The Single Biggest Challenge to the India Investor Story
Can investors solve the country’s massive inequality problem?
Investors love stories. The most sophisticated of them won’t admit it, but the simpler the story, the better. Consider how one acronym, BRIC, dramatically changed the flow of emerging market investments toward four countries — Brazil, Russia, India, and China — with little commonality. Or consider the term “emerging markets”, conceived in 1981 by a World Bank staffer, Antoine van Agtmael, who realized that pitching a “Third World” equity fund would not go very far. But call it “emerging markets”, and voila! — the world is interested.
Today, a narrative of India has taken hold of emerging market investors: India is hot. Last October, Morgan Stanley noted the “party has just begun” for Indian stocks (though it recently lowered the music slightly on the party). A prominent London-based money manager, James Syme, described India’s economy as “a coiled spring waiting to be released”. He said Indian stocks, already one of the best performing in the world in 2017, could be in for a significant rally.
India’s hot equities run, however, should not mask a significant structural challenge facing its economy and society: inequality. India is one of the world’s most unequal countries. It also holds the largest bottom-of-the-pyramid (BOP) population in the world — some 924mpeople, according to the World Bank. These Indians live on less than $8 per day and lack access to basic goods and services.
One of the world’s most unequal countries
According to the 2018 World Inequality Report, the top 10% of income earners in India account for 55% of the share of national income. This represents one of the worst country cases of inequality in the world. And a recent paper by French economists Lucas Chancel and Thomas Piketty lays out a devastating case for India’s inequality. The top 1% of income earners capture 22% of total income today, an inequality level not seen since the late 1930s at the height of the British Raj.
Obviously, such levels of inequality pose systemic political risks to any society, especially in the information age. It also poses a considerable challenge to Prime Minister Narendra Modi, whose election campaign focused heavily on economic rejuvenation. Modi’s signature initiatives — a new goods and services tax and demonetization of larger cash notes — may have been far sighted in the long run but proved highly disruptive in the short term.
Protests against rising inequality often lead to populist reactions that may soothe the problem initially but create new problems over the long term. India’s political elite have long favored economic populism as a way to win over poor and lower-caste voters, who regularly vote in higher proportional numbers than the rich or those in the upper castes. Indeed, Modi’s latest budget is packed with pro-poor policies, including what may be the world’s largest health insurance plan, dubbed “Modicare”.
Can the government unlock India’s potential?
In addition to the largest health insurance plan, India also has the world’s largest biometric identity program, known as Aadhar. While Aadhar has been a source of controversy for privacy concerns, it also offers tremendous promise for economic inclusion for the poor. The Indian government aims to link Aadhar biometric IDs with simplified and digital payments. The result of this strategy, dubbed the India Stack, will be a streamlined system of money management that will allow for digital welfare dispersal, digital medical records, and the foundation of a cashless society.
Initiatives like Modicare, Aadhar, and rising access to mobile money payments should ease the way for private sector initiatives to enter the potentially lucrative base-of-the-pyramid space. Thus, instead of viewing inequality solely as a problem, businesses can look deeper into the numbers and spot an opportunity.
Bottom of the pyramid as a growth class
Investors take note: Those 924m Indians that the World Bank describes are far more than just a statistic. They are also consumers with aspiration and agency, and represent a vast market for future growth in fields ranging from financial inclusion to healthcare to education.
Consider the Unilever example. The Anglo-Dutch giant has been a leader in developing a product mix for the lowest-income BOP customers. Through targeted ad campaigns, including an ingenious one that plays on the “missed call” culture among low-income phone users, the use of rural saleswomen for their products, and the marketing of small, more affordable packets of shampoo or detergent, Unilever has cracked the code for how to sell in rural and lower-income India.
A constellation of healthcare companies have also emerged to serve the lowest-income consumers in India. As the International Finance Corporation, the private sector arm of the World Bank Group, noted in a report, India’s BOP healthcare market amounts to $41.2bn annually. With the Modicare announcement, this sector is likely to grow even faster than expected.
The companies on the cutting edge of delivering health services to the poor in India are not only reducing the friction that arises when health needs are unmet, they are also tapping into the largest BOP consumer base in the world. What is different today than when Unilever first began its push into the BOP consumer base is rapidly growing technology access.
Technology levels the playing field
Entrepreneurs with technology-enabled solutions will potentially be able to scale their products faster within India and even to other BOP markets. Suddenly, that little healthcare startup in India that finds scale at home will have a global BOP market of some 4bn people spending more than $158bn annually to tap. Many of the newly minted unicorns in India have such high valuations because the growth scenario assumes a market size that includes a majority of the population. One of those unicorns, Paytm, India’s largest digital payments company, is uniquely positioned to ride the growing move away from cash payments and rising technology access among the poor.
With numbers like these, one thing is clear: The base of the pyramid is not a place for charity. It’s a place to grow a business, scale it, and unlock potential in the broader economy. In the process, those stark inequality numbers could just begin to tick downward.
