TWS Policy Paper: ‘The Startup Ecosystem in India’

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By Haroun Mahmud

On 22 April 2016, The Wilberforce Society met in Keynes Hall, King’s College Cambridge and held a policy paper presentation about ‘The Startup Ecosystem in India’. The paper presentation was the culmination of the research and writing undertaken by a group of Cambridge students. The authors of the paper are: Sarah Wong, Pranjal Bajaj, Charlotte Grace, Vanya Kumar, Viva Avasthi and Ruby Stewart-Liberty, with Alicia Loh as editor.

The paper provides policy suggestions to the incumbent Government of India, which has taken a pro-startup stance and evaluates the effectiveness of some of its current policies.

The team invited Dr Jaideep Prahbu, Jawaharlal Nehru Professor of Indian Business & Enterprise, to give a speech on his views on the paper. His comments are summarised below.

At the start, Dr Prahbu congratulated the team on a very well-researched and informative paper. He commended in particular the accuracy of the ideas presented within it, noting that a few weeks ago during a trip to India he met entrepreneurs whose sentiments he felt were reflected in this paper.

He noted that in India much potential continues to be unrealised. The ecosystem seems to hold Indian people back.Innovation in Developing Countries - Startups in India

As a university student at IIT Delhi in the late Eighties, many of his peers were intent on leaving the country, to seek opportunities abroad which they felt were lacking at home. But since the Eighties and Nineties, young people are still leaving India but – rather than intending on starting a life abroad – they wish to gain skills and return back home. This has been called ‘brain gain’ or ‘brain circulation’.

Entrepreneurship in India continues to be elitist; investors, with some but not complete justification, target people from certain institutions such as IIT.

There is some progress to diversify investment. Kerala recently opened its first Fab lab, a small-scale workshop offering personal digital fabrication, an idea which originated from America’s MIT.

Eluding to Larry Collins and Dominique Lapierre’s 1975 non-fiction book, Dr Prabhu suggested that Indians need more ‘Freedoms at Midnight’. Bureaucracy can be incredibly stifling to startup, not least the tax system. India collects tax through the TDS (Tax Deducted at Source) method and getting a rebate can be an incredible hassle. Bureaucrats, although committed and intelligent, are very risk-averse, making them a hindrance to business and innovation. With politicians breathing down their necks and the press operating in a sensationalist fashion, one can perhaps excuse them, but not without realising that a change is needed.

Dr Prahbu pointed out that is far better to work in a decentralised way, working with states rather than through central government. Narenda Modi, the current Prime Minister of India, made good use of this decentralised method as a Chief Minister of one such state, Gujarat, but is finding less success deploying similar tactics for the whole country in central government. This is because national politics is much more consensual, requiring the agreement of many scores of people, unlike the more streamlined state-level governance.

The paper’s findings

The research paper outlined some of the factors hindering entrepreneurship, classifying them into four main categories, nominally: a) culture and education; b) funding; c) tax and regulation hurdles and d) is there even a market?

Unsurprisingly, with a country as vast and therefore as varied as India, there is considerable disparity between the different regions. In some regions for example, the lower castes suffer from a lack of good network connections. Students from outside the IITs (India’s Ivy League-style elite university institutions) find difficulty to access funding, due to a bias among investors to favour the latter. The preoccupation with rote learning curtails the potential for innovation and new ways of thinking so crucial to entrepreneurship.

India’s cultural, regulatory and economic environment combine to induce a lack of investor confidence. There is an overly fragmented and complex tax structure, with dissimilarities in regulations across regions and sectors.

What is India doing?

Despite the obstacles outlined above, India is making strides to enhance and encourage entrepreneurial activity. For example, there are seven new research parks as well as 35 new incubators. To circumvent the restrictive tax regimes of old, tax exemptions have been offered to startups for the first three years as well as an eighty percent rebate on patent applications filed by startups.

Policy recommendations

The paper’s policy recommendations are wide-ranging, focusing on how the government can help startups from the very beginning of their ventures throughout the process.

They can be categorised in four main ways: firstly, through securing support for startups; secondly, giving them the support they need to work with confidence; thirdly, minimising the red-tape and finally, widening opportunities to those typically left out.

The government can use state media to provide leverage to the existing programmes and initiatives as well as encouraging and legislating for firms to sponsor the most promising young entrepreneurs from local universities (not the IITs) as part of their corporate social responsibility mandate.

Providing startups with support can also be done by encouraging early stage funding through regulation as well as straightening investor protection.

The simplification and consolidation of both the tax and procurement systems will remove the hesitance which many currently feel.

The paper suggests the adoption of the ethos ‘sabka saath, sabka vikas’ [together with all, development for all], which was in fact a key poll slogan for Prime Minister Narendra Modi. Entrepreneurship and innovation can be integrated into India’s wider development agenda of inclusive growth through an affirmative action-based approach, by catering to the marginalised sections of society.

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  1. […] It was a very important event and a very relevant too, focusing on the same subject matter that the TWS team explored in their policy paper (see previous blogpost here). […]