India needs entrepreneurship 2.0 with risk-taking, visionary founders

The entrepreneurship that India requires must have two key characteristics. First, it must be willing to be innovative in the sense that it takes on new products and processes as part of its business. Second, it must be global in its marketing orientation so that it can compete with foreign suppliers in India and in global markets.

 

This was the case in the past. A very readable book by Lakshmi Subramanian provides useful information about entrepreneurship in the pre-Independence era. In Mughal times, innovation was not prominent, as it was a pre-Industrial Revolution era. What mattered was finance, where the rulers did not have enough control, and the finance and trading network was dominated by entrepreneurs. Two major examples of this are the banker Jagat Seth in Bengal and the trader Mulla Abdul Ghafur in Surat, who commanded an impressive fleet of ships and whose operations dominated the markets of West Asia. 

India, in fact, was a major exporter to West Asia, where two large empires — the Safavid and the Ottoman — provided a lucrative marketing area. One must also recognise the economic boom, largely under private enterprise, during the Mughal era. In 1700, the peak of Mughal rule, India’s share of the global gross domestic product (GDP) was 24 per cent, which dropped to 16 per cent by 1820. The decline became even sharper with the spread of the Industrial Revolution in the West. 

The situation changed in the colonial era. Trade in the Indian economy took place through several hundred informally organised bazaars, which linked sources of products and consumption areas. These were dominated by Indian bankers and financiers and relied heavily on the hundi as a bill of exchange and for fund transfer. The colonial masters were not satisfied with this but could not reduce their dependence on the Indians bankers in the early stages of their rule. However, when it came to global trade, Indian traders were marginalised with the growing dominance of agencies set up mainly by British business groups. Ms Subramanian highlights two individuals Jamsetjee Jeejeebhoy and Dwarkanath Tagore as Indian business persons who challenged the colonial domination and rose to prominence in global trade involving opium, mainly to China, and indigo. 

What is more striking in the colonial era is the emergence of significant Indian companies in industry. Ms Subramanian elaborates on Jamshed Tata’s innovative involvement in steel production and hydroelectricity, the Godrej group’s involvement in locks, typewriters, and other products based on self-development, and later the emergence of Kirloskars, Bajaj and TVS Sundaram when the colonial rulers eased conditions for Indian companies after the First World War. I would add to this the work of Walchand Hirachand who set up innovative units, like what is now Hindustan Aircraft, the shipping unit Scindia, a shipbuilding unit in Visakhapatnam and Premier Automobiles. 

In the pre-Independence era, several Indian entrepreneurs launched new products and played a useful role in promoting global trade. In the Mughal era, the government depended more on enterprises, particularly for finance, than enterprises depended on the government. Later, in the colonial era, indigenous enterprises seldom received support from the government, except for a brief period after the First World War. 

Independence reversed the past, creating strong links between the government and private enterprises, both during the licensing regime and even thereafter, with the government seeking to implement its views on how development should proceed, for instance, through the  production-linked initiative  and its decision to involve the private sector  in infrastructure development, which, because of its monopoly characteristics, requires specific choice of investors by the government.   

Innovation — in the sense of enterprises specialising in new products and processes — did emerge during the licensing era, mainly through new public enterprises. However, these often lacked the drive that comes with management ownership, and several of these public sector initiatives came to grief. The dependence on the private corporate sector did increase in the 1980s, and the major shift towards private enterprise came after the delicensing of 1991, driven by the extensive liberalisation of the financial system. 

The major entrepreneurial advance in recent decades has been the rapid growth of software, business services, and digital economy-related trading firms.  Much of this stems from the low-cost availability of skilled labour in India.  A telling example of this is the set of foreign-owned firms based in India that account for about 20 per cent of global chip design — firms that rely on Indian workers but not Indian entrepreneurs. What is even more telling is the low level of indigenous enterprise engagement in chip manufacturing or assembly, a shortfall that has led the government to adopt a heavily subsidy-driven approach to industrial development. The scale of government involvement in this area is vividly striking in the 70 per cent capital cost subsidy, amounting to nearly $2 billion, given to a new semiconductor plant being built in Gujarat. 

Despite these efforts, the scale of innovation in India has lagged behind countries like China, South Korea, and Taiwan. Many major entrepreneurs who ought to be more innovative and globally oriented have instead preferred to diversify into low-tech areas like retail finance. An even more disturbing trend is the slow growth in manufacturing investment over the past decade.

  A summary of the major advances we need to make Indian entrepreneurs more focussed on innovation and global trade involvement is as follows:

• Establish a government policy on entrepreneurship and competition that recognises the power of market forces and promotes a market-friendly environment, rather than favouring specific sectors or businesses. 
• Aim at controlling the power of promoters in family-owned firms, and increasing the influence of domestic and foreign institutional investors on the professionalisation of corporate management. 
• Promote the proliferation of startups by technologists linked to apex firms oriented towards new products and processes as may be happening in relation to the Indian Space Research Organisation. 
• Improve organised financial support for small enterprises, which, according to a 2017 comprehensive study, had to depend for 85 per cent of their financing needs on informal sources. 
• Organise a trade policy that creates a strong corporate incentive to rapidly expand exports. 
• Ensure that foreign investment promotes and leads to local supplier development and effective transmission of technological know-how.

As India approaches the frontiers of global development, its enterprises must evolve beyond their current role as low-cost suppliers of skilled labour. They need to become significant innovators and global trade leaders. The government and the stock market must support risk-taking entrepreneurs, innovators, and major global trade activists capable of positioning Indian-managed companies as key players in international trade and technology, as  East Asia has done with firms like Samsung or Taiwan Semiconductor Manufacturing Company.

 

desaind@icloud.com