An Assessment of Business Environment

and New Vistas for Small, Medium & Tiny

Entrepreneurship in India
By: Amit Bhushan

Date: 26th April, 2011

The Indian Economy is in a stage of flux. The statistical growth figures produced by the
Government, tries to project that everything is hunky-dory. India’s GDP growth is likely to be
above 8 percent, its non-urban (Semi-urban & rural) areas are expected to grow at a faster pace
than urban areas, expenditure (public & private) on health, education, and infrastructure is
rising. If these trends continue forward in unhindered manner, most likely outcome shall be
reduction in poverty, rise in productivity & consumption; and a likely kick-off of a “virtuous growth
cycle”. Naturally, quite a few foreign Investors are taking note of this and are weighing various
options for entering the country.

The challenges India faces are also tremendous, such as high fiscal deficit (for central as well
as state government), high current account deficit, High level of corruption which is now
showing even at policy formulating level (i.e. Central Cabinet Ministers; although it always
existed at operational level) and thus a rise of Political risk & stability. This being so because in
a democracy like India, a change of guard/political change, which debunks policies of past
government with popular public support, can never be ruled out. This may lead to policy
changes that are to the detriment of existing business units. The Judiciary though independent,
is so pathetically slow in delivery of justice that it may not be considered reliable option for
businesses to rely on to protect their commercial interests. High inflation and price volatility,
endemic poverty levels, poor education & unruly labour etc. are some other causes of anxiety
for business persons to tackle. Overall poor level of infrastructure such as Power supply, water
resource management; Transportation, environmental protection etc. are among some other
areas of concern. These challenges are nerve-wrecking for Investors. Now Corporate India, in
its vigour to attain first mover advantage, is trying to overturn all rulebooks (of course with tacit
approval from people in power; politicians and bureaucrats) and is venturing into areas hitherto
a domain Medium, Small and Tiny entrepreneurs. It is in this backdrop that this paper tries to
analyze new opportunities that are emerging for Medium, Small and Tiny entrepreneurs.

It is important for businesses to have good understanding of the business environment in which
they are operating and also to figure out ‘how the business environment is changing, which
forces/competitive forces are impacting the business environment and their cumulative impact,
what is the likely shape of the new emerging competitive situation and what needs to be done to
take advantage or thrive in the emerging scenarios’. What were the regulatory, technological,
economic & commercial forces that maintained the existing business environment, how these
are impacted and what might be the shape of emerging threats & opportunities and more
importantly, why so?

Most of the India commercial enterprises were shielded from global competition through a
plethora of legislations. A further legislative web was created in the form of domestic licensing
for all major manufacturing units. The result was that commercial enterprises & entrepreneurs
saw much benefits flowing out of ‘managing’ government for ‘rights’ or ‘licenses’ and very few
flowing due to customer patronage in most of the industries. In fact, since customer had few
choices, so he was mostly taken for granted. The Medium, Small & Tiny units thrived, if they
could somehow out-compete the larger Industrial units on ‘prices’. A ‘tilted’ excise
duty/production tax structure, lack of surveillance for ‘Labour conditions & environmental
pollution’ etc. helped them achieved the required ‘clout’ to capture the market. Most of these
businessmen also entered political fray to maintain regulatory conditions in their favour.
Frequently, unethical practices such as theft of energy (supplied by Government),
embezzlement of central & state taxes, lack of consideration for public & worker safety &
hygiene etc. also mixed up with the business practices in a race to out-do & out-grow each other
and maintain ‘profitability’ of the venture. Since such business men are also involved with
politics in the country to ‘manage’ bureaucratic & legislative forces, so common masses
sometime feel distraught in distinguishing such people from criminals while making decision for
electoral hustling.

The stereotype although may not be valid for all SMEs, some of which cherish themselves for
their ethical and religious philosophical leanings and high moral values; however it is true for
most of the SMEs. It is also true that frequently the SMEs feign ignorance about such
values/laws rather than admit to being party to a criminal act or to an act of criminal omission &
commission. Regards their view about bureaucracy or ‘babudom’, they visualize them as rent
seeking agents of political masters (often compared to ‘thugs’) at the centre or at the state level
rather than a guardian of Customers, Taxpayers and Local Concerned Communities. However,
to be fair to the entrepreneurs, the ‘babudom’ has sustained this perception of itself without
making any attempt to seriously get rid of it. Its corrupt rank and file benefit from such
perception as ‘people’ tend to ‘yield’ more easily when they are expecting corruption, while
those who are not corrupt try to maintain trouble-free relations with peers and keep the corrupt
politicians happy (without soiling their ‘own hands dirty’) with help of such colleagues.

The Economic Reforms process forced by IMF on India changed the conditions, but only a little.
The domestic licensing was abolished for Industries, although the government did reserve
approx. a thousand odd items reserved for Small enterprises and large units were not allowed to
manufacture the same. The Industrial growth that followed the reforms between 1992 -1996 was
a result of that. This happened because there was some unmet demand in the market.
However, the businesses failed to understand the quantum of this demand and rushed to put up
large capacities. The shallow nature of the markets soon led to large spare capacities and
resulted in ‘crash’ of industrial growth. Luckily, the ‘services’ industry started to ‘export’,
especially the software development service industry; which kind off restored demand and thus
the manufacturing industry could see a growth in capacity utilization year on year. The Y2K
opportunity and the Dot.com boom helped the services industry to grow in clout and status. The
Software/Services Exports Industry also managed for itself some important tax breaks or
extension of tax breaks, so to say, which paved path for its further unhindered expansion. Thus
period from 1998-02 was mostly a services led growth era. It may be noted that India managed
to avoid the ‘Asian Financial crisis’ during this period while maintaining the growth tempo. By
2002, most industries reached near full capacity utilization levels and started to expand
capacities again albeit in calibrated manner.

During the period 1992 to 2002, SMEs ventured into the ‘Export-Import’ sector, while the units
manufacturing goods reserved for ‘Small’ enterprises thrived as a result of expansion of
demand. SMEs also benefitted by supplying raw materials and semi-finished goods to large
corporate players and were involved in distribution and services for such goods. A structured
supply chain also begun to emerge/thrive and started gaining clout or visibility in this period. The
entry of MNCs with ‘deep pockets' resulted in new opportunities and quite a few of the SMEs
started to align with these MNCs to create a congenial business environment for these units in
India and to benefit from strong business alignment with them. A powerful new growth engine
gained visibility and prominence during the period in the form of ‘Software’ exports which was
started by SMEs but which later grew to become some of the largest companies in the country.
India faced the collapse of Soviet Union, one of its largest trade partners without much ado,
during the period. The industrial growth plummeted during 1996-2000 period, but it was due to
excess capacity creation and resultant crash of profitability and lack of demand for capital
goods, however SMEs got the time to absorb new technologies and management practices
during the period. The demand growth continued on the back of growth in services especially of
‘Services export’ sector & excess capacities (created in the period 1994-98) were absorbed by
2002 on the back of this demand.

From 2002-2004 saw reforms/further liberalization in Telecom sector, Public Electronic Media,
privatization of a few Public sector undertakings, some reforms in Insurance sector, proliferation
of BPOs, some mild reforms in Infrastructure sector such as Roads & Ports, Air Transportation
etc. This was result of a realization amongst all large & small industries that in a globalized
world, one way of being competitive is to have access to cost effective and reliable
infrastructure support. A spate of Multinational Corporations (MNCs) entered India mainly to
cater to the nascent market and capture a significant market share in this market which was
amongst some of the large and fastest growing ones. The MNCs dominate Construction &
Transportation equipment industry, the Consumer Electronics industry and even the Consumer
goods industry. The MNCs in Indian market mostly thrive because of Technological
advancement of products and power of their ‘brands’ along with innovative delivery of ‘customer
support services’. Thus while infrastructure industries as a sector started to emerge, however
growth engine continued to be led by services, followed by the industry. In the entire period of
‘Financial reforms’ i.e. from 2002 onwards, little focus was on agricultural and allied products
growth with the effect that the sector received only ‘trickle down’ benefits. The discontent in this
sector which is mostly unorganized was kept under check through subsidy on fertilizers, a few
loan waivers schemes and delivery of ‘aid’ and ‘support’ through some ‘NGOs’.

The country during this period witnessed growth rate of 6-8% annualized and was touted as the
‘new Hindu rate of growth’. While the services sector continued to grow smoothly even with
‘sanctions’ due to ‘Nuclear Tests’ conducted by India, the industry also did well on the back of
rising domestic consumption. Investments from Non-Residents into Realty, stocks and business
ventures flowed in resulting in a perception of “India Shining” for denizens of Delhi &
Mumbai/Bombay. However, the impact of these investments on semi-urban and rural India was
minimal. The countries that had put ‘Sanctions’ had to rethink their policy and soon the
Investments from such countries too started to flow in along with Credit Flow or aid from
Multilateral Agencies such as the World Bank. The country’s Infrastructure sector started
witnessing some action in the period. The SMEs benefitted as a result of overall growth in the
economy, although the ‘tilt’ in the playing field that was in their favour was slowly moving to
‘normal’ due to lowering of protectionism, new Trade pacts, push from MNCs, globalization and
resulting competition etc.

Year 2004-2008 saw action on Infra front especially in Telecom sector followed by ‘liberalization
of ports’ sector. Thus the Telecom services boomed while ports segment started attracting
Investments for capacity addition for cargo handling. The capacity addition for by “air
transportation” segment was also significant but jury is yet to be out, that if it were really
needed. The National Highways network development initiated in 2006 saw the plans being put
on road / field, the ‘Metro’ rail transportation became live in Delhi amongst some of the notable
achievements. Some other notable progress are in ‘Energy Extraction via New Exploration
policy’, growth of Refining and Petrochemicals sector, growth of passenger automobile and
components sector, India’s clout growing as one of the significant players for Generic Medicines
etc. India also achieved distinction in outsourcing of software development and other
Engineering services as the quality of its Engineering manpower and talent were established as
amongst the best, globally and its companies started to fiddle in global project exports market
especially for MENA region. The growth of Services and industry continued unabated along with
strong performance of the Realty sector which is highly employment intensive. The years saw
over 8% growth and this rate became the new normal. The population and business units now
aggressively started to clamour to beat down the Chinese growth rate of over 10%. To realize
the new aspiration of growth, the industry started seeking reforms such as pruning of the ‘Small
Scale Sector Reserve Items List’, reforms in Land procurement and Realty, new Tax breaks for
exports segment in the form of Special Export Promotion Zones, access to cheaper funds
through reforms in Insurance & Pension sector, reforms in Energy/Electricity sector including
transmission & distribution as well as production, reform in labour laws and reforms into Retail &
Wholesale trade segment amongst others.

Through the high growth phase of 2004 to 2008, the SMEs have enjoyed the fruits of high
growth and expanded enormously, however the new set of reforms being sought by large scale
sector is likely to be tough challenge for SMEs to accede to. This being so, because it shall rob
SMEs of the ‘protection’ that the segment is so used to. Very few of the SMEs see either
technological or managerial competence or innovation as their core competency contributing to
success of their business units. Most SMEs feel that large units have ‘outsourced’ jobs to them
only due to their ‘political’ acumen and to benefit from lower production cost which is a result of
the SME ‘cloak’ with them and all the practices that go hereunder. Thus competing on
‘professional merit’ alone is not seen as one of their areas of strength. Besides, the changes
may kick off other reforms and SMEs have considerable reluctance to give up the abrogated
power & clout, they are so used to.

The rise of some SMEs & their transformation into Large companies in Infrastructure, Realty,
Financial services, Power, Wholesale & Retail trade are not being seen as opportunity but as
threats. This is so because the opportunities in these sectors are not being shared equally with
all and also because few SMEs have depicted aptitude or management capability for such
opportunities that require a more organized set up. The prevailing level of corruption and lack of
transparency, ’tilt’ witnessed in Government policy for existing “large” players’ or towards select
SMEs, lack of ability to meet technological advancement of MNCs and Large corporate players,
lack of ‘qualified and reliable’ manpower (basically within the business family), are among some
of the reasons for SMEs and their political masters/mentors are reluctant to move forward with
such reforms i.e. if they are not involved with halting of these reforms.

The ‘Slowdown’ in 2008-2010 on the back of Financial meltdown in the “Developed countries”
gave rise to clamour for such reforms further, as these were seen as a way to pave the path for
further growth of the “Industry”. However, quite a few people including professionals, taxpayers,
‘international strategic observers’ etc. were in favor to let the ‘dust to settle down first’ before the
new reforms are ‘kickstarted’, so as to have a clear idea of what’s likely to fail and way to avoid
negative impacts of ‘failed experiments’. The investments by Corporate & MNCs also dwindled
in the period and so the clout of these segments had dwindled considerably to be able to
strongly push for such reforms. The Government pumped money into ‘infrastructure’ sector to
keep up the growth momentum, however it could only manage a reduced level of approx. 6.5%.
The industry on its part, kept raising its noise for reforms, every now & then.

With developed world now looking up again and a return of Investment led growth for Corporate
India, the clamour for such reforms is back. However, different segments of the Industry seem
to be having dis-similar views on how such reforms should be carried forward. Most of the
Indian Corporate sector has always found it easier to cope up with or manage the SMEs &
whims of their political masters; however it is not so sure about is ability to take on their MNCs
rivals. Hence their position on such reforms is at best ambivalent, as for them, it may mean a
loss of market share or even extermination from the domestic market in the face of competition.
This is even as they see reforms as one of the ways that has potential to bring down the cost of
capital/credit for them (which shall be a result of inflow of foreign funds as well as better
integration of the country to Global Markets). It is thus the MNCs and Foreign investors who are
clearly not enamoured with the lack of reforms, although some of the MNCs who have captured
a position in the fast growing market may feel that they are better off with ‘current limited
competition’ rather than a fully blown up ones. The other category of MNCs feel dejected since
lack of reforms means low or limited opportunity for them and therefore they are pulling back
investments which anyway has ready takers back home in the post meltdown growth phase of
those markets.

The SMEs, as explained above, continue to see the reforms as threat due to aforementioned
reasons. They have not benefitted much from the inflow of foreign capital or technology barring
a few select sectors. They have grown due to overall expansion of economy which was a result
of the rise in Investments, however they also played their part (and worked hard at it) in growing
the market & developing consumers for various new products & services. Now the Large
corporate & MNCs are looking enviously at some of these sectors which is likely to result in a
slugfest between corporate India & SMEs.

It is in this backdrop that the political masters are being challenged and the Industry is forcing
an agenda of ‘Second Generation Reforms’ on them. The political masters also try to feign that
they are busy hunting for ‘Future’ growth and they are apparently trying to ‘build consensus’ for
reforms, a move to keep their political careers on move/rolling (and keep people enamored with
them). The new set of reforms is thus struck at ‘Political’ level with too many stakeholders, all of
which have significant political clout and divergent views & interests. With the ‘Telecom’ sector
spilling the beans about this ‘open secret’, the government has been reduced to a mockery.
With the vastly reduced ‘stature’, reforms in other controversial segments are now even more
susceptible to be targeted by ‘willy’ politicians against those specific reforms. Thus, the
likelihood of the ‘Reforms’ bill meeting the fate of a “Nuclear Liability Bills”, which even after
enactment has served no useful purpose for its proponents, is much more likely. As in the case
of the Nuclear Liability bill, the opposition to reforms was as much from within the ruling
dispensation as much as it was from outside. The present set of proposed reforms seems to be
meeting the same level of opposition from within if not more.

The SMEs though have been losing support of the ‘consumer groups’ who have increasingly
shown preference for the technologically more advanced products backed by reliable customer
services over the shortchanging practice of SMEs. The Taxpayers are also increasingly up in
arms against the SMEs as they are viewed as tax evaders due to which others have to ‘pay
more’. Within SMEs lobby also, there are different voices and sub-groups which do not see eye-
to-eye. The SME manufacturer lobby, which is a large employment generator see ‘Traders’ as
lichens who do little value addition, but corner a larger amount of profits on the back of their
‘shops’ at premier ‘market locations’. The agriculturalist (a large lobby of producers) also shares
a similar view about ‘Traders’ although it must be admitted that the ‘Traders’ are a necessary
‘evil’ who ‘put money’ to stock goods & help in making these reach to the customers. The
consumers though do business with the ‘Traders’ however are vary of the ‘malpractices &
shoddy goods’ that pushed by the ‘Traders’ to them & the lack of ‘Customer Service /
Warranties’ with such goods. The ‘employees’ working with the SME units see their employers
as ‘suckers’ exploiting them to death and hardly offering the workers any ‘employee benefits’
offered by the corporate, thus keeping them ‘trapped’ to the vicious poverty cycle. The local
communities around SME units feel SME do not keep the promises on controlling pollution, put
pressure on demand for power & water resources (& most do pay the full value for these), offer
negligible employment opportunities & show little empathy to the needs of their surroundings
while focusing on generating ever larger ‘mullah’ for their owners. Thus, though SMEs seem to
have enjoyed the fruits of reforms so far, but there seems to exist, a strong lobby which now
wants them to reform or mend their ways.

Most of the SMEs, especially the larger ones have grown to be ‘Traders’ acting as
intermediaries between consumers and manufacturers (large & small) in India’s large Cities &
towns. While quite a few SMEs used to be manufacturers before reforms, post reforms in the
face of growing competition, most were relegated to ‘Trade’ which as a business was less risky
compared to manufacturing. ‘Trade’ paid a premium for good Location and thus these
businesses enjoy a period of profits for their location and ‘realty’ became a second business for
such ‘Traders’. The SMEs have generally shunned any ‘Experimentation’ on their own part and
was fixated on ‘turnover’ & ‘location’ for profits. Now with MNCs and Large Corporate raiding the
‘Trade’ segment in Wholesale as well retail, the segment is waking up to a new reality about
various competition formats as well as need to have a supply chain and effective customer
service. The SMEs are also being forced to rethink about their current and future value delivery
model that could sustain present and future competition. However, instead of getting on with
reforms, the SMEs seem to be dragging its feet and forcing government’s hand on reforms. This
seems to be cause for a tussle between SMEs (with their political masters) & other lobbies.
The political masters of these SMEs feel that reforms without adequate safeguards for domestic
industries will crush opportunities for employment for domestic workers. They shun the MNC
lobby as they have delivered very little in terms of creating employment opportunities (note:
SME employ a greater number of people as compared to corporate/MNCs). They are therefore
stipulating tight conditions such as free movement for Indian workers for short period to deliver
services in countries where these MNCs belong (and which are keen to push these Second
Generation Reforms). They cite these as necessary conditions for the growth of India markets &
prosperity, that the Indian workers is able to ‘sell’ its skills freely and earn a livelihood to
consume products/conditions that MNCs want to thrust on India. They also cite campaign in
‘West’ against ‘Outsourcing’ as a sign that MNCs are unfriendly in their approach and seek
‘markets’ without any quid pro quo in terms of sharing global opportunities with India. Thus,
unless MNCs move significant number of jobs to India in areas such as back office work of their
offices abroad in areas such as Software development & maintenance, Finance, HR, Law office,
Research and Global Procurement, Supply Chain & logistics coordination etc.; it is unlikely that
the they find “Softer Politicians”. In other words the MNCs shall need to nurture a ‘Professionals’
lobby along with cultivating Consumer & Taxpayer lobbies to effectively counter SME lobby.

The SMEs on their part have already been moving on to engage with MNCs & Large corporate
as Suppliers & Dealers and align their interests with the corporate sectors interests. Quite a few
are sprucing up their management capabilities & technology to wear the mettle of ‘Corporate’
themselves. These SMEs are identifying niches in which they can compete with their MNC
counterparts effectively. Often such companies are venturing abroad for ‘buy’ opportunities to
capture markets, brands & technologies. Quite a few others are working to ‘raise’ entry barriers
for other players to raid their markets by investing to develop a strong customer service & brand
power, world scale capacities with low cost base etc. Thus some SME have now acquired
global ambitions, some others are focused to emerge a ‘large corporate’ in domestic markets,
some others are consolidating in niches that shall be difficult for others to penetrate while some
of the SMEs are benefiting out of Government’s largesse in terms of opportunities in
‘Infrastructure’ sectors, mining, and other ‘Licensed’ sectors. Quite a few others are taking
plunge into sectors such as Education, Healthcare services which are growing fast & where they
feel Corporate & MNCs shall not be able to pose much threat due to the nature of the market.

In spite of the above, there are still a considerable number of SMEs who have yet to figure out
what’s going on in the market & define strategies & tactics to take on these challenges. Also,
SMEs have not yet pressed the button for “innovation”. They are not collaborating with
“Innovators” on development of new products that may offer more ‘Value’ to consumers. They
are also not thinking in terms of developing a ‘supply chain’ that is able to meet the demands of
their ‘niche’ client segment more efficiently than Large Corporate or MNCs. They are also not
engaged in developing “new business models” with emerging sectors that may be win-win; For
example a tiny or small unit may join hands with a new educational unit/school for either
maintaining a library, a computer lab, a sports/gym club, a band/music club, post school tutorial
classes etc. in a manner that could be more efficient than the school owners (may be using
used books & equipments) and also help to lower the ‘Entry barrier’ for people venturing into
‘School/College’ sector (They may seek a small but regular fee from students for such services).
The SMEs may also seek to make use of rural skills in sectors such as Ready-made garments,
Handicrafts & gifts, Food processing etc. to evolve an efficient supply chain that may rival the
ones from Corporate & MNC segments. The SMEs may also study ways to raise Farm & allied
sector productivity in a profitable manner by ‘collaborating’ with farmers. Lastly, the ‘rural
innovators’ and ‘artisans’ have long been a neglected lot, all through these years of
independence. The SMEs can look at ‘identifying & commercializing’ there skills/innovations
which meets customer’s expectation for ‘Value’ in an effective manner and in the process
develop some ‘patents’ and ‘world class skills’. However all this may require to begin with a
“Mindset Change” that is a challenge to overcome. The point is “Are we ready to embrace this
Mindset Change”.