India’s Problem with Creative Destruction

Both natural and economic ecosystems have one thing in common – they evolve through a process of “creative destruction”. The inefficient are weeded out over time and are replaced by those that are more competent. Thus, the competitiveness of an economy is critically dependent on its ability to encourage and endure a churn despite all the disruptions it may cause in the short run. Unfortunately, the evidence suggests that India still does not have a level of churn that one expects of an economy based on high levels of innovation and risk-taking.

One simple way to gauge creative destruction is to look at the churn in the top ten companies by market capitalization over time. Comparing the top ten companies in India in March 2005 to those in March 2025, it is quite striking that seven of the ten companies are the same: Reliance, Tata Consultancy Services, Infosys, State Bank of India, Bharati Airtel, Hindustan Unilever Limited, and ICICI Bank. Of the new entrants, Life Insurance Corporation is an old public sector enterprise that happened to be listed in recent years. The other two - HDFC and Bajaj Finance - are hardly examples of new blood.

Contrast this with what happened in the United States in the same period. Only one company – Microsoft – managed to stay in the top ten by market capitalization. Companies like General Electric, Exxon Mobil, AIG and Walmart have been replaced by the likes of Meta, Alphabet, Amazon and Tesla. It is not just the companies but the successful sectors that have changed. This is what has allowed the United States to remain an economic superpower.

A similar dynamism is visible when one looks at China’s top ten companies. Seven of the top ten have changed over the last twenty years. Only three state-owned banks are common to both lists. Meanwhile, old heavy-weights like Petro-China, Sinopec, and China Mobile have been replaced by the likes of Tencent, Alibaba and Kweichow Moutai. Ranked at number eight, BYD has completely disrupted the world of automobiles. Notice again how both companies and sectors have churned.

The importance of young and energetic companies is visible in both United States and China. Most of the high-performance companies in the United States were set up after 1990: Alphabet (established in 1998 as Google), Meta (2004 as Facebook), Amazon (1994). Microsoft and Apple, set up in 1981 and 1977 respectively, are old companies by American standards. With the exception of the state-owned banks, China’s top companies are also young: BYD (2007), Alibaba (1999), Tencent (1998) and so on.

Contrast this with India’s big companies: State Bank of India (established in 1921 as Imperial Bank), Tata Consultancy Services (1968), Reliance (1973), Life Insurance Corporation (1956), Infosys (1981), Hindustan Unilever (1933) and so on. The only top ten company established after 1990 is Bharati Airtel (1995).

This is not to suggest that India has not experienced any creative destruction at all. In the last decade, several large companies such as Jet Airways and Essar Steel have disappeared even as new ones like OYO and Zomato have emerged. The introduction of the Insolvency and Bankruptcy Code in 2016 and the subsequent cleaning of the banks led to some amount of churn. There has also been a boom in startups in recent years. Nevertheless, it is fair to say that India, now at the threshold of becoming the world’s third largest economy, still does not have the same level of dynamic churn as the top two.

So what needs to be done? In my personal view, the first step would be to change a deeply engrained social attitude that looks with suspicion at risk-taking and innovation. Indeed, insolvency is often seen as a moral failure rather than a business failure. It is common during bankruptcy procedures that pleas are made to somehow save an insolvent company. It is as if we were dealing with a much-loved relative who needs urgent medical care rather than a practical resolution for a financial problem.

Second, financial regulations and processes need to allow for a lot more creative destruction as well as emergence of new kinds of financing. Today’s regulations are so focused on so-called “investor protection” that they do not allow for the risk-taking that generates cutting-edge innovation. By the same token, the bankruptcy process needs to focus on fast resolution rather than “revival”. Regulators, bankruptcy courts and policy-makers need to accept that all risk-taking entails some amount of failure. The sensible approach is to clear away the debris as soon as possible so that a new round of risk-taking can begin.

Third, there should be less protection for established incumbents in most sectors. India’s economic policies have, since the 1950s, been inordinately oriented towards protecting inefficient incumbents from global and domestic competition. This has been done through licenses, permits, regulatory complexity, import tariffs, government contract requirements and other protection against competitors.

I can say from experience that industry associations rarely demand economic reforms and mostly demand protection. Since they represent incumbents, their goal is not global competitiveness or efficiency but the building of a moat. Protection is sometimes needed for national security or for an infant industry, but this must be carefully calibrated. Any attempt to protect everything will effectively protect nothing.

Incidentally, the above argument for creative destruction also holds true for government where defunct agencies, laws and regulations need to be periodically removed. This is the focus of a systematic effort is being currently done in the central government under the banner of “process reforms”. Hundreds of old laws and regulations have been removed, outdated agencies such as the Tariff Commission have been shut down, and default lists – such as those for national monuments – are being revisited.

To sum up, India needs to celebrate creative destruction in the economy. The central philosophical idea has existed in India for millennia in the form of Lord Shiva and Goddess Kali. We now need to incorporate it into our policy-making, and cultural attitudes towards risk-taking, failure and renewal.

(Sanjeev Sanyal is Member, Economic Advisory Council to the Prime Minister. All opinions are personal).