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Bridging the Gaps: The Role of Government in Supporting the Indian Tech Startup Ecosystem
Bridging the Gaps: The Role of Government in Supporting the Indian Tech Startup Ecosystem

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Over the past few years, the dynamic Indian tech startup ecosystem has been witnessing the government ramp up its efforts to provide support, foster innovation, and boost the ecosystem’s growth across all key sectors. At the heart of this undertaking lies their focus on deep technology, or simply, DeepTech. Cutting-edge technologies like AI, Blockchain, IoT, Quantum Computing, Robotics, and others hold immense potential to revolutionize industries, promising unprecedented advancements and economic growth. However, their development requires substantial investment and an enabling environment, which requires proactive measures from the government.

The Interim Budget 2024 has gained a lot of attention from the industry owing to its emphasis on DeepTech. This strategic budget allocation aligns closely with the government's overarching vision of attaining self-reliance, often termed as "Aatmanirbharta". In the defence sector, the Department of Defence Production, in 2021, had already approved funding of around INR 500 crore for the Innovations for Defence Excellence (iDEX) scheme spread across five years to. The objective of the scheme is to offer financial support to startups, MSMEs, individual innovators focused on innovation in defence technology, while connecting them to incubation facilities. This year the government announced schemes to push the deployment of DeepTech in the defence sector.

The focus of the government is not confined to DeepTech, but extends to the broad tech startup ecosystem, which is huge, and covers diverse industries. Mega corpus of INR 1 lakh crore was announced by the government in the Interim Budget 2024 to fuel R&D in the sunrise sectors both by startups and enterprises. The government plans on using this corpus to dole out long-term financing or refinancing at nearly nil interest rates. Furthermore, the deadline for Startup LLP/Company incorporation to qualify for Section 80IAC exemption under the Income Tax Act 1961 has been extended by an additional year until 31st March 2025. Now, DPIIT-recognized startups, either a private limited or an LLP, incorporated between 1st April 2016 and 31st March 2025, with a turnover less than INR 100 crores in any previous financial year, will be eligible for 100% tax exemption for three out of their initial ten financial years. This extension presents a unique opportunity for recently formed startups to leverage tax relief, by allowing them to reinvest savings into their business, and boost growth within a specified timeframe. Extension of tax benefits to startups on investments made by sovereign wealth or pension funds till March 2025 reflects the government's focus on providing a much-needed support to the ecosystem.

Furthermore, the government's recent focus on deep tech startups can be seen through the India AI mission, which is a positive step towards creating a conducive investment environment. With an approved outlay of Rs 10,372 crore for five years, the mission aims to accelerate R&D in AI through public-private partnerships (PPPs). Notably, Rs 2,000 crore is earmarked for financing deep tech startups, addressing a significant roadblock for innovation in the sector.

However, the question remains – Is the current government support truly enough for Indian tech startups? Although the allocation of INR 1 lakh crore towards long-term loans signals intent, the practicality and returns over the proposed 50-year period remain questionable as the success of these initiatives depends on careful execution across the entire value chain. Other challenges, such as lack of patient capital, lack of skilled research talent, and complex regulatory frameworks, among others also continue to hinder the growth of the ecosystem. Hence, the government should shift focus from incubators to sectoral innovation clusters across sectors such as healthcare, cybersecurity, manufacturing, and logistics among others. Timely implementation of the DeepTech policy recommendations will also be instrumental in enabling the ecosystem to address some of the challenges it faces. By addressing these challenges in a timely manner, India can unlock the full potential of its tech startup ecosystem and emerge as a global hub for innovation and entrepreneurship.


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Dhiraj Sharma
Principal Analyst

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