How India's start-ups are feeding the country's unemployment crisis

India is a country that is inhabited by more than 1.21 billion people, and by 2022 it is projected to replace China as the most populated nation in the world. This enormous size of its population has resulted in the difficulty of providing ample jobs to its citizens; the severity of the problem can be understood from the International Labour Organisation’s (ILO) report titled world employment social outlook, which states that the number of job seeking Indians is projected to reach 17.6 million people in 2017.

Last year, the Chattisgarh Government's Directorate of Economics and Statistics was barraged by 75,000 applicants for 30 peon jobs – a 14,000 Rupee position that involved basic tasks such as fetching tea. Amongst these queries many included requisitions from qualified engineers and management graduates. In 2011, around ten million Indians with graduate, post-graduate and technical degrees were looking for work. Unemployment rates were higher among the better qualified, and highest of all among the 7.2 million people with a technical diploma or certificate. According to a monthly unemployment index, which was established by BSE in collaboration with Centre for Monitoring Indian Economy (CMIE), the overall rate of unemployment, including literates, has increased from 7.97 per cent in April 2016 to 9.84 per cent in August this year.

In these dire times, when other sectors, especially manufacturing, have not proven very effective in the creation of jobs, citizens have pinned their hopes on the foremost promising sector of the economy--the Indian start-up ecosystem. A poll by Inshorts and Ipsos has highlighted that over 50 per cent of the young Indians (below the age 35) prefer working with start-ups over large corporations. Most of the people in this age group also aspire to become part of this revolution; out of the 53,089 users in this poll, more than 45 per cent users are looking at establishing a start-up in the next 5 years.

Start-ups have emerged as the growth engine of this country, backed by the venture capitalists who have poured resources into India over the past few years, and founders who have spent money--hiring employees in hordes. However, in 2015 this trend of excessive hiring and capital input came to an abrupt halt when the venture capitalists closed the tap leading to drying up of funding for start-ups. Rishabh Lawania, founder of Xeler8, a market intelligence platform for VCs and corporates says, "The party is over and all of us will have a severe hangover."

Facing pressure to cut the flab, start-up entrepreneurs have responded with a slash in monthly expenditures, which have impacted the following factors:

Hiring of new employees: According to Ayush Lakhotia, placement coordinator at Indian Institute of Technology (IIT) Mumbai: "While one start-up withdrew offers given to six students, a few others are saying they will come up with later joining dates." Along with IIT’s in Delhi, Roorkee and Guwahati, Indian Institute of Management Ahmadabad (IIM-A) witnessed Flipkart deferring joining dates of students by six months and at Indian School of Business (ISB), a clutch of e-commerce firms including Stayzilla, Hopscotch, Ivis International, Babajob and Nearbuy (formerly, Groupon) delayed the induction of at least 50 students. This has impacted the reputation of start-ups as sought-after employers as IIT’s have threatened to add the incumbent start-ups in a black list. In a much publicised email the IIM-A chairman has also categorically stated that such actions will lead to students regretting their decision to join the e-commerce market leader.

Failures of start-ups: According to Xeler8, while last year 15 start-ups closed shops, this number have almost doubled to 29 in the first six months of 2016. Out of the 2,281 ventures that started up since July 2014, 997 have shut down, resulting in a failure rate of 43.7 per cent. While a little over a fifth (20.90 per cent) of the failed start-ups are from the logistics segment, e-commerce flameouts aren't far behind, at 19.64 per cent, followed by food tech (18.74 per cent) and analytics (11.36 per cent). Most of their founders went on to take jobs in corporates or start-ups, with 22-24 per cent opting to stay the course of entrepreneurship.

Layoff of employees: "Entrepreneurs can celebrate failure. But it's the employees who have to endure it," says Divyadeep Jadhav, who got laid off by one of the start-up unicorns in India. Since October last year, Foodpanda and Zomato India have laid off more than 300 employees. This year has been worst hit as Snapdeal has let go of 200 employees, common floor has shown the door to 100, and Flipkart and Ola Cabs each has given pink slips to 700 individuals. Along with this the shutting down of e-commerce firm AskMe is projected to affect livelihood of more than 4000 employees.

As a result employees have become skeptical of joining this ecosystem. This situation is turning out to be a blot on Indian start-ups, which employed 500,000 people at an average of 125 per enterprise in 2014, according to Premjith Alampilly of MeritTrac Services, an assessment company that monitors the start-up ecosystem. The following year roughly 3,100 tech start-ups employed 65,000 people, at an average of 21 per enterprise, according to Zinnov, a consultancy, and Nasscom, a software industry association. This is projected to reach 250,000 people by 2020.

As one can comprehend from the above stated facts, the brunt of the fall in funding has been borne by the employment industry in this ecosystem. Unemployed personnel are taking precautions by randomly gauging out enterprises based on the credentials of the start-up, its financial position, funding and business model. The government must amend the “Start-up India, Stand up India” policy by removing start-ups’ exemption from labor inspection for the first three years of its existence. To solve the problem, more jobs need to be created and laws strengthened to protect employees from being fired. Also there is an urgent requirement for labor reforms, which will give a sense of protection and lead to more of a degree of faith in a sector with a high failure rate of more than 70 per cent.