Getting the Indian consumer to rescue us

The country needs transformative change to create a vibrant consumer market and drive economic growth

Let’s not blame economists, politicians, bureaucrats for our economic travails like not enough jobs, losses of public sector, collapse of the banking and infrastructure building companies and the agrarian crisis.

And let us also not lament that our economic travails are because we as a country are caught in a vicious cycle of business folk who focus on trading and rent-seeking on land (real estate), spectrum (telecom), and labour (IT services) rather than on technical innovation. Or blame the chorus of economists and financial policy-makers, educated and with full-time jobs abroad who come for short sinecures that embellish their resumes and who spend their time chanting “FDI! FDI!” like our ancestors chanted “Ram!Ram!” when faced with similar difficult times.

The fact is that once we peep behind the curtains of the above -described dramas, a new truth emerges — that Indian domestic consumer and institutional markets are very small, and the tiny sliver of the relatively well-to-do consumers and decision-makers are consistently technology-averse which makes it next to impossible for innovation driven businesses to achieve scale.

Illustration by Binay Sinha

How thin is this sliver? According to a study by the National Council of Applied Economic Research (NCAER), How India Earns Spends and Saves, just about 80 million Indian households earn enough to be able to spend on anything beyond the basics. NCAER says this group, made up of managerial, technical, professional classes of households earn a household income of about Rs 13,000 per month. The rest of India, made up of farmers, fishermen, workers in transportation and informal workshops and those who work as hawkers and street vendors, make do with a monthly household income of about Rs 4,000 to Rs 5,000, which does not leave them much to spend on even essential consumer durables. What this means is not that there is no market for products in India, but that entrepreneurs must do radical technical innovation to make products sophisticated enough to satisfy these parsimonious potential customers, and at half or third of world prices for the Indian mass market to be able to afford these products.

Which brings us to India’s next mega public policy challenge: Using military procurement to drive and stimulate technical innovation. Prof Mariana Mazzucato of the University College London is the one who opened our eyes to the extent to which technical innovation is dependent on military procurement. In her seminal book, The Entrepreneurial State: Debunking Public Vs. Private Sector Myths, she takes the example of the iPhone which in everyone’s eyes is the work of one solitary genius — Steve Jobs, and his one solitary company, Apple. She points out that, to start with cellular technology itself is a product of US military investments, as is the multi-touch mobile phone screen that we all adore, not to mention the micro-hard drive that lets us carry around with us a thousands of images and music, the Lithium Ion batteries that lets us carry our mobile phones for hours without re-charge and the GPS (Global Positioning System) that lets us navigate using mobile phone-based maps. She describes the similar role that the US military has played in creating and sustaining US leadership in aviation and space technologies, pharmaceuticals and biotechnology, and more recently, in nanotechnology.

But this role of the military to create early stage demand and sustain innovators is nothing new: Early demand for steel, for example in the 8th century AD, was driven by need to make swords and daggers.

India’s mobile industry is an example of tremendous lost opportunity: Indian government policy resulted in Indian mobile phone operators outsourcing the technology and management of mobile networks to foreign players like IBM; these foreign players created no opportunities for potential Indian network equipment or device manufacturers to be weaned. India now imports $80 billion dollars of mobile phones; this demand could have created a vibrant and world scale electronic manufacturing capability in India. Similarly, in the Personal Computer era, many Indian companies tried creating innovative products in PC hardware and related software, but a complete lack of early stage support from Indian defence procurement forced the industry to embrace the body shopping mode of Information Technology services.

While there are deep political economy reasons why all the above has come to pass in India, there is a glimmer of hope offered by Dr Raghunath Mashelkar and Ravi Pandit in their recent book, Leapfrogging to Pole Vaulting, Creating the Magic of Radical Yet Sustainable Transformation. Their notion of “pole vaulting” consists of a system of four levers each working synergistically with the other levers. The first lever is technology and here they suggest that we approach technology with the belief that nothing is impossible to achieve. The second lever is public policy, but they caution that governments must choose carefully when to intervene and when not to. The third lever, social engagement, is best achieved when products or services are created that appeal and are useful for a great mass of people, particularly those at the bottom of the pyramid. And the final lever is the economic model underlying the effort; here they point out the critical importance of pricing the product or services at a level where it is considered value-for-money by all stakeholders. The many examples in the book provide inspiration and hope that a transformative change is not out of our reach. A vibrant Indian consumer market will then be the engine that drives our economy.

The writer is the author of The Wave Rider, a Chronicle of the Information Age; ajitb@rediffmail.com