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?