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[Burning Issue] States’ Startup Story

Start-up Ecosystem In India – Civilsdaily

Context

  • The ‘States’ Startup Ranking 2021’ was recently released.

‘States’ Startup Ranking 2021’: Key Highlights

  • Gujarat and Karnataka are the top achievers in creating startup ecosystems for aspiring entrepreneurs.
  • Gujarat was recognized as having the best performance for the third time in a row.
  • The top performing states included Jammu and Kashmir, Kerala, Maharashtra, Odisha, and Telangana.
  • The leaders’ category includes Punjab, Tamil Nadu, Uttarakhand, Uttar Pradesh, Andaman and Nicobar Islands, Arunachal Pradesh, and Goa.
  • Chhattisgarh, Delhi, Madhya Pradesh, Rajasthan, Chandigarh, Puducherry, and Nagaland are among the states and UTs that fall under the category of aspiring leaders.
  • Andhra Pradesh, Bihar, Mizoram, and Ladakh are among the states in the category of developing startup ecosystems, according to the study.

What are Startups?

  • A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable economic model.
  • While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend to become registered, startups refer to new businesses that intend to grow large beyond the solo founder.
  • At the beginning, startups face high uncertainty and have high rates of failure, but a minority of them does go on to be successful and influential.  Some startups become unicorns.

Why do we need start-ups?

Start-ups make an indispensable contribution in the economic growth of a nation.

(1) Employment Generation

Entrepreneurship creates more avenues for new job in the economy. This would help harness the readily available employment in our country. This mission will reduce the burden from service and agricultural sector and enables condition of balance in economy.

(2) Creation of Wealth

Since entrepreneurs are attracting investors by investing their own resources, the people of the nation would get benefit when startups grow. Since the money is sharing with the society, wealth is creating within the nation.

(3) Better standard of living

Startups can implement innovations and technologies to improve the living of people. There are many startups who are working for rural areas to develop the community.

(4) Economic growth

GDP plays a vital role in enhancing the economic growth of a country. By supporting and encouraging more startups, it is possible to generate more revenue domestically and consumer’s capital will also flow around the Indian economy.

(5) Source for FDI

It has been noted that in recent years, the volume of foreign investments made in the Indian startup is quite huge. The foreign investments in the startups act as an easy capital raise and technological investment for the startups which makes them readily accept the investments coming towards them.

(6) Culture of Entrepreneurship

Startups encourage a culture of entrepreneurship and innovation which leads to create new job opportunities and provide support to the economy. Success stories motivate talented youth to start their own ventures and help them to become a job provider instead of a job seeker.

(7) Advancement in technology

Startups are more focused on new technologies and cutting-edge innovation. Free from a multilayered corporate bureaucracy, startups are more agile and able to build an idea into a product and improve it upon consumer demand with faster decision-making communications.

About Startup India Scheme

  • Startup India is an initiative of the Government of India.
  • The campaign was first announced by PM Modi during his speech on 15 August 2015 address from the Red Fort.
  • The action plan for this initiative is focusing on three areas:
  1. Simplification and Handholding.
  2. Funding Support and Incentives.
  3. Industry-Academia Partnership and Incubation.
  • An additional area relating to this initiative is to discard restrictive States Government policies within this domain, such as License Raj, Land Permissions, Foreign Investment Proposals, and Environmental Clearances.
  • It was organized by the Department for promotion of industry and internal trade (DPI&IT).

An evaluation of the Scheme

(A) Successes

  • Investment: $63 Bn has been invested in Indian startups in the last five years.  
  • Growth: Between 2016 and August 2020, Startup India programme has recognised over 34.8K startups. 
  • Rise of Unicorns: Unicorns are privately held, venture-capital-backed startups that have reached a value of $1 billion. From 17 Unicorns in 2018 the number went up to 38 in 2020 and it’s 71 and counting in 2021.
  • IPRs: Among these, 8.3K startups received intellectual property rights (IPR) fee benefits, while over 2.6 lakh people enrolled in the entrepreneurship-focused learning courses.
  • Gender inclusion: In terms of gender diversity across workspaces in India, just 9% of the board members of the top 20 unicorn startups in India are women.

(B) Failures

  • Clearances: The Startup India scheme had received around 1368 applications by mid-December last year out of which DPIIT has only accepted 502 application forms and recognized them as ‘startups’.
  • Delay: The delay and lack of efficiency is a cause for the startup plan to fail in some cases.
  • Funding: The concerns of domestic angel and VCs on capital gains tax remain largely unaddressed.
  • EODB issues: Venture capital firms and angel investors are more cautious while investing in Indian startups. It is because the conditions, the ease of capital flow and doing business are not stable enough.

Some lacunae of the scheme

  • Definitional issues: The scheme is criticized by professionals because of the definition of Start-up provided in the scheme. The definition states that a mere act of developing products or services that do not have the potential for commercialization or have no or limited incremental value for customers would not be a start-up.
  • Test of ‘Innovation’: Each startup is scrutinized by an Inter-Ministerial Board (IMB) to see if the startup is ‘innovative’ – i.e. if it is unique or a world first. Most of start-ups would lie outside the purview of this definition.
  • Red tapism: Further eligibility of start-up, lies under definition or not, shall be approved or certified by an inter-ministerial board which is a retrograde step and against the government policy of ‘Min Government Max Governance’.
  • Taxation mirage: 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 them of the tax break.
  • Patenting terms: The other option for startups to get tax benefits is to get a patent. And we all know that it takes several years to register a patent in India, and if royalty profits accrue before then, the tax benefits will be denied.
  • Heavy concentration in megacities:  Entrepreneurship continues to be “highly concentrated” in three megacities, namely, Mumbai, Bengaluru and Delhi NCR. Such concentration can lead to increased economic inequality and hinder the emergence of entrepreneurs from industries other than those belonging to the clusters.

Inherent challenges to Start-ups in India

  • Financial scarcity: Availability of finance is critical for startups and is always a problem to get sufficient amounts.
  • Lack of Infrastructure: There is a lack of support mechanisms that play a significant role in the lifecycle of startups which include incubators, science and technology parks, business development centers etc.
  • Regulatory bottlenecks: Starting and exiting a business requires a number of permissions from government agencies. Although there is a perceptible change, it is still a challenge to register a company and exiting it.
  • Compliance hurdles: For example earlier Angel tax, which stands removed no, falls under corruption and bureaucratic inefficiencies as it takes the focus of entrepreneurs away from building a product or service to responding to tax notices and filing appeals.
  • Low success rate: Several startups fail due to poor revenue generation as the business grows. As the operations increase, expenses grow with reduced revenues forcing startups to concentrate on the funding aspect, thus, diluting the focus on the fundamentals of business.
  • Lack of an Innovative Business Model: To be successful a startup must be innovative. Unfortunately, Indian startups are less innovative than startups elsewhere. Many Indian startups don’t have an original business idea that is disruptive and by which consumers will be provided with better service.
  • Non-competitive Indian Markets: Too many startups serving too few consumers are saturating the Indian market.  Most startups serve the fraction of Indians who live in urban India. The majority of Indians who live in rural areas and small towns remain untouched by most startups.

Recent challenge: Downtime for Edu-techs

  • Pandemic accelerated edtech’s ascent:
  1. Massive funding
  2. High rates of enrollment and
  3. Positive word of mouth
  • However, the metric that the tech companies are using to show their growth is the number of paid enrollments that they achieve by their army of salesmen and NOT the results or true learning outcomes.
  • They never cared to track learning outcomes through some randomized control trial which would take a lot of money and time.
  • Edtech companies sell their products without putting a thought if a particular student really needs them.
  • Their one-size-fits-all sales strategy is now backfiring. It helped them boost their revenue, but without results.

Various initiatives by the Govt.

There are numerous government initiatives to assist start-ups,

  • MUDRA Scheme: Through this scheme, start-ups get loans from the banks to set up, grow and stabilize their businesses.
  • SETU (Self-Employment and Talent Utilization) Fund: Government has allotted Rs 1,000 Cr in order to create opportunities for self-employment and new jobs mainly in technology-driven domains.
  • E-Biz Portal: Government launched e-biz portal, India’s first government to business portal that integrates 14 regulatory permissions and licenses at one source to enable faster clearances and improve the ease of doing business in India.
  • Credit Guarantee Fund: launched by the GoI to make available collateral-free credit to the micro and small enterprise sector. Both the existing and the new enterprises are eligible to be covered under the scheme.
  • Fund of Funds for Start-ups (FFS): 10,000 Rs corpus fund established in line with the Start-up India action plan under Small Industries Development Bank of India (SIDBI) for extending support to Start-ups.
  • Tax Sops: Tax exemption on Capital gain tax, Removal of Angel tax, Tax exemption for 3 years and Tax exemption in investment above Fair Market Value.

Way Forward

The best of the Indian startup ecosystem still lies ahead.

  • There is a need for policies and progressive strategies from governments to encourage startups and provide access and assistance in key areas including tax clarity, incubation, affordability and licensing.
  • In any case, governments should be well prepared and dedicated to creating a culture of startups to impact the entrepreneurial ecosystem in their cities, countries and citizens.
  • Innovation and economic growth depend on being able to produce excellent individuals with the right skills and attitudes to be entrepreneurial in their professional lives.
  • It is critical, therefore, that nations set out to develop entrepreneurial skills, attitudes and behaviour in the school systems at all levels as a part of the lifelong learning process.
  • To produce effective entrepreneurs who can initiate change, governments need to cut ‘red tape’ and streamline regulations.
  • Funding, another daunting and difficult challenge, has to be resolved at earliest with liberal funding mechanisms.
  • Apart from all these concerns, Start-up India has potential to solve India’s problems and create jobs. Nonetheless, the challenges and changes are not to be dreaded but defeated.

Conclusion

  • The current economic scenario in India is in expansion mode.  Indian Startups are now spread across the length and breadth of the entire country.
  • The Indian government’s policies like Make in India, Digital India, Atmanirbhar etc. shows the enthusiasm of centre to imbibe reforms.
  • With the government going full hog on Startups, it could arrest the brain drain.
  • Efforts are being made by diverse stakeholders in the Indian startup ecosystem to elevate domestic policies in concurrence with global trends.

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