The need to use creative destruction

The need to use creative destruction

  • 20.03.2025 19:15
  • newindianexpress.com
  • Keywords: Creative Destruction, Market Churn

India lags behind global leaders in economic dynamism, as evidenced by minimal change in top companies over two decades. While startups and reforms have emerged, a cultural shift toward embracing risk and failure is needed, along with regulatory reforms to foster innovation and competition.

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Estimated market influence

Reliance

Reliance

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Analyst rating: Buy

Reliance is a major company in India's market, contributing significantly to the economy.

Tata Consultancy Services

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Analyst rating: N/A

TCS is a leading IT services company that has maintained its position over time.

Context

Analysis: The Need for Creative Destruction in Economic Growth

Key Findings:

  • Creative Destruction:

    • Refers to the process where inefficient firms are replaced by more competent ones, driving economic evolution.
    • Evidence shows India lacks sufficient churn compared to global peers like the US and China.

  • Comparison of Market Leadership:

    • India (2005 vs. 2025):
      • Top 10 companies by market cap remain largely unchanged, with only three new entrants (Life Insurance Corporation, HDFC, Bajaj Finance).
      • Seven companies from 2005 are still in the top 10.
    • US (2005 vs. 2025):
      • Only one company (Microsoft) remains in the top 10.
      • Replaced by tech giants like Meta, Alphabet, Amazon, and Tesla.
    • China (2005 vs. 2025):
      • Seven companies have changed in the top 10.
      • New entrants include Tencent, Alibaba, Kweichow Moutai, and BYD.

  • Age of Top Companies:

    • India: Most top companies are old (SBI: 1921, TCS: 1968, Reliance: 1973,Infosys: 1981, Hindustan Unilever: 1933).
    • US and China: Dominated by younger companies (Alphabet: 1998, Meta: 2004, Amazon: 1994; Tencent: 1998, Alibaba: 1999, BYD: 2007).

  • Recent Changes in India:

    • Disappearance of Jet Airways and Essar Steel.
    • Emergence of startups like OYO and Zomato.
    • Impact of the Insolvency and Bankruptcy Code (IBC) introduced in 2016.

Market Implications:

  • Global Economic Superpower:

    • The US remains dominant due to its ability to replace old sectors with new ones (Tech replacing Oil, Retail).
    • China’s transformation is evident in sectors like Tencent, Alibaba, and BYD disrupting traditional industries.

  • India's Lag:

    • Insufficient dynamism in corporate churn.
    • Dominance of legacy firms hinders innovation and risk-taking.
    • Slow adoption of creative destruction limits economic growth potential.

Competitive Dynamics:

  • US:
    • Companies like Meta, Alphabet, Amazon exemplify the power of continuous innovation.
    • Tech-driven transformation has reshaped global markets.
  • China:
    • Dominance of young tech giants (Tencent, Alibaba) highlights the importance of sectoral churn.
    • BYD’s disruption in automobiles underscores China’s focus on new industries.
  • India:
    • Legacy firms (Reliance, TCS, SBI) dominate, limiting space for new entrants.
    • Slow regulatory reforms and risk-averse culture hinder competitive dynamics.

Strategic Recommendations:

  1. Cultural Shift:

    • Embrace risk-taking and innovation as core values.
    • Move away from viewing insolvency as a moral failure.

  2. Regulatory Reforms:

    • Simplify bankruptcy processes for faster resolution (vs. current focus on revival).
    • Reduce protectionist policies that shield inefficient incumbents.

  3. Financial Innovation:

    • Allow new forms of financing to support cutting-edge innovation.
    • Balance investor protection with risk-taking incentives.

  4. Sectoral Competition:

    • Remove barriers for new entrants in most sectors.
    • Focus on global competitiveness rather than protecting domestic incumbents.

Long-term Effects:

  • Economic Growth:
    • Creative destruction is critical for sustained growth and innovation.
    • Without sufficient churn, India risks stagnation as global peers advance.
  • Regulatory Impact:
    • Streamlining laws (e.g., IBC, process reforms) can accelerate creative destruction.
    • Periodic removal of outdated regulations (e.g., Tariff Commission abolition) is essential.

Conclusion:

India must embrace creative destruction to achieve its economic potential. By fostering a culture of innovation, reforming regulations, and reducing protectionism, India can align with global trends and sustain long-term growth.