India has the capital but no policies to support startups

Indian startups too fared better than the rest of the world. The slowdown broke the myth of "growth at all costs" as profitability has become the obsession of all founders and boards. Investors looking at India are also sitting on a mountain of dry powder (uninvested capital) that is waiting to be deployed in the next year. Though some of the blockbuster IPOs of the last year have stuttered, a slew of smaller IPOs signals the appetite of Indian markets for tech companies of all sizes. India has the most optimum convergence of factors to take its place as a leader on the world stage.

For this, Indian startups and investors are looking for two broad themes to unfold in this coming Union Budget:

Indians are powering the global innovation economy. A third of all founders in Silicon Valley are either Indian or of Indian origin. COVID-19 bought digital to the forefront and tore down geographical barriers to go global. This has seen "flipping" – the act of shifting one's headquarters overseas while still residing in India – accelerate amongst Indian entrepreneurs. There are many reasons given for this shift:

Each of the above unpacks extensive issues that have plagued one sector of Indian startups or the other, pushing Indian innovation overseas. The lack of policy penetration, legacy artefacts in Indian regulations and restrictions on operations are pushing Indian innovation overseas. These issues have been deliberated and detailed but need to be acted upon to prevent a crisis.

The Indian startup industry has suffered from the lack of rupee capital participation, with around 15 percent of capital raised by startups. Indian capital is prevalent in the early stage – where the amounts are the smallest and the risk highest. It's almost non-existent in growth stages – where the capital needs are the highest. This pushes Indian startups and even fund managers to move overseas, closer to the sources of capital.

India has the capital but not the policies to allow Indian funds and startups to access it. Indian financial institutions like insurance companies and pension funds either lack regulations to invest or have such archaic, conservative regulations that make investments improbable. Their global peers take country and currency risk to directly invest, but India is yet to even allow this as an option sans catch-22 conditions.

Changes to the Income Tax Act, Insurance Act, and Provident fund regulations, will help unlock Indian institutional capital and hopefully push rupee capital participation to 50 percent by 2030. Easing investments into such SEBI-regulated alternate investment funds (AIFs) will create a flywheel of investments in Indian innovation. Indian AIFs also need to have regulatory recognition of their operations – the lack of which causes judicial pronouncements and regulatory changes to have unintended consequences for such AIFs.

India's rise is an inevitability, not just a possibility. For India to deliver, we need policies that reflect the optimism of the future, not the legacy of the past.