4 min read.Updated: 20 Jan 2017, 04:16 AM ISTLivemint
Instead of providing an enabling business environment, the government is applying a version of the infant industry logic
Around this time last year, the Narendra Modi government launched the Startup India, Stand Up India campaign. It announced a slew of measures—simplifying regulations, offering some handholding, a few tax breaks, and a fund-of-funds—to rev up the start-up engine and enable entrepreneurship, technological progress and innovation. Twelve months down the line, however, there has been very little forward movement. Only a handful of start-ups have bought into the plan, while the government is still struggling to get the nuts and bolts in place. Unfortunately, this was to be expected, given the fundamental design flaws in the campaign.
Let’s start with the big start-up fund that grabbed all the headlines last year: This Rs10,000 crore war chest, managed by the Small Industries Development Bank of India, or Sidbi, was supposed to invest in venture capital (VC) funds, which in turn would invest in start-ups. However, not a single rupee has been disbursed yet. The problem is not excessive paperwork or red tape. In fact, as Indian Angel Network chairman Saurabh Srivastava points out, Sidbi has already sanctioned some money but this amount hasn’t been withdrawn. This is because the 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 halved, according to data analysis firm Tracxn Technologies.
A second problem was that the government had initially mandated that VCs could only use the money to fund early-stage start-ups. This severely restricted the investment options of VCs, who then simply ignored the government’s offer. So much so that, mid-year, the scheme had to be restructured to loosen the restrictions. Under the new rules, VCs will only have to invest half the corpus in start-ups while the other half can go to relatively mature firms. Critics may say this is a dilution of the Startup India mandate but the fact is that the original plan was not working and practical changes had to be made. For example, another reason for the poor response from VCs was the government’s requirement that participating investors had 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.
The situation is similar with start-ups. The government has so complicated access to the programme that start-ups haven’t been able to get close. Take a look at the numbers: The government received only about 1,368 applications; of these, only 502 were recognized as start-ups by the department of industrial policy and promotion. And an even smaller subset—just the 111 firms incorporated after April 1, 2016—were considered for tax benefits. Finally, the benefits were granted to only eight start-ups. And that’s just one half of the problem.
The other problem with the tax benefit specifically is that it assumes that start-ups will be profitable—and that too within the first three years. Yet, only a small percentage of start-ups succeed at all and even fewer turn profits so quickly, making the tax holiday a redundant sop. This has been pointed out repeatedly to the government—which in turn has responded by extending the tax holiday to five years.
These operational issues fit into a larger pattern. Instead of providing an enabling business environment—necessary not just for start-ups but for industries across the board—the government is applying a version of the infant industry logic. In the process, it is demonstrating that it hasn’t learnt from history. There is a reason why micro-, small- and medium-scale industries haven’t grown commensurate to significant government support in the form of tax breaks and the like. The government too is interfering with the market mechanisms necessary for steering the growth of start-ups. Excessively high valuations and irrational funding are neither sustainable, nor healthy. A move towards rationalization of the kind that we have started seeing of late is necessary. Government funds can only short-circuit the process.
The one aspect of the Startup India programme that did have potential was that of industry-academia partnerships through new incubators that were to be set up across the country. But progress has been sluggish on this count. It was only last month that some 17 established incubators were selected to receive government funding to scale up operations. To be fair, these processes do take some time but it is important to ensure they remain on track and stay viable. This is not dependent entirely on the government. While part of the lack of high-level research and development in the country can be blamed on inadequate government funding and excessive regulation, the private sector’s failure to step up is also a problem.
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