The amazing thing about India is that we have now gone through 20 years of economic reforms without actually articulating what it is we are reforming towards. At the end of the day, reforms are about the process by which an economy moves from one set of underlying principles (or philosophy, if you will) to another. In order for this process to be coherent, we have to define where exactly we wish to be. The reform processes that were undertaken in the past, and being discussed today, have never been placed in such a context, so it becomes impossible for us to take a view on what the next logical step should be.
One characterisation that has been talked about at length has been that the reforms are aimed at moving India towards becoming a market economy. If this is the only objective of the reform process, then we appear to be very much there, with non-market decisions prevailing in only a few segments of our economy, which are pretty much known. This, however, is most unsatisfactory.
In addressing the issue of the next steps for economic reforms in India, I would therefore define the objectives of the process as creating conditions which will allow the full play of entrepreneurial energies at all levels and wherever they are to be found.
Rural Business Model
It is important to recognise that entrepreneurship is not the sole reserve of corporates or even small companies. In order to get a sense of the kind of entrepreneurship that exists in India, a glance may be given to the Economic Census 2005. In this Census, 42 million non-agricultural enterprises were identified, and the number of enterprises had increased by about 8 million within a decade. Add to this the 72 million farms that exist in the country, all of which require entrepreneurial decision-making of the same degree as in any other enterprise.
Together, therefore, in 2005 we had 114 million agriculture and non-agricultural enterprises, which translates to roughly one enterprise for every two households in India. While granting that many of these enterprises exist because their owners have no choice and are essentially part of the survival strategy of the poor, many are not. Non-agricultural enterprises, employing at least one non-family worker, number about 18 million. This is a phenomenally large number by any measure.
The reform process therefore should be seen as the measures that would be required to unleash the full entrepreneurial capabilities of the owners of these enterprises. Sometimes, the next steps are not obvious. A very recent example which has a powerful message in this regard is the impact of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). This scheme was seen essentially as an income support programme for the poor, but it has had the enormous, and unintended, effect of unleashing entrepreneurial spirits in rural India.
The pace of diversification of agricultural production and of rural livelihoods has accelerated significantly in the past few years. This is reflected not only in the higher rural incomes that can be observed, but even more so in the growth of agricultural productivity that has been recorded in the near past.
The problem is with the way we think of our reform process as not about entrepreneurship but about companies. This shift of focus is important. At the heart of any system which supports entrepreneurship is the ease with which an enterprise can be born and can die without placing undue hardship on the entrepreneur. The lesson of MGNREGS is precisely this. It has allowed farmers to take risks with the assurance that even in the case of failure, he can sell his labour and not his asset — land — which was earlier the case.
The issue of ease of starting business is already very much a part of the current discourse. As things stand now, most of the action in this regard lies in the domain of the state governments, and even more so of local bodies. However, there is little, if any, discussion on the ease of exiting from enterprises.
Exit is not merely about closure, but also about changing the ownership of the enterprise. The Indian system today is extremely unkind in matters of entrepreneurial exit. Bankruptcy laws are archaic, and little has been done to revise them. There is much talk about encouraging venture capital and angel investor funds to boost innovation and entrepreneurship in the country. The fact is that none of this is going to happen unless such investors are able to exit the ventures they support without being taken to the cleaners. We therefore need to pay as much attention to the ease of closing business as we are doing to the ease of opening.
Pronab Sen is principal economic adviser, Planning Commission.