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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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The Two-Track Indian Economy

There is of course a fifth element – the shadow economy, better known as the informal economy.

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While old-economy industries in India like automotive and construction remain stressed, new-economy sectors are booming. Startups in artificial Intelligence (AI), machine learning, digital payment gateways and the internet of things (IoT) have been vacuuming up private equity funding and creating jobs. 

Even a smallish bike rental startup like Vogo is adding hundreds of jobs as it scales up. More mature startups are hiring in the thousands – engineers, designers and software developers among others. 

None of this though is going to solve India’s jobs problem. There are four tiers of employment generators that need to be targeted to get the overall economy buzzing again. The first tier is the traditional sectoral group of steel, cement, automotive, infrastructure and housing. The second tier comprises fast moving consumer goods (FMCGs) ranging from white goods to biscuits. The third group consists of services across finance, infotech and logistics. The fourth tier hosts new-economy startups, a small but growing part of India’s formal economy. 

There is of course a fifth element – the shadow economy, better known as the informal economy. This is where many of the Mudra loans go – self-employed businesspeople, many of them women, running tiny businesses. 

It’s the traditional sector, however, where red flags have gone up. The collapse of sales in the automotive industry has spooked manufacturers of passenger cars, commercial vehicles and two-wheelers. The downturn, they fear, may not be cyclical or seasonal. It might well presage a fundamental socio-cultural shift. 

As Uday Kotak, chairman of Kotak Mahindra Bank, observed recently, cars are no longer regarded as aspirational. His son prefers hopping into an Uber or Ola cab rather than driving his own car. Finance Minister Nirmala Sitharaman has echoed Kotak’s views but was unfairly criticised for trivialising the issue.

Technology has added to the automotive industries’ long-term sense of doom: the move towards electric vehicles (EVs) will change the way consumers perceive cars. Many are deferring buying cars till BS-VI norms kick in next year; others are holding back as they await electric-petrol hybrids and the growth of battery charging infrastructure. 

New public transport systems pose an additional challenge. By 2024, Mumbai will have over 300 kilometres of high-tech metro networks, a new fleet of airconditioned electric buses on wet lease, and modernised suburban railway infrastructure. The migration of upper middle-class consumers from private transportation to public transportation – which took place in the West and Japan decades ago – is inevitable in India.

While new-economy startups believe they will leapfrog over such socio-economic changes, there are warning signs for them too. Paytm, a bellweather for India’s startup ecosystem, tripled its loss from Rs. 1,604 crore in 2017-18 to Rs. 4,217 crore in 2018-19. Other startup bellweathers like Flipkart are also losing heavily. How long can they continue to bleed? If old-economy firms lost Rs. 4,000-plus crore in a year, they would shut down. Jet Airways, for example, was losing far less before collapsing. 

The business model of most startups is flawed. Instead of sales revenues taking care of expenses, venture capital is used to fund expenses. This is unsustainable beyond a point. Even Amazon, after years of losses, had to tighten controls and eventually turn a profit. 

Paytm’s example is particularly revealing. Its annual loss of Rs. 4,217 crore is more than its total annual revenue of Rs. 3,579 crore. Its expenditure is Rs. 7,730 crore. So for every rupee Paytm earns, it spends two rupees, racking up a loss of over 100 per cent on revenue. Paytm is not alone. Virtually all startups make humongous losses because their business model is based on heavy discounts. Without discounting, they wouldn’t exist. 

The problem was highlighted by the ongoing battle between food and restaurant aggregator Zomato and the National Restaurant Association of India (NRAI). Zomato Gold subscribers receive 50 per cent discounts, cutting into the profit margins of restaurants which foot the discount bill. Without deep discounting, many small restaurant discovery aggregators and table bookers could go out of business. 

Start-up valuations are the other anomaly. Room aggregator Oya has a valuation of Rs. 72,000 crore without (till recently) owning a single hotel room. The Taj Hotel Group, with dozens of hotels worldwide on prime real estate, has a market valuation of a mere Rs. 16,000 crore. It is sobering to know that the $25 billion (Rs. 1.80 lakh crore) valuation of asset-light Flipkart (including its hot payments company PhonePe) is nearly five times more than the $5.3 billion (Rs. 38,000 crore) valuation of asset-heavy Tata Motors. Some startups like online education pioneer Byjus have meanwhile cracked the business model: it reportedly made actual profits on a turnover of Rs. 1,430 crore in 2018-19, though evidence of this remains to be verified. 

Startups are a key cog in India’s economic wheel. In the next few years, robotics, AI and IoT will fundamentally change the way people work and live. Already, e-commerce sites like Flipkart-Walmart and Amazon have transformed the lives of consumers in small towns. Often bereft of well-stocked malls and brick-and-mortar shops, customers in tier-2 and tier-3 towns see e-commerce as a means to overcome the lack of physical infrastructure. 

One of India’s shrewdest businessmen, Reliance Industries Chairman Mukesh Ambani has clearly seen the writing on the wall. He is lowering the company’s dependence on oil and gas and increasing investments in retail, e-commerce, mobile telecom, streaming media content on Jio, and other consumer-facing businesses. By selling 20 per cent shareholding in flagship Reliance Industries to Saudi Arabia’s Aramco, Ambani is deleveraging the firm and signalling that oil and gas – RIL’s decades-long mainstays – will no longer be key drivers in the future. Being asset-light rather than asset-heavy is the way forward. 

As in life, there is always a middle way, a meeting ground between the old and the new in India’s two-track economy. While traditional companies like Reliance Industries migrate online, internet firms like Oya are migrating towards brick and mortar. The firm last month bought the 657-room Hooters Casino Hotel in Las Vegas for $135 million (Rs. 9,800 crore). And even Paytm wants to buy a real bank (Yes Bank) if the Reserve Bank of India (RBI) will allow it. 

This is where India’s two-track economy converges.


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