We have one enterprise for every eight workers and our official unemployment rate of 4.2% is not a fudge. But then, why are so many Indians poor?
India does not have a shortage of entrepreneurship, enterprises or jobs. Fifty percent of our labour force is self-employed, we have one enterprise for every eight workers and our official unemployment rate of 4.2% is not a fudge.
But then, why are so many Indians poor? Because most of our enterprises are dwarfs rather than babies (80% of manufacturing is done in companies with less than 50 employees), vary considerably in productivity (there is a 22 times productivity difference between a firm at the 90th and 10th percentile by size in manufacturing), and 40% of our labour force is working poor (people who make enough money to live but not enough money to pull out of poverty). Our problem is not jobs but formal jobs; India is just not producing enough enterprises and individuals with the productivity to pay or deserve higher wages.
Any entrepreneurship discussion should start with India’s current enterprise stack. We have 63 million enterprises, of which 12 million don’t have premises and 12 million operate from home. Only seven million enterprises have some kind of tax registration. Only 1.2 million enterprises make contributions to employer-based pension and health insurance plans. There are only one million companies incorporated in India. Most painfully, we only have 14,500 companies with a paid-up capital of more than ₹ 10 crore. Why?
Cultural explanations for the scarcity of entrepreneurship are, at best, the soft bigotry of low expectations and, at worst, outright racism. But a lack of vibrant entrepreneurial ecosystem, inefficient factor markets (land, labour and capital) and regulatory cholesterol combine to make India a hostile habitat for first-generation entrepreneurs. We’d like to make the case that making India a fertile habitat for entrepreneurship does not lie in industrial policy (targeting a sector with cheap money, free land and import barriers) but a radical reboot of India’s innovation and regulatory regime. The role of the government is not setting things on fire but creating the conditions for spontaneous combustion.
Innovation and entrepreneurship are used interchangeably, but we’d like to separate them for detailing the agenda. Our committee views the innovation agenda as a pyramid with long-term attitudinal change through role models and narratives, medium-term human capital reform, and the immediate action of setting aside of a large sum of money for grand challenges (grants to tinkers who propose solutions to India-specific challenges like drinking water, technology in education, primary healthcare, renewable energy, urbanization, etc). Human capital reform is about amending our Right to Education Act to become the Right to Learning Act, fixing our vocational system, and massifying our over-regulated and under-supervised college system by making the painful choice of separating small research universities focused on knowledge from large vocational universities focused on employability.
The entrepreneurship agenda is well known. The first variable of land needs more cities (we have only 45 cities with more than a million people relative to China’s 375) with real mayors (impotent or unelected city leadership creates dumb, not smart cities).
The second variable of capital requires deepening and widening equity and bond institutional markets, bringing back the offshore bond and currency derivative markets, and issuing many new bank licences. Most importantly, we need a level and predictable playing field for entry, taxation, and exit norms for foreign and domestic private equity and venture capital.
The third variable of labour needs an overhaul of labour laws. The broad themes of regulatory change would be decentralization (29 chief ministers matter more than one prime minister for entrepreneurship) and civil service reform (we need to manage our permanent generalist bureaucratic cadre better and complement them with lateral entry) combining with a stable and transparent tax and regulatory regime.
Author Annie Dillard said that how we spend our days is how we spend our lives. Entrepreneurs suggest that two plumbing interventions would change their daily lives; (1) a single Aadhaar number for enterprises to replace the 17 currently used across all state and central governments, (2) online and deadline: A single electronic interface with a deadline for all government registrations and permissions. This enterprise interface will be anchored on Aadhaar enterprise number on one end and the processing capability created by the government or outside software companies based on the application program interfaces (APIs) to be generated by the ministries responsible for all registration/applications in the next two years. Going forward, all new laws should be required to be born digitally native.
India’s recent history of entrepreneurship has three phases. Entrepreneurship 1.0 was doing business under the British till 1947—a painful period during which India grew at a pathetic 0.5% per year. Entrepreneurship 2.0 was the licence raj from independence till 1991, when most companies didn’t have clients but hostages, and India grew at an insufficient 2.4% per year. Entrepreneurship 3.0 began with reforms that raised growth to 7% but the lack of systemic changes for entrepreneurship means that we are not creating jobs at the scale needed. Entrepreneurship 4.0 is about making India a fertile habitat for entrepreneurship where the courage in your heart, sweat of your brow and the strength of your backbone matter more than your connections, parents or money. It is the meritocracy that Gopal Krishna Gokhale dreamed of when he headhunted Gandhi back from South Africa with the challenge of “Making India proud of herself again". The policy agenda to create this meritocracy is obvious; the monster lies in how and who. But policy is a child of politics, and given political will, this monster is slayable within five years.
Vallabh Bhanshali and Manish Sabharwal serve on the NITI Aayog Committee on Entrepreneurship and Innovation.