Why Startup India is a Big Policy Failure

Under our Start-up India Action Plan & regressive taxmen, we may enter the record books with a 10/10 failure rate.

Remember, nine out of ten start-ups fail; but under our Start-up India Action Plan, and regressive taxmen, I am convinced that we shall find our hallowed place in the Guinness Book with a ten on ten failure rate.

(Photo: The Quint)

11:07 am (after a few minutes of mandatory Opposition ruckus) on Thursday, 1 February 2018; at Lok Sabha, Parliament of India, Nayi Dilli; New India is born; the mid-wife is India’s finance minister, about to make a historic speech.

Madam Speaker, I rise to present the Union Budget for Financial Year 2018-19. Unlike my worthy predecessors, I am not going to quote from Tagore or Ghalib or Iqbal or Subramanya Bharti. Instead, help me Lord Hanuman, I am going to quote from the legendary British pop music group, hugely in vogue during my college days in DU (aka Delhi University, for the ignoramuses), The Beatles:

He’s a real Nowhere Man
Sitting in his nowhere land
Making all his nowhere plans
For Nobody!

That’s exactly what we thought of India’s muddled, mixed up, mismanaged economy when we took office in May 2014. We promptly axed the most “iconic” symbol of our Nowhere Economy, demolishing the absurdly archaic Planning Commission. But then, unfortunately, for some nowhere reason, we just stepped back and allowed the State and status quo to overwhelm us…

Tryst With the Destiny of India’s Long-Suppressed Economy

Swivelling sharply to his left, the minister continued: May I beg my prime minister for his indulgent forgiveness, as I mouth another non-sanskaari (ie, heretical) reference? It’s a line from Tryst With Destiny, that obliterated speech delivered by that person whose name dare not be taken, in this very monument at the stroke of the midnight hour on 15 August 1947. “A moment comes, which comes but rarely in history, when we step out from the old to the new – when an age ends, and when the soul of a nation, long suppressed, finds utterance”. Allow me to substitute the words “a nation” with “an economy”. Yes, it is my intention to deliver a Budget speech today which shall liberate the soul of our long-suppressed economy.

I am sure I have by now shocked you into a numb awe or bubbling rage. But please hold your emotions. Today, I intend to completely renege on our accumulated economic “wisdom” of the past 70 years. As is their usual wont, finance ministers, at this point in the speech, launch into a litany of “achievements” and “outcomes” of policies and programs announced last year. I won’t do that – for one, there is hardly any worthwhile outcome to boast about; and two, I would like to begin with our most egregious policy failure. I believe confessing to such a perfidy will be cathartic; it shall allow us to launch New India – (again, swivelling to his left) – which you can see gleaming in the eyes of our revered prime minister.

New India is Still-born Under Start-up India

Now to deal with an embarrassment of riches – how do I select our most egregious policy flop? I am tempted to pick upon the treacherous missteps of GST, or the stasis in agriculture. But somehow, those are par for the course.

After much brainstorming and soul searching, I have zeroed in on Start-up India, where we, politicians and bureaucrats, decided to play “vee cee, pee ee” like kindergarten kids. For the uninitiated, “vee cee” is venture capitalist and “pee ee” is private equity. It was an end game with no exit, because governments cannot, and should not, be in the business of picking market winners.

Swivelling to his left one more time: The prime minister will forgive me, but I would like to rattle off a few stats. We launched the Start-up India Action Plan on 16 January, 2016. The idea was to invest Rs 10,000 cr over four years in a fund of funds to set the cat among those entrepreneurial pigeons who were struggling to get cash. Half way into the program, it’s clear that either our cat is lazy or the pigeons are comatose. Because we have disbursed only Rs 90.62 crore – yes, you heard me right!

Half way through, we’ve disbursed less than 1 percent of the corpus to 17 Alternate Investment Funds (AIFs), who in turn have invested Rs 337.02 crore in 75 start-ups. Even by our exalted standards, this is a staggering under-achievement. In a recent poll, over 33,000 start-ups said they have gained virtually nothing from this initiative.

Start-up India to Close Down India!

Worse, (jerking his neck to look at the benches right behind him) for all my worthy colleagues who believe in black magic, we seem to have become a bad omen for a once-thriving venture capital industry.

In 2016, nearly 7,500 start-ups registered in India; the very next year, they plummeted to less than 1,300, a six-fold drop.

Just in Bangalore, 1,316 start-ups in 2016 shrank to 224 in 2017. And here’s the tragic irony – this has happened despite the government floating at least 50+ sector-specific or agnostic schemes, including Single Point Registration Scheme (SPRS), Bank Credit Facilitation Scheme (BCFS), Pradhan Mantri Mudra Yojana (PMMY), scale up support for incubation centres, among several other acronyms in this alphabet soup.

The Path to Tax Hell is Paved With Good Intentions

Madam, we gave several years of a tax holiday on profits, hoping to thrill start-ups with our largesse. How innocent of us! What’s the point of a tax exemption when start-ups won’t make profits for 5, even 7, years?

Worse, we strangled them with upfront service taxes (if a tax exemption had to be given, it should have been on service, not income, taxes), forcing them to park nearly a fifth of their equity with us.

Quite apart from giving them risk capital, we took what they had away from them. As if that wasn’t enough, we capitalised their marketing and brand-building expenditure, further increasing the tax burden.

For the piece de resistance, I would urge you to log into Change.org and read a petition filed against our atrocious “angel tax”. We have become the judge, jury, and executioner here. We decide what an angel investor should pay for equity in a start-up. But if he values it higher than our medieval bureaucratic calculus, we slap a 30 percent tax on the difference. Got it?

Here, let me simplify it for you. Say an angel investor values a start-up at Rs 100, but our tax boys think it’s worth a fifty. Just like that, without any expertise in valuing risk, we conjure a number and say, “It’s not worth Rs 100, but only Rs 50”. And then what do we do? We merrily slap a notice on the start-up, saying you have “gained” an extra Rs 50 in income, so you better pay us Rs 15 in an entirely unheard of, unprecedented, and grossly silly tax regime impossible even in Timbuktu!

Small wonder our start-ups are beseeching on Change.org: “We request honorable finance minister to strongly review Section 56(2) and Section 68 with retrospective effect to help us focus in building our start-up”.

Remember, nine out of ten start-ups fail; but under our Start-up India Action Plan, and regressive taxmen, I am convinced that we shall find our hallowed place in the Guinness Book with a ten on ten failure rate.

What Happened When Uncle Sam Decided to Play Venture Capitalist

I shall rest my case with my third heretical reference today, this one from the big bad evil capitalist Uncle Sam. How do you handle a problem like Solyndra? It was a Silicon Valley start-up founded in 2004, to make solar panels without polysilicon.

The American government thought it could build a champion rebuke to cheaper Chinese rivals. So they gave it a government-guaranteed loan of $535 million (about Rs 3,500 crore) under the Energy Policy Act of 2005, which was their version of our Start-up India Action Plan. But their economic logic was as daft/stupid as ours, ie; the idea that the Yankee government could become a venture capitalist and “nurture” promising start-ups.

What followed was an unmitigated disaster. In February 2008, the price of polysilicon fell sharply, handing back a huge competitive advantage to Chinese rivals. Meanwhile, Solyndra’s management was accused of using its bounty of undeserved government cash to make “questionable spending decisions and wasting the loan money on state-of-the-art equipment that went unused”. Like many other start-ups scouting for capital, Solyndra was thought to be “exaggerating sales, exaggerating the nature of contracts, boosting growth predictions, and leaving out unflattering information with investors, the press and customers”.

A sharp pro venture capitalist could have caught the chicanery. But a leaden footed (even complicit) bureaucrat was outfoxed. Eventually, Solyndra filed for bankruptcy in August 2011, proving the brutal truth that a State which wants to play “vee cee pee ee” (VC/PE) shall come to inexorable grief. Governments do not have the wherewithal, acumen, or DNA to pick market winners. There is simply no escape from that merciless axiom.

Now Another 184 Paras to UN-MIX Our Economy…

Madam, now that I have made it this far without getting lynched, allow me to spend the rest of my 184-para speech to tell you how we shall completely UN-MIX our hopelessly garbled economy. May I also point you towards this brilliant piece on The Quint which gave me the inspiration…

And so the finance minister went on to give the rest of his speech that never was, and perhaps never shall be… alas!

Video Editor: Purnendu Pritam