By Ashok MalikIs the digital economy about digitising the real economy, society and governance – or is it simply a valuation game? The question is particularly valid as a series of digital and e-commerce companies and startups have totted up impressive funding without quite knowing how to build a sustainable business model. India may be at the cusp of round two of the dotcom bust that came at the beginning of the century, as the first generation of online companies saw a ruthless market correction.This anxiety is not misplaced. Assessments of how even well-known e-commerce companies, some of which are nothing more than apps, are doing are worrying enough for employees to wonder just how much their stock options are actually worth.Such markets operate on the ‘greater fool’ theory. As long as you can sell (a part of) your stock to a new investor, with a higher valuation, you are happy and rich. Yet, one day the story is bound to grind to a halt. Some analysts feel the situation is already in the bubble zone.The reasons are not difficult to seek. The Indian economy is still in recovery mode, being propped up primarily by increased government spending. Private sector investment and consumer interest remain tepid, though there is some hope for the latter in this Diwali quarter. Nevertheless expectations are muted.How does one square this with the irrational exuberance in the past few months for e-commerce apps and digital startups, with investment numbers and valuations soaring? Are they truly expanding the market – in a manner that the real, physical economy is not being able to do – or is much of this just a myth?Take four examples. The companies are not being named, but the information has come from industry insiders. A leading taxi aggregator and app company has been collecting fresh rounds of funding and reached astronomical valuations. It says its market share and consumer and partner base in India – comprising passengers/users and drivers – is unceasingly expanding. It records each new customer or partner with a unique mobile number associated with that individual.A closer analysis is revealing. Each new customer and partner gets an incentive from the taxi aggregator. The difference between the incentive and the cost of the cheapest pre-paid mobile card (each card being linked to a different and new mobile number) is about Rs 200. It is surmised that many of the partners are simply using new cards on a regular basis to take part in an unremitting arbitrage opportunity.The user and partner base is not expanding as impressively as would appear. Investor money is being deployed instead to subsidise incentives for many who may be receiving those apparently one-time incentives several times.There are other cases. A food app promises a user a 50 per cent discount each time he orders from a restaurant using the app. On its part, the app management pays the restaurant full price. A leading hotel bookings app has blocked and paid top rates for thousands of hotel rooms and is saddled with a huge inventory. However, it has been able to sell less than half those rooms, and that too at an extremely discounted, promotional rate. Where is the revenue stream?ate. Where is the revenue stream? The strangest instance is of a leading electrical and electronics manufacturer, approached by an in-the-news Indian e-retail site with a bulk order for one of its popular kitchen appliances. The site bought the appliance at full price and began selling it at a 40 per cent discount. Sales were brisk, and more orders were placed.It was found that the manufacturer’s associates and distributors were themselves buying back the appliance from the website (having registered as regular shoppers). Then they were either selling it offline for the normal price (which would constitute selling the same product twice) or selling it back to the e-retailer (which would constitute a Ponzi scheme).Variations of such stories are being heard repeatedly. In all cases, the ‘incentive’ or ‘discounted pricing’ is paid for by the massive investment (itself the result of eye-popping valuation) brought in by a familiar bunch of big international funds. As is usual, they are putting their money in multiple startups, knowing most will fail but one or two may hit gold. That’s the long-term call; in the short-term everyone is on the treadmill and is too scared to get off.The internet can be a force multiplier.It can help, say, a small furniture maker in Bengaluru access an all-India market. Twenty-five years ago, such a company would have been restricted to two or three stores in its home city. The internet is also a boon for entrepreneurs who can deliver a service online that has no offline competition or analogue, and is designed and built for an online platform alone.This is not what many of the marquee Indian e-commerce and digital startups are doing. They are only artificially cannibalising the market, arguing that subsidies – which everybody seems to loathe when the government justifies them – are suddenly a wonderful instrument for giving away investor money in the quest for ‘customer loyalty’, even though the customer has no reason to be loyal. This is the logic of a bubble – and a bubble that grows and grows is still a bubble.