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The valuations are completely unsustainable, says Romesh Wadhwani

Silicon Valley entrepreneur and philanthropist Romesh Wadhwani likes to talk about wealth creation. He spoke to Goutam Das on India's jobs crisis and the skilling challenge.

Silicon Valley entrepreneur and philanthropist Romesh Wadhwani

Silicon Valley entrepreneur Romesh Wadhwani likes to talk about wealth creation. He is a philanthropist too - the Wadhwani Foundation, which he started in 2000, focuses on "economic acceleration in emerging economies". He spoke to Business Today on India's jobs crisis, skilling, and the e-commerce bubble.

BT: Jobs are not growing at the pace the economy is. What are the three interventions that are required immediately to fix this?

Wadhwani: The first intervention is to focus on Start-up India, but focus on the full lifecycle of a start-up - from providing education to students to become entrepreneurs to access to the ecosystem of mentors and angel investors. Then provide the start-ups with opportunities for growth. This could be in the form of procurement opportunities and innovation grants. The second intervention would be to remove barriers in the way we classify businesses as micro, small and medium. Any company should be incentivised to grow to its largest possible scale.

The more jobs you create, the higher the incentive as compared to getting an incentive for staying small. Whatever the incentives are - could be lower levels of regulation, tax incentives, training credits, innovation grants, R&D credits - all those are possible, but the key is to incent job growth. Right now, we de-incent growth. Why would we do that? The third intervention should be around innovation. India does not have a reputation of being an innovative economy. For domestic consumption, our products are "me-too" products.  For exports, we are known as a low-cost exporter, not a high IP exporter. We need to accelerate the growth of innovation. There are many ways to do that but one way is to do what the US did many years ago - establish a system of innovation grants. They are provided on an open competitive basis. The purpose is to take problems from various sectors, get the best ideas, select the best of the best, and then provide funding. Each of the ones that are selected will create 10-15-50 jobs. It will be a huge jobs accelerator and build a culture of innovation in our country.

BT: What is the biggest obstacle in skilling people right now at the bottom of the pyramid?

Wadhwani: Part of it is motivation. That means you have to create that desire in them while they can still be influenced as students. That's why I feel the skilling journey doesn't begin when you are 30 years old; it has to be created in high schools. Then, the skilling institutions, whether they are the ITIs or privately owned vocational institutions, need to be market-focused.

The focus of markets can be different depending on the part of the country - the kinds of jobs available in Tamil Nadu can be different from the jobs in Indore, for instance. Make sure that the local ITIs and vocational institutes are providing skills for those occupations and not for some idealised view. We also need an apprentice programme, the final mile of training.  No ITI will be capable of providing it but employers can. Employers have an obligation to be part of this vocational training ecosystem.

BT: Isn't the problem at the policy level?

Wadhwani: When it comes to apprenticeship, it is at the intersection of government and industry. I don't think employers and the industry can take the position that this is entirely a government problem because every problem cannot be solved by the government.

The government cannot provide that last bit of specialised training. And employers have an obligation to increase the overall level of skills in India because ultimately, it benefits them. So the industry needs to step up. Of course, the government can play a very important role in a variety of different ways. It could be in the form of providing training incentives or partial stipends. It is a joint solution.

BT: You spoke of entrepreneurship as one of the areas to focus on. Do you think there is a bubble in the start-up world? What impact could it have on jobs the moment it is priced?

Wadhwani: There are so many sectors in India - there is an IT services sector that has nothing to do with B2C e-commerce. The job creation in that sector is not determined by what happens to Flipkart and Snapdeal. If you take the automotive industry, its job creation is also not impacted by B2C e-commerce. The bubble is in a very narrow slice of the economy. A bursting will have a minor impact on other sectors. What is much more important is to get the other sectors growing. 

BT: But you do believe there is a bubble in e-commerce?

Wadhwani: In the B2C sector, I absolutely believe there is a bubble. The valuations are completely unsustainable. I feel many of the business models people are playing with are unproven. If the only way in which you can grow is by giving away a Rupee and getting 70 Paise back, because you are giving massive discounts, is this model sustainable?

If you had to take the prices up to a point where you will be profitable and change your returns policy, would you be growing at these rates? I'm almost certain the answer is "no". It doesn't mean you won't grow - but you won't grow at 100 per cent. You will grow at 10-20 per cent and then, should the valuation be 50 times revenue?  Or should it be 15 times profit? What will happen is that as business models becomes sensible, growth rates will come down, so will valuations.

Money will always not roll into broken business models. It stops. How hard was it for the B2C companies to raise the last round? What are their liquidation preferences? They are horrible. There are notional valuations but if you look at the liquidation preferences, the true valuations are half, one-third, one-fourth of that. So the valuations are already coming down. Ultimately, the valuations will be at a level consistent with a sustainable business model. You can't get around the law of gravity.

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