The drawback in Modi's big plan to fund start-ups

Practising Indira Gandhi's brand of socialism today will not just be anachronistic but also economically harmful. 

In his Independence Day address to the nation, Prime Minister Narendra Modi has announced a "Start-up India" programme, under which 125,000 bank branches in the country will finance as many start-ups so that 125,000 tribal and Dalit entrepreneurs can come up. 

What is more, the bank branches can finance as many women entrepreneurs too.

Thus, a whole range of new entrepreneurs can come up in the country, each employing one to four persons.

This "Start-up India", the PM informed the nation would lead to a "Stand-up India". 

Certainly, the goal is laudable. And it is the duty of a leader to think out of the box. But the proposed programme raises many questions.

The first question is whether such a programme sits well with the government's desire to professionalise the management of public sector banks (PSBs). After all, it has just announced a seven-point programme to that end.

How can a professional management tasked to bring down the current high level of non-performing assets (NPAs) also be asked to run a programme like this with a target handed down from above?

Ever since leading Indian banks were nationalised, they have been tasked to nurture and help grow small-scale enterprises and small businesses under mandatory priority-sector lending targets.

Schemes had also been introduced to lend to the poor at differential (that is, lower than market) rates of interest.

While these policies have undoubtedly promoted broad-based economic growth and created jobs, they have also come with the aberration of politically directed lending, accompanied by loan melas.

These have caused PSBs to incur huge losses. Economic historians will chalk out the pluses and minuses of these policies but the point is that post-reform India has moved on.

Practising Indira Gandhi's brand of socialism today will not just be anachronistic but also economically harmful.

If the government can restrict itself to delivering on infrastructure like electricity for all and a proper road to every village, then the inherent entrepreneurship among the people will do the rest. 

The other problem with the programme is the choice of the expression "start-up". The term has gained currency in the last few years with innovative ventures, invariably relying on information technology, attracting global high-risk capital (and certainly not state funding).

According to the Nasscom Startup Report 2014, India has received $ 2 billion funding for its over 3,000 startups, projected to go up to over 11,000 in five years.

All this has created a buzz over the term "start-up" which Mr Modi may be seeking to co-opt. But Mr Modi's programme and the manner in which start-up firms have grown in the last year or two belong to two different worlds.

Today's start-ups owe their origins to the success of Indian software. That happened because the government chose to follow the right policies in the early 1990s.

The institution of the "software technology park" was created to keep government out of software writing and exports.

Simultaneously, the government had exempted software export earnings from income tax.

The government has a role in start-ups. But that role should be to create an ecosystem that is conducive to growth and development of start-ups. Directing banks to give them loans is not likely to yield the desired results.