Understanding India’s Economic Woes

The economy of India is the 10th largest in the world by nominal GDP and the 3rd largest by Purchasing Power Parity. The value of Indian economic output in 2012 will be $1.95 trillion at market prices and $2.12 trillion in 2013.

India has already surpassed Canada and will climb over Italy soon in terms of the sheer size of economy. This should be a very positive indicator for the nation of 1.2 billion people. But all is not well. India’s fiscal health is degrading.

The new IMF Fiscal Monitor shows that India will have one of the highest levels of fiscal deficits in the world, at 9.5% of gross domestic product (GDP). Japan is the only major economy that does worse. The IMF expects India to end the year with a current account deficit of 3.8% of GDP, very high compared to its Asian peers. The high fiscal and current account deficits indicate serious macroeconomic imbalances and have put the Indian economy at risk.

Apart from the macroeconomic factors there are inherent roadblocks, self-imposed limitations and growth averse business framework that keep India’s entrepreneurs, businesses and economy as a whole from moving forward at the pace that is necessary for a nation of this size and potential.

Creator of Twitter Jack Dorsey in a recent interview to the Forbes magazine commented, “The most efficient means to spread an idea today is a corporate structure.”

What Jack was emphasizing on is the well-established knowledge that in the 21st century a business and corporate structure is the most effective and efficient way to innovate, bring social change and create shared value. The root of every business is in the spirit and principle of entrepreneurship and the foundation of every enterprise is an idea. A nation’s success therefore in these times can be well judged by the growth and size of its entrepreneurs and their ventures.

Entrepreneurship is about having the ability to ideate, create, build, scale and lead. It is also a process where you engage, disrupt, co crate in close collaboration with the society and the economic and political structure of your market. There are some economies and nations that have created a natural environment for business, especially entrepreneurship to prosper.

For example, the robust academic participation for incubation available in the United States or Israel which is termed as a “Start up Nation” for the vast number of ventures it creates every year.

India, although having a population that is naturally enterprising has not managed to create an enabling ecosystem of enterprise creation and expansion.

Let us examine some data.

The World Bank’s Doing Business Rankings of 185 countries is a glaring example. Despite India having a ranking of 23 for Getting Credit (our banking systems are better than most), ranking for Starting a Business in India fell by 4 points to 173 in 2013 than the earlier 169 in 2012. Even though Investor Protection is ranked at 49, Enforcing Contracts ranks at a dismal 184. As one of the largest economies in the world, India’s share of the global trade is still below 5% and its Trade Across Borders ranking is as low as 127. The overall ranking for Ease of Doing Business is at a disappointing 132.

Let us look in detail at the factors that drive Ease of Starting a Business.

To start and register a business it takes 27 days in India, compare that with 13 days in Brazil, 7 days in Sri Lanka, 6 in the US, 5 in Israel and South Africa, 2 in Australia and just 1 day in New Zealand.

A country’s ability to register and start new enterprises is as much a social commitment to its people as economic. If we observe the Business Entry Density Rate which is calculated by looking at newly registered companies over the past seven years and dividing it by per 1000 working population number (age 15-64 yrs), India’s density is a poor 0.09 much below its BRICS peers and 9th from the bottom.

A country whose asset is its large young working population, which is only getting younger, has such a dismal record of starting, registering and building businesses. This is not just an economic risk but is a social threat to our well being as a civilization. To ensure that we have enough opportunities of livelihood for the 700 million strong young working population, we will have by 2020, we as a nation must work towards building capacity in our entrepreneurs, business leaders, business environment and the overall economy.

Creating successful enterprises also allows the companies to give adequate compensation to employees and reduces pressure on government subsidies. Let us compare some numbers. A 19-year-old worker in India gets a minimum wage of 29 dollars (USD) per month, compared to USD 204 in China, USD 349 in Brazil, and a whopping 621 USD in South Africa.

This infers that not just it is difficult to start businesses, we are also doing it at a horrid low pace for the size of our population. Even the employment we generate is not as well paying as it should be. It seems our economic math is not adding up. There seems to be a dire need for innovation, creative disruption and expansion. Surpassing Canada in the sheer size of economy is one matter but Indian businesses must focus on the fact that the Global Innovation ranking of Canada is as high as 12 and that of India is 64.

In addition to innovation and entrepreneurship, India has to focus on creating more value out of its Micro, Small and Medium Enterprise (MSME) sector. MSMEs have the potential to contribute 22% to India’s GDP in this decade. Currently, the sector accounts for 95% of industrial units, 45% of manufacturing units, 40% of exports and employs 60 million people, second largest after agriculture.

This sector, which is the highest growing sector in India faces several growth pangs. Lack of IT, processes, financial resources, marketing, branding skills and inability to attract rich talent keeps the sector constantly struggling. The role of academia too is limited and corruption continues mar the growth of thousands of enterprises.

Yes, India’s government needs to carry out its responsibilities in terms of better management of fiscal health of its economy, building infrastructure for business and people and creating an investor and consumer friendly market system. But the business leaders in India also have to focus on building their own capacity for growth, risk, expansion and innovation.

Indian business leaders have to ask themselves critical questions about their capacity to innovate, ideate, their ability to engage markets beyond their traditional consumer base, their willingness to explore global partnerships and most importantly their commitment to enhancing the inherent potential of their human capital.

Being the 3rd largest consumer market, the 10th largest economy, having the largest young population and being the largest democracy are assets. But advantages will soon become liabilities if the business leaders and government don’t act in tandem for creating an environment of enterprise, expansion and innovation.

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