India – Ground zero for entrepreneurship and innovation

Every day, there is a story or two on e-commerce startups. The regularity of the stories would lead most to believe that India has made its mark on the world’s entrepreneurship landscape. This can be analysed by seeking answers to two key questions:

  • Is entrepreneurship thriving in India?
  • Is entrepreneurship sustainable in India?

A large number of start-up enterprises are classified under the category of Micro, Small and Medium Enterprises (MSMEs). According to the projections made in the Annual Report of the Ministry of MSME 2014-15, India had 4.88 crore MSMEs at the end of 2014 (35% growth since 2006-07), employing about 11 crore people.

There were more than 17 Lakh new firm registrations from 2007 till 2014 clocking a healthy annual growth rate almost 1.5 to 2.5x of the GDP. Study of the last seven years’ data on new MSME registration across states suggests:

  • States of Tamil Nadu, Gujarat, Maharashtra and Karnataka recorded amongst the highest increase in the number of new enterprises. However there are regional imbalances as nearly 93% of the new enterprises were registered in 10 states in 2013-14.
  • The reason for this imbalance is the dominance of large states due to their favorable climate for businesses. India’s federal system of government gives extensive power to state governments as land, an integral requirement for industrial activity – remains a State subject.

This information leads to impression that India as a country does have spirit and momentum for entrepreneurship.

India’s rank of 142 out of 189 countries in ease of doing business as per the World Bank report 2014-15 has unambiguous message that there is an urgent need to improve India’s image as a business destination. At the country level, the Central government has realized that this initiative can only be made successful by engaging the state governments. Indian government has roped in the Department of Industrial Policy and Promotion (DIPP) to initiate a process through which states will be ranked for ‘ease of doing business’. This is expected to bring awareness among states and encourage them to compete with each other for investments. Mapping India’s ease of doing business at the state level is also important from an investors’ point of view  as such an initiative can help investors make a much more informed decision on attractive locations within the country. Although this step only recently started, the results are keenly awaited!

For India to have a sustainable entrepreneurship culture, it is also important that its MSMEs continuously innovate. While it appears that India has a large base of MSMEs, and every year several firms are being set up, India’s rank of 66 out of 142 countries as per the Global Innovation Index 2013 is a reality check of where Indian entrepreneurism is. Indeed, business models of many of the upcoming enterprises in the e-commerce space are a simple replica of existing ones found elsewhere in the world and most of these are the aggregation models. These aggregation based business models are a phase and in the absence of real innovation at ground level this will not sustain after all entrepreneurship is not just halo of aggregation.

One point which needs to be kept in mind is that Indian social systems are highly sensitive to failure as we have progressively stigmatized failure. This is largely due to the resource constraints, which puts emphasis on continuous success as the only method of measurement of individual or family success. Although the situation is slowly changing, we still have to evolve as a more tolerable society to encourage innovation!

Guru Malladi, Partner and Leader, Advisory Services and Prakash Singh, Director, Advisory Services have contributed to this article.

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