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May, 13 2010

SMEs HAVE BIG GROWTH POTENTIAL

INDIA'S entrepreneurial landscape offers an interesting mix in various businesses. If on one hand, there is a tea stall owner or a vegetable vendor or a hawker who has been forced into entrepreneurship due to lack of better opportunities

INDIA'S entrepreneurial landscape offers an interesting mix in various businesses. If on one hand, there is a tea stall owner or a vegetable vendor or a hawker who has been forced into entrepreneurship due to lack of better opportunities, on the other, there is a person from an IIT or an IIM who has excellent job offers but declines them because he wants to start a venture of his own.

There is yet another group which is neither as impoverished as the former nor as high-tech and globalised as the latter. He is an entrepreneur by chance but has the potential to grow and flourish as a business owner, like a flourishing dhaba owner on a highway. This heterogeneity presents tremendous challenge before the government to devise support strategies for everyone, right from the bottom of the pyramid to the top.

In an interview with Taslima Khan, Montek Singh Ahluwalia, Deputy Chairman, Planning Commission,  talks about the government's initiatives to promote a healthy environment for entrepreneurial growth in the country.

What is the government doing to help entrepreneurs?

Indian entrepreneurs face a lot of constraints, especially the small ones. The government's job is to remove these constraints. A major one is power. Say Mukesh Ambani, who runs one of the best companies, is dependent on his own power. But the small guy has to get his power from the utilities and he faces the problem of being overcharged or high cost of power.

If the power supply is irregular, the quality of his production is affected. There are SMEs doing a variety of machine work that require power.

So, if the government were to say to the SMEs that we are going to do nothing for you other than to deliver you reliable power, it would be a big boost for the SMEs. Unfortunately, SMEs don't do that. They say they know the government can't do this or that and therefore demand sops.

What initiatives are being undertaken to ensure a healthy environment for entrepreneurial growth?

To promote a healthy environment, there is a general feeling that clustering is a good idea. However, the Central government's role in clustering is limited and the state government has a bigger role to play in it. So, all we are doing is signing cheque for the state governments. Effectiveness of the entire scheme will depend on how the state governments work on clustering.

What are the major issues confronting cluster development? What should be the approach to cluster development?

One of the biggest problems is people like to name a few clusters and define them. What the governments should do is follow the market. That is to say, where some clustering has begun, support should come from the government to make it a bigger cluster and improve the infrastructure, etc. Our fellows typically want to start a new cluster in some backward district, say Tirupur. Once it is formed, the government will take a big step to improve infrastructure. So, this approach to clustering that this is a district which has no industry and let us set up a cluster here is wrong. They should respond to the market needs instead.

There is a lot of reluctance on the part of banks to lend to SMEs, even to rated ones. What do you have to say?

I agree with that. The reason banks are reluctant to lend is because your fiscal deficit is so high. If our finance minister was to suddenly drop the fiscal deficit by 2 percentage points of the GDP, the release of resources would be of the order of Rs 1,20,000 crore if not more. Banks will suddenly have quite high liquidity and if they try to keep buying bonds, interest rates will go down. And if they happen to lend to the Centre at 6 per cent, you have a rated SME that is willing to borrow at 12 per cent and they might be tempted.

Today what is happening is they can make all the money they want to by lending to the Central government. To encourage banks to look forth more aggressively down the credit ladder you have to get the grill and the workshop, which is really what the government is doing in the credit market to some extent. This is what people mean by crowding out.

The finance minister's outlined programme reduces the fiscal deficit from about 6.8 per cent to around 4 per cent. That is 2.8 per cent of the GDP, which is approximately Rs 2 lakh crore. That means Rs 2 lakh of money will be lying around for investment. Interest rates would generally go down and banks would be looking for good guys to lend.  Somebody would tell them that look the untapped area is really SMEs.

The Prime Minister had set up a task force for the overall development of SMEs and the recommendations came just before the budget. Unfortunately, the scheme has received just Rs 1 crore of budget allocation. Your take on this.

Why do you think the budget allocations are important for SMEs? The government would concentrate on providing better infrastructure, hassle-free environment, more lending by banks and more venture capital. The government has limited funds and in my view should focus on improving the power situation for SMEs. More incentives should be given for cluster development, which has to be done mainly by the states. I am in favour of increasing budget allocation at the clustering level. You need a banking and financial environment that supports good SMEs.

There is a huge section of entrepreneurs in the country who are pushed into entrepreneurship because they have limited options. Will these micro enterprises be sustainable?

I agree that many people are pushed into entrepreneurship. These people are not going to succeed. They are just treading water, trying to make the best they can. And they are going to stay there in a very vulnerable environment. As the rest of the economy improves and as soon as they find better jobs elsewhere, they are going to stop being entrepreneurs. A large number of complaints come from these entrepreneurs, the forced entrepreneurs. I am going to concentrate all my energies on making life better for SMEs, which have the potential to grow big.

What explains the high rate of failure of new businesses?

Out of those who take a conscious decision to become entrepreneurs, only 6-8 per cent are going to succeed. This is the group that is going to expand and soon come to the middle stage and then they will grow big. A very large number, may be 50 to 60 per cent, will continue to do well but will remain SMEs. They won't scale up but they are going to a have a good life. Say there is a guy who opens a dhaba and prospers making good money so that his son prefers to run the dhaba rather than work in a workshop. So he's doing fine and he even owns a Maruti car.

On the other hand, there will be another guy who does so well that he will go on to make one restaurant, and then another and he will have a chain of restaurants soon.

Then there are some guys who would do a lousy job; they are not meant to be entrepreneurs. They went into it because nobody was giving them a job.

In the US, the rate of failure of small businesses is 30 per cent. That's the trend universally. New businesses have the highest rate of failure. However, the advantage in that system is that it is easy to fold up and start something else. In our system, they keep on hanging around, asking the government to save them and that is not a solution.

What can the government do to provide more support to those who are doing reasonably well as entrepreneurs?

Government schemes are meant to bring relief to the very bottom, which is actually not the most important.

I personally think we should create an environment where the middle group can do reasonably well. However most important are those who have the capacity to expand to become the Narayan Murthys of the future.

SMEs are innovation hubs of the country. What is the government doing to promote innovation in the country? What should we expect in the 12th five-year plan?

Well, we want to make innovation a big issue. The earlier approach was that growth is caused by investment and we must stimulate growth by giving incentives to investment. Today the notion is that once you have sufficient investment flows, growth takes place because of innovation which increases productivity. So Arun Maira has been given the job of speculating on strategies for promoting innovation. It is not easy. It can't be done by having a centrally-sponsored scheme on promoting innovation. It's more about creating an ecosystem.

Most entrepreneurs do not know how to convert their innovation into a successful product launch. What kind of support should be given to them?

The kind of support they need is not provided by IAS officers but by creating an ecosystem so that the entrepreneur with an innovative product can get the capital to push it forward or sell the IPR to someone else. But many of our entrepreneurs wrongly think that because they have invented something, they must be the ones who should take it all the way to fruition. An innovator need not be a great businessman and they must understand that.

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