Recasting India (4 page)

Were it not for the steady increase, however modest, in prosperity and aspiration—as desolately tragic as some of the worst neglected, hunger-prone areas are—the violence would be many times more vicious. And quite possibly there would be no India, only a broken smattering of balkanized, quarreling states.

It is this rise of the common entrepreneur that keeps the idea of India afloat. But modern India does not celebrate the common entrepreneur. It celebrates billionaires, sometimes even barely disguised oligarchs, while neglecting to applaud these everyday miracles of enterprise that glue it together.

This proliferation of entrepreneurs is not happening in isolation. The government has launched several large schemes that created what I call a “rights economy.” A rights economy is one in which the state commits to deliver several services to the citizens—such as a minimum amount of food to those who cannot afford it and health care—not just as welfare but as a guaranteed legal right. This, in turn has created a new universe of empowered consumers and micro-entrepreneurs.

I first realized this at Kotkasim, about a two-hour drive from Alwar, Rajasthan, where Jaisingh Vyas told me about Paanch Bhai soap. Vyas ran a grocery in the district where the government launched a pilot scheme in 2012 to transfer kerosene oil subsidies to the poor directly as cash. Money was deposited into the bank accounts of the area's 25,000 people who hold below-poverty-line (BPL, a government measure for low-income groups that need state dole) cards, for them to buy kerosene at market rates. Subsidized kerosene costs Rs 15 a liter (about a quart) in ration shops and around Rs 50 in the open market. The government pays BPL card holders Rs 35 for a liter, in effect the difference. Each person has a monthly quota of three liters.

Two things happened after the scheme was introduced: one, an entire supply of 84,000 liters (about 22,190 gallons) of kerosene, earlier ostensibly sold on paper, dropped to 22,000 liters (about 5,812 gallons). Second, only half the BPL card holders could get themselves a bank account (to receive cash transfers) because of bureaucratic delays, lack of banking staff, and the inability of the poorly educated card holders to grasp banking paperwork. Although the scheme's results highlighted India's usual problems of corruption and implementation, it was still a success. Cash transfers have been rolled out in 25 schemes across 121 districts and have impacted around 10 percent of the population ever since.

But what's this got to do with soap? Vyas tells me that many buyers of Paanch Bhai are beneficiaries of the kerosene cash transfers. “People hear all the time through government campaigns that soap needs to be used to stay healthy. So when they get some money, soap is one of the main things they buy.” Sales at his tiny shop have gone up from one or two bars of soap to four or five every day.

Another program inadvertently bolstered the trend. Between 2004 and 2012, the Congress-led government built 93,426 toilets under the Nirmal Bharat Abhiyan (NBA), its flagship program that aims to drastically reduce the number of Indians without access to toilets. As much as 50 percent of the country's population defecates in the open, but that's down from about 75 percent two decades ago.

This push for better sanitation, coupled with the cash transfer, is something that makes Desh Bandhu Madan happy. His family owns the Paanch Bhai (or Five Brothers) brand, which was started by his father and uncles in 1957. With six factories in Faridabad, each of which had a turnover of Rs 24 crore in 2012, Madan and his brothers have captured most of what he calls the
pehli baar
, or first-time customers for the soap in Haryana, Rajasthan, Punjab, Himachal Pradesh, Uttar Pradesh, Gujarat, and Jammu and Kashmir.

Paanch Bhai is value for money. At Rs 44 a kilogram (about 2.2 pounds), wrapped in yellow wax paper, it is one of the cheapest branded soaps here. Premium products such as Wheel or Rin from Hindustan Unilever sell at around Rs 50 for 160 grams (about 5.6 ounces). Madan says demand for Paanch Bhai has been growing at more than 10 percent each year for the last three years. Each factory sells 550 metric tons (606 short tons) of soap a month. Still, demand outstrips production by at least 50 percent.

“You have to understand who buys my soap,” explains Madan. It's the village woman who has been using ash to clean up for a long time until she learns of government campaigns and goes to buy the soap. Washing soap ubiquitously doubles as hand soap in this market.

Much like India's “rights-based governance system,” a “rights-based economy” is at work here.

Economists have always debated the social and economic aspects of India's roughly Rs 190,000 crore annual spending on social welfare schemes, such as the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) and the Sarva Siksha Abhiyan (SSA), which promises free primary schooling. But few have examined the impact of all that money through the lens of rising purchasing power, mostly in rural India. Experts say that nearly two decades of economic growth and the last ten years of sustained government spending have fueled a unique transformation in many villages.

What the soap example shows is that when subsidies move from kind to cash, beneficiaries find the best use for it, often in areas that the state wouldn't have thought of (less kerosene, more soap). Schemes like MNREGA fuel the rights economy by putting cash directly into the hands of beneficiaries, while programs like SSA allow the poor to redirect the money they would otherwise have spent on their children's schooling.

It's very difficult to ascertain the size of the rights economy. For one, there are still enough leakages to distort the picture. Also, it's not a part of the rural economy as we know it, but a subset of it. No study has been done—it is perhaps not even possible—to demarcate which part of the new purchasing power of the poor came from GDP–led growth (fueling the rural economy), and which resulted from social welfare schemes. Often, the lines between them blur. But there is enough evidence that the two are now going hand in hand to effect the economic change seen across India's villages, where around 68 percent of the country's population lives.

When C. K. Prahalad wrote his seminal book
The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits
in 2004, he argued that companies would discover a huge market if they built products targeting the purchasing power of the poor by seeking out an existing market and fixing the supply side.

What makes the rights economy different—and why it's attractive to companies—is that it's spawning a new level of demand. When people who have rarely, if ever, had disposable income get access to hard cash, what they choose to buy, even if in small quantities, forms the heart of this economy. It's often driven by people who aspire to surpass their relatively poor rural neighbor's purchasing power and buy an expensive product, say a bottle of Coke or Pepsi, instead of three cups of tea at the roadside stall. Indeed, one way of looking at the rights economy is as an aggregation of splurges.

“When the poor get cash, they spend it exactly the same way as us—on private education or private health care and food, from subsistence level to fruits and vegetables and meat,” says economist Surjit S. Bhalla, refuting the notion that the poor spend differently from the middle class. (Bhalla also believes that most of the subsidies don't reach the beneficiaries.) He cites the experience of Santiago Levy, father of the cash transfer system in Mexico in the mid-1990s. Levy, who was undersecretary in the Treasury Department when he proposed the cash transfer plan, had famously asked: “Once you realise that all you are transferring is income, the obvious question is why you don't just give them income directly.” The success of income transfer was seen in two pilot projects in Madhya Pradesh between June 2011 and January 2012. Conducted by the charity organizations SEWA Bharat and UNICEF, 6,000 people across two villages were given Rs 300 per adult and Rs 150 per child with no restrictions on spending it. The main items they bought were better education for children, better walls, better food, roofs for their homes and toilets.

For Madurai-based Manickam Ramaswami, managing director of Rs 1,500 crore Loyal Textiles, there's a “forced trickledown” benefit. He cites a survey done by his industry a year after the MNREGA was implemented in 2006. It showed a 26 percent rise in the purchase of textiles among BPL families. What happened was that he used to get his low cost labor from rural areas. But with the introduction of MNREGA, the cost of this labor had to increase because the workers now had a choice to stay in their village, instead of working in the textile factory in the town, and earn the same amount of money. So wages had to rise. “What we were paying our workers—Rs 60 a day—was below subsistence. But I could not have unilaterally raised pay, because competition would price me out. The MNREGA made the market equal for everyone.” Today he pays a minimum wage of Rs 180 a day.

Kashyap of MART talks of how often he sees an empty pack of Dove soap lying in a village room. “It says we are not left behind.” Sales of the premium Unilever soap are growing rapidly in rural India. Kashyap points out that the country's social sector spending, depending on the year, could easily match or exceed the approximate annual turnover of its soaps, clothes and food industry (Rs. 170,000 crore), and its contribution to aspiration and consumption is underrated.

He believes there are a few factors responsible for this. One, most people living in villages no longer till the land. Farming accounts for only 40 percent of the rural economy (some call it the rural GDP). Manufacturing is 20 percent, and the bulk of that is low-skill, including traditional crafts and artifacts, and services like rural retail make up for the rest. The other factors are migration from villages to towns and cities, reach of mass media, and ever-improving connectivity between villages and cities, for instance via all-weather roads and cities like Delhi or Bombay expanding into ever-intermingling city-villages. “When people talk of direct cash transfers, I say there is also direct culture transfer that is happening rapidly from urban to rural India, where urban habits are quickly picked up and adopted.”

Economist Sudipto Mundle, formerly with the Asian Development Bank, points to another factor: he says that compared to the middle class, the poor have the maximum propensity to spend (and conversely, the least to save), when given the opportunity.

All of this is leading to a reexamination of the alleged richpoor or urban-rural divide. According to Pratap Bhanu Mehta, president of the Centre for Policy Research, the country's leading think tank, “This Bharat vs. India—what is good for rich India is not good for the poor—divide does not hold anymore. Bharat and India are far more interlinked through domestic migration, remittances, formal and informal labour, and endless feedback loops than people can think of. What is happening is a combination of growth and government spending.”

This is best illustrated by Vivek Puri, who runs Puri Oil Mills, whose P Mark mustard oil is one of the strongest players in Jammu and Kashmir, Ladakh, Punjab, Himachal Pradesh, and Haryana. His annual turnover is Rs 250 crore. “My grandfather [who started the company in 1933] and father would talk about how people use mustard oil for body massage across India. Five years ago, I realised the trend was dying even in villages. Young people don't like mustard oil for massage. It is too sticky and pungent, and not in the least fashionable,” says Puri.

He hired scientists to experiment with other formulas, and the result was Shakti, a perfumed light oil for massage, which comes in 100 milliliter (about 3.4 fluid ounce) bottles for Rs 50. However, he also innovated by making the packaging dowdy. “Most of our buyers are women who live with their in-laws, and while they want to buy a superior product, they don't want to be seen spending money on a fancy cosmetic product.” The slightly shabby packaging helps them buy Shakti oil and yet not get into trouble at home. Demand for Shakti has been growing at 8 percent annually.

Social scientist and author Dipankar Gupta, who has spent 40 years studying the rural markets, however, says it's wrong to term these people consumers. “The increase in purchasing power doesn't make them consumers,” he says, adding that a consumer is someone who buys things purely out of desire. This is, at best, an increase in purchasing power for a few, and the items bought are matters of dire necessity. He adds that the government's ability to stop the theft of money spent on social projects will be critical to the increase in purchasing power. States that govern the best, like Kerala, may see the highest impact.

So what does this new phenomenon do to conventional business? One, it will challenge consumer goods companies' classic market segmentation by population, income and education. Nikhil Joshi, managing director of Sapat Tea, a company that operates only in Maharashtra, is aware of this challenge. He uses 12,000 marketing agents, which gives him immense insight into how consumers think. To sell one of his labels, Sahyadri Tea, in Vidharbha three years ago, he realized that just pricing things cheaper than the competition would not work. “Though the people were very poor, they wanted to buy something different and get the satisfaction of buying something better than usual.” Pitched as an extra-strong tea, Sahyadri now sells at a premium of roughly Rs 5 over other brands (Tata Agni, Assam Dust) for a 250-gram (about 8.8-ounce) pack and is growing at 20 percent annually.

Or take the example of Rajkot-based Chandubhai Virani's Rs 1,000 crore chips and snacks empire, Balaji Wafers. Virani sells wafers for Rs 5 a packet. Balaji has 90 percent of the market in Gujarat, and by some estimates more than 75 percent in western India. Seven Balaji plants process 5 lakh (1 lakh = 100,000) kilograms (more than a million pounds) each of potatoes and pulses every day. It's the second-biggest player in this category with 14 percent of all-India market share. Virani says 70 percent of his revenue comes from the lowest-priced items, targeted at people “who need to eat cheap, quickly, and what fills their stomach and does not make them ill.” He travels through construction sites and villages every week to see if people are buying Balaji. One trick he employs to keep his costs low: he uses zero advertising.