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What are the biggest challenges facing Indian companies

as they seek success in the global marketplace?

By Pritam Banerjee

Empowering a million entrepreneurial mutinies: Reducing trade and

entrepreneurial transaction costs
On an average winter morning in Delhi, Jaipur, or Lucknow, the local cloth and garment markets are teeming with
Europeans. They are not tourists; they are entrepreneurs who are bulk-buying cloth and dress material, fashion
accessories, and furnishing material for resale in Europe at a substantial profit. The fact that the products of Indian micro,
small, and medium enterprises (MSME) enter the global production and distribution networks thanks to these travelling
businessmen, and not the organized industrial effort of Indian businessmen themselves, has an important story to tell us.
The high costs of doing organized business and the poor facilitation of trade have ensured that Indian entrepreneurial
genius is being constantly denied its rightful place in global production value chains, despite its ability to adapt and
innovate and its ever-evident skills at lean manufacturing. This translates into the loss of hundreds and thousands of
sustainable livelihoods that could have gone a long way in reducing Indian poverty.

The story of Indias relative lack of success (compared to its Southeast and East Asian comparator countries) is really
about the failure of policymakers to enable Indias smaller entrepreneurs to benefit from global opportunities. Indias
bigger and even some medium-sized business houses have always found a way to manage around high transaction
costs and trade facilitation issues, and they have always had a global footprint of sorts. The rapid expansion of that
footprint in recent years only highlights the fact that Indian big business is still much more able, given its economic
muscle and better political networking, to get around the system. But the MSMEs the small start-ups, the smaller-
town industrial units are being stifled by this combination of high trade and entrepreneurial transaction costs,
preventing such entrepreneurs from integrating into global production and distribution networks.

The recipe for unlocking this pent-up talent of Indian creativity and entrepreneurial ability has two basic components.
The first is to simplify the plethora of regulations and procedures that add to costs, lead to delays, and require the services
of expensive agents to clear export and import shipments, scaring off thousands of MSMEs from even considering
connecting with global markets. Changing this would require comprehensive trade-facilitation-related reforms that create
a single-window system for both exports and imports. Imports need to be facilitated since critical components for export
products often need to be imported, as do samples and designs from overseas buyers. Such a single-window system would
support document images and digital signatures and reduce the discretion of officials to a minimum. There are enough
best practices available, including in Asia, for India to learn from.

The second component is to ensure that transaction costs imposed on entrepreneurship by industrial licensing, inspection
regimes, inefficient interstate border-crossing procedures, and archaic regulatory architecture governing product and
labor markets are replaced by more enterprise-friendly regimes. Again the reforms needed are incremental and do not
require huge investments by government. The effective use of IT and RFID (radio-frequency identification) technology
on trucks could minimize physical inspection during the crossing of state borders and reduce the official discretion
of local tax-collection authorities. The development of an ombudsman system for product- and labor-market-related
regulations in which ombudsman committees have private-sector participants, and an insistence on the digital recording
of all inspection procedures at the factory and other trade-related premises, could effectively reduce rent seeking and poor
implementation of rules. Finally, public audit mechanisms to oversee the process of industrial and trade license issuance,
a neutral arbitration panel, and administrative rules requiring authorities to approve licenses within stipulated periods
would dramatically reduce the costs and barriers to starting new factories and workshops, and result in an explosion of
entrepreneurial ability.
If the costs of trading across borders and barriers to entrepreneurship were significantly reduced, little else would need to
be done. Indian entrepreneurial genius would do the rest. It would seek ideas for product differentiation, find innovative
ways to source capital, and actively seek global partnerships to expand its footprint. The usual litany of poor infrastructure
and lack of skills would not hold India back. Indian entrepreneurs would find a way around both through private
initiatives. The reduced costs of doing business would attract global procurement specialists to look at India as a source of
products for their global distribution networks. Indian intermediate parts and inputs in sectors as diverse as engineering,
chemicals, textiles, furniture, and electronics would enter the global production networks as Indian entrepreneurs
innovate, reverse engineer, and find novel ways of cutting production costs.

New industries would develop. Indian roadside garages and small repair shops, with the right mix of investment
and entrepreneurship, could become back-workshops of the world. With low-cost global connectivity and trade
facilitation, it would be easy to ship products to India for repairs, quality checks, and design rectification. The skills of
reverse engineering in Indian repair shops and garages would become a resource, and just as coding skills led to the IT
revolution, it would help India crack what could become a US$250 billion market by 2020. With its proven combination
of IT skills on the design and development side and decentralized manufacturing skills on the shop floor, India would
become an ideal destination for investment in a world that is rapidly being defined by customized manufacturing with
lower reliance on standardized products and an increasing combination of services in the final consumption mix (in the
form of repairs and returns, post-manufacturing value addition, and post-production product support). An emerging
new middle class in rapidly globalizing urban economies across Asia, Africa, and Latin America would add millions
of potential new customers for Indian entrepreneurial talent in lean manufacturing for delivering customized products
supported by a strong service component.

India would then become the source of a million new mutinies that shape global production and distribution networks,
led by its MSME capitalists. These are not pipe dreams but eminently achievable targets resulting from targeted
regulatory and procedural reforms based on strong private-sector feedback. In the actualization of these reforms lies the
final test for Indian democracy as it begs to answer the question whether Indian policies are democratic enough for the
smallest capitalist to be empowered to participate in the pursuit of prosperity in a globalized world.