Vishal Agarwal is a partner and PE leader at Grant Thornton Bharat, while Priyanka Duggal is partner, transaction tax at the consultancy firm.
Amid global economic turmoil, growth and employment concerns, foreign investors exiting the capital markets, and a falling rupee, Indian finance minister Nirmala Sitharaman presented her eighth consecutive budget on Saturday (Feb. 1).
Budget 2025 aims to keep India on the growth path while not neglecting fiscal prudence. As expected, the focus is on where to spend.
The annual Economic Survey, released a day before the Budget, laid the groundwork and emphasised (a) the need to encourage private investment; (ii) deregulation; (iii) encouraging manufacturing; (iv) green energy; and (v) startup and innovation.
Budget 2025 has outlined six engines to drive growth and employment on the route to Viksit Bharat (developed India). These are (i) taxation; (ii) power sector; (iii) urban development; (iv) mining; (v) the financial sector; and (vi) regulatory reforms.
Across the Survey and the Budget speech, the message was clear—there is a need to supplement government spending with private capital, now more than ever. There is recognition that simplification of regulations, including tax laws, is key to growth. It is also clear that the government and private capital need to move together even in areas such as startups and innovation for the country to see real gains.
Startups in India
In FY24-25, there were 668 transactions by private equity funds with an average size of less than $10 million. These were in various sectors from retail and financial services to pharmaceuticals.
Also, the first startup Fund of Funds (FoF) launched by the government in 2023 has already deployed Rs 10,000 crore ($1.14 billion), which has prompted another similar fund with an initial corpus of Rs 10,000 crore.
Hence, there is reasonable recognition for the country’s startup community, which can expedite India’s journey to becoming a real tech and innovation powerhouse globally.
This is also reflected in the announcement of a deeptech Fund of Funds for next-generation startups, schemes for first-time entrepreneurs, and enhancement of credit availability thresholds with guarantee covers for startups.
On the tax front, the Budget proposes to extend, by five years, the benefit of a 100% tax deduction available for specified startups incorporated before April 1, 2030. All of these are welcome announcements and demonstrate that the government remains focussed on supporting the sector.
With the possibility of a slew of reforms in the regulatory framework, and an assessment of financial sector regulations, we could see a movement to improve the ‘ease of doing business’ climate which is a key ask for startups and any change in this area, however small, could have a magnifier effect.
For example, could there be a single registration for all matters to start a business, could it close easily, could compliances be eased and simplified till a certain size is attained. Each of these could support businesses and entrepreneurs who can then put the money to use in core businesses rather than handling compliance challenges.
Are PE-VCs adequately enthused to invest in India?
Measures to support startups also have a rub-off effect on the PE-VC community. It encourages the efficient deployment of capital. PE-VCs need (i) a supporting environment; (ii) good entrepreneurs; (iii) vibrant exit opportunities; and (iv) predictable tax regimes.
Firstly, government capital towards startups and deeptech is a major boost. It shows the government is willing to walk with the PE-VC community to drive innovation and now they have a ‘skin in the game’ as well.
Secondly, entrepreneurs who are supported by the ease of regulations should be able to focus on business better, build better value and drive innovation.
Thirdly, the IPO market in India over the last two years has shown that it is possible to get multiple high-value exits consistently; more so for tech companies which, until around five years ago, wanted to only list in the US.
Lastly, tax predictability. On this count, Budget 2025 has taken away the Tax Collected at Source (TCS) on purchase of shares. This is a great win and recognition that the quality of governance and regulation for the PE industry does not warrant excessive compliance burdens.
Also, defining all securities held by PE funds as capital assets resulting in capital gains, takes away the decade-old debate on whether income generated from funds is business profits or capital gains. The former results in materially higher taxes than capital gains.
Also, specific amendments proposed to the India-based fund manager regime would encourage more fund managers to be in India and manage global funds. However, more could be done on this front.
India now has a vibrant investment manager community, which is well-connected to the startup community. The tax laws enable moving global funds into International Financial Services Centres (IFSCs).
We should not stop there. There is a need to ensure that fund managers are excited to be based here and manage India and global funds, from India. Economically, it adds to the communities they work in, but also encourages a culture of innovation which comes from global experiences as investors and entrepreneurs combine to form vibrant communities.
There aren’t too many specific announcements in Budget 2025 for startups and PE funds. Those that are there build on some initial actions taken a few years ago. There are, however, enough opportunities in themes identified for growth, in the vision for how development and private capital need to go together and the need to make it easier to do business in India.
With fiscal prudence in place, growth on a decent path, capital markets doing well, and global recognition of India as a strong democracy and growth engine for the world, there is an opportunity like never before to develop an ecosystem that attracts global talent to ‘work in India’, ‘live in India’ and ‘innovate in India’.
Will the new tax law and the review of regulations throw up enough changes to support the Economic Survey to encourage private capital and deregulate?
