Beedis, wages and the gig economy
To put it simply, we’d do well to remember that cheap is not necessarily cheerful
For 25 years, Narmada served our family. Nammaunty, as I called her in my anglicized childhood naivete, would come home first thing in the morning and take care of everything in the house until she left for her home at around 4 in the evening. To the 10-year-old me, Nammaunty was family. So I never quite understood why she had to leave every evening. And so one day, I decided to follow her home on my brand new Hercules bicycle.
When I finally got there, somehow still unnoticed, I witnessed a strange sight. As soon as she got home, Nammaunty sat down, picked up a leaf and with a series of deft movements turned it into a little brown beedi. I watched, almost hypnotized by her efficiency. Pick up leaf, stuff tobacco dust, roll, pack, tie string, toss aside, repeat. I must have been watching this for almost half-an-hour when her husband spotted me and looked alarmed. Nammaunty was alerted, and when she looked at me with a mixture of worry and warmth, I froze. The rest of the events of that evening are a bit of a blur. I must have got back home somehow; I can’t really remember. But I will never forget watching her hands move with a fluid yet mechanical precision as she stared out into the distance or made idle conversation with a passerby.
This was my first encounter with India’s beedi industry. A Rs15,000-crore-a-year behemoth that employs 5 million people, over 90% of whom are women. And it has spawned some massive companies, all of which are privately held. Two of the top five manufacturers in India happen to hail from my hometown of Mangaluru. So clearly, this is a topic that’s close to home.
The industry is a masterclass in distributed manufacturing. The procurement of the raw materials, namely the tendu leaf, tobacco dust, string, and the packaging paper is centralized. The raw materials are then distributed to local contractors who manage a small area of anywhere between 20-50 households. Every morning the contractor delivers the raw materials to the ladies, each of whom is expected to deliver 1,000 rolled beedis at the end of the day if they work full time.
Depending on who you ask, the women get paid anywhere between Rs120-170 per 1,000 beedis. Once rolled, hundreds of stacks of 25 beedis each are sent for final packaging to another set of women to create the final product. This is collected by the same contractor and then delivered to distribution centres, from where they are shipped to the northern states where most of the demand stems from.
The result of the effort by millions of daily wage labourers controlled by large companies is the humble beedi packet containing 25 sticks and retailing at just Rs20.
Let’s take a closer look at the unit economics of this supply chain, 1,000 beedis at a time. At the retail price, a thousand beedis sell for Rs800. We already know the ladies get at most Rs170 a day. Other costs, approximated through conversations with folks from my hometown, include raw materials (Rs100), contractor commission (Rs100), retailer commission (Rs150), employee benefits (Rs80), but often sidestepped by underreporting), and finally taxes (Rs40), leading to a profit after tax of 17.5%. Which, for a Rs15,000 crore industry, works out to Rs2,600 crore, a tidy sum, made off the hands of 5 million women who risk their health and learn less than $3 a day.
So why am I talking about all of this? In the past few years, “gig-economies” and “aggregation platforms” have become massive buzzwords in the private equity/venture capital space. As these models enter the Indian economy either through global players, or homegrown competition, they would do well to remember some key differences.
In India, the “sharing economy” doesn’t exist for most services. Our app-based cab drivers aren’t casually using a car they already own to make money on the side. They take loans to buy vehicles and make this their full-time job. Similarly, there is no equivalent of an English-educated college student running a TaskRabbit (US firm that hires freelancers to get odd jobs done) errand to make some pocket money. Our society is too stratified for that. India’s delivery boys brave awful conditions just so they can send money back home. In this context, we can’t just copy the model and expect it to drive “livelihood improvement”. As the needs of high income segment begin to be well served, these companies will inevitably drive further down the income pyramid in search of new customers. These new customers have significantly lower disposable incomes, and are extremely price-sensitive. Therefore, serving them profitably will mean delivering high-volume low-value products and services efficiently. Much like the beedi industry.
It is in this context that social impact measurement becomes a crucial part of the business. Because if left unchecked, these value chains have a natural tendency towards wealth concentration, often at the cost of the worker providing the service.
This is where responsible impact investing comes in. By placing a large emphasis on measurement of livelihood improvement, impact investors are able to push their portfolios towards more sustainable business models that are able to “do well, by doing good”; driving better employment practices and higher wages. Both of which will become ever more important as we evolve business models that attempt to meet the twin goals of: (1) generating enough employment to meet the requirements of the 1 million people who enter India’s workforce every month, and (2) providing new and affordable products and services to the middle and lower-middle class.
To put it simply, we’d do well to remember that cheap is not necessarily cheerful. And the only way to spread the cheer to those who deliver those products and services, is to make measurement and reporting of wages and livelihood improvement a key part of defining what success means for a business. So that folks like Nammaunty get paid fairly for the work they do.
Sahil Kini is a principal with Aspada Investment Advisors. The Bharat Rough Book is a column on building businesses for the middle of India’s income pyramid. His Twitter handle is @sahilkini
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