Job creation has been one of Narendra Modi's key initiatives ever since he took oath as the Prime Minister of India in 2014. During his campaign Modi promised to create 3 million new jobs for India's youth and in July he set the wheels in motion with the launch of the National Career Counseling Portal. Modi, with help from the central banker Raghuram Rajan, is aggressively reshaping India's business economy to help prepare it for potential future growth.
It's exciting to see Modi taking action to create more opportunities for the newest members of the workforce. While his efforts to-date has created good momentum, I have an idea for accelerating that progress. If Modi is wondering where he can find room for the 3 million new jobs he's hoping to create, I have one suggestion: Startups.
Small businesses have created two-thirds of new jobs in the US since the 1970s, according to the US Small Business Administration. India could easily experience such growth with the amount of energy Modi and his administration is putting into Digital India. In fact, Indian startups could employ a majority of the 2 million new youth that join the workforce every month, effectively employing the next generation. The only missing ingredient in this recipe for success? An environment conducive to funding.
Indians startups don't miss out on funding due to a lack of money. There is plenty of venture capital in the global economy to go around. The problem is Indian policy makes it incredibly difficult for startups in India to receive venture money. Plenty of people want to invest in the country's future, but few care enough to deal with ambiguous taxes, the endless paperwork and legal headaches. Understandably.
There are a couple actions the government should take to make way for the money and establish India as the most investment-friendly country in the world. As a start, the government should base its decisions on two principles. First, adopting best practices and policies creates a stable, predictable and transparent environment for investors to place their money. Second, benchmarking against other countries can help reduce transaction costs. Below are specific tactics the government can use to execute on these principles, which will create an environment amenable to investors both local and international.
1) Modify Tax Policies to Make India the #1 Investment Destinations
If one seeks a weather vane for the economy or a gauge that will predict tomorrow's business climate, they need only review the current tax policy. The government's attitude toward investment greatly influences whether the money is staying or leaving. India has an ambiguous tax code that scares investors away. In a recent ABA survey, attorneys said they were more hesitant to work with Indian companies than Chinese, US or U.K. businesses because of the regulatory environment. The best way to make India the No. 1 investment destination is by clarifying rules and taxes. If India really wants to open the spigot on capital they can reduce the capital gains rate to zero for a period of, say, 20 years. At the very least, the government should make the capital gains rate flat and predictable. Firms have already found a path through Mauritius. Why not roll out the red carpet directly?
The effectiveness of a zero-capital-gains-rate policy was proven in the US during the 70s and 80s. Profits from exits were a key driver for Silicon Valley's rise, as investors recycled funds from exits to back more companies. Moreover, India already has a zero capital gains rate for stock market floor transactions. Why not extend it to private markets as well? The income tax money created by new jobs will fill the government's coffers and, ultimately, less than 1 percent of tax revenue comes from capital gains anyhow.
The above modification in the tax policy will barely affect the budget, while offering massive benefits, both PR-wise and GDP growth-wise, for the Indian government. I estimate this change would produce a 1-2 percent increase in the GDP growth rate.
2). Simplify Exits to Increase the Velocity of Capital Flow
In order for the startup ecosystem to function, businesses must be able go through every stage of the lifecycle without hassle. Investors and entrepreneurs must be able to exit through acquisition or IPO if the company succeeds or a swift bankruptcy process if it fails. Making exits easier is key to attracting and maintaining more capital in India.
Every investor dreams of taking a company public. It's the ultimate proof of concept when a business is able to stand on its own. Once a startup reaches IPO, the investor may feel it's time to move on to his or her next venture. Unfortunately India's Companies Act of 2013 puts serious restrictions on investors and entrepreneurs in what would otherwise be an enviable scenario.
Source- economictimes.indiatimes.com
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