False start

Given India’s continuing jobs crisis, the government has increasingly turned to entrepreneurship and start-ups as a possible way of meeting some of young Indians’ aspirations and employment demand that are not being fulfilled in the current system. This is wise, though it should be seen as a backup strategy at best and some aspects of its implementation are worrying. One major component of the government’s push in this direction has been the “Startup India” programme, which was meant to support new enterprises. The headline Startup India initiative was a Rs 10,000 crore fund of funds to be built up by 2025 and managed by the Small Industrial Development Board of India, or Sidbi. Yet, as this newspaper has reported, this initiative is slow off the ground. A corpus of Rs 1,315 crore has supposedly been built up, with only Rs 110 crore actually committed, and a mere Rs 5.66 crore disbursed. It is exactly two years since this fund of funds was announced in the 2015-16 Union Budget.

While this slow pace may not be unusual in government policy, it is quite out of place in the fast-moving world of start-ups. In fact, it underlines the fact that the ponderous processes and glacial pace associated with the Indian bureaucracy can hardly serve as a support base for incubating dynamic new enterprises that will transform India’s economy and provide employment opportunities. The basic question will have to be asked once again: Why is the government in the business of selecting and promoting start-ups at all? This is clearly not its domain of competence. Certainly, it should create an enabling environment, but that will mean reducing red tape and bureaucratic interference, while creating the infrastructure, digital and physical, that connects possible start-up founders to the world. Trying to be a funder, instead, means that the government is incentivising rent-seeking among young firms, providing opportunities for patronage and favours. That is a dangerous proposition, it might undermine the sources of the Indian start-up ecosystem’s strength.

The idea that the government must direct finance specifically to start-ups will lead to other inevitable distortions. It has already been argued by officials, for example, that the Life Insurance Corporation of India should increase its commitment of funds to start-ups. Is that really how Indians’ savings should be invested? What of LIC’s fiduciary duties? Should it not be looking for stable investments, especially at a time when several stakeholders no longer exhibit the boundless enthusiasm that was visible in the initial stages when the Indian start-up machine was being built?

The government may need to revisit its policy assumptions in the light of the slow progress that Startup India has made. Any system that requires the government to fund start-ups is open to exactly the same problems that plague public financing of the private sector elsewhere: Cronyism, misallocation and delays. The government should remember that, instead, improving the ease of doing business for small companies is paramount. This includes streamlining their access to capital by increasing the role played by private finance in the country and reducing, not increasing, the size of the state-led financial sector.

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