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Riding the unicorns

Unicorns are a sign that India need not be following a path that retreats to the old economy of a few powerful, politically-connected business houses thriving behind trade barriers, and stifling competition

Right now, too many small and medium firms are dependent on a handful of large conglomerates for business, and they end up being squeezed and even starved by the giants. Competition can help throughout the value chain, and not just improve the lot of final consumers.

At a time when India is suffering because of a huge spike in Covid-19 cases, far beyond what it experienced in the first wave, with politics and protests rounding out the gloomy headlines, some good news may be useful in lifting spirits.

While the unicorn of tradition was a mythical beast, and focusing on myths seems to mar the current political landscape, the hundred Indian unicorns of this column are very real. A unicorn in this concrete sense is a private company with a valuation of over $1 billion.

Valuing private companies is more difficult than listed companies, where public market valuations are available. So, a recent Credit Suisse report required fresh research to come up with this number: Three times the previous estimates, and almost one-third of the number of listed companies in India that meet this valuation threshold.

Why does this news matter? India’s future lies in industrial growth, not necessarily of the kind that propelled the Industrial Revolution or the East Asian miracle, but definitely the kind that increases productivity and creates jobs. This is the one area where India has continued to lag in pursuing economic development. The country has not been creating enough modern, dynamic firms to achieve its politicians’ targets of 10% growth or a $5 trillion economy.

This news also comes at a time when one apparent driver of the farmers’ protests is the feared concentration of economic power in their sector in the hands of a couple of giant conglomerates.

Unicorns are a sign that India need not be following a path that retreats to the old economy of a few powerful, politically-connected business houses thriving behind trade barriers, and stifling competition. Of course, even 100 unicorns are a drop in the bucket compared to what India needs overall. The same report argues that they are at the top of a fast-growing pyramid of 80,000 start-ups, with the number of firms having increased 70% in the last eight years.

Another important facet of this development is the role of private equity. The Credit Suisse report is, in fact, aimed at such global investors who are considering India as a destination. This kind of capital flow represents a more positive alternative to the headline-making fear of hot money flowing in and out of the country quickly, creating instability in its wake.

Private equity may not be an unmitigated blessing, but it potentially represents patient and knowledgeable capital, which is what India needs more than ever, given the parlous state of its domestic financial sector, which, even at the best of times, has been suboptimal in its financial intermediation role.

The unicorns are also encouraging because they are not narrowly concentrated in any one sector. Ten are in e-commerce, 15 in finance and insurance, and a dozen each in information technology and in software as a service (SaaS). But this is just half the total, and there are representatives of many other sectors: energy, foodtech and staples, education, logistics and transport, healthcare and other areas. Of course, these are almost all areas in which human capital is a critical input, and this points the way to the need for expanding higher education in India to feed the growth of these firms—financial capital will not be enough.

To continue with the hopeful message of these developments, it is these unicorns that can play a role in creating an ecosystem for other newer, smaller firms to start, survive and grow. This can be in facilitating finance for such firms, or improving their logistics or other business processes, or even as subcontractors for the larger firms.

Right now, too many small and medium firms are dependent on a handful of large conglomerates for business, and they end up being squeezed and even starved by the giants. Competition can help throughout the value chain, and not just improve the lot of final consumers.

If the above sounds too rosy, one can close with some cautions. The trickle-down from the wealth creation of these new unicorns to the average India will still be too limited and slow for what the country needs overall. So, growth in conventional, labour-intensive manufacturing for the domestic market and for exports will still be needed at levels that India has consistently failed to achieve. Solving this riddle remains the biggest challenge for policymakers, though systematic attention that goes beyond slogans should make a difference. India’s employment generation record for its masses remains pitiful—something that is also manifesting itself in the farmers’ protests.

If India had done a good job of moving employment out of agriculture into higher productivity alternatives, those farmers would not be in positions of precarity that impel them to protest.

Two-thirds of the 100 unicorns started after 2005, so the underlying processes are neither glacial nor mercurial. One can conjecture that they are the product of India’s long march out of a poverty mindset, as reflected in economic policy reforms. But if the processes are to continue and accelerate, policymakers will have to ensure continued progress of reforms, avoidance of backsliding, and maintenance of as level a playing field as possible in every sector of the economy, so that a handful of powerful conglomerates do not dominate and trample the new blooms. As India emerges from the pandemic, even with a now-likely delay, these will be vital issues for policymakers.

The author is Professor of economics, University of California, Santa Cruz

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