Reform’s kids

Reform’s kids

In a speech he gave this week to a group of management consultants in New Delhi, Prime Minister Manmohan Singh said that “the economic reforms of 1991 unleashed a new era of entrepreneurial growth in India".

This is a well-known fact, albeit one that is not appreciated enough. Too much of the analysis on India’s growth spurt over the past decade and a half has stayed focused on macroeconomic issues such as savings, deficits, exchange rates and the like.

A modern capitalist thrives on turmoil, as the old is swept away by the new. That is the essence of enterprise and innovation, as economist Joseph Schumpeter so powerfully argued.

India has seen a lot of renewal of this sort—though perhaps not enough of it. “I believe most of your clients today, certainly the most important clients of yours, were non-existent in 1991, or had hardly any presence at that time. I call these enterprises the children of reform. Today, they are among the world’s most respected companies," said the Prime Minister in his speech.

There is little to disagree with here. But the children of reform are part of a large brood that spreads to almost the entire country.

While the marquee names of firms that emerged into the corporate top league out of nowhere are well known—Infosys Technologies Ltd or Pantaloon Retail (India) Ltd, for example—the role played by their smaller corporate brethren is not appreciated widely enough.

That’s a pity. Because it is these small companies that perhaps have fought the tougher battles in the years that immediately followed the reforms of 1991.

India’s smaller companies have been through very rough times—as import duties dropped, the list of items that were reserved for them was dramatically pared down and the larger companies cut flab from their supply chains. Their world was turned upside down. There was even a time in the late 1990s when the average small company in India was deep in trouble and seemed to have no worthwhile future.

How much things have changed since then, as fast and nimble companies have adjusted to the new realities. Thousands of small and medium enterprises (SMEs) have reinvented themselves, often by linking to global production chains. Clusters such as Tirupur (textiles) and Pune (auto components) are flourishing. New SMEs have emerged, not just the tech start-ups in places such as Bangalore, but also in other more prosaic areas. Banks and private-equity firms are actively seeking them out as clients.

Small firms have also been at the forefront of job growth and exports. This is not unique to India. A new survey of innovation as in The Economist points out, “From 1980 to 2001, all of the net growth in American employment came from firms younger than five years old. Established firms lost many jobs over that period and dozens fell off the Fortune 500 list."

To stoke the fires of innovation and enterprise, India needs more ground-level reforms. Too much entrepreneurial energy is currently wasted in chasing approvals and bank loans. It takes far too much time to set up and close down a business, as successive World Bank surveys have shown. Economic growth will be sustained over the decades only if there is vibrant corporate churn, as old companies die and new ones emerge.

India has made progress on many headline reform issues. But it needs to quickly remove the several hurdles that block entrepreneurial activity in the country.

Only then can a million new entrepreneurs bloom.

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