A herd of elephants

Note: This is an article I wrote in April of 2009. Published it elsewhere, but never put it on my blog.

The arrival of the investor-friendly politician

As India began 2008, we watched Tata Motors enter its 20th month of impasse with protestors at the Singur site of its proposed Nano car plant. In the time since Tata unveiled plans to build its ground-breaking $2,000 four-passenger car out of a new factory in the town of Singur in West Bengal, few imagined the opposition that would build up. This was hardly the first time a project faced opposition in India, but the thousands of lives the Singur factory had touched ensured a protracted battle between its proponents and opponents.

Among its most vociferous supporters stood the ruling party, the Communist Party, which had gone to great lengths to attract the much coveted project. In what is one of the greatest political ironies in India, the party that had long relished being a vocal critic of corporate India, did a complete turnaround under its Chief Minister, Buddhadeb Bhattacharjee, to support the Tata project.

It is unclear exactly when the balance of power shifted between the opposing sides, but once the courts got involved, events started working against the project. In an affidavit mandated by the state High Court, the West Bengal government admitted that only 30% of the land for the project had been acquired with the consent of the landowners. For the protestors who had been claiming they had been treated unfairly, that was the evidence they needed to justify their opposition.

For investors in India, the state government’s botched management of the land acquisition process reveals a couple of considerations. First, a supportive government need not represent popular support. When investing in densely populated regions or agricultural lands, investors may have to deal directly with landowners. Second, monetary compensation need not be the best way to buy land. To a farmer, land can represent an inflation-indexed livelihood and collateral – benefits which are typically excluded from the government’s buying price. Third and most importantly, it pays to reduce your fixed investments in India today more than any point in the past, particularly because there are alternatives.

Hardly four days after it announced its decision to leave West Bengal, Tata Motors revealed a deal to relocate the Nano project to Gujarat. In an otherwise noisy democracy where every politician jockeys for attention with populist sops, the reception that Modi gave Tata was noticed. It remains to be seen whether Modi’s strategy will reap dividends in the upcoming elections, but for now, his constituents and investors benefit from the Chief Minister’s ambitious drive to reinvent his image, sullied by the Gujarat riots in 2001, and his state as the place to do business in India.

A few decades ago, such an alternative would have scarcely presented itself to Tata merely because India’s socialist policies suffocated business activity comprehensively. India’s heavily protected economy was mediocre all around, irrespective of which part of India you were talking about. Back then, the very idea of bureaucrats competing for investments was laughable. Today, it is conceivable.

Evidence of competition

Inter-state competition is not new to India; one of the best examples of economic competition occurred three centuries ago in Rajasthan’s Shekhawati region. A significant portion of the trade between India and Central Asia travelled through the princely states of Jaipur and Bikaner in those days. The farsighted rulers of Shekhawati lowered transit taxes to divert caravans from their rivals. As Shekhawati grew in importance as a trading route, traders migrated to the region and invested their fortunes there. Today, the region is home to beautiful traditional villas evoking memories of a rich past.

As of the last election in 2004, India sported some 6 national and 47 state parties, each promulgating its own social and economic agenda. Some on the far left, some to the center and some to the right. The scale here is relative, because India’s political and economic language has socialist moorings, and will continue to do so for some time. But within what the U.S. would consider to be a largely socialist vocabulary, there is plenty of scope for differences. And these differences have only grown as the central government has devolved more and more powers to the state and local governments.

Source: Department of Industrial Policy & Promotion

The disparity between the states becomes clearer with a comparison of their track records with attracting investments. In fiscal 2008, Chhattisgarh catapulted to the top of the league table based on investment proposals filed with the government. In 2001, after years of consensus-building and political campaigning, Chhattisgarh, formerly part of Madhya Pradesh, was given the status of an independent state. So Chhattisgarh gives us a rare opportunity to observe what devolving powers can achieve. From 1999 to 2000, Madhya Pradesh, including Chhattisgarh, attracted Rs. 115 billion in investment proposals. From 2002 to 2003, Chhattisgarh attracted Rs. 242 billion solely by itself. During the same period, its former parent state lagged behind at Rs. 25 billion. While only one indicator of progress, Chhattisgarh’s success with attracting investments as a state lends more support to the notion that it was underserved as part of a larger state.

There is more evidence that state governments are getting more aggressive about attracting investors. A ranking of the states by investments announced during the fourth quarters of 2008 and 2007 shows that while the states at the bottom are consistently poor performers, the states at the top are less consistent. Of the five poorest performers in 2007, four continue to lag behind their peers in 2008, whereas only Maharashtra and Orissa have retained their position in the top five. So, once you get past the laggards, there are plenty of movers and shakers, reflected in the progress made by Gujarat, Uttar Pradesh, Punjab and Bihar. The picture that emerges from this data is that of an increasingly competitive economy where governance is becoming an important differentiator.

Within chaos, diversity

Analysts often contrast the speed of economic reforms between “de-centralized” India and “hyper-centralized” China. Such simplifications ignore important exceptions in the political systems of both countries. For India, the lack of a heavily centralized government also leaves space for a variety of freedoms at the state level. True, the country still has much to do before it can claim to be a truly localized democracy, but even as it is today, India’s federal structure gives scope for different kinds of consensus to play out in the country.

For decades, my home state, Kerala, has seen a massive migration of its labor force to the Middle East and other parts of India. The flip side of having a fully literate society is that as peoples’ skills increase, their expectations will increase and they will seek higher paying jobs. But as Kerala’s history of militant trade unions and communist leanings has turned away many potential manufacturing investments, many Keralites have voted against their state’s economic choices by leaving for more fertile grounds. This scenario is playing out in other states in India where governments and civil societies are pursuing different socio-economic tradeoffs. As this happens, the cliché of India as a lumbering elephant will look increasingly outdated. If anything, India will begin to resemble more a herd of elephants, some sprinting, some stumbling and others idling.

The bottom of the pyramid challenge

Part I: The need to innovate

We live in an era of unprecedented global economic growth and widespread poverty. While poverty rates in many parts of the world, including India and China, have dropped significantly over the past decade, the benefits of economic growth to the most deprived sections of society still remains the “trickle” quoted in old economics textbooks. Fortunately, change is brewing.

Today, efforts in many disparate parts of the world to integrate the poorest of poor, better known as the “bottom of the pyramid” or BoP, are focusing on bringing goods and services to the deprived. And surprisingly, these goods and services have achieved a wide range of levels of sophistication, from savings programs that take advantage of group-based lending models (the most-widely quoted example is the Grameen Bank) to emerging re-insurance programs for micro-health insurers. Many, if not most of these financial programs rely on community savings, in a reversal of the primarily charity-based aid programs of yore. The new mantra today is not just “Give and ye shall receive” but also “Ye shall receive and give”, encapsulating that oft-told story of the boot-strapped entrepreneur. In the process, many of the lessons of financial theory of portfolio diversification and risk management are being applied to sustain such services as health insurance and project finance for people who’ve been limited by the individual income profiles.

Yet many basic services including education, power and medical services have remained outside the scope of the microfinance services for various reasons. Some of these services are based on capital-intensive business models, which are a challenge for limited pools. Schools require buildings and the accompanying infrastructure. Power typically requires transformers, wires for transmission, and not to mention, expensive generators. The challenge is to innovate and adapt these services to the pay-as-you-go business models. The story of CavinKare, which pioneered the “sachet” model of marketing[1] by selling shampoo in the form of small packets, is now legendary among BoP thinkers. While these micro-packaging methods are not replicable everywhere and have been disputed as to their efficacy in boosting consumption, they point to the potential of tailoring business models to cater to the poor. And just as importantly, to tailor them to local circumstances.

There are parts of Africa where a HIV patient can be found in every family of a village. The consequences of contracting HIV are too long to list here. But the particularly nasty aspect of this affliction is the constraint it places on the families and dependents of its victims. Treatment of HIV patients is expensive both in terms of the financial burden it places on their families but also in the time taken to care for them. The latter is time lost on an occupation – an unfortunate double-whammy for these families. To add to their troubles, conventional health insurance programs place severe limitations on HIV treatment costs, thereby rendering them useless for the needs of most of these families.

My friend, Omar, and I are focusing on one such village, Lwala, in Africa. Lwala, in Omar’s words, is a:

“village of approximately 1500 people near Lake Victoria in western Kenya. Within an hour’s walk, approximately 3000 additional people live in nearby villages accessible by dirt roads. The majority of the area residents are subsistence farmers….

The official 15% prevalence of HIV in the region is the highest in Kenya (2003 Kenya Demographic and Health Survey). Of the 529 villagers who were tested in 2006, 32% were infected (24% men and 40% women).”

Ordinary microinsurance providers can do little here; most are unwilling to finance the high costs associated with treating HIV patients. Our challenge is to build an insurance program that satisfies the medical needs of both sets of patients, spreads the risk across a large pool of members and is also self-sustainable. That’s a difficult gap to close; ordinary medical expenses in Lwala cost less than $0.10 a day at first glance, but HIV treatment is upward of $2 a day.

Among some of my ideas to tackle this idea is to look at the externalities of HIV treatment. An HIV patient who is treated and cared for at a clinic frees up resources for his/her family. Relatives can pursue other occupations to generate revenue for their families. That is not to say that HIV afflicted families can afford HIV treatment any more than non-HIV families. But, their priorities and benefits from insured healthcare are substantially different. Can these families pay meaningfully higher premiums?

Successful treatment of HIV patients can also lead to meaningfully healthy lives. In such cases, the challenge of the model is to create a relationship with patients post-treatment to recover the costs, not unlike the deferred compensation model in labor theory. That challenge is also compounded by the fact that HIV is not curable. There are treatments out there to make the disease more manageable, but many of them cannot be afforded without very deep pockets.

It’s a long list of challenges, but the promise of a solution is too great to be ignored. Being able to finance HIV treatment in Lwala would go a long way to getting this community back on its own feet. It could finally break the debilitating nature of the disease.


To learn more about Lwala’s clinic initiative, which was started by Milton and Fred Ochieng, fellow Dartmouth graduates, I refer you to Omar’s profile of this initiative at Real Medicine’s website and the Lwala community clinic initiative website at Vanderbilt University, where Milton currently attends school.

[1] Inappropriately attributed to Hindustan Lever by CK Prahalad.
Source: http://www.iimahd.ernet.in/publications/data/2007-07-13Jaiswal.pdf