By Girish Linganna
Feb 21: The tech sector in India is experiencing a major shift, highlighted by the challenges faced by prominent companies Paytm and Byju's, raising alarms about the stability of the nation's startup environment.
For the last twenty years, the export of services from India, especially in information technology and business process outsourcing, has played a vital role in boosting the nation's economy.
Furthermore, international companies are tapping into Indian expertise by utilizing their capability centers in India, which house more than 5 million employees. This combination of high-quality talent and efficiency has positioned India as a potential epicenter for technology and innovation, with businesses worldwide aiming to integrate technology on a global scale.
Yet, the aspirations of technology startups have faced obstacles over the last year, with the wider industry experiencing a significant decline in investment levels.
Although reports of job cuts were prevalent in the startup industry in 2023, a survey of more than 100 startup founders revealed that over 65 percent of them engaged in moderate levels of recruitment last year, according to the report.The spread of tech startups in tier 2 and 3 cities demonstrates the robustness of the ecosystem.
While the digital payment and financial services company Paytm and the educational technology firm Byju's operate in different sectors, their concurrent struggles have raised concerns within the Indian industry, with analysts predicting that the fallout could worsen.
Paytm is facing a crisis due to ongoing regulatory non-compliance issues. The Reserve Bank of India (RBI) has imposed a sudden restriction on Paytm's payment operations, pointing to widespread failure to comply with regulations and neglect in addressing supervisory issues.
The firm has been ordered to halt all banking operations starting March 15. Since the RBI's initial declaration on January 31, its stock value has fallen by 40 percent.
The RBI has prohibited the Paytm subsidiary from processing any new deposits, wallet top-ups, or credit transactions starting February 29. This restriction also covers its prepaid solutions for FASTags and National Common Mobility Cards (NCMC).
In the past 15 days, there has been a reported fivefold increase in the number of individuals seeking jobs from Paytm's fintech sector following the RBI's directive on its lending branch.
Byju's, previously recognized as the most valuable startup in the education technology sector globally, is confronting a widely expected crisis, mainly due to issues with its investors.
The education technology company is entangled in legal battles, financial mismanagement, a decrease in valuation, and conflicts between investors and the management team. Two years prior, Byju's was valued at US$22 billion. However, when it issued a rights offering last month to secure new funds, its valuation had plummeted to approximately US$220 million.
Neil Shah, the research vice-president at Counterpoint, a market research company, emphasized the necessity for fundamental compliance and thorough due diligence within the fintech industry. He highlighted the need for a strong system to deter manipulation and guarantee genuineness, as reported by SCMP.
Shah mentioned that this situation serves as an alert for other firms in the sector to begin putting their affairs in order. He explained that the issue arises from operating in a market that is vast and not fully tapped into, offering numerous opportunities. This environment encourages companies to prioritize quick growth and expansion, rather than taking a more cautious approach that emphasizes genuine and authentic business practices.
Tech as a Pillar: With the global economic challenges and geopolitical instabilities already causing concern, the slowdown in India's growth is raising fears about its standing as a technology leader.
The technology sector in India recently surpassed US$250 billion in revenue. However, data from the industry indicates that its yearly growth rate dropped from 8.1 percent in the fiscal year 2022-2023 to 3.8 percent in the fiscal year 2023-2024, which concludes next month.
While India remains a compelling choice for Western nations adopting a China+1 strategy over the long term, the recent downturn in the tech sector serves as a cautionary signal. This is characterized by a significant reduction in technology investments, a decrease in the number of deals finalized, and a decline in software services exports.
The China+1 strategy involves diversifying business operations beyond China to another country, reducing reliance on China alone for supply chain and manufacturing needs.
Data from the market research firm Venture Intelligence shows that venture capital investments in fintech and ed-tech startups in India last year hit a five-year low, according to SCMP.
Last year, fintech firms received investments amounting to US$1.349 billion, a significant drop from the peak of US$8.01 billion in 2021. Similarly, ed-tech startups saw investments of merely US$198 million, a stark contrast to the record high of US$4.1 billion in 2021.
In the last year, investment, particularly for expanding businesses, has decreased noticeably. Anuj Roy from Fidius Advisory highlights that companies are shifting their focus from rapid growth strategies to strategies aimed at achieving profitability,as observed by the media house
This significant shift over the past two years has been driven by a lack of funding, resulting in a reevaluation of company valuations and prompting a shift in focus from growth towards profitability. Consequently, companies are now paying closer attention to their cost structures, he further explained.
Vijay Shekar Sharma of Paytm and Byju Raveendran of Byju’s have personalities that critics claim have become more prominent than their companies. Their strong personal brands lead to situations where new ideas are often ignored, and any disagreement is usually rejected.
Analysts expect further disclosures and obstacles to emerge in India's technology sector soon.
The Path Forward: The Indian tech sector faces challenges due to declining investor confidence, numerous project shutdowns, and extensive layoffs, painting a bleak outlook for the near future.
The situation within startups is evident. There's an ongoing adjustment of performance indicators and objectives. A comprehensive shift towards realignment is taking place, affecting not just Paytm or Byju’s but the entire sector. According to Anshuman Das, CEO of Longhouse Consulting, as these shifts occur, some companies will navigate successfully, while others may struggle, reports SCMP Media House.
In India, a nation home to over 68,000 tech startups, there has been a significant decrease in the founding of new startups in the past two years. This downturn has even deterred seasoned players in the tech market from going public with their companies last year.
Das mentioned that we are transitioning into a period characterized by high inflation, reduced liquidity, and significant fiscal deficits. In such conditions, securing funding will be challenging for all businesses. This shift occurred rapidly, leading to widespread concern and tension, he explained.
Foreign direct investment (FDI) into India fell from US$85 billion in 2022 to US$71 billion in the previous year.
Das expressed that the nature of technology and internet businesses allows for rapid gains as well as quick losses. He remains optimistic about the medium and long-term prospects, but acknowledges a pessimistic outlook for the short term.
(The author Girish Linganna of this article is a Defence, Aerospace & Political Analyst based in Bengaluru. He is also Director of ADD Engineering Components, India, Pvt. Ltd, a subsidiary of ADD Engineering GmbH, Germany. You can reach out to him at: girishlinganna@gmail.com)