India’s Startups Thrive Despite Pandemic

Flourishing sector provides bright spot in virus-crippled economy

By: Neeta Lal

Indian Prime Minister Narendra Modi’s much-criticized Make in India program, which has had desultory success, appears to be gaining traction in India’s startup ecosystem, with new avenues of growth and opportunities emerging with rapid digitalization and tech adoption providing the tailwind.

At 12,500, India has the third-largest number of startups in the world after the US and China. These enterprises’ impressive growth and the future potential of the country’s startup ventures merit focused attention in a brutally competitive economic climate worsened by the pandemic, say experts. According to the National Association of Software and Services Companies, startups received US$11.5 billion in new funding across 924 transactions, a 14 percent surge since 2019. Overall, 1,600 tech start-ups and 12 unicorns, the highest added in a single calendar year, debuted last year while the tech start-up base expanded by 8-10 percent year-on-year.

Economists say the growth trajectory startups augurs well at a time the Indian economy is facing headwinds from soaring unemployment, recessionary trends and skyrocketing business losses stemming partly from the Covid-19 crisis, which has sickened 11.1 million people, the second-highest number in the world after the United States, and killed 157,350, the fourth highest. The crisis was exacerbated by a sudden national lockdown last May, sending tens of millions of people scrambling back to their home villages where medical care was spotty. Traffic accidents produced chaos.

According to the National Statistical Office, gross domestic product GDP contracted by a record 7.7 percent during the 2020-21 fiscal year with the pandemic playing havoc with key manufacturing and services sectors. Unemployment surged to 38.7 million in December compared to 27.4 million in November, an uptick of 11.3 million according to the Center for Monitoring Indian Economy, an economic think tank.

Finance Minister Nirmala Sitharaman in her budget speech last month announced more measures to buttress the startup ecosystem. Accelerating start-up growth by allowing incorporation of one-person companies, with no restriction in paid-up capital and turnover, is one such initiative. Entrepreneurs say this will help them set up companies as solo enterprises without forcing them to look for a co-founder, a previous requirement.

The government is also extending tax holidays for start-ups by one more year to help entrepreneurs tide over cash flow and investment issues. Other budget incentives include simplification of regulations for early stage start-ups to receive investments, as well as a doubling of expenditure allocation towards micro small and medium enterprises to US$2.5 billion in FY22, a 20 percent annual increase.

“The pandemic has been a steep learning curve for all of us and startups are focusing increasingly on growth through operational cost optimization measures and improving bottom lines,” said Prateek Agnihotri, CEO of Starwell, an education-based startup located in NOIDA, Uttar Pradesh. “That recent unicorns have a more diverse background, are globally focused, and have B2B offerings indicate the savviness of the Indian tech startup industry.”

Other government initiatives have helped. Modi recently announced a Start-up India seed fund worth US$150 million to support budding start-ups. He asserted that the government’s goal is to strive for “turning unicorns start-ups of the country into global giants.” Modi also emphasized that the biggest USP of the Indian start-up world is its disruption and diversification capacity, bringing revolution in diverse sectors with unprecedented scale and substance. “The greatest feature of this ecosystem is that it is guided more by passion than pragmatism. This 'can-do' spirit is evident in the way India is working today," he added.

Industry veterans feel such measures couldn’t have come a day too soon.

“With the slowing down of the economy and lack of funding, the sustainability of startups is a big concern,” Sunanda Verma Bhatta, co-founder of The Daftar, a co-working space startup, told Indian Express. Provisions like the extension of tax holidays and exemption from capital gains taxes will help to boost the investment in the startups. Lowering the compliance burden, reducing residency requirements, and setting up of seed fund corpus are a welcome move to encourage new startups.”

One of the most vibrant segments in the startup sector is education as necessity mothers invention. Covid-19 has forced schools and colleges to close, with school administrations struggling to hold classes physically even as children have suffered due to lack of academic and pedagogical exposure. This has opened up new frontiers for edtech startups like Byju’s Unacademy, Khan’s Academy, Vedantu, Toppr, Cuemath that are mushrooming in every part of the country to meet the rising demand.

Tech startups too, have witnessed exponential growth on the back of the country’s technology revolution in the last decade. “Tech startups have been at the forefront of digitalization of both Indian consumers and enterprises through revolutionary products and services delivered through disruptive business models. This has facilitated the creation of stellar innovation-led organizations which have displayed the flexibility to emerge stronger from the crisis and thrive in the new normal,” said Ravi Bijlani, a tech consultant with a New Delhi-based multinational organization.

Entrepreneurs add that by focusing on enhancing customer and employee experiences to accelerate business traction has been key to their success. “Add to this the fact that Covid-19 also prompted startups to look at global markets a lot sooner than they would have, and leverage technology to capture new opportunities at minimum effort and it’s clear why they did well even during a turbulent period,” Bijlani said.

The accelerating digital economy is further bolstering tech startups. Debjani Ghosh, the president of the National Association of Software and Service Companies, an Indian trade association, the country’s US$1 trillion digital economy vision is anchored around priority themes such as healthcare, jobs and energy for all, quality education, skilling and e-governance for the future which are creating sustainable solutions across sectors.

However, the startup sector would do well to be mindful of some salient points, analysts say. Whittling down their dependence on foreign capital investments, which is currently very high, is one such factor. Starwell’s Agnihotri said it is vital to infuse domestic capital into companies.

“With corporate participation surging in the startup ecosystem, there’s a need to accelerate it further to compete with global ecosystems,” he said. “Institutional support is vital to enable revenue generation for startups from domestic and global markets.” Others feel that apart from schemes, and the push provided by the budget, the government also needs to step up its incentives and impetus for existing startups who are struggling to stay afloat in the current volatile business environment. This, they add, will be key for the industry’s future growth.

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