Budget 2020 | What the government can do for startups

Aryaman Tandon

Indian startups received 25 per cent of the total $21 billion capital raised from private equity investors in India in 2018. Between January 2014 and November 2019, close to 550 Indian startups in the B2B (business to business) space raised $16.6 billion.

These figures highlight the fact that the Indian startup ecosystem is a hotbed of interesting ideas with the entrepreneurial energy of Generation X and Y. The ecosystem is benefiting by India’s improvement on the ease of doing business index. However, access to capital is still an opportunity owing to the NBFC (non-banking financial companies) and NPA (non-performing assets) issues.

To support the existing and next wave of entrepreneurs and transform the Indian startup ecosystem, here are five opportunities for all the stakeholders.

Upskilling talent

• Large workforce but lack of skills: India has one of the largest working age populations in the world, but the problem is lack of skills and training. Due to low employability of Indian graduates, startups often end up investing significant resources in training new employees. The government is working together with educational institutes and industry bodies to create a talent pool through schemes such as Skill India.
• Improving education: The education system can also be made more agile in terms of regular syllabus updates as demanded by today’s fast-changing technological and business environment. Autonomy and industry academia collaboration is already reaping benefits in some of the premier Indian institutes such as the IITs and the IIMs. Considering these institutes as part of a successful pilot study, the changes can now be introduced in all the institutes pan-India.
• Targeted online education: Even though most of the startups in India are tech savvy, certain areas need expert interventions such as customer service, marketing and the like. Promotion of online education can be an effective way to bring in the required intervention and create a large-scale impact.
• Visa for attracting global talent: Although India offers high business prospects, the lengthy visa approval process for entrepreneurs and investors acts as a deterrent. Therefore, simplified visa processing can be a small but first step to attract global talent.

• Business models: Additionally, Indian entrepreneurs often find themselves trapped in the habit of copying western business models which are often outdated and need localisation to succeed in India.
• High ingenuity with low R&D spend: Indian entrepreneurs are well known for their ingenuity regarding cost-effective and innovative solutions. However, apart from the cases of ingenuity displayed at a small scale, in general, Indian companies lay lower focus on innovation and R&D capabilities. This is reflected when we look at the low number of annual patent filings by India as compared to China, Japan, or the US.
• High ingenuity with high R&D spend: The government can leverage the inherent innovation trait in Indian entrepreneurs by scaling up various schemes under the Atal Innovation Mission (AIM) to address indigenous problems.

• Funding to startups: Lack of funding and profitability accounts for closure of nearly half of all startups in India. Indian startup and business environment is facing lack of funding issues due to NPAs and aftereffects of the NBFC crisis of 2018. The government has already improved the recovery rate for creditors through IBC (Insolvency and Bankruptcy Code). This coupled with the promotion of priority lending to startups can create confidence among entrepreneurs.
• Tier 2 cities are catching up: While most of the PE-VC (venture capital) deals and funding go to Delhi, Bengaluru, and Mumbai, there is a lot of on-ground activity in tier 2 cities. Most of these cities have high quality education institutes and therefore provide easy access to talent. In addition, they offer lower commuting and travel times, lesser operational cost, and a lower attrition rate than tier 1 cities. They also have access to mentorship through organisations like TiE (The IndUS Entrepreneurs) having presence in these cities. There can be more collaboration with startup accelerators to support the ecosystem. Additionally, through schemes like ‘Startup India’, the government is expanding focus to widen the population ambit by involving all states and tiers. For example:

o       Other emerging hubs include Ahmedabad for financial startups, Chandigarh for IT-based ones, Chennai (software), Jaipur (operations and IT), Pune (analytics) and Raipur across sectors.

• Customising taxation: Commonly, startups in the B2B space often receive payments on a delayed basis from their customers and business partners, which lands them in a liquidity crunch and therefore, they are unable to file tax on time. In such cases, avoiding hefty penalties and allowing extensions to file taxes can help the sector.

• Contract enforcements: According to the World Bank, it takes 1,445 days to resolve a commercial dispute in India, almost three times the OECD (Organisation for Economic Co-operation and Development) average. While India’s overall rank in ease of doing business is 63/190, it ranks 136 for starting a business as the process is still cumbersome and time-taking. Closing a business is even more difficult. Therefore, there is a need for India to improve contract enforcement. The scope of improvement can be highlighted by the fact that China ranks 5th globally on this parameter on the World Bank’s ease of doing business index.
• Easing FDI norms: Since improving FDI (foreign direct investment) regulations has direct impact on startups in terms of raising capital, the government has been helping ease these regulations. In 2019, it liberalised FDI norms for more than 21 sectors that will also benefit startups. Standard Operating Procedures (SOPs) were introduced for FDI proposals. Startups are now allowed to issue convertible notes to foreign investors. In fact, startups can raise up to 100 per cent of funds from foreign VCs by way of issuing both equity and debt. Today, barring few sectors, nearly 90 per cent of the total FDI inflows are through the automatic route. To make startups more competitive, the government can remove restrictions like the requirement of local sourcing.
• Helping Indian startups go global: With over 25 percent of entrepreneurs exporting their goods or services, India is an exceptional performer among large population economies i.e. China, the US and Brazil as a result of the government’s efforts to push exports. The latter can further provide support to startups on competence building, technology support, and cloud computing which can help acquire global customers with increased customer comfort in evaluating and purchasing over the internet. Startups can also be assisted in finding an opportune time to go global. They can be guided on meeting tough market regulations e.g. while expanding in the EU (European Union). Indian startups can also be guided on securing capital for global branding.

This is one area where the government can have direct impact on the startups that it partners with. It will also help the government see and understand the startup world from up close: what works, what are the unique challenges that startups face and so on. A few things to note here are:

• Relaxing B2G eligibility criteria for startups: For example, the minimum 5 years of balance sheet criterion sometimes does not make startups even eligible to work with the government.
• Improving the payment terms: There is a need for restructuring and customizing the payment terms while availing of products and services from startups as they are generally cash constrained and are very sensitive to receiving trade receivables on time.

• The Election Commission now displays real-time election results on mobile app
• The Coffee Board uses technology solutions to automate coffee brewing patterns
• The Andhra Pradesh government has secured digital land records of 1 lakh farmers
• Governments in Andhra Pradesh, Madhya Pradesh, and Rajasthan are conducting Hackathons to crowdsource solutions in healthcare, sanitation, technology, and transportation
• The Maharashtra government has set up diagnostic machines to monitor haemoglobin

While all the above superstructure policymaking solutions would help startups in India, the importance of microstructure policy implementation solutions i.e. active monitoring of on-ground execution cannot be overemphasised. A joint effort by various industry bodies and the government in the above-mentioned focus areas will help create a promising and sustainable startup ecosystem in India.

Aryaman Tandon is Director, Praxis Global Alliance. Views are personal.