We live in an amazingly dynamic world. It is a world that inexorably throws up new trends, attitudes, visions, and ways of life. Nothing is static as is evident from the fact that every institution and individual has to undergo regular and radical alterations to persevere in this world. This vibrant and ever-changing tendency of the world has spawned up a new business trend that has feverishly gripped the minds of the Indian youth. Even people (like yours truly) who have no knowledge about the financial world have heard about it. Some of us have read about this trend in books and newspapers while others have come across it in pop culture products like TVF Pitchers. If you haven’t already guessed it, the trend being referred to here is Startup culture. The government of India acknowledged this development in 2015 and came up with a scheme titled ‘Startup India’.
The specifics of ‘Startup India’ can be quite confusing for someone who is a layman. Keeping this in mind, this article will follow a step-by-step approach starting from the meaning and the macro-level economic impact of a startup. After that, the features and impact of Startup India will be outlined.
Let’s start with the meaning of a startup. The picture that a group of individuals has an idea about an innovative product. They are quite confident of its authenticity and are also positive about its exclusivity. With this in mind, they will seek to create a Private Limited Company so that they can implement their idea. A startup is a broad term used to refer to such fresh economic entities and endeavors. In technical terms, Startup refers to any entity which has been in existence for less than 10 years and has an annual turnover that is less than a 100 crore rupees.
Modi government’s Startup India scheme aims to encourage and incentivize the youth to come up with innovative ideas and launch startups. The natural question that arises here is, how do startups benefit the economy of India? The fact that the government is promoting and encouraging them to convey their inherent invaluableness to the economy. Apart from some obvious benefits such as an increase in GDP and innovation, startups provide many tangible advantages to the economy.
Firstly, startups generate a staggering amount of employment. Picture a hypothetical situation. A student graduates from IIT and looks for a job. On the other hand, one of his classmates decides to launch a startup and creates 10 new jobs on his/her own. Common sense should be enough to indicate which option is more beneficial for the economy in general. No startup can succeed without the efforts of skilled employees who are dedicated to the idea. Hence, startups are always on the lookout for talented and well-qualified individuals thereby increasing the job prospects for college students around the country.
Secondly, the existence of startups makes the national financial atmosphere more competitive and dynamic. Companies with similar products are incentivized to improve the quality of their respective products while keeping their prices low. These companies know that if they fail to do this, they won’t be able to survive in the market. This prevents the emergence of monopolies which is highly beneficial for consumers.
Thirdly, startups have the liberty and capability to experiment with various innovative business models. The world of business is vibrant and ever-expanding. This has naturally led to the emergence of academic literature on various business phenomena and trends. Based on the detailed and intricate academic analysis, many new business models have been proposed that have the potential to vastly improve the efficiency of a company. However, there is always a certain degree of risk associated with these business models as they haven’t been tested. Hence, large corporations, who are responsible to millions of shareholders, cannot afford to experiment with these business models lest they have to bear heavy losses. Therefore, only startups can test the strength of such business models as they are not under any sort of pressure by the board of directors who represent the shareholders.
For all these reasons, it is in the best interests of the government to fan the flame of the already-booming startup culture in India. Let us now turn to ‘Startup India’ and its impact.
This highly anticipated scheme was inaugurated on 16th January 2016 by the then Finance Minister Mr. Arun Jaitley. There was a huge buzz surrounding the inception of this scheme. Budding entrepreneurs across the country were expecting a plethora of benefits which would allow them to embark on their cherished economic endeavors. It’s fair to say that they weren’t disappointed. The scheme offered 3 year-long exemptions from various kinds of taxes to ease the initial financial burden on startups in India. It also decreed the setting up of incubation centers around the country.
The role of an incubation center is to provide guidance, training, and services to startups so that they can forge their own paths in a highly competitive business environment. Lack of such initial handholding is one of the major reasons why many startups refuse to meet their targets and are forced to shut down. The scheme also aimed to create flourishing startup hubs with A-grade infrastructure and facilities where aspiring entrepreneurs can meet and consult with each other. In a move that received mild criticism, startups were exempted from certain labor law compliances as well.
Another revolutionary aspect of the scheme was an incredible reduction in Intellectual Property Rights fees. Startups could now file for patents by paying a fee which was half the erstwhile amount. This provided a great financial boost to startups who have limited funds, to begin with. But perhaps the most amazing feature of this scheme was the establishment of a fund of funds. One of the major obstacles that startups face is access to cheap credit. Banks are often reluctant to lend money to entrepreneurs whose businesses are not properly established yet. Even venture capitalists and hedge funds are largely selective in their dealings with startups. So, the government decided to maintain a fund of 10,000 crore rupees that were to be utilized by startups who were recognized under the scheme. This was an unprecedented move as it offered an assured source of funds for entrepreneurs who have to make all sorts of concessions to secure funding for their products.
After considering all these features, it is fair to conclude that it was a well-thought-out and intricately planned scheme. But the execution of this scheme, as is the case with almost every other well-intentioned governmental scheme, was messy. Due to administrative and bureaucratic constraints as well as costly oversight of glaring loopholes, the benefits intended under this scheme were never really actualized. Let’s look at what went wrong with the ‘Startup India’ Scheme.
The underwhelming performance of the scheme can be outlined by a staggering fact. Between March 2016 and March 2019, only 600 crores out of 10,000 crores had been utilized. The fact that 9400 crore rupees were left unutilized is mind-boggling for a country where startups are largely starved of funds. This article will now outline various reasons behind the scheme’s miserable performance.
Firstly, a startup could avail of the benefits under the scheme only after getting recognition from the Ministry of Commerce and Industry. This meant that it was the prerogative of the entrepreneur to get his/her startup registered with the government. To do this, each startup had to undergo a lengthy application process. The complex nature of the application process discouraged many startups from applying for the scheme. Those that did manage to apply had to incur huge costs. Why did this happen? Due to the lack of information dissemination by the government, most of the entrepreneurs had no idea about how the application process worked. Hence, they had to rely on consultancies to handle their application process. These consultancy firms charged heavily (40,000-50,000 rupees per startup) for the services they rendered thereby crippling many of the startups. On top of this, only about 3 out of 10 applications were accepted.
Secondly, the tax exemptions that were promised under the scheme were quite difficult to avail. These exemptions had to be approved by an inter-ministerial board which made the task complicated and cumbersome. Surprisingly, there were cases where entrepreneurs received tax notices even after exemptions had been approved. On top of this, angel tax had not been included in the list of exempted taxes. It is a heavy tax that is levied on the private funding of a startup. The rationale behind it is that the angel investments that many startups receive from hedge funds are often in excess of the fair market price of their shares. To skim off this excess and prevent money laundering by big businessmen, the government levies this tax.
Thirdly, there were a lot of myths and confusion surrounding this scheme due to a lack of awareness workshops by the government. No real effort was made by the government to explain the features of this scheme to budding entrepreneurs and to ease the process of application. Due to all these reasons, only about 16,000 startups were recognized in three years.
In 2019, the government finally decided to take a stand and rectify the loopholes that had emerged in the execution of this policy. Many of the application complexities were removed and the inter-ministerial board approval was also abolished. This led to the simplification of the tax exemption process and as a result, the number of applicants increased. In just one year, the number of recognized startups increased by 100 percent. Perhaps, the most significant reform was the abolishment of angel tax for startups. Finally, the approval rate also increased. It was decided that recognition should be granted to even those startups that are just at the ideation stage. All these reforms brilliantly turned around a policy that had been declared as a failure by many financial experts. The impact that COVID-19 will have on this policy remains to be seen.
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The one word that defines him is curiosity. Always looking for new things to explore and learn. Apart from this, he is an avid debator which largely stems from his habit of reading voraciously. Currently pursuing Political Science (Hons.) at Ramjas College, Manraj is a movie buff and a huge football fan.