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Coke, Pepsi, Ford... unless you understand the Indian market properly, you will get nowhere

The year just ended (1996-97) has been a peculiar year for India. Very little seems to have gone right. Towards the end of the year, there were political convulsions which led to the ouster of the prime minister, who was, of course, promptly replaced by another one from the same stable.

But it is on the economic front that things seem to have gone really awry. The government kept saying that everything was under control, but apparently very little was under control. GDP growth rate came down from 7 per cent last year to something like 6 per cent, a substantial decline. Industrial growth rate tumbled from near -- 12 per cent to 8 per cent. Exports ground to a halt, one or two per cent above last year. And as if all this was not enough, the inflation rate nearly doubled from 4 per cent in May last year to 7 per cent this year.

The share market tumbled too and despite the so-called dream Budget, the Bombay Sensex is actually lower than it used be around this time last year.

What went wrong? Nobody seems to know. The government still pretends that things are not all that bad. Until a few weeks ago, it really believed that the economy was doing better than ever. In fact, until corporate results started coming in -- terrible results -- even businessmen kept saying that things were wonderful.

Now suddenly everyone is saying that things are depressing. The worst part is that they do not know or pretend not to know why they are so bad. In an interview with the Economic Times, Rahul Bajaj confessed that he simply did not know. "My dealers say that people are just not buying scooters. Perhaps they are saving instead of buying. The reality is that inflation has also not been all that high. Foreign investment is not worse than before. It is probably some psychological constraint."

When hard-headed businessmen talk about psychology, things must be really bad.

What went wrong? There is a very simple explanation. India is still too poor a country to afford an industrial growth rate of 12 per cent a year. After all, when you produce something, there must be customers. In a poor country, customers are too few, and are not growing at the pace they should. When there is no demand, as Rahul Bajaj has confessed, there can be no supply.

The reformers refuse to admit that India is a poor country. Finance Minister Chidambaram once said that the fact that tickets for the Michael Jackson show were going for Rs 10,000 each proved that Indians had money. This was a silly statement.

What is happening is that the kind of people that can afford 10,000 rupee tickets are increasing but others are not. This is happening all over the world. It has been happening in Britain too, which is why the Tories were thrown out and Labour came in.

In India, the market is very narrow. According to Asian Development Bank, 52 per cent of Indians live below the poverty line. I would say that two-thirds of Indians are destitute, making two ends meet somehow, with very little cash to spare. Out of the remaining one-third, only about one-third, that is ten per cent of the total population, has enough money to spend. This means about 100 million people, with incomes that are a fraction of those in the West.

It is also my hunch that this small market is not increasing at the pace it should. Look at the motor car market. Initially, there was a great deal of pent-up demand. So many new models came in that Indian roads looked like an ad for foreign models. But the boom lasted just about a couple of years. Now there is a slump. And the same car manufacturers who were talking in terms of bringing in dozens of new models are now worried whether their investment is safe.

Those who argue that more foreign investment will do the trick are mistaken. The market is so narrow that even the existing foreign companies are hard pressed for customers. The two soft drink companies are at each other's throats. They are reducing prices by bringing out smaller bottles and slashing prices for cans. They first raised the price Rs 18 a can. They have now brought it down to Rs 13. A new company, Cadbury-Schweppes has slashed it further to Rs 11. And none of the companies is making a profit.

Does this mean that reforms are over? No, it only means that the Indian market is unique in many respects and unless you try a to understand it properly, you will get nowhere.