Budget 2021: Govt needs to unlock potential of domestic capital for Aatmanirbhar Bharat

2020 was a catalytic year. It was the year when large and small business faced multiple challenges. Some missed a step while others leveraged and grew their businesses exponentially. The Indian startup ecosystem was no different and many entrepreneurs seized the new opportunities thrown up and quickly innovated. The year only brought to the fore the strength and vibrancy of the Indian entrepreneurial ecosystem.

Innovating, starting up, investing, fund raising, and exits didn’t stop. We saw unicorns and decacorns emerge, good companies raising money from India and overseas, and investors harvesting returns! And this has continued in 2021 with the year already throwing up its first unicorn!

But, while the Indian startup ecosystem has revealed has the most talented and innovative minds building companies, it is critical for us to unlock India’s domestic capital — echoing Prime Minister Narendra Modi’s call for an Atmanirbhar Bharat. The government has already established the Fund of Funds and another Rs 1,000 crore for startups was announced by PM Modi on January 16.

Along with private capital, there is a need to unlock domestic institutional capital. We, for instance, need insurance companies to be able to invest in startup funds — at least three to five percent of their investible corpus. This will need a slight tweaking of the IRDAI Act and then we will have govt and privately owned insurance companies investing.

There is a need to enable pension funds to invest three to five percent of its investible corpus in funds. This will have a catalytic impact as it did in the US when pension funds invested in the early-stage funds. These funds are aligned with the need of startups — both have long gestation investment periods, but pension funds have low returns and a small investment in startup funds, could well provide the kicker to their returns.

Organisations like NABARD, which focus on food and agri, could well be enabled to launch a fund, say of Rs 5,000 crore, to invest in the agri space to bring in the much-needed innovation and enable higher productivity, quality, and increase jobs in a sector, which is the backbone of the Indian economy.

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It is now critical for domestic private capital to be unlocked, which has started to invest in startups, either directly or through funds. However, we need to create an enabling framework for HNIs, Family Offices, and Corporates to invest in startups to create valuable companies and jobs.

We do hope the Budget clears the runway for domestic capital to flow into the ecosystem, along with some long pending recommendations — like aligning capital gains tax of unlisted shares with listed shares — at least for unlisted companies invested by SEBI registered funds, making Indian funds competitive to foreign funds investing in India, simplifying M&A exits, improving ease of doing business by reducing the number of returns and approvals that startups need to comply with, amendments to tax on ESOPs to attract high quality talent to startups, and more.

India is at a cusp; it can well become the epicentre of innovation and entrepreneurship for the world. And overseas investors are interested. However, the Indian regime and frameworks for foreign investors make us uncompetitive.

Overseas investors will be attracted with simplified approval processes, efficient process of remittance of returns, competitive costs of investing in Indian funds, simple norms for exits of unlisted shares to overseas investors, etc.

By just creating an enabling framework hinged on simplicity, transparency, predictability and speed will make India “The Destination for Startup Investing”.

Digital push

The pandemic has given a big push to technology enablement and 2020 stimulated digital transformation and innovations in several sectors including education, healthcare, ecommerce, agriculture, and so forth, to a large extent. This has brought in a transformational change to consumer behaviour.

It has now brought about new needs for breeding high quality technology talent for skills like AI, ML, etc. And hence, there is a hope that the government will enable skilling and reskilling talent in these critical areas.

Further, the pandemic also showed the need for India to ramp up its healthcare system, including becoming aatmanirbhar for medical devices, equipment, infrastructure, per se.

All of this will not only need funding but also institutional frameworks to ensure the country not only builds competencies and capabilities to fulfil these needs, but these are of the highest quality.

The headline of the wishlist for the Budget is that it brings an “enabling framework” to build a highly innovative and fast growing ecosystem, which makes India not only self reliant, but one which solves the real problems of the world as well.