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Realising the dream economy

Realising the dream economy
The government has given a big push to it’s “Start Up India, Stand Up India” scheme in the 2016 Budget. The programme aims at promoting entrepreneurship in India by cutting down the infamous red-tapism and the still pervasive license-permit Raj. In a significant move, it stipulates three-year income tax exemption for start-ups and tax relief on capital gains. Earlier, such benefits were limited only to the powerful industry magnates who could influence government policies to their benefit. But the latest government move has democratised it, benefiting millions of budding young entrepreneurs. The scheme envisions easy exit policy along with providing relief in experience and turnover criteria for start-ups in the government purchases, and 80 percent reduction in patent fee and strengthening the intellectual property right protection, single point clearance and self-certification. Beside this, it is proposed to establish a fund with Rs 10,000 crore corpus to promote and sustain the scheme with the government acting as a hand holder of the first generation entrepreneurs apart from encouragement to incubation centers and promoting innovation among the younger generation in the school and colleges.

The most crucial part of the scheme is the push towards the easy access to finance. The main obstacle facing a young or a first-time entrepreneur is the lack of availability of funds. Investors tend to shy away from such enterprises due to the high risk involved or charge higher rate of interest which increases the burden on new fragile enterprises. To counter this, a credit guarantee scheme has been proposed. Also, the Budget has seen a five-fold increase in the allocation for the scheme, which is specifically aimed at providing seed capital for around 50 new ventures with funding up to 1 crore per company. This will enable them to approach the venture capital funds with renewed confidence. And around sixty percent of this funding would go into the hardware and manufacturing sector, which is in synchronisation with the “Make in India” policy of the government.

To ensure a long-term viability of the start-ups, the Budget has reduced the corporate income tax rate for small enterprises of turnover upto Rs 5 crore. It will be 29 percent plus surcharge and cess. The manufacturing companies can avail a tax rate of 25 percent plus surcharge and cess if they do not claim profit/investment-linked deductions etc. Beside this, holding period for the Long Term Capital Gain Tax has been reduced to two years from the earlier three years in the case of unlisted companies. Further, to promote financing, the Budget has permitted the NBFCs deduction of upto 5 percent of its income with respect to the bad and doubtful loans. As the rate of failure of start-ups is higher, many NBFCs are cautious about putting funds in the startup. This provision may ease some of their anxieties and enable a flow of funds towards the start-ups.

Besides this, “Stand Up India” has been specially launched to promote SC/ST and women entrepreneurs. Rs 500 crores have been allocated towards this end. The lack of access to institutional finance, the absence of requisite skills and technical know-how, and assured market are the main issues plaguing the entrepreneurs coming from the backward strata of the society. The scheme is expected to benefit around 2.5 lakh such entrepreneurs, which can be a game changer in the quest for social mobility.

But the scheme also faces a potential risk of creating a start-up bubble. It may well happen that the availability of easy finance may encourage sub-optimal ventures which have little chance of succeeding. This may create a bubble with several investors locking in their funds into such ventures. And when the things start to go awry, we may face serious crisis and chaos in the financial market. The risk is potentially very high as most of these start-ups are expected to be in the IT sector or in the e-retail business making use of rapidly expanding penetration of smartphones. But we can already see that all is not well, even with the big e-commerce giants like Flipkart and Amazon. Snapdeal is facing trouble and the Grofers (a phone-based app that allows customers to get groceries delivered at home) has already announced rolling back its operations in nine cities. This means that market is not well developed yet for such enterprises and the Indian customers are not as much into e-shopping as it is being made out in the euphoria.

Therefore, sufficient safeguards must be in place to avoid pushing the dubious ventures forward in the name of promoting start-ups. The profitability and sustainability criteria should be rigorously applied while screening for the beneficiaries under this scheme. Also, given a market demand, a major issue in the success of start-ups is logistics. India has high logistic costs compared to the international standards. It also suffers from poor infrastructure, network connectivity, and lack of skilled labor. The success of enterprises does not only depend on funneling in adequate finances but it also on the ecosystem in which they are operating. Without taking concrete steps to ease the infrastructure bottlenecks and reduce logistic costs, it will not be possible for the start-up boom to be able to sustain itself.

Finally, the government must put enough safeguards in place to ensure that the funds being allocated do not end up in phoney companies due to corruption or is used to promote crony capitalism. The vigorous performance analysis and flexible but strict debt recovery mechanism may reduce the problem of moral hazard in the sector and make the dream behind “Start Up India, Stand Up India” a reality.

(Dr. Sharad Ranjan is Associate Professor (Economics) at Zakir Husain Evening College. Views expressed are strictly personal.)
Sharad Ranjan

Sharad Ranjan

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