April , 2018
Invest in entrepreneurship for economic development
15:54 pm

Varsha Singh and Ankita Chakraborty

Before liberalisation, most Indian businesses functioned with contacts based on licences, government connections and were integrally related to the bureaucratic system. Market competition was relatively less. The government aimed at import substitution to attain economic development. The era was not entrepreneur-friendly, capital was meagre, and the business community avoided risks.

Entrepreneurship is a less desirable career choice in India as compared to other developing countries like Brazil, China, and South Africa. According to a survey by Global Entrepreneurship Monitor (GEM), a global consortium that researches  on entrepreneurship, only 39.3% in India think of entrepreneurship as a good career choice as compared to 65.9% in China, 73.8% in South Africa, and 77.7%  in Brazil. 

Growth of Indian entrepreneurs

The government liberalised the Indian economy in 1991. Family businesses, which dominated Indian markets, now faced competition from multi-nationals that had superior technology, financial strength, and deeper managerial resources. This ushered in a significant churn in the economy. While many Indian businesses were successful in adapting to the new economic realities, others struggled and failed. A new breed of businesses emerged. Many of them were companies who focused on Information and Communication Technology (ICT). The post-liberalisation era witnessed a large number of successful IT businesses, which were customer-focused and professionally managed. Opportunities grew manifold.

At present, entrepreneurs are cautious about their access to venture and growth of capital with a reasonable business model and customer-friendly services. N.R. Narayana Murthy co-founded Infosys in 1981 with an initial capital of Rs 10,000 ($250.00). The success of his company gave a fillip to the IT services industry in India and encouraged entry of several new IT businesses. However, to maintain business growth, Indian entrepreneurs need to segregate operating control of the business from the beneficial ownership. They also need to mitigate business and family succession risks.

Presently, India is witnessing a volume of young budding entrepreneurs. But being able to manage the business efficiently holds the key. These entrepreneurs need to be multi-faceted in order to make their business stand out.

Sunil Mittal, who was a first generation entrepreneur, identified an opportunity in mobile telecom. In 1994, he successfully bid for a telecom licence, and services were launched under the brand name Airtel. The business model was innovative. IT management services and hardware (telecom towers) were outsourced to vendors. Fixed costs were converted to variable costs. Mittal was able to professionalise the organisation quite early. That helped him to build a larger institution.

As Indian businesses became professional, opportunities to acquire global businesses increased. In 2006, Corus, an Anglo-Dutch steelmaker, accepted a $7.6 billion bid by Tata Steel. This allowed Tata Steel to become a global leader in the steel business.

In India, 38% adults perceive good opportunities to start a business and the same percentage of adults believe they have capabilities to start a business, while 44% feel that the fear of failure is preventing them from taking the plunge, the GEM survey points out.

The same survey by GEM found that in India, 3.2% adults are ‘nascent entrepreneurs’ who are actively involved in setting up a business, while 7.7% are ‘new business owners’ working in operation for more than three months but less than 42 months. India’s entrepreneurial exit rate is the second lowest among all GEM countries, which is indeed a positive factor.

According to the GEM National Experts Survey 2015, major constraints for entrepreneurship development in India include lack of funds, government regulation, and complex tax structures, low entrepreneurial education at primary and secondary school levels, and culture and social norms.

Where do women entrepreneurs stand?

The Global Entrepreneurship Summit (GES) held in Hyderabad last year, mainly focused on promoting women entrepreneurs. Prime Minister Narendra Modi said at the summit, “We believe women empowerment is crucial to our development.”

But the situation for women entrepreneurs doesn’t seem too bright. According to the Sixth Economic Census, out of the 58.5 million entrepreneurs, only 8.05 million are women entrepreneurs. Women constitute only 13.76% of the total entrepreneurs in the country. Women entrepreneurs owned establishments provide employment to 13.45 million people.  Out of the total women entrepreneurs, 34.3% or 2.76 million women work in the agriculture sector and 5.29 million or 65.7% of the total entrepreneurs work in  non-agricultural sectors.

“In some traditional cultures like in Asia, people expect women to be just at home and not express themselves as they deserve to,” said Mandy Nguyen, who works for Start-up Vietnam Foundation, a group that supports entrepreneurs. Deepa Mani, Associate Professor, Information Systems group and Research Fellow, Indian School of Business (ISB) informed, “Only around 10% of entrepreneurial ventures are kick-started by women in the country.”

Constraints of entrepreneurs in India

The Indian entrepreneurial spirit can only develop and grow if the Indian economy continues to grow steadfastly. The risks to India’s continued growth are terrorism, political corruption/stalemate, non-inclusive growth that focuses only on the urban rich, and stalled reforms.

As the investment cycle strengthens, foreign businesses can invest in India independently or through partnerships. The businesses factor, the political, economic and family risks in and at the same time be able to earn profit. However, not many are able to manage this and hence fall prey to large debts. A very small percentage of entrepreneurs are able to take their idea to the second stage. 

Poor credit facilities: Many financial institutions offer business loans but their interest rates are worrisome. Moreover, banks demand strong backup for mortgage. As a result, many have to submit property papers as mortgage. But what about those who can’t? Even at the early phases of business, many entrepreneurs don’t have sufficient financial records and transaction history, and banks prefer most of the credit applications on the basis of past monetary performances.

Low access to financial expertise: Improper knowledge on how to approach banks for loans, how to prepare a healthy details project report (DPR), limited understanding and knowledge about financial services available make things difficult for emerging entrepreneurs.

Priority sectors: According to the instructions of the RBI, it is mandatory for banks to supply debt to sectors which tops the priority list of backward sectors. Micro and small enterprises, agriculture and tourism are some of the sectors that are prioritised by banks.

Equity access: Venture capital (VC) in India is at a nascent stage. As this directs towards some form of ownership in the venture it makes capitalists check both the good and adverse effects. The tax policies regarding venture capital are not static. Such fluctuations are not favoured.

Unequipped business plan: The business plan should reflect the revenue generation model in detail. Often, investors do not find this information properly, hence get demotivated.

Lack of proficient teams: The core team of most of the new ventures consists of First Generation Entrepreneur (FGE) himself and his coworker. It is necessary to have a professional in the team. That is lacking at times. 

Family constraints: In various cultures in India, families discourage individuals to opt for entrepreneurship because of the risks involved. As time is a major hassle with budding entrepreneurs or startups, many families fail to support them. 

Cronyism issues: Low skilled persons are often promoted and based on back door recommendations or political interference. This reduces the efficiency level of nascent entrepreneurships. Wide spread corruption and bureaucratic tussles complicates matters.

Unpredicted challenges and expenses: An entrepreneur should be prepared for whatever comes in his path, as a sailor who always stays ready for the unexpected storm. Unexpected hurdles may come in the form of law suits, changed policies, unable to procure payroll, unexpected leaving of workers/staffs, worse debts from buyers, dropping of market shares, insufficient stock or inventory and many others.

Ability to take risks and do multitasking: A new entry in the market either with a new service/product involves considerable risk for the entrepreneur. Risk in this context refers to the probability and magnitude of downside loss which could result in bankruptcy. It is a dangerous situation for those who have no previous experience of business. Most of the time, risks originate from the entrepreneur’s uncertainties over market demand, technological development and action of the competitors. Market scope and imitation are the two widely used strategies for risk reduction.

Funding is a major issue

As part of the Start-up India Action Plan, the Indian government had set up a fund with a total corpus of Rs10,000 crore ($1.6 billion) to support emerging companies over the next four years. This money is disbursed via the Small Industries Development Bank of India (SIDBI). As of March 2017, SIDBI has selected 17 venture funds, declaring support to them with an amount of Rs 623.50 crore. However, due to a slow and complicated process, this amount has reached only a small number of start-ups, prompting most applicants to look for alternative avenues of raising market capital. Only around 10% of the total fund has been released. “As on December 18, 2017, Rs 605.7 crore has been committed by SIDBI and Rs 90.62 crore disbursed to 17 Alternative Investment funds (AIFs), who in turn have invested Rs 337.02 crore in 75 Start-ups,” informed C R Chaudhary, MoS, Department of Commerce and Industry, stated in a written response to a question in the Lok Sabha on December 18, 2017.

Banks also often do not give any loans or working capital to start-ups without any collateral. This makes meeting  day-to-day operational costs extremely tough for them if it’s considered that a vast majority of them don’t achieve profitability within the first five years.

Tax exemptions allowed to eligible start-ups under Start-up India Programme:

Three year tax holiday in a block of seven years: The start-ups incorporated after April 1, 2016, is eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years provided that annual turnover does not exceed Rs 25 crores in any financial year. This will help the start-ups to meet their working capital requirements during their initial years of operation.

Exemption from tax on long-term capital gains: A new section 54 EE has been inserted in the Income Tax Act for the eligible start-ups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by the Central government within a period of six months from the date of transfer of the asset. The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall remain invested in the specified fund for a period of 3 years. If withdrawn before three years, the exemption will be revoked in the year in which money is withdrawn.

Tax exemption on investments above the fair market value: The government has exempted the tax being levied on investments above the fair market value in eligible start-ups. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investment made by incubators above fair market value is exempted.

Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Start-ups u/s 54GB: The existing provisions u/s 54GB allows the exemption from tax on long-term capital gains on the sale of a residential property if such gains are invested in the small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act, 2006. But now this section has been amended to include exemption on capital gains invested in eligible start-ups also.

If an individual or HUF sells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible start-ups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within five years from the date of its acquisition. The start-ups shall also use the amount invested to purchase assets and should not transfer asset purchased within five years from the date of its purchase. This exemption will boost the investment in eligible start-ups and will promote their growth and expansion.

Success rate of entrepreneurs in India

According to a new study by IBM, India is booming with young entrepreneurs and start-ups but more than 90% of start-ups in the country fail. The same study indicates that lack of innovation, non-availability of skilled workforce and insufficient funding are the main reasons for the high rate of failure. The IBM in a statement stated, “77% of venture capitalists surveyed believe that many Indian start-ups lack pioneering innovation based on new technologies or unique business models. Indian start-ups are prone to emulate already successful global ideas.”

70% of the venture capitalists believe that talent acquisition is one of the biggest challenges faced by Indian start-ups and limited availability of necessary skills impedes growth. The IBM study, ‘Entrepreneurial India’ is based on interviews with more than 1,300 Indian executives, including 600 start-up entrepreneurs, 100 venture capitalists, 100 government leaders, 500 leaders of established companies and 22 educational institution leaders.

Governmental measures to help entrepreneurs

The Indian government has undertaken several initiatives and instituted policy measures to encourage the culture of innovation and entrepreneurship in India. The biggest challenge that the country faces at present is job creation. India has a significant and unique demographic advantage and has immense potential to innovate, raise entrepreneurs and create jobs for the benefit of the nation and the world.

Recently, the government has come up with a wide spectrum of new programmes and opportunities to nurture innovation across a number of sectors. From engaging with academia, industry, investors, small and big entrepreneurs, non-governmental organisations the government has reached out to the most underserved sections of society. Women entrepreneurs have also been encouraged for economic participation and in enabling the country’s growth and prosperity. The government seeks to bring women to the forefront of India’s entrepreneurial ecosystem by providing access to loans, networks, markets and trainings. Some of the efforts taken by the government at promoting entrepreneurship and innovation are-

Start-up India: Launched in 2016, this initiative promotes entrepreneurship by mentoring, nurturing and facilitating start-ups throughout their life cycle. In its first year, the initiative saw a growth of around just 500 start-ups but by December 2017 up to 6,337 start-ups were recognised, a significant 12-fold increase from 2016. The initiative has given a head start to numerous aspiring entrepreneurs and also provides a comprehensive four-week free online learning programme, has set up research parks, incubators and start-up centres across the country by creating a strong network of academia and industry bodies. Also a large corpus fund has been has been created to help start-ups gain access to funding. At the core of the initiative, is the effort to build an ecosystem in which start-ups can innovate and excel without any barriers, through such mechanisms as online recognition of start-ups, Start-up India Learning Programme, facilitated patent filing, easy compliance norms, relaxed procurement norms, incubator support, innovation focused programmes for students, funding support, tax benefits and addressing of regulatory issues. Close to 4,400 technology start-ups exist in India and the number is expected to reach over 12,000 by 2020. India is also at third place, behind US and Britain, in terms of the number of start-ups.

Make in India:  Launched in 2014, this initiative is designed to transform India into a global design and manufacturing hub. It came as a powerful call to India’s citizens and business leaders, and an invitation to potential partners and investors around the world to overhaul out-dated processes and policies, and centralise information about opportunities in India’s manufacturing sector. Among several other measures, the initiative has ensured the replacement of obsolete and obstructive frameworks with transparent and user-friendly systems. This has, in turn, helped procure investments, foster innovation, develop skills, protect intellectual property and build best-in-class manufacturing infrastructure.

Atal Innovation Mission (AIM): AIM is the Government of India’s endeavour to promote a culture of innovation and entrepreneurship, and it serves as a platform for promotion of world-class innovation hubs, grand challenges, start-up businesses and other self-employment activities, particularly in technology driven areas. In order to foster curiosity, creativity and imagination right at the school, AIM recently launched Atal Tinkering Labs (ATL) across India. ATLs are workspaces where students can work with tools and equipment to gain hands-on training in the concepts of STEM (Science, Technology, Engineering and Math). Atal Incubation Centres (AICs) are another programme of AIM created to build innovative start-up businesses as scalable and sustainable enterprises. AICs provide incubation facilities with appropriate physical infrastructure in terms of capital equipment and operating facilities. These incubation centres are present across India and provide access to sectoral experts, business planning support, seed capital, industry partners and trainings to encourage innovative start-ups. The AIM along with Self-Employment and Talent Utilisation (SETU) are Government of India’s the leading ventures to promote a culture of innovation and entrepreneurship. The Atal Innovation Mission has two core functions, first being entrepreneurship promotion, through self-employment and talent utilisation, wherein innovators would be supported and mentored to become successful entrepreneurs. Secondly, it aims at innovation promotion to provide a platform where innovative ideas are generated.

Support to Training and Employment Programme for Women (STEP): STEP was launched by the Government of India’s Ministry of Women and Child Development to train women with no access to formal skill training facilities. The Ministry of Skill Development and Entrepreneurship and NITI Aayog recently redrafted the guidelines of the 30-year-old initiative to adapt to present-day needs. The initiative reaches out to all Indian women above 16 years of age. The programme imparts skills in several sectors such as agriculture, horticulture, food processing, handlooms, traditional crafts like embroidery, travel and tourism, hospitality, computer and IT services.

Jan Dhan- Aadhaar- Mobile (JAM): Launched in 2014, this is a technological intervention that enables direct transfer of subsidies to intended beneficiaries and eliminates all intermediaries and leakages in the system. Besides serving as a vital check on corruption, JAM provides for accounts to all underserved regions in order to make banking services accessible down to the last mile.

Digital India: The Digital India initiative was launched in 2015 to modernise the Indian economy and make all government services available electronically. The initiative aims to transform India into a digitally-empowered society and knowledge economy with universal access to goods and services. Given the country’s poor internet penetration, this initiative aims to make available high-speed internet down to the grassroots. This program aims to improve citizen participation in the digital and financial space, make India’s cyberspace safer and more secure, and improve ease of doing business. Digital India hopes to achieve equity and efficiency in a country with immense diversity by making digital resources and services available in all Indian languages. To pave the way for greater advancements in digital technologies, the government has doubled its allocation to the ‘Digital India’ programme to Rs 3,073 crore in 2018-19.

Biotechnology Industry Research Assistance Council (BIRAC): BIRAC is a not-for-profit Public-Sector Enterprise, set up by department of Biotechnology to strengthen and empower emerging biotechnology enterprises. It aims to embed strategic research and innovation in all biotech enterprises, and bridge the existing gaps between industry and academia. The ultimate goal is to develop high-quality, yet affordable, products with the use of cutting edge technologies. BIRAC has initiated partnerships with several national and global partners for building capacities of the Indian biotech industry, particularly start-ups and SME’s, and has facilitated rapid developments in medical technology.

Department of Science and Technology (DST): The DST comprises several arms that work on all major projects that require scientific and technological intervention. The Technology Interventions for Disabled and Elderly, for instance, provides technological solutions to address challenges and improve quality of life of the elderly in India through the application of science and technology. On the other hand, the ASEAN-India Science, Technology and Innovation Cooperation works to narrow the development gap and enhance connectivity between the ASEAN countries. It encourages cooperation in science, technology and innovation through joint research across sectors and provides fellowships to scientists and researchers from ASEAN member states with Indian R&D/ academic institutions to upgrade their research skills and expertise.

Stand-Up India: Launched in 2015, Stand-Up India seeks to leverage institutional credit for the benefit of India’s underprivileged. It aims to enable economic participation of and share the benefits of India’s growth, among women entrepreneurs, Scheduled Castes and Scheduled Tribes. Under this programme at least one woman and one individual from the SC or ST communities are granted loans between Rs 1 million to Rs 10 million to set up green field enterprises in manufacturing, services or the trading sector. The Stand-Up India portal also acts as a digital platform for small entrepreneurs and provides information on financing and credit guarantee.

Trade related Entrepreneurship Assistance and Development (TREAD): To address the critical issues of access to credit among India’s underprivileged women, the TREAD programme enables credit availability to interested women through non-governmental organizations (NGOs). As such, women can receive support of registered NGOs in both accessing loan facilities, and receiving counselling and training opportunities to kick-start proposed enterprises, in order to provide pathways for women to take up non-farm activities.

Pradhan Mantri Kaushal Vikas Yojana (PMKVY): Launched in 2015, PMKVY is a flagship initiative of the Ministry of Skill Development and Entrepreneurship (MSDE). This is a skill certification initiative that aims to train the youth in industry-relevant skills to enhance opportunities for livelihood creation and employability. Individuals with prior learning experience or skills are also assessed and certified. Training and assessment fees are entirely borne by the government under this programme.

National Skill Development Mission: Launched in July 2015, the mission aims to build synergies across sectors and states in skilled industries and initiatives. The seven
sub-missions proposed in the initial phase to guide the mission’s skilling efforts across India are institutional training, infrastructure, convergence, trainers, overseas employment, sustainable livelihoods, leveraging public infrastructure.

Science for Equity Em-powerment and Development (SEED): SEED aims to provide opportunities to motivated scientists and field level workers to undertake action-oriented, location specific projects for socio-economic gain, particularly in rural areas. Efforts have been made to associate national labs and other specialist S&T institutions with innovations at the grassroots to enable access to inputs from experts.

Modified Special Incentive Package Scheme (M-SIPS): The M-SIPS scheme provides capital subsidy of 20% in SEZ and 25% subsidy in non-SEZ for business units engaged in manufacturing of electronics in the fields of the Internet of Things, aeronautics/aerospace and defence, automotive, renewable energy, non-renewable energy, technology, green technology and nanotechnology.

NewGen Innovation and Entrepreneurship Development Centre (NewGen IEDC): The NewGen IEDC is being promoted in educational institutions to develop institutional mechanism to create entrepreneurial culture in Science and Technology (S&T) academic institutions and to foster techno-entrepreneurship for generation of wealth and employment.

NewGen IEDC provides a limited one-time, non-recurring financial assistance to entrepreneurs up to Rs 25 Lakhs in the fields of chemicals, technology hardware, healthcare and life sciences, aeronautics/aerospace andf defence, agriculture, AI (artificial intelligence), AR/VR (augmented plus virtual reality), automotive, telecommunication and networking, computer vision, construction, design,
non-renewable energy, renewable energy, green technology,  fin-tech, Internet of Things, nanotechnology, social impact, food and beverages, pets and animals, textiles and apparel.

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