We are going to decode the “Budget for FY 2023–24” and what’s in there for Startups and Fintech.
Let’s dive in!
The financial industry welcomed the Union Budget 2023, particularly the extension of DigiLocker services to fintech and MSMEs that they support. The budget also included several benefits for MSMEs, including a Rs 9,000 crore credit guarantee scheme, an extension of ECLGS until March 31, 2023, a Rs 6,000 crore RAMP programme, and a Rs 2 trillion credit under the CGTMSE scheme. These initiatives, along with digital services such as the PM Jan Dhan Yojana, Indian Stack, and UPI, are propelling the fintech industry forward.
But, as with everything else, the devil is in the details, so let’s look at some of this year’s budget highlights and lowlights for the fintech and startup ecosystem as a whole.
Announcements regarding PAN as the common business identifier and the expansion of Digilocker’s scope will further reduce compliance costs for banks, NBFCs, and fintech. A simpler KYC framework would benefit fintech NBFCs, particularly those providing unsecured personal loans. As more types of documents are added to DigiLocker, digital service providers will be able to instantly verify more users’ credentials.
A few questions remain, such as what will happen to cKYC now that DigiLocker will have enhanced features. Will DigiLocker function as an authentication mode as well? Authentication, which ensures that someone is submitting their KYC documents and not someone else’s, cannot be eliminated. Also, the country’s digital penetration has slowed, and there is a clear digital divide. As a result, the budget’s tech vision and fintechs’ hopes for new lucrative markets are dependent on how quickly people migrate online.
MSME/Startup Credit Guarantee🏛️
The government plans to increase the corpus of the Emergency Credit Line Guarantee Scheme by Rs. 9,000 crore (ECLGS). Access to low-cost finance will help SMEs grow faster, creating enormous value for the startup ecosystem.
Despite the fact that India has 6.3 crore MSMEs employing over 11.6 crore people, a Rs 9,000-crore infusion may be insufficient. According to data from the Udyam Registration Portal, the number of new MSMEs registered in the last year has increased by approximately 70%.
The turnover limit for a small enterprise is 50 crores for classification. If their turnover is 50 crores, their credit needs could be around 10 crores. However, the guarantee under this scheme is only available for loans of up to Rs 2 crore; there is a need to increase this limit and reach a larger number of beneficiaries in order to meet the sector’s credit needs.
Agriculture Accelerator Fund🧑🌾
The central government has decided to encourage investment in agrotech startups through a self-created Agriculture Accelerator Fund. In context, agriculture accounts for an average of 18% of the total gross value added in the country (GVA). Agriculture also employs roughly 40% of India’s adult population, and according to the Economic Survey of 2020–2021, this sector has seen a capital expansion of 16.4% of the total market size.
In any case, a sector that employs 40% of the adult population while contributing less than 20% of the country’s GDP isn’t ideal. According to a back-of-the-envelope calculation, the total addressable market here is worth around $320 billion. The proposed agrotech fund by the government could be just what India’s agriculture sector needs.
Crypto Stays Flat📉
The Indian Union Budget 2023 made no changes to existing crypto taxes, effectively putting Indian crypto firms on the Stairway to Heaven. There is still uncertainty in the industry as a result of high taxes and a lack of a solid regulatory framework, which are stifling progress. The budget will have no further negative consequences for the crypto industry because it has already reached rock bottom.
AI Catches GoI’s Fancy✴️
Artificial Intelligence (AI) has captured the public’s attention. Large Language Models, such as GPT-3, are becoming easier to design, less expensive to train (due to falling computing costs), and more human-like.
The Indian government has thrown its weight behind AI, proposing the establishment of three centres of excellence, most likely housed within the Indian Institutes of Technology (IIT). This could kickstart the development of a deep-tech talent ecosystem, which could then lead to the development of an AI startup ecosystem in India. This could begin as early as 2028–2030 when the first cohorts of these CoEs graduate.
Capital Flow — Only In, No Out💰
P-Notes are back, allowing foreign investors to invest in Indian markets through a contract with one of the many MNC banks rather than directly. Due to speculative charges, SEBI banned the use of P-Notes entirely in 2018, effectively shutting down a significant channel of capital flow.
Offshore derivative contracts are now legal, and P-Notes, which fall into this category, have returned. Allowing them to go through the International Financial Services Centre (IFSC) in GIFT City, Gujarat ensures that foreign investors can invest in India without having to worry about taxes. This has the potential to reopen a critical channel for foreign capital to flow into Indian businesses.
Capital Account Convertibility, or Indian citizens’ ability to purchase assets freely in foreign countries, has been slowed. As an upfront tax, the Indian government has proposed collecting 20% of the amount remitted. This will be offset by future liabilities. This could be the government’s attempt to prevent an influx of Indians giving up their citizenship and moving overseas with their assets.
The unintended consequence of halting this trend is that startups that made foreign investment simple will suffer. Take, for example, INDMoney and Vested. Both companies make investing in the United States simple and seamless. With the government’s new proposal, clients will most likely be irritated because their purchase value will be reduced by 20% right away.
Similarly, fintech Niyo’s forex card is a popular option for travellers who want to manage their foreign currency spending. This will also be subject to the government’s pre-emptive 20% collection. This will undoubtedly disrupt the leisure travel plans of India’s growing middle class.
The government’s decision to limit domestic funds leaving India while increasing foreign capital entering the country tells its own story. It is an admission that India is desperate for any and all capital it can get its hands on. Economists will argue that it is impossible to breathe in without breathing out and that capital cannot flow in without allowing it to flow out. However, if India is successful in executing its plans, many observers will have to sit up and take notice.
Thanks for reading!