By Sarah Watson —
In November India will host the 2017 Global Entrepreneurship Summit in Hyderabad. This piece is the first in an occasional series exploring the climate for entrepreneurship in India, what the Modi government has done to promote entrepreneurship, and best practices for promoting entrepreneurship in other countries.
Prime Minister Narendra Modi has made support for innovation, entrepreneurship, and start-ups a key part of his economic reform agenda for India. Breaking with conventional Indian approaches to employment generation, which have focused on ‘jobs-for-life’ with large public or private employers, Modi has encouraged Indians to think creatively and see themselves as “job-creators, not job-seekers.” His government has backed this appeal with numerous programs that seek to smooth the way for entrepreneurs and bolster India’s innovation economy. Data from Modi’s three years in government, however, show how much farther India has to go before it can be described as truly entrepreneur-friendly.
Modi’s flagship entrepreneurship program is the “Start-Up India” initiative, which aims to free new ventures from burdensome regulation (such as labor laws and exit requirements), act as a resource for start-ups looking for partners, and make it easier for inventors to patent their innovations. These objectives are crucial; standard labor and safety regulations impose a significant administrative and financial burden on all firms, but start-ups often lack the resources necessary to meet the requirements. Patenting inventions also presents challenges; a backlog of applications means that it can take up to seven years (although this may be improving). Registered start-ups can now take advantage of self-certification of compliance with nine laws on environmental impact and labor regulations, as well as a fast-track process for patents. Perhaps most importantly, the strong message from the center has encouraged 13 states and Union Territories to introduce their own start-up and entrepreneurship policies; these may have a far greater impact on entrepreneur’s daily lives than any central policy could.
In order to ease the problems entrepreneurs face in getting access to capital, the Start Up India initiative also included a $1.5 billion fund of funds that will be used to fund venture capital funds investing in start-ups. The future of the fund looks uncertain, however; it was originally allocated a total of $172 million in fiscal years (FY) 2015-16 and 2016-2017, but in fact received only $93.7 million; it did not receive any allocations in the FY 2017-18 budget. Venture capitalists report that restrictions on who can receive the funds and how they must be used prevent many interested partners from participating.
The Modi administration has also addressed entrepreneurship through programs like the Atal Innovation Mission, which approaches entrepreneurship primarily through the lens of innovation — sponsoring incubators and tinkering labs throughout India. Like Start-Up India, which defines an eligible startup as a young company “working towards innovation, development or improvement of products or processes or services,” the Atal Innovation Mission conflates entrepreneurship with innovation, particularly technology-related innovation. India is well-positioned to take advantage of a tech-driven innovation boom. But even so, many successful small businesses have business models that do not depend on innovation. Entrepreneurs in this category do not appear to be well served by the government’s current programs.
More than three years into the Modi administration, new and small businesses still face headwinds as they seek to grow and access capital. Bank credit to micro and small firms in the industrial sector has hovered around 14 percent of all lending for Modi’s entire administration. Perhaps more importantly, total lending to such firms has grown only 2.4 percent in the three years from June 2014 to June 2017. Lending to small industrial firms peaked in March 2015 and has since contracted by 4.8 percent. Small firms in the services sector have done far better; under priority sector lending rules, bank credit to such enterprises has gone up 38 percent during Modi’s administration. Small firms also suffered disproportionately from the shock of demonetization: sales growth in Fiscal Year 2016-17 was negative for businesses with sales of up to $78 million, and businesses with annual sales of under $4 million saw a drop of 44 percent.
Many of the concrete programs (rather than policy goals) described in the Ministry of Skills Development and Entrepreneurship’s (MSDE) 2015 National Policy for Skill Development and Entrepreneurship have been slow to get off the ground. In November 2016, for instance, the MSDE announced a national entrepreneurship education program that would allow 1.5 million college students to access online courses on entrepreneurship. Although the five-year project has a total budget of $70.3 million, only $13.7 million was allocated to entrepreneurship education in the 2017-18 budget, compared to $248 million for skills development. The government has not yet acted on the MSDE’s proposal for creating Entrepreneurship hubs.
Indians are already an instinctively entrepreneurial group; 44 percent of workers work for themselves. But these micro-enterprises are often basic and not particularly productive. Kicking India’s entrepreneurial spirit into high gear requires a renewed emphasis on making sure that entrepreneurs in all sectors — not just tech — have the tools and the funding they need to thrive.
Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.