The Indian Unemployment Concern: We Do Not Have Enough Risk Capital

When a major emerging economy grows significantly, you would expect that job growth would follow, however, this hasn’t been the case in India. Between 2016-2019, India’s GDP growth was 27% but its net job growth was only roughly 3%. Unemployment in India had been on the rise, and in fact, due to COVID-19, the situation has only worsened. To understand the solutions to the economic crises facing India for the post-COVID era, we must first analyze the causes of this already present faulty growth in the pre-COVID era.

With job growth rates so low, the obvious question is, what is the main cause and remedy of this crisis; the answer lies in entrepreneurship, or the lack thereof. At a glance, it would be hard to tell that entrepreneurship in India is a pertinent issue, or rather, an issue at all. Ever since India’s economic liberalization in 1991, the growth of enterprise and the success of innovative entrepreneurs have only been on the rise. The Ministry of MSMEs (The Micro, Small & Medium Enterprises) estimates that between 2014 and 2017, the number of working MSMEs grew at a rate of 4.51% annually. India is one of the fastest-growing economies in the world with a significant youth population. However, the heart of the problem is that there exists an abundance of willing entrepreneurs but a simultaneous lack of healthy start-ups. A 2017 Gallup study of 20 economic entities in Asia showed that India ranked in the bottom quartile on several important indicators of a well-functioning entrepreneurial ecosystem. While it is incorrect to compare India to other Asian countries due to the cultural, economic, and governmental diversity, being on the lower quartile arouses major concerns. 16% of Indian adults report that they currently own a business. Of those, 22% say they formally registered their business. Half of the country’s business owners report working alone, and 47% have hired five or fewer employees. Twelve percent of all business owners say they plan to hire more employees next year, and 55% say their number of employees will stay the same.

These outline the issue at hand, it is not easy to create start-ups in India. Only 9% of Indian’s who do not have their own business have merely thought about creating a start-up, and only 5% have acted on it. It’s the economic environment, the culture that is around us. Clearly, India needs to minimize barriers and provide the support that would accelerate entrepreneurial growth in India to satisfy existing demand, creating jobs for others. It isn’t easy to start a business in India, when asked about the difficulty according to a Gallup 2015 report, 46% of Indians stated that it would be hard to start a business in India. The World Bank ranked India at 166^th out of 183 countries in it’s Doing Business 2015: Doing Business in a More Transparent World” report.

The causes are simple, widespread corruption, governmental mismanagement, and a faulty ecosystem for entrepreneurs due to anti-risk-taking attributes.

India has attracted the attention of global investors, bringing in a lot of FDI for start-ups in India, however, this isn’t the kind of investment we need. The solution is to find the right kind of investment; domestic portfolio investments. Entrepreneurs can seek out investors in India; however, the fear of failure runs so deep in the venture capitalist world, they only seek to invest in later stages. Ideally in a market economy, private business would take the most effective strategy and perhaps this cautious corporate culture is appropriate for present circumstances, but the government initiatives to drive investment has fared no better. While projects like Start-up India are good in theory, it served as a failure, with over 80% of the recipients of the program stating that they received no benefits. Moreover, we should take inspiration from America’s Small Business Innovation & Research initiative wherein various government departments allocate funding for innovation by SMEs (Small and Mid-size Enterprises), selected through an open, competitive process. This has helped create thousands of new companies and millions of new, quality jobs in America. With something similar in India, it could be quite impactful if each ministry for example were to fund innovation grants annually through competitive processes. Who doesn’t love friendly competition?

However, we need to deal with the issues of the banking system too. Bad debt has made lenders risk-averse in India, due to previous mismanagement especially of public sector banks that have wracked up NPAs (Non-Performing Assets). As of March 31, 2018, provisional estimates suggest that the total volume of gross NPAs in the economy stands at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances of public sector banks. For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh crore. In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017.

The solution to this? According to a recent article by The New Indian Express article written by Seela Subbarao “Six-point strategy to solve non-performing assets problem”, she underlines solutions such as, Stricter NPA Recovery: The government needs to amend the laws and give more powers to banks to recover NPAs. The Insolvency and Bankruptcy Code has brought in discipline because of fear of losing the asset. Asset Reconstruction Company: There’s a need to set up an ARC or an Asset Management Company to fast track resolution of stressed assets.

If the percentages of NPA’s were to reduce and the financial system allowed to function properly, then this will allow banks to spare more risk capital to entrepreneurs at early stages and have scope for those who default. It’s the mindset that counts, in order to succeed, entrepreneurs must fail. But at least the banks can ensure that entrepreneurs fail in moderation and that losses don’t pile up. Solving NPA crises can allow for lower interest rates on loans, especially for start-ups, and as aforementioned, if a start-up with the help of a bank loan were to reach a stage where the private sector can now fund their enterprise, it’s a win-win scenario.

Now that we’ve understood what the pre-COVID era’s faults and solutions were, it’ll allow us to adapt and create solutions for the post or current COVID era. Entirely new markets have emerged, paving the way for many e-start-ups which will serve as the future of start-ups. E-commerce will rise, and pave the way for more youth start-ups. Entrepreneurs must be patient during this time, but also be optimistic. It is, after all, an economic crisis, however, one that has created new markets.