Indian Start-up Ecosystem

Important for

Prelims: Indian Economy

Mains:
General Studies III

Indian Start-up Ecosystem

  • Due to interest rate hikes of global central banks and the ongoing banking crisis in the US, startups are facing difficulties in fund-raising.

What is a Start-up ?

  • A startup is defined as an entity that is headquartered in India which was opened less than 10 years ago and has an annual turnover less than Rs 100 crore
  • It is an entrepreneurial venture in the early stages of operations, typically created for resolving real-life problems.
  • Unicorn – It is a term given only to startups who have a valuation of over $1 billion.
  • Decacorn – The startups that exceed the valuation of $10 billion are grouped under the term called decacorn (a super unicorn).
Indian Start-up Ecosystem

Importance of Start-ups

  • Employment creation – The startups are enabling more jobs than large companies or enterprises thus curbing the unemployment problems.
  • New investments – Many multinational corporations are now outsourcing their tasks to small businesses in order to focus on their core competencies.
  • Research and Development (R&D) – Start-ups heavily subsidize R&D as they frequently have to deal with high-tech and knowledge-based services.
  • Better GDP – It is feasible to increase revenue domestically by promoting and supporting more start-up initiatives.
  • Democratizing the technology benefits – Fintech startups are reaching out to remote areas with their solutions and making financial solutions easily accessible in tier 2 and tier 3 cities.

Reasons for Shortage of Funds

  • Interest rate hikes of global central banks
  • Steep correction in valuation of technology stocks
  • Increased risk aversion due to ongoing banking crisis in the US and Europe
  • Excessive liquidity created during the pandemic
  • High borrowing cost impacting profitability, leading to massive lay-offs in this segment
  • Global venture capital investors who have suffered large losses in their portfolio are unlikely to provide much funding support.

Ways to Support Start-up Ecosystem

  • Policy support – The high net worth investors, investment funds and companies who have displayed a willingness to invest in fledgling companies should be channelized.
  • Fiscal and regulatory policies – Investors need to be encouraged with suitable fiscal and regulatory policies to support the segment in periods when global funding dries up.
  • Abolition of Angel tax – Angel tax, which requires start-ups to pay income tax on capital received at a premium to their fair valuation should be abolished, since it deters fund raising from angel investors.
  • Alternate Investment Funds – Investment into Alternate Investment Funds which invest in start-ups could be incentivized through a tax concession.
  • Capital Gains tax rate – Paid by resident individual investors on their start-up investment can be lowered.
  • Overseas Exchanges – Indian startups should be allowed to list on overseas exchanges.

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Indian Start-up Ecosystem
Indian Start-up Ecosystem
Indian Start-up Ecosystem
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