What's wrong with India's tech world? Potential collapse of big names Paytm, Byju's signals change in digital landscape

The Indian tech landscape is undergoing a significant transformation marked by the struggles of two major players Paytm and Byju's as concerns mount over the fragility of the country's start-up ecosystem.

Over the past two decades, India's services exports, particularly in IT and business process outsourcing services, have been a crucial driver of the country's economy.

However, the ambitions of tech start-ups have been hit by setbacks in the past year as the broader sector recorded a sharp drop in investments.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

While the reasons behind the challenges faced by digital payment and financial services platform Paytm and education tech firm Byju's differ, their simultaneous downturns have sounded alarm bells in the Indian sector with analysts expecting the repercussions to intensify.

Paytm is grappling with a crisis rooted in persistent non-compliance. The Reserve Bank of India (RBI) has mandated an abrupt clampdown on Paytm's payment services, citing extensive non-compliance with regulations and failure to address supervisory concerns.

The company is required to cease all banking services from March 15. Its share price has plummeted by 40 per cent since the RBI's initial announcement on January 31.

RBI governor Shaktikanda Das reiterated on February 12 that the decision was final, emphasising the central bank had carefully considered the matter.

Byju's, once the world's most valuable ed-tech start-up, is facing a long-anticipated calamity primarily driven by investor-related issues.

The ed-tech firm is mired in legal conflicts, financial mismanagement, reduced valuation, and internal disputes among investors and the leadership team. Two years ago, Byju's had a valuation of US$22 billion. When the company floated a rights issue last month to raise fresh funding, its valuation had dwindled to around US$220 million.

Neil Shah, research vice-president at market research firm Counterpoint, pointed to the need for basic compliance and due diligence in the fintech sector, stressing the importance of a robust system to prevent manipulation and ensure authenticity.

"This is a wake-up call for other companies operating in this space to start cleaning up their own house and this is a reality in an open, underpenetrated high opportunity market which inculcates a 'land grab' approach over a more measured and authenticity-driven business practice," he said.

Already troubled by global macroeconomic headwinds and geopolitical uncertainties, the declining growth in India is feared to have an impact on its status as a tech powerhouse.

India's technology industry recently exceeded about US$250 billion in revenue, but industry figures suggest its annual growth declined from 8.1 per cent in the 2022-2023 financial year to 3.8 per cent in the 2023-2024 financial year that ends next month.

Despite being an attractive destination for Western countries for their China+1 strategy in the long run, the recent sluggishness in the tech world has been a warning bell, marked by a sharp slide in tech spending, fewer deal closures, and weaker software services exports.

According to the figures by market research agency Venture Intelligence, the VC investments into fintech and ed-tech start-ups in India last year were the lowest in the past five years.

Investments to fintech companies stood at US$1.349 billion last year, compared to its all-time high of US$8.01 billion in 2021. Ed-tech start-ups attracted investments of just US$198 million last year, compared to an all-time high of US$4.1 billion in 2021.

"For the last year, the capital has dried up, particularly the growth-side capital. What we've seen in recent months is that there's a radical shift from a growth mindset to a profitability mindset," said Anuj Roy, managing partner at the leadership advisory firm Fidius Advisory.

"This is the biggest change that has taken place in the last two years. The scarcity of capital led to a reset in terms of valuation, which led to a change in approach from growth to profitability. And this is forcing the companies to look at the cost structure more closely," he added.

The founders of Paytm and Byju's, Vijay Shekar Sharma and Byju Raveendran respectively, have developed personalities that some argue have overshadowed their companies.

Their cultlike personalities - both inside and beyond their companies - have resulted in echo chambers with little strategic business thinking to build a stronger brand, with criticism reportedly shot down.

Analysts anticipate more revelations and challenges in India's tech sector in the coming months.

With weak investor confidence, widespread project closures, and massive lay-offs, the immediate future of the Indian tech industry does not look rosy.

"What is going on in start-ups is quite visible. The metrics and goalposts are being corrected. There's a whole systematic shift that is happening in terms of course correction. This is not confined particularly to Paytm or Byju's. When such systematic shifts happen, there will be companies that are on the right side and those that aren't to manage these shifts," said Anshuman Das, CEO of the executive search and talent advisory firm Longhouse Consulting.

A country with more than 68,000 registered tech start-ups, India witnessed a major decline in the creation of new start-ups over the last two years that discouraged even established tech market participants from taking their companies public last year.

"We're now entering an era of high inflation and low liquidity with high fiscal deficits. In that kind of scenario, money is not going to be easy for any business. Unfortunately, this change happened very fast. That's why we see so much anxiety and heat being generated," Das said.

Foreign direct investment into India declined from US$85 billion in 2022 to US$71 billion last year.

"The beauty of tech and internet companies is that you benefit very fast, and you lose very fast. I'm pretty positive and hopeful about the medium and long-term, but the short-term is definitely bearish," Das said.

This article originally appeared on the South China Morning Post (SCMP).

Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.