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Uber’s sell-out to rival Didi Chuxing in China has triggered off waves of emotions and comments in India, the crux of them being that India needs to play a greater role in supporting local enterprises.
They also talk of the Chinese Government’s overt support and protection of domestic industry and willingness to eject foreign players or hold them from entering in the first place.
There is an allied, utterly misguided view that I came across in The Economic Times, where the author talks of taking recourse to the `large pools of capital sitting with Indian insurance companies and pension funds’ in order to fund and fuel innovation.
I will return to the latter in a moment.
First, it is too late to cry about India’s mode of liberalization as opposed to the Chinese way of liberalization. China began liberalizing in 1980 and has slowly opened up the market since.
It allowed internal competition, including with state-owned enterprises. That helped companies become strong and competitive. All through, it has restrained foreign companies from entering the market or holding majority stakes. Japan has evolved similarly.
India began opening up in the early 1990s thanks to a balance of payment crisis. India’s moves to liberalise and bring in foreign investment thus never had the advantage of calibration the Chinese had.
It could of course be argued the blueprint to liberalization was in the hands of the then Narasimha Rao Government alongwith Finance Minister Manmohan Singh before crisis struck.
India has tried to control the entry of foreign players.
But the appeal of the domestic market to foreign investors was never as mouth-watering as China. Foreign companies have been willing to go in with low stakes to enter the Chinese market, including to set up manufacturing bases. In India, from automobiles to insurance, foreign companies have fought hard for higher stakes.
India ran out of time to first seed the market for domestic players. Moreover, India was starved of capital and knowhow. There was no time to plan a methodical opening up. Bajaj Auto Chairman Rahul Bajaj has told me in several interviews in the past how his company went from being a monopoly scooter player for decades to suddenly facing competition from global players.
In retrospect, India did the right thing. It did not go for a gradual opening and went whole hog in many industries. There are industries like defence, aviation and media which are still controlled tightly and are being opened up selectively.
In aviation and media, the problem is surely not lack of competition, though it might be insufficient capital.
Now, who should fund our young innovators ?
Answer. It should categorically not be the Government of India. Nor can money belonging to ordinary depositors and savers be frittered away trying to fund the 25th grocery delivery startup or India’s next sure-shot response to Tinder, as the case might be.
Funds lying in insurance companies and pension funds have been placed there by middle class to poor Indians with great trepidation and the last thing this pool of capital should be exposed to is high-risk startups.
Moreover, the Government’s job, as this insightful article by Praveen Chakravarty & Rajeev Gowda points out, is to tackle India’s real problems pertaining to lack of capacity in education, healthcare and the larger challenges of rural distress, infrastructure and so on.
The larger question could be: Are we facing a shortage of venture capital ? Chakravarty & Gowda argue that that is the least of India’s problems. In their article which argued against the Government setting up a venture capital fund, they said:
“Over the last 10 years, in India, $60 billion has been invested in more than 3,000 new start-ups. Indian start-ups received nearly 50 times more venture capital in 2015 compared to 2000.
In 2015, venture-capital investments in India were higher than net foreign investments in stock markets for the first time in history, leaving out the global financial crisis years,” the authors have argued.
Now, the author in the ET article also says that if it weren’t for US-based Tiger Global and Japan’s SoftBank, `Many of our startup founders would have been unable to raise sufficient capital to get off the ground, build large businesses and hold off foreign capital.”
I assume he is not talking of Housing.com when talking of building large businesses. The jury is out on the rest but it should be clear as day that most investments by these noteworthy venture capital names have or are in the process of going up in blue smoke, the kind you can see from far away.
There is the larger question of what venture capital really delivers to an economy, since the author links VC funding with grander economic growth.
Of course venture capital does create jobs, but has anyone paused to ask how many real ones ? I for one would surely hold bringing out my calculator for a few more months. Reason is I would rather measure net job creation, rather than add and subtract, given the number of VC-funded companies imploding around.
Risk capital has a role to play in any economy. It does in India too. Whether foreign or domestic really does not matter though I would prefer it is foreign because I can’t think of a worse way to blow up capital in a third world country trying to find India’s answer to a consumer product delivery company (Amazon) or a social network (Facebook). But the choice is the giver’s, not mine.
China is ahead of India in many economic and social respects and will remain so for a long time. Yes it has created strong domestic brands in the internet and other industries. But China also understood capitalism much before we did. And we are still unsure where we stand.
We may or may not build strong domestic brands. But we cannot expose the hard earned savings of poor and middle class Indians to a world of cowboy investing. The author of the ET article is welcome to invest freely, but with his or his lenders’ funds. Leave our savings alone.