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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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