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Budget 2024 – Empowering Startups and MSMEs, and Doubling Down on DPIs and R&D

This 2024 Budget coming post-election has aroused the most curiosity since the budget of 2014. It is for two reasons that this 2024 Budget is significant as we work towards a Product Nation: Reason 1 is for this budget’s Innovation and related public spending on private innovation and Reason 2 is for the next-generation reforms to create a simpler regulatory environment. It is heartening to note that both items are priority areas.

The continuity of the interim budget announcement of 1 lakh crore for private R&D funding is encouraging enough for the startup ecosystem. Under the Vishvamitra initiative, iSPIRT has been pursuing funding at scale for private sector-led R&D and its commercialization. The announcements of funding research in highly sensitive strategic areas such as Small Modular Nuclear Reactors and setting up a 1000 crore venture capital fund for the Space economy have been on our list of initiatives to advocate for and it is heartening to see the Government address R&D investments in geopolitically sensitive areas. 

The Finance Minister announced, “We will set up a mechanism for spurring private sector-driven research and innovation at commercial scale with a financing pool of 1 lakh crore.” What and how this mechanism will be set up will be critical for enabling R&D in the country to achieve Viksit Bharat 2047.

Among iSPIRT’s top  initiatives is the Stay-in-India checklist, and the request to remove the “Angel Tax” for all classes of investors. The removal of angel tax is the biggest highlight of this budget for the startup ecosystem. The announcement comes after decades of struggle and persuasion. Finally the government has recognised the role of startups in generating employment and has acted in a positive direction. 

There is a huge amount of work pending to reform Ease-of-Doing Business (EoDB) if India is to achieve the set objective of Viksit Bharat 2047. The Finance Minister stating an  intent to “formulate an Economic Policy Framework” to set the “scope of the next generation of reforms for facilitating employment opportunities and sustaining high growth” perhaps speaks about the government’s thinking on it.  

The government’s intention to involve states in ease of doing business (EoDB) efforts is also a very welcome step. We hope the next moves are swift and the government seriously attempts to at least be in the top 10 EoDB destinations globally. This is much needed for MSMEs, Startups, and even to attract FDI in GCCs. The economic survey tabled yesterday also aligns with this thought process. 

“We have successfully used technology for improving productivity and bridging inequality in our economy during the past 10 years” said the budget speech. Public investment in Digital Public Infrastructure (DPI) coupled with innovations by the private sector has been a well-accepted norm now. The Government is serious about using the DPI approach in multiple areas, from agriculture to education, etc. The increased penetration of DPI will eventually help digitalization and penetration of software products in the economy. 

The budget recognising MSME credit as one big area requiring attention has also called for several actions in this direction. One important step is involving PSU Banks to build their in-house capability to assess MSMEs for credit using an MSME’s digital footprint, instead of relying on external assessment. This will encourage banks to develop cash flow based lending on lines of another initiative of iSPIRT – the Open Credit Enablement Network (OCEN) that focuses on information based collateral lending rather than asset based collateral lending which in turn could help in developing a new credit assessment model that evaluates the digital footprints of MSMEs in the economy. 

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Company Incorporation further Simplified by MCA

Ease of doing business – Some new additions in Company Incorporation rules

Ministry of corporate affairs (MCA) has announced the Companies (Incorporation) Third Amendment Rules,2016. The set of announcements made will replace or change the the Companies (Incorporation) Rules, 2014.

There are about 12 changes announced in the notification published at MCA website here. However, the simplifying impact is well associated with few clauses with reasonable clarity.

Mr. Sanjay Khan Nagra, iSPIRT volunteer explains the new announcements in below the embedded video.

Rule 13(2) of Companies (Incorporation) Rules, 2014 following explanation has been added

2014 notification: Following provisions existed

i) The memorandum and articles of association of the company shall be signed by each subscriber to the memorandum, who shall add his name, address, description and occupation, if any, in the presence of at least one witness.

ii) Where a subscriber to the memorandum is illiterate, he shall affix his thumb impression or mark which shall be described as such by the person, writing for him, who shall place the name of the subscriber against or below the mark and authenticate it by his own signature

2016 notification: Now the type written or printed particulars of all the subscriber and witnesses shall be allowed.

Rule 16(1)(m) – of Companies (Incorporation) Rules, 2014 following explanation has been added

2014 notification : Every subscriber to the memorandum was required to submit and file Proof of Identity with the jurisdictional Registrar of companies.

2016 notification: If the subscriber is holding a valid Director Identification Number (DIN), and the same  have been updated as on the date of application and the declaration on this effect is given in the application, the proof of identity and residence need not be attached.

For other changes in the rules we suggest you refer to the Notification given at MCA website. Access this link here.

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The Real Reforms: Is Anyone Listening?

The papers are breathlessly reporting the arrival of   “reforms 2.0” while the stock markets are doing what they always do – reacting to rumour,  hyperbole,  fears, uncertainties and doubts. But reforms 2.0 won’t impact the lives of citizens and won’t create jobs, that most crucial of determinants of the economic well- being of a people.

“I’m moving my company to Singapore”, said the CEO of an innovative startup. The company had developed sophisticated imaging and vision products using proprietary technology that would be of great benefit to the defence forces. The company was based in Bangalore where the design and development got done, components were sourced from overseas, manufacturing and assembly got done partly in India and partly overseas. The final product was Indian and competed more than favourably against competition from Israel and some other countries. However, given procurement policies, products from foreign companies were cheaper, received payments far more smoothly whereas the Indian company had to pay duties and taxes on imports (set-offs for these duties too forever to materialize) and had to constantly follow up for several months to get their bills cleared. Of course, that this company didn’t employ “consultants” who could help smoothen the process didn’t help matters. Hence the move to Singapore where the product would get built and shipped to India as a foreign product against a LC (letter of credit) issued by the purchasing entity in India!

Another entrepreneur, similar tale. Upon following up for months to get his payment, he was advised to divide his invoice into two parts in future: one for which payment would be made in US Dollars since it was imported and another for the Indian components of the final product. The US Dollar invoice would get paid via a LC while the Rupee invoice would get paid in due course. The only problem – the US Dollar invoice was only 30% of the overall price! Of course, this entrepreneur too wasn’t willing to inflate invoices and continued to suffer.

In another case, upon filing for the registration of his new company with the Registrar of Companies (RoC), the entrepreneur was informed, after a few weeks of course, that the registration request had been rejected as the name he had selected had “venture fund” in it and therefore required to be approved by the concerned department in Delhi. Not wanting to get into that black hole, the entrepreneur decided to re-file with just “fund” in the company’s name. After some more weeks, another rejection letter ensued. Upon again following up with the RoC, he was told that “fund” didn’t quite explain what the company did! Exasperated and harried as almost 7 weeks had elapsed, he asked the RoC for his suggestion. Finally, after almost 9 weeks, he got the “fund advisors” approved as the suffix.  Another entrepreneur’s application got rejected  since in the opinion of the RoC, the selected name sounded made up! The entrepreneur had to take a dictionary to the RoC to show them the name actually meant something in the English language!

These are but four examples of the kinds of absolutely irrational, meaningless, unfriendly, opaque bureaucratic policies that plague our system. Is it any wonder then that mind numbing corruption takes hold?

There are all kinds of approvals and permits and registrations required to set up a business. The Political and Economic Risk Consultancy based in Hong Kong in a January 2012 report said India’s bureaucracy is the worst in Asia – no surprise to anyone! According to a November 1st 2011  Wall Street Journal article, “India ranks among the world’s worst countries at encouraging entrepreneurs. For ease of starting a business, India is 166th out of 183 countries, just ahead of Angola, according to World Bank figures released recently. Only one country, Timor-Leste, is worse at enforcing contracts.” According to the World Bank “Doing Business” publications,  India ranks an abysmal 132 out of 183 countries in “ease of doing business’ and where, among other notable dismal indicators,  it takes, on average 7 years to close a business and  1,420 days to enforce a contract and where the cost of starting a business is 46.8% of per capita income!

Given this pathetic state of affairs, one can only stand up and salute the intrepid Indian entrepreneur who perseveres with fortitude in spite of the best efforts of bureaucracy, corrupt officials and maddening policies.  India’s small firms add about 3.3 million jobs each year but with over 15million people entering the job market each year, entrepreneurs can and should be playing a critical role in India’s economy.

The two fundamental and critical reforms namely, (a) administrative,  to dramatically simplify, empower and make transparent rules of engagement and (b) legal, to enforce the sanctity of contracts and the rule of  law in a speedy impartial manner are still pending in spite of the recommendations of umpteen committees over past decades. Real reforms in these two areas alone will unleash the energies of entrepreneurs and take India on a different trajectory. Is anyone listening?

Reblogged from YourStory.com