The Grey Economy

The more you shop in Delhi the sooner you realize that the vast majority of consumer retail activity here, whether measured in customers, transactions, or even in absolute Rupees, is unreported, untaxed, and handled in cash. In the absence of major department stores or supermarkets there exists here a vast grey economy of bazaars and vendors with obscure names and self-made products. Transaction records are kept with pencils and notepads, with hastily scratched, illegible notes often serving as a buyer’s only receipt. Brand names like Subway and Citibank stick out like Western oases in a sea of carpet shops and vegetable carts. When locals talk about where the “posh” neighborhoods are, they inevitably mention places within spitting distance of an American fast food joint. For most shops in the markets, there are no posted business hours, no answering machines to explain where a store is located or who to call for customer service. My roommates' and my experience with this strange system has included delivery men who show up in the middle of the night, electricians who come and go without telling you what they are doing, and Internet technicians who tell you “it’ll take an hour,” only to have it take six. But for all its unpredictability, one constant exists. Networks of family-like relationships built over time exist between vendors of different sorts across the city – every baker knows a candlestick maker, every candlestick maker moon-lights as a travel agent, and every travel agent has a cousin who sells washing machines. We once asked a young clothing vendor with a good command of English for pricing guidelines on refrigerators here (hoping to get an independent opinion). He just smiled and nodded his head, “Yes, come with me, I’ll take you to my Uncle’s shop.” All of this leaves the wandering ex-pat wishing for a Wal-Mart or Ikea - some form of centralized distribution house for consumer goods, where prices are clearly marked, time is used efficiently, and customer service actually means addressing someone’s needs rather than trying to distract him or her with unwanted items or cheesy sales pitches. The great part about this is I’m fairly certain that more than a handful of these merchants hawking handkerchiefs and two-wheelers are the same ones benefiting from the micro loans provided by the companies we back…yes, there’s a nice touch of irony to it…so its with a mixture of amusment and admiration that I consider the economy that microfinance (at least urban MF) helps to fuel. But for all my criticism about its quirks, business does get done here. An extremely wide range of goods and services are available for very low prices, new companies (beyond just those in the bazaars) are being started, and the individual entrepreneur, rather than the state, is making decisions about production, pricing and marketing. This informal economic system, while far from perfect, provides a livelihood for millions in a country where not long ago, softball socialism was the rule. Despite a generation of attempts to foster economic development with protectionist policies, the growth story today in India is about what is happening in spite of the state, not because of it. Quite separate from the Bombay set (where the Sensex has enjoyed a monumental recovery since its fall last May) are the businessmen representing the other 90% of the country. “Bottom of the Pyramid” entrepreneurs, both the poor and the less poor, avoid formal documentation because the taxes and stacks of paperwork required are an enormous burden to small businesses. If every customer who comes to your shop to buy a phone, gas stove, or Internet connection has to fill out paperwork, provide photographs and purchase government licenses for you to make a sale, you’ll never make a living. When compliance here becomes too costly and intimidating for the poor and uneducated, savvy entrepreneurs move out of the light of bureaucracy and follow profit into the shadows. As I am witnessing in my own work here, the legacy of forms and formality left over from the British Raj has itself been a driver of growth for urban microfinance, as poor and often illiterate borrowers run away from the heavy documentation of banks and into the arms of MF groups. It took more than a week, multiple visits, two forms of ID, a letter from my boss, a copy of my contract, ten of my personal signatures and 6,000 rupees for this educated, employed American with more savings than a small Indian village to get an ICICI checking account. God help the basket weaver who wants a working capital loan. All of this brings me to mention the annual Indian Microfinance conference which I attended with my colleagues from Lok Capital this week in Delhi. Besides hearing speakers from various MFIs, NGOs, rating agencies and social investment firms, there were opportunities to meet with the entrepreneurs themselves who are leading microfinance into its next stage. While the approaches and business experience of these promoters vary greatly, there seems, among most, a common understanding that for microfinance to meet the estimated demand in India of roughly 300 – 400 million people, foreign investment is required and MFIs must be profit-oriented finance companies, not simply grant-based charities. That most microfinance providers agree on these points is somewhat of an achievement considering the sector’s origin. But that is where the agreement ends as opinions diverge on how profitable microfinance should be (where is Gordon Gecko when you need him…?), whether equity finance should be utilized (gee…I hope so), and who should bear the cost of growth and expansion (that’s us! the VC!). But there are trendsetters from Vikram Akhula’s SKS to the new mobile payment vendor FINO, pushing for standardized collection processes and training methods, and working to integrate new cost-saving mobile technologies. A last note, a few pictures below, one of Delhi’s India Gate, a monument to Indian soldiers lost in foreign wars and one from the furniture market. Notice the haircut going on in the front right…speaking of which, I think its time to get one, I guess its back to the furniture market…