India’s entrepreneurial landscape according to Ernst & Young

Entrepreneurs in India don’t have it easy. Research by Ernst & Young underlines the country’s challenging entrepreneurial environment, and yet, of the 20 countries surveyed, India looks poised to become one of the fastest rising stars among the world’s emerging economies.

Thanks largely to coordinated support championed by India’s government, groundwork to address hefty challenges surrounding education and red tape for new ventures have been laid, leading to a burgeoning entrepreneurial culture — especially in among technology startups.

What is the government doing? The Technopreneur Promotion Programme (TePP) aims to help tech innovators become successful entrepreneurs by promoting, supporting and funding their projects. Then there’s the Credit Guarantee Fund Trust for Small & Micro Enterprises (CGTSME), which enables banks to lend up to INR10-million (US$212 000) to entrepreneurial businesses without any collateral or security.

Further government-backed aid includes the National Entrepreneurship Network (NEN), which offers entrepreneurship education and fast-track access to incubation, funding, mentors and experts, as well as the Trade Related Entrepreneurship Assistance and Development (TREAD) scheme for women, under which the Indian government grants 30% of the total project cost to non-governmental organisations (NGOs) to promote entrepreneurship among women.

While the government’s involvement is encouraging, these schemes are not exactly new efforts. CGTSME launched in 2000, TePP in 1998, NEN in 2003 and TREAD a bit more recently, in 2008.

So, if these excellent initiatives have been in place for a while, why isn’t India rated higher in Ernst & Young’s study?

India faces serious problems in its education sector. The problems are so onerous in fact, that the report ranks India at the very bottom in its “Education and training” metric.

Thankfully, India’s government is taking steps to improve things. Going by India’s success in offering coordinated support for entrepreneurs, things appear hopeful.

Let’s take a look at India’s challenges and strengths.

Education and training

Overall enrolment for India’s secondary and tertiary education is weak. This leads to fewer people with the necessary skills to start and run a business, as well as a smaller pool of talent that entrepreneurs can draw from to expand their ventures.

There is also a need for more consistent quality of higher education. Despite a handful of high-ranking universities, Ernst & Young reports that standards in other universities are typically far lower.

Consider for example, that in 2011, according to The World Bank, only 5 168 patents were granted in India, compared with 172 113 in China. Education need to be enhanced and research and development (R&D) activity needs to be ramped up to make the most of this advantage.

Fortunately, the Indian government plans to spend US$20-billion (INR 1.1-trillion) on higher education. This sum is part of its US$82b-billion (INR4.5-trillion) five-year education plan, which started rolling out in 2012. The plan represents a 155% increase in education spending.

Many top business schools have also begun to include entrepreneurship education in their curriculum.

Tax and regulation

Ernst & Young rates India’s regulatory environment for startups as very poor — second from the bottom, in fact.

According to the report, the cost to start a business in India is over five times the G20 average of 9.4%.

The good news is that the Indian government is taking steps to make improvements to several areas of its business and regulatory environment — for example, businesses can now register online.

In terms of taxation, while the burden is said to be less excessive, the time and hoops that require jumping through, as well as the complexity of the system, all contribute to a slow rise in new ventures.

Again, the Ernst & Young reports that things look set to change for the better. For a start, the Indian government will introduce a new direct tax code that should simplify the tax rules, introduce new levels for taxation, expand the tax base, improve tax compliance and lower tax litigations.

Finally, the Indian government has reformed policies to make foreign investment more attractive.

Access to funding

Despite ranking in the bottom half for this category, 66% of entrepreneurs surveyed for the report said that access to private funding has improved in the last three years.

The report also cites a Planning Commission report that predicts incubators in India will rise from 120 in 2012 to around 1 000 within the next 10 years.

With the Indian government’s influence on funding came initiatives such as the SME collateral free loan, the SME credit card and the aforementioned Credit Guarantee Fund Trust for Small & Micro Enterprises, which has invested US$8.8-billion in small ventures — collateral free.

Lastly, India’s Finance Ministry has recently allowed startups to be listed on the SME Exchange without being required to make an IPO, making it easier for fledgling companies to raise equity.

Entrepreneurship culture

While India ranks in the bottom half overall, it’s one of India’s strong points, notes the report, especially compared to other emerging markets surveyed — India comes out on top.

The government-driven National Entrepreneurship Network (NEN) does valuable work in promoting entrepreneurship in the country through things like awareness campaigns and startup competitions.

Add to government efforts, the success of tech startups in recent times and it’s easy to see why 69% of local entrepreneurs believe that the country has a culture that encourages entrepreneurship.

As about a third of those surveyed still see any risk of failure as a barrier to future business projects, the government has responded with a plan to set up 15 technology development centers in India, to the tune of US$400-million. The report notes that an additional sum of around US$36-million has been set aside to fund organisations that scale up science and technology innovations, commercialise R&D results and make products available to people.

The government also rewards, promotes and motivates aspiring entrepreneurs, all of which strengthen the country’s entrepreneurship culture.

The report notes that there is room for improvement, however. In 2011, only 0.09 companies were registered in India for every 1 000 people of working age — among the lowest in G20 countries.

Coordinated support

Coordinated support is India’s biggest strength and ranks fifth overall – 70% of local entrepreneurs report that access to informal entrepreneurial networks has improved in India over the past three years.

The report notes how public and private bodies are seemingly becoming more organised in supporting entrepreneurs. The government’s non-profit National Entrepreneurship Network, which now has 70 000 members in 30 Indian cities, plays a key role.

Other programmes include the Entrepreneurship Development Institute of India, IIM Ahmedabad’s Center for Innovation Incubation and Entrepreneurship, both of which provide mentoring, financial support and knowledge to entrepreneurs.

Additionally, Rajiv Gandhi Udyami Mitra Yojana helps individuals who have undergone vocational training to become entrepreneurs, and the Trade Related Entrepreneurship Assistance and Development (TREAD) provides active support to India’s female entrepreneurs.

44% of local entrepreneurs surveyed intend to use teaming or mentoring programmes in the next three years.

Read the full 2013 G20 Entrepreneurship Barometer report.

Photo: Bryan Allison