Creative Destruction: A New Growth Paradigm In Indian Economy

The phenomenal growth of startups in India has reinvigorated the Indian Economy. The Department for Promotion of Industry and Internal Trade (DPIIT) has officially recognised 84,102 startups to date, of which 39,660 have been recognised in 2021 and 2022. These startups are cumulatively expected to raise $180 billion by the end of 2023. Consequently, the Indian startup ecosystem has grown to become the third-largest globally with more than 100 unicorns created between 2011 and 2022.

This entrepreneurial spirit is accelerated by growth in indigenous innovation. India's ranking in the Global Innovation Index of the World Intellectual Property Organisation (WIPO) has risen from 81 in 2015 to 40 in 2022. The number of domestic patent filings surpassed the international filing, in India, for the first time in Q4-FY22. There has also been a five-fold increase in the number of patents granted from FY15 to FY22.

The above data highlights a new growth phase for the Indian economy. This phase is powered by twin engines of the pervasive rise of new firms and innovation. Such a phase of growth is labeled as Creative Destruction by eminent economists like Joseph Schumpeter and Philippe Aghion. In this growth phase, new technology and firms produce goods and services with higher efficiency and efficacy. They then create an existential challenge for the established firms, which are either forced to reform or perish away as obsolete.

The Indian Context

India's growth story after the LPG reforms followed the Neoclassical growth phase (propounded by Robert Solow). Accordingly, the Indian firms focused on capital accumulation which was reflected through the increasing value of their assets - tangible and intangible, cash holdings, plant and machinery. This model has propelled India to become the fastest-growing major economy and maintain this status through significant downturns like the Global Financial Crisis. However, this growth model does not provide a prescription for tackling the stagnation caused in the economy due to diminishing returns of capital accumulation. Japan for instance has grown by the Neoclassical model to become a $4.9 trillion economy, the third-largest globally, but faces grave economic challenges due to growth stagnation.

Additionally, the world has now become increasingly vulnerable, uncertain, complex and ambiguous due to the Covid-19 induced lockdowns and the challenges posed by climate change. In this scenario, Low and Middle-Income Countries need continuous growth to extract their populations from poverty. These countries are constrained by their time-bound comparative advantage and climate-responsible growth. India, a Middle-Income country with a PCI of around $2400, has a comparative advantage of a young population and has to grow while attaining its UNFCCC-CoP 27 declared Intended Nationally Determined Contributions (INDCs). This context makes for a suitable platform for India to adopt the Creative Destruction growth model.

Creative Destruction in India

The Creative Destruction phase has some essential elements like innovation and diffusion of knowledge, production and incentivisation of intellectual property rights, and creation of new firms. The outcome of the implementation of these elements has been recorded through empirical research. A study by Haltiwanger, Jarmin and Miranda, US 2005, has revealed that new firms of 0 to 1 year of age were responsible for the largest job creation among all firms. There is also a positive correlation between counties of the US with the most patents and job creation. Integrating the above empirical research it can be deduced that innovation and new firm growth lead to high job creation. It was reported by DPIIT that the jobs created by such startups in India are also increasing year-on-year. The startup ecosystem created around 1.6 lakh jobs in 2020, 2 lakhs in 2021 and 2.4 lakhs in 2022, with an overall 8.6 lakh jobs to date.

In the Indian context, these correlations are much more apparent. Ola Cabs brought forth an innovative cab booking and travel method which enhanced user experience. Consequently, it replaced Meru Cabs in the travel industry. In the Ed-Tech space, firms like Byju's and Unacademy reformed the coaching industry by bringing in customized courses for examination preparation while challenging the dominance of coaching institutes and hubs in Kota, Delhi and Mumbai. In the health-tech space, firms like NeoDocs have come up with an innovative Point-of-Care solution for diagnostics which challenges the established diagnostic labs ecosystem. In eyewear, Lenskart has leveraged digital technology to transform the consumer journey and expedite buying decisions.

These firms have increased productivity in two ways. Firstly, by imitating the technology and global best practices and, secondly, by creating frontier technology and processes. Imitating technology means learning from other firms, buying technology and experimenting based on feedback received from customers. This is the first phase of innovation in an economy which can power labor-intensive industries. Relevant for India to become a manufacturing powerhouse and an alternative to China. The second phase involves the generation of new knowledge which gives control over intellectual property and rents received from it. India is currently in the first phase of innovation which is also reflected in the nature of the commercial activity of these new

startups.

Systemic factors

Creative Destruction is a new paradigm of growth which requires many factors of support. Research and Development (R&D) oriented education, entrepreneurship, culture, openness and policy are the most essential factors. R&D-oriented education prepares a cohort of individuals who are skilled at problem-solving through novel methods, creating new knowledge in the process. These individuals can then commercialize their novel solutions and skills through entrepreneurial channels to build new firms.

Indian society since ancient times has rewarded and recognised entrepreneurial spirit. Indus Valley Civilization's trade with Mesopotamia, the merchant guilds of the Gupta era, swadeshi firms established during the colonial period, heavy manufacturing firms established post-independence and now new age tech firms established in the 21st century, bear testament to the fact that Indian entrepreneurs have evolved with changing nature of business. So, India has a culture of entrepreneurship which can act as a growth bed for new firms.

India opened up to the world for business after the 1991 reforms. This opening up has cumulatively attracted around $732 billion of FDI. It has enabled technology transfer through multinational firms, taught global best practices, and made Indian entrepreneurs internationally competitive. Most importantly it has opened up a large market space for Indian entrepreneurs and increased the incentives for innovation. On the policy front, the StartUp India, Invest India, Make in India for the world, and Production Linked Incentive Scheme has acted as a catalyst for innovation and new firm growth.

The Way Ahead

India needs to take conscious steps to expedite the Creative Destruction phase in the economy. UNESCO reports that India spends only 0.7 per cent of its GDP on R&D as opposed to 2.2 per cent in China.

This research too is concentrated mostly in universities. Firstly, there needs to be increased collaboration between the industry and universities for industrial research and development. Secondly, universities need to create industry-supported incubation centers. Thirdly, industry and government spending on fundamental and applied research should be increased to at least 2 per cent of the GDP by 2027. Fourthly, policies which isolate the Indian economy or restrict entrepreneurs' market access abroad should be withdrawn.

Nation-states are in a continuous attempt to increase their Comprehensive National Power (CNP). It is well understood that the economic sub-component of CNP powers all other aspects. Given the flux in the world economy and the world order, it is essential for India to be propelled by the combined strength of Lakshmi, Saraswati and Durga. The Creative Destruction model is one such way to keep India on a high growth trajectory.

Divya Singh Rathore, a Public Policy Professional. She tweets at @_divyarathore

Suryapratap Babar, Public Policy enthusiast. He tweets at @SuryapratapBab3