How India can support its start-ups

May 22, 2015

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

India is a country full of young people. In fact, half of the country’s population is under the age of 25 and more than 65 percent is under 35. It is set to be the youngest country by 2020.

This is important, because to build India’s future the government has to nurture the next wave of innovation that starts with this generation.

They’ve already built up a solid educational base with science and math, ranking among the world’s best. However, there’s still something missing. Once ideas are fostered, there’s nowhere for them to go next.

The reason is simple. An idea is not enough. Game-changing ideas need to locate necessary funding and the right tools to bring them to market. Now is the time to develop that environment.

Some of the initial numbers seem promising. India recently experienced a highly popular election, skyrocketing citizen confidence within the government and economy. Following Modi’s electoral win, India’s stock market surged and the rupee strengthened by more than 1 percent, hitting a new 10-month high against the dollar.

However, this hasn’t translated to incubating new ideas. According to government estimates, only 4 percent of 57.7 million small business units in India have access to institutional finance, leaving others to rely on informal lenders. Out of 189 ranked countries, World Bank placed India 142nd for ease of conducting business, 158th for starting a business, and 184th for dealing with construction permits.

To a certain extent, India’s leaders are taking steps to amend the lack of funding. Modi just announced the launch of MUDRA Bank with $3.2 billion of capital to support micro-financing firms that help smaller business. They’ve also passed a new simplified tax regime for small businesses, and these are steps in the right direction.

That should be the beginning, and India needs to make changes on several other levels.

First is to expand on those funding options. One clear way to do that is through venture capital. I’m not insinuating they launch “Shark Tank India,” but the government must foster a venture capitalist environment that is on par with other countries, including a 10-year tax hold for venture capital firms who support innovation and new entrepreneurs. The government could also offer a full tax deduction for companies that make investments into new companies.

The second area of potential improvement is around government regulations about the founding of businesses. The policies in place for entering the Indian business market are complex and outdated. To date, there are over 345 programmes and policies in place for new entrepreneurs. While some may seem positive — including programmes that ostensibly incubate new technologies – the truth is this makes it extremely confusing for young entrepreneurs.

Change can be acquired by “cutting the red tape” preventing new businesses from accessing the market to address some of the dire numbers on the ease of doing business in India. One major change is for India to create industrial and technology parks where entrepreneurs can rent or buy ready-to-move-in facilities reducing start-up time. By taking steps to create affordable industrial parks, with resources there dedicated to growing tech ideas, India is taking steps towards promoting innovation.

There is no reason why India cannot be the innovation capital of the world, home to the next Google or Amazon. However, the government needs to ensure ideas are given the opportunity to grow into a business.  Creating tax reforms, bringing in venture capital, and creating simple policies for new businesses is the way to spark this transformation.

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