India has consistently occupied the top slot for being one of the fastest-growing startup ecosystems in the world. For the Indian economy’s continued growth, the government should support the vibrant startup ecosystem that has about 50,000 startups of which 12,500 are tech startups, including 12 unicorns.
The government needs to nurture and protect startups through policy initiatives that fuel innovation to further encourage the creation of robust startup hubs within the country. Fortunately, a number of policy initiatives have been taken by the Government of India and various state governments to sustain the vibrant startup ecosystem in the country.
Here’s looking at some of the key policy initiatives that have been launched to aid Indian startups to remain competitive at the global level:
Startup India Policy (Government of India)
The Startup India Action Plan was launched by the Government of India in 2016 to empower startups to innovate and contribute to wealth and job creation in the economy. It is the flagship initiative of the government to handhold startups throughout their growth journey from inception, product development and legal compliance to funding, public procurement and formulating an exit strategy. The Startup India Hub is a single point of contact for startups and offers resources, such as a step-by-step guide to starting a business in India, pro bono legal and banking services and assistance in company registration and networking among mentors, accelerators, investors and the government.
Angel Tax Abolition (Government of India)
Recently, Indian startups received a much-needed shot in the arm from the government. The 2019 Union Budget announced that startups would be exempted from Section 56(2), popularly known as the “angel tax.” The tax law—that was considered as an unfair tax burden for the startup community—stipulated that startups were obligated to pay a certain tax if they received an investment at a rate higher than their “fair market valuation.”
Prior to the abolishment of the draconian angel tax, startups were taxed more than 30 per cent on the funds invested by the individuals in an unlisted firm at the share price above the fair market value. As per the new policy, startups registered with the Department of Industrial Policy and Promotion will be exempted from the angel tax. Further, those startups and their investors who provide information on their returns are exempt from scrutiny. The relaxed norms are expected to ease funding for startups and thus boost the overall ecosystem.
Pradhan Mantri Mudra Yojana (Government of India)
One of the key requirements of startups is access to funding and startup-friendly financing opportunities. The Government of India has launched a variety of schemes to aid new businesses to grow and scale, one of the most important being the Pradhan Mantri Mudra Yojana.
The scheme was launched in 2015 to assist first-time entrepreneurs in their fundraising activities. The loans have three product categories: ‘Shishu’, ‘Kishore’ and ‘Tarun’. Under the scheme, startups can avail themselves of funding and low-interest loans through Micro Units Development and Refinance Agency or Mudra, a non-banking financial company (NBFC).
The security-free Mudra loans cover various stages of a startup’s journey, including the initial years of the company and the phase when the business seeks to expand operations. Loans up to INR 10 lakhs can be availed of under the scheme that is especially beneficial for SME manufacturing units, retailers and vendors. The loans have a repayment tenure ranging from 12 months to five years with flexible EMIs.
Easing Public Procurement (Telangana State Government)
It’s not just the Central government that has launched startup-friendly policies. The Telangana government is a leader among state governments to showcase its commitment to empower startups to thrive and create a robust entrepreneurial ecosystem in the state. Telangana’s startup policy called the Innovation Policy was launched in 2016 with the larger objective to leverage the skilled technology workforce in the state to contribute to India’s overall growth story.
The ease in public procurement to enable the participation by the startup community in government tenders is one of the key policy initiatives of the Telangana government. The state has strived to remove barriers to entry for entrepreneurs keen on participating in government tenders by exempting startups from submitting Earnest Money Deposit (EMD). Additionally, the Telangana government has also provided 15 per cent relaxation to startups that submit financial quotations pertaining to public procurement. The removal of these two criteria has created a level playing field for startups that are now able to participate alongside established corporates in the bidding process. As a result of the policy initiative, there has been an increased demand for products and services from startups. Further, a culture of robust entrepreneurial-driven practices prevails in Telangana that gives a fillip to the state’s startup ecosystem.
Startup Hub (Government of Odisha)
With the objective to emerge among the top startup hubs in India, the Odisha government is actively seeking strategic partnerships and investments into the state. It’s also focused on creating startup-friendly policies that would make it easier for entrepreneurs to do business in Odisha. Recently, Odisha became the seventh state in India to successfully complete the ‘ease of doing business’ reform. The State Government has launched the Startup Odisha initiative alongside the Startup Odisha policy.
Among its key policy initiatives is its decision to create a ‘Startup Hub’ in Odisha in 2021, to facilitate employment opportunities for the youth. The Odisha state government has announced it will provide financial assistance to five startups and four incubators as a part of the Startup Hub initiative. The hub will also provide entrepreneurs with infrastructural support that includes a co-working space and a laboratory, among other facilities.
The Odisha government’s policy also supports Inclusivity and Diversity by lending financial assistance to startups founded by women, transgenders and members from SC/ST/SEBC/PH communities. The state funding supports the startups in areas such as product development, marketing and publicity.
As the startup ecosystem scales and flourishes, the onus lies on the government to ensure that the regulatory and policy environment are conducive for continued growth. Entrepreneurship-friendly policies and grants will not only improve the startup ecosystem but also ensure the best talent is identified across sectors.
If India wants to emerge as a startup paradise, the key ecosystem stakeholders should first and foremost cultivate an entrepreneurial mindset. Only then would they be able to draft favourable policies and attract funding opportunities for the country’s vibrant startup community.