• In Conversation

Montek Singh Ahluwalia is the man executing India’s 5-year plans. Here, he outlines the need for an assault on constraints to develop a conducive entrepreneurial ecosystem in the country.

Montek Singh Ahluwalia (MSA): What schemes and policies has the Government of India put in place to help entrepreneurs?
Entrepreneur (E): To view individual schemes is not the right way to view entrepreneurship. The shift is systemic—you are creating what some people may call the ‘ecosystem’ that boosts entrepreneurship. Obviously, an essential precondition of that is openness, the ability to compete, removal of dysfunctional control on decisions that need to be taken by the private sector, freedom to import what you need, among others. I think the first stage of economic reforms really concentrated on getting rid of control, which limits entrepreneurs from making decisions and competing.

I’m not saying that there shouldn’t be any controls at all. Earlier we had controls on the technology to be used, where to use it, which locations to operate from, the scale of a business; these were ultimately dropped. That was a very crucial step as it increased the competitive environment. Competition alone cannot achieve very much unless you open up your economy.

Getting rid of controls on trade—introduced under the guise of managing the balance of payment and foreign exchange scarcity—made a big difference. Allowing foreign investors to come in, on their own or through joint ventures, was another major decision that created competitive environment. This is what I call the first stage of reforms. None of these are schemes, but just the act of getting rid of controls.

The next stage, again, doesn’t have to do with schemes, but institutional development. Does the financial sector have the capability to take risks and support new entrepreneurs? Controls had let to monopolistic or semi-monopolistic positions by established companies, where banks only lent to these companies.

The moment you create an ecosystem—where you think the established position of existing companies can be challenged by new entrants—it makes sense for bankers to judge if they are backing a horse that is flogged or they backing a horse to win. These are institutional steps that are relevant for banks and for creating a capital market.

I am not very impressed with schemes that promote entrepreneurship like subsidies. It’s the change in the total ecosystem that has unleashed a flurry of entrepreneurial activities. Where I think you do need some special effort is in the initial stages; when somebody is coming in and you don’t have a ground-breaking financial system, it makes sense for you to find ways in which your own banking system can become innovative.

The other aspect is to provide infrastructure to develop and spur entrepreneurs. To improve entrepreneurship, you have to improve infrastructure. This role would fall under schemes, but 90 percent of what causes the unleashing of entrepreneurs has to do with abolishing dysfunctional controls, setting up infrastructure and sorting out the financing side. If I am a small and medium business in U.P., for instance, the most important thing for me is to get my product to the Mumbai port in one-third the time it presently takes.

That, I think, is much better then giving capital subsidy to buy machines. Things like subsidies are very popular and individuals like the specific benefits, but the contribution that overall infrastructure makes is huge. For me, the single biggest factor for anyone getting into business is to have assured quality electricity at reasonable rates.

E: What do you consider to be the optimal role of an entrepreneur in India?
MSA: Every entrepreneur looks for spaces in his own economy—and the circumstances and challenges are totally different in India than abroad. The levels of scale at which you can start up are different, as is the nature of demand. C.K. Prahalad talks of the bottom of the pyramid and the huge, unexplored potential. We are in a situation where, every 10 years, about 100 million people will move from not being in a market to being in a market. The U.S. is not in that sort of a situation. There, the environment is relatively stable, but technology is continuously changing. I do not think we are doing enough to ascertain technology changes that would be relevant for a market in India. Entrepreneurs need to look at linking up with the domestic resource capability and tailor products for Indian circumstances.

E: According to you, which are the best sectors for entrepreneurs to operate in?
MSA: I am not competent to judge that. I think more damage is done by the government trying to spot winners. Is this not a chicken and egg situation? Barring the IT industry, startups in other sectors face huge financing problems. For startups that are in the science and technology stage, it is often the Ministry of Science and Technology that helps entrepreneurs. Is this worrying?

For instance, Ashok Jhunjhunwala invented the wireless and local loop; but it was first applied elsewhere, not in India. We need to ask ourselves if there is something about the way our industrial structure works that leads to innovations not being picked up. One reason is complacency on part of the companies. Also, there is an assumption that the best technology comes from abroad—nobody is looking at breakthroughs taking place at home, which could be very productive.

I think this will change. In the end, if people are looking for technology that’s homegrown, business and corporates will also have to follow suit. We should not be limited to importing technologies from abroad, but also support technologies being developed at the IITs. This is happening in the pharmaceutical industry, though, maybe due to the IPR issues; in other areas, there is much less of it. Supporting innovation should be an extremely important objective for us right now. We are currently preparing the mid-term appraisal for the 11th plan; in it, we plan to give special focus to innovation.

E: Do you think the vastness of the Indian market limits a global outlook for companies?
MSA: The notion that the Indian market is huge applies only if it is protected. It is not necessarily huge in absolute terms. If it becomes open, it is a very small part of the global market. Over the last 20 years, we have lowered trade barriers, which continue to be higher when compared to most developing countries. We need to continue opening up the market; you will then see Indian entrepreneurs doing far better. After all, the Indian IT industry did not benefit from the domestic market.

The downturn in the global economy spells poor export opportunities, this year and the next. Looking at the medium term, we have a recipe for what is needed: more domestic competition and a drive to open up the economy, promote innovation, improve infrastructure and create institutions that will enable capital to flow. We also need reforms in the labor market. People find it more profitable to invest in China, Bangladesh or Sri Lanka because of our rigid labor market.

E: Any complaints about entrepreneurs in India?
MSA: You cannot complain about entrepreneurs as a whole. What this country expects of entrepreneurs is to be innovative and stand the test of competition. Entrepreneurs say they are willing to compete, provided the competition is fair and measures are taken to deal with unfair competition, such as anti-dumping. One thing is clear: we have many good entrepreneurs. Some of our large companies are regarded very well in terms of entrepreneurship.I’m hoping that entrepreneurs who started out in the mid-‘90s will play a significant role in the country by 2015.

E: Is corporate governance an issue for SMBs?
MSA: Corporate governance is a bigger issue in large companies than in smaller ones. In smaller companies, it’s usually the entrepreneur who takes the risks and is the dominant shareholder; but it is important to note things like whether he is showing their finance book properly.

There is a need to associate corporate governance with transparency, which much be enforced by the regulatory system. There is no alternative to vigilance and better regulatory and accounting standards, which important in today’s world as companies have to keep in mind. We have seen that even minor incidents have resulted a change in the outlook of investors.

E: Companies are complaining about credit availability. How can this issue be solved as it would choke a large number of companies and entrepreneurs in India?
MSA: There is no quick fix for it. Certainly, the issue of financial inclusion is very important. Creating a database of credit history would be the best way to determine an individual’s position. It is very important to put a bankruptcy code in place and enforce the recovery of dues.

Our banks often find it difficult to do so—and if you do not have a smooth recovery process, banks are hesitant to lend. People wrongly believe that preventing recovery is a way of helping small-scale enterprises. It certainly helps the enterprise who has defaulted, but it discourages banks from lending to others.

©Entrepreneur October 2009

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Ahluwalia, Ashok Jhunjhunwala, C.K. Prahalad, ecosystem, entrepreneurs, government, India, Ministry of Science and Technology, Montek, Singh, smetv