The last decade has witnessed an unprecedented surge in the growth of Indian start-ups. India proudly holds the title of having the third-largest start-up ecosystem globally, with an impressive count of over 77,000 registered start-ups. The trajectory is likely to continue, with the number of Indian technology start-ups projected to reach 1.8 lakh by 2030. Recognising the importance of this growing segment of the economy, the Government has been at the forefront of regulatory and policy reforms aimed at supporting start-up growth. In addition to its flagship Start-Up India Scheme, the Government has implemented over 50 regulatory reforms between 2016 and 2022 to enhance the ease of doing business and reduce compliance burdens for start-ups.
However, sustaining this momentum will require the Government to sustain its push for progressive reform. After witnessing record levels of growth over the pandemic period, venture capital and private equity investments in start-ups dipped by almost 60 percent in 2023 compared to the previous year. Similarly, levels of private investments across the economy have been stagnant. While investment levels are expected to grow, recovery has been slow. Given this context, the next phase of growth for Indian start-ups will invariably depend on sustained and pragmatic policy support from the Government.
E-commerce Policy Frameworks
India’s e-commerce sector has emerged as a powerful growth catalyst for start-ups and MSMEs. The sector has enabled start-ups to tap global markets while also simultaneously benefitting from the increasing levels of consumer trust in e-commerce. Similarly, the emergence of e-commerce marketplaces has enabled start-ups to concentrate on product innovation and operations by offloading overhead costs associated with setting up logistics and marketing networks. The Government is now expected to bring in frameworks to enhance the sector’s growth. It is hoped that the E-commerce Policy and Draft Amendment to the Consumer Protection (E-Commerce) Rules, 2020 are notified soon to bring in the much needed regulatory certainty.
As we move forward, it will be critical to balance the competing aims of protecting consumers and enabling start-ups to innovate and operate without disproportionate compliance burden costs.
For instance, holding marketplaces accountable for a seller’s negligence in relation to the sale or delivery of products may prompt marketplaces to be risk-averse and enlist only trusted sellers. This could adversely impact nascent start-ups looking to utilise e-commerce channels. Balancing innovation and consumer protection can ensure that the envisioned $188 billion domestic e-commerce industry by 2025 creates exciting opportunities for start-ups to scale and contribute significantly to the nation’s economic landscape.
Competition Law
Recent reform proposals aim to make markets more contestable for Indian start-ups. These include the Digital Competition Act proposal, which aims to prescribe a set of pre-emptive rules, curtailing certain practices and imposing additional obligations on large technology companies operating in India, including a few home-grown start-ups. As the Government finalises the policy on this matter, it must ensure that the quest for contestability does not adversely impact start-up growth and investments. Small businesses and consumers have benefitted immensely from the tools and services provided by the technology ecosystem. Disproportionate restrictions or modifications to these tools may necessitate additional investments from start-ups to set off the gains foregone due to product modifications.
Taxation Frameworks
Another key area that plays an important role in the growth of start-ups is favourable taxation policies. With the vision of one nation one market, the GST regime has streamlined the process of compliance and facilitated tech-enabled reforms in the tax regime. Moreover, earlier, the GST council exempted sellers from mandatory GST registration to sell online. This ensured parity between online and offline selling and encouraged the sellers to use e-commerce to expand their businesses. Taxation policies can further encourage the growth of start-ups in the foreseeable future. For instance, it is important to streamline the principal place of business (PPOB) requirement under the GST regime.
Every seller must register a physical PPOB in every state they want to supply their goods, which necessitates them to keep physical records and accounts. Considering the cumbersome nature of this compliance, the GST framework may consider mandating a PPOB only in the seller’s parent state, at least for small sellers, as recommended by the Parliamentary Committee Report on Promotion and Regulation of E-commerce. Compliance activity in states where the seller supplies can then be done digitally.
Conclusion
The significance of regulatory certainty, consistency, and ease of doing business in India’s evolving policy frameworks cannot be overstated, especially when the technology landscape is rapidly evolving. A progressive and balanced policy ecosystem will create a stable and predictable environment for start-ups, which will fuel the mission towards a trillion dollar digital economy.
While the past decade has been marked by phenomenal growth in the Indian start-up ecosystem, the journey ahead requires a sustained commitment to nurturing entrepreneurship. The government, industry players, and other stakeholders must collaborate to build and refine a policy ecosystem that sustains the momentum and propels Indian start-ups to greater heights.
Dr. Sasmit Patra, MP, Rajya Sabha and Kazim Rizvi, Founding Director, The Dialogue
