India poised to become world’s next startup nation

If India is to follow Israel and the US to become the world’s next great startup nation, it must do much more to vamp up internet access and cut choking red tape both of which do little to encourage entrepreneurship.

India is still coasting on a high following Prime Minister Narendra Modi’s historic visit to Silicon Valley last weekend. While there he interacted with entrepreneurs like Facebook’s Mark Zuckerberg and Tesla’s Elon Musk.

The release of the latest Global Competitiveness Report by the World Economic Forum on Tuesday is an added boost — India has risen an impressive 16 places to 55th spot.

Read more: India is home to 3rd-biggest startup ecosystem in the world, says report

Modi has launched various startup schemes since he was elected — including a new VC fund of funds last month (see this earlier post). In August he spoke during India’s Independence Day speech of a “Start up India, Stand up India”.

And his campaign Digital India (launched in July) aims to put government services online and connect rural communities with high-speed internet. India really needs it.

Internet let down

A mere 18% of Indians access the web, the latest UN broadband report reveals (two-thirds of Malaysians, half of South Africans, 57% of Brazilians and 72% of Chileans are online).

But the tech savy Modi (the second most followed world leader on Twitter) has a plan.

He told a US audience last weekend that his government is making digital infrastructure and service affordable that will bring broadband to 600 000 villages and free WiFi to schools, universities and public places.

Revolution

But arguably his bigger hurdle is trying to push through reforms to cut red tape that is stifling economic progress.

He has had to hold off on plans to roll out General Sales Tax (which would simplify present India’s tax system which complicates trade between states) after he failed to get the measure passed in Parliament recently.

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And newly introduced reforms which aim to reduce red tape (see this post) may also take some time before they take hold properly (a single window for registration some say some still involves a business having to go from pillar to post to rather the various documents needed to register).

A new bankruptcy law was proposed in India’s budget earlier this year and could help. It takes years to wind up a company and settle commercial disputes.

Along with crippling red tape and corruption this discourages many from starting out and could be why so few Indians are involved in starting or running a new business (6.6% of all adults, according to the 2014 Global Entrepreneurship Monitor report).

​Small jobs impact

Then there’s the question of which kind of entrepreneurs the government should support.

The Indian government’s approach to creating the over one million jobs the country needs each month to prevent unemployment from growing is to help more people to start businesses and to provide them with the necessary skills to do so

For example it wants to roll out 500 small training centres. The small business ministry also carries out jobs fairs and in July last year launched a jobs portal. So far just 85 enterprises have been registered and 16 000 potential employees have joined the database.

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This seems the right move. But one scheme — the prime minister’s employment generation programme covers helps finance new projects undertaken by micro enterprises, created only 41 000 jobs in the year to July.

The problem is that India’s almost 49 million small businesses (which account for 37.5% of the country’s gross domestic product) create on average just 2.2 jobs per firm, according to the small business ministry’s latest annual report.

Job-losing

A comparison cited by the World Bank in a 2013 report reveals that average employment at Indian firms actually declines by a quarter after a firm has been in existence for 35 years.

Comparatively in Mexico employment doubles and in the US grows 10 times bigger on average for those firms that survive for 35 years.

The World Bank blames Indian small businesses’ poor productivity for their poor performance in creating jobs.

High growth subset

A better bet would be to channel more support at India’s 3 100 tech startups that employ 65 000 people, at an average of 21 jobs per enterprise, according a recent report by Nasscom, a software industry association (see this earlier post).

Modi should take heed. Silicon Valley shows what can be done. There, Indian immigrants are responsible for starting 16% of all new firms, says entrepreneurship expert Vivek Wadhwa. Given the right incentives and right environment entrepreneurs can flourish.

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