The limits of unicorns

Start-ups cannot be a growth engine for the Indian economy

This may have been the second year of the global pandemic, but for start-ups in India, 2021 was golden. By some estimates, the number of unicorns in the country more than doubled over the year, with upwards of 40 start-ups crossing the billion-dollar valuation mark. Easy liquidity in the West, driven by loose monetary policy, helped induce investment in the sector; in July this year, for the first time since 2013, more venture capital investment poured into India than into China. In an economy shot through with gloom, the start-up sector provides a pinprick of hopeful light; the Economic Survey for 2021 at the beginning of the year in fact identified the sector as the next engine of Indian growth. Certainly, there are many reasons to feel hopeful. Any sector that can attract investment into the country deserves attention from policymakers. And there are good reasons to suppose that the human capital flowing into the sector will help address outstanding problems for Indians as a whole. Fintech will make payments easier. E-commerce and delivery start-ups will help consumers make decisions, get better prices, and access a larger pool of goods. Yet it may be too much to expect that these represent a new engine of growth.

First, it is reasonable to ask if they spread prosperity widely. It used to be argued that every job in information technology created in the boom of the early 2000s created several others to support it. Many jobs created by start-ups are somewhat lower down on the value scale, with consequently lower multipliers. In addition, the growth of platforms and start-ups does not aid in growing “good”, secure jobs so much as increase the amount of relatively precarious employment in the “gig” economy. Second, will the sector pay out into local, state, and national taxes? The answer here is even more doubtful. As Zerodha founder Nithin Kamath, a relatively objective critic of his own sector, has pointed out, the trend is now for start-ups “building for India but incorporating outside India”. This means that wealth creation and capital gains are all outside India; and since many start-ups “prioritise growth over profits”, their corporate income tax contribution is also low. A recent report by the Bangalore [sic] Chamber of Industry and Commerce has blamed this tendency on the complexity and business-unfriendliness of India’s tax system.

Even optimistic views of the start-up ecosystem note that it cannot replace, in terms of growth, the physical economy. A report earlier this year from HSBC Global Research argued that if start-ups in India, over the next decade, closed half the gap they had with China’s, then they would raise the consumption component of gross domestic product and, together with some secondary impacts, add a quarter percentage point to annual growth in the period. In other words, even under the optimistic scenario, the overall growth impact is relatively disappointing. It is worth noting that the report’s authors also point out that the Chinese start-up miracle — driven by companies like Alibaba and Tencent — was also because start-ups closely integrated with both extensive physical infrastructure to connect small and medium enterprises to one another. They could easily have added that start-ups equally seamlessly integrated with the financial architecture in a way that the Indian central bank may not allow. Start-ups’ great year is worth celebrating. But India must look for its growth engine elsewhere