The budget must remove the restrictions that drive startups out of India

Few events attract as much attention as sporting events, which have the power to both uplift and deflate the dreams of millions in a matter of seconds. Among them is undoubtedly the honourable finance minister's annual budget speech. India ended 2022 "bloodied, but unbowed," in the words of WE Henley. The rupee has performed better than others when compared to the dollar, and the total economy is predicted to become the global growth engine in 2023.

Indian startups outperformed the rest of the world. The downturn shattered the idea of "expansion at any cost," as profitability has become the obsession of all entrepreneurs and boards. Investors interested in India are also sitting on a mountain of dry powder (uninvested capital) ready to be deployed in the coming year. Though several of the year's major IPOs have faltered, a wave of smaller IPOs indicates Indian markets' hunger for digital companies of all sizes. India has the most favourable convergence of elements to take its place as a world leader.

For this, Indian startups and investors are anticipating two key themes in the upcoming Union Budget:

i) Going global from India

ii) Unlocking rupee capital

Going Global from India

The global innovation economy is being driven by Indians. One-third of all founders in Silicon Valley are Indian or of Indian ancestry. COVID-19 propelled digital to the forefront and broke down geographical limitations to reach a worldwide audience. This has resulted in an increase in "flipping" - the act of relocating one's headquarters elsewhere while remaining in India - among Indian businesspeople. There are numerous explanations for this shift:

- Non-residents pay lower taxes than locals.

- Time-bound, objective departure frameworks

- The ability to keep and manage foreign currency accounts

- Opening up startup incentives

Each of the above addresses major challenges that have afflicted one or more sectors of Indian startups, pushing Indian innovation outside. Lack of policy penetration, legacy artefacts in Indian rules, and operational constraints are driving Indian innovation abroad. These issues have been discussed and detailed, but they must be addressed in order to avoid a crisis.

The following modifications are required:

One security, one tax - The capital gains tax rate and holding term must be harmonised, whether listed or unlisted, domestic or foreign, to avoid artificial friction.

Time-bound departure frameworks - Rather than requiring NCLT approval, an objective and time-bound merger process will allow corporations to acquire and grow stronger more efficiently.

Foreign currency accounts - As companies expand worldwide and collect income through payment gateways, the requirement to file documents for each receipt and payment creates an operational bottleneck that forces tech enterprises to relocate overseas.

- Addressing this, whether through GIFT or special zones, will allow Indian startups to expand globally from India.

Unblocking startup incentives - India offers a slew of tax breaks for "eligible startups," or those that the government deems innovative. Tax breaks, ESOP tax delay, and other incentives are available.

- The procedure is so faulty that it benefits less than 1% of India's 84,000 DPIIT (department for development of industry and internal trade) registered startups.

- Broadening this recognition by using objective measures such as raising money from VC funds will aid in broadening the base of these incentives.

Startups, not subsidiaries, should thrive in India.

Unlocking Rupee Capital

The Indian startup economy has struggled from a lack of rupee capital involvement, with firms raising only about 15% of total capital. Indian capital is common in the early stages, when the numbers are tiny and the danger is high. It's essentially non-existent throughout the expansion period, when capital requirements are greatest. This forces Indian companies and even fund managers to relocate outside, closer to finance sources.

India has the funding, but not the rules to make it available to Indian funds and companies. Insurance companies and pension funds in India either lack investment laws or have such outdated, conservative regulations that investments are doubtful. Their global peers accept country and currency risk in order to invest directly, but India has yet to even consider this as a possibility without catch-22 circumstances.

Changes to the Income Tax Act, the Insurance Act, and the legislation governing provident funds would help release Indian institutional capital and, perhaps, drive rupee capital participation to 50% by 2030. Easing investments into SEBI-regulated alternate investment funds (AIFs) will generate a virtuous circle of investment in Indian innovation. Indian AIFs also require regulatory recognition of their operations, without which court declarations and regulatory changes have unforeseen effects for such AIFs.

India's growth is a foregone conclusion, not a possibility. For India to deliver, we need policies that reflect future optimism rather than past legacies.