5 Silver Linings For the Indian Startup Ecosystem Amidst Covid-19 Crisis

Covid-19 induced lockdowns and subsequent low growth along with accompanying investor sentiment is no less than a punch on the face of the Indian startup ecosystem
5 Silver Linings For the Indian Startup Ecosystem Amidst Covid-19 Crisis
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Office of Advisor (Shweta Shalini) to former Chief Minister of Maharashtra Devendra Fadnavis
6 min read
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“Everybody has a plan till they get punched in the mouth” said legendary boxer Mike Tyson.

Covid-19 induced lockdowns and subsequent low growth along with accompanying investor sentiment is no less than a punch on the Indian startup ecosystem, which had planned to be a beneficiary of the sustained macro-economic growth of the country.

While World Bank estimates a growth rate of 0.9 per cent for East Asia and Pacific region, major economies including India and China are staring at prospect of negative growth for financial year 2020-21. India with its stringent lockdown may have managed to outperform the covid-19 battle with very low mortality rate but can’t undo its economic impact.

The RBI financial stability report indicates high systemic risk in the economy. While foreign investors pull out money towards home countries or safe havens, the excess liquidity created by easy monetary policy may have resulted in disconnect between ground reality and stock market sentiments.

The macro economic factors which affected large businesses resilient to shocks may have seen many startups wither away. As per NASSCOM, 70 per cent startups in India have less than three months of cash runway. It won’t be pessimistic to argue that most of this 70 per cent lot has either shut operations or is in deep financial distress.

However, even with the entire prevalent crisis, the worst may be behind us, as is evident from the fact that electricity consumption in India registered a growth (after a six month gap) of 5.6 per cent in September at 113.54 billion units.

Here are five silver linings in the startup ecosystem that stand out in post lockdown period:

Priority Sector Lending (PSL)

Conventional banking credit has long evaded the Indian startup ecosystem due to startups inherently being high-risk, high-reward ventures. A majority of Indian startups are bootstrapped by the founders, family and friends while business loans come by with great difficulty without a track record.

The RBI’s move to assign priority sector lending (PSL) status to India’s startup sector will open up opportunities for startups by opening up banking credit.

All scheduled commercial banks and foreign banks with a sizeable presence in India are mandated to set aside 40 per cent of their Adjusted Net Bank Credit (ANBC) for lending to priority sector. The PSL status will enable lower cost funding and the paradigm shift caused by RBI move will have a ripple effect on the government policies at various levels.

Priority of loans up to INR 50 crore to startups will play a crucial role in mainstreaming the startup ecosystem for bankers. With angel investors and venture capitalist having to compete with banks, which will push credit to meet the priority lending requirements, the bargaining power of a startup entrepreneur has substantially increased.

Talent Pool

The economic lockdown imposed due to the pandemic has resulted in churn in the job market.

Unemployment spiked in April-May and is slowly stabilizing as large firms expect a V-shaped economic recovery and are going slow on layoffs.

The startup ecosystem is well positioned to acquire competent talent from the workforce to ignite growth with urban areas recording unemployment at 8.83 per cent in week ending 20 September 2020. Enterprising entrepreneurs can grab the opportunity to get better talents on-board with a promise of long term prospects as opposed to the pre-Covid-19 times when startups found difficult to retain talents. For a lot of startups that downsized, now is an appropriate time to make a fresh beginning with a better team.

Ample research indicates that competence and team work of the first few employees determine the trajectory of startups. The employment scenario, which is a challenge for the overall economy, is actually a silver lining for startups in getting the best talent.

Rural Demand

Contrary to what the GDP growth figures suggest, all is not lost for the economy and rural India has been resilient to economic setbacks. In July, tractor sales were on a double-digit rise on an annualized basis and sustaining at positive levels even in September, indicating a thriving rural demand.

With Kharif sowing suggesting a 10 per cent jump around this time, a possibility of new high can’t be ruled out. With about 55 per cent of the population residing in rural economy, the startups focused on social impact still have a large base of consumers who will spend.

Interventions by the government in the rural economy have been aggressive and additional allocation of INR 40,000 crore in MNREGA has put cash in the hands of rural population. Morever, data suggests that joblessness in rural areas is now lower than pre-pandemic levels at just 5.21 per cent. Those startups that realize that the economic weight of India is slowly shifting towards Tier II and Tier III cities and shift their strategy accordingly stand to gain.

Consumer Social Behavior

The social behavior mandated to restrict the spread of Covid-19 has resulted in a number of industries coming up with novel solutions. Right from contact-less delivery of food to PPE kits, which were not produced in India, and changed customer behavior has opened up possibilities for newer business models and processes.

While many startups that can’t cope up with the new normal will shut down, another clutch of startups that grab the emerging opportunities in the market will rise in their place. The digital medium has become a preferred medium for transacting economic activities and entertainment OTT platforms have seen massive surge. Tech startups which can brand themselves into a niche which solves the problem in their respective industry can thrive even while broader economic growth will remain muted for next few years.

Local Solutions

For a long time, Indian startups faced stiff price competition from China with its economies of scale. The government emphasis on Atma Nirbhar Bharat and ban of certain China-origin apps along with possible tariff hikes on Chinese products will negate the Chinese advantage, paving way for Indian startups to pick market share.

With companies across the world diversifying supply chains from China, the Indian startups which provide competitive options have a ready domestic market to tap.

The Indian businesses have received a hard knock-out punch due to the economic lockdown and startups have shared disproportionately high share of distress and business plans have crumbled down. It’s time to draw up a new plan and chart a fresh course of action in tandem with new realities.

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