Start-up Ecosystem in India – UPSC GS3

  • India is home to the world’s third–largest startup ecosystem.
  • India has recognised more than 61,000 startups as of date.
  • In 2014, there were only four startups in the unicorn club but in 2022 there are more than 70 unicorns.
    Start-ups are responsible for 2/3rd of jobs in USA.
  • There are more than a hundred funds registered with markets regulator Securities and Exchange Board of India alone.
What are the strengths of Indian Start-ups?
  • Large pool of cheap talent
  • Huge domestic market
  • Willingness of foreign companies and invetstors to be a part of Indian market
  • Government support:
    • Start-up India
    • Start-up Fund
    • Atal Innovation Mission
    • Ease of Business etc.
Issues in India:
  • Due to excessive red tape in the investment processes, many companies are leaving India. Ex. Flipkart was forced to register in Singapore.
  • Start-ups want government not to club them with SMEs, and to focus on removing regulatory hassles
  • They want abolition of capital gains tax to allow Valley-based entrepreneurs to invest early in Indian start-ups, and help them grow global businesses.
  • Lack of exits due to Bureaucratic and regulatory hurdles in merger and acquisition processes
  • Last year, 54% of funded tech start-ups domiciled themselves out of India to Singapore & USA because of better regulatory environment there. Ex. Flipkart
  • Man power – scarcity of people who are ready to take risk.
  • Weak infrastructural support – need more acceleration centres, incubators etc.
  • Diverse market i.e. different languages, tastes, culture – it hinders growth of a big product.
Steps to Succeed
  • Friendly and pro-active tax regime
  • Benefits such as R&D credits and capital gain tax credits for entrepreneurs
  • Government should setup & fund incubators at universities and colleges.
Central Government’s effort to improve the condition:
  • The Centre alone has announced a corpus of Rs. 10,000 crore to fund start-ups, of which 75 have actually received some money so far
  • India’s policy on foreign direct investment was specifically amended to include start-ups,
  • Start-ups are now allowed to accept up to 100% of their funding requirement from foreign venture capital investors
    Tax write offs
  • Relaxation of rules for venture capital flow
  • Rules that make it easy for start-ups to shut down
  • Streamline patent process online to make it more convenient
  • Research park initiative – at 50 institutes Rs 100 crore from next year -> will foster the start-ups by students and former student -> handholding start-ups in initial phase
  • The Reserve Bank of India (RBI) has permitted startups to raise external commercial borrowings (ECBs) of up to $3 million in a financial year for three year tenure.
Various schemes:
  • There are many schemes run by various arms of the government, all of which provide tax breaks, incentives, grant money and other forms of assistance to wannabe technopreneurs
  • Technical Assistance: The Department of Electronics and Information Technology offers technical assistance for filing patents.And up to Rs. 15 lakh per invention, or up to 50% of the costs incurred in filing a patent
  • The department has multiplier grants scheme which provide up to Rs. 2 crore for start-ups in the IT services, analytics, artificial intelligence, and Internet of things space
  • Funds for Borrowings: The Credit Guarantee Fund Trust for Micro and Small enterprises underwrites borrowings of up to Rs. 1 crore per unit
  • Encouraging initiative: The Centre’s Atal Innovation Mission funds up to Rs. 10 crore for each Atal Incubation Centre set up under the scheme
  • The Atal Mission also provides funding to schools to set up ‘Atal Tinkering Laboratories’ to spur the spirit of innovation and enterprise amongst the young
  • BHARAT Fund :  It is a fund launched by the Prime Minister Narendra Modi during his recent visit to the US. It is a fund for Better Health, Agriculture, Renewable and Technologies (BHARAT). It is a major initiative to encourage start – ups.
  • 72% of founders are less than 35 years of age (young start-up Nation)
  • Reasons:
    • Hot spots like Bangalore, NCR, Mumbai
    • Availability of VC’s
  • Impact:
    • Innovative tech solution to key social problems
  • Need of hour:
    • Clear policy: define what a Technology start-up is
    • Easing rules and regulations for funding
    • Simplifying compliance procedures by minimising licenses, permits, approvals etc.
    • Tax benefits
NITI Aayog Panel Report:
  • 1%  of corporate profit can be directed towards research labs in universities &/or University – Industry research collaboration –> corporate venture capital fund for investment in start-ups and/or incubators
  • Contracts with foreign defence companies above $5bn –> 5% can be directed towards establishing research centric universities with emphasis on core products
  • GRAND Prizes can be established for finding ultra-low cost solutions –> Incentivised Innovation
  • Increase in investment in Business Incubators with up to Rs200 cr public spending per year and roping in Private players
  • Establish “FUND-OF-FUND” by the government to seed other early stage venture funds with corpus of Rs 5000 cr.
  • Overhaul innovation ecosystem in country
  • Will provide the framework to government to encourage and promote self-employment as a career option
  • Seeks to combine innovators from Universities, consultant and private sector enterprise with government
  • AIM would have four working groups on
    • Idea and Network: collaboration among various stakeholders
    • Angel funds – fund of funds
    • Governance Innovations
    • Missions or Special Initiatives group to take ideas from concept to implementation
Can start-up ecosystem actually be created through state intervention and policy?
  • Israel is the most celebrated success story of state intervention and policy creating and shaping an innovations powerhouse. It set up a technology incubator programme way back in 1991, under the office of its Chief Scientist. Since then, it has gone on to become a major world power in IT innovation, as well as innovation in the pharma sector. Many countries have tried to follow the Israel model, but with far less success
  • This is probably because Israel’s policy was clearly focussed in a few areas of technology where
(1) It enjoyed a human capital advantage,
(2) The ecosystem was small and manageable, and
(3) The policy was administered by science and technology experts rather than administrative generalists
  • On the other hand, the U.S., with the largest start-up ecosystem has no clear start-up policy, though almost every state and several major cities have specific policies
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