What does one make of the allocation of Rs1,000 crore to enable information technology start-ups, create additional funding avenues for small companies to raise money and, in turn, generate more employment? Photo: Hindustan Times (Hindustan Times)
What does one make of the allocation of Rs1,000 crore to enable information technology start-ups, create additional funding avenues for small companies to raise money and, in turn, generate more employment? Photo: Hindustan Times
(Hindustan Times)

Boost for start-ups and Digital India in budget, but devil lies in fine print

The NDA’s articulation of its vision saw concrete announcements, but the budget speech also left questions unanswered

Mumbai: One of the overarching themes of the 2015 Union Budget was clearly that of laying a sound foundation, and creating an ecosystem, for Digital India and for Make in India. We saw the beginnings of this in the budget speech of July 2014, when the Bharatiya Janata Party-led National Democratic Alliance government spoke of smart cities, funding for start-ups, an e-biz platform to integrate government departments, digital classrooms, introduction of e-visas, sops to encourage manufacturing of electronic goods, creation of more jobs and increased broadband penetration.

On Saturday, the government’s articulation of the vision went a step further with some concrete announcements on how it plans to fulfil this dream, but the speech also left a host of questions unanswered and it glossed over many facts. Like, what does one make of the allocation of 1,000 crore to enable information technology (IT) start-ups, create additional funding avenues for small companies to raise money and, in turn, generate more employment? This is undoubtedly a sound and logical move. But one may recall that in July, too, the government had announced its intention to allocate 10,000 crore to provide “equity, quasi equity, soft loans and other risk capital for start-up companies". There was no clarification thereafter and the industry is still confused over that amount. What does one presume now: That the newly-announced 1,000 crore is part of the 10,000 crore allocation announced in July, or that the allocation target has been lowered to make it realistic?

Also, how does one avail of these funds—will it be through the Micro Units Development Refinance Agency (MUDRA) Bank, where the focus is primarily on scheduled castes and scheduled tribes (SCs and STs)? And will the government take equity in these start-ups, have government members on the boards of start-ups, or simply provide loans against collateral?

Hopefully, the government will provide some answers to these questions in the following months, failing which its credibility would be at stake, coupled with the fact that neither investors nor start-ups would take it seriously. The fact is that there are over 3,100 product start-ups in the country with more than 800 being added annually, according to software industry lobby National Association of Software and Services Companies (Nasscom). These start-ups have received over $2.3 billion in funding till date. And money flows in easily from angel investors, venture capitalists and crowdfunding platforms, especially when it comes to backing technology start-ups.

A wiser move, perhaps, would have been to do away with the so-called angel tax that continues to apply to investments made by individual investors who are not part of any organized angel investor group.

Currently, capital raised by an unlisted company from any individual against an issue of shares in excess of fair market value is treated as “income from other sources" under Section 56 (2) of the Income-Tax Act, and hence is taxable, making start-ups liable to a 33% tax on any investment they receive.

This means start-ups have to raise more money than they actually need, just to pay tax, which explains why many have their headquarters in countries like Singapore and the US. This also implies that to raise the additional monies, start-ups are forced to further dilute their equity in the company. The problem may get compounded with the increase in service tax as proposed by the budget.

Now, consider the aim of creating jobs through start-ups, which the government hopes to achieve by setting up a mechanism to be called Self-utilization and Talent Utilization (SETU) to provide technical assistance and incubation to start-ups. “I am setting aside 1,000 crore initially in NITI Aayog for this purpose," said finance minister Arun Jaitley in his budget speech on Saturday. This is indeed a tall order since the skills required by the traditional IT industry and that by start-ups are different.

Most of those hired by IT companies are from engineering schools. With almost 50% engineers being unemployable in even traditional IT firms, start-ups—which typically require people with skills that go much beyond just an engineering degree—face a more formidable task. Start-ups require skills in big data, social media analytics, collaboration and productivity tools, healthcare and visualisation solutions, wearable tech, home automation, 3D printing, payment solutions and even marketing analytics. One will have to wait and see how the government ropes in the industry to make SETU relevant to start-ups.

The move to set up new Indian institutes of technology (IITs), Indian Institutes of Management (IIMs) and medical colleges and the emphasis on quality education, innovation, research and development will hopefully ensure skilled youth, and bridge the demand and supply gap. But that is bound to take time, and as history has shown, quality of education has always been of concern in the newly set up IITs and IIMs. Nevertheless, the government should be given credit for its attempt to create new vehicles to attract private sector investment and promote technology-based entrepreneurship.

The government, in its budget 2015 speech, also proposed a reduction in royalty and related taxes from 25% to 10% for technology start-ups, a move that is positive for its Make in India push. A step that will definitely help start-ups is the benefit of deduction for employment for those that have fewer than 100 employees—eligibility for deduction is now 50. But one must remember that most start-ups have fewer than 20 employees, and many fail in the first or second year of operation.

A mention on reforms in labour laws, for example on how to help start-ups wind up operations easily, would have gone a long way in comforting entrepreneurs.

In his 2014 budget speech, Jaitley had also proposed to allocate 7,060 crore to develop 100 smart cities and satellite towns. A smart city is typically one that runs on technology—be it for electricity, water, sanitation, traffic or transport systems—and use data analytics to provide efficient solutions. Smart cities are the need of the hour since India’s urban population is estimated to reach 590 million by 2030, and they will live in at least 60 cities with a population of more than a million each, requiring an investment of over $1 trillion for their development, according to industry estimates.

It’s puzzling, then, how the government can arrive at a figure of just 7,060 crore for 100 smart cities. Perhaps the budget speech is not the right place for a status update on the same, but Jaitley could have provided some comfort, had he given some details, especially in the Digital India paragraph of his 2015 budget speech.

The heartening fact, meanwhile, is that the National Optical Fibre Network Programme (NOFNP) of 750,000km, connecting 250,000 villages, is being further expedited by allowing “willing states to undertake its execution on reimbursement of cost as determined by department of telecommunications". Jaitley named Andhra Pradesh as the first state to have opted for this manner of implementation.

But here, too, India has to increase its broadband speed from its 512 kilobits per second (kbps) definition to a respectable one if it is serious about its efforts to implement digital services like e-governance and smart cities that define its Digital India vision. India cannot continue to define broadband as equal to, or greater than, 512 kbps download speeds at a time when the US Federal Communications Commission has updated its broadband benchmark speeds to 25 megabits per second (Mbps) for downloads and 3 Mbps for uploads. Too much fine print could derail an otherwise commendable vision for Digital India.

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