Is Narendra Modi ready for the creative destruction that Start-Up India will unleash? - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 19 August 2015
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Is Narendra Modi ready for the creative destruction that Start-Up India will unleash? A  A  A

- By Vivek Kaul

Vivek Kaul
In their brilliant book, Why Nations Fail: The Origins of Power, Prosperity and Poverty, Daron Acemoglu and James A Robinson recount a story from ancient Rome that is relevant even today:"During the reign of the emperor Tiberius, a man invented unbreakable glass and went to the emperor anticipating that he would get a great reward." Tiberius ruled between 14 AD and 37 AD.

This anticipation of a reward came from the fact that the Roman state did encourage new inventions. Nevertheless, this did not happen and the man was in for a surprise. As Acemoglu and Robinson recount: "He demonstrated his invention, and Tiberius asked him if he had told anyone else about it. When the man replied no, Tiberius had the man dragged away and killed, 'lest gold be reduced to the value of mud'."

A similar story comes from the era of Elizabeth I, who ruled England and Ireland from 1558 to 1603. William Lee made a knitting machine in 1589 and approached the Queen for a patent, so that others would not copy his invention and he could cash in on it.

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The Queen refused to grant him a patent and told him: "Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring them to ruin by depriving them of employment, thus making them beggars."

Lee went to France and was refused a patent there as well. Back in England, James I (Elizabeth's successor) also refused to give a patent to Lee's knitting machine.

By now, dear reader, you must be wondering why I am telling these historical tales, particularly given the headline suggests this is a column on Prime Minister Narendra Modi. Allow me to explain.

In the Independence Day speech Modi gave a few days back, he initiated a new call: "Start-Up India, Stand-Up India". Whether this was just another marketing slogan Modi and his backroom boys are so good at coming up with, will only become clear in the time to come. But the idea, as Modi explained during the speech, is that each of the 1.25 lakh bank branches all across India "should encourage at least one Dalit or Adivasi entrepreneur, and at least one woman entrepreneur".

On the face of it, like most of Modi's big ideas, this makes tremendous sense. Around 13 million Indians enter the workforce every year, and it is start-ups that have the potential to generate the huge number of jobs that India needs to create for its burgeoning workforce.

The trouble is that start-ups also challenge the existing way of doing things and lead to what economists call creative destruction.

Creative destruction was a term coined and defined by Austrian-American economist Joseph Schumpeter in Capitalism, Socialism and Democracy as the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one".

This process of "industrial mutation" challenges the existing paradigm, and it is messy, causing reluctance among governments and politicians to accept the new inventions, discoveries and ideas of start-ups.

Here's Acemoglu and Robinson again: "For sustained economic growth we need new technologies, new ways of doing things, and more often than not they will come from newcomers such as Lee [in today's terminology essentially start-ups]. It may make society prosperous, but the process of creative destruction that it initiates threatens the livelihood of those who work with old technologies, such as hand-knitters who would have found themselves unemployed by Lee's technology."

The point is that if Modi's "Start-Up India, Stand-Up India" call is more than a marketing slogan, it has the potential for widespread creative destruction, and this will challenge the incumbents and their way of doing things.

Obviously, the incumbents will try to do everything to stop their businesses from becoming irrelevant...including trying to get politicians on their side.

Take the case of what has happened around the entire issue of "net-neutrality, which the mobile phone companies have opposed tooth and nail because it would make substantial portion of their business model irrelevant.

Or take the case how life is being made difficult for taxi-cab operators like Ola and Uber who've challenged the existing paradigm. As Acemoglu and Robinson write: The elite, when their political power is threatened, form a more formidable barrier to innovation. The fact that they have much to lose from creative destruction means not only that they will not be the ones introducing new innovations but also that they will often resist and try to stop such innovations. Thus society needs newcomers to introduce most radical innovations."

If "Start-Up India, Stand-Up India" goes beyond just being a marketing slogan, a whole host of existing businesses will feel threatened, and will approach the government for relief. Given the close relationship most governments share with existing businesses, they are more than likely to oblige.

Acemglou and Robinson offer the example of manufacturers of woollen textiles in England who, when faced with fierce competition from imported textiles, "lobbied Parliament to pass legislation in 1666 and 1678 that would make it illegal for someone to be buried in anything other than woollen shroud'.

If the creative destruction of "Start-Up India, Stand-Up India" is indeed unleashed,

Modi and his government will have to resist the temptations of doing similar things. However, India is ranked 158th among 189 countries worldwide, and last among the eight South Asian countries (Afghanistan, Sri Lanka, Pakistan, Maldives, Bangladesh, Nepal, Bhutan and India) in the World Bank's annual Ease of Doing Business Rankings.  

Before we see creative destruction in India...before Modi is even in a position to grant protections to fading industries...the ease of doing business in India must improve.

I remain sceptical.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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11 Responses to "Is Narendra Modi ready for the creative destruction that Start-Up India will unleash?"

AK Singh

Aug 20, 2015

It is nothing new that when new ideas come to market , older things have to go and this is perfectly aligned to the demand of nature. However, at the same time it is also true that at a point of time the older workforce adopts to new technology and make a place for themselves. The hype and fear created against the computerisation of various departments have died its own death and the country has moved on. Yes, there would be a section opposed to the changes but remember that the new 'Start-ups' are also being encouraged out of the same lot. Change is 'Nature'. It is Life. Let's wait for the modalities to come out. Hope for the best.

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ygendra pal singh

Aug 20, 2015

My dear Vivek
you have hit the nail on head
love ,
yp

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PM Menon

Aug 19, 2015

The moot point to be considered here is:: has the ""whole lot of businesses..""' contributed to the full potential or have they actually blocked and manipulated in some ways so that their status quo is maintained?? have they used the system to keep open clean competition out??

Maybe it is time to shed the unending skepticism ( skepticism being just another status quo maintaining tool ) and have a positive contribution towards the ways and means the proposal can be provided traction in a structured way without simply overturning the cart as it is. A gradual, domain wise controlled approach, aimed at giving better than the best products, would in fact make these "" whole lot of businesses"" wake up and be forced to be efficient ( including the Govt and the host of road block, harassing agencies). Once the latter feel threatened that they could be redundant, that will make them strive to be positive contributors and be part of the solution as against being part of the problem as now.. Maybe time to take the steps to insulate India from the H1Bs, H1B++s systems and also pull up the major "" businesses"" that thrive on relatively short sighted manpower business etc. Sure it cannot just be mandated by half baked rules. Needs the brilliance and brains of capable people to form the framework. The issues of ease of doing business, access etc should like charity begin at home. The domestic businesses environment should be made easy, attractive, harassment free with clear tax regimes and survival of the most efficient and innovative be the norm. A long road ahead, sure, but a road indeed. Time to hit the road.

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Shrinivas Moghe

Aug 19, 2015

Mass production and automation will be the two tools with which MN Companies would be arriving. Make In India with Indian labor is not possible, given the indifferent aptitude and attitude of Indian workers. Skill India has to first get ready with infrastructure, before Make In India arrives. Its a long drawn arduous procedure, and obviously looks impossible. In stead India should move ahead addressing the core problem of unemployment. To do this, the only way out is to make our home manufacturing sector self reliant with respect to quality and marketing. Besides catering to domestic market, we must capture export market. And for achieving this, India is most favorably placed. There is nothing that we don't have. Only sincere political will is needed, which we seems to have now. Only, we should not fix wrong priorities, that's all !

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E.A. Khan

Aug 19, 2015

The danger which you have apprehended in your present post is quite relevant. But you or anyone, can help. In capitalist oriented/supported governments such catastrophe is bound to take place. Unorganised sectors are bound to decay. In such governments there is no scope for subsidies. Any individual or an organisation can only survive if they have the capacity to sustain themselves in the changed scenario.

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Venkatasamy subburam

Aug 19, 2015

The article gives an example how the established business will resist the change for the better since their position is in danger.The corrupt political clout in all political parties will certainly fight tooth and nail not to insist or to dilute the slogan to nought.The example is Parliament winter session where the so called MPs have not even allowed to pass the GST bill in which the common man will at least be benefitted This is the way every good thing will become standstill.This may be the position.
od thing

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Chintan Patel

Aug 19, 2015

Good article but saying one side of story, dont be pessimistic about it.

I think start up doesn't ONLY mean your come with new innovative ideas or change they way doing traditional business and things. In India there is lot of scope to do things and manufacturing which is now getting imported or done cheaply in China or elsewhere, Id Indian just try to make those thing in different way more cheaper that will create lot of employment opportunity in India.

Point take that gov shall protect innovation and promote creative destruction as you mentioned, we all know that once Telephone revolution started lot of STD/PCO booth operators have lost their business.

But I would like to wish all success for this program and scheame

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GHHOLA

Aug 19, 2015

Vivek has prudently highlighted the enigmatic hurry of building castles in the air unmindful of (ir)rationality of the same.Modi Ji has all grandiose plans well ensconced in the airs. Problem lies with his need to blabber and speak up without evaluating the far reaching consequences of his announcements.

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NS RAO

Aug 19, 2015

The much ridiculed and humiliated ex-PM, Sri.Manmohan Singh can be considered a no match for the incumbent PM , Sri.Narendra Modi on issues of impropriety and corruption of his own ministers and chief ministers - even extrordinary number of murders of people in Vyapam scam gets his appreciation --he has remained silent in the parliament, setting his loyal,subservient ministers to go after opposition for not allowing parliament to run - he alone is responsible for the way the parliament functions. Such being the hidden agenda -- his utterances in foreign soil or in states where elections are due are truly masterpieces of bombastic nothings and pure lip service -- I am not able to call them lies for fear of being punished -- you see, there is no action worth mentioning on any major issue in the last 18 months since he came to power. Like the " make in India " slogan , Rs.15 lakhs in every citizen's bank a/c from the black money recovered , or cleaning of Ganga(nobody knows what's happening though a central misnister is made exclusively responsible for it ) -- this slogan on start-ups is just another political gimmick. One thing you can add to your examples of creative destruction is the Oil cartel's influence to thwart any inventions or research on renewable energies for decades with active political and industrial (read automobile and allied ) clout.Our ranking in many aspects of industry , administration and quality of life(apart from religious , casteist and reservations politics), is so low -- there are a world of oppurtunities for start ups. The independence day speech must be a music to the corrupt politicians, bankers and administrative machinery ( read beareaucracy) to siphon off money in the name of adivasis, women etc. The crux of the matter is we have no leadership that is committed to what they say and use all resources, especially the financial resource for the upliftment of the nation as a whole.Even AAP & kejriwal are no exceptions.

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Mohan Joshi

Aug 19, 2015

While i appreciate the POV of Vivek, there is an inherent flaw.. All old examples were of individuals . Today Modi has made these as open announcements and are intended to be widespread. Once set out it is challenging to contain these initiatives. Hence it is because of this while OLA and UBER are facing challenge in Delhi but surviving in Mumbai and other cities. I would agree there could be challenges due to all rich and powerful wanting to curb these but i am optimist on this.

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