Socialist Companies for a Socialist Democracy

Axiom #1: There is untapped fortune at the bottom of the pyramid
This was first advocated in 2002 by C. K. Prahlad in his article (now a book) Fortune at the Bottom of the Pyramid, and it has since then become the holy grail for any social entrepreneur. There are 5 billion people in the world living in poverty, and if services are developed for them in the right way, then it can not only help eradicate poverty, but also become a huge business opportunity for the service providers. No wonder Reliance is trying to tap into the rural market with increasing cellphone penetration, and HLL is marketing FMCG items to the villagers. In fact, more than 80% sales of certain goods comes from the rural market itself. Even other companies like Titan, Videocon, and Asian Paints are joining in the fray.

Axiom #2: The top of the pyramid is getting richer with more disposable income
The growth of movie theatres and shopping malls, the exponential increase in the number of cars running on the roads, and more and more Indians vacationing abroad, are clear symptoms of the fact that the upper and middle classes are getting richer and richer. Many factors contribute to this, including the fast growing IT services market, increase in FDI for steel manufacturing, an attractive tourism industry, and positive outlooks for each and every industrial sector. This has resulted in a fast increase in salaries, but inflation is still low, leading to more and more disposable income in the hands of the people.

Axiom #3: Economics is all about cash flow
This is the first lesson in any micro/macro/industrial economics class because cash flow is needed for growth. If a company just sits on its profits without rechanneling it into streamlining processes, or organic and inorganic growth, it cannot grow and remain competitive. Similarly, cash flow is imperative for a country's economy so that appropriate monetary and fiscal policies can be applied to manipulate inflation and interest rates, which in turn mobilize the government, private companies, and the people to make investments. Creation of cash flow was also the main reason for stock markets to come into existence, so that investors could more efficiently utilize their cash reserves.

Result
What happens when you put all these axioms together? You get what I call socialist companies. A socialist company is one which creates cash flow by mobilizing its earning from the richer middle and upper classes, into providing services for the bottom ofthe pyramid. This is rare in today's scenario. Most companies just cater to the middle class and feed their profits back into more and better services for the same middle class. A lot of the companies in the vehicle industry, housing sector, entertainment services, and retail chains are good examples. Why is this bad? For a lot of reasons.

Firstly, the sustainance of these companies becomes dependant upon the state of the economy: till the time the economy is doing well, the middle class will continue to grow, and the industries will profit. The moment the economy dies, as what happened during the dot com bust, all these companies will begin to run into losses. Fortunately India was not badly affected by the 2000 economic downturn, but the economy is much more global now, and becoming more and more global each day. India will not be able to escape the bitter consequences of a global downturn this time.

Secondly, disposable income with the middle class consumers is not infinite. A city can only sustain a certain maximum number of movie theatres and not any more. The basic law of diminishing returns comes into play, and companies need to diversy into different areas in order to grow.

Thirdly, the returns from tapping into the huge rural market can be much higher and faster than the RoI from the middle class. I wish I knew enough economics to prove this, but ITC, HLL, ICICI, and many more are already doing it and it is working.

Fourthly, and most importantly, this should be considered as a moral responsibility by all companies working in a socialist democracy like India. Responsibility does not end just by paying taxes and leaving the socialist aspect to the government, but by taking socialism to the grassroots and applying it yourself.

Many will argue that the core competencies of their companies cannot be applied to rural services. Some might say that even if they want to create other companies, their scale of operations are too small to do so. Very rightly so. Every company or person cannot be rich and/or philanthrophic enough like Bill/Melinda Gates and Bono. But as they say in hindi, Boond boond se hi sagar sagar banta hai. And this sagar or ocean can be organizations none other than micro venture capital firms like Aavishkaar. The VC model of funding ventures is much better than the bank model of giving loans. Companies should partner with micro-VC firms to generate corpus funds which can help create new and sustainable social ventures. These companies will then be called socialist companies, and they can tap into the rural market indirectly and profit from the new ventures. It is all about generating cash flow in the right direction, and this direction is rural India. Profiting from the cash flow directly or indirectly is hardly of any consequence, but the key is to mobilize new ventures by creating the cash flow required by them. Micro finance organizations are using the same principles of cash flow to instead mobilize the poor people. Thus, micro finance circulates cash among the consumers to buy goods and services, and micro venture capitalism circulates cash among the new ventures to provide these goods and services. The huge potential unlocked by this combination of micro finance and micro venture capitalism is still to be realized, but not entirely unachievable.

To examine what kind of new ventures can be created with the help of the so-called socialist companies, we need to first identify the problems faced by rural India, and then examine possible solutions for it. I will do so in my next article.