Column: Starting up India

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January 29, 2016 12:36 AM

The two key inputs for Startup India are going to be financial and human capital

Earlier this month, the prime minister announced the details of the Startup India initiative, which had been presaged in earlier speeches and policy actions, but emerged now as a full-fledged 19-point action plan. Despite the laundry-list approach, Startup India is relatively focused and well-targeted, especially when compared to larger visions such as Make in India and Digital India. The key elements of Startup India, in my view, are the plans to improve (that is, to lighten) regulation of start-ups that fit certain categories of innovativeness (though that may require some new bureaucratic machinery) and to give them tax breaks. Some have expressed scepticism about whether these policies will be implemented well, but there is hope, as I explain later in this column.

Importantly, Startup India may be the foundation for getting some traction with the two larger initiatives, since new enterprises that innovate in manufacturing or services are likely to rely in some way on digital technologies. Indeed, if Startup India registers some successes, it may provide the blueprint for more general changes in how business is conducted in India, and especially in the regulatory and legal environment. Those more general changes will require legislative modifications that can face political headwinds, but the hope is that successes from Startup India will change political attitudes.

In a sense, the origins of Startup India go back to what may turn out to be one of the most significant events in modern Indian history. The rise of Infosys, in particular, showed that middle class Indians with an appropriate education could work as a team to build a world-class business organisation from scratch. Moreover, this was done without having to play the rent-seeking game so often required of Indian businesses because of government policies. There were other early information technology (IT) successes, of course, and there are other examples of Indian businessmen and women who have built great organisations in similar ways, but Infosys remains a canonical example. In recent years, it has sometimes looked like India was regressing to a model of business dependent on government favours (the stifling model of crony capitalism), so Startup India may provide an opportunity to recharge the Infosys model.

The fact that India’s canonical start-up story came in IT is also significant. I remember at the time a British academic lamenting that the economic model was one of “techno-coolies,” while others harped on the narrowness of IT as a contributor to the economy. In fact, both these negative views, typical of some of India’s old intelligentsia, proved dramatically wrong. IT firms upgraded their capabilities to stay globally competitive, and their business models and reputations spilled over into a host of IT-enabled services, and then beyond those into other areas of the economy. Indeed, IT is proving to be the basis of a fundamental shift in the way all manner of market institutions are organised as well as changing the organisation of firms themselves. In all of this, India can position itself well to take advantage of the likely technological drivers of growth in the 21st century.

None of this is going to be automatic, of course, and one cannot get carried away with grand visions that have no substantive implementation plans to back them up. The two key inputs for Startup India are going to be financial capital and human capital. For the first, there is already a blueprint. Narayana Murthy, the first CEO of Infosys, chaired the Alternative Investment Policy Advisory Committee of the Securities and Exchange Board of India, which gave its recommendations less than a week after the public launch of Startup India. This report clearly and in detail provides recommendations for reconfiguring tax policies for the sources of financial capital for startups, including angel investors, venture capital, and private equity. There are also important suggestions for relaxing restrictions on who can invest in start-ups at various stages. Large organisations can certainly handle the risks involved, since they have the scale to diversify effectively.

As in so many aspects of the Indian economy, the greatest challenge will be in building human capital, that is, education and skilling. In the case, of start-ups, the new incubators and research parks will help, but there has to be greater attention to overhauling India’s higher education sector to bring it closer to the global frontier, so that students are able to experiment and innovate as part of their education, and have access to top quality teachers and mentors. Creating programs to bring in temporary talent from other countries to fill these roles seems to be the only way to have access to the needed human capital in the short run.

There is much else that needs to be done in fine-tuning Startup India to make it significant and successful, but its very existence marks an approach to economic development that would have been unimaginable a couple of decades ago. That in itself is cause for hope.

The author is professor of economics, University of California, Santa Cruz

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