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IBEF, Knowledge Centre

Sep 28, 2021 14:47

India’s startup journey is not a recent one, with the 80s and the 90s, witnessing the inception of giants such as Infosys and Airtel, along with many others that went on to become stalwarts in their respective industries. India is a vast country and there remains a plethora of unsolved problems across various sectors. In the recent decade, Indian start-ups have tried to solve some of these problems by working on innovative ideas with regards to business models, products/services and technologies. And this trend will only accelerate in the future.

Over the past few years, India has emerged as a major player in the global start-up ecosystem, along with the US, China, the UK and others, on the back of strong government policies to encourage entrepreneurship & innovation and significant funding from premier venture capital and private equity firms.

India ranks 20th among the top 100 countries in the 2021 Global Startup Ecosystem Index by Startup Blink. Three Indian cities—Bengaluru, Delhi and Mumbai—also feature among the top 20 cities globally. Also, India’s ranking has improved from 81 to 48 in the Global Innovation Index 2020.

Tech start-ups are leveraging increasing digital adoption and have already changed the lifestyle of young Indians – from shopping to ordering food from restaurants and streaming entertainment on-the-go, everything has moved to online platforms. With more success stories, improving digital infrastructure and favorable policies, these start-ups have the potential to impact the next leg of economic growth.

Growth Drivers
Start-ups have seen increasing traction in India over the past few years. Fuelled by significant funding from global investors, some firms have become unicorn start-ups providing huge gains to their investors. Scaling up a business without the required capital is next to impossible and hence, these investors have catalysed the growth of start-ups. For example, Zomato, which had raised a total of ~US$ 2 billion in funding before a public listing (total valuation of US$13 billion) in 2021, provided 20x and even 100x returns to some of its investors. It is just one of the companies in the long list of start-ups to have successfully raised funds worth billions of dollars from investors.

India has been one of the fastest-growing economies in the world in the last decade. Rising disposable income levels (per capita income rose to ~Rs. 95,000 or US$ 1,301 in 2019 from ~Rs. 73,000 or US$ 1,000 in 2015) have been instrumental in fueling consumption levels. Additionally, more than half of the country’s population is under 25 years and rapid penetration of smartphones has made India an attractive consumer base for businesses. A young consumer base can be encouraging for start-ups offering innovative products/solutions, as it increases the chances of early adoption of products/services.

The government has recognized the value that start-ups can offer to the economy in terms of innovative solutions to real problems as well as job creation. Hence, various steps have been taken by the government in providing a base, which is conducive for tech-led start-ups to grow in India. The government has launched several programs/schemes, hosted competitive events and amended and introduced several laws to build a strong start-up ecosystem.

In addition, adoption of digital technologies is transforming India into a new-age digital economy. The Aadhaar-based biometric ID has provided a digital identity to each Indian, helping companies quickly and conveniently verify identities and customer information. As per the RBI, financial inclusion improved 24% between March 2017 and March 2021, enabling more sections of the society to be brought into the fold of a formal economy, gradually expanding consumer base for relevant start-ups.

Key Trends
Increased digital adoption

Consumer and business habits are changing rapidly with increasing penetration of digital payment solutions, fast internet connectivity and cheaper smartphones. COVID-19 has accelerated digital adoption and now, even small offline retail merchants are keen to have an online presence and accept payments through online channels. With this new normal, technology-led start-ups are leveraging this digital wave; the industry witnessed a surge with 1,600+ new start-ups in 2020.

Hiring contractual staff

In a post-COVID-19 environment, companies and especially start-ups with stressed balance sheets have realised that hiring full-time workers lead to higher costs mainly during such uncertain times. This has led to increased hiring of gig workers or contractual staff, particularly by early-stage start-ups for short- term projects. As per a report published by Assocham in January 2020, the gig sector is estimated to reach US$ 455 billion by 2023.

AI and ML to continue gaining prominence

Artificial intelligence (AI) and machine learning (ML) are hot topics in the start-up and innovation world. Based on data science, AI/ML technologies find application in various fields such as medical, personal assistance and consumer electronics. Hyperautomation, Big Data analytics and cyber security are some of the key application areas of AI/ML. As per a Deloitte survey in 2020, 74% AI adopters say that AI will be implemented in all enterprise applications in the next three years.  With investors showing a keen interest in AI/ML-based start-ups, their number is likely to increase in the future from the current 7.5% start-ups (as of 2019).

Start-up wave is spreading to Tier 2 cities

Rising digitisation has led to mushrooming of start-ups in tier 2 cities, which helps leverage the local talent pool and reduce cash burn. Even before the pandemic, as per the Economic Survey of 2018-19, a whopping 50% of the 16,500 start-ups (registered by March 2019) were based in tier 2 and 3 cities. Jaipur, Ahmedabad, Pune, Chandigarh and Indore are some tier 2 cities to witness spiralling start-up activities.

Government Initiatives and Schemes
Government schemes and grants for start-ups are one of the reasons for accelerated growth of these companies, paving the way for a new-age economy. Without government support and encouragement, it becomes difficult for start-ups with novel ideas to follow through on their initial work, resulting in a dearth of innovative products that are truly Made in India. Hence, the government has launched a host of schemes and initiatives to nurture start-ups and innovation. Some of these are discussed as follows:

Start-up India Initiative

A flagship initiative of the government to support, build and recognise start-ups and create an ecosystem of innovation and entrepreneurship. Launched in 2016, the initiative has various micro-schemes and programmes that address different needs of a start-up broadly under three categories – compliance and legal support; funding and tax grants; and incubation and industry partnerships.

Atal Innovation Mission (AIM)

AIM was launched in 2016 with an objective to create a culture of innovation and entrepreneurship in the country. The scheme involves schools, research centres, NGOs and MSMEs at district and state levels. To oversee the innovation ecosystem in India, it offers labs, incubation centres, innovation centres, mentor networks as well as strategic public-private and country-to-country partnerships.

Support for International Patent Protection in Electronics & Information Technology (SIP-EIT)

When companies file international application for IP, they find it difficult to protect their intellectual property rights due to high costs. Initiated by the Department of Electronics and Information Technology (DeITY), SIP-EIT is a scheme offering financial assistance to tech-based start-ups as well as MSMEs for international patent filing. (Note: As per the Ministry of Electronics and Information Technology website, this scheme is under review).

Promoting Innovations in Individuals, Start-ups and MSMEs (PRISM)

Initiated by the Department of Science & Industrial Research (DSIR), PRISM supports individuals who have innovative ideas and want to create a prototype or working model. The ideas considered under the scheme could belong to green energy, industrial materials, waste management, affordable healthcare, clean energy or any other technology-based field.

Aspire – A Scheme for Promotion of Innovation, Rural Industries and Entrepreneurship

To promote entrepreneurship and create jobs in the agro industry, the Ministry of MSME launched ASPIRE so that a network of technology and incubation centers can be established. Under the scheme, 50% of the cost of plant and machinery (land and infrastructure not included) or Rs. 50 lakhs (~US$ 68500), whichever is less, is granted for setting up incubation centers.

Apart from the above-mentioned schemes, there are more than 100 other schemes and initiatives undertaken by the government to encourage a culture of entrepreneurship and innovation in the country.

The Road Ahead…
Having a 9 am to 5 pm job is still in vogue in a country like India, which has a huge proportion of a middle-class population. However, in the last decade, there has been a gradual change in perception towards entrepreneurship and start-ups. More and more passionate youngsters are coming up with innovative ideas and are being supported by their colleges and society in general. Not having a regular corporate job and working on a start-up idea is not looked down upon as much as it was perhaps a few decades ago.

As per a report published by Inc24, by 2025, India is estimated to have 100k+ start-ups, which may create 3.25+ million jobs.

With more policy push from the government and flow of funds from generous investors, formalising entrepreneurship as a career choice is slowly getting easier, although we still have a long way to go in terms of creating world-class products and services compared with global peers.

As per a recent media report, India is slowly becoming an innovation hub of AI, with 4,000+ patents filed between 2015 and 2020—6x more than the previous five-year period. In the years to come, India can brace for more home-grown innovations on the back of surging technology adoption, young consumer base, increasing financial inclusion as well as a start-up-friendly environment.