It’s India’s fault local startups are trailing China

By Mihir Sharma

India’s minister for commerce and industry, Piyush Goyal, set off a firestorm when he noted how dissatisfied he was with the nation’s startups, an unusual target for the ire of a government official. His trenchant criticism was both accurate and unfair.

Startups are more accustomed to being feted as an example of what has gone right in the economy. Officials often complain that legacy companies, especially in manufacturing, aren’t investing enough, but are happy to present these new players as a success story.

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 threw up a slide comparing India’s startups with China’s. The local apps were “turning unemployed youth into cheap labor so the rich can get their meals without moving,” he kvetched, while Chinese entrepreneurs were “investing heavily in self-reliance, building chips and AI models for the future.” Each of his five points contrasted Indian companies focusing on serving niche demand with counterparts in China that he claimed were building out deep tech and new industrial sectors.

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 “unmonetisable users.” And an India-2 in the middle, of 300 million people whom the report described as “heavy consumers and reluctant payers.”

Many startups promise investors the scale of India-3 with the revenues of India-1. But the successful ones leverage the capital of India-1 and the labor of India-3 to serve India-2, promising low margins but reasonable scale.

Goyal is right to argue that these, however effective they may be at implementation, are not necessarily breaking new ground. Nor is investor interest as great as many think. That became impossible to ignore two years ago, when a much-publicised conference in the innovation hub of Gurugram wound up attracting hundreds of founders and barely any investors.

If India doesn’t have the battery or electric vehicle entrepreneurs that China does, it’s for the same reason that its legacy manufacturing underperforms China’s: a business environment that’s simply unfriendly to bricks-and-mortar manufacturing. By now the government should know that this is, in large part, its own fault.

Companies are simple, predictable things. They respond to incentives. When any country’s private sector isn’t behaving the way the government expects, the state should always look within. Either its expectations are unrealistic, or it has set up perverse incentives.

India’s government has simply failed to reform manufacturing sufficiently. For batteries, robotics, or EVs to thrive, the private sector needs less state intervention, fewer restrictions on credit, more flexible labor laws, and a less problematic tax system. The delivery and betting apps that earned Goyal’s ire can simply short-circuit this regulatory burden; anything engaged in the real economy cannot.

Startups are just another business. They aren’t special. They will flock to sectors where business is easiest and entrepreneurship rewarded. If these aren’t the industries the government wants them to go into, it should indeed get angry — but at itself.