Tuesday, September 21, 2010

India: Lacking incentives for opportunity-led entrepreneurship

India's homegrown entrepreneurs feeding domestic demand may help India cross over to double digit growth territory in the next 4 - 5 years. But the real question is whether Indian entrepreneurs are encouraged and incented enough to create new markets as opposed to serving existing markets and natural domestic demand.
In India’s bottom up economic model, private entrepreneurship is central to economic growth. In fact over 75 per cent of the 10 million jobs India needs every year comes from private entrepreneurship in the unorganised and SME sector.  India needs to nurture a different kind of entrepreneurship - it needs opportunity led entreprenuership not need based entrepreneurship. Opportunity led entrepreneurship is about creating new opportunities from new products, newservices, new markets and new industries. Need or demand led entrepreneurship is often about reacting or providing scale to a need or domestic demand for existing products or services which is where bulk of India's workforce is currently engaged in. There are two reasons why opportunity led entrepreneurship hasn't taken off.

  • Regulations, policies and law around entrepreneurship needs reform. Reform has to intensify to make the shift to opportunity-led entrepreneurship a reality. For example, indirect tax regimes suppress scale and encourage firms to remain small. Labor laws limit labor mobility. Precious capital is locked in providing lacking infrastructure instead of growing businesses. Poor judicial enforcement of property rights and inadequate availability of land with clear titles has forced entrepreneurs to make unproductive investments in fixed assets. There are few tax breaks for innovators and entrepreneurs. And ofcourse there is no differented incentivisation schemes for those who create newer industries, markets, products or services.

  • Extremely low emphasis on innovation in the private sector is the other reason why private entrepreneurship evades creation of new markets. Two thirds of the R&D expenditure in India is in the public sector that has no interest in commercialization, which is exactly the opposite of the trends in U.S. To reverse the post-independence emphasis on indigenization that drove technological innovation away from commercial viability, reform and investment into a National Innovation System is critical. Such an ecosystem (that provides for IP protection, seed and venture capital, public-private partnership models, access to research labs, institutions, universities, market development, testing, prototyping support), is one where entrepreneurs and innovators can rely on while they endeavour to push ideas through execution. If designed well a National Innovation System  can inbreed inclusive opportunities such as sustainable ways of increasing agricultural output while reducing the dependence on traditional farming methods.

India’s FDI regime hasn’t helped opportunity-led innovation or entrepreneurship either. There is no suggestion that FDI cannot address this challenge. India has been a laggard in appropriating FDI opportunities. Even if India relies on FDI, it needs a steep FDI intake over a short period of time. Take infrastructural sectors for example. According to the investment commission , India will require additional funding of approximately $ 350 bn over 5 years, over and above current spending, in roads, power, telecom and ports alone. In many of these sectors, a JV or 100 per cent FDI is permitted, sometimes with loaded incentives and tax exemptions. At current levels of FDI absorption, India will need to double the FDI intake to about $ 70 - 80 billion per year to meet its 5 year goals. Such demands couldn’t come at a worse time when foreign investors themselves are recovering. At the same time, having emerged from the global crisis, India now needs to return to its longer-term reform agenda aggressively to support its private entrepreneurs.

First Posted on March 2, 2010
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