In a country notorious for stifling private enterprise, can the next decade be the best ever for new businesses?
Neelkanth Mishra
Last Updated at April 29, 2021 00:17 IST
In the first three parts of this series, we saw how India’s corporate landscape is transforming, the progress in layers that is driving rapid and broad-based growth, and sector-specific trends nurturing clusters of unicorns. In this concluding part we do some crystal-ball gazing for what these mean for the future of entrepreneurship and the Indian economy. We focus on the virtuous cycle of capital, and the long-lasting implications of technology innovations.
Capital availability has strong self-reinforcing feedback loops, as discussed briefly in the first part of this series. The higher a company’s profit, the more the capital available for investing in future growth. In richer nations, there is more capital available for taking business risks, which if invested wisely (often outside the country), further increases wealth. Tomes have been written on the difficulty of starting, running and closing a business in India, and very rightly so. While those challenges need our attention, so does the much bigger problem of a lack of capital. After all, well before the reforms of 1991, the number of private companies was growing in double-digits every year, and rose four-fold from 1980 to 1991 (new company registration data is not a perfect proxy for business formation, but is the best available dataset). The challenge was in getting access to risk capital to grow rapidly: Between 1980 and 1992, average paid-up capital (again, a weak proxy for risk capital but the best available) for these firms was unchanged despite double-digit inflation. Even after 1991, only a few business groups had the capital to enter sectors vacated by the government.
The creation of more than a hundred unicorns in a short space of time means that large pools of capital are reaching new hands: An estimated $35 to 50 billion in wealth has been created for these mostly first-generation entrepreneurs. According to the Credit Suisse Wealth Report 2020, after stagnating for several years, the number of millionaires in India rose rapidly in the two years before the pandemic; a trend that we believe can persist for several years going forward. Unlike capital accumulation in dynastic business houses, which is normally deployed into new lines of fully-owned businesses, a meaningful part of this wealth is also likely to be invested as venture capital in new start-ups run by other first-generation entrepreneurs. Several successful founders (some of them too young to bother about estate planning and creating different lines of business for each progeny) are also prolific angel investors and mentors.
Similarly, funds that have invested in these companies and have booked gains are likely to redeploy again in Indian businesses. This surge in wealth creation is also changing ambitions: Whereas nearly everyone in my and nearby batches in the computer science department at IIT Kanpur went abroad for studies, current batches in most IITs are seeing a stronger interest in entrepreneurship. To be fair, the current euphoria in funding is unlikely to last long, and a year or two of funding drought may follow; but the trend line is likely to be upward sloping, in our view.
Now let us discuss the role of technology in bringing down the cost of ownership of a good or a service, shifting the economy to a higher equilibrium.
Several goods add not only to the seller’s income but also to the buyer’s productivity. Take motorcycles: While demand projections focus on affordability and income per capita in the economy, a motorcycle also improves productivity and therefore incomes by improving mobility and bringing down commute time. A person on a motorcycle can make many more food deliveries than one walking or using a bicycle, and thus earn more. Similarly, a smartphone is as much a consumer product as a driver of productivity.
We have earlier discussed the impact of bringing down the cost of a banking transaction on banking penetration. Several other products and services are seeing a similar transformation. Car sharing apps, for example, make car rides cheaper by improving the utilisation of a car. If a car costing Rs 7 lakh, designed for 250,000 kilometres (km) of life, is used only for 50,000 km before being sold at, say, Rs 1 lakh, just the capital cost is Rs 12 per km driven; fuel and maintenance costs extra. Only a few households can afford this cost. If on the other hand, the same car runs as a taxi and runs 200,000 km, the capital cost can be Rs 3 per capita, and many more can afford it.
Education technology promises a similar change: For education delivered in person, a teacher’s salary had to be apportioned among, say, 20 students. Conversely, the fee paying capability of these students determined the teacher’s salary, and as less than 15 per cent of India’s households can afford to pay more than Rs 1,000 a month per child, teaching does not attract the best talent. However, as technology allows the best teachers to address a substantially larger number of students, not only do many more students benefit from the lessons, the much-needed competition is also likely to improve quality standards in education. We recall that 150 years back music and drama were mostly accessible to the ultra-rich, and musicians were patronised by kings, rich businessmen, or by religious centres. Such leisure became more accessible with the development of audio and then video recording technology: A few dollars per person aggregated over millions of viewers, brought in talent and more work.
These are only a few such examples, and many more are underway, with substantial longer-term implications. The total revenues of unicorns in our list was 1.2 per cent of India’s GDP last year, but in five years their incremental revenues can potentially be 5.3 per cent of incremental GDP. The indirect, harder-to-measure impact can be substantial too, in our view.
(Series concludes)
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