Indian economy is facing the worst growth slowdown in years, with Niti Aayog Vice-Chairman Rajiv Kumar saying the ongoing financial crisis in India is “unprecedented.” Even Moody’s Investors Service has slashed India’s GDP growth rate to 6.2 for the year 2019 against the earlier projection of 6.8.
The impact of economic slowdown
Several sectors, including automobile and financial services, have been taking the brunt of the economic slowdown. Most importantly, the real estate and construction sector have faced the worst of it all, credited to account for around 40 per cent overall jobs and business being slower with each year. According to sources, in the April-June quarter of 2019, growth in the real estate sector fell to 5.7 per cent, compared to 9.6 in the same quarter last year. On the other hand, unlike the sectors that depend on consumer demand or government spending, the pharmaceutical sector is relatively immune to a slowdown.
How investors are seeing this as a silver lining and investing in startups that seem capable
Despite an economic slowdown, start-up and tech businesses are seeing a steady rise in funding and valuations and the emergence of new ventures. Industry observers say that the impact of the economic slowdown may be minimal for early-stage start-ups with a limited market share or start-ups that are looking to expand. Here is how an individual business owner or a budding start-up should see things and turn them around for himself.
Reduction in corporate tax
Recently, Finance Minister Nirmala Sitharaman announced a cut in corporate tax for companies from 30 per cent to 25 per cent. For companies that don’t avail of any other incentive or commission, the effective tax rate would be 22%. This step will not only reduce the cost of capital but also incentivize more investments in the consumer segment, which will result in a more significant influx of cash funding into the start-ups. According to different sources, in the year 2018, entrepreneurs were able to attract around $4.3 billion in investments and this number has already surpassed in the first seven months of 2019 with investments worth $4.7 billion.
Various economists have welcomed the decision, and they are quite confident that this will have a positive impact on growth, although the estimates of the extent of the effect differ. Also, global rating agency Moody’s has said that reducing the corporate tax is positive for companies since it will enable them to generate higher post-tax incomes companies. This will increase the government’s fiscal risks and not just boost investments in the start-up sector. Even tech start-ups in the financial and payments space welcomed the government’s corporate tax cuts. Companies will also get a larger share of profits from existing investments.
With fund inflow into tech start-ups continuing at a brisk pace, the effect of the slowdown on hiring depends on the industry concerned. The Society of Indian Automobile Manufacturers (SIAM) says that almost 3,50,000 jobs, most of them contractual, have been lost and over a million are at great risk due to plant shutdowns and bankruptcy of dealers and component makers.
However, due to an influx of funding in start-ups, they are on a hiring spree even though the economy has slowed down. Vogo, a bike rental start-up, has planned to double the number of employees by 2020 whereas the Start-up India Scheme has managed to create more than 5 lakh jobs so far.
How start-ups with investment can change the economic game
Although the slowdown may not impact the capital-raising ability of start-ups, their fundraising will depend on factors such as their competitors, the type of business sector they cater to. Since the base of start-ups is smaller and they require less capital when compared to other sectors like manufacturing or services, their double-digit growth has been successful in generating hundreds of jobs, products, technologies, services, markets, and returns.
So, even though we can see the effect of the economic slowdown in various sectors, it brings us to the question of whether the Indian start-up ecosystem or entrepreneurs will feel the impact or will they power through.