When Piyush Goyal, India’s minister of trade and industry, expressed his displeasure with the country’s startups—an odd target for a government official’s ire—he ignited a firestorm. His scathing critique was unfair as well as true.
Startups are more used to being hailed as a shining example of the economy’s successes. While officials are glad to portray these new players as success stories, they frequently lament that older companies, particularly in manufacturing, are not spending enough.
The Prime Minister Narendra Modi likes to talk about how the growth of the sector shows that India is “dynamic, confident and future-ready.” His ministers praise their contribution to employment generation and highlight how much foreign investment they attract. This is seen as demonstrating the effectiveness of Modi’s business-friendly reforms.
But on this occasion, Goyal’s diagnosis was, frankly, accurate. And that’s why it struck a nerve.
The minister displayed a presentation that contrasted Chinese and Indian startups. He said that although Chinese companies were “investing heavily in self-reliance, building chips and AI models for the future,” local applications were “turning unemployed youth into cheap labor so the rich can get their meals without moving.” In each of his five arguments, he compared Chinese companies that were allegedly developing deep tech and new industrial sectors with Indian enterprises that were concentrating on meeting niche demand.
Goyal isn’t wrong about the consumer-facing nature of local startups. But although he might have diagnosed the disease properly, he was wrong about what might have caused it. The anger in his speech is misdirected. If India’s startups aren’t in the same sectors as China’s, the fault lies with the economy and its stewards — with, in fact, the government.
New firms are created to serve the economy of which they are part. In India, there are some fields of innovation — space or semiconductor design for example — with multiple stand-out young businesses. But, overall, most startups are simply responding to the fact that growth in India is driven by consumer demand and not industrial production.
That demand has a peculiar segmented structure. As a recent and much-discussed report by the VC Blume Ventures pointed out, there are three Indias. An India-1 at the top, with a population of 150 million, consisting of globally benchmarked consumers and savers. One at the bottom, an India-3 of a billion “unmonetizable users.” And an India-2 in the middle, of 300 million people whom the report described as “heavy consumers and reluctant payers.”
With the income of India-1, several businesses promise investors the scale of India-3. However, the successful ones promise poor profits but respectable scale by using India-1’s money and India-3’s labor to service India-2.
Goyal is correct when he says that these are not necessarily pioneering new ideas, even if they are successful in their execution. Investor interest is also not as high as most people believe. When a highly promoted conference in Gurugram, a center for innovation, ended up drawing hundreds of founders and hardly any investors two years ago, it became impossible to ignore.
For the same reason that China’s legacy manufacturing outperforms India’s, India lacks the battery and electric vehicle entrepreneurs that China does: a business climate that is just not conducive to traditional brick-and-mortar manufacturing. The government ought to be aware by now that it is mostly to blame for this.
Businesses are straightforward and predictable entities. They react to rewards. The government should always look inward when the private sector of a nation is not acting as it should. It either has perverse incentives in place or its expectations are unrealistic.
The Indian government has just not done enough to restructure manufacturing. The private sector requires less government involvement, less credit constraints, more lenient labor regulations, and a less troublesome tax structure in order for robotics, batteries, or EVs to prosper. Anything involved in the actual economy cannot avoid this regulatory burden; the delivery and betting applications that infuriated Goyal may.
Startups are just another type of company. They are not unique. They will swarm to industries that encourage entrepreneurship and make doing business easier. The government should be upset, but at itself, if these are not the fields it wants them to pursue.