Budget 2016: Fiscal prudence is the order of the day for economy and start-ups

By Arun Krishnan

One of the key principles of strategy as defined by management guru Michael E. Porter involves creating a fit among an organization's activities – fit being defined with ways in which the myriad activities of an organization interact and reinforce each other. The benefits that accrue from activities that mutually reinforce each other, help to drive competitive advantage and sustainability for an organization.

Representational image

Representational image

In recent days, there has been seemingly disparate news about the Indian economy that seems to mutually reinforce each other in ways that can only harbour well for the Indian economy.

The first piece was the recent announcement by Prime Minister Narendra Modi of the Start-Up India campaign to boost entrepreneurship and job creation with a slew of measures for enabling start-ups to quickly set up, sustain and exit businesses. Some of these were simpler procedures for start-up businesses, venture debt finance flows from banks to start-ups through the setting up of a Rs 10,000 crore start-up fund over four years, exemption from income tax for up to three years, exemption from capital gains tax for VCs and easier exits for start-ups.

Soon after this came the decision by RBI governor Raghuram Rajan to keep interest rates the same, indicating his focus on reigning in inflationary forces. In addition, ahead of the budget session, Rajan, in a clear plan to support the Start-Up India initiative has announced measures that will make it easier for start-ups to raise foreign venture capital through innovative instruments as well as to enable outward remittances.

These are all welcome moves both at strategic and monetary policy levels that can give a boost to the PM's vision to make India a hub for entrepreneurship and innovation.

It is clear that the Government of India is looking to give a fillip to its Make in India program by enabling the start-up sector. These mutually reinforcing moves must, however,  be supported by the appropriate fiscal policy. The start-up ecosystem is waiting with bated breath for the budget session and Jaitley's policy announcements.

While pundits have been speculating that Rajan's holding of the repo rates unchanged is a signal to Jaitley to keep moving along the fiscal consolidation path, he would have to walk the tightrope of boosting industrial productivity and growth at the same time. This can have a major impact on options available to start-ups both from  B2B and B2C perspectives.

Export-oriented technology start-ups servicing the overseas market are happy that the RBI has allowed the rupee to float and find its natural levels. Rupee devaluation has always helped the IT services industry by making it more competitive. However, start-ups that are competing in the Indian market are going to find the going tough, especially in the B2B space if Jaitley's policies suggest a round of belt tightening.

Unchanged interest rates, the crisis in China, a reluctance on the part of the government to pass on the savings from falling oil prices to the public allied to a potentially fiscally-prudent budget, seem to imply a scenario wherein  companies are likely to put off any major investments until at least the second half of this year resulting in a lean first half for start-ups looking to boost their revenues.

All is not gloom and doom. Venture capital investments in the first quarter have shown no signs of slowing down with over $60 million worth of deals being completed. The news from Davos has consistently been that India is one of the few bright spots in an increasingly beleagured world market.

The government is stepping up its efforts to boost the economy through large scale investments in infrastructure. FDI inflows have shown a marked increase over the last year. If fiscal prudence signals a long-term sustainable strategy to both FDI and FII, we are likely to see inflows increasing even further. This would certainly enable large organizations to invest in expansions.

While VC investments aren't showing signs of slowing down any time soon, it is clear that the days of an open fisted policy are probably in the past. While VC firms will still have a positive outlook on start-ups in India, they might want to see them match the fiscal prudence of the Indian government by focusing on profitability along with growth. That wouldn't necessarily be a  bad expectation in the long run.

(The author is an ISB alumnus, Class of  2013 and Founder- CEO of HR Analytics star- up,  nFactorial Analytical Sciences.   Views expressed are personal.)



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Updated Date: Feb 26, 2016 14:29:07 IST

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