India’s long march: From agrarian economy to becoming a digital powerhouse

India is not just a country; it’s an idea. An idea that represents the power of resilience, the spirit of innovation, and the quest for progress.

Emerging from colonialism, India has been through its shares of hard times including poverty, limited industrialization, and inadequate infrastructure. At the time of independence, the nation had an agrarian economy, with agriculture contributing to half of the GDP and the vast majority of the population was working as farmers. The per capita income was significantly low, and industrial development was minimal, leaving the nation with no hope but to revamp its economic growth & development.

Today, India stands as the fifth-largest economy in the world, with a GDP exceeding $3 trillion. The nation has transitioned to a strong economic structure, with significant contributions from agriculture, industry, and services. The resilience of India’s economy has been evident in its recovery from 2008 global financial crisis, and the most recent COVID-19 pandemic. The past decade has received massive investments in infrastructure, digitalization, and innovation, all of which have propelled India's growth. Amidst this robust economic framework, India's start-up industry has flourished, establishing the country as the third-largest producer of unicorns globally which is driven by technology and innovation.

According to Tracxn’s India Tech Semi-Annual Funding Report H1 2024, Indian tech start-ups raised $4.1 billion in H1 2024, a 4% increase from $3.96 billion in H2 2023. However, that is still a 13% decrease compared to the $4.8 billion raised in H1 2023. India remains the fourth-highest tech start-up landscape in the world, with the United States leading in overall funding volumes, followed by the UK and China.

The elimination of the angel tax marks a pivotal moment. It has removed a barrier, encouraging entrepreneurs to take risks. By simplifying regulations, the government has cultivated a more investor-friendly climate. This is expected to attract substantial venture capital, high-net-worth individual investments, family office investments and foreign capital. These funds will be crucial for nurturing early-stage start-ups and accelerating their growth.
Moreover, the businesses are now likely to have reduced disputes and litigation, providing much-needed tax certainty and policy stability. This will foster a more predictable business environment, encouraging long-term investments and fostering a culture of innovation. The move is particularly beneficial for emerging sectors such as deeptech, artificial intelligence, and clean energy, which require substantial early-stage capital to scale and compete globally.

Further, the reduction in long-term capital gains tax in unlisted securities from 20% to 12.5% will now significantly incentivize domestic investors to participate more actively in the start-up ecosystem. This shift towards domestic capital would strengthen the foundation of the start-up ecosystem. Start-ups have historically faced a tax disadvantage compared to listed securities, with investment income taxed at more than double the rate of capital gains from listed securities. This disparity discouraged domestic investment in early-stage ventures that required capital to stay invested for a longer term, carry higher risk and yet be subject to higher capital gains tax compared to listed securities. 

In contrast, most transactions in the listed market involve investor-to-investor transfers, with the company receiving minimal direct benefit. Given that investments in start-ups primarily fund new asset creation, job growth, and product development, a more favourable tax environment for these investments was crucial. It’s now a ONE country ONE long term capital gains tax regime in India which makes long term investments, simple, predictable and sustainable. Additionally, the previously lower tax rate for non-resident investors compared to domestic investors exacerbated the issue, leading to a heavy reliance on foreign capital. By addressing these tax disparities, the government has taken a crucial step towards fostering a more robust start-up ecosystem.

India's journey towards a start-up hub bears similarities to other nations that have successfully cultivated innovation ecosystems. Countries like Estonia, for instance, have leveraged digital infrastructure and streamlined governance to foster a conducive environment for entrepreneurship. By adopting similar strategies and focusing on creating a simplified regulatory framework, India can accelerate its journey towards becoming a global start-up epicenter, attracting both domestic and foreign investment.

To fully unlock the potential of the start-up ecosystem, a comprehensive approach is required. The government must continue to create an enabling environment by simplifying regulations, improving access to affordable capital, and fostering a culture of innovation. Additionally, targeted support for specific sectors, such as cleantech, healthcare, and agriculture, can accelerate innovation and create global champions.

Fostering a culture of risk-taking and experimentation is paramount for achieving. This can be accomplished through initiatives such as start-up incubators, accelerators, and mentorship programs. By providing entrepreneurs with the necessary support and resources, we can create an ecosystem where innovation thrives.
Collaboration between the government, industry, and academia is also essential for driving the start-up ecosystem forward. Public-private partnerships can bridge the gap between research and commercialization, accelerating the translation of ideas into market-ready products and services.

While the government has made significant strides, there is still scope for further initiatives to bolster the start-up ecosystem. Here's the six-point framework that can unlock the next stage of growth:

1.    Expanding access to affordable capital: The government could explore further options such as credit guarantee schemes, venture debt funds, and co-investment platforms to enhance funding availability for start-ups.

2.    Improving the regulatory environment: Streamlining regulatory processes, reducing compliance burdens, and providing clarity on intellectual property rights can significantly benefit start-ups

3.    Enhancing research and development infrastructure: We strongly welcome the Rs 1 lakh crore allocation to R&D. Investing in R&D facilities, promoting academic-industry collaborations, and incentivizing research-oriented start-ups can foster innovation. Reliable and affordable internet connectivity, world-class research facilities, and access to essential resources are prerequisites for start-up success. The government can further invest in developing these infrastructure elements to create an environment conducive to innovation and growth.

4.    Developing talent pipelines: A crucial aspect of fostering a thriving start-up ecosystem is the development of a robust talent pool. Investing in STEM education, skill development programs, and entrepreneurship training is imperative to create a skilled workforce capable of driving innovation. Additionally, promoting entrepreneurship as a viable career path can inspire a new generation of innovators.

5.    Creating global market access: To compete on the global stage, Indian start-ups require access to international markets. The government can play a pivotal role in facilitating market entry by providing export incentives, organizing trade missions, and establishing partnerships with foreign governments.

6.    Develop a culture of entrepreneurship: To fully realize the potential of the start-up ecosystem, a culture of mentorship and knowledge sharing must be fostered. Experienced entrepreneurs and industry leaders can play a crucial role in guiding and supporting aspiring entrepreneurs. Establishing mentorship programs and knowledge-sharing platforms can accelerate the learning curve for start-ups and increase their chances of success.

As we celebrate India’s 78th Independence Day, it is clear that India's economic progress has been remarkable. From an economically weak country to a global player, India’s story is one of continuous evolution. The vision of Viksit Bharat @ 2047 represents the next chapter in this journey—defined by innovation, entrepreneurship, and a commitment to sustainable and inclusive growth.

Let us together reaffirm our commitment to building a future where India is not just a participant but a leader in the global economy. The road to 2047 will undoubtedly be challenging, but with determination, innovation, and collective effort, India can achieve its full potential as a global leader, fulfilling the dreams of our founding fathers and building a nation that stands tall on the world stage.

Views are personal. The author is National Chair, CII’s India@100 Council