A culture pitted against entrepreneurship

India has recently moved up in the World Bank’s Ease of doing Business by a few ranks, managing to reverse a downward trend, though it ranks a dismal 130 out of 189 countries. The country can go even higher and may break into the top 100 if it introduces some structural management and change in outdated laws,

That said, the reality on the ground goes beyond changing laws. Broadly there are three areas that have to be addressed for us to really ease doing business in India. Our fear of failure, unenforceable contracts and too much control in the hands of the bureaucracy, all originate from a gaping trust deficit that exists across various sections of the society.

Fundamentally, we are a risk averse and failure allergic country. We cannot accept failure at any level, be it our kid’s performance in school, the Indian cricket team or any business. Entrenched in our thought process is an absolute revulsion to failure.

This gives rise to a culture of mediocrity as we do not take any risks that might backfire. We are able to ‘game’ the system in education but when it comes to business or competitiveness there is much that we can do to bridge the gap especially on innovation and game changers.

When an entrepreneur sets up a business, it is a big step for them into the unknown. He or she is giving up a life of a safe career to pursue a dream. Instead of celebrating that we throw all sorts of obstacles in their path from official paperwork to a hostile banking system.

For example, an entrepreneur cannot get a bank loan without a personal guarantee and a property to cover the loan in most cases. Personal guarantees and collateral for loans to smaller companies by banks in India are a substitute for lazy banking. A bank does not want to put in the effort to understand a business and assess business risk.

The easy way out is a personal guarantee and collateral. It is a huge hindrance for anyone to take up entrepreneurship knowing that not only will he lose his company if he makes a mistake but also most of his wealth.

Where is the encouragement to start a firm in this atmosphere? Digging deeper as to why this is a very unique Indian phenomenon is a lack of trust. There are people who have taken loans and used it for some other purposes or embezzled the funds so everyone gets hit with these onerous rules. These few bad apples spoil the barrel due to lack of proper judicial remedies.

Unenforceable contracts due to a judicial system that is inefficient and ‘pliable’ leads to a multitude of problems for doing business in India. The confidence that a case can be postponed forever leads to contract violations. An unfortunate outcome is it feeds corruption as entrepreneurs approach politicians or officials who can ‘solve’ these problems for a ‘fee’.

Another key issue due to judicial delays is not prosecuting IP violations fast enough. Employees, partners often start copycat companies with same products with impunity as they know that they will never get caught. Given the existing trust deficit, entrepreneurs are very averse to sharing and debating ideas openly which is so essential in a fast moving technology world.

The third big obstacle is the power vested with state-level and multiple organisations to audit and shut down companies. For example, the IT department has a TDS audit, a Transfer Pricing audit, a regular audit for multiple years all going on at the same time and asking for the same information.

The commercial tax department could come at a company from a sales tax, VAT or service tax angle and all from different officers and different agendas. The Registrar of Companies could audit a company to see company law compliance and the Provident Fund department could show up any time.

Then there is the Professional Tax department and even the local municipality who could show up with some new GO. Not to forget Excise and Customs departments if they export or import anything. If a company has any international transactions the banking system comes in with their own regulations overseen by the RBI.

Again this comes from a deep tradition of distrust of the business man and viewing all of them guilty unless they can prove their innocence. Most of these officials can shut down a company, close bank accounts on any suspicion and go scot free even if they don’t find anything. This is win-win for them but a huge cost for doing business in India.

The solutions for these problems have to be tackled across all levels but the root lies in addressing the judicial process.

If that can be fixed through separate courts or something similar to lok adalats , we will end up addressing a lot of issues. Another suggestion is for government to step in as a guarantor for startups and other small and medium companies.

The government already has some programmes, but this is barely sufficient. There will obviously be a lot of finger pointing based on political affiliations as to who gets these guarantees but this can be solved through a process of approvals by panels of eminent business people where companies pitch as if they were pitching to a VC.

The bureaucratic nightmare can be solved by exempting companies of a certain size or certain years in existence from audits and holding the accounting firms that audit them responsible for any lapses taking the onus away from entrepreneurs. Also, for companies that get picked for scrutiny let there be one audit across all departments so that the company can present all papers at one go and get on with running their business.

This requires coordination amongst various departments and one panel from all departments doing the audit. In addition, unsuccessful companies who fail during any phase should also be allowed to shutdown through one of these panels with minimum harassment of entrepreneurs.

Finally a big change required is the attitude of people towards entrepreneurship and failure. We have to celebrate failure and stop treating business people with suspicion. And the community of businessmen and entrepreneurs have to hold that trust sacred and not abuse it so that we don’t just ‘Make in India’ but ‘Make for the World’ in India.

The writers are co-founders of Ocimum Biosolutions and mapmygenome

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