Can unicorns become growth engines for the Indian economy?
In May 2022, a report in the magazine, The Economist, asserted that “a new confluence of forces is likely to transform India’s economy over the next decade, improving the lives of 1.4 billion people and shifting the balance of power in Asia. Technological leaps, energy transition and geopolitical changes create new opportunities and new tools to solve insoluble problems.
The locus of this transformation, according to this report, is a national “tech stack” that India has deployed. It is claimed that this technology stack – a collection of state-sponsored digital services, payments, tax systems, bank accounts and an electronic identity system – has propelled India’s third largest start-up in the world. world. scene, after the United States and China.
In May 2022, India became home to 100 unicorns (in business, a “unicorn” refers to a start company worth more than a billion dollars) as neo-banking startup Open raised $50 million to enter the country’s rapidly clubbing list of unicorns.
As of June 2022, three more companies have been added to this list. Bengaluru-based software startup LeadSquared is the latest addition to the unicorn list. The list includes household names, such as Zomato, Swiggy, Oyo, Quikr, Paytm, Snapdeal, Ola, MakeMyTrip, Flipkart, PhonePe, Byju’s, Unacademy, Lenskart, BigBasket, etc.
The financial elite and international economic institutions have predicted that the growing ecosystem of start-ups will drive the country’s economic growth over the next decade. Venture capitalist and former CFO of Infosys, Mohandas Pai, (considered close to dispensation to power) predicted that within a decade Indian start-ups will help triple its GDP (gross domestic product). This narrative has been widely used by the Indian government to distract from its failures in the face of the chain of economic failures and crises that had set in before the pandemic even hit the country.
Calling the startup world “the spirit of New India” in an episode of his monthly radio show, Mann Ki Baat, Prime Minister Narendra Modi said: “Today, India’s start-up ecosystem is not just limited to major cities; entrepreneurs are also emerging from small towns and villages. This shows that in India, whoever has an innovative idea can create wealth.
Union Trade and Industry Minister Piyush Goyal also claimed that the country’s start-up ecosystem was responsible for India’s meteoric rise in the Global Innovation Index of 76. in 2014 to 46 in 2021.
India’s ruling dispensation, along with the world’s financial elite, paints this euphoric picture of the economy at a time when its working population is reeling from soaring prices and the prolonged economic distress caused by the COVID-19 pandemic. Before diving into examining these claims, here is a brief overview of the start-up ecosystem in India.
According to the Department of Promotion of Industry and Internal Trade (DPIIT), the total number of start-ups registered in India at the time of writing is 74,082. Anurag Jain, Secretary of DPIIT, says that ‘in India, about 80 start-ups are registered every day.
In 2021, Indian start-ups raised $42 billion across 1,583 deals. A total of 42 companies have become unicorns in this process and by the end of 2021, India had 86 unicorns. The first quarter saw the emergence of 13 more unicorns. India passed the 100 unicorn milestone with the entry of neo-banking startup, Open, into the list in May 2022.
Today, India is home to a total of 103 unicorns. These companies mainly operate in the service sector in the fields of e-commerce, fin-tech, ed-tech, bio-tech, health-tech, etc. Many of these companies are part of what is called the “digital platform”. economy’.
The proliferation of the Internet since the early 2000s has given rise to what is known as the “new economy” or the “digital platform economy”. This new economy has been built on adapting to the economic model of platforms and digital strategies.
Over the past 15 years, global platform companies, such as Facebook, Amazon, Google, Airbnb, Uber, Lyft (and the list goes on) have come to dominate and arbitrate our daily transactions. These digital platforms use the Internet to connect dispersed networks of individuals to facilitate digital transactions between two parties – demand and supply.
While traditional business models create value by creating products and services that are sold to customers, platform-based business models create value by connecting its users – consumers and producers, businesses and individuals – through their platforms. on line.
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As India and its economy have remained under full and partial lockdown during the COVID-19 pandemic, internet-based digital platform start-ups in India have witnessed an unprecedented surge. These start-ups are largely based in Tier 1 and Tier 2 cities. Most of them were founded in the three cities of Delhi NCR, Bengaluru and Mumbai. Apart from these, a few start-ups have also sprung up in other cities, such as Chennai, Pune, and Hyderabad.
In 2021, Indian start-ups raised around $39 billion. This was three times the investment raised by start-ups in 2020. Much of the start-up industry is funded by venture capital (VC) firms. The main venture capital funds that finance Indian start-ups are Sequoia Capital India, Tiger Global Management, Soft Bank, Soft Bank Vision Fund, etc. Apart from venture capital funds, these entities have also been funded by private equity funds and companies such as Tancent, Google. and Twitter.
However, it is important to consider whether India’s startup ecosystem, on its own, can be seen as the engine of growth and recovery. With rising inflation and an anticipated global recession, a funding winter has already set in for India’s start-up industry. So far in 2022, more than 12,000 people, including employees and contract workers, have been laid off by Indian start-ups as they try to cut costs.
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To put things into perspective, it was reported in June 2022 that India’s 100 unicorns provide formal employment for around 2,72,000 people, which is a small fraction of overall corporate employment and what these unicorns employ. in the informal sector. Formal employment represents only one tenth of the total employment they generate. The remaining jobs are in the “gig economy”, in ancillary areas, such as contract employment, content creation, tutors, delivery partners, drivers, etc. Over the past three years, the dire and exploitative conditions under which digital platform companies, like Uber and Amazon, employ their workers have been widely reported.
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As the global economy slides deeper into another economic recession, investors are moving away from bullish speculation and towards caution. Investors and stock markets are now demanding that these startups show them cash flow beyond “innovative ideas” to bet on. It is claimed that as a result of the funding winter, a large number of newly created unicorns will turn into zombies.
“Zombie unicorn” is a term used for businesses that continue to operate after funding runs out but don’t actually grow. In this climate, expecting the newly minted unicorns to lift the country’s economy to new heights may prove premature and overly optimistic.
Ultimately, it is important to note that a prolonged decline in demand has been behind the sinking Indian economy since before the COVID pandemic. This basically means that despite the ample supply in the markets, Indians do not have cash in their hands to buy enough to keep the economy in good shape. India’s relatively new and fragile start-up ecosystem is no solution to this larger problem of impoverishment in the labor force.
The writer is a researcher and author. She is currently pursuing a PhD in international development at the London School of Economics and Political Science. Opinions are personal. She can be reached on Twitter @ShinzaniJain.