Friends of Economic Development

Dear Friend of Economic Development,

This month on FED dialogues, we sat down with business executive, social entrepreneur and writer, Ravi Venkatesan , who's the founder of GAME - Global Alliance for Mass Entrepreneurship . Ravi shared his experience of leveraging mass entrepreneurship as a solution to India's unemployment puzzle, and delved deep into the 'mindset' of an Indian entrepreneur that's constraining the growth of Indian MSMEs.?

In our data story for this month, we look at the countries that have gained from China vacating its global market share in apparel exports, and why India must target this sector in a big way. We also share our article in The New Indian Express assessing the limitations of duty drawbacks.

If you like what we share, do follow us on Twitter and LinkedIn.?

Warm regards,

Rahul Ahluwalia

Founding Director, FED

FED Dialogues???With Ravi Venkatesan?

From classrooms to political rallies to multilateral summits, entrepreneurship is the buzzword being peppered liberally everywhere, and for good reason. It’s the fulcrum of innovation, employment and wealth creation. And nothing breeds success like success! It takes a few to succeed, for a thousand more to strive for success. So, the flywheel keeps spinning. But are we correctly defining entrepreneurship – the kind that will be one of the solutions to India’s unemployment puzzle? It’s not narrow, i.e. restricted to tech startups with an office in Bengaluru looking to be the next unicorn. It’s also not entrepreneurship by compulsion, like the street vendor with a degree who’d much rather have a good job. We want entrepreneurship by conviction; to have that, we must remove the compliance burden that prevents our micro, small and medium enterprises (MSMEs) from becoming bigger. FED’s analysis reveals that of the 6.5 crore MSMEs in India, only 60,000 engage in meaningful exports. Much of it is because of a deficient ecosystem – only 15% of Indian MSMEs can access formal credit. Our guest for this episode argues that a lot of it is also attributable to the absence of a growth mindset and complacency. In this episode of FED Dialogues, Piyush Doshi, Operating Partner at Foundation for Economic Development, sat down with Ravi Venkatesan, who quit a successful corporate career at Microsoft and founded Global Alliance for Mass Entrepreneurship (GAME). From working with local businesses in Ludhiana to help them identify a growth event to pursue, to seeding the idea of entrepreneurship in young minds through the school curriculum, Ravi shares profound insights about what it takes to encourage an entrepreneurial drive in an entire nation. What keeps him going? “It’s a country with mouth-watering opportunities and eye-watering challenges.”

Read the edited excerpts below.?

PD: We do have six and a half crore enterprises, majority of them are micro enterprises, I think 98% or 99% of them are micro enterprises - probably most of them are entrepreneurship by compulsion. There are a few that are entrepreneurship by conviction. Do you make a distinction between these two types of entrepreneurs??

RV: The terminology is necessity entrepreneurs versus opportunity entrepreneurs. Necessity entrepreneurship is disguised unemployment. So, your chai-wala and the pakode-wala, whom we celebrate, they would probably much rather have a good job. In the absence of a good job, they're doing something else to make ends meet; a few of them become successful. But it's very different from the entrepreneur who starts out thinking about a business or by seeing an opportunity. So, think about young Narayan Murthy, seeing an opportunity and building an IT services company. That's a very different type of entrepreneur, very different mindset. In our country, we need many more of such opportunity-driven entrepreneurs because they’re the ones who grow. Necessity entrepreneurs tend to not grow. They're largely self-employed, around 98% are less than 10 employees. And they're not interested in growing, they’re content at the level they're at. It’s the lack of growth that's not creating the employment we need.?

PD: What do you think holds back the growth mindset for opportunity entrepreneurs? What are your thoughts on their bottlenecks?

RV: It's really hard in most of India, to run a small business. It's extremely hard for most entrepreneurs who don't have collateral to get loans from a bank or an NBFC. Only 15% of our MSMEs can access formal credit. So, what do you do? You're not able to invest in machinery or able to access working capital to support your growth. On top of that, you have delayed payments – almost nobody gets paid in 45 days, most people get paid in 90-100 days, in some cases even 180 days, which is crazy. There're infrastructure challenges, etc. For all these reasons, businesses don't grow. But all these variables are exogenous. Yes, more needs to be done to make them favourable. But I have been struck by the endogenous factors, which is, what is the mindset of most entrepreneurs in our country??

Too many of our entrepreneurs either have a victim mindset, or they're complacent. The victim mindset is – oh god, look at all these horrific challenges, how can I grow? But when you look at India's most successful companies that were started in the last 20-30 years, all of them started out with the same exogenous variables. You talk to India's first-generation entrepreneurs, those who started pharma businesses, our e-commerce guys, etc., and you'll find that they also had formidable challenges which they overcame. So, what you need is this growth drive, the desire to build excellent businesses, and create great value for customers, shareholders, and yourself. We don't have enough of that, so too many people become victims. The second is complacency – you achieve a certain level of success and then you're satisfied. You have a nice home, a car, you're sending your kid to a good college, so why should you grow? With growth come more problems, so it's best to just stay at that level, ideally under the radar and live a comfortable life.

We need to work as much on this mindset as on those other variables. That is completely missing in the narrative today, all that's being said about MSME growth, or ‘Make in India’ and ‘Viksit Bharat’, this aspect of the mindset doesn't come out strongly enough. There’re also profound skill issues. Most of our small business owners, they don't know how to build an organisation and delegate authority so they can focus on growth. They're so involved in the day-to-day and minute-to-minute operational issues. There's such a big gap between the founder or the promoter, and the next level that there's no capability to build excellence. There are lots of these soft tissues. And the real issues are the soft tissues.?

PD: What has been your experience in trying to address these mindset issues? How do we intervene to make small business owners feel motivated and overcome this complacency?

RV: One of the most interesting experiments we did was called Growtherator. About three years ago, we started working with the local industry association in Ludhiana to see if we could help accelerate the growth of small businesses. In the beginning, we focused on really small businesses, which were one crore or so. Gradually, we increased it to about 4-5 crores annual turnover businesses. These businesses could be in textiles, light machinery, food, business, etc., but almost none of them were growing significantly. So less than 5% annual growth – stagnant. We put them in a cohort of 20 such businesses. We used a methodology, which we adopted from a person named Dan Eisenberg - It says, you work with each entrepreneur, and find a growth event in their business. A growth event can be finding a new customer, getting a new export order, first export order, or starting to sell online, or launching a new product that addresses a new segment. Then you help them execute that growth event. What happens in six months is miraculous; across four different cohorts or roughly 100 entrepreneurs, the average growth rate is 35%!

Some businesses grow 50, even 100%! Some grow a little less, but the average growth rate is 35%. That just blows their mind. Suddenly, there's a sense that it's doable, and the confidence grows. That's why the cohort is so important. The peer-to-peer learning, inspiration and support is very important. If you do this with enough entrepreneurs, the whole culture and mindset of the place begins to change. Today, nearly three years later, there is a buzz in Ludhiana. More people are talking about growth. So, this has been a fascinating experiment. There's almost nobody who cannot grow. It's therefore a mindset issue and then a little bit of a skill issue.

I'm very interested in mainstreaming this mindset issue because I think that's what's holding us back. The difference between a Chinese entrepreneur and an Indian entrepreneur is this growth mindset, the burning desire to build a global scale firm that can compete; we just don't have enough of those entrepreneurs. I'm not saying we don't have any, but we need many more to achieve our potential. Watch the full interview on our website through the link below.

Watch the full conversation here.

Data Story????Why Apparel Exports Should Matter More To India!

In 2022, global apparel exports were more than USD 550 billion. Yet India only captured 3% of this market. What’s more? Over the past decade China has been vacating this huge market because of a reduction in competitiveness as well as geopolitical factors. Over the same period, countries like Bangladesh and Vietnam have expanded their share of the global apparel market. Bangladesh’s apparel exports more than doubled from USD 26 billion in 2015 to USD 56 billion in 2022. Similarly, Vietnam went from USD 19 billion to USD 34 billion. India, on the other hand, has barely crept up from the USD 16 billion of apparel exports in 2015. This has meant that India has actually lost market share in global apparel exports.?

Why is the apparel industry important for India? First, it can create a large number of jobs. An apparel company will typically employ more than five times as many employees as a pharmaceutical company of the same size. Second, it employs a lot of women. About 75% of the workers in large apparel companies are women. It is about time we unlock the vast potential of our apparel industry.

In-Focus????Duty Drawbacks As?Counterweight To Import Duties?

?? We've been making the point that exports and economic growth go hand in hand. Less obvious is the fact that there's a strong correlation between a country's exports and imports. Data from India from 1980-2018 shows a high correlation between exports and imports, suggesting that our exports have required imports to sustain them, and that openness is needed for growth ??. China, often hailed as an export powerhouse with over $3 trillion in exports, also imports about $2.5 trillion worth of goods.

Economists have thus long pointed out the detrimental effect of import tariffs on a country’s exports as they make local exporters less competitive. Tariffs on imports of raw materials or inputs for finished items -- say the components for a mobile phone -- raise the prices of downstream exports, i.e. the mobile phone, making them less competitive in international markets.

Instead of cutting tariffs, policymakers have offered duty drawbacks as a “trusted and time-tested scheme to promote exports.” But what are duty drawbacks and are they a solution for exporters? Yuvraj Khetan , Senior Programme Associate at FED, has the answer in this article for The New Indian Express .?

Read the full article, here.

Good Stuff We Read/Listened To ?????

1. Why has the term 'industrial policy' acquired such a bad name? While East Asian governments ??? used such policies to?make?their export-oriented industries more competitive, the 'industrial policy' of?today?gives?rise to heavily coddled and inefficient manufacturers.?How to tell good industrial policy from bad.?
2. For a country that's looking to become a manufacturing powerhouse, it's not pleasant news that in several states, archaic building codes for factories are significantly more restrictive than in other developing countries. In this episode of Puliyabaazi, Bhuvana Anand and Sargun Kaur talk about Prosperiti's latest report -?State of Regulation: Building standards ??? reforms for jobs and growth. Listen here.?
3. At a time when the US and India, are attracting a lot of hype for their enduring strength, it is worth looking at Canada, Chile, Germany, South Africa and Thailand -?the?“breakdown nations”, and they?carry a lesson. A warning from the breakdown nations ??. Read here.?
4. Jason Furman shared this insightful graph on X (formerly Twitter) that has once again underscored the point that growth ?? matters, even if it's a few tenths of a percentage point. Here, he shows that the difference between the US and Argentina over the last 12 years has been just 0.5 percentage point.?This ties in perfectly with the previous edition of our data story, where we argued that growing at 4% vs 6% over the next?30 years will be the difference between India achieving the living standards of Libya or Mexico respectively. Read Furman's post here.?

Welcoming Our New Team Members.

1. CA Shubham Chaturvedi , Team Lead, Ex - Chief Minister's Office, Haryana
2. Indu Madhavan , Pro-bono, Part-time CFO, Ex - Director, Deloitte
3. Mihir Parekh , Associate Partner, Ex- Director -?Textiles & Apparel, Government of Telangana

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