View: Because innovation needs a full tank of support

Rapid digital growth, driven by the tailwinds of consumer behaviour change during the pandemic has accelerated the Indian e-commerce industry from $22 billion in 2018, to a projected $100 billion in 2024, further scaling to $300 billion by 2030. In the next decade, Indian startups will create over $800 billion in value — growing our GDP, and creating over 7 million high-skilled, white-collar jobs. There's no better time to encourage startups, and turbocharge their progress.

As VCs, we meet an average of 150 founders every month, and it’s clear that their talent and abilities are on par with their counterparts anywhere in the world. What would greatly empower them, and help propel their businesses into the stratosphere would be a founder-focused, highly enabling budgetary framework.

In many of our conversations, some wish-list themes have repeated themselves:

Fuel innovation.

It’s the lifeblood of startups, so entrepreneurs are looking to deepen their commitment to innovation, but are hoping for a longer timeframe to carry forward losses to enable them to invest boldly. Additionally, as the majority of startups use international digital cloud, advertising, and marketing services for core operations, the GST on reverse charges puts them on the back foot as compared to their global peers, when it comes to the total cost of doing business.

Make compliance easier. Reducing the frequency of GST and TDS returns to annual or quarterly filing would greatly improve the task of compliance, especially for fledgling startups — perhaps up to a certain threshold of funds raised, or revenue.

Enable greater ESOP participation. Altering the current practice, and making ESOPs taxable at the time of their sale rather than the time of exercise will attract greater participation from employees, while allowing for broad-based wealth creation.

Help Indian corporations stay in India. Easing up the burden of compliance, as well as the process of incorporating a business in India would help reverse the growing practice of startups incorporating overseas. In fact, bridging gaps in ease of compliance and tax arbitrage will encourage founders to incorporate their companies in India, resulting in greater wealth creation through capital gains, as well as no loss of domestic tax revenue.

Encourage the spirit of entrepreneurship. Simplifying the process of winding up a company will help founders exit their faltering businesses in the case of unfortunate circumstances, and help them regroup, and restart quickly.

Helping the Indian entrepreneurial ecosystem flourish will lead to quicker, and more dramatic leap-frog in GDP growth. However, as an investor, it’s disheartening to realise that barely 5-10 percent of capital invested in Indian startups is domestic. In comparison, China’s startups enjoy 60 percent domestic investment.

As a result, over 80 percent of all value created by Indian startups in the last decade has gone outside India. And until we find ways to reverse that, even the most stellar Indian startup success won’t really profit India, as much as a clutch of overseas investors.

Sharing some thoughts that could encourage more local capital participation:

Consider relaxing regulations that inhibit large domestic institutional capital in VCs and startups. In more developed economies, some of the largest institutions like pension funds, DFIs, sovereign wealth funds, banks, and grants are the biggest investors in funds and startups. Imagine the dramatic change in the landscape if the large domestic pools of capital like LIC, EPFO, ESIC and Pension Funds could invest deeply in the startup ecosystem.

A complex tax system, with higher LTCG on unlisted entities vis-à-vis listed shares end up guiding investors away from startups. A simpler, more equitable LTCG rate and structure would encourage them to evaluate the opportunity from a risk-reward perspective rather than tax optimisation. Hence, startups that create employment as well as IP, could see more capital available to them.

In closing, here’s a thought that will benefit entrepreneurs, investors, and the government alike — Indian digital public infrastructure and platforms.

It took the UIDAI to give all Indians a digital identity. UPI, with its 3 billion monthly transactions, has truly leapfrogged traditional payment networks, and made us the world leader in digital payments. And finally, apps like Aarogya Setu, which saw 50 million downloads in less than two weeks, have beaten the likes of Pokemon Go or Animal Crossing hollow.

In a world where entrepreneurs pay up to 30 percent to compete on platforms like the App or Play Stores, digital public infrastructure could be a game-changer. Let’s not forget that it was the introduction of UPI that enabled massive Indian fintech unicorns. The soon-to-be-introduced UHI seems set to spark a new generation of health service delivery. Similar investments in public digital infrastructure in key areas like education, marketplace, logistics and blockchain will unleash a wave of creativity and entrepreneurship.