Govt needs to bet on the start-ups that will work
The Centre must start measuring the health of the economy not just by GDP figures but by the rate of growth of start-ups.ht view Updated: Feb 22, 2015 22:55 IST
It is a simple equation: Create employers and jobs will be created automatically. The Narendra Modi government has focused on making life easier for large businesses in India. But this is not enough to encourage the creation of millions of new companies.
The young in India are bubbling with ideas. When they get together to channel their ideas into a business, most lose their enthusiasm. For start-ups procedural complexities, the cost of operation and lack of financial support are daunting. Those who muster the courage to launch a company spend more time managing the processes than in actually running their business.
Most would-be entrepreneurs abandon their projects for the safety of a paid job. In the process, India fails to harness the excitement of new ideas that could accelerate development. India is a terrible place for small companies.
Large corporations have the voice, clout and resources to manage the many hurdles that the procedural framework creates at the Centre and states. The entire business environment is designed to work for large businesses. Start-ups and small business get a raw deal. Banking systems, real estate market and government procedures are geared towards large corporations.
Banks lend only to companies with collaterals. The real estate market is so skewed that a rare start-up can afford office space. And government procedures require so much effort that only a large company can afford the cost. A new manufacturing unit requires more than 50 approvals from central ministries.
Start-up and small business can be broadly divided into two categories. First is in IT, including e-commerce and the services sector. The second is in manufacturing.
The highest number of approvals and procedures apply to manufacturing and infrastructure businesses. As a result, the vibrancy in the start-up environment is limited to technology and e-commerce. In these sectors, the number of approvals is relatively few. E-commerce companies are in the headlines, but they represent a small section of the start-up ecosystem.
The e-governance plan of the government is seeking the participation of technology players. The processes to engage with private technology companies focus on old rules of revenues, size and experience.
Technology companies work in the opposite way. The smartest tech companies have low revenue, small size and negligible experience. So they are automatically excluded when government departments seek technology solutions.
Modi and Union finance minister Arun Jaitley have to create processes that allow the government to work directly with start-ups. The rules must be changed to ensure that merit, solutions and ideas matter and not just size and experience.
The government can even think of processes that encourage larger IT companies to partner with smart start-ups.
Funding institutions like private equity firms, venture funds and angel investors are not doing enough to support start-ups. A few foundations are focused on helping start-ups but early stage funding and mentoring has to be more robust.
It is time bankers paid more attention to business model and intellectual capital. Bankers should realise that the best collateral is a great idea that will work. A clear direction and focused pressure from the finance ministry will help start-ups get funds. The borrowing requirements of such start-ups are a fraction of what the banks offer to large corporations.
The Modi government is rightly focused on the ease of doing business ranking by the World Bank Group. Much of the talk and pressure around this has been created by industry bodies that have the interests of large companies in mind. It will be important for Jaitley to keep the focus on smaller companies and start-ups.
The central and state governments have ministries and departments focused on micro, small and medium enterprises. Sadly, these departments have not been able to make it easy to launch a new company or run a small business.
The last few years of reforms saw jobless growth as large companies became more capital-intensive to stay competitive. While the companies grew and their markets expanded, jobs were not created.
Job creation can be accelerated if the government creates more employers. As these small companies grow they will also re-energise innovation and undermine the complacency of older players.
The US has bounced back largely because of the ease with which start-ups can be transformed into successful business models. The importance of small and eager companies shouldn’t be ignored.
The Modi government should start measuring the health of the economy not just by GDP figures but by the rate of growth of start-ups. New companies in technology, manufacturing and services can transform the economy of a young demography. Create a million start-ups now.
Pranjal Sharma is a senior economic writer
The views expressed by the author are personal