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9 September 2021, Hindustan Times

India-China: Diverging tech trajectories

The simultaneous rise of India's tech unicorns with the unexpected crackdown by China on its star tech players, is an interesting study. India will certainly be a beneficiary of China's move, which is likely to scare foreign capital away. There's plenty on offer in India, with nearly 60 IPOs scheduled for a 2021 listing.

Senior Fellow, Energy, Investment and Connectivity

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India’s startups have started to hit the financial markets – in dazzling lights. After Zomato’s successful listing, Policy Bazaar and PayTM India have lined up billion-dollar Initial Public Offerings (IPOs). They are part of the nearly 60 IPOs scheduled for a 2021 listing[1], and their success may encourage more to emerge. Many more in the unlisted space have raised capital privately, with an unprecedented 26 startups joining the unicorn club[2] – crossing the $1 billion valuation mark. These numbers change by the week – August ended with a big bang all cash acquisition of fintech startup BillDesk for $4.7 billion[3]! What a contrast to China, where the brightest and best in the tech sector are struggling against multiple waves of a government- driven crackdown.

India’s economic divergence with China, which began with the Press Note 3 in April 2020, will widen due to China’s restrictions on its own tech majors. In the past year, Indian tech companies have belied fears that reduced Chinese funding will hurt this high growth sector. The circumscription in China is likely to scare foreign capital, some of which may find its way to India, further offsetting the lower capital flow from Chinese investors.

Historically, Indian tech startups – companies yet to show sustained profitability – have relied on foreign capital as their funding requirements increased. Domestic venture capital hasn’t had the capacity to provide risk capital of $50 million -$100 million to unproven business models. This role has been filled by foreign capital which has written the successful startup play book especially funds such as the U.S.’s Sequoia and Japan’s Softbank and also companies such as Alibaba, Tencent and Facebook and super-rich individuals, usually tech billionaires. The last category is especially important – entrepreneurs who have made it big in tech are more willing to back untested ideas with their personal capital. In the Indian context, a good example is Sanjeev Bhikchandani’s Info Edge, a dotcom era success which was an early investor in Zomato. The initial investment of Rs 4.7 crores is now worth over Rs 10,000 crore[4]. These are not bets that traditional business houses can easily make.

Successful listings by Indian tech unicorns can help create two new categories of investors – Indian tech majors and Indian tech billionaires – both largely non-existent now. India’s software giants reinvested in their existing business models but did not invest in the broader tech eco-system. The new tech – mostly e-commerce – billionaires, a larger pool of investors, will further offset the missing Chinese investors.

Those are unlikely to return soon. China’s own tech sector is facing headwinds. The Chinese Communist Party has fettered its tech majors – Alibaba, Tencent and Didi Chuxing among others. Alibaba’s founder Jack Ma vanished mysteriously for several months and has been since lying low[5].Subsidiary Ant Financial[6] and the group was fined $2.8 billion for abusing market dominance[7] – all within months of Ma’s criticism of China’s financial regulator. Tencent, China’s most valuable company, stopped registration of new users on WeChat – a Chinese messaging service similar to WhatsApp[8]. Ditto with Didi Chuxing, a China-based ride hailing company similar to Uber[9].

There have long been question marks on the true ownership and control of Chinese companies, on whether the Chinese private sector is truly private. The crackdown will raise further questions on actual control and, in the longer term, may also alienate western investors who have funded and championed many of these companies. With their valuations and future access to capital dipping, their progress could slow. Greater oversight by the CCP will also likely crimp innovation.

The goal for India is to get its house in order, so it can lure some of the capital to India. India still has significant regulatory hurdles with issues ranging from land acquisition to the recently reversed retrospective taxation. If these can be lowered to the level of merely being irksome, then the IPO train can speed up, giving India a chance to truly become a significant global tech player.

Amit Bhandari is Fellow, Energy and Environment Studies Programme, Gateway House.

A part of this article was first published in the Hindustan Times.