Startups can be the icing on the ‘growth’ cake, not the cake In the last few years, a new narrative has been peddled to us; that startups are key to driving the next phase of economic growth and taking India from being a $3 trillion economy to becoming a $30 trillion economy (or $50 trillion or choose any other very large number). And the old way of doing things, we are told, is passe and no longer applies to this new go-go era of innovation. The trouble here is that some basic thinking can clearly show us how startups may be the icing on the cake but not the cake itself. When it comes to the cake, it’s the old way of doing things that still remains relevant. But let’s first talk about startups. Some of the biggest startups or unicorns (those with a market capitalization of more than a billion dollars) are built on top of something that already exists. Take the case of Swiggy and Zomato, which home deliver food cooked in restaurants. So, before such a service existed, I regularly ordered meals from restaurants near where I live. This included food from a restaurant called Matruchaya, which makes the best Bombil fry I have ever eaten. I also regularly ate chicken burgers from Parsi Bakery, which tasted better than all the burgers sold by fast food chains. (Interestingly, both Matruchaya and Parsi Bakery are the last of the holdouts; you won’t find them on any of the food delivery apps). Now with Zomato and Swiggy, I can order food from a restaurant which is even 10 km away. I don’t think I have ever done that, but I order food from restaurants as far as four to five kilometres away. But here is the thing. Whenever I order something from a restaurant 4 km away, I don’t order something from a nearby restaurant that I could have called and gotten something home-delivered. So, the point is someone is bearing the cost here, though it’s not so obvious in the first place. Of course, with the food delivery apps, my proclivity to order has increased, but then that is money I will not be spending elsewhere. Also, people who frequently order from food delivery apps form a very small number. As Zomato recently reported: “Customers with annual order frequency >50 as a % of annual transacting customers have increased from 1.4% in 2018 to 4.7% in 2022.” Now let’s consider a service like Zepto or Blinkit or Instamart, for that matter. I get groceries and vegetables (though not always of great quality) home-delivered. Indeed, this is a huge convenience. Nonetheless, every time I order from Instamart, I am not ordering from the local grocery shop or a vegetable vendor, which I used to do before these apps came into being. So, again someone is bearing the cost. Also, given a certain income level, a household can consume only a certain amount of groceries in a month, irrespective of the convenience these apps provide. Or let’s take the case of an app like Dunzo, which essentially couriers stuff from one part of the city to another. Recently I had an excellent experience with them. A friend and I had feasted on some marvellous seafood at the Gajalee restaurant in Ville Parle (East) in the western suburbs of Mumbai. In our excitement, we ended up overordering food. So, we got the leftovers packed. After that, we decided to go to Title Waves, a bookshop in Bandra. At the bookshop, I got hold of 10 titles written by the Nobel Prize-winning author Annie Ernaux. My happiness knew no bounds, and I forgot the leftovers at the bookstore, which I realized after I had reached home. Now in the normal scheme of things, I could have let this go or taken a cab back to Bandra and picked up the food parcel I had forgotten. Before I did any of that, it occurred to me that I could get the parcel Dunzoed, which is precisely what I did with a smug look on my face. In around half an hour, the parcel had reached me. This was a great use case, but how many times a year can one use a service like this to move stuff across the city? Or let’s take the case of any of the apps which aim to deliver education through a laptop or a phone. How many households can afford to buy their services without taking a loan? And among those who have taken on a loan, how many continue to repay it? Also, households with the money to buy such services are probably in a position to send their kid(s) to a local coaching class or hire tutors who can come home and teach. Or let’s take the case of Nykaa. It’s a boon for women living in smaller towns who order stuff from this app/website because the best brands/products may not be available in the towns that they live in. But at the end of the day, their ability to order depends on their purchasing power or the amount of money they make on a regular basis. So, there are three points here. First, while the individual apps might be growing, are they adding to growth at an aggregate economic level? As the above examples show, I am really not sure. Of course, this needs more research to establish the difference between the impact on individual companies and the aggregate economy. Second, most of these apps have overestimated the size of the market they are catering to (which is visible in their very expensive valuations). As Nithin Kamath, the founder and CEO of Zerodha, recently put it: “Unreasonable total addressable market (TAM) assumptions are a larger problem in India because the revenue opportunity other than lending is limited to the top 2 crore Indians (~1.5% of India).” Third, most of these apps offer services, and people’s ability to consume these services depends on their purchasing power, which in turn depends on their income and which in turn depends on the key economic activity in the city/town where they live. This leaves us with two important questions. First, why is the hype around startups powering the next wave of economic growth so high? Second, if startups are not the cake, then what is? Let’s try and answer the first question first. Most communication around the narrative of startups powering the next wave of economic growth is carried out by guys who run these startups, those who have invested in them, or those whose incomes depend on these firms. Of course, it is also a huge talking point for politicians, who are perpetually looking for new things to talk about. As David Edgerton, a historian of science, puts it in The Shock of the Old – Technology and Global History Since 1900: “Too often the agenda for discussing the past, present and the future of technology is set by promoters of new technologies.” And it’s hardly surprising that these promoters talk up new technologies. Bitcoin is a great example of this. It was really talked up by everybody who was a part of this ecosystem. The media fell in love with such guys and forgot to ask the most basic questions. In fact, the core business model of the most famous startups revolves around the internet (a new technology) and digital technologies. And given that, it’s hardly surprising that the promoters and investors of these companies say what they do. They have a constant economic incentive to talk up their firms and their ability to deliver fast economic growth, simply because that drives valuations higher. This confidence is basically what is termed internet-centrism. Evgeny Morozov defines internet centrism in his book To Save Everything Click Here as “the firm conviction that we are living through unique, revolutionary times, in which the previous truths no longer hold, everything is undergoing profound change and the need to “fix things” runs as high as ever”. And internet and new digital technologies will be at the heart of fixing everything that requires fixing. In this, “the new is presumed to be better because, well, it’s new”. And these new technologies will now drive fast economic growth. The trouble, as we have seen earlier, is that this is clearly not possible in the Indian case. At the risk of repetition, startups, at best, are the icing on the cake. So, that brings us to our second question, if startups are not the cake, then what is? The cake is the old way of doing things. And what’s that? Now let me tell you about my growing up years in Ranchi. Therein lies the answer to this question. For most of the first two decades of my life, we stayed on Kanke Road in Ranchi. If you travelled all the way on the Kanke Road, you ended up where else but Kanke. Kanke was the place where the Central Institute of Psychiatry was located or which was locally more famous as the mental hospital or simply the pagalkhana. And if you grew up on Kanke Road, jokes on the mental asylum were inevitably cracked at your expense. My family lived in the CMPDI Colony on Kanke Road, where CMPDI stands for Central Mine Planning and Design Institute, the only subsidiary of Coal India which does not dig up coal. CMPDI is the internal consultant to Coal India. At a simple level, they figure out where to dig for coal, how much to dig, how to dig and so on. Around 1.2 km towards the left of CMPDI Colony was another colony called Jawahar Nagar. Jawahar Nagar was a colony where most of the top management of Central Coalfields Ltd (CCL) lived. CCL is one of the subsidiaries of Coal India and which, unlike CMPDI, actually digs up coal in the coalfields in and around Ranchi. Around 1.1 km towards the right of CMPDI Colony was another colony called Gandhi Nagar. Gandhi Nagar was also a CCL colony. Most of the local economy ran because of those who worked in CMPDI and CCL and lived in these colonies. These included grocery shops, STD booths (zoomers may please Google), medicine shops, small restaurants like the Sabitri Mistan Bhandar right opposite the CMPDI colony gate, tailors, who were more into fitting clothes than stitching them, small electronic shops, cassette shops, where you could and get your favourite songs recorded, Chinese stalls, which sold chicken chow mein for as low as Rs 5 per plate and so on. And then there were tuition teachers all over the place, with Professor Dipankar De, who taught Physics for IIT entrance exams, being the most famous of the lot. He was world-famous in Ranchi. So, what’s the point I am trying to make from this dose of nostalgia? The point is that employees of CMPDI and CCL earned salaries and spent money. Their spending drove many services in the local economy. In this day and age, people might very well be ordering singhadas or chicken chow mein on Zomato or Swiggy and not Sabitri Mistan Bhandar or the local Chinese stall, but at the end of the day, the money to order is coming from the work that they do. Zomato and Swiggy see demand simply because those who are gainfully employed are choosing to order online and not like they used to in the past. Given this, while Zomato and Swiggy might be doing more business, does that mean the whole market is expanding? I am really not so sure of that. Services businesses sprout when there is some core economic activity happening. Now, what was the core economic activity of CMPDI and CCL? The core economic activity was digging up coal and selling it. While that may not have happened exactly on Kanke Road, where we lived, it drove the economy there. In fact, not just the service economy. As people started retiring, they wanted to continue living on Kanke Road. That was hardly surprising given that they had spent a major portion of their lives there. Most people that they knew also lived around that place. The CCL hospital, which they had free access to, was nearby. So, this led to an explosion of apartments being built on Kanke Road. In the early 1990s, there were hardly any apartments that had been built. When I last went to Ranchi in 2018, Kanke Road was full of apartments. And many of these apartments, at least up until real estate prices went crazily out of reach for the middle class, had been bought by people who had retired from CCL and CMPDI. This is how the core economic activity of digging up coal drove economic activity on Kanke Road in Ranchi. Indeed, if you see the success stories of the last few decades, economic growth in many cities has come from a core economic activity. Bengaluru’s population has grown from a few lakhs to close to a crore because a huge number of firms operating in the information technology sector are based in the city. This has had a multiplier effect. Everything from banks, restaurants, the malls, schools, colleges, transport operators, and real estate builders, have benefitted. Other cities like Pune and Hyderabad have also benefitted from the growth of the IT sector. Chennai has benefitted tremendously from the auto and auto-ancillary sector. Gurugram has its BPO companies and auto companies. Pune has many engineering companies and educational institutions catering to students from across the country. In fact, Mumbai continues to be relevant because a lot of the financial sector continues to be based out of the city. And of course the film and the TV industry. As Martin Wolf writes in The Crisis of Democratic Capitalism: “Clustering is why cities have always been important for economic prosperity.” This clustering happens because companies specializing in one broad area gradually set up shop at one place. This ultimately feeds into the local economy and helps many service businesses. In that sense, for the economy to grow in a particular area, there has to be a core economic activity that it benefits from, with or without clustering, for that matter. There can be many companies operating in one particular sector. Or there can be one large company, like Tata Steel, in Jamshedpur. Delhi benefits tremendously from so much of the central government being based there. On the back of these companies (or the government, for that matter), many ancillary and service businesses can sprout. Nonetheless, these service businesses cannot drive fast economic growth on their own without the presence of a sector or a company in the area. Many small cities in the US are great examples of this. Typically, the local economy was driven by the presence of this one large manufacturing company. Nonetheless, as productivity improved, and many factories moved to China to cut costs, the economies of such cities were destroyed (and that, among other things, ultimately led to Donald Trump). As Wolf writes: “Those more specialized cities and towns whose businesses lose out in global competition risk falling into cumulative decline: bright young people leave; new businesses do not enter, because the skills they need are unavailable.” The city of Kolkata is a great example of this in an Indian context. I know this is a very basic point. But sometimes, the hype around a narrative gets so strong that basic points need to be reiterated. This is what India needs. It needs more manufacturing, more industry, more IT firms and so on. Only if these firms thrive will startups thrive. Startups, in their current form, on their own cannot drive the growth of other startups or the overall economy for that matter. The trouble is that this seems to have been forgotten in all the hype and the noise accompanying startups. I guess there are two reasons for this. First, the superb marketing and communication skills of those working for startups. Second, the inability of journalists covering these startups to ask the most basic questions. As Morozov puts it: “It’s time our technology reporters learn to control their hagiographic impulses and start challenging the just-so narratives sprouted by Silicon Valley [which funds most startups].” That’s the long and the short of it. | 
No comments:
Post a Comment