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Business News/ Opinion / Views/  The promise and pitfalls of India’s startup boom

The promise and pitfalls of India’s startup boom

Our spectacular run of new unicorns reflects a Schumpeterian embrace of risk that should eventually serve the Indian economy well. Till then, tax reforms could advance the cause


In his latest Mann Ki Baat broadcast on Sunday, Prime Minister Narendra Modi drew popular attention to India’s startup boom and the post-covid enlargement of our unicorn club. Modi noted that India now has as many as 70 unicorns, defined as startups with valuations of $1 billion or above, and hailed the vibrancy of a space that frequently resets its own investment records. “It is true that this is the era of startups," he said, “and it is also true that in the world of startups, India is leading in a way today." This is indeed a positive sign for our economy. A glance at the latest roundup by VCCircle of weekly startup activity shows robust inflows. In the most recent seven-day period under its review, the total value of private equity and venture capital deals involving new ventures jumped over threefold, with three new unicorns added to our tally. This is a torrid pace. By VCCircle’s count, nearly $1.7 billion was raised, with as many as 42 deals notched up, five more than in the preceding week. Separately, Slice made news over the weekend as our 41st unicorn born this year, and the 11th fintech firm to achieve this prized status, after it raised $220 million from investors. This was shortly after online broker Upstox had been celebrated as India’s 40th. Losing count has never been easier.

The buzz around Indian startups has raised valid hopes of a boost to our economy. But this will take some while, and till then, we must not let rhetoric run ahead of reality. Remember, money is relatively easy to raise in the global glut of liquidity that central banks released to cushion us from the covid crisis. Also, our addressable market online is now so vast that scaling up almost any ambitious business model requires a sum that can turn a garage venture into a unicorn if a slice of it is sold for the same. Crucially, the billions of dollars going into startups represent large bets on distant outcomes, not value generation by way of revenues. Nor can we assume a high rate of enterprise survival, as assured by profits. Indeed, the way venture capital works, big investors would hit pay-dirt even if only a small portion of their portfolio were to eventually strike success. We cannot expect an entire herd of unicorns to gallop its way to glory. Critics also point out the rarity of concepts that are unique enough for global scalability, though this would be irrelevant if domestic success is sufficient, as the case usually is. Such quibbles, however, should not dampen risk-taking. Whether or not the wagers of investors work out well, we need all this money and more for the incubation of value-generators that could help rewire our economy for faster expansion over the decades ahead.

Our startup space can be said to reflect a Schumpeterian shift of sorts, an embrace of ‘creative destruction’ as a vital sign of progress, with old ideas yielding to new ones and with innovation in command of capital. It helps that today’s wave is seeing equity ownership being shared ever more widely. Policy favour has helped. Startup earnings, for example, are tax exempt for some years. But the taxation of stock options issued to workers is rather too complex. Levies on investments and capital gains made by early-stage investors could also do with clarity. Liability overlaps in a maze of tax rules allow interpretations that let officials abuse their discretionary authority. This is an investor put-off whose scope needs reduction. To end ambiguity, we need tax reforms. Top-level intervention would help.

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Published: 29 Nov 2021, 10:08 PM IST
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