Will Budget 2014 create an enabling ecosystem for enterprises?

During the recent launch of a news outlet in India, former chairman of Microsoft India, author and impact investor Ravi Venkatesan opined that enterprises catering to low-income markets were no longer part of ‘Act 2’. “It has grown into a legitimate class of entrepreneurship, not something you do after you make your first billion,” he said.

Such for-profit enterprises catering to low-income markets are increasingly gaining traction in India. However, despite the significant opportunity, scaling both operations and impact within these markets can be complex and risky.

The initial 2014 Union Budget tabled by Finance Minister Arun Jaitley has focused on startups and entrepreneurs. However, it remains to be seen whether the overall requirements of entrepreneurs working in low-income markets have been considered and whether the budget truly creates an enabling ecosystem for all startups.

Access to capital:

Despite a broad mix of capital from grant makers, philanthropists and impact investors flowing into low-income markets, enterprises in the pilot and prototype phase continue to struggle to access much needed capital.

In order to tackle this, the government announced the setting up of an INR 10,000 crores fund to boost capital flow towards small and medium size enterprises. The proposed fund is likely to increase prospects of financing in form of equity and quasi-equity among other forms of risk capital. An additional INR 100 crores has also been offered for the Startup Village Entrepreneurship Program, thus localizing employment opportunities.

The above kind of financial engineering will help channel investment towards a greater number of enterprises working in low-income markets. However, there is a risk that the increase in capital flow is likely to sideline the model of blended returns, where enterprises are evaluated based on their ability to generate a blend of financial, social and environmental value.

Fostering early-stage investments:

The recognition and promotion of early-stage investments and early stage impact investors such as angel investors, impact funds, through development of appropriate policy measures and fiscal incentives has also been overdue.

Budget 2014 proposed that the time period for tax on short-term capital gains in unlisted securities be increased from one year to three years. This was primarily done to discourage angel investors from making early exits as it would attract higher tax. It would also give the entrepreneur sufficient time to build their venture without the threat of an early exit from the investor.

However, this initiative could also mean that entrepreneurs now find it harder to raise seed capital as the lock-in period for an investor is now raised to three years.

Debt funding:

Debt funding is critical to meeting the working capital requirements of enterprises that have achieved some scale in low-income markets. Traditional debt providers like banks, however, do not lend without collateral and at least a three-year operating track record. In an effort to support banks in creating capacity and capability in lending to such ventures, the government will provide institutional finance to farmers. This will happen by implementing schemes such as the ‘Bhoomi Heen Kisan’ through NABARD, the ‘Long Term Rural Credit Fund’ and the ‘Rural Infrastructure Development Fund’.

The government can further act to promote social ventures by encouraging banks to percolate down to the branch level with whom entrepreneurs interact the most. Banks must also be encouraged to invest in early-stage venture capital funds by treating such investments as “priority sector” funding without capital market exposure and provisioning norms being applied.

Encouraging partnerships in low-income markets:

Low-income markets are characterized by several challenges such as last mile distribution, inadequate infrastructure and low disposable incomes. In such markets, enterprises need to constantly innovate in the value chain through their own operations, and look at establishing creative partnerships with NGOs, government bodies, corporations and community groups.

The budget proposes a nationwide district level Incubation and Accelerator Programme to be taken up for incubation of new ideas and the provision of necessary support for accelerating entrepreneurship. Plans are on the anvil to amend the existing bankruptcy laws, with the Finance Minister proposing an entrepreneur-friendly legal bankruptcy framework for SMEs to enable easy exits.

There are also plans to initiate a technology driven second green revolution, which will focus on higher productivity and INR 100 crores has been set aside for the ‘Agri-tech Infrastructure Fund’ which will be used to make farming more competitive and profitable. In addition, over 100 mobile soil-testing laboratories will be set up across the country and there are plans to invigorate the warehousing sector. Given that most of India’s agriculture industry continues to be within rural low-income markets, these measures by the government are poised to have a significant positive impact in these communities.

History has shown us that enterprises that have achieved scale in both operations and impact in India have done so with access to early-stage equity capital and regular debt funding for working capital requirements. Capacity building support from the ecosystem is also instrumental in the success of such enterprises.

The 2014 Union Budget has suggested some interesting initiatives. Unlike the recent past, the newly elected government in India has a clear majority in the lower house. Unfettered by the pressures of coalition politics, it is widely expected that these innovative and constructive measures aimed at kick-starting the Indian economy will have far reaching long-term benefits.

Ennovent’s Startup Services enable enterprises in low-income markets to develop and refine their business models so that they are able to take ideas to markets faster. Explore how we can help accelerate your innovation now.