One of Indian Prime Minister Narendra Modi's most resounding campaign pledges was to make India a top 50 business destination of the world. A World Bank index measuring the ease of doing business placed India 130th on the list last year – an improvement from some years, but a far cry from the Indian prime minister's goal. 

But with a sweeping series of tax initiatives intended to benefit startups in India, Prime Minister Modi may have just taken a noticeable step towards improving the country's middling business climate. The new plans are designed to take advantage of India's strengths, as well as address some of its more chronic business problems.

Modi's Startup Vision

In a speech on Jan.16, Prime Minister Modi announced the creation of a 100 billion rupee (or $10 billion) fund to encourage startup businesses as well as sweeping deregulations for entrepreneurs. New startups in India will receive three-year tax breaks, a streamlined patent application process and generous credit guarantees from the government. Encouraging startups to help advance Indian society at the individual and community levels, Modi said, "Startup does not mean a billion dollar company where thousands of people work. It is about employing five people, and developing India." (See also: India: A Bright Spot in Today's Global Investment Landscape.)

The initiatives are aggressive, especially the three-year tax break, which could cost the government billions in revenue. But they are also banking on India's strengths. With terrific human capital (often in the form of cheap engineering talent) and burgeoning infrastructure needs, India is ripe for startups. The streamlined patent application, which will be boosted by mobile patent registration, is another smart move. Money is drained from India's economy at every level by corrupt officials demanding payoffs for approving or expediting patents, zoning and other business applications. But the new measures by the prime minister are a welcome step to remove opportunities for skimming.

Options for Western Investors

While it's difficult to invest directly in startup companies in India, India-centric investment banks, mutual funds and ETFs  provide a lot of options for foreign investors. Moreover, in recent years, a series of successful Indian startups, like the ride-sharing company Ola and online retailer Flipkart, have attracted funding from overseas investors. Modi expects that his startup-friendly deregulations, along with promising growth projections for India from the World Bank and other sources, will draw in international capital. (See also: How do mutual funds work in India?)

For now, investors should look to a few key banks and ETFs. Two tech-centric options, iShares MSCI India ETF (INDA) and the Powershares India ETF (PIN), are poised to take advantage of the technology boom in India. Both these funds are heavily invested in Infosys (INFY), a profitable IT consulting giant that provides a more individual opportunity for the investor. Rediff (REDF), an Internet provider, trades cheap and has enormous potential in a tech-booming India that has still to connect millions of people to the web.

The Bottom Line

Modi's pro-business agenda is starting to pay dividends. India's growth rates are set to eclipse China's this year, and innovative companies are drawing substantial capital from investors around the world. With 2016 already off to a rocky start, investors should pay attention to India right now - between the business-friendly leadership and wealth of human capital, India has reliable growth potential.




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