venturing.in

Category: Essays

  • Much Ado About Nothing

    Reading the business press in India can be much like reading a Shakespearean tragicomedy. I recently came across a news item that talked of the agriculture ministry’s efforts to set up two billion rupee poultry venture capital fund. According to an agriculture ministry official, capital subsidy, in the form of venture capital, was better than providing interest-free loans to farmers in the poultry sector.

    Elsewhere, an article published on the same day by a business newspaper spoke of how Intel’s latest Xeon processor was designed completely at the company’s Bangalore research center. Noshir Kaka, director at consulting firm McKinsey, says none of the major product companies who have an R&D presence in India can do without these development hubs. In fact, conducting cutting-edge research and expanding product development in India is high on the agenda of companies such as Google, Cisco Systems, DuPont, Renault and General Electric.

    Such is the dichotomy of the Indian growth story. On the one hand, the government appropriates the vocation of venture capital to provide capital subsidy for the poultry sector, and on the other hand talented Indian engineers are noted to be busy at work developing next-generation technology for global corporations.

    Indians create the fundamental technology for global firms which is re-imported back to India as a finished product, and the benefits of which are reaped in the long-run by the foreign shareholders of the companies, not Indian citizens. The global firms are enticed to set up shop in India usually with a slew of tax breaks, possibly contributing less to the government exchequer than Indian firms of a similar size.

    Shakespeare would smile at this comedy of errors.

    Not to be protectionist or to blame India’s engineers, because they are merely responding rationally to incentives. India has the capacity and talent to compete with the world’s technology leaders, but the government disincentivizes entrepreneurship.

    Even though the Finance Minister acknowledged in his budget speech that the growth from 2004-2008 was driven by private investment, there was precious little to reward that achievement in what is considered to be the government’s economic policy statement.

    It’s anything but easy being an entrepreneur in India, which ranks 122 on the World Bank’s Ease of Doing Business Index, behind both Serbia and Pakistan. Starting a business in India takes on average 12 procedures and 34 days costing 47% of per capita income, the World Bank says.

    The average medium-sized company in India also has to pay some 60 different kinds of taxes. Many people would probably throw in the towel just picturing the administrative burden of the paperwork. The effective total tax rate on profit, including central sales tax, corporate income tax, social security contributions and excise duty, amounts to 71.5%, the World Bank notes.

    Indian labor laws are antiquated, and continue to be a serious impediment to the growth of industry and manufacturing. Companies having over 100 employees can only retrench with government approval.

    The Indian banking sector remains dominated by government-controlled banks, and financial sector reforms have been long overdue. The bank nationalization of July 1969, praised munificently by the Finance Minister in the budget speech, politicized control over credit and loans and cemented the government’s grip on the economy, strangulating entrepreneurs.

    Despite the impressive growth of the IT sector and emergence of major manufacturing firms such as automotive components maker Bharat Forge Ltd., the stark reality is that the agriculture sector continues to employ 60% of the workforce while generating just 16% of GDP.

    Six decades of socialist economic policy have kept farmers in a time warp. The more the plans fail, the more the planners plan. A country that creates cutting-edge microprocessors prays for sufficient rainfall every year, and political parties craft populist policies precisely because of the disproportionate number of people dependent on agriculture. Not that these policies really help the intended recipients, if history is any guide, but populism usually never fails to win elections.

    One has to ask the question whether this condition is inescapable or self-inflicted. Is there a way to break this vicious cycle?

    Originally Published: http://navam.in/1pEPZqg

  • Harnessing India’s Technological Potential

    Over the last decade, clean technology and nanotechnology have emerged as prominent investment themes in venture capital.

    According to New York-based research firm Lux Research, venture capital investment in cleantech and nanotech has grown at about 40% annually since 1997. Rapid advances in the physical sciences and materials engineering have ushered in everything from hybrid-electric cars and lighter airplanes with substantially enhanced fuel efficiency to eco-friendly specialty chemicals and stain-resistant apparel.

    As China and India industrialize, there is a glaring need for such innovation to ensure that limited natural resources are consumed with high efficiency. Venture capitalists have a key role to play in fostering that innovation.

    VCs typically consider India to be just a technology deployment market. That view is too narrow: India has not just the entrepreneurial competence but also the scientific talent to invent and lead in science-driven innovation.

    The American model for technology commercialization has proven to be highly successful. Corporate giants such as Hewlett-Packard, Genentech and Google took root at universities.

    More recently, President Barack Obama unveiled the government’s biggest infrastructure investment plan since the creation of the U.S. highway system with energy efficiency as its cornerstone.

    Prof. C. N. R. Rao, chairman of the Prime Minister’s Scientific Advisory Council and one of India’s most distinguished scientists, has worked tirelessly for the cause of science education and research, recently obtaining a grant of over $200 million from the central government for fundamental research in materials science and nanotechnology. When I met him in July last year, he lamented the lack of enthusiasm for science and technology in India, and commended China’s nationalist zeal for building prowess in high-technology.

    There is no dearth of scientific ability in India, but Indians prefer to work in laboratories abroad thanks to the lack of cutting-edge infrastructure in their home country. What’s missing here are incentives for innovation and entrepreneurship.

    The Indian government has promoted investment in renewable energy sources such as solar and wind, and these sectors are beginning to see some traction. However, India is still way behind both the U.S. and China.

    Economist Joseph Schumpeter feted the entrepreneur as the growth-driver of an economy, the “wild spirit” who would cause creative destruction by innovation and disruption. A market-based mechanism must be adopted, but the government has a vital role to play in setting effective policies. The government should invest in basic scientific research and introduce reforms in higher education, allowing for the creation of more world-class universities.

    Culturally, Indian scientists are hesitant to partner with entrepreneurs and external investors. For some Indians, the traditional concept of education clashes with the notion of commerce. Profit is still a dirty word in India’s academic circles. This malaise is partly caused by the red tape stifling Indian educational institutions.

    Basic mechanisms for technology transfer are absent or deficient at leading Indian universities. When the appropriate systems are in place and research institutions are forthcoming, venture capitalists and entrepreneurs can license and commercialize technology, moving it from the lab to the market. Taxpayers get a return on their investment in the form of better products and increased productivity if investors and entrepreneurs are able to beat the odds and succeed.

    Otherwise, research remains research. IIT Delhi and IIT Bombay have taken the lead by establishing sophisticated infrastructure for technology transfer and venture incubation. I’ve seen technology transfer offices at some of the world’s leading universities, and the offices at these two Indian institutions are comparable to the best. Others would do well to follow their example.

    The next step should be the establishment of a national group to represent the voice of science-driven innovation, on the lines of the Indian information technology industry’s Nasscom. With prudent government policy and a thriving ecosystem, private capital can kick-start the transformation of laboratory inventions into marketable products.

    India missed the information technology and electronics manufacturing wave. If India is to transform itself from an economy driven by agriculture and services to one with high-technology industry and manufacturing as its bedrock, it should put in place effective policies to ride the new Schumpeterian wave of creative destruction driven by physical sciences-based technology.

    Originally Published – http://navam.in/1iL8eTr