Saturday, February 6, 2016

Vivan Sharan on "No Country for Start-Ups Yet", BusinessWorld, 06 February 2016

The Government of India's "Action Plan" for catalysing a start-up ecosystem feels incomplete and somewhat amorphous. PM Modi's commendable vision of "starting-up" India is premised on the ability of start-ups to capitalise on the so-called "demographic dividend" and also leverage the large domestic markets for their services and products. Of course the PM's thrust for creating this ecosystem must also derive from a desire to reduce the state's own disproportionate burden of job creation. With one million people joining the workforce every month and only a handful of formal jobs to go around, start-ups are seen as a panacea for all that ails the Indian economy.

There is much scope for improvement in the approach taken thus far starting with how the Government procures services from the private sector. In order to promote a start-up ecosystem the Government must first fundamentally reorganise its procurement policies (admittedly there is some lip service to this effect in the Action Plan). In doing so it would recognise two facts - that start-ups have the potential to disrupt existing service providers through new technology, processes and dynamism, and that government departments are among the largest potential clients and beneficiaries of an emerging start-up ecosystem.

There are limited avenues for start-ups to engage directly with government, and all of them are circumscribed by an anachronistic set of regulations called the General Financial Rules (GFR). A voluminous set of regulations, the GFR has limited provisions that allow for purely merit based selection of service providers. The Ministry of Finance wields the rules on any hint of deviation, even if some procurement may actually be in the larger public interest (something it may not itself be optimally set-up to assess).

Some state governments have taken progressive steps to overcome the limitations of the GFR variety. States like Rajasthan have a procurement process called "Swiss Challenge" to promote innovative interventions in service delivery and infrastructure creation. Rajasthan's Swiss Challenge Guidelines are laid down in an amendment made to the Rajasthan Transparency in Public Procurement Rules, 2012. This method of procurement allows for the private sector to suggest innovative projects to the State, which in turn can form the basis for a public tender on which the propositional entity has first right of refusal. This method exists in a few advanced economies and the objective is generally to allow for non-government stakeholders to address service delivery and infrastructure creation/maintenance challenges through innovative means and viable economics.

However, the Swiss Challenge method also has its inherent biases. For a state like Rajasthan, small businesses are the backbone of the economy. Yet, the rules do not allow for firms with less than three years of audited balance sheets and less than Rs 50 crores in value, to take part. The rules show a clear bias towards infrastructure projects rather than service delivery. In fact this logic of attempting to harness the private sector for picking up the slack for the public sector's ability to create infrastructure is ubiquitous. A few years ago, the erstwhile Planning Commission estimated that India needs $1 trillion every five years, in the medium to long run, to invest in infrastructure creation; about half of this would have to come from the private sector. Perhaps the preponderance on public-private partnerships as a development model stems from the hope that the private sector can somehow plug all the fiscal holes in government planning. It does not seem emanate from some inherent appreciation of the private sector's delivery styles or efficiencies.

A central proposition that the state and central governments must begin to contend with is that unless the bureaucracy can begin to cultivate a modicum of empathy for private sector stakeholders, hoping for start-ups to invigorate job creation is unreasonable. The legacy of colonial rule has unfortunately not left government thinking - and while some would contest this, the continued resistance to allowing lateral entry of experts in decision making roles is indicative of this systemic challenge. Perhaps it is time for democracy to play its role and for the parliament to legislate its way out of the imminent impasse that limited governance capacity will result in.

Hard pressed for expertise in all spheres - ranging from diplomacy to technology and defence, government processes must now allow for the strategic involvement of domain experts and private sector professionals and firms. Of course this is easier said than done with an underlying trust deficit in engagement with partners outside the conventional government fold.

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