The Rise of India’s Rights Economy 

(And why companies objecting to government handouts might be missing some points)

IT WAS AT Kotkasim, about a two-hour drive from Alwar, Rajasthan, that I first heard of Paanch Bhai soap. Jaisingh Vyas, who introduced me to it, ran a grocery in the district where the government launched a pilot scheme last year to transfer kerosene oil subsidy directly as cash to the poor. Money was deposited into bank accounts of the area’s 25,000 people who hold below-poverty-line (BPL, or a government measure for low-income groups that need state dole) cards, to buy kerosene at market rates. Subsidised kerosene costs Rs 15 a litre in ration shops and around Rs 50 in the open market. The government pays BPL card holders Rs 35 for a litre, in effect the difference. Each person has a monthly quota of three litres.

Two things happened after the scheme was introduced: one, an entire supply of 84,000 litres of kerosene, earlier ostensibly sold on paper, dropped to 22,000 litres. 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. If, on the one hand, the scheme helped curb rampant illegal sale of kerosene, on the other, it highlighted India’s usual problems of implementation. Cash transfers have been rolled out in 25 schemes across 121 districts and has impacted around 10% 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 cash transfer. “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.

Between 2004 and 2012, the Congress-led government built 93,426 toilets under the Nirmal Bharat Abhiyan, its flagship programme that aims to drastically reduce the number of Indians without access to toilets. As much as 50% of the country’s population defecates in the open, but that’s down from about 75% 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 last year, Madan and his brothers have captured most of what he calls the “pehli baar”, or first-time customers of 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 kg, 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 gm. Madan says demand for Paanch Bhai has been growing at more than 10% each year for the last three years. Each factory sells 550 tonnes of soap a month. Still, demand outstrips production by at least 50%.

“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.

Think of it as a rights-based economy, if we were to extend the government phrase of “a rights-based governance system”, that is at work. Economists have always debated the social and economic aspects of India’s roughly Rs 190,000 crore annual spend on social welfare schemes, such as the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) and the Sarva Siksha Abhiyan, 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, nearly two decades of economic growth and the last 10 years of sustained government spend have fuelled 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). Other schemes which are fuelling the rights economy like NREGA are also putting cash directly in the hands of beneficiaries, while things like Sarva Siksha Abhiyan allow the poor to redirect the money they would have otherwise 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. Then, 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 purchasing power of the poor came from gross domestic product (GDP) led growth (fuelling rural economy), and which through social welfare schemes. Often, the lines between them blur. But there is enough evidence that the two are now going hand in hand to effecting economic change seen across India’s villages, where around 68% of the country’s population lives.

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

The beauty of the rights economy—and why it’s attractive to companies—is it is more about spawning a new set of demand. When people who have rarely had any “disposable income” get access to hard cash, what they choose to buy, even if in small quantities, forms the heart of this economy. The rights economy is often about people who aspire to surpass their relatively poor rural neighbour’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 to see it 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, disabusing the notion that the poor spend differently from middle class. (Bhalla also believes that most of the subsidies don’t reach the beneficiaries.) He cites the experience of Santiago Levy, father of cash transfer system in Mexico in the mid-’90s. Levy, who was under-secretary 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 charity organisation 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, and roof for their homes and toilets.

For Madurai-based Manickam Ramaswami, managing director of Rs 1,500 crore Loyal Textiles, there’s a “forced trickle down” benefit. He cites a survey done by his industry a year after the MNREGA was implemented in 2006. It showed 26% rise in purchase of textiles among BPL families. “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.

Pradeep Kashyap, founder and CEO of MART, India’s biggest rural marketing consultancy, talks of how often he sees an empty pack of Dove soap lying in a village room. “It says we are not left behind.” The premium Unilever soap growing at 100% annually in rural India. Kashyap, who’s spent 30 years working in villages says that the country’s social sector spend is more than the Rs 170,000 crore annual turnover of its soaps, clothes, and food industry.

He believes that a few things are causing this. One, most people living in villages no longer till the land. Farming accounts for only 40% of the agrarian economy (some call it the rural GDP). Manufacturing, a bulk of which is low-skill (20%), including traditional crafts and artefacts, and services like rural retail makes 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 limits of cities like Delhi or Mumbai 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, even through media of the urban life.”

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), given the opportunity.

All of this is leading to a relook of the existing notions of rich-poor, 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 and the result was Shakti, perfumed, light oil for massage, which comes in 100 ml bottles for Rs 50. He, however, 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% annually.

Rural aspirations and what happens when money trickles down are best understood through a research that Dalit scholar Chandra Bhan Prasad did in collaboration with the University of Pennsylvania and the Harvard Kennedy School. Prasad has been advocating fighting social ills like untouchability through capitalism. His theory that pizza delivery has no caste points out that orthodox Hindus who would not accept food touched by the Dalits never bothered to ask the caste of the pizza delivery boy. About the survey, Prasad sums up that for the very poor and the lower caste, even the act of purchasing a bottle of cola from the same shop as the wealthy and the upper caste is an act of defiance that drives demand.

In 2010, he along with three other researchers studied 19,087 Dalit households in two districts of Uttar Pradesh—Bilaria Ganj at Azamgarh in the east, and Khurja at Bulandshahr in the west—to compare their lives before and after the Indian economic liberalisation between 1990 and 2008. The survey found a sea change in the ownership of consumer items. It was revealed that in both areas, TV set owners grew 33%, 45% more household had fans, mobile phone ownership jumped from near-zero to almost 35% of households, and 50% more people had started living in concrete homes. To get a sense of how impoverished the situation used to be–for the first time, a quarter of households in both areas had armchairs.

There was an even more intimate transformation. People here barely used toothpaste; this changed more than 65%. Shampoo, another unheard of luxury, jumped to nearly 70%. The impact it had on centuries of discrimination, where it was forbidden to drink or eat from utensils touched by a Dalit, was that instances of upper-caste people eating and drinking at Dalit homes rose more than 70% in the east, and nearly 45% in the west. “The rights economy will only expand the sociological impact of what is already underway in India’s rural economy,” says Prasad. The survey was unique in a way that the questions were framed by Dalits reflecting their lives and concerns, and not by any upper castes.

Social scientist and author Dipankar Gupta, who has spent 40 years studying the rural markets, however, says it’s wrong to term these people as 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 of dire necessity. He adds that the government’s ability to stop theft of money spent on social schemes 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 understanding of the rights economy do to conventional business? One, it will challenge consumer good companies’ classic market segmentation by population, income, and education (Sec A, B, etc). 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 realised just pricing things cheaper than 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 roughly a premium of Rs 5 to other brands (Tata Agni, Assam Dust) for a 250 gm pack, and is growing at 20% 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% of the market in Gujarat, and by some estimates more than 75% of western India. Seven plants of Balaji process 5 lakh kg each of potatoes and pulses every day. It’s the second-biggest player in this category with 14% of all-India market share. Virani says 70% 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.

Virani, who started out as a canteen boy at a local film theatre in Dhundoraji, about 80 km from Rajkot says “part of the demand comes from a giant sociological leap”. He argues that earlier villagers thought of packaged foods as stale. “Now the idea of bacteria is understood by everyone, even by BPL customers. Something sealed in a packet is considered safe,” he says, adding, “Anyone can open a Rs 10 pack of chips from any international company and one of our Rs 5 packs, and see if there is any difference in quality.” (According to a Nielsen study, in 2011 more than 58% of demand for salty snacks came from rural India.) Then, as an aside he says that for the last one year, Pepsi (makers of Frito Lay) has been aggressively trying to buy a 25% stake in his company, but he is yet to relent.

Adi Godrej, chairman and managing director of Godrej Industries, is a strong supporter of the MNREGA. This, he thinks, is good because it is creating millions of new potential customers and that companies should focus on having products ready for them. “Only in three things there is full penetration—toilet soap, detergent, and matchsticks. In everything else, there is a long way to go to even get awareness going,” says Godrej. Already 35% of his sales come from rural India.

Biraj Patanaik, principal advisor to the Supreme Court Commissioners on Food says industry must realise that it is rural demand that saved India during the 2008 crisis. “A lot of it was helped by the MNREGA.” He echoes Godrej when he adds that the government is helping India Inc. by creating millions of empowered future customers for them through rights governance.

However, the right-based economy still has a long way to go. Yamini Aiyar, whose Accountability Initiative is India’s only organisation that tracks grassroots government spending, says this kind of demand has barely scratched the surface because of lack of delivery mechanisms. “The trouble is that we don’t have the district-level, or block-level people to enforce government schemes, including cash transfers.” She rues the fact that we keep talking about technology, but on the ground people can barely use pen and paper correctly. Rights governance, coupled with rural economic growth, is waiting to fuel an explosion of demand. But industry needs to push for administrative reforms and provide better training to tap it. “What they would be doing is securing a very large future markets,” says Aiyar.

(This essay was first published in the Indian edition of the Fortune magazine.)