What India’s electoral verdict means for the startup ecosystem

On June 4, India’s electorate delivered a surprise verdict, returning the ruling Bharatiya Janata Party (BJP) led National Democratic Alliance (NDA) to power, but at the helm of a coalition government that may demand a more consultative and deliberative approach to policy making than the BJP has been accustomed to for the past ten years. 

Coalitions make for messy politics. The concern across quarters is that while a consultative approach is desirable to engender a healthy democracy, the NDA may be compelled to slow down key policy measures, especially those with the potential to stimulate medium-term growth, to accommodate the regional interests of its alliance partners.

The composition of the 30-member Modi 3.0 cabinet that took charge soon after the new government was sworn in reflects the BJP’s endeavour to strike a balance between continuity and conciliation. The Modi 2.0 cabinet ministers for finance, home affairs, defence and foreign affairs have retained their portfolios. The ruling party also retained other key ministries including commerce, road transport and highways, information technology, and agriculture. Only five out of the 30 cabinet seats, including civil aviation, small and medium enterprises and food processing have been allocated to allies.

For India’s startup and venture capital ecosystem, the election outcome is significant to the extent that a stable government focused on pushing through policy initiatives that sustain the economy’s growth momentum will further the creation of medium and long term value. 

The upcoming Union Budget 2024, scheduled to be unveiled later next month, is expected to lay out the roadmap for Modi 3.0. While projecting GDP growth at 8% for FY25, industry representative body CII said, “The growth estimate hinges critically on addressing the unfinished reform agenda on priority…” outlining a 14-point agenda for the government.

Some of the key recommendations in the agenda include continuing with a capex-led growth strategy; raising health and education expenditure to 3% and 6% of the GDP respectively by 2030; the generation of livelihood at scale which will in turn boost consumption; an action plan for climate change; and accelerate tax reforms.

It also noted, "Many of the next-generation reforms lie in the state and concurrent domains and require tough consensus building to take them forward. Inter-state institutional platforms on the lines of the GST Councils can be created.”

Continuity in policy-making and next-generation reforms is important for the startup and venture capital ecosystem in the context of the downturn that has been raging for over two years. From a peak of $35 billion in 2021, an outlier year by all accounts, startup funding in 2022 plunged to $24 billion in 2022 and slid further to $10.8 billion at the close of 2023. 

Access to growth capital has been particularly challenging. “Several shifts observed in 2022 continued through 2023. Mega-rounds plummeted by almost 70%, from 48 to 15. Several scaled start-ups chose to defer fund-raising since the advent of the funding winter–this drove consecutive and substantial declines in the emergence of unicorns, reaching pre-2019 levels.

In contrast, small and medium deals (less than $50 million) witnessed milder compression, declining by about 45% from 1,501 to 852. This resilience signalled investor optimism for India’s medium-to-long-term prospects,” Bain & Co said in the India Venture Capital Report 2024.

The first quarter of 2024 has seen an easing in capital flows and differentiated businesses have been able to selectively access growth capital. Lightbox portfolio companies Zeno Health, Amaha and Bombay Shirt Company raised significant follow-on capital rounds from new investors as these businesses demonstrated their ability to build a roadmap to profitability.

In the context of the recent election outcome, the ongoing downturn holds an upside for startups. It has made businesses grounded in real-world metrics far more resilient. The downturn has compelled companies to focus on metrics that lead to profitability rather than unrealistic valuations. 

Having weathered the worst over the past two years, for startups and businesses in general, the political environment isn’t expected to be a major determining factor for how long-term value is created. India is no stranger to coalitions and past records offer ample evidence that coalition governments have been as effective as majority-led governments in fostering the economy’s growth agenda with bold reforms.

The 1991 PV Narasimha Rao-led minority coalition, for example, was instrumental in pushing through liberalisation and privatisation reforms. Governments, coalitions or otherwise, have been pragmatic in injecting enough stimulus to propel the economy towards its stated goal of becoming the world’s third largest economy within the decade. The next five years will be no different.

Sandeep Murthy is partner and managing director of Lightbox, a Mumbai-based venture capital firm.