By Anant Gupta
India boasts of over 7,000 startups. The startup culture in India has grown leaps and bounds over the past decade, when it was just a buzzword on everyone’s lips. Startups such as Flipkart, Ola, Zomato, and PayTM are now considered industry leaders, and are ruling the roost in niche segments which were earlier virtually non-existent.
While many startups had to tough it out themselves, some of them have also flourished under the aegis of the government of India, and the various schemes launched to support existing and emerging startups. With a push towards encouraging startups to create jobs and improve the economy, the government assistance rendered to these companies have helped to reduce the burden of operating a startup, and focus on the more relevant aspects of running a business.
Through this article, we endeavor to understand how various startup schemes might have impacted these fledgling companies and helped evolve the startup culture in the country.
Major startup schemes and their impact
The Indian government officially commenced its contribution in the startup journey, by launching ‘Startup India’ on January 16, 2016. The aim of the initiative was to provide ample support, and benefits to innovative startups to allow them to flourish as full-fledged companies.
Since then, the Centre has launched over 50 schemes aimed at assisting startups in areas such as patent filing, tax rebates, infrastructure, providing incubation, mentorship, and advice. However, a tiny fraction of these schemes overshadow the rest. While the schemes were launched with much fanfare, the actual impact in many cases has been dismal.
Perhaps one of the most promising schemes launched by the government is the Fund of Funds for Startups (FFS) scheme, which aims to invest Rs 10,000 crore in SEBI registered Alternate Investment Funds (AIF), which in turn, will invest in startups. By minimising the problems that come with the dearth of funds, which most startups face, credible startups can use the resources to scale up quickly, and contribute to the economy.
While the initial funds allocated look to be substantial, the actual allocation of funds, as of January 4, 2018, has been a paltry Rs 605 crores, which was allotted to 17 AIFs, which have consequently invested in 75 startups. From a list of sver 6,000 officially recognized startups, this figure clearly indicates why startups are still struggling to secure funding from the government despite the massive allocation.
Another major scheme introduced by the government was the Tax Exemption scheme, which was introduced through the Finance Act 2016. This act allows income tax exemption to startups for 3 years, in a 5-year block. Since majority of startups struggle to breakeven in their initial years, the possibility of generation of income, and subsequent taxation remains low. Even for fast-growing startups, it does reduce the burden of paying and filing of taxes, and provides an impetus to reinvest their income for further growth.
However, again the number of startups actually impacted remain low. At the start of the year, only 74 startups were officially allowed tax benefits under the scheme. This number is expected to increase, since the budget this year further provided exemption to startups that have a turnover under Rs 25 crores, thus benefitting a larger group of startups. Following the budget speech, this fiscal year startups with turnover less than Rs 50 crore pay 25% income tax, compared to the previous 30%. Since a majority of startups fall under this category, this move is estimated to create a sizeable impact.
Many startup founders invest their residential properties to make help run their startups. The government has also provided tax exemption on such capital gains arising out of sale of residential property, proceeds of which are invested in the startup. While the numbers are not out yet, this move can be significant for many entrepreneurs who invest their life-savings in creating something innovative.
Startups many a times require incubation—a phase when they are supported with good infrastructure, mentorship, and access to investors. The government has taken a serious initiative to set up incubation centres across the country. The NITI Aayog has approved 13 institutes to set up incubation centres (Atal Incubation Centers or AIC) with a grant of Rs 10 crores provided to each one of them. The government is also focusing on scaling up the existing incubation centres to match the demands of investors and startups alike.
Have the governments schemes helped startups do business with ease?
India gained worldwide prominence when it broke into the top 100 club in the ease of doing business ranking index in 2017, climbing 30 spots. A big reason for this was the introduction of the Insolvency and Bankruptcy Code 2016, which also had special provisions for startups in it. Sections 55 to 58 pertain to the Fast Track process, which allows startups to wind up their business within 90 days, curtailing a process which used to take years.
Many promising startups had to pack up, and the code came into full effect. Stayzilla, a hotel aggregator, and TinyOwl, a food delivery startup, were among several other firms that faced bankruptcy. On the flip side, valuations of major startups continues to rise. Walmart, which is looking to buy a major stake in Flipkart worth $10 to $12 billion, has its valuation skyrocket to over $20 billion. Ola is estimated to be valued at $7 billion dollars, and both Ola and Flipkart’s value are estimated to rise in the near future. In other words, while business has been easy, for some, others have had to ease out of the race.
Meeting Ivanka – and other benefits of having a startup
While Startup India has its host of benefits, Prime Minister Narendra Modi also takes special pride in the booming startup culture in India. This was visible in the 2017 Global Entrepreneurship Summit in Hyderabad, when 5 startups with highly innovative ideas showcased their products to Ivanka Trump, special advisor to US President Donald Trump.
This event increased networking opportunities, and also opened up overseas shores for export of products and services. The Centre has also instituted several awards to recognise fast-growing startups. Such steps create a positive impact in the mind of startups seeking recognition and government support.
The bigger picture
The government’s initiatives have been lauded across the board for having been designed to boost the startup culture, and improve the ageing business culture in India. However, the numbers show a different story. With minimal impact registered at ground level, questions have been raised about some of these schemes being all smoke and no fire.
Unfortunately, India’s burgeoning population has been struggling with low employment rates. A major push in further establishing the startup system in India can solve both the problems of unemployment and low income. There also needs to be more awareness about the various schemes introduced, since the target audience is sometimes unaware of the benefits they can avail. The teething stage of India’s startup culture needs to be overcome quickly, lest it escalate into a major problem for the country in the future.