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A debt trap or a death trap?

A debt trap or a death trap?
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First Published: Mon, Mar 19 2007. 11 53 PM IST
Updated: Mon, Mar 19 2007. 11 53 PM IST
As she saw a motorbike zip past our gate, my mother commented on the changing social fabric of my village. Exposed to advertisements on TV, people, especially youngsters, want a host of new things, even if they have no steady income. Parents are often coerced into borrowing to buy these. Otherwise, moneylenders step in to “help”. Borrowing from one to pay off another is becoming common. My village, at the bottom of the pyramid like many others around, is falling steeply into indebtedness.
It is great that there is a new surge of interest in poor people, thanks to the attention created by the discussion on the Bottom of the Pyramid (BoP) thesis. Statistical extrapolations suggest a market size of $500-600 billion by 2020, for those waiting to exploit the BoP opportunity. This is much bigger than the opportunity that multinationals, enticed by estimates of a 200-million middle class, pursued during the Gold Rush in the initial years after liberalization. That Gold Rush led to many failed strategies.
The learning from the earlier costly experience should guide companies in their strategies to exploit the emerging multi-billion-dollar market at the bottom of the pyramid.
While appreciating the potential of the BoP market, we have to be realistic about its nature. Strategies devoid of the socio-economic realities on the ground will be costly. A close look at the pyramid will show that it is not yet built on a solid foundation. True, the numbers look impressive; but without adequate purchasing power, it will take time to build this foundation.
The concept of rural business hubs to process rural produce and the creation of relevant infrastructure are still on the drawing board. The process of empowering panchayats with multiple stakeholder interests and varied capabilities will not fall in place suddenly. India’s experiences in developing rural areas have not been very good. The situation may be better this time with a public-private model but for this to happen, corporate goals have to align with developmental goals. So, the assumptions behind the creation of a new set of value links for the formation of a potentially rich supply chain will not be largely valid in the near term.
Specifically, there are two major threats to the development of markets ahead of the creation of sustainable purchasing power at the BoP. One is the potentially growing rural indebtedness. The existing picture is not rosy. Rural indebtedness in 2002 was the highest in some of the wealthiest states, such as Andhra Pradesh, Gujarat, Haryana, Kerala, Maharashtra and Punjab, compared to the all India average of Rs7,539 per rural household. In the absence of simultaneous growth and sustenance in purchasing power, indebtedness is only likely to grow further—with damaging ramifications, since the source of financing is mostly non-institutional.
At the same time, the rapidly rising debt–asset ratio over the past two decades, particularly post-liberalization, does not leave a comfortable feeling. Andhra Pradesh leads at 7.84 in 2002 (against 3.58 in 1981) and Maharashtra follows at 4.11 (2.44), while the national average is 2.84 (1.83). Also, companies have been targeting rural areas to tap potential demand for both consumables and durables. To what extent is rural indebtedness linked to exposure to TV commercials and other aggressive marketing efforts needs further study.
Typically, the cycle of consumption-led indebtedness begins with aggressive marketing, with a BoP focus. People naturally try to generate disposable income. A lack or shortage of it witnesses the arrival of financing agencies led by moneylenders, offering a ‘friendly’ helping hand. Most of the marketing teams, for both products and finance, with targets to achieve, naturally tend to push their products. There is a cascading effect of compounding interest in the absence of consistent supply of purchasing power. A less-publicized fact is that states such as Kerala, which are witnessing a boom in consumerism also have stories of growing suicide tendencies to escape from debt traps.
It cannot be a coincidence that farmer suicides due to crop failure in recent years have been reported primarily from Andhra Pradesh, Kerala and Maharashtra, where the debt burden has been steadily rising, particularly in the post-liberalization era. While innovations in farming are necessary to break into new growth trajectories, there have to be adequate socio-economic safety nets created to support any downside risks. Lessons from these experiences are also valid for the current initiatives.
In essence, rural transformation and wealth creation cannot happen overnight. A rise in aspirations without adequate purchasing power is bound to lead to a state of rebellion and anger. Similarly, rising consumerism on borrowed money can be very dangerous. Rural areas are not yet prepared to take off. We need to have a more realistic picture about the potential and micro- level operational strategies for the BoP to grow, to avoid getting rural people into the debt, if not a death, trap.
Kavil Ramachandran is a professor of entrepreneurship, family business and strategy at the Indian School of Business, Hyderabad. Comments are welcome at theirview@livemint.com
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First Published: Mon, Mar 19 2007. 11 53 PM IST
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