Social enterprise: can it succeed where traditional development has failed?

Living in India, you would be forgiven for thinking that social enterprises were going to solve the many challenges of alleviating the country's poverty.

After six decades of development initiatives, social entrepreneurs are now the child star in an otherwise much-maligned space. Governments sing their praises, business schools teach their methods and award schemes elevate them to iconic status. But can social enterprises fill the gaps left by traditional state and NGO-led development?

Pressure to demonstrate that traditional development work is mounting from all sides. From budget cuts to demands for greater accountability from northern NGOs, it is facing a significant backlash, regardless of its practitioners' good intentions.

Social enterprises, however, seem to be beyond critique. Instead of being lumped together with the rest of the development sector, they are hailed as the solution. "Fortune at the bottom of the pyramid", a phrase coined by the late Indian academic CK Prahalad, has become the mantra for development practitioners across the subcontinent. Prahalad argued that entrepreneurial solutions to development can also bring economic prosperity, and funders have embraced his vision wholeheartedly.

The UK's decision to end its aid commitment to India is founded partly on the premise that enterprise will do more to help India than traditional forms of development ever could. From 2015, Britain's Department for International Development (DfID) will continue to invest in social enterprise schemes that help the poor and generate a return.

DfID joins other donors, including the World Bank, which support a development marketplace. Last year it gave $2m (£1.2m) to social entrepreneurs in India. The scheme attracts thousands of applicants each year. Private finance for social enterprise is also on the rise.

Ravi Venkatesan, the former head of Microsoft in India, is one of its main proponents. He set up the $15m seed fund Unitus, which backs social entrepreneurs who are ready to expand their projects. Recipients include enterprises that bring traditional handicrafts to market and companies that help young people find employment.

There are areas in which social enterprises clearly trump traditional development – fair trade businesses, employment training, green energy providers – but they are also working in traditional areas such as healthcare, education, water and sanitation provision. Social enterprises such as Operation Asha, which has won numerous awards for offering low-cost tuberculosis detection and treatment in India and Cambodia, are on the rise.

Increasing hostility towards NGOs is one of the drivers of the rapid growth in social entrepreneurship in the south. Critics say NGOs are outdated, and fail to reflect reality on the ground. Critics of social enterprises are, however, equally challenging. Social enterprises not only put a market price on what should arguably be provided by public services. They often require a significant return on investment, potentially making their costs of delivery higher. DfID's India fund expects a 12% return on its investments. This may be reasonable for private investors in social enterprise who expose themselves to some level of risk, but it is a questionable demand of aid budgets.

It could also be argued that by pursuing a market-based form of development, social enterprises let governments off the hook. Venkatesan agrees that they cannot replace the public sector, and says India needs better public services if it is to tackle poverty. Social enterprises such as Operation Asha provide valuable services, but are they not services government should deliver free to all?

The "ocean of need" will not be met entirely by one or the other, but NGOs and the aid system clearly need to evolve if they are to remain relevant in places like India.

Social enterprises' drive, innovation and support for grassroots, home-grown talent are commendable, but overemphasis on them as the sole solution to poverty eradication risks de-politicising the development landscape, which is as much about power and social structures as it is about service delivery.

Social enterprises are by nature often apolitical, taking an uncritical view of the limitations of markets, and solving short-term needs at the expense of long-term, governance-based transformation. Advocates need to engage openly in this debate as much as their NGO counterparts do.