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Charity begins at home for Indian companies that want to expand the domestic market.
Tom Leander, CFO Magazine
November 1, 2007
"Businessmen cannot be philanthropists," says Krishna Kant Rathi, CFO of Pantaloon, a big Indian retailer. "Our concern is profits." Absolutely, but Indian companies — including Pantaloon — see a benefit in positioning themselves as helpers to the poor.
It's no secret why. Most of India's population still lives in villages that are desperately poor. According to McKinsey & Co., 110 million Indian households — about 550 million people — make do on incomes between $1,500 and $4,000 a year, and an additional 40 million households are simply destitute, earning less than $1,500 a year. Indian companies have a choice of expanding overseas, or tapping the home market. But the home market is hardly ready for them. "Income growth in India is restricted to the top 10 percent of earners in the population," says Rathi. "That has to widen to at least 20 percent if we're to meet our goals."
That's why large retailers are taking action. Farmers in most states are forced, for lack of a better alternative, to sell their produce through government-approved channels that offer little price transparency. Several retailers are now building proprietary supply chains to deal directly with farmers. The aim is to bypass middlemen and offer better pricing. Anirudha Dutta, analyst at investment bank CLSA, says, "If agricultural supply chains can be reformed it could have as big an impact as the 1991 reforms," which dramatically opened India's economy.
Financial institutions, too, are attempting to improve on a failed government approach. Indian banks were once required by regulators to build branches throughout the countryside. This hobbled their ability to provide micro loans and insurance — the only thing most farmers can afford — because of high costs. The government eased this policy some years ago, allowing banks to abandon the branch-heavy approach. But some banks haven't exited the countryside. In one example, ICICI, one of India's biggest banks, has started up partnerships with the Indian postal service and existing microcredit organizations, retaining access to rural communities while keeping costs down.
Some strategies seem more shrewd than altruistic. Several years ago, Reliance started giving away mobile phones across India, a move that greatly expanded its revenue base while increasing access to the mobile-phone service that is the lifeblood of many entrepreneurial ventures in India. There is plenty of room for skepticism. Reliance's plan could just be brilliant marketing, greatly increasing revenues by removing a barrier to entry. And regarding those retail supply chains, a cynic might point out that you can sidestep corrupt middlemen, but what's to stop big companies from creating monopolies that exploit farmers?
A subtle dance is going on in rural India between companies desperate for new markets and the desire of India's poor for a better life. Given that most of the world's population is still below the poverty line, the effort bears scrutiny by all who dream of lucrative markets at the bottom of the world's economic pyramid.
Tom Leander is editor-in-chief of CFO Asia.