Start-up India: Did the government overreach?
Sometimes, the best practice a government can adopt is to stay away
Dave
Thomas, founder of the famous fast-food restaurant chain Wendy’s, once
said, “What do you need to start a business? Three simple things: know
your product better than anyone, know your customer, and have a burning
desire to succeed.” But in a country as difficult to do business as
India, an entrepreneur also needs a fourth attribute: knowledge of a
complex maze of laws and regulations. In this context, the government’s
Start-up India campaign, initially announced by Prime Minister Narendra
Modi during his last Independence Day speech, was eagerly awaited.
The daylong event on Saturday saw the unveiling of an action plan
for the campaign. The measures announced by the government fall under
three distinct heads: simplification and handholding; funding support;
and industry-academia partnership and incubation.
Sometimes, the most salutary
practice a government can adopt for a sector to flourish is to stay
away. While the start-ups in India have, of late, seen a boom, most of
it is despite the government and not because of it. The year 2015 was,
by far, the best year for Indian start-ups. On the back of a massive
spurt in funding, India is now—according to a report by software lobby
group Nasscom—the world’s fastest growing and the third largest start-up
ecosystem. With a lively venture capital financing culture, the
government would have been better off avoiding the funding support it
announced on Saturday.
Though this fund—amounting to Rs.10,000
crore over four years—will be in the nature of Fund of Funds and will
be invested in Securities and Exchange Board of India-registered venture
funds (many of the big-name investors aren’t), the selection of
appropriate venture funds for investment is a privilege the government
can do without. Besides the high opportunity cost and potential charges
of cronyism, the government fund is neither sufficient to resurrect the
start-up ecosystem if it is floundering, nor is it required if the
ecosystem is alive and kicking. Likewise, the government should also
desist from the temptation of organizing start-up fests and such events,
and leave this job to industry associations.
A whole host of
simplification measures announced to make business easier for start-ups
is indeed welcome, but with a caveat. A lot of these steps need to be
taken for improving the business environment across the board and not
just for start-ups. For instance, it will help if a mobile app and
portal is available to all businesses, and not just to start-ups, for
clarification of regulatory requirements. And what about reducing the
number of regulations and discarding the archaic laws which would make
such an app superfluous? This should be part of the government’s broader
effort towards ‘ease of doing business’ and the app should not become
the permanent solution.
Most of the exemptions and
concessions offered to start-ups were either not needed or not
desirable. The tax holiday for the first three years is much ado about
nothing. Few start-ups, if any, can be expected to start returning
profit in just three years of existence. A number of other exemptions
and “handholding” measures are a throwback to the “infant industry
argument” which becomes an excuse to protect a certain class of
industries from market competition. A number of concessions available to
the small and medium enterprises in India, for instance, have done
little more than keep them from growing up. Moreover, these exemptions
stand in direct contrast to the government’s intention to phase out all
exemptions and reduce corporate tax rates from 30% to 25% by 2019.
The government’s focus on
industry-academia partnership is perhaps the most appropriate one. Most
of India’s top institutes of higher learning are not known for their
research outputs. Moreover, a lot needs to be done to make research
outputs useful for industry. Conversely, the feedback from industry
should be used as inputs for research. Such centres of excellence which
combine education, research and industry experience can become hotspots
for disruptive technologies and start-up ideas.
Most of the Indian start-ups
are engaged in fixing broken markets. While this is commendable in
itself, India also needs start-ups throwing up globally path-breaking
products. An enabling environment for this will comprise incubation
centres which can plug into cutting-edge research happening in the
country. If the government pulls this off, the Start-up India campaign
would have done some good.
Will the Start-up India campaign end up making India the start-up hub of the world?
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