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This article is part of the special coverage of the upcoming Union Budget 2018 from the lens of Indian startup ecosystem. In this pre-budget series, we’ll shed light on major expectations of the startup industry from Budget 2018 for various industries like edtech, across all the key areas including taxation. To read all the stories of this special coverage of Budget 2018, click here.

“Technology will never replace great teachers, but technology in the hands of great teachers is transformational” – George Couros, Author

From the traditional gurukuls to the modern brick and mortar schools, equipped with new technologies, India is currently on an entirely different path when it comes to education. In this growth, however, a crucial role is being played by the new age edtech startups who are willing to find the new niche areas in the existing education ecosystem of the country.

In 2016, industry body ASSOCHAM released a report which stated that India will take about 126 years to reach global education standards. This appalling situation could be surely mended by leveraging technology-enabled learning in Indian classrooms.

As per analysts, the future of education in India relies upon online learning as half of the population is under the age of 25 and the number of Internet users is expected to reach 650 Mn. Also, India has a dearth of faculties, wherein even today over 40% positions are vacant, with an even bigger issue in the quality of the faculty.

The situation worsens in the remote and rural areas. For now, the best way to counter this on a large scale is by using technology to reach quality education from these few faculties to a significantly larger student base using technology. There is no other way out from our current plight.

Further, according to a recent report by Google and KPMG, the Indian edtech space is projected to grow from $ 0.25 Bn to $1.96 Bn and online education will witness 8x growth over the next five years.

Interestingly, re-skilling and online certifications category will continue to remain the most dominant category in the Indian Edtech sector. Currently, the segment is worth $93 Mn.

With so much to unveil, and so much to achieve, the edtech startups have high hopes from the upcoming budget 2018. However, before we delve further into their aspirations, let’s have a recap of the hits and misses of Union Budget 2017 and the existing challenges the Indian edtech startups are facing.

Budget 2017-18: Education Sector Recap

  • To boost services exports, the Government in its mid-term Review of Foreign Trade Policy 2015-2020, has increased incentives under Services Exports from India Scheme (SEIS) by two percent, leading to an additional annual incentive of $179 Mn (INR 1,140 Cr) which could help services exports including Hotel & Restaurant, Hospital, Educational services, etc. – Economic Survey 2018
  • In Education budget for 2017-18, a slew of reforms were suggested for the UGC and immediate push towards building job opportunities and providing vocational training by means of ‘Digital Education’ was a much-awaited approach.
  • The concern for building skill centres across India was a welcome step as it will not only make quality education accessible and available to the masses but will lead to an overall improvement of educational facilities throughout the country, particularly in Tier-II and Tier-III cities.
  • For the early-stage startups, the profit-linked deductions from three out of seven years instead of three out of five came as a breather during the Union Budget 2017 for the education sector startups.
  • Although Budget 2017-18 increased the government’s outlay in education, but by a quantum that was generally seen to be inadequate.
  • The e-learning portfolio of higher education has been allocated a total of $78 Mn (INR 497 Cr) in 2017-18, as opposed to $86.7 Mn (INR 552 Cr) in 2016-17.
  • The Union Budget 2017 gave a thrust to the education industry with higher budget allocation to the sector and announcements with ICT-enabled initiatives like SWAYAM and SANKALP.

SWAYAM was an edtech platform providing access to 350 courses to students across the internet, and SANKALP was a vocational training program to create industry-ready graduates. Along with STRIVE, these initiatives show that the government is focussing on re-skilling and upskilling citizens with an eye towards job creation but isn’t yet focussing on doing so outside of the ITIs.

As Gaurav Goel, Co-founder of TopRankers said, “The Union Budget 2017-18 can indeed be tagged as an overall ‘Progressive Budget’. For the education sector, there were definitely some positives and also a preview of some long-term initiatives by the government.”

The Government is also implementing the flagship ‘Bharat Net’ project (in two phases), to link each of the 2.5 lakh Gram Panchayats of India through optical fibre network. This is the largest rural connectivity project of its kind in the world and is the first pillar of Digital India Programme. It will facilitate the delivery of various e-Services and applications including e-health, e-education, e-governance and e-commerce in the future.” from Economic Survey 2018

A similar positivity is expected by the Indian edtech startups from the upcoming budget 2018.

Current Challenges Faced By The Edtech Startups

Conversing with Inc42, Beas Dev Ralhan, founder of Next Education, highlighted some crucial challenges faced by the Indian edtech startups.

According to him, the business with all government schools are too consolidated while the business with private schools is too fragmented. So far, tenders for all government schools are released and accepted at the state level and not at the district level, which often makes it difficult for small edtech startups to obtain them.

On the other hand, there are not many private chains of schools in India and mostly, all schools function independently.

“Thus, getting a deal with a single private school might seem like too small a contract to pursue over one annual sale cycle. In such a scenario, sustenance becomes difficult for startups,” he added.

Beas further shared that the B2C market has not developed fully for the education sector. Parents are still not buying the online education solutions and this creates a hindrance for edtech players to thrive.

Thirdly, trends show that competitive exams such as CAT, JEE, etc. incur most of the expenditure in the education sector. However, good edtech players are more focussed on encouraging lifelong learning in students.

“While securing good marks and managing time is of utmost importance in competitive exams, edtech players are trying to focus on effective learning and build a strong understanding of basic concepts. Thus, edtech players are often left at a disadvantage because their focus areas are still not drawing enough attention or encouragement,” he added.

Apart from these, the poor accessibility to internet, lack of familiarity to app-based learning, slow adoption of new age technology by Indian schools as well as parents, are other factors affecting the growth of the edtech startups in the country.

As Beas emphasises, “The innumerable challenges the education system in India poses – the gatekeeper problem in educational institutions, multiple stakeholders with different agendas, short sales window and a long sales cycle, a myopic vision still focussed on standard academic success, lack of understanding around the intangible elements (knowledge, experience, networking, etc.) and an extremely low willingness to pay for a product that few could understand fully.”

Indian Education Sector: Startup’s Expectations From Budget 2018

Infusion Of More Funds Particularly Into The Edtech Sector

According to Nikhil Barshikar, MD, Imarticus Learning, it seems to be a constant chicken and egg situation with respect to funding in the edtech sector. The Startup fund initiative was ambitious but as of October 2017, only 74 were approved. This is dismal. Also, out of $1.57 Bn (INR 10000 Cr), just $94.2 Mn (INR 600 Cr) has been released to SIDBI.

“How can we encourage innovation when we have essentially reduced the source of funds to one channel i.e. private equity. We need to have more access to funding, more channels and more programs we can tap for funding. The centre has to roll out sector-specific grants to reward innovation and new thinking, otherwise, we’re always going to be weak in actual product development,” said Nikhil.

Dr. Soumyatanu Mukherjee, Assistant Professor, Economics Area, IIM Kozhikode shares similar thoughts as Nikhil. According to him, though the revised budget on e-learning talks about  $81.2 Mn (INR 516.89 Cr) allotment for the fiscal ending March 31, 2018; the new allocation is below the revised estimates.

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“Therefore, I think, the budget 2018 must be the candidate for allocating more to the school assessment program, to the e-learning portfolio of higher education, the massive open online courses (MOOC) and needs to bring more clarity on the proposal of ‘innovation fund’ mentioned in the Union Budget 2017,” he added.

Beas further believes that in the upcoming budget 2018, it is expected that the government will increase the outlay for the education sector to 6% of the GDP.

Relook At The Angel Tax, GST And Other Taxation Issues

While GST inculcates mixed feelings among startups, all of them, however, took one stand on the issue of reduction in Angel Tax.

Nikhil believes that as startups are at the forefront of everyone’s mind, the government need to take a look at the Indian Income Tax Act which states, ‘any consideration that if a company receives from a resident in excess of a fair value, then such shares will be taxed as “income from other sources”.’ “We need clarity on what ‘fair’ value is,” he questioned.

Ali Asgar Kagzi, co-founder Genext Students and Karthik KS of Aeon Learning supports Nikhil’s views and believes that for the Indian education ecosystem to get a boost, reducing the tax burdens, especially the GST on education services and teachers will be very helpful.

As Karthik said, “Introduction of GST to a large extent had an adverse effect on the edtech industry and GST made the entire value proposition of edtech startups look more expensive.” Ali also added, “For edtech startups to thrive, reduction in angel tax to promote more angel investing will also boost this sector, as education is a long-term association.”

Beas, however, supports the one-tax-for-all mantra of GST but still emphasises that a tax exemption for or at least a reduction on technology-based products like digital classrooms, labs and learning apps would be encouraging for the education sector.

Going a step ahead, while Digiperform’s CEO Manu Jolly believes that there should be no Indirect Tax on any private institution who is working on skill development in the country, Sivaramakrishnan V, Managing Director, Oxford University Press India (OUP) considers that  the government should give 100% tax exemption on digital education products and services.

As he further added, “As per the 2011 census, over 24.6% of our population is in the age group of 5-14 years and therefore, early seeding of digital products and devices is an investment for the future. Tax exemption on digital products and services will encourage schools and also parents to invest in learner-centric education technologies.”

Development Of Infrastructure In Education Sector

It’s a well-known fact that the development of technological infrastructure is a prerequisite to impart quality education. The edtech startups believe that in order to attain this vision, the government should first implement measures to utilise the existing technologies and infrastructure available in schools.

“In fact, this expectation is aligned to the recent promise made by the Finance Minister that budget 2018 would focus on infrastructural development,” said Beas.

Ambarish Datta, MD and CEO, BSE Institute further added, “The Ministry of HRD should allow the corporate to set up management business schools, engineering colleges, medical schools, etc. under a new framework. The current AICTE/MCI model does not allow flexibility in this regard.”

Focus On Encouraging Online Skill Development Startups

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Owing to the influx of technologies such as Artificial Intelligence, Deep Learning, Data Analytics, India Inc. is facing an acute shortage of relevant talent. “Government must look into ways of equipping our youth with the relevant skills using tech-enabled learning to make them employable and bridge the human capital gap in the industry,” said Karthik.

Beas Dev Ralhan shares similar views and suggested that the government should formulate policies in the budget 2018 to initiate skill development in early learners, as an early start will be more effective. Presently, most of the skill development programmes are aimed at graduate and postgraduate students.

Ishaan, MD India of Udacity, stated, “Large proportions of the Indian workforce will need re-skilling in the next few years i.e. over 40% by 2022, according to Ernst & Young. This will be a necessity in order to become capable of holding up gainful employment in the face of upcoming automation.”

“This is a mammoth task and the government should incentivise or subsidise re-skilling in sectors such as IT or BPM and BFSI, as these are expected to be the worst hit in terms of job creation by the march of automation and AI,” he added.

Additional Perks And An Updated Education Policy

Ali Asgar believes that the government should also consider some perks for tutor training as there exist a huge shortage of tutors and tutors are the ones who make any education scheme successful.

Beas Dev Ralhan shared his sentiments, adding that there is also a need to earmark a substantial part of the budget for teacher-training programmes. “The government can enter into a partnership with private players to train teachers on the latest pedagogies and the use of Information and Communication Technology (ICT) tools to ensure that teachers are abreast with the latest developments,” he added.

Ambarish further believes that government should use unspent education cess collected pre-GST for strengthening primary teachers’ training and focus on digital, financial and health literacy.

To Sum Up

This is a pivotal moment, and the Union Budget 2018 could have far-reaching effects on how well-prepared India is for the jobs of tomorrow, which require new skills in cutting-edge technologies.

As Ishaan indicates, “There is an important opportunity here – India is poised with promising demographics at a time of great change in the economy and job market. Concerns about employment are increasing and people are more amenable than ever to the changing dynamics of technology and the job market.”

The challenge continues to be one of recognition for the digitally-led learning platforms. The lack of a proper system of accreditation for private players is extremely unfortunate, as it would be beneficial for the whole ecosystem to have benchmarked standards.

“If reviewing institutions isn’t possible, a common examination like the Bar Exam can help ensure a quality education for the many millions being taught using online educational platforms,” he added.

So far, the Indian government has been bullish on the education sector and a comparatively positive scenario has been observed in the previous budgets. All we have to see is if Finance Minister Arun Jaitley could rise up to the expectations of the edtech startups and create more opportunities for growth in the burgeoning digital education segment.

As Ashwin Damera, Executive Director, Emeritus Institute of Management aptly sums up, “The edtech players are eager for some progress in digital infrastructures and the government’s initiatives such as Digital India, Make in India and Skill India. The sector believes that the use of technology in education needs to be further encouraged and included in syllabuses, thus making students and professionals future-ready. The government should design policies that pave the way to provide pedagogy, world-class faculty, global peer-groups and other supporting services through technology.”

In the coming parts of the pre-budget series, we will be providing a detailed analysis of expectations from Union Budget 2018 accompanied with commentaries and diverse views of multiple stakeholders including views from the leading startups of India from different sectors. To read more articles on this series click here

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