The Silicon Valley approach to Indian innovation

Prime Minister Narendra Modi's visit to the Silicon Valley, the global hub of high technology innovation, is to hard sell India as a manufacturing, innovation and back office destination for the world's leading technology companies such as Apple, Google and Tesla, among many others. He will also seek to invigorate India's still nascent innovation culture by building bridges between the leading companies in Silicon Valley and Indian industry to push the start-up eco-system in this country.The truth is that despite the disproportionate media space that start-ups in India command, the innovation space in India is hobbled by a still hostile regulatory and social environment, resulting in only incremental innovations coming out of India.“We haven't really promoted the culture of innovation in India,” says Sudhir Singh, Partner, Emerging Companies, PricewaterhouseCoopers, one of the Big 4 global consulting giants. “Innovation starts when you allow people to think out of the box. We don't do that. Instead, we continue with our risk-averse culture.” “We don't have a culture of innovation. How many Indian companies are really innovative ” asks Rajarshi Sengupta, Chief Innovation Officer, Deloitte India, adding: “In India, we have zero tolerance for failure. There is no safety net; if you fail once, you are left to hang and dry. A cultural change is needed.”“Innovation requires an attitude and a mindset. I don't think we've done enough in our education system to encourage innovation. That needs to change. Expecting an innovation culture to suddenly develop here is expecting too much,” says Singh. Our education system encourages learning by rote. Examinees are rewarded for displaying high retention power. It does not promote a deep understanding of the subjects being taught. That has to change.“Alongside some genuine innovation, there's lots of replication happening here as well,” says Singh. “Hitherto, it was difficult to monetise new technologies in India. That, fortunately, is changing now,” adds Sengupta, but much more needs to be done. Even now, a large part of the funding for start-ups comes from venture capitalists and other investors in the US, Europe and Japan. Most of this money is routed through Mauritius or Singapore with which India has tax treaties.Now consider this: 15-20 per cent of start-ups are owned by people of Indian origin. Many are serial entrepreneurs with substantial investible capital. But they shy away from investing in India because of an adversarial and onerous tax regime. For example, under Indian law, foreign investors are not required to pay capital gains tax on stocks they hold for over one year, if they are listed on the stock exchanges. Since start-ups are almost always privately held, investors in these companies are denied the tax benefit that buyers of listed shares receive though their risk is much higher and they stay invested for much longer than the average portfolio investors.According to the Center for Venture Research, angel investors invested almost $25 billion in US start-ups last year. Since a large percentage of such investors are of Indian origin, they could be persuaded to invest in Indian start-ups if they were exempted from paying the capital gains tax. Many of them run relatively small financial ventures and don't want to take the hassles, or can't afford the cost, of maintaining offices in Singapore or Mauritius.Indian start-ups received foreign investments of about $10 billion from Singapore and Mauritius over the last five years. Analysts say this figure could be more than doubled over the next five if the capital gains tax on sale of start-up equity is withdrawn. There will be no loss of revenue for the government as the direct and indirect taxes paid by start-ups and their employees financed by these individuals and small firms would more than compensate for any revenue lost.This small step can go a long way in connecting the Indian start-up ecosystem with that in Silicon valley and encourage more innovators to take risks they otherwise wouldn't. While there, he will meet Google founder Mark Zuckerberg and CEO Sundar Pichai, Apple CEO Tim Cook and Tesla chief Elon Musk and seek their support for his government's ambitious Digital India initiative, which proposes to leverage technology to deliver governance at a low cost to the remotest corners of India and for his equally ambitious plan to harness the abundant sunshine and wind in the country to generate 175,000 MW of renewable energy to India's powerstarved industries and households. PwC's Singh, however, cautions against irrational exuberance.“There is a lot of vibrancy in the Indian innovation ecosystem right now. People are trying to create disruption. Investors are coming in and valuations are mind boggling. While it's great for people landing jobs and those holding shares in these start-ups, with success comes responsibility.”These new companies, Singh adds, need to be transparent to investors, employees and other stakeholders and also need to spend money wisely. “When the bubble bursts, lots of well funded companies will go down,” he warns.This is what happened in the dotcom bust of the early 2000s. “We have to develop a culture that values quality. For that, innovators must never compromise. They must view products and services from a functionality point of view. Look at what Steve Jobs did with Apple. Like him, we must follow the customer. But in India, we still tend to follow the engineer,” adds Singh.Sandip Samaddar, Additional Director & Head, Americas, Federation of Indian Chambers of Commerce & Industry, advocates the creation of innovation clusters in India. “The US is a vast country. Even there, it's not as if innovation is taking place everywhere,” he says.For a start, he adds, the government should take steps to ensure seamless connectivity between the education system and industry as in the US. “It will happen here for sure, but will take some time,” adds Samaddar.By creating the right linkages and an enabling atmosphere, “we can bring back some of the leading Indian innovators from the US. There's a lot we can learn from the US. The boombust cycle is part of the game and you have to live through that,” says Singh.Start-ups thrive in an ecosystem where failures are never seen as failures because there are lessons in them. That is missing in India. Innovators have put India on the world map despite the constraints and the restrictive procedures and laws that are in place. So, even as Modi invites Google's founder Mark Zuckerberg and CEO Sundar Pichai, Apple CEO Tim Cook and Tesla chief Elon Musk to step up their engagement and investments in India, his government has to remove the regulatory and tax-related roadblocks that are keeping India's innovators from reaching their full potential.