Insights into Editorial: Startup India’s flaws are beginning to tell

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Insights into Editorial: Startup India’s flaws are beginning to tell


 

Summary:

Government’s ambitious ‘Startup India, Stand Up India’ campaign aimed at boosting entrepreneurship marked its first year anniversary on January 16. The Startup India initiative had received only 1,368 applications by mid-December 2016, of which only 502 were recognized as startups by the Department of Industry Policy and Promotion (DIPP).

Startup India, Stand Up India

 

What is “Startup India, Stand Up India” campaign all about?

Start-ups and entrepreneurship are critical to India’s efforts to restart private investment into the economy, in the face of risk aversion, stalled or slow investments from corporate India. Start-up India’ initiative was launched in January 2016 by Prime Minister Narendra Modi in a move to help start-ups and catalyse entrepreneurship.

  • The Start-up India Action Plan lists out a comprehensive set of structural and regulatory reforms – Income tax exemption, easing compliance through reduction of regulations and having fixed qualifications as to what a ‘start-up’ is.
  • The action plan also provided an 80% waiver on patent filing fees by start-ups and advisory services, It also created a Rs.10,000 crore fund-of-funds which is to be managed by professionals drawn from the private sector.

 

Why the scheme has not been able to meet the expectations?

  • A tax break of three years has been given in the scheme. Anyone who has business sense knows that only a few of start-ups will be profitable in the first three years and so this handful can avail themselves of the tax break.
  • When it comes to the ‘fund of funds’ under the initiative, Rs500 crore has already been provided as fund corpus in 2015-16 and Rs. 600 crore has been earmarked for 2016-2017. Cumbersome procedures to access funds from the Rs. 10, 000 Cr. corpus have, however, made the plan a non-starter and Sidbi has committed only Rs. 129 crore to VCs so far so the progress has been slow.
  • Under the scheme, bank only puts in 15% of the total corpus, while it is the VC that has to bring the remaining 85% to the table. And, this year, VCs have struggled to raise that kind of money—as a result, funding has almost halve.
  • There is also the government’s requirement that participating investors have to be registered with the Securities and Exchange Board of India. But some of the biggest VCs aren’t, and the government has essentially shut them out.
  • There is still no exemption is MAT (Minimum Alternate Tax) which could’ve helped businesses to cut losses.
  • A lot of entrepreneurs and investors think that demonetization and the lack of exits in start-ups by investors are adding to the gloom; After demonetisation, the investors are afraid to exit their investment due to slump in the IPO (initial public offering) market.
  • The scheme sets up an ‘Inter-Ministerial Board’ led by the Department of Industrial Policy and Promotion which ‘validates’ the innovative nature of an enterprise, thereby qualifying it as a start-up – an involvement of government in this ecosystem that is hardly desirable.
  • It also exempts starts-up from inspection under a fixed number of labour laws — six to be specific. But, there are about 45 laws at the central level and about four times this number at the state level. The Centre needs to work with the States to ensure a smooth rollout of the benefits under the Action Plan and avoid discord between policies at the two levels.
  • The Action Plan requires an enterprise or partnership to be innovative by developing and commercialising a new product or service — a step to promote truly innovative ideas. But it institutes an inter-ministerial body led by DIPP to examine whether an enterprise is ‘innovative’.
  • It also requires a ‘recommendation’ from an incubator setup by the government or be supported by an incubator in a post-graduate institution recognised by the government — this need for validation and recommendation goes against the very steps the Action Plan takes to reduce government involvement. This additional layer of bureaucracy could slow down the starting up process and needs to go.

 

Way ahead:

Around 800 start-ups founded after 2011 have shut shop already, signaling a deteriorating health of the sector. The year 2015 had seen an 87% increase in the number of startups being founded, the number dropped by 67% in 2016. Funding has also decreased in 2016 by around 47.7%.

A year on since the launch of Startup India Stand Up India campaign, the mood is slightly muted, the momentum slowed a bit and the talk shifted from bombastic projections of crossing Silicon Valley to more realistic targets of making India an innovation hub. But entrepreneurs and investors acknowledge that after the January 16 event last year, the needle on entrepreneurship has certainly dramatically moved. Over the last year there was lot of out-of the box thinking and a sense of direction given.

This year’s Budget to be announced next month is expected to be a big one for start-ups. The startup ecosystem is expecting the government to announce initiatives to support them like: Widening of the tax-free regime to five years from three years.

 

Conclusion:

While initiatives like start up certification, roping in bodies like CBDT to give tax breaks to entrepreneurs, setting up incubators and tinkering labs have been lauded there is a lot more that could have been done. While the progress is slow, the ecosystem feels much supported as the government put light on their struggles and achievements. However, there is a lot more that can be done in programming and implementation of start-up India action plan.

Start-up India is consistent with the PM’s call for innovation when he launched Digital India. The Start-up India Action plan is a good start to this – but will need continued support and evolution to make this a true, deep revolution for the youth of India.