Growth and Challenges of Indian Start-up Ecosystem

By: Mr Prashant Pitti, Chair, Startup Committee, PHDCCI

India has the third largest start-up ecosystem in the world after US and China, with the number of start-ups consistently increasing in the country since the launch of Start-up India Initiative in 2016. As of today, India has around 1 lakh DPIIT-recognized start-ups. These start-ups are not confined to IT/services and knowledge-intensive sectors alone but are rapidly growing in new and emerging areas also i.e. climate change, sustainability, EV, health, Fintech, agri-tech and millets, E-commerce, eco-tourism, recycling, bio-fuels and solar-energy.

The large demographic dividend, growing middle class, business reforms, ease of doing business and availability of large pool of engineering and technical graduates in India has created a conducive environment for setting up increased number of start-ups in diverse fields in the country.

In addition, public policy mechanism has been playing active role in catalyzing Indian start-up ecosystem, including an array of policies ranging from funding of startups, marketing, international exposure to products produced by Indian start-ups and income tax-exemption for first three years. Programs like Fund of Fund for Start-ups, Credit Guarantee Scheme for Start-ups, e-Market Place (GeM) Startup Runway, Seed Fund Scheme, and International market access have played significant role in building solid
foundation of the Indian startup ecosystem. Such policies have increased the confidence in government support and boosted business sentiments to invest in Indian start-ups.

The success of these start-ups has large spillover effects in terms of generating employment for youth, providing them with flexible working environment and enhancing their income-levels, thus making them ‘job-creaters’ rather than ‘job-seekers’. The sustained success of these diverse Indian start-ups can actually be a game-changer and take forward the growth trajectory of the Indian economy to new heights.

Indian startup ecosystem has registered 64 percent increase in employment in FY22 compared to average of last three years. Though, some recent slowdown is observed in employment generation in the Indian start-ups owing to effects of global headwinds and the consequent decline in funding. These effects are likely to fade away as the recovery process fastens and new investment players become active, thus indicating the need to unlock domestic capital and adopting successful fundraising strategies for venture-
capitalists. However, start-ups in E-commerce, Fintech and software services are performing fairly well in post-covid times.

Though there are immense opportunities for growth of start-ups in India, there are challenges as well i.e. lack of adequate funding, dominance of few profitable start-ups in market, interest of investors in funding large established profit- making start-ups, flipping i.e. companies getting headquartered in overseas markets owing to better tax structure and recent exit of large number of senior executives from startups and joining traditional Indian companies due to cut in growth projects and slowdown in funding. In addition, uneven allocation of funds by some schemes might affect the balanced growth of start-
ups across all Indian States.

The Government is committed to overcoming these challenges. It has endeavored to tailor its policies in a way so as to facilitate reverse flipping, simplification of Employees Stock option policy, and streamlining the corporate laws as those existing in Singapore, UAE, Netherlands where no withholding taxes are imposed while distribution of dividends to residents and non-resident shareholders.

Also, Government needs to encourage the startups which can cater specifically to the local needs of the communities coupled with realization of potentialities of grass-root innovations through sustainable and cost-effective solutions. These start-ups have large employment generation capacity for the local residents especially for youth and women of those areas.

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