For clarity, we define a startup as a registered organization, with less than 20 employees and revenues under Rs. 3 crores (US $400,000) a year.
A number of media outlets and business platforms look at startups from the prism of funding. Governments buying corporate debt, restrictions being imposed on cross border investments etc., are considered par for the course. This makes no sense at all. Assessing so-called startups, with billion dollar valuations and several rounds of funding in the bank as the national standard, is similar to putting a square peg in a round hole.
One needs to understand, the existing business dilemma is at a demand level and not necessarily a supply issue. Be it services of manufacturing, a substantial number of startups are sitting on unused capacity. Standard economics dictates, excess capacity leads to retrenchment, price wars and sadly business liquidation.
Government intervention is paramount and the Indian startup ecosystem needs a tailor made solution. With vast disparity in living standards, robust yet large work force in the unorganised sector and a diverse population, increasing rural and urban consumption will remain the key enabler for businesses and the Indian economy to survive.
We dissect a few options, which may help improve consumption and kick start the Indian startup ecosystem.
Reduction in GST rates —
The Indian consumer is price sensitive. Irrespective of a B2B or B2C buyer, price elasticity is never infinite. We believe a reduction of 50% on GST rates for startup businesses will offer a massive leverage to them. A substantial number of services startups, have little in the form of input consumption to balance GST inflows. A lower GST regime will make products or services cheaper and more attractive to the end buyer. Over the next 18 months, the Government can consider a differential GST tax slab, based on annual revenues.
We propose the following slabs:
- Up to Rs. 3 crores a year — 9%
- 3 crores to Rs. 20 crores a year — 15%
- Over Rs 20 crores a year — 18%
Experts will argue about the inefficient multi layered GST slabs, but desperate times require unusual and arguably inefficient measures.
Debt Financing —
Indian banks have a critical role to play in reviving the Indian economy. The Reserve Bank of India (Central Bank), has very aggressively reduced the Repo Rate (rate at which it lends to commercial banks) to 4.40%, Reverse Repo Rate (rate at which commercial banks park their excess funds) to 3.75% and the CRR (cash reserve ratio) to 3%, thereby unlocking and additional Rs. 1.37 lac crores of liquidity in the banking system.
Indian banks are flushed with funds and need to take a leap of faith with startups. Business failures will happen and banks may have to take a haircut, however the long term economic and employment benefits, will far exceed the limited non performing asset probability.
We suggest the following banking interventions for startups:
- Loans up to 40% of previous years’ revenue numbers, based on ROC filings, at 4%-6% interest rate.
- Collateral free loans of up to Rs. 30 lacs (US 40,000), within the 40% annual revenue criterion. Discretionary collateral beyond that limit.
- Interest moratorium of 12 months.
- Moratorium on principal repayment for 24 months.
Buying Support —
To enable a robust demand side environment, the Government and large corporates with revenues of Rs 250 crores and above (US $ 33 million) should commit to buying 40% of all its products (inventory, consumables, etc.) and services (marketing, technology, or allied) from startups. The Indian startup ecosystem is extremely vibrant and matching global quality standards will not be an issue.
Across the globe, especially during an economic recession Governments become net buyers. If large private sector players can be motivated to buy from startups at pre defined quantities, a multiplier effect can be created by:
- Generating demand for startups, without large private and public sector enterprises having to increase procurement levels.
- As startup’s and the SME sector are large employers, this demand will protect and create new jobs within the economy.
- Bringing a larger proportion of the workforce currently in the unorganised sector into the mainstream.
Economies across the globe have announced fiscal packages to reduce the impact of COVID 19. Interventions include subsidising 80% of salaries and transferring money into bank accounts. While these stimulus packages might work in specific geographies, their impact is questionable within the Indian context.
The Indian ecosystem is based on an unmatched entrepreneurial spirit. If the nation can create a mechanism of sustained demand, we presume the startup community will play its part to ensure economic prosperity and growth at near double digits, within 12 months.
A seasoned entrepreneur and business professional, Sauvik Banerjee is COO at Array Innovative Services Private Limited. His portfolio of startup ventures include; BPlan Experts, PresentationGFX, CrazyAboutStartups, Vezume, and Xprez.io. As a mentor, Sauvik works with start-up businesses and entrepreneurs, to help launch and scale up their businesses. Prior to founding new ventures as an entrepreneur, Sauvik worked as a Management Consultant with some of the largest professional services and technology firms globally, working with CXO’s of both private and public sector organisations.