By Akhilesh Kumar Sharma*
Entrepreneurs shape the growth path of an economy by taking risk to invest in new ideas, offering products and services, creating employment and wealth, and generating revenues for the government. In the recent years, Indian entrepreneurs have performed very well. India’s ranking has improved in the World Global Innovation Index from 81st in 2015 to 57th in 2018. Government’s support has also played a crucial role in it. India’s ranking in the ‘Ease of doing Business’ has jumped 65 places, from 142nd in 2014 to 77th in 2018, which is a record improvement for any major country.
The improvement in these two rankings indicates that the business environment in India is becoming more supportive of entrepreneurial activities as well as more people are coming forward for experimenting with new ideas. The Modi Government-2 has not only continued, but in fact increased, its support to the entrepreneurs, particularly Micro, Small & Medium Enterprises (MSMEs) and startups.
According to a notification by the Department for Promotion of Industry and Internal Trade (DPIIT), Government of India in February 2019, an entity, working towards innovation, development and improvements of products or services, will consider Startups as up to ten years of its incorporation and with turnover less than Rs. 100 crores in any of the financial year since its incorporation.
In the Union Budget 2019-20, the Finance Minister, Ms. Nirmala Sitharaman, clearly chalked out the vision of the second innings of the Modi Government. The government wants to expand the size of our economy to US$ 5 trillion by 2024-25. For achieving this target, she illustrated 10 points including Make in India with particular emphasis on MSMEs and Start-ups.
A day before the presentation of the Union Budget 2019-20, the Economic Survey 2018-19 also highlighted the role of private investment as key drivers of growth and employments. Incentivising private investment and strengthening entrepreneurial ecosystem in the country may facilitate the government in achieving its other points of vision of the decade.
Incentives to Investors
The government has proposed to widen the coverage of lower corporate tax rate of 25 percent by including companies having annual turnover of Rs. 400 crores. The tax benefits received by firms may encourage more of them to invest in alternative investment funds (AIFs) to support start-ups. The government has also solved the angel tax issue by initiating a mechanism of e-verification of identification of investor and source of his/her funds. It also removes the need of scrutiny of such investments from income tax department.
India has introduced regulatory provisions in 2012 (SEBI (Alternative Investment Funds) Regulations, 2012) for the securities market engaged in providing financial assistance to startups and early stage ventures, including venture capitalists and angel investors. Investment through AIFs has become increasingly popular among investors (See Figure 1). Startups raising funds from Category-I AIFs investors (i.e. venture capital funds, SME funds, social venture funds and infrastructure funds) do not require justifying fair market value of their shares issued to them. This benefit has been extended also to the funds from Category-II AIFs investors (e.g. real estate funds, private equity funds, PE funds and funds for distressed assets).
The share of Category-I AIFs in the cumulative net investment made AIFs, as on 31 March 2019, is only 28 percent while the share of Category-II AIFs is 62 percent of total net investment made under AIFs. Further, the government has proposed several direct tax incentives to promote International Financial Services Centre (IFSC) which attracts Category-III AIFs (e.g. hedge funds, PIPE Funds). Thus, with this proposal, not only start-ups will be encouraged to raise funds from AIFs but inventors will also get incentives to invest through AIFs.
The government has also proposed to relax the condition for carrying forward and set off losses in cases of eligible start-ups. In addition to it, capital gains from sale of residential property on investment of net consideration in equity shares of eligible start-up will be extended by 2 years.
The Standup India Scheme, designed to promote SC, ST and women entrepreneurs, has been proposed to continue till 2024-25, i.e. the period of the 15th Finance Commission 2020-2025. The government also proposed other schemes to encourage women entrepreneurs like expansion of women SHG interest subvention programme to all districts, overdraft facilities of Rs. 5000 to every verified women SHG member, MUDRA loan of Rs. 1 Lakh to one woman in every SHG.
Along with strengthening MSME59, a flagship scheme for easing access to finance for MSMEs, the government has also announced allocation of Rs. 350 Crore under the interest subvention scheme for MSMEs for 2 percent interest subvention for all GST registered MSMEs for fresh or incremental loan. These measures will encourage MSMEs to enhance their financial literacy and follow GST norms to avail these benefits.
Measures to Strengthen Entrepreneurial Environment
The government has proposed to start a television programme exclusively for startups as well as designed and executed by startups within the DD bouquet of channels. It will serve as a platform for discussing various issues affecting growth of startups. At present around 61 percent startups are in category X cities (Population of city/town ≥50 Lakhs). The programme will support the spread of startups in the categories Y (Population of city/town in the range of 5-50 Lakhs) and Z (Population of city/town <5 Lakhs) cities along with rural areas.
The Budget has proposed to create a payment platform for MSMEs to enable for filling bills and payments thereof on the platform itself. According to 67th round (2010-11) and 73rd round (2015-16) NSSO surveys of unincorporated non-agricultural enterprises, financial dues are one of the major problems faced by the MSMEs. The number of firms reported financial dues as major problems was higher than access to credit problems in the both surveys. The percentage of enterprises facing problems of financial dues has increased from 8.6 percent to 9.5 percent during 2010-11 to 2015-16. Thus, the government’s proposal to create a payment platform for MSMEs will certainly boost the growth of small businesses.
Government has also proposed a number of measures to enhance the sources of capital for infrastructure financing. The statutory limit for foreign portfolio investors (FPI) has also been increased from 24 percent to sectoral foreign investment limit. Further, 100 percent foreign direct investment (FDI) will be permitted for the insurance intermediaries and local sourcing norms will be eased for FDI in single brand retail sector. These measures may support growth of domestic entrepreneurs through backward and forward linkages. Organizing Annual Global Investors Meet in India, as proposed in the budget, may attract foreign investors to explore business opportunities by making investments in India.
The government has also proposed measures to improve physical connectivity through Pradhan Mantri Gram Sadak Yojan; Industrial Corridors; Dedicated Freight Corridors; Bharatmala and Sagarmala projects; Jal Marg Vikas; Udan Scheme; and new metro rail projects. Government has proposed to improve the enabling environment for growth of maintenance, repair and overhaul industry. These measures will enhance the growth of infrastructure development in the country and thus will promote entrepreneurial activities along with opening new business opportunities.
Schematic Measures to Promote Entrepreneurial Development
Apart from above measures, there are many government schemes to promote growth of entrepreneurship in the country directly or indirectly, particularly in the rural areas. These schemes include National Education Mission; Jobs and Skill Development; Prime Minister Employment Generation Programme (PMEGP); National Livelihood Mission – Ajeevika; Innovation, Technology Development and Deployment; Technical Education and Quality Improvement Programme of Government of India; Pradhan Mantri Gramin Digital Saksharta Abhiyan; Promotion for Digital Payment; Skill Development and Livelihood; and Credit Link Capital Subsidy and Technology Upgradation; etc.
In general, there are marginal variations in the budgetary allocation to these schemes for the year 2019-20 in comparison to revised estimates of 2018-19. However, surprisingly, government has reduced the budgetary allocation for schemes like Promotion for Digital Payment; Skill Development and Livelihood; and Credit Link Capital Subsidy and Technology Upgradation Scheme. These schemes are equally important to promote growth of entrepreneurship in the country. Government should increase allocation to these schemes also.
The above measures clearly illustrate that the government has planned to attract private investment and promote entrepreneurial ecosystem in the country. India is the second most populous country in the world. More than 50 percent of its population is below the age of 25 years and majority of them are searching suitable employment and earning opportunities.
Given the limited resources, it is the biggest challenge to the country to provide employment opportunities and decent jobs to all. By promoting start-ups and MSMEs, India will be able to not only to boost its growth rate, but also to solve its many socio-economic problems including providing jobs to its aspiring youth. However, effective implementation of the government schemes to support entrepreneurs and start-ups are another big challenge to the government and will test the motivation of the government in achieving its vision for the decade in the next five years.
*Assistant professor at the Institute for Studies in the Industrial Development, New Delhi, and visiting fellow at the Impact and Policy Research Institute (IMPRI), New Delhi. Views expressed above belong solely to the author and not necessarily to the Institute. Contact: firstname.lastname@example.org