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Context:
India is now home to the third largest startup ecosystem with more than 1.4 lakh Department for Promotion of Industry and Internal Trade (DPIIT)-registered startups.
Growth and Status of Startup Ecosystem in India:
New additions:
- Findings by Economic Survey of India 2024-25 shows:
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- India adds more startups per day than any other country.
- One unicorn is added every 20 days, which is supported by Higher Education Institutions (HEIs) and the development of Tier II/III cities.
Employment opportunities:
- Since 2017, DPIIT-recognized startups have created over 15.5 lakh direct jobs. (DPIIT annual reports)
- In 2023, startups generated 3.9 lakh jobs, a 46.6% year-on-year increase.
Economic contribution:
According to a 2024 Confederation of Indian Industry (CII) Report, Indian startups contributed $140 billion to the economy in FY23, nearly 4% of GDP, compared to 8.6% in the UK. The US startup ecosystem created 37 lakh jobs in 2022.
Drivers for growth of the startup ecosystem in India:
Digital Infrastructure Growth:
- According to data from the National Payment Corporation of India(NPCI), as of August 2024, the Unified Payments Interface (UPI) has facilitated transactions worth over ₹20 lakh crore, significantly contributing to growth in the digital economy.
- Data charges are the lowest globally (₹6.7 per GB in 2023). Low data rates and widespread internet and cell phone usage offer cost-effective customer acquisition opportunities.
Vibrant Demography and Rising Graduates:
- India is the most populous country as of 2023 and will remain youthful until 2070.
- As per All India Survey on Higher Education (AISHE) 2021-22, Over 4.3 crore students are enrolled in 1,168 universities and 45,473 colleges.
- Annual graduation rates are increasing, with a projected 1.75 crore graduates by 2035 and 2.4 crore by 2050.
Government policies:
- Government capital expenditure and telcos-led internet penetration have fueled startup growth.
- The Indian government's various initiatives such Startup India and Stand Up India further supported the growth of the startup ecosystem in India.
- By June 30, 2024, a total of 1,40,803 startups have received accreditation, benefiting from tax incentives and compliance support.
- Under the Fund of Funds Scheme (FFS), ₹7,980 crore was invested in 99 Alternative Investment Funds (AIFs) by December 2022.
Mature Financing Ecosystem:
As per DPIIT annual reports, In the first half of 2024, Indian startups secured $4.1 billion in funding, a 4% increase from the second half of 2023. The growth in the domestic economy and global investor interest has diversified funding sources.
Industry-Specific Opportunities:
- As per India Brand Equity foundation reports( IBEF), The aerospace sector received investments totalling US$124.7 million by 2023.
- Ex. The successful launch of Skyroute Aerospace’s Vikram-S rocket in 2022 has opened opportunities for private sector involvement in space.
Growing Domestic Market:
India’s expanding middle class, projected to add 140 million households by 2030, offers significant opportunities for startups, with the market estimated to be valued at around US$100 billion by 2025.
Challenges
Lack of Entrepreneurial spirit:
- In leading economies, a higher percentage of students pursue entrepreneurship post-education (16% in the US, 5% in the UK, 4% in China).
- As per Niti Aayog, Only 2% of graduating students from top Indian HEIs pursue entrepreneurship.
- If 5% of Indian students chose entrepreneurship, it could result in 5 lakh new entrepreneurs annually, with about 50,000 startups surviving and creating significant job opportunities.
Regulatory Hurdles:
Startups face significant operational challenges due to complex regulations, such as ongoing debates over ride-sharing companies under the Motor Vehicles Act and compliance issues stemming from the Digital Personal Data Protection Act, of 2024.
Talent Retention:
Despite the large number of graduates, about 60% of Indian tech professionals are willing to move abroad, which creates competition with multinational corporations and international job markets, which impacts startups' ability to retain talent.
Infrastructure Gaps & Uneven Funding:
As per Telecom Regulatory Authority of India Consultation Paper on Digital Inclusion in the Era of Emerging Technologies, Internet penetration in rural areas is only 37%, limiting market potential. Additionally, women-led startups encounter a significant funding disparity, even though urban areas have a 71% internet penetration rate.
Scaling Issues:
Approximately 90% of startups fail within five years due to difficulties in scaling operations and entering new markets.
Way ahead:
New HEI Success Metrics:
- Traditional HEI success metrics focus on high-paying job placements. A new metric should include the creation of entrepreneurial ventures by students and researchers.
- Integrate higher education with entrepreneurship through systematic pedagogy and research.
Industry-academia linkages
- Industry-academia linkages are crucial for nurturing and funding ventures.
- The US’s success in tech transfer and R&D expenditure highlights the importance of such linkages.
Enhanced Tax Incentives:
Extend tax benefits for startups from three to five years and offer additional incentives for deep-tech ventures. This strategy is inspired by Israel’s tax incentives for its technology sector.
Changing perspective of HEIs:
There is a need to transition HEIs from being viewed as a social sector to a strategic asset.
Linking education, entrepreneurship, and employment:
Shift from linear to synergistic growth where education, entrepreneurship, and employment are interlinked for exponential economic advancement.
Robust IP Protection Framework:
We need to simplify the patent application process and implement fast-track examinations for startups.
Government Procurement Boost:
Require a portion of government procurement to be sourced from startups, similar to the US policy where 23% of federal contracts are allocated to small businesses, thus creating substantial market opportunities for startups.
Important links
Startup-ecosystem in India
Angel Tax
Start-up India
Unicorns in India and implications
Startup India seed fund
Sources:
https://indianexpress.com/article/opinion/columns/making-india-a-start-up-nation-9562903/#:~:text=other%20leading%20economies%3F-,If%205%20per%20cent%20of%20Indian%20students%20opted%20for%20entrepreneurship,indirect%20and%20gig%20jobs%20annually.
https://www.startupindia.gov.in/content/sih/en/international/go-to-market-guide/indian-startup-ecosystem.html
https://www.livemint.com/companies/start-ups/from-2014-to-2023-how-the-startup-ecosystem-is-thriving-in-india-explained-11705547737333.html
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PRACTICE QUESTION
Q.Discuss how the startup ecosystem of India is significant for India’s economic growth and innovation. Analyse how current government initiatives aimed at supporting them are effective at nurturing the startup ecosystem in India. (250 words)
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