The Hindu Business Line : Growth with a different angel

When State Governments turn angel investors, there is great promise for industrial growth, but will they simply be warehouses for political patronage?

One of the more positive results of the economy’s sustained growth over the past four years is the slow but steady awakening of the reform spirit among State governments, regardless of political affiliations. While traditionally advanced States such as Tamil Nadu, Maharashtra, Andhra Pradesh, Karnataka and Gujarat continue to stay on the radar screen of most investors, it is heartening to note that others are attempting to catch up, using the powers a federal polity awards them. Till VAT (Value Added Tax) and reforms in the Central Sales Tax were introduced a few years ago, most States vying for investments would offer tax incentives. Some of those incentives, offered notably by the newly-formed States, such as Uttarakhand and Jharkhand, may appear to have worked in drawing industries, but at a national level they have contributed to a distortion in the tax structure and made harmonisation of taxes that much more difficult.

Now, some States have devised a novel way of boosting industrial growth, one that is happily free of the distortions inherent in tax breaks. Led by Gujarat more than a decade ago, Kerala, Punjab and Rajasthan, among the backward States, and Andhra Pradesh and Karnataka, among the advanced have turned ‘angel investors’, setting up dedicated venture capital funds for start-ups in the bio-technology, IT tourism and retail sectors. This innovative step is more likely to help budding entrepreneurs on the ground than any other Plan or officially sponsored scheme for fund allocations, principally because the seed money that venture funds provide are project-specific. That some have tied up with SIDBI should make the selection process more professional and clearly help in the spread of employment opportunities in States such as Rajasthan and Kerala that have few industries at present. But for angel investing to succeed, as it has in other parts of the world, the States will have to clear the decks of the rubble that impedes enterprise growth. Rigid labour laws, opaque land markets and contentious land acquisition norms, not to mention an indifferent environment safety regime, may nip in the bud the initiative for any start-ups. Upstream, these hurdles may deter the global angel investors that the States would do well to attract as partners in the novel venture to nurture start-ups with financial and marketing inputs.

While the angel investor route thus holds promise, it poses challenges that can derail the best intentions. In the absence of political will to sweep away the remnants of the control regime that hindered enterprise-building, angel investing may become warehouses for patronage instead of laboratories for business ideas. India cannot afford the former any longer.

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