Indian Decade

Is India Strangling its Economy?

India’s economy is slowing. But is the government making things worse and hampering entrepreneurial zeal?

That India’s growth story is faltering isn’t a secret. In fact, it’s interesting how quickly things can change. Up until about a year ago, India seemed on the threshold of economic stardom – courted by global companies as a must location, and buoyed by forecasts that its decade-long robust growth might continue in perpetuity.

Today, things look very different – thanks to slowing growth, rising inflation and policy paralysis in the union government. Reforms have been stalled, costs have gone up and “good” trade and business deals seem to be drying up. In fact, some global publications and economic forecasters have even suggested that the “I” in BRIC (the grouping of fast-growing economies of Brazil, Russia, India and China) should be changed from India to Indonesia.

Thankfully, over the past year, I’ve personally been able to find some things to be positive about as the editor of a magazine that focuses on small- and mid-size companies in India. India has come to be known as an exciting crucible for entrepreneurial ideas – more and more, one sees “for-choice” entrepreneurs (investment bankers, marketing honchos and quality management students) give up their expected career choices to found companies of their own.

This entrepreneurial zeal is India’s core competence, and many say, its unique differentiator when compared to economies like China. Which is why so many first-time and first-generation entrepreneurs I know were so taken aback by a nasty surprise for them in this year’s union budget for India. Finance Minister Pranab Mukherjee has proposed an amendment to Section 56 (2) where start-ups are stated to be taxed on any investments (like those put in by angel investors) above their “fair market value.” What this means is that young companies – those really trying just to survive – will be liable to pay taxes on capital they raise.

Already, start-ups in India have a tough time getting bank loans (coming as they do with mortgages against property – an asset many young, first-generation entrepreneurs aren’t likely to have). The ecosystem for funding from angel investors and incubators was just beginning to pick up. If passed, Mukherjee’s amendments could be a big obstacle to growth for some worthy companies who might have had ideas and gumption, but didn’t have money. You only have to read this article by Amit Wilson, an entrepreneur who runs a document storage company, to understand how damaging this amendment could potentially be.

If there’s one thing India has going for itself, it’s the grit and the determination of its entrepreneurs – should we not do more to facilitate their progress?