Significance of ‘Vocal for Local’ in the startup ecosystem - a VC’s perspective

Addressing the nation on May 13, Prime Minister Narendra Modi’s “Vocal for Local” might have become the most potent slogan the country has heard in the last 50 years. In a power-packed speech, PM Modi announced a whopping Rs 20 lakh crore economic package to revive India’s economy that has been severely battered by the crisis caused due to the COVID-19 pandemic. He also urged the people to come forward in creating a self-reliant (Aatma Nirbhar) nation by supporting local businesses.

Rise of swadeshi movement in India

While ‘Vocal for Local’ has become the most trending phrase in the last two days, it is nothing but an extension of the ‘Swadeshi Movement’ idea conceived by some great freedom fighters of the country, including the Father of the Nation, Mahatma Gandhi.

The movement, which started in the early 1900s, called for the use of locally-made products. The trend lasted for some years before Economic Liberalisation began in the wake of the 1991 economic crisis, which led to a steady rise in FDI with the entry of global brands into the country.

This phenomenon led to stiff competition between the home-grown players and foreign players as the latter offered better quality products at competitive prices. Unable to compete, many small Indian players got acquired by big multinational companies. Except for few diversified conglomerates such Tatas, Godrej, Reliance, and Raymonds, to name a few, many smaller brands fell by the wayside.

Why it failed?

Archaic laws, lack of funding, and mentoring amongst several other factors were responsible for the failure of local brands. Doing business in the nineties and early 2000 was the most challenging thing due to the prevalence of red-tapism.

Things have, however, improved in a significant way over the last one and half decades with the relaxation in FDI norms, entry of foreign private equity, and venture capital firms, who were, to a large extent, responsible for the creation of India's startup ecosystem.

The Indian brands and technology-backed startups started by smart tech-savvy entrepreneurs have proved that the country has the potential to create global companies. Some of the examples of these brands are Paytm, Oyo, Ola cabs, and InMobi, among several others that have been successful in becoming billion-dollar businesses in a short span due to the availability of VC funds.

PM Modi’s version of the Swadeshi Movement

The Prime Minister’s ‘Vocal for Local’ clarion call is to help in expanding the startup ecosystem by multi-folds, thereby aiding the country’s aim to become a $5 trillion economy by 2025. The idea is to create more local brands and take those to the global arena. It is only possible with a focus on technology-based companies that can be scaled-up faster.

From a VC's point of view, the Prime Minister's vision to focus on home-grown companies would encourage investors to look for enterprises and other consumer brands as the idea is to not only increase domestic consumption but also intensify the export activities and rely less on imported products.

For Indian and foreign VCs, it might be a good idea to back some local brands as they would have some government support. Finance Minister Nirmala Sitharaman has announced some measures and sops for the MSMEs and for micro food processing units that would help create smaller ventures.

The change in the definition of MSMEs also, in a way, helps the startup ecosystem as many of these startups fall under the revenue bracket mentioned under the new definition. Under the new definition, these companies can grow to a specific size without losing their MSME tag and benefit.

More VCs would now want to bet on these companies as they would also want to expand their wings and grow their revenues.

‘Vocal for Local’ can create China like startup ecosystem

Several domestic and international VCs are looking for home-grown startups across the sectors from every nook and corner of the country. These companies earlier did not receive any intellectual support and technical know-how from the government, and hence their growth remained stunted.

These enterprises or ventures never had any aspiration to grow big or go global. But the ‘Vocal for Local’ would provide these smaller ventures with that opportunity. Some of these companies, with proper handholding, can become a publicly listed company or get acquired by some bigger international brand, thus providing good exits to the VCs.

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The government’s idea is to create a China-like ecosystem in India, and make the country a hub of the global supply chain. But we are still waiting for more precise guidelines from the government on the definition for local companies and brands. A lot will depend on the criteria on which a company can be termed local.