A proud moment for India was to have been ranked as the 5th most startup-friendly economy in the world, in 2019. This was based on five parameters: human capital investment, research and development, entrepreneurial infrastructure, technical workforce and policy dynamics. Despite losing the first four positions to the USA, UK, Canada and Israel, India has come a long way due to various government schemes such as Startup India, Make In India, Digital India, the setting up of the Biotechnology Industry Research Assistance Council (BIRAC) and many more which foster a culture of entrepreneurship and innovation in the country. However, India has lagged behind other countries in two aspects majorly; innovation and taxation. The persistent dearth of successful innovation and the recent ‘Angel tax issue’ have discouraged investors from providing funds to Indian entrepreneurs for the creation of their own startups.
As per Global Innovation Index 2019, India stood at the 52nd position out of a total of 129 countries for capacity and success in innovation. For a country that is the fifth leading startup- friendly economy globally, to rank so poorly in innovation is nothing short of a disgrace. This lack of innovation is clearly depicted by India’s relatively low expenditure on research and development. Although India stands at the 7th position when it comes to absolute money spent on R&D (after adjusting PPP) with a mammoth expenditure of $48.1 billion. However, this generally isn’t enough, given the large geographical area and population.
The relative figures show a different reality altogether. India’s expenditure on R&D continues to be as low as 0.8% of the GDP, much lower than countries like South Korea at 4.3%, Israel at 4.2% and Japan at 3.4%. The lack of quality research is evidenced by the fact that many of India’s startups are nothing but an emulation of successful global ideas fine-tuned to serve local needs. Talk about the American Uber and Indians have an Ola. Think about Spotify and we have the Indian version Gaana. For Amazon, we have Indian competitors, Flipkart and Snapdeal. For Airbnb, we have OYO Rooms. We have the Indian Zomato and Swiggy as replacements of the middle-eastern Talabat. All these foreign startups were established before we Indians copied their ideas and made it our own. One cannot deny that India has become a startup hub with a total of 8625 startups in 2018 across various fields like edtech, traveltech, fintech, logistics and healthtech, yet it is even harder to disagree with the reality that the number of these startups formed out of original new ideas of Indians is laughably low. This is perhaps due to loopholes in the Indian education system that fails to provide the requisite infrastructure, skills and highly-qualified, research-oriented teaching faculty in universities.
Next lies the issue of the ‘Angel tax’ which has been tormenting the Indian startup ecosystem lately. Angel tax is an ‘income tax’ payable on capital raised by ‘unlisted’ companies via issue of shares, where income refers to the share price in excess of the fair market value of the shares sold. The investors providing funds to these companies also have to pay a ‘gift tax’ on the excess amount. The Angel tax was introduced in India in 2012 with the aim to curb money laundering by various small companies by imposing a high tax rate of 30.9% on all unlisted companies in the country, along with a tax on the investors. It all started when owners of small-scale companies started laundering their tax-evaded income by selling their shares to investors at a price above the fair market value. In reality, the investors got the money to be invested in the companies from the owners themselves and charged commission for helping the owners carry out the money laundering process smoothly. The Angel tax successfully curbed such malpractices.
However, this started creating problems for startups (which are often unlisted companies), when honest angel investors who provided seed funding to these startups had to start paying an exorbitant tax on the excess amount, they began putting their money elsewhere. This gave entrepreneurs a hard time in finding that first cheque to kick start their business, thus, resulting in unnecessary road kills of many good ideas. However, there was a sigh of relief when Indian Finance Minister Nirmala Sitharaman announced in her 2019 Budget that startups and their investors, who will provide the requisite declarations on their returns, will not be subject to scrutiny under the Angel tax. The government also eased the norms for companies to qualify as startups by increasing the upper limit for the turnover of the tax exempt startups from ₹250 million to ₹1 billion. Furthermore, an entity will now be considered a startup for upto 10 years after its incorporation, as compared to 7 years earlier.
India has definitely come a long way, but still has a lot to learn from how other countries have successfully implemented some out-of-the-box policies to create a vibrant startup ecosystem. The global startup economy has achieved great heights with a total economic value of nearly $3 trillion in 2019, a 20% increase in worth from the prior two periods. This growth is largely driven by high-tech startups in the fields of advanced manufacturing and robotics, blockchain, agritech and new food, and artificial intelligence. Meanwhile, sectors such as edtech, digital media, gaming and adTech have seen falling levels of investment.
Some countries have outperformed others in terms of innovation, friendly government policies and entrepreneurial mindset. Israel is one such country which boasts of the highest venture capital investments as a percentage of GDP. The influx of highly educated Jewish immigrants in the 1990’s and the training of people in sophisticated technology, due to compulsory military service, has given a boost to technological research in this small Middle-Eastern country.
The government has played an instrumental role in ensuring that this abundant human capital does not go to waste by providing adequate funding to convert their ideas into businesses. The Matching Grants Programme is one such government initiative that was launched with the aim to eliminate the financial risk associated with the ambiguity in the outcome of a research. The firms simply have to submit their R&D proposals to the chief scientist, and grants are awarded on a competitive basis, with 66% to 90% of the research costs covered. These grants act as high-risk loans, where successful projects repay the funding received via a deduction of a small percentage of annual sales whereas the government bears the costs of the unsuccessful projects. This policy played a major role in boosting the high-tech industry of Israel and made it the ‘Startup Nation’ that it is today. In India, the government does provide funds to startups to carry on R&D, but it does not bear the risk of failure of startup. With over 90% of Indian startups failing in the initial years due to lack of original ideas and innovation, a government policy mirroring Israel’s will inculcate a sense of confidence conducive to taking bolder risks by entrepreneurs.
Canada is also known for its startup hubs like Montreal, Vancouver and Toronto. Canada has successfully launched and implemented NextAI: the first global programme to build Canada’s Artificial Intelligence ecosystem. It not only provides funding to talented teams and individuals in AI ranging from $50,000 to an additional $150,000 to the top performers, but also provides them with education from AI experts, a network of like-minded innovators and corporate mentors, office space in AI-focused hubs, and easy access to visas to entrepreneurs from abroad. R&D on AI is non-existent in India and initiatives like NextAI must be undertaken in collaboration with educational institutions, the corporate sector and international governments to provide Indian researchers the required expertise and monetary support to kickstart such a programme.
In European countries, like the UK, private companies help individuals and firms in the paperwork of proving and estimating the costs of R&D for a meagre commission, a facility non-existent in India. This has great prospects in India because this Asian country requires every fund-raising request to go through 14 procedural stages against the global average of 4.3.
However, the single most important aspect which Indians lack is the Israeli ‘chutzpah’, which literally translates to audacity and boldness. Entrepreneurs in countries like USA, UK, Canada, Japan and Germany are risk-takers who are not afraid to fail. Unlike India, where being practical and financially secure is given far more significance than the ability to dream big, failure is merely seen as a learning experience and a stepping stone to success in these counties. The Indian startup economy has not yet seen its full potential due to the timid and risk-averse nature of people, which is reiterated time and again, thus, creating a mental barrier in people. However, India is changing for the better, with a bold, young generation ready to take the risks of having their own businesses. India is treading the correct path. All it needs to do is learn from the best; whether that is innovative governmental policies or Chutzpah, and finally, implement it efficiently in their country.
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