Sustained economic growth needs to be fueled by entrepreneurship. In a country reeling under unemployment, a steady fillip to entrepreneurship and self-employment is necessary for achieving smart, sustainable and inclusive growth. While state involvement in education, health care and basic public infrastructure like roads is necessary, more and more left-leaning people have also come to accept that private entrepreneurship without unnecessary regulatory bottlenecks needs to be given a chance to boost productivity and generate employment.
As per the latest NASSCOM Startup Report 2015, startups created 65,000 new jobs in 2014 and by 2020, the number is expected to touch 2,50,000. The scale of startup action in the country has been nothing but stupendous and the government has taken note of that. The current government’s agenda posits to create a startup- friendly ecosystem.
In August 2015, Prime Minister Narendra Modi launched the action plan for Start Up India, Stand Up India, an initiative to build a strong ecosystem for nurturing innovation and bolster entrepreneurship in India. The venture has raised an uproar among the investors, businessmen and budding entrepreneurs alike. Clearly on the outset, it appears to be a great method to incentivise business and mitigate unemployment: the government’s dream to convert the job seekers to potential job-creators.
The business environs of India has been criticized by investors for being meddled with red tape and hostile to efficient transactions. The World Bank ‘Ease of Doing Business’ report, for instance, shows little change in the ‘number of procedures’ required to start a business in India has hovered between 13 and 15 – which is inexcusable given that it takes less than half the number of procedures in developed economies. Removing unnecessary approvals simplifies the process of registering a startup and investing in them. The Startup India Action plan aims to usher a business friendly regime with minimum bureaucratic hassles, besides doling out various incentives for budding businessmen.
In order to provide funding support to startups, government will set up a fund with an initial corpus of 25000 million rupees and a total corpus of 100000 million rupees over a period of four years (i.e. INR 2,500 crore per year) .The Fund will be in the nature of Fund of Funds, i.e. that it will not invest directly into startups, but shall participate in the capital of SEBI registered Venture Funds. The Fund of Funds shall be managed by a Board with private professionals drawn from industry bodies, academia, and successful startups. A special corpus of funds would be allocated to women and SC entrepreneurs, who wish to venture in the startup business.
Announcing the Act, the prime minister also said that each of the bank branches should fund at least one Dalit or Adivasi entrepreneur and at least one woman entrepreneur. The specific mention of supporting women entrepreneurs is the much needed initiative for businesswomen that will certainly provide them an edge over their male counterparts. Women have shown that they are not far behind when it comes to entrepreneurship; some have tapped their potential to become successful businesswomen. According to a report by the International Finance Corp, the country is home to millions of female entrepreneurs, in charge of their own tiny businesses. There are many more such outstanding women leaders who have smashed the glass ceiling in India. Examples include Aditi Gupta, founder of Menstrupedia; Ajaita Shah, founder of solar startup Frontier Markets; Gurgani Daga, co-founder of adventure sports web portal Thrillophilia; Anu Sridharan, founder of water conservation solution NextDrop and many more. Likewise, many Dalits from weaker backgrounds have empowered themselves by way of entrepreneurship, as have many Adivasis and many Muslims.
Amongst the many incentives bestowed through this initiative, the key ones include exemption from payment of income tax on profit for first three years, a simple exit policy, fast-tracking of patent applications, 80% exemption of patent fee etc.
The government shall also be introducing a Mobile App to provide on-the-go accessibility for registering startups with relevant agencies of the government. This will prevent delay in registration of startups. Norms for public procurement will also be relaxed for startups with the Government exempting startups (in the manufacturing sector) from any criteria of “prior experience/turnover” in cases of bidding for a tender floated by a government entity or a PSU.
Given the innovative nature of startups, a significant percentage fail to succeed. In India, such failure is met with stigma and most of us were taught from very early years to be risk-averse and prudent in financial issues. In order to encourage experimentation among startup entrepreneurs, venture debts would be provided by banks and lending institutions to startups. The government has allocated a budgetary corpus of 5000 million rupees per year for the next four years. A swift process has been proposed for startups to wind-up operations. Startups with simple debt structures or those meeting such criteria as may be specified may be wound up within a period of 90 days from making of an application for winding up on a fast track basis.
The action plan has also proposed tax incentives by exempting startups from income tax for a period of 3 years and capital gains tax. The exemption is limited to those who have invested such capital gains in the Fund of Funds recognized by the Government. Added to that, investment in shares of the startup (company) above the Fair Market Value, by Venture Capital Funds and incubators will be eligible for exemption.
Through the Startup policy, the government has also offered to subsidize by up to 80%, the cost of filing for patents and trademarks. A panel of facilitators will also be formed to assist startups with filing for patents. The previous government already started a scheme to provide financial support to SMEs and technology startup units for international patent filing so as to encourage indigenous innovation.
Startup fests will be organized at national and international stages which will foster innovation at a grass-root level among students in schools and colleges. Government will create a policy and framework for setting-up of incubators across the country in public private partnership. The funding for setting up of the incubators shall be provided by NITI Aayog as part of Atal Innovation Mission. To build World Class incubators in India, government plans to launch an annual Incubator Grand Challenge to identify leading Incubators in India. Besides centers for innovation and entrepreneurship and research parks will be set up at national institutes like IITs, NITs etc.
The startup policy is apparently an important recognition of the need to stimulate the economy. The states must strive to implement the directives and encourage new businesses to thrive. Governments of some states like Kerala and West Bengal had already, before Prime Minister Narendra Modi’s announcement, taken some concrete steps to providing entrepreneurs assistance for setting up and running business successfully. Kerala has decided to invest 1% of the state’s budget (approximately INR 500 crore) in the nascent startups of the state. The West Bengal government has tied up with IIM-Calcutta for training officials to go over each district educating and assisting all prospective entrepreneurs with everything they need to start their own ventures. The target is to create 4000-5000 new entrepreneurs along with helping existing ones. The state government in collaboration with the Bengal National Chamber of Commerce & Industry has also created a non-profit institute called Enterprise Development Institute for strengthening entrepreneurship with structured training and certification programs.
A comparison can also be made with China. There are more entrepreneurs in India than China but they are individual companies striving hard towards growth. But growth will happen at an individual place unlike China where an entrepreneurial ecosystem is well-established. Both domestic and foreign companies are located there (For example, Shenzhen in Guangdong province has the most well-established ecosystem, from R&D (research and development) to manufacturing and assembling of mobile phones.) The Chinese government has put in a lot of effort to ensure that local companies do not lose out and can progress hand-in-hand with the major international companies. The Chinese government’s active role in steering the entrepreneurship movement is what have made them a success. The need of the hour for India is a vision of how technology can be a fundamental part of the socio-economic development of India, which has been translated in the Startup India mission.
However, the government funding of startups, following certain requisites, goes against the idea of minimum government and maximum governance. To entail the benefits of this programme, the bureaucratic logjam still seems to persist. A startup shall be eligible for tax benefits only after it is certified by an inter-ministerial board. The policy regime should not favour one class of investors over another. Tax breaks cannot be a loophole for shady companies to disguise themselves as startups.
An even bigger issue is the attempt to define the startups eligible for the support and funding announced by the prime minister: firms set up in the past five years with an annual turnover below 250 million rupees, working ‘towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property’. It is far from clear why only companies which satisfy the government’s restrictive definition of a startup – “driven by technology or intellectual property” – should have access to an enabling environment. In addition, to be eligible for schemes, startups will have to show that their innovation has “significantly improved” existing processes, keeping another loophole open for the bureaucrat to once again insert himself into the process.
Meanwhile, critics have also raised the question whether the government which says it wants to be more of a facilitator, should get into the funding of startups? The government of India has decided to invest Rs 2,000 crore of taxpayer money in venture-capital funds that will then be used to invest in various startups. Venture-capital funds are well acknowledged to be on the extreme “high risk-high reward” payoff matrix, and India has attracted investment even without the government pooling in funds. Venture-capital financing for Indian startups has grown at a compounded rate of 30 per cent over the last 15 years. That there is a thriving and growing private venture-capital industry for providing risk capital to startups in India is quite evident. In spite of that, the government’s pumping money to spearhead the Start up campaign may seems unnecessary. But it is important to understand that a government action in India is extremely necessary to infuse an entrepreneurial spirit amidst the citizens. Venture capital financing is fine, but it has been seen, that such finances are restricted to the tech-startups or the likes of which can make fast profits. Entrepreneurship needs to be skin-deep and for that, it is necessary that the government infuses money in sectors where private money may not reach. In sectors like agriculture, rural infrastructure, health etc. innovation is the need of the hour, which will inculcate efficiency and benefit the populace at large. The government stepping in the startup system has brought the much needed assurance to businessmen to venture in new waters and take risks. Hopefully within a few years, youngsters will be exempted from raised eyebrows and family concerns when their conscious career choice is to build a startup.
For startups to succeed, basic public infrastructure in the form of better roads, better supply of electricity, better and more easily accessible education, health care and law-and-order facilities are necessary, and while this is not to say that the government must necessarily have to wait till these are substantially done to start encouraging entrepreneurship, some have argued that rather than the government investing money in startups, taxpayers’ money would be better spent in the other sectors.
Also, the Modi sarkar certainly just cannot take the sole credit for having promoted startups. Steps taken by governments of Kerala and West Bengal, even involving financing startups like Narendra Modi’s initiative (though specific details differ), have already been mentioned. Even at the central level, the Congress-led UPA government too took some steps in this regard. The Prime Minister’s Employment Generation Programme instituted by Dr. Manmohan Singh was a step in this direction, in which money was given for starting micro enterprises in the manufacturing sector and the service sector, and even earlier schemes have existed like the Prime Minister’s Rozgar Yojana, dating back to 1993. Also, while the Modi sarkar has sought to reduce the patent fee by 80% for startups, an exemption of up to 50% for them was already in existence. Thus, while this initiative may be promoted as something very new altogether, in reality, it isn’t. It may also be mentioned that back in 1993, the Indian Institute of Entrepreneurship to train budding entrepreneurs was set up near Guwahati by the then Congress government. Also, those trying to promote ease of doing business and doing away with unnecessary licensing procedures include even the AAP government in Delhi, which indeed has abrogated many unnecessary regulatory hindrances to smooth functioning of business. Interestingly, a year before Prime Minister Narendra Modi announced the Startup India initiative, Dr. Kalam had talked about inculcating entrepreneurial skills through the education system and encouraging banks to be more startup-friendly.
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