The Planning Commission wants you to start up
The country's entrepreneurship ecosystem urgently needs a push to help it grow to attain even a fraction of its complete potential. A recent Planning Commission report may help in doing just that
November 20, 2012 / 13:19 IST
By Shruti Chakraborty
If you have already started your business in India, you are likely to know exactly what The World Bank means when they decide to rate India 166th out of 183 economies in the world on the ease of starting a business. If this is a discouraging figure for you and you’re planning to take that cushy job instead of starting your company, the Planning Commission of India may have something for you. In the last week of August, a committee set up by the Planning Commission came out with a report ‘Creating a Vibrant Entrepreneurial Ecosystem in India’ and presented it to Finance Minister P Chidambaram and Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia.The report gives hope that entrepreneurship in India is likely to be treated as more than the unwanted son of the government, come the 12th Five Year Plan. Ahluwalia, in fact, said in a statement that the findings of the committee will be reflected in the 12th Plan Document.The committee, chaired by Sunil Mitra, ex-revenue secretary, Government of India, comprised Saurabh Srivastava, Founder and Director of the Indian Angel Network; Ashish Dhawan, Founder of ChrysCapital; Jayant Sinha, Managing Director, Omidyar Networks India Advisors; Alok Mittal, Managing Director of Canaan Partners; Jyoti Sagar, Founder of JSA Law; Rajiv Memani, Country Managing Partner for Ernst & Young; and Harkesh Mittal, Adviser & Head, National Science & Technology, Entrepreneurship Development Board, amongst others. The research behind the report has been done by Bain & Co.The task at handThe report highlights some of the key challenges faced by entrepreneurs in India and looks at the relevant changes that need to be made to help entrepreneurship flourish in the country. It looks extensively at the shortage in the availability of capital at the level of angel and early-stage investments. Jayant Sinha, in fact, says “we are well below where we need to be.” The report looks at the potential for job creation by driving entrepreneurship and says that all big organizations, including the large companies in the public and private sector are incapable of generating enough jobs to meet the demand that is likely to come up in the coming decade.The report states that the banking sector in India has recorded almost no employment growth in the last two decades despite multifold growth in its revenues and assets. Agriculture employs nearly a half of India’s workforce but employment is likely to decline in this sector, due to improvements in productivity. The report also looks at the changes that can be brought about in other sectors like healthcare and education through a vibrant entrepreneurship ecosystem and by encouraging impact investing.Says Sinha: “If we can get the entrepreneurial ecosystem fired up, we could make a huge difference.”The size of the challengeThe report throws up a few figures to give an estimation of the scale of the problem faced by Indian entrepreneurs as opposed to entrepreneurs in other economies. It states that in 2011, Indian angels, constrained by regulations that make both investing and exits cumbersome, invested only about Rs. 100 crore (approximately $20 million) in around 50 deals as compared to Canada, where angels invested Rs. 2,000 crore ($390 million). As a proportion of early-stage investing, angel investments in India comprise just around 7 percent as against around 75 percent in the US. Early-stage venture capital investing is around Rs. 1,200 crore ($240 million) annually as against Rs. 29,000 crore ($6.3 billion) in the US and Rs. 3,000 crore ($700 million) in China.Another major problem, Sinha says, is that “we don’t have a local venture capital industry”. Around 90 percent of the early-stage venture funds in India come from offshore sources rather than from domestic investors. “Being an angel investor in India means that you are handicapped in many ways. The tax treatment of angels is very murky right now. The treatment of capital gains is an issue, amongst others, which is a dampener for the community,” he says. The reason for most of the early stage venture funds coming in from offshore sources, Sinha explains, is that RBI regulates what the pension funds and insurance companies can do. “Pension funds can’t even invest in the equity market, let alone invest in an asset class like early-stage venture capital. Then there are the capital market provisioning norms. Everywhere else in the world, pension funds have played a tremendous role in fostering the venture capital industry.”The report also states that in the next decade, Rs. 3 lakh crore will be required to promote entrepreneurship in India. A significant part of this would be impact investing-to address the country’s key development issues such as sanitation, clean drinking water, affordable healthcare and technology.What the committee saysBroadly, some of the recommendations made in the report include that agencies at all levels-central, state, and local-reduce transaction time and costs through measures such as single-windo- clearance and access to well-developed industrial clusters. A model along the lines of Software Technology Parks of India (STPI) could be created for early-stage ventures which could get affiliated to “entrepreneurial hubs” that enjoy similar facilities as STPI units.A policy framework for easier exits will encourage early-stage investments by angels and others, the report says. For angel investors, Sinha says the committee made the following recommendations: “The treatment of angel investors can be easily improved. A simple clean-up of the tax code will help, for starters. A few tax deductions can be made for angels as it is done in Singapore and the US.”It is further added in the report that the government must simplify IPO requirements including permitting overseas listing without the necessity of domestic listing.It also suggests that the government must remove regulatory hurdles that inhibit domestic fund-raising. The report suggests the creation of a ‘fund-of-funds’ to seed other early-stage venture funds. With a corpus of `5,000 crore, this fund-of-funds will invest, as an anchor investor, in a number of Alternative Investment Funds (AIFs). These AIFs, in turn, will raise capital from other sources-domestic and foreign-thereby creating a multiplier effect.The report also suggests developing and scaling up of debt offerings by expanding the lender base by incentivizing banks to offer SIDBI-like schemes to early-stage ventures.The big missionAnother aspect the recommendations touches upon is a greater engagement of established businesses with emerging ventures. Towards this objective, the report recommends that the government set up a National Entrepreneurship Mission. The Mission will need to work closely with government ministries/departments of Finance, Ministry of Small and Medium Enterprises, Human Resource Development Ministry, etc. The Mission, it is suggested, will similarly work with regulators, banks, financial institutions, angel investors, venture capitalists, industry bodies and chambers of commerce and educational institutions, both public and private, with the objective of regulatory outcomes which promote and facilitate entrepreneurship. The Mission should ideally be set up under the Prime Minister’s Office, the report adds.While a number of incubators have been established in educational institutions, the report emphasizes the push this initiative needs. The report says that 1,000 incubation facilities should be set up in the next decade to encourage entrepreneurship and innovation in the ecosystem.Says Sasha Mirchandani, Founder and Director at early-stage venture capital firm Kae Capital: “It’s a great step in the right direction. The focus now must be to get things done. Even if 50 percent of the recommendations are implemented, it will be a boost for the ecosystem.”Sinha adds: “We have now set up a technical working group that is looking into each of the recommendations.”Mirchandani says he is optimistic about it all. The entrepreneurial community will be hoping that this report does not end up joining the several others gathering dust in the rooms of the policymakers.Entrepreneur India October 2012 Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
