The middle class and global companies

The Indian government should create policies that focus on GDP growth with equitable income distribution. India can then attract investments and curb high profile exits.

Published: 13th June 2022 12:57 AM  |   Last Updated: 13th June 2022 07:23 AM   |  A+A-

Illustration: Soumyadip Sinha

High profile global companies exiting the country always attracts attention. Ford Motor, Metro AG and Holcim were among those who decided to call it quits in the recent past. Earlier, there were a spate of telecom exits—Docomo, Aircel, Telenor, Systema and others. In the auto sector, General Motors and Harley Davidson were two big names that decided to exit India long before Ford. And these were only the big global brand names. 

According to a reply by Union Commerce Minister Piyush Goyal in Parliament, 2,783 foreign companies closed their offices or operations in India between 2014 and November 2021. Of course, many more entered the country—10,756 global firms set up liaison, branch, project or other offices in India during the same period. But, even though new global entrants are coming in, it is important to understand why so many are also giving up on the Indian market despite having invested billions of dollars and spent decades in the country. 

Two main reasons have often been proffered. The first is poor product and marketing strategies that led to losses piling up. The second is policy flip-flops that made the market unattractive—the prime example is the telecom industry, which proved to be a graveyard for most global telecom giants. There is a third reason that does not get quite as much attention. It is the fact that the size of the market in India turned out to be smaller, less attractive and growing at a slower pace than many multinationals had initially projected. 

When the Indian economic reforms were initiated in 1991, most big global companies looked at India with great interest because of the potential market size it represented. With a population close to China’s, a demography which would see the working age population remain much higher than the retirees for several decades to come and a number of sectors being opened up for domestic and global investors, India was easily one of the most attractive—if not the most
attractive—countries to set up operations in.

The thinking was that investments in various sectors would create jobs and boost incomes and push an increasing number of people in the ranks of what  is termed the “middle class”. The appetite for goods and services of this booming middle class would, in turn, create a virtuous cycle of more investment and more demand in every sector. 

To a certain extent, that wisdom held true till the global financial meltdown triggered by the Lehman Brothers collapse in 2008 and even till about 2010–11 because of economic stimulus packages announced by the then government. Between a global boom and successive reform-minded Indian governments, incomes, living standards and consumption grew steadily, especially between 2000 and 2008. But in the past dozen years, things have not gone according to plan. Economic growth has been well below expectations barring a couple of years. Job creation has fared badly. And with more people entering the workforce than jobs being created, this has inevitably had its effect on slowing income growth in most sectors. 

The pandemic only made a bad situation worse. Despite the government talking about the robust bounceback in GDP growth, the Indian economy has barely come back to the level it was at the end of FY20. In fact, per capita income remains below pre-pandemic levels while private consumption is only marginally higher than it was at the end of 2019. 

For many global companies, the potential size of the Indian middle class and its consuming power has proved to be a mirage. A recent State of Inequality in India report by the Institute of Competitiveness, released by Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, posited that people with wages of `3 lakh per annum or about `25,000 per month fall in the top 10% in India in terms of income. For many MNCs, therefore, the promised huge market in India for their goods never actually materialised.

The government needs to understand this. It has often been fixated on absolute GDP growth numbers rather than GDP growth with more equitable income distribution. Multiple studies show that the top 1% of the population of the country is growing wealthier but the rest of the population has either largely seen their incomes stagnating—or, because of the pandemic, have actually seen incomes shrink. This, in turn, is slowing India’s private consumption growth. Unless private consumption goes up rapidly, capacity utilisation will remain too low to attract investments that lead to fresh factories being built. Much of the corporate focus will remain on mergers and acquisitions and brownfield capacity expansion as has happened in dozens of sectors in the past decade. 

For the government, the challenge is to create policies that lead to growth with more equitable income distribution. Until that happens, high profile exits will not slow down or stop.

Prosenjit Datta 
Senior business journalist


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