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10 Common Problems in Starting a Small Business in India

Information Amit Gokhale 23 December 2017

India Is Home To Staggering 40 Million Small Businesses, According To Statistics Available From Various Sources

India is home to staggering 40 million small businesses, according to statistics available from various sources. This figure represents commercial establishments that hold licenses and are registered with appropriate authorities. The number could be higher considering the number of business that operate illegally, without registration and required licenses.

Types of Small Businesses in India

India has diverse small businesses. The first are those coming under purview of the Ministry of Micro, Small and Medium Enterprises. Others are stores and restaurants that are licensed by local municipalities and village administrations (Gram Panchayats) and thirdly, start-ups that are registered by the Ministry of Corporate Affairs and other authorities. The fourth category, unfortunately are small, home-based businesses that operates sans any registrations or licenses for various reasons.

Current Scenario

Entrepreneurship in India was limited until the last three years. This trend is now changing thanks to stimulus provided by the Central and state governments to start-up ventures. Various initiatives including Micro Units Development and Refinance Agency Bank (Mudra Bank), Skills India and Make In India initiatives launched by Prime Minister Narendra Modi’s government are encouraging entrepreneurs.

However, various problems continue to plague budding entrepreneurs wishing to start a small business in India.

Common Problems

While 40 million small businesses may sound impressive, the figure is pathetically low considering the vast geographical expanse of India. There are several reasons for lower entrepreneurship among Indians. Here, we explore 10 common problems in starting a small business in India.

Indian Culture

For some reasons, most educated Indians are inclined towards finding employment, preferably in Central or state government ministries, departments, Public Sector Undertakings and nationalized banks. Alternatively, they seek jobs in the private sector. This quest for employment is triggered by one main reason: the quest for security. Indians falsely believe that jobs offer secured income. Barring a few communities actively engaged in business, entrepreneurship is generally frowned upon due to its inherent risks. This syndrome plagues academically qualified Indians who look for elusive job security rather than venturing into business.

Licensing, Bureaucracy, Red Tape

Regardless of the nature of small business, would-be entrepreneurs are often deterred by sheer large number of licenses, permits and approvals they need to procure from civic bodies, state and Central governments. Despite the much hyped ‘ease-of-doing business’ and ‘single window clearances’ for businesses promised by the Center and states, would-be businessmen are forced to overcome often insurmountable bureaucratic hurdles while cutting through thick Red Tape that exists at government departments and offices. Procuring licenses and other approvals can prove fairly expensive since entrepreneurs have to provide supporting proof and documents that are sometimes hard to procure.

Capital & Funds

Unless you are launching a small business with savings accumulated over years, finance from family and friends, raising capital and funds for the venture can prove extremely difficult. Venture capital and crowd-funding in India remains rudimentary. Banks are reluctant to provide business loans without adequate collaterals. Private lenders charge very high interest rates like usurers. Additionally, budding businessmen have to provide a plethora of documents ranging from business plan that includes projections of Return on Investment, project reports, feasibility studies, among others.

Lack of Originality

India ranks a dismal 66 on the Global Innovation Index. Indian entrepreneurs that have launched innovative businesses are rare. RedBus and Patanjali Ayurved are perhaps the only examples of original Indian ventures. You need a great business idea to succeed in this scenario. Giants like Flipkart were modeled on Amazon, OYO Rooms on Airbnb and Ola cabs on US-based Uber.  Most Indian entrepreneurs try opening small businesses based on successful models abroad, particularly in the US. They fail to grasp that market conditions in India vary immensely from those in the US and other parts of the world. Further, attempts to popularize Indian products are generally pooh-poohed by our compatriots that view patronizing ‘phoren’ brands as prestigious. A clear example is unsuccessful homegrown venture -Goli Vada Pav struggling to counter the fame of US-based McDonald’s and Burger King Franchises in India.

Real Estate Prices

Buying or renting an office, warehouse or other facilities required for opening a small business costs a fortune. Unless you are launching a business from home, prevailing real estate prices can deter the most determined entrepreneur. Customers for also patronize small businesses that have impressive office addresses in large cities compared to those operating from small towns.

Staffing Problems

Obviously, small businesses cannot pay salaries at par with large companies. Hence, they struggle to find suitably qualified and experienced staff. Many launch by taking fresher on board. Every fresher will leave a small business when offered job by a large organization. They work with small businesses only to get some experience for mentioning on resumes and to use as bargaining chip during job hunts. Small businesses are plagued with high staff attrition rates.

Scant Social Media Use

Only a handful of small businesses in India are active on social media platforms including Facebook, Twitter, Instagram, WhatsApp, Pinterest and free video portal, YouTube. India has one of the highest rates in the world for Internet usage. Sadly, significance of deploying social media for business promotion and customer service has not gained ground in this country, despite its cost effectiveness and inherent benefits.

Logistical Nightmares

Getting logistic support for any small Indian business can be a nightmare. Firstly, India lags drastically behind in logistics chain, despite its geographical landmass. Secondly, speedy delivery of your products to distant locations can be impeded by non-availability of timely transport. Additionally, sending goods from one place to another involves voluminous documentation, which small businesses can ill afford due to paucity of staff. Procuring raw materials can also prove expensive unless the source is located near your factory.

Undercutting Prices

Almost every new small business in India promotes its products and services by pitching prices that are lower than its nearest competitor. The false notion that people patronize cheaper equivalents dictates this practice. Entrepreneurs forget that undercutting prices to gain a market slice is invariably counterproductive. Lower prices impart an impression that your product or service lacks quality.

Power & Communications

Several large cities and towns of India continue to reel under daily electrical power outages and brown-outs. This situation is harmful for all businesses- manufacturing, retail, wholesale or service provider, among others. Electricity is required for computers and other office equipment. Further, telecom services across India can be a problem since mobile coverage is not uniform. Power and telecommunications are two vital resources required for any small business.

In Conclusion

The good news is, despite these problems plaguing small businesses in India, several entrepreneurs have struck it big. It requires little ingenuity and some extra efforts to overcome these hurdles. A few other obstacles can be tackled if you have sufficient funds.

With new policies of the Central and state government getting popular, common problems in starting small business in India are expected to reduce gradually.

Amit Gokhale

Amit Gokhale

Amit Gokhale is a journalist and blogger. He has extensive experience in writing news, features and blogs and has worked in various countries across the world during his career spanning 28 plus years.