The outcome of the latest Indian election was unexpected. The National Democratic Alliance (NDA), led by the Bharatiya Janata Party (BJP), is still in charge, although it now heads a coalition administration. This change calls for a more thoughtful and collaborative approach to policymaking, which could have an effect on the Indian startup scene.
Challenges and Opportunities of Coalition Politics
A robust democracy may benefit from the more measured policymaking that coalitions frequently bring about. But there’s a worry that in order to take into account the regional interests of its alliance partners, the NDA may need to moderate its policy agenda, particularly with regard to growth-stimulating initiatives.
Modi 3.0 Cabinet Reflects Balancing Act
This 30-member Modi 3.0 government is an example of the BJP’s attempt to strike a compromise between unity and continuity. The finance, home affairs, defense, and foreign affairs portfolios of prominent ministers from the previous administration were kept. Likewise, recognized faces may be found in other important ministries such as agriculture, business, transportation, and information technology. Only a few portfolios, such as those related to food processing, small and medium-sized businesses, and civil aviation, include new faces.
Startup Ecosystem Focuses on Long-Term Value Creation
For Indian startups and venture capital, a stable government focused on sustainable economic growth policies remains crucial. This stability creates an environment conducive to building long-term value for startups.
It is anticipated that the forthcoming Union Budget will set the direction for the Modi 3.0 administration. Although industry experts predict an 8 percent GDP growth in the fiscal year 2025 (FY25), they are nevertheless wary. “The growth estimate hinges critically on addressing the unfinished reform agenda on priority,” states the Confederation of Indian Industry (CII), which also lays out a 14-point agenda for the government.
The CII also highlights the need for collaboration across state and central governments for “next-generation reforms.” Platforms like the GST Council can serve as models for fostering such collaboration.
Startup Funding Downturn: Continuity and Reforms Are Key
Policy continuity and next-generation reforms are both vital for the startup and venture capital ecosystem, especially considering the ongoing funding downturn. From a peak of $35 billion in 2021, startup funding plummeted to $24 billion in 2022 and further down to $10.8 billion by the close of 2023.
Growth capital has been particularly challenging. Mega-rounds decreased by almost 70%, while several scaled startups opted to delay fundraising due to the “funding winter.” This led to a consecutive decline in the emergence of unicorns, mirroring pre-2019 levels.
However, smaller and medium deals (less than $50 million) witnessed a moderate compression, declining by about 45%. This could indicate investor optimism for India’s medium-to-long-term prospects, as per Bain & Company’s India Venture Capital Report 2024.
Early Signs of Recovery in 2024
The first quarter of 2024 has seen some improvement in investment flows. Companies like Lighthox portfolio companies Zano Health, Amaha, and Bombay Shaving Company raised significant follow-on capital, demonstrating their ability to build a path towards profitability. The ongoing recession has a silver lining for startups. It has made businesses focus on real-world metrics for survival and profitability rather than chasing unrealistic valuations.
Political Environment Not a Major Determinant for Long-Term Value
Having witnessed the world over the past two years, startups and businesses generally don’t expect the political environment to significantly impact long-term value creation. India has a history of coalition governments effectively implementing economic growth agendas with bold reforms.
For instance, the minority coalition administration led by P.V. Narasimha Rao in 1991 was instrumental in enacting reforms related to privatization and liberalization. Coalitions or not, governments have shown pragmatism in providing the necessary stimulus to push the economy in the direction of its objective of emerging as the third-largest economy in the world. It is unlikely to be much different in the upcoming years.
Despite the recent election outcome and ongoing downturn, the Indian startup ecosystem remains cautiously optimistic. The focus remains on long-term value creation through sustainable growth policies and reforms. While the political environment might not be a major determinant, a collaborative approach between the government, startups, and investors will be crucial for navigating the challenges and realizing India’s full economic potential.
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