Startups, innovation and frontier industries

Detail

1. Where startups fit in the story of Indian industry

• IPR 1948 / 1956 to 1990: the State led industry. There were licences, reserved sectors and public sector undertakings (PSUs). Private enterprise worked inside tight controls, so risk-taking by new firms was limited.
• 1991 (LPG reforms): most industrial licensing ended and the private sector got more room. This made space for new private firms.
• 2016 onwards: the government actively promotes new, tech-led private firms through Startup India. The State moves from owner of industry to enabler of entrepreneurs.

2. The entrepreneur (NCERT Class 8, Factors of Production)

• Entrepreneurship is the fourth factor of production, alongside land, labour and capital. The entrepreneur is the person who brings the other three together.
• According to NCERT, an entrepreneur:
• identifies a problem that people need solved;
• combines the factors of production (land, labour, capital);
• takes risks with money and time;
• makes key decisions;

• contributes to society's welfare.

• NCERT case: J.R.D. Tata

• Started Tata Airlines in 1932.
• It later became Air India.
• He received the Bharat Ratna in 1992.

3. What a startup is, and how it is officially recognised

• Startup (NCERT): "an entrepreneurial venture with limited resources that aims at rapid growth and expansion while leveraging technology".

• How it differs from a normal small business: a startup aims to grow very fast, usually through technology. A small shop usually aims for steady income.

• Startup India was launched on 16 January 2016. This date is now celebrated as National Startup Day.

• DPIIT recognition. DPIIT is the Department for Promotion of Industry and Internal Trade, under the Ministry of Commerce and Industry. A firm needs DPIIT recognition to get startup benefits such as tax breaks and easier compliance.

Criterion	NCERT scaffold	Current (revised framework)
Age limit (general startup)	up to 10 years	up to 10 years
Turnover limit (general startup)	≤ Rs 100 cr	≤ Rs 200 cr [2]
Deep Tech Startup (new sub-category)	—	age up to 20 years, turnover ≤ Rs 300 cr [2]

• Why deep tech gets a longer limit: such firms have long gestation periods (they take many years to earn revenue), high R&D intensity and need a lot of capital [2].
• Size of the ecosystem:
• DPIIT had recognised 1,97,692 startups as on 31 October 2025 [3]. (NCERT: about 1.9 lakh.)

• India is the third-largest startup ecosystem in the world and has 100+ unicorns (scaffold).

• Tax holiday under Section 80-IAC: Budget 2025-26 extended eligibility by 5 years. Startups incorporated before 1 April 2030 can now claim it [12].

4. The funding ladder: how a startup raises money

Money comes in stages. The risk is highest at the bottom, so early money is small and costly.

• Step 1: Bootstrapping. The firm grows on the founders' own savings and its own revenue, with no outside investor.
• Examples: Zoho and Zerodha.

• Plus side: founders keep full ownership.

• Step 2: Seed funding. This is the earliest outside money. It pays for the idea, the prototype (first working model) and the first market test.

• Startup India Seed Fund Scheme (SISFS), 2021. Corpus (total money set aside) of Rs 945 crore. It funds proof of concept, prototypes, product trials, market entry and commercialisation [11].

• By December 2024, 2,622 startups had received Rs 467.75 crore under it [11].

• Step 3: Angel and venture capital (VC).

• Angel investor: a rich individual who invests early in exchange for a share in the firm.
• Venture capital: professional funds that invest in high-risk, high-growth firms.
• Fund of Funds for Startups (FFS), 2016
  • It is managed by SIDBI (Small Industries Development Bank of India).
  • It does not invest directly in startups. It invests in SEBI-registered Alternative Investment Funds (AIFs), and those funds invest in startups.
  • So one rupee of government money draws in several rupees of private money.
• Startup India Fund of Funds 2.0
  • Approved by the Cabinet with a Rs 10,000 crore corpus, to bring in more venture capital [8].
  • It was later notified, and DPIIT has issued operational guidelines [9].
  • This is the "new FFS" announced in Budget 2025-26.

• Angel tax was abolished for all classes of investors in Budget 2024-25 [10].

  • What it was: under Section 56(2)(viib) of the Income-tax Act, if a startup sold shares above their "fair value", the extra amount was taxed as the startup's income.
  • Why it hurt: it punished startups for raising money at high valuations.

• Step 4: IPO (Initial Public Offering). The firm sells shares to the public for the first time and gets listed on a stock exchange. Early investors can now sell and exit.

Incubator vs accelerator (a common trap)

	Business incubator	Startup accelerator
Stage	Very early, often just an idea	Already has a product or early traction
Duration	Long, open-ended	Fixed-term cohort (a batch that starts and ends together, usually a few months)
Offers	Office space, mentors, networks	Intensive mentoring plus a small investment for a share of the firm
Ends with	No fixed end	A demo day, where startups pitch to investors
Indian examples	Atal Innovation Mission's Atal Incubation Centres (AICs); DST Technology Business Incubators (TBIs)	Private and corporate cohort programmes

5. Valuation labels

• Valuation is what investors think the whole company is worth. For a private firm it is based on the price paid in the latest funding round.
• Worked example: an investor pays $50 million for 5% of a startup.
• Valuation = 50 ÷ 0.05 = $1,000 million = $1 billion.
• So the startup becomes a unicorn.

Label	Valuation (private, unlisted firm)
Soonicorn	Likely to reach $1 bn soon
Unicorn	> $1 bn
Decacorn	> $10 bn
Hectocorn	> $100 bn

• These labels apply to private (unlisted) firms. Once a firm lists through an IPO, it is valued by its stock-market price instead.
• In GII 2025, India ranks 11th in unicorn valuation [4].

6. Deep tech and reverse flipping

• Deep-tech startup: a firm built on real science or engineering, not just a new app or business model.
• Examples: AI, semiconductors, biotech, quantum computing.

• It needs long gestation (many years before revenue) and heavy R&D.

• Policy support:

• the draft National Deep Tech Startup Policy;
• a Deep Tech Fund of Funds;
• the new DPIIT Deep Tech Startup category (20 years / Rs 300 cr) [2];

• the RDI scheme, which names deep tech such as quantum, AI and biotech among its target areas [6].

• Flipping: an Indian startup moves its parent (holding) company abroad, often to the US or Singapore. The reasons are easier foreign funding, easier foreign listing and better tax or legal treatment.

• Reverse flipping: the startup moves its parent company back to India.
• Examples: PhonePe, Groww, Zepto, Razorpay.
• Why firms are coming back:
  • Indian IPO markets are strong, so firms can list at home and get good valuations.
  • GIFT IFSC (India's International Financial Services Centre in Gujarat) offers global-style finance on Indian soil.
  • The 2024 fast-track cross-border merger rules make it easier to merge a foreign parent into an Indian company.
• Cost: reverse flipping can trigger a one-time tax bill in the foreign country, but many firms still choose to pay it.

7. Innovation base: R&D spending

• Research and development intensity = GERD as a share of GDP.
• GERD (Gross Expenditure on Research and Development) is total R&D spending in the country by government, companies, universities and non-profits.
• Formula: R&D intensity (%) = (GERD ÷ GDP) × 100

• Worked example: GDP = Rs 300 lakh crore and GERD = Rs 1.92 lakh crore.

  • R&D intensity = 1.92 ÷ 300 × 100 = 0.64%.
  • To reach 2% of the same GDP, GERD would need to be Rs 6 lakh crore, about 3 times higher.

• India's level: GERD is about 0.64% of GDP [5] (NCERT: ~0.65%).

• Comparison: China ~2.4%, US ~3.5%, Korea ~5% (scaffold).

• Who pays for India's R&D:

• the public sector pays about 60%;
• the private sector pays only about 35-36% [5] (NCERT: ~36-40%);

• in leading innovative economies, the private sector pays over 70% [5].

• New funding institutions:

• Anusandhan National Research Foundation (ANRF)
  • Set up under the ANRF Act, 2023.
  • The Act came into force on 5 February 2024 [5].
  • It gives strategic direction for research, innovation and entrepreneurship in science and technology.
  • Its Governing Board is chaired by the Prime Minister [6].
• Research Development and Innovation (RDI) Scheme
  • Total outlay of Rs 1 lakh crore over 6 years, with Rs 20,000 crore for 2025-26 [6].
  • It gives long-term loans or refinance at low or nil interest to draw in private-sector R&D. It does not simply give grants [6].
  • The Rs 1 lakh crore RDI Fund was launched by the Prime Minister on 3 November 2025 [7].
  • The ANRF Governing Board gives it overall direction [6].

8. Global Innovation Index (GII)

• The GII is published every year by WIPO (World Intellectual Property Organization, a UN agency in Geneva).
• It ranks economies on innovation inputs such as institutions, human capital, infrastructure and markets.

• It also ranks them on innovation outputs such as knowledge, technology and creative goods.

• India's rank:

• 81st in 2015 (scaffold);

• 38th in 2025, up one place from 2024 [4] (NCERT: about 38-39th).

• India in GII 2025 [4]:

• India is the top performer among lower-middle-income economies and has held this position since 2022. It also leads the Central and Southern Asia region.
• Indicator ranks: 1st in ICT services exports, 4th in late-stage VC deals, 9th in finance for startups and scale-ups, 8th in intangible asset intensity and 11th in unicorn valuation.

9. Frontier industries

• Sunrise industries are new, fast-growing sectors with a big future:
• Semiconductors: chip design and fabrication (making the chips).
• Green hydrogen: hydrogen made using renewable electricity. The National Green Hydrogen Mission (2023) targets 5 MMT (million metric tonnes) a year by 2030.
• EV and ACC batteries: batteries for electric vehicles and Advanced Chemistry Cell (ACC) batteries.
• Drones.
• Space: opened to private firms after IN-SPACe (2020). IN-SPACe is the Indian National Space Promotion and Authorisation Centre, which authorises private space activity.
• AI: the IndiaAI Mission (2024).

• The RDI scheme calls these "strategic and sunrise domains" and lists energy security, climate action, quantum, AI, biotech and the digital economy [6].

• Sunset industries are mature or declining sectors:

• film cameras;
• landlines;

• coal-based power.

• Just transition (linked to coal): when a sunset industry closes, its workers and regions need help to move to new work. Examples are retraining, new local industries and social security.

• Industry 4.0 is the fourth industrial revolution. It combines cyber-physical systems, where machines are linked to software and to each other, with IoT, AI, robotics, big data and cloud computing.
• The result is smart factories, where machines sense, share data and adjust on their own.

• Indian support: SAMARTH Udyog Bharat 4.0 (Ministry of Heavy Industries), which spreads Industry 4.0 to manufacturers.

• Industry 5.0 adds a human-centric, sustainable and resilient focus.

• Humans and machines (for example "cobots", or collaborative robots) work together, instead of machines replacing people.

Prelims Hooks

• Startup India launched on 16 January 2016. That day is now National Startup Day.
• Under the revised DPIIT framework, a general startup can be ≤ 10 years old with turnover ≤ Rs 200 cr (earlier Rs 100 cr). A Deep Tech Startup can be ≤ 20 years old with turnover ≤ Rs 300 cr [2].
• The Fund of Funds for Startups is managed by SIDBI. It invests in SEBI-registered AIFs, not directly in startups. FoF 2.0 has a Rs 10,000 crore corpus [8].
• Angel tax (Section 56(2)(viib)) was abolished for all classes of investors in Budget 2024-25 [10].
• Incubator = long-term and very early stage. Accelerator = fixed-term cohort ending in a demo day.
• Valuation labels: Unicorn > $1 bn, Decacorn > $10 bn, Hectocorn > $100 bn. They apply to unlisted firms.
• The Global Innovation Index is published by WIPO, not by the World Bank, WEF or NITI Aayog. India ranked 38th in 2025 [4].
• The ANRF Act 2023 came into force on 5 February 2024. The ANRF Governing Board is chaired by the PM [5][6].
• The RDI scheme has Rs 1 lakh crore over 6 years. It gives low or nil-interest long-term finance, not grants, to private R&D [6].
• SAMARTH Udyog Bharat 4.0 is for Industry 4.0. IN-SPACe (2020) is for private space activity. Reverse flipping means moving a startup's parent company back to India.

Mains Points

• The State changes its role: after 1991 the State stopped trying to own and control industry (IPR 1956) and began enabling private risk-takers.
• Tools: recognition, fund of funds, seed funds, abolishing angel tax, the 80-IAC tax holiday.
• Result: about 1.98 lakh recognised startups (October 2025) [3] and a rise in GII rank from 81st (2015) to 38th (2025) [4].

• Useful for GS-III answers on "inclusive growth and industrial policy".

• The R&D gap is the real constraint:

• GERD is only about 0.64% of GDP, and the private share is about 35-36%, against 70%+ in innovative economies [5];
• so most Indian startups are consumer or service apps, not deep tech;

• the RDI Fund and ANRF try to fix this with patient, cheap capital for private R&D [6]. Success depends on actual fund deployment and links between universities and industry.

• Deep tech needs patient capital:

• such firms take 10-20 years to earn revenue, while VCs usually want an exit in 5-7 years;
• this justifies public tools such as the Deep Tech category (20-year age limit) [2], a Fund of Funds and the RDI Fund;

• public money should draw in private money, not replace it.

• Sunrise vs sunset industries needs a just transition:

• supporting semiconductors, green hydrogen and EVs meets the goals of Atmanirbhar Bharat and net zero by 2070;
• but the decline of coal hits specific districts in Jharkhand, Odisha and Chhattisgarh;
• so policy must pair frontier-industry support with reskilling and regional diversification. Industry 5.0's human-centric approach supports this.