The environment for micro, small and medium-size enterprises — which together take up nearly 9% of India’s GDP in 2009 — needs to power up if the nation wants to continue to capitalize on its celebrated entrepreneurial spirit

Sanjit Das / Bloomberg via Getty Images Tailors work in Shahpur Jat village in New Delhi on July 24, 2012. The Indian economy expanded by 5.3% in the three months ending in March from a year earlier, the slowest pace since 2003

Related U.S. and India: The Squeeze on Small Business Financial Times

Epic electricity outages are not the only challenges that small-business owners are up against these days in India. A white paper released by Gallup on Wednesday says the environment for micro, small and medium-size enterprises — which together took up nearly 9% of India’s GDP in 2009 — needs to power up if the nation wants to continue to capitalize on its celebrated entrepreneurial spirit.

The world’s largest democracy has an underutilized resource: a large, young and determined population. Over half the 1.2 billion people who live in India are under 25, and, according to Gallup polls, nearly 60% of the population have personality traits that the polling organization categorizes as “critical for success as an entrepreneur,” such as being business-minded, optimistic or determined to succeed despite obstacles. Why, then, do only 16% of Indians report owning their own informal and formal businesses? What’s stopping these millions from striking out on their own? Despite their ambitions and business sense, nearly 40% of those polled report that the prospect of starting a business is simply too risky, a feeling that the polling organization says comes from a combination of the perception of widespread corruption, lack of education and a dearth of legal protection for small-business owners.

(PHOTOS: Blackout Leaves Millions of Indians Without Power)

As a result, 20 years after India’s process of liberalization began, state-owned enterprises and old conglomerates still control a larger share of the Indian economy than the businesses that started after the reforms. According to first-quarter results of the 2012 Gallup World Poll, the vast majority of small businesses in India employ under five people, and most say they don’t plan on adding any more employees in the next year. “India needs more businesses — but only those that satisfy an existing demand and that create jobs for people other than the business owner and his or her immediate family,” the report says.

Overall, the nation’s “entrepreneurial ecosystem” ranks among the lowest in Asia, says Gallup. Nearly half of Indians polled think the government makes it hard to start a business, and an overwhelming 72% say corruption is widespread in the business community. With most venture capital going to tech companies, only 29% of aspiring entrepreneurs feel they have access to the money they need to get started, down from 37% in 2012 and almost 15% lower than the average for 20 Asian countries polled last year. Similarly, only 22% of would-be business owners in India have access to formal or informal training, compared with a 44% average across Asia.

(MORE: A 12-Step Program for India’s Economic Recovery?)

The paper concludes by encouraging policymakers to think about ways to better utilize Indian citizens’ talent and ambition. Its authors point out how people’s perceptions of government corruption improved after the Supreme Court cracked down on the illegal issuance of telecom licenses and says how this kind of reform, while it may have the short-term effect of slowing down the informal sector, will ultimately encourage legitimate businesses — and the Indian economy — to thrive.

MORE: Is India’s Government Killing Its Economic Miracle?