A host of burning issues needed to be addressed that the early stage investors were expecting. This includes resolution of the angel tax issues, taxation of ESOPs, parity in treatment to taxes paid by investors in startups vis-a-vis listed companies, removal of MAT on startups, smoother GST regime for startups and most important being — the definition of startup. In defense of the government, it was only an interim budget and maybe we were expecting a bit too much.
But it is only reasonable that subsequent government regimes and the powers to be empathised with the challenges the industry is facing and continue the dialogue that this government has been having over the past five years and also work towards translating their honest thoughts into concrete and meaningful action.
A look at some of the measures proposed/stated in the Interim Budget speech does give the startup industry a flavour of the times to come. I have reasons to believe the environment would continue to remain favourable to various stakeholders in our community regardless of whether we see a continuity in the political regime or a change of regime. While I will continue to be disappointed until we manage to translate the government’s startup vision into action in favour of the industry participants, let us look at some of the positives from the budget speech of the finacne minister on the startup industry.
Digital India Theme
At an overall level, the thrust on Digital India continues. And policy initiatives like setting up the National Programme on Artificial Intelligence are welcome and we will have to wait for more details before we rejoice or reject it. On the other hand, aspiration of 100,000 digital villages is a great macro ambition and this process of digitisation coupled with the ongoing smart cities projects, will pave the way of creating a few unicorns (startups that get valued at $ 1 billion or more) on the way.
Coupled with the thrust on mobile/jandhan/aadhaar, the sub-verticals that will benefit from these initiatives are around renewable energy, connectivity, infrastructure, e-commerce as well as e-services including those into edutech, agritech, healthtech, etc. A significant part of this spend that the government will make in digitising these villages and the benefits that will arise due to this digitisation will directly have over-arching benefits for various products and services startups and their investors.
Historically, agriculture as well as rural India hasn’t seen as much of startup financing activity as the other areas have and this may well be the deck on which we see that wave where agritech startups, startups targeting rural India get the higher investor love than they have got historically because of the simple fact that, if done well, these initiatives expand the market for businesses to target and large investors always prefer that the companies they invest into are targeting big enough markets to cater to and benefit at scale. What is also interesting is that fintech, for long, has been seen as a vertical under the overall Technology space as well as the early stage framework, in times to come it will clearly emerge as a horizontal. Coupled with tech infrastructure and e-highway, it will pretty much be the pillar on which Digital India will move.
If we have to talk about the 10 constituents that the finance minister laid out as areas that will drive the India growth agenda of the next decade or so clean energy and renewables, thrust on digital infrastructure, electric vehicles & transportation, agriculture including organic food, focus on health are areas where the startups will not only be participants but also critical stakeholders of this journey.
If you look at the last 10 years and what the future path is, few philosophical trends are clear. The startup journey has seen through successive government regimes of UPA I, UPA-II and NDA-II. The roots of this vibrant ecosystem can be sourced during the NDA-I regime.
The Foreign Hand
A significant part of the action over the past 15–20 years in this sector has been led by Indian entrepreneurs backed largely by foreign capital and to a small yet very meaningful extent by domestic capital led by DFIs like SIDBI etc. Policy has played its part and it has left lot more to be done.
So it is clear that the startup agenda is only going to move forward and upward. For now the only tangible thing that can be measured in numbers for this industry (so far as the interim budget is concerned) is the number of times the word startup was used. Higher than any other budget so far. Let us take that as an indicator of conviction the finance minister and this government has on the industry.While one cannot debate the intent, the issues that need deliberation are:
How will the financial rewards of this growth be reaped by the Indian investor community in a significant measure or like it has been in past? Will our domestic constituencies will be the last in the pecking order to benefit? When will the government machinery come forward and be a catalyst to the industry that this government itself has claimed to be of critical importance in building the future of this country? Why should the torchbearers of this sunrise industry (i.e. entrepreneurs who bring their path breaking ideas and vision on the table and give up opportunities that are more lucrative) continue to have to seek antibiotics of legal recourse, policy uncertainty/flip-flops as well as surgeries of having to relocate to overseas jurisdictions or will they get their deserved vitamin doses from the government as well as the larger Indian corporates, that will allow them to focus on their core skills – i.e execute and scale great ideas?
For these sectors to do well and for India to grow sustainably at 7.5 percent growth rate over the next two decades, we will continue to need FDI. Translating the Prime Minister’s vision of Startup India into meaningful impact will certainly take a long time but for that to be achieved we will need to see a new economic framework being laid down.
Amongst the various demands that the industry has been crying out loud, it also includes appropriate tax policy (both for investors into startups and entrepreneurs and employees alike), consistent and friendly FDI framework, accounting systems and a flexible and considerate regulatory environment. The interim budget speech continues to tell is that the government and its machinery is well meant in its intentions towards the startup industry in general. That said, we are eagerly awaiting to get released from the shackles and give global peers a run for their money and deliver the growth framework that the citizens of this country deserve.
Ashish Fafadia is partner at Blume Ventures