India budget promotes start-ups, boosts public investment

Finance Minister Arun Jaitley announced in his annual budget speech that the government would take several steps to improve the environment for new businesses. One of the most prominent measures is a tax holiday for Indian start-ups that would eliminate taxes on any profits in three of the first five years of a start-up's life, a measure that Prime Minister Narendra Modi proposed at the Start-Up India event last month.

The start-up tax holiday has attracted some criticism from GPs who are skeptical of its real value, since most start-ups do not make a profit in the first three years anyway. However, other market watchers believe the removal of tax burdens could encourage entrepreneurs to move toward profitability sooner in their companies' life cycles.

In another measure aimed at encouraging entrepreneurship, the government said that it would streamline the process of starting a new business, hoping to reduce registration time to one day. According to the World Bank, in 2015 it took 29 days, on average, to start a business in India, with 13 separate procedures required.

The government's plans to boost the start-up sector do not, for the most part, extend to direct support for PE and VC investors themselves; in his speech, Jaitley did not mention the INR100 billion ($1.5 billion) fund of funds that Modi announced last month.

However, the budget did include some measures that could prove indirectly beneficial to the industry, such as a reduction in the tenure for long-term capital gains tax on unlisted companies. Under the new budget, investors could exit a portfolio company after two years without paying long-term capital gains tax, rather than the current three.

The government also plans to boost its support for the agriculture and investment sectors, pledging a total investment of INR2.2 trillion on infrastructure projects including construction of new roads and highways and new greenfield ports on the east and west coasts. Total investment in agriculture and farmer welfare projects will reach INR360 billion.

Regulations will be relaxed somewhat as well, with the investment limit for foreign entities in Indian stock exchanges to be raised from 5% to 15%, and the limit for investment by foreign portfolio investors in listed Central Public Sector Enterprises will be raised from 24% to 49%.

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