Last Update: May 2023 (Startups in India)
This article deals with ‘Start ups.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.
What is Start Up?
A start up should satisfy the following conditions
- Enterprise should be registered under the Companies Act or Partnership Act or Limited Liability Partnership Act.
- From the date of registration, 10 years must not have been passed.
- The total annual turnover should not be more than Rs 100 crores in any year.
Why do we need Start ups?
- To reap the demographic dividend, India needs new companies.
- Instead of training and educating people to seek jobs, the government wants to create an environment where people can create jobs.
- In the era of LPG, the government can’t create enough jobs. The private sector has to come forward. Startups can help in creating those jobs.
- India has to correct its proportion of persons involved in different sectors by increasing percentage of people engaged in manufacturing & service sector and decreasing persons in Agricultural sector. This objective can’t be achieved by relying just on the traditional companies of big business houses.
Side Topic: Unicorn Club
- Unicorn Start ups are those StartUps whose valuation is more than $1 billion.
- There are 80 Unicorn Startups in India as of 2022, including Swiggy, Paytm, Byjus, Unadadamy, CRED, etc.
Startup Trends in India
According to Economic Survey (2023)
- States with the largest number of Startups are – 1. Maharashtra, 2. Karnataka, 3. Delhi, 4. UP and 5. Haryana
- Sectors in which Startups are coming up are – 1. IT Services, 2. Healthcare, 3. Education, 4. Professional Services and 5. Food Beverages.
Factors affecting new firm registration/startup in a given area are
- Physical infrastructure: It includes basic physical infrastructure such as roads, electricity, water, etc., and proximity to large population centres.
- Social Infrastructure: It includes education level identified through the proportion of the literate population and number of colleges.
- Government policies: It includes labour and taxation laws, subsidies provided in the form of cheap electricity, easier acquisition of land etc.
What government is doing in this regard?
1 . StartUp India
- Startup profits to be tax-free for 3 years.
- Compliance regime based on self-certification for labour and environmental laws.
- Setting up StartUp India hub to create a single point of contact for the entire Startup ecosystem.
- Easy exit policy for StartUps within 90 days.
- The government will try to link Industry & Academia so that both can work in synergy.
- Rs. 10,000 crores ‘Fund of Funds’ to promote Startups.
- Liberalised Fast-track mechanism for startup patent applications with 80% cost rebate.
- Encouraging Startups to participate in public procurement by easing norms of minimum turnover.
- Mobile apps and portals to register StartUps in a day.
- Public-private partnership (PPP) model for new incubators.
- Government to promote core innovation programmes in 5 lakh schools across the country.
Overall, Start-up India will turn Indian youths from job seekers into job creators. The initiative aspires to give India wings to fly above the sky.
2. Stand Up India
- The StandUp India scheme has been started to promote entrepreneurship among the Scheduled Caste/Scheduled Tribes (SC/ST) and Women entrepreneurs.
- Under the provisions of the scheme, approximately 1.25 lakh branches of Indian banks have been mandated to provide a loan worth Rs. 10 lakh to Rs. 1 crore without collateral to one Dalit or Adivasi member and one woman each for setting up greenfield enterprise in the non-farm sector.
3. Governance Reforms
- The government has reduced the plethora of regulatory procedures involved in creating StartUps.
- Bankruptcy laws have been amended according to world best practices to provide easy & safe exit. StartUp business is precarious, and even in Silicon Valley, 1 out of 10 StartUp is successful.
4. Groom Entrepreneurship via Schemes
- More “Incubation centres” have been set up.
- Scheme for Promoting Innovation and Rural Entrepreneurs (ASPIRE): To promote StartUps in rural and agriculture-based industries.
5. Encouraging innovation
- Under Niti Ayog: Atal Innovation Mission (AIM), Self Employment & Talent Utilisation (SETU) etc., have been started.
- Start-Ups Intellectual Property Protection (SIPP) scheme: Creates awareness about intellectual property and encourages Startups to go towards creativity and innovation.
- Uchhattar Avishkar Yojana: The government of India spends ₹ 250 crore/annum for fostering high-quality research among IIT students.
- Smart India Hackathon: Event organized by the Ministry of Education. College students are asked to solve the challenge faced by the public sector, industries or NGOs.
6. Help to make Capital available
- The government encourages more Venture Capitalists & Angel Investors to invest in India by making the regulatory environment conducive.
7. Faster Judiciary
- The government has created separate commercial courts have been established.
Critical Analysis – Potential of Startups in Extensive Job Growth
Favour Points are many as discussed above
- After finishing studies, many entrepreneurs who would have been looking towards the government to get jobs are now creating jobs and opening their own companies due to Startup India.
- It also helps to stop the Brain Drain.
- Examples of Startups giving Jobs
- Startups like OLA have provided jobs to thousands of youth as Taxi Operators apart from Tech Experts managing Logistics.
- Flipkart has created many jobs in Logistics, even in Tier 2 & 3 cities.
- Most of the Startups are in IT Sector. Hence, Startups are technology and skill intensive. These Startups value skill rather than mass employment. So one particular Startup can’t lead to the creation of many jobs.
- Government should encourage Startups in diverse sectors like
- Low Skill Manufacturing Sector: Apparel and shoes are employment-intensive and employ women.
- Agro Business Startups: Food processing by making contracts with farmers
- Startups are located in limited areas geographically like Bangalore, Delhi, Mumbai etc. Government should incentivize Startups in Remote regions like North East leveraging ICT and cheap labour. North East can be used to create Server Farms of Technology Companies due to cold climate (Tech Companies locate their Server Farms in cooler areas).
- It has led to the rise of the Gig Economy with no job security.
Challenges with StartUps
- Failure Prone: Even in Silicon Valley, just 1 out of 10 Startups succeed.
- Access to Funding: If Startups take funding from Venture Capitalists or Angel investors, the stake of the original entrepreneur is diluted, and Investors start to interfere in decision-making processes.
- Foreign ownership: Almost all prominent Indian StartUps like Ola, Flipkart, PayTM etc., are now presently owned by foreign companies and financial institutions like Softbank, Tencent, Alibaba, Walmart etc.
- Flipping: Indian startups are involved in flipping ownership. Flipping refers to the complete transfer of ownership, IPR etc., of an Indian company to a foreign entity. This process is predominantly undertaken to relocate to countries with more lenient tax and legal regulations, such as UAE or Singapore, and to access more affordable financing options.
- Fake Start ups: Established companies are promoting sister entities as Startups to avail benefits of the Startup Scheme.
- Overvaluation: Most Startups are overvalued.
- Startups concentrated in e-Commerce Aggregation: Most StartUps are concentrated in the e-commerce aggregation sector (Zomato, Flipkart etc.), whereas India needs more Startups in Agriculture, Manufacturing, Healthcare and Education.
- Bubble Creation: According to analysts, India is witnessing a bubble similar to the heady dot-com rush of 1999-2000 in Silicon Valley with too much money chasing too few ideas.
- Issue of Corporate Governance in Startups: There are issues wrt Corporate Governance in the StartUps exemplified case where Flipkart Co-founder Binny Bansal was accused of sexual harassment with the company’s women employees.
- Criticism of Startups by Raghuram Rajan: Raghuram Rajan believes that ‘there is no FREE LUNCH in the economy. When companies give free products or cashback to the consumer, it is ultimately paid by the government through tax holidays & subsidies given to that company.