C K Prahalad coined the term “Bottom of the Pyramid” to describe the lowest deciles of income distribution, who are generally not factored into any discussion in business circles, presumably because of the perception that they have little economic value as a consequence of little purchasing power. Prahalad went on to show powerfully with anecdotal
C K Prahalad coined the term “Bottom of the Pyramid” to describe the lowest deciles of income distribution, who are generally not factored into any discussion in business circles, presumably because of the perception that they have little economic value as a consequence of little purchasing power. Prahalad went on to show powerfully with anecdotal evidence and with data that this is, in fact, a serious error, and that this section actually represents huge business potential for imaginative and innovative companies.
This point was well brought out in a talk I saw recently on YouTube that described the functioning of enterprises in the ‘informal’ sector (including agriculture) which covers more than 95 per cent of the total number of enterprises in the country, 93 per cent of the total employment in the country, and possibly more than 50 per cent of the total GDP! Yet, this massive sector is dismissively referred to as the ‘informal’ sector.
One definition of the informal economy useful for the present discussion is: the part of the economy that is neither taxed nor monitored by any form of government. Activities of the informal economy are not included in a country’s GDP. More importantly, for the present discussion, this sector does not figure in the discourse, policy formulation or programmes related to economic development.
The informal sector has certain distinct features which have important implications for policy makers. First, there are no entry barriers, which means that anyone can join and find work that will result in cash earning. Second, there are no stable employer-employee relationships, which make it attractive for business. Third, the small scale of operations make enterprises viable, and the cost of both entry and exit is minimal.
An important dimension of the informal sector is that, in developing countries, the largest part of informal work is classified as self-employed. The majority of informal economy workers are women. Policies and developments affecting the informal economy thus have a ‘gendered effect’. Workers in this sector earn lower incomes, their incomes are unstable, and have no access to social security and other services.
Taking into account the features of the informal economy outlined here, we can see whether there are ways for us to enable participants in this economy to escape the iron circle of poverty and get into the orbit that enables them to grow and prosper. A street hawker needs finance to buy an inventory of newspapers or straw hats or packets of peanuts, and this is today available only at extortionate rates that simply do not allow her to generate any meaningful surplus. There are many examples of micro-credit schemes based on self-help groups helping such hawkers to procure inventory at reasonable cost, and make enough money to pay back the loan, and have something left. This can unleash a virtuous cycle of business growth.
The informal sector consists of hundreds of thousands of people moving goods, providing services, selling products, making products, all the quotidian tasks that go on every day in any economy, enabling goods and services to flow from producers to consumers, across the length and breadth of a huge, complex and diverse country. They are entrepreneurs who should be supported and enabled to do their tasks better. They are today not supported by any programme of the government, do not have access to credit at reasonable rates, have no security of employment or income, and have no health benefits.
But people in the informal sector do not meet the definition of entrepreneur or startup as mandated by the many schemes of the Centre and the States. A startup here appears to mean a technology-based venture that attempts to bring to market an innovation. Such startups are supported generously with funding on easy terms, housed in futuristic premises and pampered with other facilities.
I propose that micro-credit enterprises be created by investors, aimed at SHGs operating in the informal sector, and following the best practices that have evolved in the micro-credit sector over the past couple of decades. Its impact on household incomes among the lowest income groups would be substantial and visible.