Choosing Expediency Over Principle

“This Budget belongs to ‘Aam Aadmi’. It belongs to the farmer, the agriculturist, the entrepreneur and the investor. The opportunity is great. The time is right. I have placed my faith in the hands of the people who, I know, can be depended upon to rise to any occasion in national interest. I have placed my faith in the collective conscience of the nation that can be touched to scale undreamt of heights in the coming years.”

With these words, the Finance Minister concluded the much-ballyhooed budget speech, which my fellow panelist Mahesh Murthy believes doesn’t matter any more.

While there are plenty of schemes and sops for farmer and agriculturists – over $25 billion, about 10% of the budget, has been allocated to various schemes for rural development – there’s not much that is enthusing for entrepreneurs and investors. In his second budget after a conclusive election victory, the Minister has continued to reward his party’s core constituency and vote bank, not necessarily in ways that would actually empower or ameliorate them.

The Minister said that disinvestment would allow people to participate in the profits of public sector companies. What he fails to recognize, or chooses not to believe, is that the current program of disinvestment is a misnomer – “monetization” would be a more accurate characterization. The government proposed to sell minority stakes in public sector units to pay for the social sector schemes believed to help the bottom of the pyramid. Privatization and strategic sale of government-owned companies is what is actually beneficial to the economy.

Loosening government-control over companies results in more efficient management and lower prices for consumers, also freeing up capital for investment in critical areas such as infrastructure. India doesn’t need to borrow money from the World Bank to build roads. The raison d’être for disinvestment is change in management control, which the Minister is not achieving by monetizing minority stakes.

There are no bold pronouncements and no liberalization. Mahesh is right when he says that in recent years budgets have been predictable and populist. Admittedly, this budget too is rather stale and devoid of vision.

I don’t think we should be content with a GDP growth rate of 7% or 9%. Our true potential is at 12%-plus, for two reasons – India’s GDP stands at about $1.2 trillion and we are starting from a low base. Secondly, India’s demographic profile is also very amenable to support high-growth rates. But the specter of government-control and short-sighted and politically-driven policy making year after year is holding the country back. We saw glimpses of what is achievable when we had truly reformist and visionary Prime Ministers P.V. Narasimha Rao and Atal Bihari Vajpayee guiding policy-making. They were supported ably by cabinet ministers like Manmohan Singh, Yashwant Sinha and Arun Shourie. Without those years of breakthrough liberalization, nobody would ever think of classifying India as a world-power, and we’ve just scratched the surface.

But this year’s budget did have some silver linings. I wrote earlier that India’s “offline” market has huge potential, and some of the budget announcements are bound to make the offline market even more attractive.

The Minister reduced personal income taxes, leaving more money in the pockets of consumers. He also spoke about (finally) allowing foreign direct investment in the retail industry. This can be transformational for the sector. The Indian consumption story looks very strong.

One of the major new announcements was charging a cess of Rs. 50 per ton of coal. India’s coal consumption, of both domestic and imported coal is over 600 million tons. The Rs 3000 crore ($600 million) revenue from the coal cess is proposed to be invested in a National Clean Energy Fund. The initiative should give a boost to clean technology in India, and while the purpose and goal of the Fund is still unclear, care should to be taken that the government doesn’t take on the role of kingmaker in clean technology.

I share Mahesh’s concern about how India risks turning towards oligarchic and crony capitalism, where special interests and members of the lucky sperm club are the only ones who get to participate in economic opportunity. The way to tackle that is through meaningful reforms and more liberalization.

Perhaps entrepreneurs and believers in individual freedom and the market system should organize themselves better, and then we can expect politicians to listen to the collective voice. Paul wrote yesterday that people might wonder if they should pay more attention to Nitin Gadkari, head of the main Opposition party BJP, if the government went too far on populism yet again. Mr. Gadkari has spoken out clearly in favour of free enterprise, but his party discredited itself by staging a walk-out in the middle of the Finance Minister’s speech.

In sum, Pranab Mukherjee could have delivered more, and the few features that stand out in this budget are mere consolation prizes. The Congress has the electoral mandate, but doesn’t have the political will. Once again, it chose expediency over principle. Another year has been lost, and we continue to be in the dark.

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What the Budget Means for Entrepreneurs

Finance Minister Pranab Mukherjee will be presenting Union Budget 2010, the annual economic policy statement of the Government of India, on Friday. In most nations, this would be insignificant, but the Budget is probably the most significant annual event for Indian financial markets and economy analysts.

Most entrepreneurs are quite disconnected from the effects of the Budget, or government policy-making in general. It’s a non-event in the startup and venture world. According to conventional wisdom, weighty policy pronouncements and the politics of policy-making are considered more relevant for industrialists and established businesses, rather than a startup striving to build products, revenue and market share.

And nothing could be farther from the truth. India’s economy is still heavily shackled by state control despite the liberalization efforts of Prime Ministers P.V. Narasimha Rao and Atal Bihari Vajpayee. We are still far, far away from a true market system, which means that the government wields enormous clout in the economy. Though the effects of the Budget and accompanying policy might not be directly tangible to entrepreneurs, what the finance minister says and does can provide valuable clues to future opportunities.

For instance, the government’s flagship job creation program, the National Rural Employment Guarantee Scheme (NREGS) announced in the 2005 Budget, has transferred tens of thousands of crores in consumption power to rural areas. Theboom in rural India, and the recent food price inflation, are both partly caused by the NREGS and the government’s other social sector schemes. While such schemes are mainly created for political benefits and winning elections, at the same time investors and entrepreneurs should try to anticipate opportunities presented by policy shifts. There are startups operating in the Indian hinterland in sectors such as solar power, education and retail which have capitalized on the NREGS-driven consumption boom there. Sometimes it makes sense to follow the money.

Financial inclusion and reforms are the buzz words for this Budget, though the Congress-led UPA’s track record suggests that the former is more important to it than the latter. The Unique Identification Authority of India, led by Infosys co-founder Nandan Nilekani, is slated to get a major funding boost this budget. The goals of the UID project gel nicely with the government’s desire to reach out to the aam aadmi, and the government can likely score some points by showing support for Mr. Nilekani.

The words reforms and liberalization may sound like economic mumbo-jumbo to most entrepreneurs, so here’swhat they mean: liberalization means minimizing government interference in the market. Telecommunications and the Internet are more liberalized than, say, agriculture that has far more government control and the government decides everything from pricing to distribution. When the market is allowed to function with government only setting and enforcing minimum basic rules, the best products win and the most innovative companies grow.

India’s economy is still at a developing stage, which makes good policy-making critical for achieving our economic potential. The most outstanding example of prudent policy-making in recent years has been in wireless telecommunications. As Sanjeev Aga, managing director of Idea Cellular, said recently, the New Telecom Policy (NTP) announced in 1999 was a “watershed event” which sowed the seeds for the themeteoric rise of India’s wireless telecoms sector.

Private equity firm Warburg Pincus invested $80 million for a 20% stake in Bharti Airtel in 1999. Warburg Pincus and Sunil Mittal spotted the opportunity early and the rest, as they say, is history. Bharti’s current market capitalization stands at over $20 billion. Over the course of the last decade, the company has grown by leaps, and has just announced a deal to acquire major telecom assets in Africa The NTP policy’s thrust on competition has ensured that consumers enjoy lower and lower service rates. Mobile telephony has been among the most dynamic sectors, creating wealth and generating employment. Mobile value-added services has been a hotbed for entrepreneurial activity and venture capital investment. None of it would be possible without 1999′s NTP.

It is important to note that the NTP was not a happy accident of fate. Finance Minister Yashwant Sinha referred to the NTP repeatedly in his budget speeches. Prime Minister Vajpayee and Telecoms Minister Pramod Mahajan deserve full credit for framing visionary policy for the then-sunrise sector, allowing competition and the growth of private enterprise to fulfill the telecom needs of everyone from rickshaw pullers to billionaires.

For entrepreneurs and venture investors, liberalization and privatization open up opportunities which are otherwise inconceivable. We are in the dark, and simply can’t say what innovation we are missing out on without liberalization. The UPA has been less enthusiastic about liberalization, but this budget may spring surprises. Moreover, the Finance Minister will achieve inclusive growth if he pursues liberalization, like the example of mobile telephony clearly shows. Here’s hoping that Finance Minister Pranab Mukherjee shows us the light on February 26.

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The Potential of India’s “Offline” Market

India is a unique economy in many respects. Though Indians conduct cutting-edge and mission-critical research for Fortune 500 corporations, few Indians actually think of building products that compete with them. While the print medium is dying in other parts of the world, leading print publications such as Forbes, Entrepreneur, Harper’s Bazaar, Technology Review and even celebrity gossip rags People and Hello! magazines have launched print editions specially for the Indian market.

While the rest of the world has seen a boom in online media and social networking, India, which has less than 80 million Internet users in a population of over one billion, has seen meteoric growth in traditional electronic and print media over the decade. As Europe and the US debate the virtues of distributed power and how the electricity grid can be upgraded, India is starting with a clean slate. Large swathes of the country are still far away from grid connectivity or are shrouded in perennial power cuts.

In a nutshell, the rules and principles which would work in markets in the West do not apply directly to India. Over the last few weeks, I came across a few companies that represent the potential of India’s “offline” market.

Large parts of India are still not connected to the electricity grid. Sometimes the connectivity is there, but electricity supply is unreliable and inadequate. Bangalore-based Duron Energy has developed a solar-powered domestic lighting solution for exactly such areas. One of the most popular reasons consumers and families are willing to invest in purchasing Duron’s product is to enable their children to read and study after sunset. Duron is competing with the kerosene oil lamp, and is offering a solution to customers at the bottom of the pyramid who would probably never see electricity in their homes for at least a few years, even though a massive government push for infrastructure investment is already underway.

At IIT Bombay’s Entrepreneurship Summit, there was a company called Five Shells which is developing board games. Yes, board games. Conventional wisdom dictates that board games are dead. After all, we live in the era of Nintendo Wii, PlayStation Portable and Xbox 360. Games these days should be developed exclusively for console systems like the Wii and Xbox, and hand-held devices like the PlayStation Portable, iPod Touch and even the iPhone.

Except that in India, the conventional wisdom doesn’t quite apply that neatly. Most of the consoles and hand-held devices are priced way beyond the reach of the average Indian. It costs a great deal of money to purchase electronic hardware, which can cost tens of thousands of rupees, and supplement that with game title purchases, which start at a few thousand rupees. In short, the spending required is simply beyond the budget of the average family.

Hence, there is clearly a huge market for inexpensive and fun board games priced at a few hundred rupees, assuming a small percentage of Indians enjoys playing board games. Moreover, few companies are designing board games keeping in mind India’s history, culture and consumer tastes.

Why should Indian consumers only have a choice between Risk and Monopoly? Having said that, designing and marketing board games is no mean task. It requires an incisive understanding of consumers tastes and psychology to produce a game that is fun and easy to play. A company like Five Shells would also do well to protect indigenous intellectual property, and should avoid producing cheap knock-offs of game ideas from abroad, focusing on innovation and new ideas instead.

Another company that is innovating in an allegedly dying industry is ReleaseMyAd. Founded by former Microsoft employee and Wharton School graduate Sharad Lunia, ReleaseMyAd allows customers to take out print classified advertisements in newspapers from across the country using the Internet, eliminating the cumbersome process of finding and coordinating with a local agency. Print classifieds have been transformed from a billion dollar business into a million dollar business by the likes of Craigslist, but in India, print still rules.

The death of print has been greatly exaggerated. In India, no website comes close to the reach and readership of a newspaper, and the old-media print classifieds market stands at some $300 million. ReleaseMyAd charges nothing extra to consumers for its service, and is in fact growing the market for print classifieds by providing those who wouldn’t otherwise use print classifieds an easy, seamless and transparent way to do so.

Focusing on technology for the sake of technology can result in missed opportunities. Both entrepreneurs and investors would do well to remember that India is different. Those that build companies addressing this market’s unique and specific needs will be the ones that emerge as big winners.

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The Global Innovation Challenge

Rising unemployment and income disparity has shaken democracies across the Western world in the last year. Unemployment among young people in particular has been persistent and pervasive — the United States saw the highest ever youth unemployment in 2011, and it has reached as high as 45 percent in Spain. Job creation has suffered not just because of excessive debt. Advanced economies have seen a massive erosion in manufacturing, and new enterprises have been too focused on driving consumption.

Internet companies have mushroomed in Silicon Valley thanks to the low cost and ease of building products for the Web. They’re able to scale globally while maintaining a relatively low employee headcount. The year 2011 was a landmark one for Internet companies, with several start-ups going public and raising over $3.5 billion in the best year for initial public offerings since 2000. Among the biggest ones to do so in the United States were LinkedIn, Zynga, Groupon and Renren, a Chinese social networking site. And Facebook’s recent filing for a $5 billion public offering could make 2012 the best year for Internet I.P.O.’s since the dot-com days of 1999.

But all these companies thrive on aiding consumption, whether it’s through gaming, social networking or group discount buying.

In contrast, production-oriented technology sectors in health care, advanced materials and energy have had limited success in America. Most ventures in clean technology have absorbed large amounts of capital and have yet to show returns for investors. Many that have managed to grow, like A123 Systems, which manufactures advanced lithium-ion batteries, and Tesla Motors, aren’t very profitable. The success of consumption-driven Internet start-ups has left production-oriented ventures behind.

It’s technology that ensures equitable growth. Think of how mobile phones are ubiquitous across the developing world: there are over five billion cellphone users worldwide. Would it have been possible for all of them to have landline telephones instead? Would there be enough copper in the world to draw wiring to even the poorest day-wage laborers in India and China who today use cellphones? Even if the world had enough copper, could it all be mined quickly enough with limited environmental impact, and could it be devoted to laying telephone lines for a customer of meager means? Almost every modern day convenience that the West takes for granted will have to be re-engineered to make it cheaper and better for large-scale use in the developing world.

There’s a dichotomy here. The advanced Western economies aren’t able to create jobs partly because of their inability to compete with Asia when it comes to large-scale manufacturing, and this has in turn limited their ability to scale production-oriented technology companies. In the East, the emergence of manufacturing — and in India’s case, I.T.-outsourcing — has created higher incomes, a stronger consumer culture and the need for energy and resource efficiency. Rapid urbanization and industrialization in the developing world are irreversible trends. There are suddenly billions of consumers in Asia who can now aspire to the standard of living in advanced economies, and meeting this demand will require a giant leap of innovation across sectors like energy, chemicals, health care, transportation, water and materials.

But emerging markets lag in innovation because their entrepreneurship ecosystem, higher education institutions and research infrastructure are far less robust. Above all, entrepreneurship is celebrated in American culture and business failures aren’t looked down upon. Silicon Valley is the product of this culture — like French cuisine and Indian classical music, it cannot be cloned. As the world’s innovation engine, Silicon Valley should lead the way in commercializing game-changing technologies that can ease constraints on the world’s resources and enhance production. Instead, it has found more success in ventures for the consumer market.

But start-ups must be close to their customers, and there’s a case to be made that industrial and clean-tech start-ups in Silicon Valley have been hard-pressed for success because their real customers are in emerging markets. From an economic standpoint, climate change and resource efficiency are more the problems of developing nations. Moreover, as the bankruptcy of American clean-energy start-ups like Solyndra has shown, innovation that needs to be propped up by governments is difficult to sustain.

Similarly, consumer Internet ventures in emerging markets are only able to clumsily copy ideas from abroad. Though there is a rapidly growing middle class with Internet access in India and China, the United States still has the world’s largest and most affluent consumer base, making it a natural pioneer for consumer Internet innovation.

The Internet is challenging the hegemony of nations. An Internet start-up in any country can reach consumers worldwide because of the platform’s openness. But the same isn’t true for production-focused start-ups. Greater economic integration and free trade will help them globalize more easily. To foster innovation in production-oriented sectors, nations need to champion the freer flow of technology, labor and capital and create institutions and laws that promote the same openness. There needs to be a symbiosis between entrepreneurial talent, investment capital and sectors that are in need of transformational innovation. Only then will global economic growth be truly inclusive and harmonious.

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