Commentary

Entrepreneurship in India


Kaushik Vaidyanathan

India, perhaps, is one of the few civilizations –if any – which has survived the test of time. India is perceived differently by different on-lookers, as its consistently jostling between contradictions. There are few who swear by India’s rise as a super power and there are a few who believe India will never be able to rise to prominence owing to its multifarious problems. For instance, on one hand, the Indian economy is the second largest amongst emerging nations, and on the other, it ranks 127th in per-capita income with 42.5% of the Indian population living with less than $1.25 a day. From my experience, I would like to point out that both schools of thought are correct in their own way, and India’s future would heavily depend on how it deals with its present. This article’s goal is to not shower in the laurels of India’s glorious ancient past or brood over its recent past – but is to critically assess its economic standing in the present and discuss some constructive recommendations for its prosperous future. Many might wonder, what does entrepreneurship have to do with the lofty goal of this article?

Is entrepreneurship even relevant to a developing country like India?

Kris Gopal, co-chairman of the multi-billion dollar Infosys Corporation, argues that entrepreneurship is necessary for any economy to grow. Small ventures and entrepreneurs play a significant role in bringing to the market new ideas, services and offerings, that many large organizations are either unwilling or feel too risky to pursue. In addition to this, entrepreneurs and their ventures play a crucial role in job creation. For instance, the US venture-backed companies employ more than 10 million people and make up to 20% of the nation’s GDP.

Current state of entrepreneurship in India

Global Entrepreneurship Monitor (GEM) ranks India ninth amongst entrepreneurial countries. It is highest amongst 28 countries in “Necessity based entrepreneurship”, while 5th from the lowest in “opportunity based entrepreneurship”. Research indicates that opportunity based entrepreneurs contribute more to overall economic growth than necessity based entrepreneurs, this is an evidence to that fact that entrepreneurship in India is still far from what it could be.

How entrepreneurship is distinctly different in the developing world, especially in India?

In the last five years, thanks to globalization and advances in science and technology, Indian entrepreneurs are beginning to align themselves in three categories. A first category of entrepreneurs are focused towards developing world-class products which can compete in the international market. For instance, India is rapidly emerging as a world-class player in information technology, iron and steel industry, pharmaceutical industry etc. A second category of Indian entrepreneurs are working on products that are customized in design, pricing and quality to the needs of the Indian people, or the developing countries at large. For instance, development of cost-effective gadgets like cell phones, tablets and even laptops which are more tuned to address the basic needs of the Indian people are increasing by the day. A third and a more distinct category is the rise of hundreds of social entrepreneurs. The liberal democratic system in India allows and promotes citizens to come together as a group to solve some of the big challenges facing the nation. For instance, Serval corporation builds kerosene stoves which are 30% more fuel efficient. They have also leveraged their technical expertise to create a product assembly process which can be executed by the less-educated people in villages. Although, fuel efficiency and design of kerosene stoves need not be of any interest to the developed world, the Serval stoves play a significant role in creating a clean and healthy cooking environment in rural India. Indian Census 2011, shows about 66% of Indian population resides in villages and relies on traditional occupations like agriculture, animal farming etc. Appropriate use of technology and engineering to solve some of these real problems can make India a technology-leader midst the developing world. Indian social entrepreneurs working on rural development can minimize migration of people from rural to urban areas, leading the creation of a sustainable eco-system.

Problems facing Indian entrepreneurs & a few solutions

Risk averse society. Even after independence, the society and government are not very encouraging towards entrepreneurship. For instance, every year over one million new companies are started in the U.S., almost 50 percent of them fail the very first year. Whereas in India the numbers of startups are in low 100k’s, leaving out the small family owned retail shops. An important observation is that failure is accepted as a natural part of entrepreneurship and is not viewed as a dead end in the Unites States. On the contrary, the Indian society, to a large extent, is risk averse.

Lack of true seed capital. Kris Gopal points out that the entrepreneurial eco-system in India lacks true seed capital, as venture capital firms in India are mostly inclined towards late stage investments. According to Venture Intelligence, as on June 2011, Venture capital investments in startups with high growth potential, was an average of $5 million. Private equity players focus on mature, high-growth companies and the average deal size ranges between $25 million and $100 million. Smaller ventures that need funding are often overlooked, especially when these move away from cities.

Entrepreneurial ecosystem. Krish also stresses that there is an urgent need for an ecosystem of mentors, and programs that nurture entrepreneurship. On a positive note, a few initiatives like The Indus Entrepreneurs (TiE) are already working actively in creating this eco-system.

Government support: One popular concern entrepreneurs shared in common is the lack of government support. In spite of the fact that India is democratic, secular and liberal country with laws and reforms which are not inferior to the developed world, India lags a country like United States in law-enforcement. Even though the government and bureaucrats have to take most of the blame, nevertheless, designing and enforcing laws and reforms in a country where every 200 miles you will find a new religion, culture and language is non-trivial and requires a truly entrepreneurial approach.

The future of entrepreneurship in India

Recently, India is considered to be amongst the three top investment destinations. According to a report released by Evalueserve research, over 44 U.S. based VC firms are now seeking to invest heavily in startups and early-stage companies in India. Reports from PricwwaterhouseCoppers predict that between 2010 and 2024, 2219 multinational companies will emerge from India.

In conclusion, with a consistently growing local market for indigenous products, supported by a reasonably efficient and transparent legal system, I believe India could potentially emerge as one of the top 3 world economies in the world by 2020. This articles concludes with these lines from “The Mystery of Capital” by Hernando de Soto.

“People in developing countries “are not pitiful beggars, are not helplessly trapped in obsolete ways and are not uncritical prisoners of dysfunctional cultures.” In fact, he says and I can vouch from my experience that the developing world is teeming with entrepreneurs who possess an “astonishing ability to wring a profit out of practically nothing.

Written by Kaushik Vaidyanathan who is pursuing his PhD in Electrical & Computer Engineering Department at CMU.

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  • Sayeeshwar

    Like you said one problem is capital investment and availability of credit at the right time for a start up to take off. But even if all the funds are available and the idea is a good one, there has to be market to buy your products which makes a business profitable.1.2 billion people sounds like a good market, but when only about 200 million of them have any sort of disposable income and who themselves are more inclined towards saving, it is very hard to start and sustain a profitable business in such an environment. So unless you can find ways to export your produce, the business is bound to fail , when there is not much room in the domestic market.

    Next is the governments role.The government must not only enforce the law, but also create the right conditions to enable small businesses to thrive with less regulation,tax cuts ,controlling inflation and making easy credit available so people can spend more and stimulate the economy. But the clueless government cannot control both India’s fiscal deficit and inflation. Even a broken economy like greece can control at least one of the two,but not the so called emerging economic powerhouse.

    Inspite of this , it is possible to make a difference to people’s lives especially in villages through innovative solutions like the ones mentioned in this article. Particularly with foreign investment drying up,it is imperative to invest in our own people.