Unleashing entrepreneurship in India 2.0: Part I

Publications: The Economic Times, e27

Date of publication: June 25th, 2014

Links: Link to The Economic Times article, Link to e27 article

(This is the first of a two part series on entrepreneurship in India and the challenges & opportunities in this space)

Entrepreneurs are heroes, period. Not only do they create jobs, generate wealth and produce goods or services that society values, but they also sustain economies and act as agents of change in the global economy.  For the purpose of this article, I will refer to their businesses as MSMEs (Micro, small and medium enterprises) and define them as businesses that employ between 1 and 500 people.

In developed economies, MSMEs create most of the jobs and sustain entire economies. An OECD report estimates that 60-70% of all jobs in developed economies are created by MSMEs. In USA, there are over 27.9 million MSMEs[1] that contributed roughly to half of the non-farm GDP[2]. That effectively means that these tiny businesses having between 1 and 500 employees together generate as much value to the economy as all the major corporations and governments in USA put together.

unleashing-entrepreneurship-in-india-2-0-part-i

MSMEs in India are underperforming hugely

Known for its entrepreneurial spirit, India has produced some great entrepreneurs such Laxmi Mittal, Dhirubhai Ambani and Jamsetji Tata. However, if you look at the data closely, you will find that that Indian MSMEs, as a group, are severely underperforming heir global peers.

For example, MSMEs employ 40% of India’s workforce and yet generate only 17% of its GDP. In contrast, China’s small businesses employ 85% of its workforce and generate 60% of its GDP. The comparison with USA and UK is almost as stark.

Country No. of MSMEs (millions) % of Workforce employed Share of GDP
China 50* 85% 60%
UK 4.9 24.3 50%
USA 28 50% 45%
India 48.8* 40% 17%

Sources[3]

While the number of MSMEs in India looks impressive at first glance, standing at 48.8 million, the picture in reality is not as rosy. Most of these 48.8 million businesses are not formally registered and therefore, technically speaking, aren’t really MSMEs. When businesses aren’t registered and legally recognized, they miss out on opportunities to access credit, technology and growth opportunities.

Why is this happening? : Issues

There are a host of issues that plague Indian MSMEs ranging from the poor availability of infrastructure (roads, electricity) to the lack of adequate skilled manpower. However, two issues stand out as the biggest roadblocks to the growth of MSMEs in India.

Key Issue 1: Stifling legal and regulatory environment

Entrepreneurship is tough anywhere in the world. But in India, it is truly daunting. The regulations governing small businesses in India are excessive, restrictive and suffocating. India is rated as the worst country in Asia for entrepreneurs[4]. India stands at 179th in the world in terms of ease of starting a business and 134th in terms of ease of doing business[5], behind even Pakistan and Rwanda.

Entrepreneurs in India complain that they have to jump through hoops to start their companies. Registering a company usually takes about a month and involves significant expenditure including “incidental expenses” at various government offices.

The concept of single window clearances just does not seem to exist as several government bodies ranging from the Ministry of Corporate Affairs, the Labour Department, the Income Tax Department and the Commercial Taxes Department come into the picture. Of course, depending on the nature of the business, several other departments such as the Health Department, Fire Department or the Police Department need to be approached for licenses or “no-objection certificates” even before making a single dollar in sales.

The following table shows how India compares to South Asia as well as to the developed countries (OECD) on key indicators pertaining to the ease of starting businesses.

Indicator India South Asia OECD
Number of procedures to start a business 12 7 5
Time required to start a business (days) 27 16.2 11.1

Source: World Bank Group

Due, in large part to the burden of complying with the myriad regulations, most of India’s small businesses remain unregistered and in the process, limit their growth and potential.

Key Issue 2: Lack of adequate capital

Capital (credit) is the lifeblood of business. Indian businesses face a massive shortage of capital and struggle to get bank loans or funding.  High interest rates and the need for collateral for bank loans, limit the access that small businesses have to much needed capital.

The Planning Commission of India estimates that in FY 2014, there exists a credit gap between demand and supply of Rs 15, 66, 089 crores (MSMEs). This figure does not take into account the fact that a large section of MSMEs cannot afford to give collateral for loans.

Indicator                      Value (crores of Rs)
Total demand for credit (MSMEs) 2,803,628
Total supply of credit (MSMEs) 1,237,539
Credit gap (MSMEs) 1,566,089

Source: Planning Commission of India

The concept of collateral-free loans for MSMEs, guaranteed by a government fund is slowly picking up in India. The Government of India launched the Credit Guarantee Scheme (CGS) for MSMEs in the year 2000 that attempts to stimulate collateral-free credit to MSMEs by guaranteeing over 75% of the loan amount lent by banks to MSMEs.

However, the progress is slow at best. For example, in FY 2012, Rs 13,784 crores worth of loans to MSMEs were guaranteed under the CGS scheme, a mere 0.59% of the total credit demand of Rs 23,08,384 crore in that year[6].

The road ahead: A massive challenge or a gargantuan opportunity?

The eco-system around MSMEs represents both a massive challenge as well as a gargantuan opportunity for the country. Success with repairing this eco-system can pay rich dividends in the form of accelerated job creation, wealth generation and economic prosperity. Failure to address this problem could mean a sluggish economy and moribund growth for an extended period of time.

In the next article in this series, we will look at some of the steps that can be taken by the government to unleash entrepreneurship in India and truly put it on the path to long-term growth.

(The writer is an entrepreneur, investment professional and political consultant. He blogs at https://ashwinianand.wordpress.com and tweets at @ashkronos)

Image Credit – The Economic Times

[1] Source: US Government

[2] Source: SBE Council

[3] Sources: University of Sydney, China Economic Review, Federation of Small Businesses, Forbes, Small Business Administration, Economic Times.

[4] Source: Gallup

[5] Source: World Bank Group

[6] Source: Credit Guarantee Fund Trust for Micro and Small Enterprises

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