Budget 2020: ‘Right time for startups to innovate for manufacturing sector, make it more competitive’

Budget 2020 India: The startup sector will have ample opportunities to transform old-school economics by means of digitization of every single business process including sales, customer experience, payments, procurement and the end-to-end supply chain.

Budget 2020: ‘Right time for startups to innovate for manufacturing sector, make it more competitive’
The last industrial policy was implemented in 1991.
  • By Rahul Garg

Union Budget 2020 India | Technology for MSMEs: The new year 2020 has just begun. With the buzz around this year’s union budget getting louder and global cues continuing to disrupt growth projections, the outlook at the beginning of the year is one of cautious optimism. Given the 4.5 per cent GDP growth rate that we have managed to pull off amidst the long-drawn multilateral talks on Brexit, the shift in rules-based engagements in bilateral trade between the United States and China, the growth momentum in China stabilizing to non-accelerating levels and the evolving contours of geopolitics in West Asia, there is an underlying message for startups and big corporations alike to tighten their seat belts. Even as the next 12 months present corporate India with a reality check to introspect on their existing cost structures, we believe that this is the time for startup enterprises to innovate, create new avenues of economic and technical efficiencies for India’s manufacturing sector, and enable the Indian economy to stay put on the trajectory of economic growth and employment generation.

The Curious Case of the Indian Economy and Its Manufacturing Sector

From a perspective of economic growth accounting and employment generation, it makes enormous good sense to pin hopes on the manufacturing sector of the economy because of the sector being dominated by enterprises that are registered and thus facilitating easy accounting of the gross value addition and job creation metrics. Data for the year 2019 suggests that agriculture and allied activities accounted for 43.21 per cent of the total employment, the manufacturing sector accounted for 24.89 per cent and the services sector accounted for 31.09 per cent. India is one of the few economies in the world to have leapfrogged from agriculture to services in its search for economic growth and employment generation, while most other economies across the world have traversed along with the milestones of first agriculture, then manufacturing and finally the service sector.  This unique transition of the Indian economy has lent a unique character to the country’s manufacturing sector. 

Startups as Enablers of Value Creation for India’s Manufacturing Businesses

With the manufacturing sector in India accounting for 14.83 per cent of India’s GDP in 2019 and the IIP falling by 3.5 per cent YoY in October 2019, the manufacturing sector needs to look for greater efficiencies and create opportunities for cost rationalization for India to grow from the current GDP of $2.719 trillion in 2019 to the benchmarked GDP of $5 trillion by the year 2025. This implies that the Indian economy shall have to achieve a CAGR of 10.25 per cent. The underlying implication is that manufacturing enterprises that can create mid-sized efficiencies in the range of 1-3 per cent can achieve cost rationalization targets, stay relevant and achieve the desired bottom-line impact bounder such circumstances. For the Indian economy to generate new employment opportunities even as India’s manufacturing enterprises look to achieve this level of cost competitiveness, the startup sector will have ample opportunities to transform old-school economics by means of digitization of every single business process including sales, customer experience, payments, procurement and the end-to-end supply chain.

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Startups as Enablers of Technological Progress and Reverse Innovation

As manufacturing enterprises look to do the tightrope walk of striking a balance between fiscal prudence and cost competitiveness on the one hand and building scale on the other, India’s startup sector has shouldered a greater role in enabling both business and technical innovation and in the process generated employment for a higher proportion of India’s skilled workforce. An interesting data that reinforces this argument is that between 2015 and 2018, Indian startup enterprises have filed nearly 200 patents in the United States; an indicator of the untapped technological prowess of India’s startup sector. Further, the vast majority of these patents have been filed in the domains of new-age technological capabilities like artificial intelligence, machine learning, industrial internet, cybersecurity, and vehicle technology, thus demonstrating that India’s startup enterprises have what it takes to produce world-class technology and position India as an innovation garage on the map of the global digital economy.

The Global Investor Community and the Indian Startup Story

One of the key features of technological progress and innovation is that it confirms the VRIO framework. Technological innovation, when safeguarded by intellectual property rights, creates value for customers, lends rareness and non-imitability; a major source of competitive advantage to either the technology provider or its customers or both and disrupts organizational structures and processes, thus creating space in the markets for new entrants to fit in and drawing the attention and interest of the investor community. This has been the case with the Indian startup sector in 2019. Indian startup enterprises bagged a gross investor funding of $3.9 billion in the first half of 2019, up from $2.7 billion in the first half of 2018. When extrapolated for the five-year period from 2014 to 2019, the gross investor funding received by Indian startup enterprises stands at $50 billion; thus proving that there PE funds and angel investors are taking an interest and believe that the Indian startup story is here to stay, scale-up and grow.

Leveraging the Demographic Dividend and Enabling Employment Generation

What do these numbers hold for a traditionally labour-intensive economy like India? How have Indian startups leveraged the combination of technological progress and capital injections from investors to generate employment? As such, since the inception of the Startup India initiative in 2016, 16,105 startup enterprises that are registered with the Department for Promotion for Industry and Internal Trade (DIPPT) have been reported to have created 187,004 direct jobs, with the inclusion of indirect jobs taking the gross employment generated to 560,000 jobs. This data implies a conversion ratio of 11 direct jobs per startup and a multiplier effect of 3 indirect jobs per direct job created. At this rate, the NASSCOM report suggests that the startup sector is expected to create 39 lakh direct and 11 lakh indirect jobs, thus registering a gross tally of 50 lakh jobs.  For a country that has 6,200 engineering and technology institutions that add 1.5 million fresh technology graduates to the workforce and is expected to touch the median age of 28 years by 2022, the potential of startup enterprises to generate employment is one of the most decisive and crucial takeaways from any dialogue on economic growth

(Rahul Garg is the Founder at Moglix. Views expressed are the author’s own.)

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First published on: 09-01-2020 at 12:27 IST