Can Unicorns Become Growth Engines of India’s Economy?

In May 2022, a report in the magazine, The Economist, claimed that “a novel confluence of forces stands to transform India’s economy over the next decade, improving the lives of 1.4 billion people and changing the balance of power in Asia. Technological leaps, the energy transition, and geopolitical shifts are creating new opportunities—and new tools to fix intractable problems.”

The locus of this transformation, according to this report, is a national ‘tech stack’ that India has rolled out. It is argued that this tech stack – a set of State-sponsored digital services, payments, tax systems, bank accounts, and a system of electronic identity linking ordinary citizens with these services – has turbocharged in India the world’s third-largest start-up scene, after the US and China.

In May 2022, India became home to 100 unicorns  (in business, a ‘unicorn’ refers to a start-up company with a value of over $1 billion) as the neo-banking start-up, Open, raised $50 million to enter the swiftly bludgeoning list of unicorns in the country.

By June 2022, three more companies had been added to this list. The Bengaluru-based software start-up LeadSquared has been the latest addition to the list of unicorns. The list includes familiar 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 pump up the country's economic growth in the next decade. Venture capitalist and former finance chief of Infosys, Mohandas Pai, (seen as close to the ruling dispensation) has predicted that within a decade India’s start-ups will help triple its GDP (gross domestic product). This narrative has been widely used by the Indian government to deflect from its failures in coping with the chain of economic failures and crises that had set in even before the pandemic hit the country.

Calling the world of startups ‘the spirit of New India’ in an episode of his monthly radio broadcast, Mann Ki Baat, Prime Minister Narendra Modi said: “Today, India’s start-up ecosystem is not limited to just big cities; entrepreneurs are emerging from smaller cities and towns as well. This shows that in India, the one who has an innovative idea, can create wealth.”

Union Minister of Commerce and Industry, Piyush Goyal also claimed that the start-up ecosystem of the country was responsible for India’s meteoric rise in the global innovation index from 76 to 2014 to 46 in 2021.

The ruling dispensation of India, along with the financial elite of the world, is painting this euphoric picture of the economy at a time when its working population is reeling under the heat of soaring prices and prolonged economic distress caused by the COVID-19 pandemic. Before delving into an examination of these claims, here is a quick overview of the start-up ecosystem in India.

According to the Department for Promotion of Industry and Internal Trade (DPIIT), the total number of registered start-ups in India at the time of writing this article is 74,082. Anurag Jain, secretary of DPIIT, claims that in India around 80 start-ups are being registered every day.

In 2021, Indian start-ups raised a massive $42 billion across 1,583 deals. A total of 42 companies became 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 reached the milestone of 100 unicorns with the entry of neo-banking start-up, Open, in the list in May 2022.

Today, India is home to a total of 103 unicorns. These companies operate mostly in the services sector in the fields of e-commerce, fin-tech, ed-tech, bio-tech, health-tech etc. A large number of these companies are a part of what is called the ‘digital platform economy’.

The internet’s proliferation since the early 2000s gave birth to what is termed as the ‘new economy’ or the ‘digital platform economy’. This new economy has been built on an adaptation to platform business model 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 mediate our day-to-day transactions. These digital platforms use the internet to connect dispersed networks of individuals to facilitate digital transactions between the two sides – demand and supply.

While the traditional business models create value through creating products and services which are sold to customers, platform-based business models create value by connecting its users – consumers and producers, businesses and individuals – through their online platforms.

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While India and its economy remained under complete and partial lockdown during the COVID-19 pandemic, the internet-based digital platform start-ups in India saw an unprecedented rise. These start-ups are largely based in tier 1 and tier 2 cities. Most of them have been founded in the three cities of Delhi NCR, Bengaluru, and Mumbai. Outside of these, a few start-ups have also come 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. Largely, the start-up industry is funded by venture capital (VC) firms. The key VCs funding Indian start-ups include Sequoia Capital India, Tiger Global Management, Soft Bank, Soft Bank Vision Fund, etc. Apart from VC funds, these entities have also been funded by private equity funds and corporates, such as Tancent, Google and Twitter.

However, it is important to examine whether the Indian start-up ecosystem, by itself, can be pegged as the engine for growth and recovery. With rising inflation and an anticipated global recession, a funding winter has already set in on the Indian start-up industry. So far, in 2022, more than 12,000 people, including employees and contractual workers have been laid off by Indian start-ups as they attempt to cut their costs.

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To put things in perspective, it was reported in June 2022 that India’s 100 unicorns provided formal employment to about 2,72,000 people, which is a small fraction of overall corporate employment and what these unicorns employ through the informal sector. Formal employment constitutes only a tenth of the total employment generated by them. The remaining jobs are in the ‘gig economy’, in ancillary areas, such as contractual employment, content creation, tutors, delivery partners, drivers, etc. Over the past three years, the abysmal and exploitative conditions in which digital platform companies, such as Uber and Amazon, employ their workers have been widely reported.

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With the world economy descending upon yet another economic recession, investors are moving away from bullish speculation and tending toward caution. Investors and stock markets are now demanding that these start-ups show them cash-flows over and above ‘innovative ideas’ to bet on. It is being argued that as a result of the funding winter, a large number of the newly-minted unicorns are going to turn into zombies.

‘Zombie unicorn’ is a term used for companies that keep running after the funding runs out but do not actually grow. In this climate, to expect the newly-minted unicorns to lift the country’s economy to new heights may prove to be premature and overoptimistic. 

In the end, it is important to note that a prolonged slump in demand has been behind the sinking Indian economy since before the COVID pandemic. This essentially means that despite there being enough supply in the markets, Indians do not have money in their hands to buy enough to keep the economy in good shape. The relatively new and fragile start-up ecosystem is not a solution to this larger problem of pauperisation of the working population of India.

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. The views are personal. She can be reached on Twitter @ShinzaniJain.