Bridgital Nation

by N Chandrasekaran

  Everywhere Entrepreneurship

  27

  The Entrepreneur’s Tale

  A twenty-year-old Amit Singh, saw the value—the true value—of the college degree he was pursuing on the unforgettable day that he went out for a packet of biscuits. The owner of the kirana store recognized Amit’s history textbooks, and mentioned that he had passed the same course a long time ago. The owner went on: Not only had he graduated, he had also topped his class. Amit looked at the man anew. He was surrounded by shelves full of biscuits, chips, breath mints, and matches in his tiny, ramshackle street-side stall. All Amit could say was, ‘Then how did you end up here?’ 1

  The store owner explained. On graduating, he had unsuccessfully applied for a series of Rajasthan government jobs, then failed to find work as a teacher, couldn’t become a railway officer, and someone else always got the bank peon jobs. At each turn, there were far more qualified, and even overqualified, candidates than positions available. After several attempts, he gave up all dreams of finding a stable job. There were always more newspaper announcements to answer, more forms to fill, and more qualifying exams to give. But why would anyone put themselves through all that? He decided to start this store out of sheer necessity. 2

  As the storekeeper relived his past, Amit saw his own future.

  Amit is in his late thirties now. He smiled as he remembered what happened next, all those years ago. It was a long story, but one he enjoyed telling.

  The meeting with the man had shaken him. But just weeks later, he chanced upon a brochure for a textile manufacturing course at an apparel training institute in Jaipur, just 150 kilometres away from Alwar where he was pursuing his Bachelor of Arts in History. Jaipur was famous for the clothes it exported. He wanted to be there.

  First, though, he had to arrange an amount three times his family’s monthly earnings for the course. ‘I never felt awkward about not having money,’ he said. Prices weren’t set in stone. He asked the training institute’s principal for a discount, and got away with paying half. ‘If you don’t reach out for what you need,’ Amit said, ‘you lose out in life.’

  Discounts on rent, meals and travel were harder to come by. For a long time, he struggled to pay. Then, wandering through a trade show in Delhi, he found a company selling embroidery and screen-printing machines, which he knew nothing about. He cornered the company’s owners and asked them everything. What made the embroidery multi-coloured? How did it organize threads by number and colour? Did a long stitch take as long to administer as a short one? This is an entrepreneur’s story, so what follows is predictable: They hired him as an intern there and then.

  Amit’s duties at the factory began at eight in the evening and ended at two in the morning, while he attended the manufacturing course during the day. He slept on the factory floor near the embroidery machines. He could finally meet the costs of living, but he loved it for a different reason: He was receiving an education that no training institute could provide.

  28

  The End of the Shift

  The apparel training institute that Amit attended struggled to set up learning opportunities for students. If a factory visit opened up, the institute told students to ‘arrive at the factory on time, stand in line, ask no questions, inconvenience no one, hurry along, and return home,’ Amit recalled. During one of these visits, Amit, along with the other students, was kept waiting at the gate for hours and then told that the visit was cancelled because buyers were visiting the factory that day.

  Amit decided to scout for an opportunity himself. He made his way to another manufacturing house where he talked to the general manager about shop floor efficiency techniques. The manager told him to calculate how much time each of the 500 tailors on the shop floor took to stitch a shirt using a particular technique. Tailors are categorized by their speed, and paid accordingly. Amit’s calculations showed that most of them were slower than their categories suggested, and that the factory could save 10 per cent every month by optimizing the categories. The manager offered him a job.

  Amit hadn’t had time to study for the institute’s tests, but when he was asked to list three measurements for a shirt, he recited forty. The examiner demanded to know where he had copied his answers from, he recalled.

  Overall, Amit found the course dissatisfying, and focused more on his work at the factory. Meanwhile, his parents began to look for a wife for him. They imagined someone who could offer a double bed and a fridge, perhaps even a car, as dowry. But Amit, who had been impressed by the doctor-dentist couples who ran clinics together, wanted a partner with an entrepreneurial bent. When Niyati—whose parents kept pressing her to marry, even though she wanted to be a fashion designer in Jaipur—came up as a prospect, Amit reasoned that at least she was from his line of work.

  They married, and soon after he wanted to quit work to start a business with her. Niyati advised caution; she had seen her parents’ home grow from one room to three over several years. It was all because of the stability their jobs provided. ‘You cannot spring up a staircase in one bound. You have to do it step by step. And don’t forget that people like us don’t have a lift,’ she told him.

  He listened. He sourced merchandise, he checked for defects, he waited for the right moment. When someone offered him a million rupees ($14,000) to approve a consignment of defective clothes, he refused. Trust was the currency in the future he had envisioned.

  Waiting is hard, though. For reassurance, Niyati and Amit solicited a seer’s advice, but came away grumbling about a bleak prediction—the seer had announced that Amit would fail in the garments business.

  It was five years since their marriage. They had a daughter. The year was 2014, and there was optimism and talk of change in the air. It felt like the right moment had arrived. Just to be safe, they named the business after their daughter Shreya—one of many names for the Hindu goddess of wealth.

  29

  The Great Skew

  India famously has large business houses like the Tatas with thousands, even hundreds of thousands, of employees. At the other end are tiny firms that hire fewer than ten workers. Between them is a vast emptiness where dynamic companies that are neither gargantuan nor minuscule should be. The official shorthand for these companies is ‘Small and Medium Enterprises’ (SMEs). These firms could provide the bulk of productive employment in India if they existed in larger numbers. But they don’t. We think of this space as India’s engine for creating more and better jobs—a productive alternative to the informal sector, for the millions of people leaving agriculture as well as those who are entering the workforce in the coming decade. 1

  To understand India’s skewed employment profile, consider this: The average firm in India employs just over two people. This is because the bulk of private sector workers—about 70 per cent—work in micro firms, while just over 10 per cent are employed by SMEs. In the United States, SMEs account for 36 per cent of private sector employment. In Germany, they employ 43 per cent. In Brazil, 39 per cent. 2

  Comparisons only prove how unusual India’s case is. The textile and apparel sector that Amit is a part of is one of the largest employers in India, after agriculture and construction. In the Chinese apparel sector, employment in firms with fewer than eight workers makes up less than 5 per cent of total employment. For India, the corresponding figure is over 80 per cent. 3

  Micro enterprises are often informal, with low productivity and few prospects for growth. They have little ability to invest in machinery and equipment for their businesses. For their owners, rewards are scant; for employees, they barely provide a livelihood. Not large enough to enjoy economies of scale, and lacking exposure to modern processes and techniques, they remain small—never realizing the improvements in productivity that go hand-in-hand with growth and formalization. The foregone productivity is substantial; an Indian manufacturing firm of 50–200 employees is nearly four times as productive as one with between five and fifty. The differences between the formal and informal sector
are even more stark. Formal sector manufacturing firms are eight times as productive. 4

  Micro Firms Dominate India’s Employment Landscape, Unlike Its Global Peers 5

  Most micro enterprises are simply self-employed individuals running their own businesses—say, a paan or a kirana shop. They are entrepreneurs largely because they have been unable to find salaried jobs. These ‘enterprises’ make up more than 70 per cent of India’s firms. 6

  This isn’t the typical image that comes to mind when people think of entrepreneurship. They imagine ‘unicorns’—high-growth, venture-funded tech start-ups valued at over a billion dollars that attract the headlines. India currently has eighteen of these. It is possible that they could one day employ—directly or indirectly—thousands or even millions of people. But India needs jobs in the tens of millions. In 2018, for instance, tech start-ups employed about 170,000 people directly, and created employment for 500,000 indirectly, hiring around 40,000 new workers in the year. These are all big numbers, but in India, there’s always a bigger number. Micro firms employed nearly 121 million people in 2014. The cumulative effect of hundreds of thousands of SMEs could be massive. 7

  30

  Goldilocks Entrepreneurs

  Amit understood needles and stitches, time-and-motion studies and manufacturing crises. He did not yet understand the other things that entrepreneurs faced: the trouble in getting basic services, in getting electricity, in getting a loan, in finding land. While seeking a loan, he found himself spending days in the branch of a large public sector bank, wrestling with paperwork and trying to convince the bank officers of the viability of his business. After missing ten days of work, and still facing additional demands for changes and information, Amit gave up on the attempt entirely.

  As of 2017, the total supply of credit to SMEs and micro enterprises was estimated to be around ₹70 trillion ($1 trillion). About 84 per cent of this came from informal sources, including self-financing, loans from friends and family, and moneylenders. The rest was from banks, non-banking financial companies, government financial institutions, and other formal sources. Public sector banks, which provided ₹5.4 trillion ($77 billion)—nearly half of all formal credit—to these enterprises, found that 12 per cent of their loans were non-performing assets and likely had to be written down. This, unsurprisingly, has led to caution. 1

  Amit had given private banks a try previously. He recalled an interview with an agent for a ₹1 million loan ($14,000). At the time, he was running a factory out of a temporary shed near an industrial area. The interview, which took place at Amit’s factory, seemed designed to browbeat him. The agent was clearly unimpressed with what he saw. His questions betrayed his suspicions. ‘What will you do if your business suffers a loss? What collateral do you have to repay the loan? What if you get kicked off the property? What if you cannot repay the loan and are destitute?’

  After a certain point, Amit found the questions insulting. ‘What if you meet with an accident going home? How will you file your report then?’ he snapped back at the agent. The man was not amused. Amit’s loan request was turned down. The agent’s boss then called to say that while Amit’s report was not promising, they could have a meeting to ‘settle’ the matter. There was always some problem or the other with banks. It became clear they would only lend Amit money if he could prove he had a permanent establishment—the very thing Amit was seeking a loan to build.

  He didn’t even know of the existence of credit from small, regional and local banks, that are often tasked with filling the credit gap for entrepreneurs like him. In Europe and the United States for instance, they provide loans to a third of all SMEs. This figure is only 6 per cent in India. Their branches make up only 15 per cent of all bank branches in India, in contrast to 32 per cent in Europe. 2

  Amit’s faith in government policies and incentives was quickly dashed too. Nothing he found applied to someone starting off at his level. If anything, he realized, popular government schemes tended to encourage and further the growth of businesses that were already established, or else catered to micro entrepreneurs.

  He was too small for some and yet, not small enough for others—a Goldilocks entrepreneur.

  He could not, for instance, get a traditional business loan because he had nothing to offer by way of collateral. His firm was too large to access micro enterprise schemes like MUDRA loans or microfinance. Amit would almost definitely not be on the radar of a venture capitalist because of his inability to scale rapidly and the limited innovation in his business model. 3

  ‘Small businesses have a 100 per cent risk and attract 0 per cent sympathy,’ Amit said. ‘A big businessman gets 30- and 50-days credit from his suppliers, but if I ask for the same credit, they say no.’

  Even specially demarcated commercial land meant to facilitate trade just ended up in the hands of more powerful people. As a small businessman, Amit could barely make rent. He tried to get an electrical connection for small industries that assured him of power at a lower tariff, but the experience was so onerous that he settled instead for regular power.

  Amit remembered the struggle. ‘When I asked an exporter how to do business, he said, “This is bad work, full of losses.” People are insecure that you will take their work.’ Amit soldiered on, renting a tin shed in a slum so that he could undercut rivals, commuting on a bike, juggling three jobs. There were times he wanted to give it all up. ‘I thought of leaving the stitching business, but my wife insisted I continue.’

  Step by step, just as his wife had said, they found ways forward. They ate cheaply if they went out, holidays were spent at home, and cash gifts from relatives were saved. They needed the money to buy land, build a factory, pay for materials, and buy machines. It wasn’t like someone would just give them the capital they needed.

  So, imagine his surprise when an exporter who trusted him gave him the land for a factory for a small down payment. ‘We’ll figure out the rest,’ he remembered the exporter saying, appreciating that someone believed in him.

  Amit didn’t think his struggles were over. Even today, with fifty machines on hand, and a turnover of ₹25 million ($350,000) a year, he doubted anyone would extend him a business loan. Still, if there was one person he could rely on, it was his indomitable self. ‘I always felt like if others can do it, why not me?’

  In recent years, Amit found that formalization came with its own costs. He hired a full-time accountant for ₹25,000 ($350) a month to keep records straight and navigate the new Goods and Services Tax (GST) filing system, which he found complicated. ‘I don’t mind paying taxes, but the processes are too extensive. I used to manage this before myself, but now to tally things is impossible.’ He added, ‘At least everything is digital and above board, and there are no unpleasant surprises later.’ 4

  Amit was less sanguine about paying an agency to keep abreast of labour laws and regulations, which numbered over 200 across state and central levels, with over 1,800 possible filings annually for larger firms. ‘The formalities involved are too complex for a business person to manage,’ he said. ‘You need to meticulously detail your submissions by number of employees, hours worked, daily wages of so much, and you need to format it accordingly.’ Any deviance would attract a notice from the Ministry of Labour and then it would be a ‘tension waali baat’, a stressful matter. 5

  In the last few years, India has shot up fifty-three places in the Ease of Doing Business rankings, which assesses countries on ten different dimensions including credit, property, registration and taxes. This has not necessarily translated to an easier business environment for small and medium entrepreneurs like Amit. 6

  The average number of days to register commercial property in more developed states (such as Maharashtra, Gujarat and Delhi) is 116 days. In Uttar Pradesh, Chhattisgarh and Odisha, the time taken is higher—136 days on average. These two figures are far higher than the time used in the official rankings, based on Mumbai (eighty-five days) and Delhi (fifty-five days). Against this, the
average in high-income OECD countries is only twenty days. 7

  There is one part of the ease of doing business that all states and cities perform poorly in: Enforcing contracts and efficiency of the judicial system. In this category, India is still ranked 163rd out of 190 countries. Even in Mumbai and Delhi, the time it takes to resolve a contract dispute through the judicial process is 1,445 days versus 582 days in high-income OECD countries. Entrepreneurs feel the weight of slow dispute resolution. Small business owners naturally struggle to absorb the high costs and loss of revenue caused by lengthy judicial proceedings. 8

  India’s focus on the two extremes of entrepreneurship—high-growth start-ups and micro enterprises—has inevitably meant a lack of focus on entrepreneurs like Amit. It is in between these two extremes that the country will need to invest. India needs many SMEs, each of whom may not individually hire many people, but collectively, they can provide a quantum of productive employment that the country needs. And they need to be spread across the country—not just in the major economic centres. Since these types of firms use local inputs and often start off by catering to local demand, they can be drivers of widespread development, drawing the informal and formal sectors closer together.

  We call this the ‘everywhere entrepreneurship’ movement. The bright lights of this movement are local SMEs—the restaurant, health clinic, salon, textile manufacturer and car garage—that use tried and tested business models to solve local problems. They are unlikely to become tomorrow’s large corporations, but stitched together, they are integral to the future of India.

  31

  A Solitary Enterprise

  Facing these challenges can be a solitary endeavour for business owners like Amit. True to his dream, however, he has an equal partner in Niyati, and this lightens the otherwise lonely weight of being an entrepreneur. Niyati now maintains their long-standing relationship with Japanese customers and comes up with new designs that can be easily produced in India and which match their tastes and market appetites. She undertakes the negotiations and oversees the production of these garments until they are shipped.