Sunday, 27 November, 2022
HomeOpinionIndia’s start-ups are on fire, but unicorns can’t automatically spur growth

India’s start-ups are on fire, but unicorns can’t automatically spur growth

Economic miracles only happen when globally competitive firms tap into external demand.

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The Indian start-up scene has been on fire. India currently has the third largest start-up ecosystem in the world, with 100 unicorns, after the United States’ 444 and China’s 301. And it is only picking up pace. Ten percent of unicorns that came out globally in 2021 were from India, and at 5-7 years, India boasts of one of the shortest cycles to reach the milestone of $1 billion valuation, compared to an average of 6-8 years it takes in the US.

While the emergence of unicorns would help growth, they don’t automatically present a springboard to help us move to a path of accelerated growth. Faster growth requires refocusing energy on doing the spadework, as opposed to just believing that new-age start-ups will magically do the trick. It involves developing consensus on the next generation of economic reforms, like improving human and physical capital, reducing trade protectionism and improving ease of doing business.

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Tapping into the start-up culture

According to the just released quarterly investment fact book of the National Association of Software and Services Companies (NASSCOM), which contains data from April-June of 2022, funding in start-ups decreased by 17 per cent on a quarter-on-quarter basis. There have also been noises around some of the biggest start-ups facing financial crunch and laying off employees.

However, barring some exceptions, start-ups, most of them with a digital imprint, have had a palpable impact already, fundamentally altering the way people live.

Digital payments account for 40 per cent of overall payments; e-commerce makes up for 4-5 percent of retail spending. Last year, 62 million consumers shopped online during the festive season, up from just 20 million in 2018. It is heart-warming to see India’s emergence as one of the world’s start-up capitals—and this culture should be nurtured to maximise its potential.

Tailwinds from these new age businesses are seen as knights in shining armour who could help us tide over an otherwise difficult economic environment. India’s GDP growth was declining sharply even before the Covid-19 pandemic struck, growing by merely 3.3 per cent in October-December of 2020. And just when the economy was emerging from the after-effects of the pandemic, Russia-Ukraine war upended all calculus with respect to faster growth.

In its August 2021 bulletin, the Reserve Bank of India (RBI) said that the success of unicorns going public is a positive sign for the economy. The Economist argued that the ongoing digitisation coupled with the rise of start-ups will be a key growth pillar for the Indian economy.

But, are these prophecies based on evidence or driven by exuberance?

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Digitisation and growth are related, but not same

Two lessons emerge when we look at countries with a head-start in digitisation.

First, we are at an early stage and hence digitisation will increase over time. In 2019, among 17 major economies, India was the least digitised at 32 per cent; South Korea was at the top with 75 per cent, and China at 47 per cent. Higher digitisation means that in China, a quarter of retail sales happen on e-commerce platforms and the share of ride-hailing accounts for 36 per cent.

India is likely to follow suit, with its e-commerce share expected to rise to 19 per cent by 2030, digital payments to 60 per cent and ride-sharing to 11 million by 2025.

Second, while potentially growth enhancing, it is unlikely that these new-age businesses will impact India’s GDP growth significantly. It has not happened in other countries like China, where productivity growth has been consistently falling, from around three percent between 2000-05 to less than zero between 2013-18 despite breakneck digitisation.

Of course, we don’t know whether China’s productivity growth would have been slower had it not been for digitisation. Clearly, the productivity boost from digital businesses was not big enough to ward off this decline in productivity growth as China moved from being a lower middle to an upper middle-income country.

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Why new-age businesses don’t charge growth

So, what explains this seeming disconnect between the meteoric pace of digital adoption and its moderate impact on growth? The reason for the pick-up in digitisation is a combination of convenience and efficiency gain. And digitisation’s focus on convenience—like home delivery of food or medicine—doesn’t exactly have direct bearing on GDP growth. It then boils down to efficiency enhancing businesses to push growth.

Despite arguably being more efficient, these new-age businesses are unlikely to turbo charge growth because a large chunk of them are geared towards making services efficient, be it how people shop groceries or apparels, commute and make payments. Between 2011-21, 51 per cent of all equity investment in start-ups has gone to those focused on digital finance, digital education, e-commerce and food delivery. Since they target domestic services, growth impact is limited by the size of the economy. Simply put, one can’t keep buying more and more food, clothing, etc. just because it is easier to buy online.

Economic miracles happen when globally competitive firms tap external demand. This is where the unicorns of today differ from the traditional IT sector of India in the late 1990s and the labour-intensive manufacturing in China. Both were competitive, producing tradable commodities, tapping global demand and accelerating growth. Close to 90 percent of the Indian IT sector’s revenue comes from exports.

Likewise, in the mid-2000s, approximately 50 per cent of China’s output of labour-intensive manufactured goods was consumed by the rest of the world. To be fair, there do exist start-ups that are leveraging technology to improve manufacturing efficiency. However, these applications need to make Indian firms globally competitive to impact growth.

As a $2000 per capita economy, India must realise that a rapid rise in unicorns is not directly proportional to accelerated growth. We need the best of both worlds.

Shishir Gupta is senior fellow and COO at the Centre for Social and Economic Progress, Delhi. Views are personal.

(Edited by Zoya Bhatti)

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