Big firms don't connect with the masses

The idea that large companies need demand visibility to invest, so lower-income demand needs to be stimulated, does not hold water

The zeitgeist has definitely changed for the better and the more authentic, moving from macro numbers of all kinds and world rankings of the economy as a whole to looking inwards at what’s happening to People India and acknowledging that the core muscles of the economy need urgent strengthening.

The post-Budget commentaries from India Inc and business media (not so much stock market analysts!) have been around job creation and investment stimulation, although there is a significant constituency that saw the absence of consumption stimulation as a big miss rather than a glucose shot for a weak body with doubtful results. Also heartening is that, at last, popular commentary is acknowledging the various linkages between investment, consumption, micro, small and medium enterprises (MSMEs), and employment, instead of the siloed ways in which these topics have tended to be discussed so far.

However, still not explicitly acknowledged and framed as a basis for policy prescription is the dual nature of India’s supply and demand ecosystems (with implications for employment).

India has a “two ponds” structure of supply and demand: Large companies, with a few exceptions, primarily serve a small group of richer consumers (or bigger customers) and employ a minuscule percentage of the population, while small businesses serve and employ the remaining bulk, either as informal employees or contracted own account workers. This “two pond” structure — deliberately not called “two tier” or any other hierarchical label — requires sharply segmented policy prescriptions as the interlinkages between the two are low.

Large companies in India, by strategic choice, mainly serve the richest 20 per cent of the households (or intermediaries who serve them), and sometimes selectively extend their target markets to some parts of the next richest 20 per cent households. The small turnovers, relative to the $5 trillion gross domestic product (GDP) goal, of leading consumer facing companies across sectors tell this story. Large companies do not choose to serve mass-market India because they do not like its income demographics and the resultant difficult demand structure — that is, a lot of people or entities earning and spending a little bit each that adds up to a lot, but with vulnerable incomes and with the resultant painful challenge of having to design businesses that can balance consumer demands of price and performance with the company’s profitability. Luckily for them, because of the skew in education and capabilities, aided by the slowing economy during Covid, their chosen segment has got richer. One cannot fault their strategic logic of “when you can kiss the prince, why kiss the frog and wait for it to transform into a prince”. Ditto for multinational companies.

The “small” sector, earlier called the “unorganised” sector, had acquired agility, customer centricity and sophistication in the last 20 years, belying that label and demonstrating that  Indians are fabulous learners, and have embraced digital utility, learning and productivity tools. Their share in many sectors is almost half the total sector value. This small sector got hit by demonetisation, increased regulatory compliance, Covid, and banks getting more prudent in their lending.

Mass-market consumers and small businesses in India are served by small suppliers, mostly localised, and by imports from China and similar low-cost  markets, and distributed through wholesalers, small retailers, pavement popups and a few large retail chains as well as by tiny hotels (lodges), micro construction contractors, micro food services and so on.

How strong is the linkage between the two ponds? In the business-to-business (B2B) segment, the more robust small sector enterprises — those that have export market niches, or are a part of the tied supply chains of larger companies , or are part of a regulatory mandate — are connected to and served by the large sector.  The rest is left to the small players.

These two economies — the large and the Lilliput — need to be separately and specifically cared for in policy. Caring for the large and expecting the benefits to flow through to the Lilliput pond does not make sense. The large companies, barring a handful, are very clear that strategically they will not invest in Lilliput demand. Therefore, the argument that large companies need demand visibility to invest, so lower-income demand needs to be stimulated, does not hold water.  It may be sound economic theory, but does not account for firms’ business strategy choices. In any case, large companies should not require more proof to make their own long-term investments, given the pitches they make to foreign investors — the most populous, young, highest in world rankings, largest internet user base, still the growth bright spot in the world.

The “small” ecosystem that employs and serves the bulk of the country needs policy help beyond the paradigms of current MSME thinking. It is the future too, not a vestigial organ to be shed. It is already becoming a key element of India’s vibrant new economy startup story, which has managed to crack the price-performance -profitability challenge of mass market India. Their business model achieves this through aggregation of the small —  small suppliers, small buyers — enabling the sharing of high value items in small pieces, all seamlessly held together by small digital transactions.  Digital marketplaces are doing just that. Policy needs to do much more for venture capitalists to keep the money flowing in until this transition of small to big is well on its way.

The writer is a business advisor in the area of customer-based business strategy, a thought leader,  and a researcher on India’s consumer economy