By Sarah Watson —
In November India will host the 2017 Global Entrepreneurship Summit in Hyderabad. This piece is the third 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.
India’s central government has made a big push to support entrepreneurs and start-ups. However, in many cases, it is state government action — or inaction — that makes the largest contribution to easing the path for new companies. States are responsible for most licenses and clearances, and proactive states can help build strong innovation networks within their borders. Taking their cue from the Modi administration, many states have launched their own entrepreneurship, start-up, or innovation policies to boost growth in these areas.
The Wadhwani Chair created a preliminary ranking of the entrepreneurship environment in India’s largest states. We used a few simple metrics to measure whether states are actively encouraging entrepreneurship through smart policies that promote innovation ecosystems. We based states’ scores on the number of universities (public and private) within a state’s borders; its placement in a national ranking of state ease of doing business reforms, and the quality of its start-up or innovation policy.
Ease of Doing Business – Start-ups in India face many of the same challenges as older and larger businesses: slow regulatory approvals, difficulty in hiring and firing workers, bothersome inspections, and opaque state bureaucracies. Thus the overall ease of doing business (EODB) environment in a state is just as important as policies designed to specifically target start-ups. Our rankings use the 2016 EODB Rankings produced by the Department of Industrial Policy and Promotion. This report ranks states according to the percentage of actions in a 340-point action plan they completed during 2016. The highest ranked states (Andhra Pradesh and Telangana) received ten points in our scoring system.
Start-up Policies – A state can specifically target hurdles facing start-ups with a policy that helps new businesses obtain access to funding, fosters the growth of incubators, creates opportunities for entrepreneurs to meet mentors and get advice, and removes some of the regulatory obstacles these businesses face. For instance, most states exempt IT businesses from laws forbidding 24-7 operations; this is critical if a business is serving markets several time-zones away. The top four states in our ranking all had start-up or innovation policies that scored at least five points. Uttar Pradesh’s policy scored 8 points, the highest of any state in our survey. In contrast, three of the four states at the bottom of the ranking had no start-up policy. Delhi, while it has announced an incubator policy, has not made the text of that policy publicly available, so it received only one point in this area. Tamil Nadu and Maharashtra have no start-up policy at all (Maharashtra has circulated a draft but the state cabinet has not approved it).
Universities – Universities are a critical part of innovation ecosystems. They perform basic research that can produce marketable innovations and bring together students with entrepreneurial interests, creating innovation hubs. Of course it is harder to create new universities than it is to write policies. But state governments have significant influence over the number of universities within their borders. Nearly half of India’s universities are state universities — created by an act of the state legislature. A further 34 percent are independent, private institutions. States can encourage their growth by quickly passing the necessary legislation and by leasing them land from the state land bank at nominal rents, among other policies. The two states with the most universities (Rajasthan and Uttar Pradesh) received ten points in our scoring system.
Even the best state start-up policy, however, has one critical drawback: India defines a start-up as a business less than seven years old, never having achieved turnover of more than $3.85 million dollars, and with a business plan that involves innovation (or offers “high potential” for rapid growth). Most state start-up policies use even more restrictive definitions. Many new small businesses meet this description; but other very valuable start-ups do not: a small manufacturer, for instance, could employ dozens without reinventing the wheel. These businesses deserve a boost too, and may not be covered by state policies on ‘micro, small, and medium’ enterprises. Unless India widens its understanding of entrepreneurship, it risks stymying its own best efforts to nurture start-ups.
Annex I: Methodology & Metrics
|Number of universities||Universities are centers of the basic research that drives innovation, as well as of enthusiastic young people||University Grants Commission|
|EODB Ranking||A better business environment benefits start-ups as much as it does more established businesses||DIPP|
|Start-up policy quality||Policies (if they existed) were judged according to the breadth of the state’s definition of a start-up; the amount of venture capital funding the state mobilized; efforts to build incubators and accelerators; methods for financing new companies; and ease of doing business measures for start-ups.||Andhra Pradesh
Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.