Saving the micro buyer

Markets are said to go hand in hand with democracy. Just as people are allowed to choose their leaders in an unfettered manner, so, it is said, must happen with goods and services. And, just as democracy is messy and does not always produce the "right" answer, so are markets. Eventually, democratic systems self-correct, and so do markets. While we are deeply attached to democracy, many of our fellow citizens continue to pay a heavy price because democracy does not always throw up leaders who are worthy of a nation such as ours. We hope that, on balance, we have gained more than we have lost and that self-correction is at work.

However, we as a country have displayed much less equanimity about markets. Policy here has been characterised by a deep fear and mistrust of the private sector, leading to a series of backward and forward steps. As a result, even in mainstream markets, we have created a private sector that largely survives because of implicit government backing (e.g., petroleum refining and financial services), or because the state's failure has been so stark that even its most diehard supporters had to allow alternatives (e.g., airlines and telecom).

The waters get muddied when it comes to low-income households and to goods and services that are seen as "non-market". The implicit contract seems to be that it is all right to have the government provide deficient goods and services or not provide them at all, as long as the poor are protected from extreme shocks that market forces bring with them.

The darker side of this, however, is that the antipathy is only towards the formal private sector. So the Forwards Market Commission gets to regulate the electronic spot exchange, and the Reserve Bank of India the non-banking finance companies or NBFCs.

This considerably increases the playing field for the deeply exploitative but historically present informal private sector such as the commission agent and the village moneylender. A grim example is the current microfinance crisis in Andhra Pradesh, in which an entire industry of regulated NBFCs is being erased, leaving the field wide open for informal lenders.

Why is this happening even though the poor more than anybody else need the efficiency, the low costs, the continuity, the neutrality and the reliability that markets can provide in many areas? In part, it is happening because the very nature of the market demands inflexibility, which translates to dependability when things are going well (if you put the money down you get served efficiently no matter who you are) but can be devastating when they are not (no money, no service no matter how much you need it).

Rather than see business and responsibility as opposites, there are players that see them as being deeply consistent with each other.

In part, it is happening because the markets that serve low-income households are at a primitive stage. Early entrants are earning supernormal profits by extracting monopolist rents and benefiting from the fact that good outcomes are hard to define and measure in services such as health care and education. These very supernormal profits will attract challengers, and customers will have more choices and be harder to exploit.

Creative destruction would normally be fine except for the fact that at the other end of this chain are very poor people and whenever evidence of such value extraction emerges it becomes hard for democratic systems to allow it to continue. No democratic process will accept even short-run rent-seeking from the poor by an organised private sector, although it may turn a blind eye to rent-seeking by informal players or the non-performance of government as the sole provider.

But, in large part, it is also happening because the government had a direct and unfettered play in the area for decades and often behaves not as a neutral referee but as an incumbent corporate monopolist. So, should the private sector wait for the government to fail entirely even (as it did in telecoms and airlines) before markets can hope to serve low-income households? Will that be too late? Even when that happens, how do we protect the poor from the "natural" behaviour of markets? A large part of the private sector is in any case not interested in finding answers to these questions - rather than face the music it is already selling its tea and coffee plantations, shutting down rural branches and confining itself at most to middle India or going outside the country entirely.

What is the message then for the sliver of the private sector that is interested in addressing service delivery gaps for low-income households? The clear message is that it must redefine the manner in which it seeks to operate. It must explicitly acknowledge 'Government, Inc.' as a formidable competitor that is a powerful market player and not for a moment rely on its impartiality or look to it for solutions. It must engage the communities it wishes to serve and find market-based solutions to protect those who are not able to cope with the facelessness of markets. It must slow down to ensure that it takes firm root and cannot be dislodged easily. It must internalise John Kay's message of "obliquity": only those that truly solve "real" problems can hope to survive and grow in the long run.

Is this a utopian notion? Does such a private sector exist in India? Indeed it does. Rather than see business and responsibility as opposites, there are players that see them as being consistent with each other. In fact, this is the only way in which commercial businesses can operate if they are to survive and grow in the long run in any market and not just ones that serve low-income households.

The hope is that this sort of private sector will grow to a size that challenges our historic notions of how markets operate and builds our confidence in its ability to serve even the most vulnerable populations.

This is absolutely essential if low-income communities are to benefit from our growth momentum in the near-term and not have to wait for the trickle down to reach them. The challenges of ensuring inclusive growth are simply too large for even a high-performance government machinery to tackle entirely on its own.

Buy the Business Today January 9 edition for more such columns by business leaders like Ajay Piramal, Uday Kotak and Ashok Gulati.