Angel Tax Removal: Not a Panacea for Manufacturing Startups and SMEs

The recent abolition of the angel tax by the Modi government in the Union budet has been met with applause from the startup community. However, the question remains: is this enough to rejuvenate India's startup ecosystem? According to Dr. Yerram Raju, Economist and Risk Management Expert, the answer is a resounding no. While the removal of the angel tax is a positive step, Dr. Raju argues that the budget has missed crucial elements needed to boost manufacturing startups and SMEs.

Insufficient Focus on Manufacturing

Dr. Raju highlights a significant oversight in the budget: the lack of substantial support for the manufacturing sector.

"The focus on manufacturing has not been to the extent that we expected," he remarks. Despite an increase in Mudra loans to 20 lakhs for Tarun category borrowers, there is no emphasis on directing these loans towards the manufacturing sector. As Dr. Raju notes, "82-85% of the Mudra loans have been given to the services sector, not to the manufacturing sector."

The Need for a Robust Ecosystem

The absence of a supportive ecosystem for micro and small enterprises (MSEs) is another critical issue. Dr. Raju suggests that incentives for large and medium-sized enterprises to invest in their supply chain MSEs could have made a substantial difference.

"Even by removing the angel tax, angel investors are not going to line up and come to the rescue of MSEs," he asserts.

The budget fails to provide the necessary framework to attract investments in these enterprises, especially in their early stages within the supply chain.

Missed Mechanisms and Incentives

Dr. Raju points out that while there have been some positive measures for MSEs, such as advising banks to move away from traditional rating mechanisms and extending guarantees for term loans, the delivery mechanisms for these incentives remain unclear.

"There are 240 schemes for MSEs spread across 32 ministries, but many of these incentives have not reached their intended beneficiaries," he explains. 

The lack of a streamlined approach to deliver these incentives effectively has hampered the growth of MSEs.

Fiscal Prudence and Employment Incentives

While the budget maintains fiscal prudence with a 4.9% deficit, projected to decline to 4.5% by 2025-2026, Dr. Raju questions the feasibility of these targets. He also critiques the employment incentives tied to the top 500 companies, suggesting that these measures are unlikely to make a significant impact.

"The incentive of Rs 5000 per month for interns, connected to CSR funding, lacks clear implementation guidelines and monitoring mechanisms," he says.

Skills and Technology: The Way Forward

Addressing the need for skill development, Dr. Raju emphasizes the importance of local-level training for electricians, toolmen, welders, and other skilled workers. He warns that the rise of AI and machine learning could lead to job losses rather than job creation.

"Micro and small enterprises need support for technology upgrades, which are currently lacking," he adds. 

The short lifecycle of technologies necessitates continuous investment, but funding and support mechanisms are insufficient.

A Call for Direct Benefit Transfers

To make MSEs globally competitive, Dr. Raju advocates for a Technology Upgradation Development Fund with direct benefit transfers. "Checks and balances can be introduced to ensure these funds reach the intended beneficiaries," he suggests. With a budget discussion on the horizon, there is hope that the government might consider revising certain provisions to better support the MSME sector.

The removal of the angel tax is a step in the right direction, but it is not a silver bullet for the challenges faced by startups and SMEs in India. As Dr. Raju's insights reveal, there is a need for a more comprehensive approach, including stronger support for the manufacturing sector, effective delivery of incentives, and robust skill development programs. Only then can India's startup ecosystem truly thrive.

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