The country has significant entrepreneurial talent. It must enact major reforms to unleash it.
India has one of the fastest growing economies in the world. It also has a significant youth population. So why doesn't the country have a substantial number of entrepreneurs?
India needs to minimize barriers and provide support that will accelerate entrepreneurial growth.
A 2011 Gallup study of 20 economic entities in Asia showed that India ranked in the bottom quartile on several important indicators of a well-functioning entrepreneurial ecosystem. Although cross-country comparisons may not be ideal because of Asia's economic, governmental, and cultural diversity, ranking in the bottom quartile across a majority of indicators does arouse major concerns.
If India is to tap the entrepreneurial talent of its people, its leaders must enact significant reforms that increase support for new businesses in the formal sector.
Significant room for improvement
At a glance, you wouldn't think India has a problem. Entrepreneurs have consistently contributed to the country's vibrant growth-oriented economy since its economic liberalization in 1991. Entrepreneurship has become increasingly important in sustaining India's rapid growth.
Micro, small, and medium enterprises (MSMEs) also contribute to the country's inclusive growth and job creation. The Ministry of MSMEs estimates that between 2007 and 2010, the number of working MSMEs grew at a rate of 4.51% annually, while the number of people employed in the sector grew by 5.29% annually, and production of the sector grew at 11.48% annually. This sector contributed 8.72% of India's GDP in 2009. But as the Gallup study shows, there's significant room for improvement.
Gallup's framework for entrepreneurial ecosystems stresses the mutual interplay between individual variables (for example, talent and attitude) and contextual variables (for example, the role of government and access to information). It explicitly captures the role of human motivations, perceptions, and behaviors in explaining entrepreneurial decision making as well as the external contextual factors that support entrepreneurship and individual entrepreneurial traits.
Based on Gallup's research from March 2012, 16% of Indian adults report that they currently own a business. Of those, 22% say they formally registered their business. Half of business owners report working alone, and 47% have hired five or fewer employees. Twelve percent of all business owners say they plan to hire more employees next year, and 55% say their number of employees will stay the same.
Among Indian adults who are not business owners, 9% have thought about starting their own business. Of those, 5% plan to put their thoughts into action and start a business in the next 12 months. Clearly, India needs to minimize barriers and provide support that will accelerate entrepreneurial growth and enable entrepreneurs to satisfy an existing demand, create jobs for people other than the business owner and his or her immediate family, and contribute to the growth of India's GDP.
The key barrier to current and aspiring entrepreneurs is the lack of a robust support system. The analysis based on the Gallup framework shows that India ranked in the bottom quartile on external factors such as government support, culture, social capital, and access to training. By contrast, intrinsic factors -- such as entrepreneurial talents and attitudes -- ranked much higher than external factors in enabling support for aspiring entrepreneurs. Improved external factors may help unlock more of the Indian population's natural entrepreneurial potential.
Entrepreneurial talent is abundant; a willingness to take risks isn't
Gallup defines an entrepreneur as an individual who proactively seeks to generate value through expansion of economic activity and who creatively responds to challenges and needs encountered in the process of accomplishing this outcome. The terms proactively seeks and creatively responds capture the talent approach to entrepreneurship, which identifies areas of strength and weakness relevant to the entrepreneurial potential of an individual.
Not every individual, even armed with training and reinforcement, can be a successful entrepreneur. Success comes more naturally to those who have inherent talent for the endeavor. Successful entrepreneurs are likely to be optimistic, goal-oriented, and persistent. When examining Indians' profiles using these criteria, the population appears to have an abundant reserve of entrepreneurial talent.
More than 60% of the Indian population possesses personality traits that are crucial for success as an entrepreneur -- such as business thinking (69%), optimism (66%), and persistence (65%) -- which suggests a wealth of entrepreneurial capacity. However, willingness to take the risk of running a business is not a common trait among a majority of Indians.
Perceived risks may include personal risk (emotional strain, the unpredictability of success), financial risk (loss of savings, no resources to fall back on), know-how risk (lack of adequate knowledge and skills), or vested interest risk (lack of fair and transparent regulations and effective law enforcement). Though reducing these risks depends heavily on contextual support, few Indian entrepreneurs can claim that they feel comfortable taking risks as a result of robust support from the government, the public, and the entrepreneur community.
Contextual factors lag behind individual characteristics
A key problem for entrepreneurs has been finding the right type of funding.
Individual personality characteristics, behaviors, and attitudes are embedded in and influenced by cultural context, and entrepreneurs act within social and economic systems. So contextual support is as vital to the success of entrepreneurship as are individuals' characteristics, and lack of such support is the bottleneck currently holding back the formal MSME sector in India. The following four factors are of particular concern.
1. Reliable support from honest and efficient government institutions is essential.
It is not easy to start a business in India. When asked about the difficulty of starting a business, 46% of Indians say the government makes it hard to start a business, while 26% think the opposite. Little progress has been made on this front. The World Bank ranked India at 166 among 183 countries in its "Doing Business 2012: Doing Business in a More Transparent World" report, a ranking unchanged from 2011.
To some degree, widespread corruption might be contributing to the low efficiency and high costs of starting a business in India. Gallup started measuring corruption issues in India in 2006, and the results consistently indicate that more than seven in 10 Indian adults believe that corruption is widespread in government. More than six in 10 agree that corruption is widespread in business. Perceptions of widespread corruption in the business community are particularly high among current business owners (72%) and those who plan to start a business in the next 12 months (80%).
Perceptions of a corrupt business community could give business owners incentive to do unscrupulous things, such as paying bribes to get work done, which could exacerbate the lack of respect for entrepreneurs among the Indian public. Less than half (48%) of Indians consider business owners to be good role models for the country's youth, Gallup research shows.
2. Indian entrepreneurs need more diversified, localized funding at the initial stage.
The most helpful factor in becoming an entrepreneur in India is access to funding. Gallup data show that nearly three in 10 (29%) aspirational entrepreneurs who plan to start their business in the next 12 months agree they have access to the money they need, down from 37% in 2011. This level of financial support is also significantly lower than the average for all 20 Asian economic entities Gallup polled in 2011 (44%).
India has attracted the attention of global investors in recent years because of its growth and optimistic expectations for its future. The key problem for entrepreneurs seems to be less about the availability of funding and more about finding the right type of funding. The majority of existing venture capital funds for startups are focused on export-oriented IT or mobile solutions. Few seem to facilitate startups that offer the high-demand products and services in the healthcare or energy sectors in India's massive domestic market.
Another potential problem with funding lies in the disconnect between investment funds and local entrepreneurs. Foreign investors could make inaccurate assumptions based on funding arrangements that have worked well in their home countries or other emerging markets and, in turn, ignore that India is unique in its market demands, talent supply, and business culture.
Finally, there is considerable lack of angel or seed funding and complementary assets such as investors' expertise and participation in managing startups in India. Instead, venture capitalists in India are mostly inclined to get involved at later stages, for example, by financing the expansion of existing businesses.
3. Indian entrepreneurs need more access to training and mentorship, particularly in rural areas.
Gallup's latest data show that 37% of current business owners and 28% of aspirational entrepreneurs who plan to start their business in the next 12 months know people who can give them advice about managing a business. Perhaps the best mentorship comes from successful business owners who have personal experience overcoming entrepreneurial challenges. Though India has some high-profile entrepreneurs who can serve as inspirational icons (for example, Narayana Murthy of Infosys), there are not many who offer success stories from which aspiring entrepreneurs can learn.
Apart from mentorship, Gallup also found that 22% of aspirational entrepreneurs who plan to start their business in the next 12 months have access to formal or informal training to start a business. Again, this is much lower than the Asia average of 44%.
India has taken significant steps to promote entrepreneurial education and has established a list of national institutions to provide special training for entrepreneurs. However, according to Research and Markets' 2011 report on "Entrepreneurship Education in India," in 2010, 1,500 students were being trained at institutions that are solely focused on entrepreneurial education, while 4,700 students were enrolled in entrepreneurship programs at different business schools and institutions across India. Even though enrollment doubles each year, it is far from meeting the nationwide demand for entrepreneurship training. In rural areas, where about 70% of India's population lives, residents have few chances to take advantage of these opportunities.
Entrepreneurial education also shares many of the prevalent problems regarding the general education system in India, including a shortage of quality educators and an absence of quality content, which hinder entrepreneurial growth.
4. Enforcing agreements is necessary to protect trusting business relationships.
India has a large youth population, which tends to be more willing to take risks compared to the older population.
According to the World Bank's report "Doing Business 2012: Doing Business in a More Transparent World," India ranks 182 out of 183 countries on enforcing contracts. The time needed to enforce contracts in India is almost triple the average among Organisation for Economic Co-operation and Development (OECD) countries, and the cost of doing so is almost double the OECD average. Indian entrepreneurs, often strapped for cash and time, are almost powerless when business partners cheat them. Perhaps this is why Gallup data indicate that 83% of current business owners say they are the sole owner of their business, and only 16% of Indian adults believe they can find someone outside their own family to be a trusted business partner.
The lack of judicial infrastructure on enforcement does little to protect the trusting relationship between entrepreneurs and business partners or between entrepreneurs and customers. A lack of trust inhibits collaboration and significantly increases the risk an entrepreneur takes, ultimately slowing the growth of the MSME sector.
Implications for India's leaders
Limited access to training and funding, difficulties the government poses to starting a business, and lack of trusted business partners are all likely to have negative effects on the optimism and determination of Indian entrepreneurs. Despite these barriers, Indian entrepreneurs still rank fairly high on these individual characteristics compared with residents of other countries in Asia, further indicating that they are resilient and possess the innate talents to succeed if given the necessary support.
In addition, India has a large youth population, which tends to be more optimistic and willing to take risks compared to the older population. The 2011 national census shows that more than 50% of the population of India is younger than 25. Factoring the high percentage of young people in India with India's reputation as one of the fastest growing markets in the world, there are plenty of reasons to believe in a promising entrepreneurial future for the country.
Yet the speed with which the Indian MSME sector can progress compared with other countries in Asia or emerging economies worldwide and the extent to which entrepreneurship can contribute to the growth of India depend on improvements in contextual conditions.
Areas where these conditions must improve include the government -- such as its honesty and efficiency, simplifying tax laws, reforming investment regulations, reducing the number of procedures required to start a business, and reducing the time and cost of enforcing legal contracts -- and society -- such as increasing the interactions and collaboration among investors, aspiring or existing entrepreneurs, and advisers or educators.
It is encouraging that significantly fewer Indian adults see corruption as widespread -- down seven percentage points for government and eight points for business from 2011 to 2012, according to Gallup data. This change in opinion took place after India's Supreme Court revoked illegally awarded telecom licenses in February. Hopefully, this is not the government's temporary response to the public's outrage and protests but a sustained effort to eradicate corruption and build strong governance to support entrepreneurship development in India.
In the short term, progress in formalizing governance and making it more transparent could demoralize entrepreneurs who want to grow a business informally or go underground to exploit opportunities, which could cause a decline in entrepreneurship. But this progress could lead to reducing unproductive or destructive entrepreneurship, which is necessary for healthy and productive entrepreneurship. In any case, such improvement would require long-term joint efforts by policymakers, thought leaders, practitioners, and experts from the entrepreneurial community.
Results (India) are based on face-to-face interviews with 5,000 adults, aged 15 and older, conducted Jan. 29-March 8, 2012, in India. For results based on the total sample of national adults, one can say with 95% confidence that the maximum margin of sampling error is ±1.7 percentage points. Surveys in prior years were conducted with between 2,000 and 6,000 Indian adults, and the margin of error for previous surveys ranges from ±1.7 to ±2.6 percentage points.
Results (20 countries in Asia) are based on face-to-face and telephone interviews with approximately 1,000 adults, aged 15 and older, conducted between April 5 and Dec. 4, 2011, in Thailand, Laos, Singapore, Nepal, Malaysia, Sri Lanka, Hong Kong, Afghanistan, Mongolia, Philippines, Cambodia, Taiwan, Bangladesh, Japan, Indonesia, Pakistan, Vietnam, India, South Korea, and China. For results based on the total sample of national adults, one can say with 95% confidence that the maximum margin of sampling error ranges from ±2 to ±4 percentage points.
The margin of error reflects the influence of data weighting. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.