Tech start-ups: salvation or ruin?

As tech start-ups disrupt our established supply chains, employment generation will suffer

Every year, a million engineers join the workforce in India. The available jobs in the economy are not even close – at best, only 150,000 to 200,000 jobs are generated annually. India will become the most populous country in 7 years. Clearly, India has an employment problem. What makes it more worrisome is that the top entrepreneurs of our country are intent on putting us out of jobs. 

Internet today has become synonymous with every form of consumption activity. If you want dine out options, look at Zomato. Then book an Uber to go there. For every commodity that you can buy, there’s an app which delivers it to your home. Start-ups like GoodService and Jugaado take things to the next level. Just ask them for anything and they will do it for you! 

Augmented reality - living life with the assistance of artificial intelligence - is pretty much going to only increase from here on. At the outset, this rise of the Internet seems innocuous. But the inherent structure of the economy and the way supply chains of various goods and services have been established are not as flexible to change as our lifestyle. And in the short-term, this rapidly growing dependence on the Internet could lead to severe problems in the employment patterns of the country. 

The first wave of Internet based start-ups, e-commerce companies like Flipkart and Amazon, effectively matched supply with consumer demand through an online marketplace and a data-driven logistics system. They made your nearby, say, electronic showrooms and a major chunk of the supply chain between them and the producers redundant. 

It was all good until e-commerce start-ups facilitated buying and selling of goods primarily consumed by the upper and middle classes of the economy, the so-called luxury goods. Then, they only affected the brick-and-mortar shops selling luxury goods, which were mostly run by the upper and middle classes. Going ahead, the second wave of start-ups like

BigBasket.com has penetrated deeper. The ‘online’ grocery stores enable you to order your daily requirements through the comfort of an app. Unlike luxury goods, groceries and vegetables are staple items required by the masses. Inherently, the supply chain of these staple goods employs many more people from the lower income classes (the sabji mandi near your house, the trucking industry delivering fruits and vegetables to the sellers at the mandi etc). Disruptions here will inevitably affect the more vulnerable sections. The ease that these start-ups introduce in our lives is phenomenal: no more bargaining at mandis and you get your daily needs delivered to your doorstep at a time of your convenience. Add to that the discounts that these start-ups can provide because they cut through the supply chain. To a population whose median age is 26, this option seems much better than the alternatives of yesteryears. 

Research by the economist and author of ‘Why Nations Fail’, Daron Acemoglu, shows that the progress in an economy is often biased towards the factor of production that is relatively more in demand than the other; the case in point here being capital. As this Economist article describes it aptly, "...substituting capital for labour through automation is increasingly attractive; as a result owners of capital have captured even more of the world's income since the 1980s, while the share going to labour has fallen". The founder of Keynesian economics – John Maynard Keynes – pointed out that one of the reasons for America’s economic pessimism during the Great Depression was technological unemployment. 

Essentially, the rate at which we are substituting capital for labour is outrunning the pace at which we can find new uses of labour. And it seems that the entrepreneurs of India are on a mission to make our most abundant factor of production redundant. And because of our burgeoning population, the problem becomes compounded. Perhaps the entrepreneurs took one too many courses in computer science and industrial organization, when they really should have been learning sustainable development.
 

This cynicism does not emanate from being a Luddite. In the next blog post, we will discuss ideas on turning these threats into opportunities.

Saahil Parekh is an economist working in sustainability and climate change at the The Energy Resources Institute in New Delhi. He holds a Masters degree in Economics from IIT Kharagpur.

This is his first post on his blog, Arthashastra, a part of Business Standard’s platform, Punditry, where he intends to provide critical commentary on the changing face of India’s economy.

He tweets as @saahilparekh

Email:saahil.parekh@gmail.com