Budget 2019 Must Find Ways to Strengthen the Entrepreneur Sector
A strong policy and infrastructural support, a digital economy and ease of doing business are factors that have propelled China to become the world's second largest producer of 'unicorns'
The NDA government has received a mandate from the people to continue its economic reform agenda. Major indirect taxation reform in the form of GST, a greater formalization of the economy, and decisive action against black money are measures that have helped bring structural changes to the India economy in recent years. However, these hard-hitting measures have also contributed to the slowing down of the economy as indicated by the latest statistics.
The GDP growth for the last quarter of the fiscal year 2018-2019 was estimated at 5.8per cent, which is the lowest it has been in the last five financial years. Similarly, widespread unemployment is another major concern bedevilling the economy. As Finance Minister Ms Nirmala Sitharaman prepares to announce her first Budget, there is an imminent need to provide a positive stimulus to the economy along with concrete measures to create more jobs.
For this reason, the industry expects the government to announce a budget that will boost entrepreneurial energy in the economy. New businesses have the potential to disrupt the economy, conduct more innovation and engineer new avenues for jobs. The budget must, therefore, focus on boosting entrepreneurship which in turn will revive economic growth and create employment.
Innovation and entrepreneurship have been the bedrock of the growth story of our powerful neighbour China which has emerged as the world’s second-largest economy. A strong policy and infrastructural support, a digital economy and ease of doing business are factors that have propelled China to become the world’s second-largest producer of ‘unicorns’. China’s very own Baidu, one of the largest AI and Internet-based companies in the world rivals Google. Alibaba looks Amazon in the eye. We must take a leaf or two out of China’s book if want to engineer an entrepreneurship revolution in India.
Here bare few sops the entrepreneurial sector expects from the government in this budget:
Get rid of Angel Tax: We all know how difficult it is for startups to avail funds and investments. The Angel Tax is seen as punishing the startups that are able to do that! Angel Tax is a tax that startups have to pay on the investment they have received in case the company’s valuation of its equity doesn’t match with the tax authority’s assessment of the same. In such cases, the IT department considers the ‘difference’ in valuation as a ‘taxable income’. Thankfully, in the Interim Budget announced in February this year, the government provided an exemption from Angel Tax to companies raising a capital of up to Rs 25 crore. However, we expect an angel tax holiday in this budget. This is important considering that a lot of disruptive innovations and job creation comes from the startup ecosystem. The startups must not be punished for generating capital.
While much has been done over the past 5 years to ease the process of starting up, much more needs to be done in terms of easing the compliance of regulatory mechanisms and reducing entrepreneurs’ points of contact with the bureaucracy. Ushering in a single window clearance route that provides an end-to-end solution for all regulatory and procedural compliances can make the entire process much simpler. Not only does it encourage compliance, but it also reduces unnecessary hassle and costs for entrepreneurs. Making the regulatory process easier will be most beneficial to entrepreneurs in small-town India who lack knowledge, exposure and understanding of starting businesses. It will also provide a big boost to small businesses. Easing regulatory norms will provide a significant boost to ease of doing business in the country and propel entrepreneurs to become an engine of growth.
Boost Incubation Support
We discussed above how policy support to entrepreneurs has helped China’s startup sector big time. Notably, China is home to 115 university science parks and over 1,600 technology business incubators that offer mentorship, regulatory/legal advice as well as office spaces to budding entrepreneurs. In a country like India where digital literacy is still confined to a limited population, knowledge about regulatory requirements for starting up is almost absent and access to capital is still a major problem, we need a lot of incubation support for budding entrepreneurs. Ideally, incubation centres must be set up at all government Universities across the country so that a strong network is developed between students, residents, alumni as well as industry and there are ample opportunities for mentorship and legal advice for anyone seeking to start up.
Streamline the GST Structure
While the indirect taxation reform in the form of GST has helped in greater formalization and structural reform of the economy, the taxation slabs still seem to be a work in progress. A number of goods and services that are crucial for entrepreneurs are taxed in the highest brackets of 18per cent and 28per cent which is counter-intuitive for economic growth. For example, GST at digital technology products must be brought down from the current 18per cent to allow startups to avail these services at lower costs. Also, the input tax credit mechanism needs to be made smoother to allow companies to avail their refunds faster. It is to be underlined that for smaller organizations and startups, these refunds are a critical part of their working capital.
Boost Entrepreneurial Energy in Small Town India
While India’s major cities are buzzing centres of entrepreneurial energy, we need greater democratization of this resource across regions and the urban-rural divide. This is critical to creating widespread employment. Most companies like to start operations in big cities to be able to avail the wide consumer market as well as the better physical infrastructure.
The government must consider offering incentives to entrepreneurs who chose to establish their startups in smaller towns. Incentives may include tax benefits and funding help to such small businesses. Boosting physical infrastructure across the country in the form of better roads, improved connectivity, better power and water supply will also work to attract more entrepreneurs to non-urban centres.
Exports are perhaps the most vital source of income for any growing economy, especially for one like India which imports energy. The deficit in our country's balance of payments has continued to grow. The current-account deficit stood at $16.9 billion or 2.5 per cent of the gross domestic product in the December '2018 quarter, compared with $13.7 billion or 2.1 per cent a year ago on the back of widening trade deficit worth $49.5 billion.
The only way out here is to substantially reward and incentivize exports of Indian products. The Make In India and Digital India initiatives have brought in awareness and a measure of confidence amongst the organized Indian entrepreneurs that this Government is serious to make India into a manufacturing hub and bring in greater transparency in legislation, but along with manufacturing, a strong market for Indian made products has to be created across the globe.
What we need now is a conscious and serious push by the Government to provide India Inc with sufficient incentives to manufacture more and more export-worthy goods and services. The Chinese government throughout the nineties and all the way till the early 2000s continually allocated massive budgets to incentivize exports, while boosting domestic manufacture and the results achieved by them are here for all to see! A strong exports-oriented policy will bring in substantial forex reserves to the country's treasury, which is a need of the hour for India.
President of India Shri Ram Nath Kovind stated in the Parliament recently that the government has set a goal of having 50,000 startups in the country by 2024. While it sets a highly positive direction for the economy, this goal has to be backed by the initiation of favourable policies that make the process of converting a potential business idea into a flourishing enterprise smooth. The policies must reward entrepreneurs not make the process of starting up arduous for them, for it is new businesses that create jobs in the economy and become drivers of growth. This Budget offers a good opportunity for the government to display positive growth-centric leadership by boosting the entrepreneurial sector.