Thursday, May 1, 2008

Start-ups Seek an Enabling Environment.


What does the forthcoming Union Budget mean to an entrepreneur and how do this year’s wishlists look like.

FOR long, union finance ministers have been presenting budgets to stimulate government revenue flow or exports or consumption or revival of sick industries. But increasingly, they face one more priority. It is no longer enough to announce a few concessions, rejig taxes and leave the rest to god and a compliant citizenry. The primary objective of a modern day budget is not just to balance state revenues and expenditure, but to nurture an ecosystem for economic activity. It is natural that entrepreneurs expect the budget to ease conditions for business, so they can go ahead and give expression to their ideas. This year, finance minister P Chidambaram’s budget will be keenly watched for what stimulus it provides to entrepreneurship. The ecosystem for entrepreneurs has always been challenging in India and should ideally have improved with economic growth and increasing interest among the salaried class to start on their own. A lot of bottlenecks have been removed over time, but the basic complaints remain. Difficulties in raising capital, tax burden, inability to tackle currency fluctuations, wage costs, lack of impetus to research and a framework that favours big business.

For instance, selective tax benefits are a contentious issue when the government puts out a positive list of eligible industries, business mentor Pravin Gandhi, who is also the president of The Indus Entrepreneurs (TiE), Mumbai says. “There is a lot left to interpretation, which eventually leads to complexities, discussions and even litigation,” he says. Small businesses are often unable to benefit from such concessions if their business idea strays from the strict definitions of what qualifies. “A negative list makes a lot more sense than a positive list. Sector specific allocations should not be encouraged,” Mr Gandhi suggests. Also, when these tax benefits expire, it might hurt the new, smaller players more than the large, established ones and actually work as an entry barrier.

But industry experts say an entrepreneur, while looking to benefit from budget proposals or trying to protect one’s business from a new clause, should not fashion the business model around concessions. Many small businesses stop growing after a point, either because the entrepreneur becomes too comfortable with the concessions available only to small players or is afraid of the enhanced risks growth will bring. At the end of the day, entrepreneurs must follow what they want to do on their own and not depend on government’s crutches.

One crucial limiting factor is the lack of tax compliance. Some early stage businesses may believe in saving the money that otherwise would go to the income tax department and indulge in a range of practices to conceal revenues. This not only exposes them to penal action by authorities, but also rules out the potential for partnerships and participation in bigger business opportunities, because mature organisations will not do business with tax evaders. The government has been investing heavily in technology to improve tax policing and remaining on fringes is not going to be possible much longer, in any case. There are a few things that the government can do to reward tax-compliant start-ups in various sectors, experts say.

A lot is said about innovation, and finance ministers have set aside varying amounts to foster research in the country. But, the country remains a research-poor economy, where the potential for volume multiplication is often the driving factor for investment. The government, industry and venture capital houses all work separately, pursuing their own logic and there is little to show on the ground.

For instance, in the pharmaceutical sector, entrepreneur-driven ventures are not even recognised by the Department of Science and Technology. “The department should have a scheme to support these start-ups,” says Indian Pharmaceutical Alliance (IPA) secretary general DG Shah. The funding needs of such units are typically small and the government should be able to give them as grants, of course taking precautions to ensure it goes only to serious ventures. “An institute should be set up, which can evaluate the process, vet the applications and make grants accordingly. These steps are essential to be a player in the knowledge economy,” says Mr Shah. But, “when it comes to providing support, the government develops cold feet,” he adds. It is imperative that these startups are given a free hand along with easy access to funds.

India’s drug firms have gone overwhelmingly the way of generic drugs. They are more interested in making cheap copies of drugs whose patents have expired. While mastering reverse engineering, even the largest of them have not come out with an entirely new drug that the likes of Pfizer and Sanofi-Aventis are able to churn out. The government must push-start research in pharma sector to attract ambitious entrepreneurs, say experts. “If this was to happen Indian pharma research will grow manifold in no time,” says Novalead Pharma CEO Supreet Deshpande.

Venture capital funds typically avoid business ideas that have a long gestation period and highly research-oriented ventures are often a casualty to that approach. “Venture capital funds in the pharmaceutical sector are few and far in between,” adds Mr Deshpande. It makes sense for a venture capitalist to invest in an outsourcing firm, which generates cash registers quickly rather, than in a pharmaceutical research company, which will start seeing cash flow after 10 years. “This is the period when we need assistance. Tax sops are popular instruments, but they are not required for discovery research to flourish,” says Mr Deshpande.

For some years now, new-age entrepreneurs may have spoken as if starting up has to do only with internet, mobile technology and the typical online stuff. But, for economic growth to be wellrounded, a spurt in small business activity in the manufacturing sector is crucial. “The key issue here is that a large part of capital goods are coming from other countries. That means huge imports,” says Sarita Nagpal, deputy director general of the Confederation of Indian Industry (CII). The chamber has presented a voluminous, clause-by-clause memorandum of pre-budget recommendations to the finance minister, suggesting ways to ease customs duty and currency burden on the capital goods front. Also, “there is a significant need for a technology opportunity fund, which can play a role in developing the competency of these small units and which can finally augment capacity of the big players in the industry,” says Ms Nagpal.

Industry bodies have also been making the usual noise about extending tax holidays, providing interest rate subsidies and protecting exchange rates, but it is in the improvement of infrastructure and enabling conditions that an entrepreneur must base his or her strategy on. A new business is born to thrive in a competitive landscape, not a cocooned one.

That means, there will invariably be budget measures that a small business owner must accept and learn to adjust to. All is not lost for the export sector if the tax benefits are taken away, say industry veterans. In any case, plain services are increasingly becoming pointless and products are becoming cheaper by the day. And customers are demanding fresh value and innovation. This would call for entirely new products and services designed for the global market. For example, in the pharmaceutical sector, Deshpande’s Novalead is already showing that sound business models can be built around pure research. The company has shunned the undifferentiated generics business and has charted its own course in drug discovery. The same model could work in a variety of other industries.

The budget is at best a boost to business and at worst, just a bend in the corner to circumvent. As General Electric founder Jack Welch once said, “You’re either the best at what you do, or you don’t do it for very long.”

Article Resource:
Author: Ashish Kumar Mishra is the Chief Editor in the The Economic Times, Mumbai and the article appeared in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

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