If startups are to be saved, govt must be more proactive; and if schemes have so many caveats, why even have them?
Given the prime minister’s repeated emphasis on promoting startups, including setting up a fund to finance them, it was always believed that the government would go the extra mile to help them—and with good reason. India has the world’s third-largest number of unicorns, and the startups, the majority of which, interestingly, seem to be focused on societal problems, are estimated to be worth $100 bn already. Of the 9,000-odd startups founded in the last five years, 1,050 are healthtech, and 20 agritech; 18% of startups leverage AI, blockchain, big data, robotics, etc. The Aadhaar Stack, and over the next 5-10 years, the Health Stack, show that the startup ecosystem is not just focused on copying US business models in the way Flipkart’s founders copied Amazon. And, the India Stack apps that built upon Aadhaar—DigiLocker, eSign, etc—provided facilities that were simply not available to citizens in the past. NPCI’s UPI has emerged as a world-beater in terms of payments transfers, and even Google and BIS are recommending it to the US Fed and other central banks; within just 40 months, merchant payments via UPI outstrip debit and credit cards, which have been around for decades, by a third.
So, it does come as a surprise to hear startups complaining of step-motherly treatment. While there were complaints about the angel tax, and the preferential treatment given to foreign capital even earlier, in an article in this newspaper today, Mohandas Pai and Siddarth Pai have pointed out that Indian investors contributed just a tenth of the $14 bn that Indian startups received in 2019. In other words, India is at risk of becoming a digital colony unless the government finds ways to encourage local investors.
Indeed, while Indian startups bleed due to the corona crisis—funding and deals have already been hit quite badly—the government’s efforts look inadequate, especially in comparison with other countries. While France, for instance, has launched a $4.4 bn liquidity plan to support the cash flows of startups, according to a CNBC report, Germany has said it will provide $2.2 bn of financial assistance. In this context, the Sidbi Covid-19 Startup Assistance Scheme (CSAS) was a good idea, but it has so many caveats that they probably defeat the purpose of the scheme. Allowing loans against GST refunds is a good idea, but the scheme is to apply only to startups with at least 50 employees, those with a minimum annual turnover of Rs 20-60 crore in FY19 and FY20. Moreover, the startups have to be ebitda-positive in December 2019, or likely to be in June 2020, and they “should have demonstrated innovative measures for ensuring business continuity during the Covid-19 period.” In other words, the scheme is designed to keep the number of potential beneficiaries to a minimum. In return for the Sidbi loan, which has a 12-month moratorium, it is to get the “first pari-passu charge on current assets of the Company”, the interest rate is a high 12%, and there is a 2% processing charge and a 2% per month penal interest in case of a default—in case the default persists for more than 180 days, Sidbi can convert this into the company’s equity shares at par. While most of the leading lights of the startup world—including venture capital and private equity associations—have petitioned the government for more lenient terms, the government should, ideally, be defraying part of the salary bills for startups and asking banks to offer low- or zero-cost loans, with the government bearing the costs, including the risk of default. Startups, by definition, are poorly funded; at the very least, the eligibility criteria have to be watered down considerably.