[Expert Talk Series] Global Slowdown and Its Effects On The Startup Ecosystem

This is a Guest Post by Ms. Sana Afreen, CCO & Asst. Director of Program Management, Rizzle

Recessions affect different people in different ways. While recessions can have varying effects on businesses, specific challenges can be expected depending on their size and type.

While a Fortune 500 company may be able to save money by eliminating positions and negotiating better terms with suppliers, a small consulting firm may run into cash flow issues if clients fail to pay invoices on time.

Understanding how a recession can affect your company or business can help you avoid going out of business during the subsequent slump.

The most recent data on goods and services tax (GST) collections indicates weak domestic demand. Still, the fact that nominal GDP growth for indirect taxes is slower may also suggest that demand that had previously shifted to the formal sector following demonetization is now returning to the informal sector.

India’s GDP growth rate has dropped to 5%, the lowest in six years, putting pressure on industries already under pressure due to weak consumer demand and a credit crunch that began in 2018. The worst decline in several Indian industries has occurred in recent months or even years. The fourth-largest automobile market in the world in terms of sales, the Indian automobile industry, experienced a significant fall in the last ten months due to a decline in demand, which has caused a notable slowdown in sales. The situation is similar, if not as terrible, in a few other industries, like real estate and finance.

The Indian economy is expanding, but the growth rate has slowed, posing a significant challenge for the country, which requires a faster expansion to accommodate the millions of people who enter the labor force each year.

Aside from the current four-quarter slowdown in GDP growth, several policy decisions have been made. The two primary policy moves alleged to have harmed the Indian economy are the November 2016 demonetization and the July 2017 implementation of the goods and services tax (GST).

The twin disruptions, intended to increase the formalization of the Indian economy, have had a significant negative impact on the informal sectors, which employ the vast majority of the workforce. The banking and non-banking financial sector crises highlight the ongoing policy disruption. The failure of Infrastructure Leasing and Financial Services has a more significant negative impact on small and medium-sized businesses than anticipated (ILFS). In essence, money has ceased to flow into the market. As a result, many people lost their jobs.

Even when the economy is contracting, investment raises growth rates. On the other hand, private investment has been dismal, reaching a 15-year low. However, the government requires more resources to invest.

Private investment in India has declined due to various factors, including low demand, political interventions, and international concerns. Because of the ongoing trade war between the United States and China, global investors have been making predictions about potential investments. The consequences do not stop with India. The startups are focused on the Indian market, offering a variety of goods and services that may be impacted by lower spending power. Manufacturing, non-banking financing companies (NBFCs), financial services, real estate, and the automobile industry have all shown signs of being affected by the current economic downturn. It’s still being determined whether the cloud will impact India’s burgeoning startup ecosystem. The startup environment in India could be divided into two categories. Individuals who are simply starting their businesses rather than competing for a larger share of the market. This is similar to the funding arrangement, which may vary depending on the company’s stage of development. It was claimed that an economic slowdown would harm startups.

Conclusion:

A recession occurs when the economy experiences negative growth for two consecutive quarters. That is not the case in India. Although two of India’s largest employers, the auto and textile industries, are in decline. Despite the gravity of the situation, there is no need to panic. The more money the government spends to stimulate demand and investment, whether through tax breaks for individuals or business incentives, the faster the economy will recover. It is reasonable to expect the Reserve Bank of India to lower interest rates through rate cuts and its directive to adopt external lending benchmarks, providing much-needed relief.

The government should keep an eye on the situation for the next two to three months, when demand is expected to rise due to the start of the holiday season, and consider stimulus measures.