Some thoughts on India's private sector

A constant theme of many posts in this blog is the lack of dynamism, the absence of scale manufacturing, and the deficit of genuine entrepreneurship in corporate India. More than three decades after liberalisation,  corporate India's balance sheet is nothing to shout about. 

Despite the massive economy and even three decades after liberalisation, corporate India suffers from an acute lack of world-class companies and brands in sectors like consumer durables and fast-moving consumer goods. Across sectors, Indian companies have made little headway outside India in the competitive and mature western markets. Even in sectors like pharmaceuticals and software, where the country's companies have had a head start, there's little to show for the global stage at the upper end of the value chain. There's not one Indian engineering company that's a top global manufacturing firm. India's much-hyped software industry continues to remain stuck at the lower end of the value chain and has struggled to make any world-class software products. 

The country's high profile start-ups are faring no better than their predecessors. They are stuck chasing copycat innovations instead of being pioneers in cloud computing, IoT, data analytics, artificial intelligence and robotics. Despite having several serious development challenges in areas like health, education, nutrition, e-governance etc, and the associated market possibilities, there's nothing on the landscape with any promise to be able to make a meaningful impact on any of these problems. The story of the country's hyped Edtech companies that's currently playing out is a reminder. 

For a continental economy with nearly 1.5 billion people and 60 million plus "entrepreneurs", it violates even statistical principles that we've not been able to produce even a few world-class companies or consumer brands or software products. At the risk of exaggeration but to make the point, every other major economy has something world-class on its corporate sector balance sheet. Even Bollywood remains stuck behind the likes of Korean movies and K-pop, and Brazilian telenovelas in making an impact in western markets. I could not identify even one Indian cuisine restaurant among the 139 restaurants listed as 3-star by the Michelin Guide, though it covered every other major global cuisine. 

Now you could turn around and argue that serving the Indian market suffices, and there are large Indian companies across sectors that serve the Indian market. Corporate India making for India! Though there are several responses to the problems with that view, it's not relevant to the issue discussed in this post. 

In this context, I came across Rama Bijapurkar's oped in Business Standard where she makes the point that instead of fretting about consumer demand, commentators should be worried about the inadequate supply side in the Indian economy. She makes the point that large companies serve the top 20% market (at the most) and the bottom 80% are served largely by the informal market. She exhorts corporate India to seize the opportunity and invest in this market segment, and feels that e-commerce marketplaces offer great promise. 

She writes,

It is now the supply side that ails and lags. It needs to find/rediscover its animal spirits to serve existing demand and stoke demand growth. The explosion of consumption down the income pyramid when the value proposition is right is demonstrated by UPI, Amazon, smart phones at the lower end, and digital entertainment, among others. Consumer India is underserved not only at the bottom end of the income spectrum but also in the middle and at the top end. It can easily absorb more D Mart-type value retail chains, more Bajaj Finance-type consumption financers, many more truly full-service and full-spectrum consumer durable retail chains, more “no-frills” airlines, many more business class seats at prices not distorted by demand — supply mismatches, more truly affordable housing, more organic food, more differentiated brands of personal wear and care across price points, more brands that emulate high-priced brands at a lower price-performance point, more toy brands at all price points, and a multitude of services of all kinds.

Big Indian companies, typically listed or invested in by private equity with a view to list, and MNCs restrict themselves to serving the top of the income pyramid, (richest 20 per cent at most) with only a handful of notable exceptions. Their belief is that the remaining Indian consumer demand is not worthy yet of being acknowledged as “real, grown up” demand. This explains the limited number of consumer-facing companies listed among the top 200 companies, and only three of them having a turnover above $6 billion.

This is an important point about what I have described as an entrepreneurship deficit within corporate India,

Large Indian suppliers have restricted themselves by waiting for the majority of Consumer India to cross a certain arbitrary threshold of income in order to qualify as real customers. This amounts to saying that it is the consumer who should grow her income to be able to afford the supplier’s high costs, rather than the supplier figuring out business models that deliver to her price-performance criteria while remaining profitable. India Inc is yet to build the confidence to invest significantly in the fifth-largest economy in the world, where over half the gross domestic product comes from household consumption. If choosing not to serve mass markets is the strategic choice large suppliers make, then their influence on policymaking should diminish accordingly.

This is about who serves India's mass market consumption

The remaining 80 per cent of Consumer India is mostly served by domestic small suppliers and expedient imports pushed through wholesale trade. In the past, small suppliers equalled shoddy quality, poor features, and cheaper prices. Today, this supply segment has dramatically improved. As an example, there are 10 times more local and regional small fast-moving consumer goods brands than large supply brands, offering better customer-perceived value. The trouble with small supply is that it has little resilience to weather environmental turbulence, and little surplus to invest in scaling up and improving its offerings and operations to better serve mass-market Consumer India. They need enabling conditions to help more capable small suppliers perform better and grow larger, and not protection through tariffs and subsidies.

Finally she points to the promise of e-commerce business model in serving the mass market segment.  

A very promising new kid on the supply block is the e-commerce marketplace emerging in every category. They aggregate small suppliers and give them opportunities and benefits well beyond what their size can afford, such as wider market access and other services that they would not otherwise be able to access. Policies that support more such marketplaces to bloom while curbing exploitative practices would be a win-win for supplier, consumer, and the country.

The oped surfaces several important points about the supply side that corporate India represents. Some observations:

1. I think it's wrong to extrapolate from the "explosion of consumption" in smartphones and digital payments to assume that there's a similar explosion waiting to happen in the entire economy. These digital solutions are simple, have a readymade business model, require low investment, have limited risk, were at the right time and place for the emerging market, rode on public infrastructure, and benefited hugely from government support. None of these are applicable to the other markets that Bijapurkar mentions. Even in digital platforms, the hype around ONDC, for example, betrays an ignorance of the hard struggles and long times required to build sustainable business models. 

2. As I blogged here, there are important differences between Make in India (for the world) and Make for India. The North East Asian economies subsidised and supported their corporates but made access conditional on export competition. This led to the emergence of products, brands, and companies that were world class. They used the global market economies of scale to drive down costs and create good quality and competitive products and services that also served the local market. The local market provided the test bed to iterate and develop these products.

The Make for India without targeting the world runs into the problem of encouraging the development of sub-world class and poor quality products that are confined to serving the Indian mass market. These companies will remain still-born as Indian-class businesses. Besides it also ends up squeezing out foreign companies and any potential Indian competitors who offer better quality but higher priced products and services.

3. The mass market in India is deeply price-sensitive. This price sensitivity means that any emerging formal market player has to compete with the informal market sellers on a lopsided playing field. The formal market players have to offset their cost disadvantages with their innovativeness in the product, delivery, or business model. This is very hard. 

Besides the price sensitivity also means that the margins from these market segments will always be low. The low margins also mean that the company, especially in its initial years, has to operate a very tight ship with very little slack and is vulnerable to even slight shocks. It's very difficult to cross this valley of death to establish value proposition and affordability, and reach the scale that would give them the capabilities and resources to manage shocks and grow. 

4. As I have blogged earlier, India struggles to mobilise risk capital to meet its vast investment needs. The richest Indians and largest Indian entrepreneurs, but for a few well-known exceptions, including the new generation of Indian start-up billionaires prefer to avoid the risky private markets and instead invest in the booming public markets. 

The latest example is the country’s healthcare sector. Blackstone just announced an investment of about $1 billion to buy Care Hospitals and KimsHealth to create one of India’s largest hospital platforms spread over 11 cities with 23 facilities and 4,000 beds. This is in addition to large investments already made by foreign investors like KKR, IHH, Temasek, TPG, EQT AB, Thomson Medical Group, GIC, Apax Partners, etc. Temasek already owns the majority stake in Manipal Health Enterprises. Foreign investors have controlling or significant minority stakes in almost all major Indian hospital chains. These are some of the juiciest and least risky of assets and it’s surprising that they have struggled to attract Indian investors. 

Creating even a D-Mart requires large and patient risk capital, apart from serious entrepreneurship. There are very few such entrepreneurs in India even on the less risky consumer business side.

5. Overcoming all these constraints requires serious entrepreneurship. I have co-authored a paper that explains the difference between subsistence and dynamic entrepreneurship. India's entrepreneurship is mostly about subsistence, where people become entrepreneurs not to build businesses and create jobs but to merely survive. I have blogged about the deficit of serious entrepreneurial dynamism among Indian entrepreneurs. India already has too many entrepreneurs, but too few of the kind of productive jobs creating and business building entrepreneurs. Like other developing countries, India's felt-need to more productive jobs and not subsistence self-employment masquerading as entrepreneurship. 

As a recent illustration, take the example of Serum Institute of India (SII) which gained global prominence during the Covid pandemic as a contract manufacturer of AstraZeneca's Covishield vaccine. It struck gold and made billions from the pandemic. I wrote then hoping that SII would show the way for Indian entrepreneurs and move up the value chain. I should have known better. For a company established in 1966, the SII has been content to be a contract manufacturer of mass market vaccines aimed at developing countries and aid agencies, and has avoided the opportunity to move up the value chain by either capturing mass and high-value niche market segments in the developed countries or even shift to vaccine and drugs development. As its business practices and strategies during and in the aftermath have shown, it's unlikely to change. 

An interesting contrast here is with the managerial talent that has come out of India. On a per capita basis, it can be argued that the country creates perhaps the best managerial talent in the world. Are these, entrepreneurial and managerial, talents innately or culturally conflicting?

6. As I have blogged here, for all the troublesome reputation and sometimes questionable business practices of large Indian infrastructure and construction companies, it can be argued that building brick-and-mortar companies that make physical products and produce stuff (infrastructure, mining, steel, cement, real estate, and even large manufacturing facilities) in any developing country requires high risk appetite and an ability to navigate the local political and bureaucratic systems and manage the political economy of these sectors. Only a tiny few will ever have these attributes. They also come with too big to fail risks and associated moral hazards. 

Whether we like it or not, for a rapidly developing large economy, there may be no alternative to having India's own Gilded Age and its versions of John D Rockefeller, Cornelius Vanderbilt, Andrew Carnegie and Leland Stanford. Yuen Yuen Ang has documented the same Gilded Age in China's development trajectory. The likes of KP Singh, Dhirubhai and Mukesh Ambani, Gautam Adani, Jindals, Sunil Mittal etc may well be the Indian versions. 

7. It has been written that the license-permit raj shackled the private sector and allowed a set of favoured corporates to grow big and do lazy business feasting on a captive market. The same logic could be extended to argue that post-liberalisation, although the market has been expanding rapidly and has also opened up globally, Indian corporates mostly continue to do lazy business by preferring to serve the Indian market, lobby for restrictions and entry barriers to foreign competition, and prefer corner-cutting jugaad innovation instead of the genuine industrial-scale innovation that disrupts and creates world-class products and new market segments. 

8. Again as I have written and blogged (here and here) on multiple occasions, the size of the Indian market is far smaller than one imagines. Western multinationals who come to India looking for the 200 million middle class invariably end up being disappointed. The serious consumption class is much less than even 10%. Lowering the bar further, it'll be useful for marketers to get an assessment of the proportion of Indians who can buy smartphones, buy at D-Mart, take a no-frills airline journey, buy basic consumer durables like a mixer or a refrigerator, buy a two-wheeler etc. 

Someone should study e-commerce transactions across all major platforms for 3-4 years and analyse the numbers of customers transacting, the nature of products being purchased, the nature of discretionary consumption goods, respective shares of lower priced and higher priced brands in the same good, the proportion of buyers purchasing discretionary consumption goods as against regular consumption goods, and so on. I’m sure it would reveal the true nature of the Indian economy. 

9. Finally, I'm not sure how much can be expected of the e-commerce delivery model. For sure, the e-commerce platforms will formalise and make it easier for many businesses. And there'll be a market to serve it. But e-commerce does not avoid the need to hunker down and painstakingly build business models to get the unit economics right, and products that are affordable to a largely low income mass market. 

Here too, as I have blogged earlier, the Indian e-commerce companies have been focused on copying tried and tested business models and have not shown the innovativeness, entrepreneurship, and risk appetite to pursue what Alibaba did in China with its Rural Taobaos and create a physically facilitated digital marketplace that lowers transaction costs and increases access to the vast universe of rural and small businesses.  Indian companies like ITC with its e-choupals had started building rural supply and distribution chains a quarter century back but have struggled to create sustainable business models.   

To provoke with a popular example, for those who accuse Indian bureaucracy and political system of laziness, self-serving, and lacking dynamism (all of which may be right), even a cursory look at the evidence would reveal that the same could be said with equal vehemence about corporate India!

Update 1 (14.11.2023)

This is a good article on the ‘paisa vasool’ business model of Indian IT companies.

What has let Indian IT majors stick with their ‘paisa vasool’ (value for money) model is that the growth in salaries for Indian engineers has not kept pace with the growth in our economy. This is most evident in the starting salaries being offered by our IT majors to fresh engineering graduates. These packages have remained more or less constant for almost two decades, with insufficient correction for inflation.

This article compares the Indian IT majors with Accenture, and how the latter has continuously seized opportunities to become a leader across segments. 

Accenture Plc shared with investors its new strategy, “The Reinvention Phase”. Accenture calls the current demand for technology services the “Intelligent Reinvention”, which will be scripted by the growth of Cloud computing, AI and robotics, metaverse, and Quantum Computing. After offering services in the areas generally classified as social, mobile, analytics, and cloud (SMAC) over the decade, Accenture’s entire thesis rests on the premise that a foundation for the digital core has been built inside the technology landscape of companies. Pillars of smart cloud computing platforms, cybersecurity solutions, and other experimental technologies like artificial intelligence tools and metaverse can be laid on this Digital Core.

… not a single homegrown IT giant has publicly articulated how they expect to build on generative AI tools… Back in 2014, Accenture became the first technology services firm to quantify the digital business… The firm has more than doubled its revenue to end with $64.1 billion in the year ended August 2023. TCS, since it articulated digital business in 2015, has grown its revenue by 81%, while Wipro’s revenue has jumped 52%. Cognizant and Infosys have seen their revenue expand 44% and 78.5%, respectively, since the two companies first disclosed their share of digital business in 2017.

Accenture’s faster growth has been fueled by its rapid expansion in the cloud computing business (which has recorded a 36% compounded annual growth between 2012 and 2023) and building a new ad and marketing business under Accenture Interactive. Accenture Cloud ended with $32 billion, and Interactive had over $15 billion in revenue at the end of August 2023… the company is threatening the leaders in not one or two but three industries. A strong consulting practice now makes Accenture a competitor to management consulting firms dominated by McKinsey and Boston Consulting Groups. A strong interactive practice, which is the digital ad and marketing arm, has helped it challenge the pure-play ad firms, such as UK-based WPP and the French agency Publicis Group. Finally, Accenture continues to offer coders and do the IT infrastructure work, thereby taking on homegrown IT firms like Tata Consultancy Services and Infosys Ltd.

Update 2 (18.12.2023)

Business Standard reports that the R&D expenditures of Indian companies has been declining as a share of their net sales. It examined 445 S&P BSE 500 companies who spent Rs 651.3 trillion in the last decade of which less than one percent went into R&D. 

Even this limited R&D expenditure has been skewed towards recurring costs (salaries, wages and maintenance).

The decline in share of R&D expenditure has been seen even in technology intensive sectors like automobiles and IT. 

This is the comparison with other countries,

Companies in the United States spent the most on R&D (investing 8.1 per cent as a proportion of their net sales) in 2022. Chinese companies were the second biggest spenders (3.8 per cent) and the Japanese (3.8 per cent) came third. It was 1.7 per cent for Indian companies, according to data from the Economics of Industrial Research and Innovation.