India has an estimated 26,000 startups, making it the third-largest startup ecosystem in the world, recording consolidated inflows of over $36 billion in the past 3 years with 26 “unicorns” – startups valued over $1 billion. The Indian startup ecosystem has expanded quite rapidly mainly through private investments including seed, angel, venture capital, and private equity funds, with technical support from incubators, accelerators, and the government. The government, for its part, is creating an enabling environment through its flagship Startup India initiative, which came into force in 2016. With India pushing toward a knowledge-based and digital economy, the government is attempting to deploy ICT infrastructure and provide policy support for enhanced e-governance, investments, and technology innovation through research and higher education to support entrepreneurship and spur economic growth. Data suggest that the expansion in the startup ecosystem has largely been clustered in the large (Tier 1) cities and states with financial depth, and especially in IT-enabled sectors including e-commerce, transport, and finance. Small businesses beyond the metros are not fully aware of, or integrated into, programs that provide startups with various government incentives and tax breaks. Despite the progress made so far, Indian businesses face huge challenges, such as the unorganized and fragmented nature of the market in most sectors, a lack of clear and transparent policy initiatives that startups can tap into quickly, as well as a lack of infrastructure, a lack of knowledge and exposure, and complications in doing business. Creating more awareness of government initiatives and incentives, credit disbursement to priority sectors, promoting outreach and network benefits to Tier 2 and Tier 3 cities, as well as easing financing and tax breaks for foreign and domestic investors could improve opportunities for startups in India.
WORKING PAPER NO: 1145
