The Poor as Stakeholders: Can 'Inclusive Capitalism' Thrive in India?

Published: November 27, 2008 in India Knowledge@Wharton

Fabindia Overseas is India's largest private retail platform for a wide range of products made using craft-based processes that derive from traditional skills and techniques. The artisans are its suppliers. Normally poor and taken for granted, they occupy quite a different position in the Fabindia world: the position of shareholder. "Our aim was to achieve a more equitable distribution of wealth between the company and the artisan," says William Bissell, Fabinda's managing director. "Only through this can we ensure the survival of the craft. Unless the artisan has an incentive, he won't continue his craft."

The venture is one of several recent examples of "inclusive capitalism," a profit-driven business model with its roots in the cooperative movement. The premise behind inclusive capitalism is that India can't succeed if it leaves its people behind. But while Fabindia and other high-profile success stories indicate that businesses founded on this model can be a great benefit to those who participate in them and to society at large, some experts wonder how wide an impact inclusive capitalism can have, and how willing corporate India will be to change its traditional views on wealth ownership in the absence of any regulatory reform. 

Fabindia is actually the creation of the late John Bissell, William's father, who worked as a buyer for Macy's in New York. He came to India in 1958 on a two-year Ford Foundation grant to teach villagers how to make goods for export. He stayed on to set up an export business. The idea to have suppliers as shareholders was William's. After receiving a bachelor of arts from Wesleyan University in Connecticut in 1988, the junior Bissell returned to India to set up the Bhadrajun Artisans Trust, a cooperative of leatherworkers and weavers in Rajasthan that has evolved to embrace the artisans as shareholders.

The original idea has evolved considerably. Community-owned companies, also known as supplier region companies (SRCs), are Fabindia's core. These are the companies in which the artisans hold shares. Fabindia owns between 26% and 49%, depending on the SRC, through Artisan Micro Finance, a wholly owned subsidiary of Fabindia set up to facilitate the SRCs. Artisan Micro is a non-banking finance company providing support that extends from facilitating working capital and loans, to management, design and infrastructure. The artisans together hold a minimum of 26%; 10% is for employees of the SRC, while the rest is available to private investors.

There are several such SRCs, and more are in the works. The artisans are discovering what annual general meetings are all about. "They are starting to understand what it means to be a shareholder and see the benefits of their appreciating share value," Bissell says. "There are artisan directors on the boards of these companies who are beginning to appreciate the role that they can play in the running of the company and the decision-making processes."

The artisans can trade their shares at specially organized "share-trading rounds"; two SRCs have already had such trading opportunities. The price is decided by a formula specific to the SRC and is certified by company auditors. "No artisan has wanted to sell," Bissell says. "In fact, there have been requests to buy more shares."

Bissell has experimented with other forms of community ownership. This one appears to be working better than most. Fabindia today has 97 stores in the country and six abroad. "Our success underlines the possibilities of social entrepreneurialism in our country where craft is the second largest source of employment, after agriculture," the company says in its press materials.

Maintaining an Interest

On the outskirts of Pune -- very much urban India -- is the township of Magarpatta. Developed by the farmers who originally owned the land, Magarpatta's success has relied on inclusion. In other parts of India, farmers whose land has been acquired for similar projects have received a one-time payment and often spent it all. They sit in ever-growing discontent watching outsiders harvest industrial wealth from their land. Not at Magarpatta City.

"The farmers have become entrepreneurs and are earning returns from contracts in addition to the land cost and the dividends received from company profits," says Satish Magar, chairman and managing director of Magarpatta Township Development and Construction Company. "They are residing within Magarpatta City. Their children are attending English-medium schools. In short, they have become a part of a cosmopolitan society."

"The basic thinking behind Magarpatta City was to accumulate ancestral lands from the 120-odd families from the Magarpatta area on the principle of land pooling. A company was formed in which each landowner held shares in proportion to his land," says Magar, who took the lead in the project. Magar is part of this farming community, most of whose members share his surname. His family has been in politics and he is a graduate in agriculture.

"For an experiment like Magarpatta to work, it needs leadership from within," says Vinayak Chatterjee, chairman of the infrastructure consultancy firm Feedback Ventures. "It is important to have a well-respected person first buy in, and then support the new development."

Magarpatta City is an environmentally friendly project encompassing residences, schools, shopping and entertainment complexes, a cyber city, parks and other frills. "Our vision is to create a new way of life for the networked society of the new millennium," Magar says.

Construction for Magarpatta City started in March 2000. Farmers had started selling their land to developers when the Magarpatta City idea was born, Magar says. "They had no choice," he explains, "[but] the plan for Magarpatta gave them one." What are the original farmers doing now? "The second generation of farmers was trained to execute construction projects such as fabrication units for windows, manufacturing of fly-ash bricks and landscaping," Magar says. "They were trained to execute such projects and almost all the farmers are engaged as professional contractors." It's a very different model from what has taken place elsewhere in India -- for example in Singur, where land was acquired for the Tata Motors Nano plant, resulting in a backlash by dispossessed land owners. At Magarpatta, the original farmers are reaping the benefits of development. And they still own the land, albeit indirectly and through a corporate structure.

"Magarpatta Company is also promoting three other projects with landowner participation," Magar notes. "The farming community is now aware of the benefits derived from their land. They want to be a part of the development process."

Prime Motive: Profit

Across the country, at Salboni in West Bengal, the Jindals are setting up a 12-million-ton steel plant. This is a state that has seen violence over land acquisition and compensation norms. But the Jindals have had an easy ride. Apart from the down payment for the land, the 741 farmers involved have been offered jobs and insurance. Most important, they will get shares in a new company that will implement the project. According to Sajjan Jindal, vice chairman and managing director of JSW Steel, "Land-losers should be the owners of this plant. They must benefit out of the development."

Down south in Karnataka, the Bombay Stock Exchange-listed Shree Renuka Sugars has made farmer-shareholders a component of its success strategy for many years now. "Unlike other privately owned sugar companies, we have approximately 9,000 farmers as our shareholders," the company says on its website. "As shareholders, the farmers enjoy the benefits of sharing profits. We believe this strong relationship is a significant competitive advantage because farmers have no obligation to grow sugarcane and may switch to crops that may be more profitable."

Magar had looked at the cooperative model; he says he drew inspiration from the Amul milk cooperative in Gujarat and the Baramati wine cooperative in Maharashtra. But the reason he, Fabindia and others of their ilk are not cast in the same mold as the cooperative movement is that along side their concern for underprivileged stakeholders, their prime motive is profit.

"Fabindia is a paradigm-changing model that we are hoping will influence the way rural development initiatives are undertaken around the world," Fabindia's Bissell says. Adds Chatterjee of Feedback Ventures: "It could be the future, but [the model] needs enlightened companies."

"Fabindia and Renuka Sugars are good alternative models," says Peter deSouza, director of the Shimla-based Indian Institute of Advanced Study. "We also need to revisit our cooperative sector and see how examples like Amul and Lijjat Papad [a women's organization that makes papads and other snack foods] can be replicated in various other sectors."

Reuben Abraham, assistant professor and director of the Emerging Market Solutions Initiative at the Hyderabad-based Indian School of Business (ISB), points out that business success must come first. "At its core, Fabindia is a sourcing business," he says. "Everything else that they do -- making weavers [into] shareholders, etc. -- is peripheral to their main activity."

A Potential 'Force for Good'

Communism fell from grace with the collapse of the Soviet Union. Now, capitalism is under siege with the collapse of Wall Street. Is inclusive capitalism the new way?

"Capitalism at its core is basically agnostic," says Abraham of ISB. "It does not try to be inclusive or exclusive. Capitalism is about optimal allocation of resources. The more it is allowed to thrive, the higher the number of people who will be impacted positively by [its] growth. So, in that sense, being inclusive is perhaps a natural process. But for this to happen, what is really needed is more liberalization and fundamental reforms. For instance, until 1995 the fruits of telecom were not available to 95% of the country. Because of the reforms in this sector, [they are] now available to 50% of the country.... In this sector, capitalism has become a force for good. We could have the same thing happen over and over again in different sectors."

Corporations naturally go for high-margin customers in the beginning, Abraham notes, but given that there is a very small number of high-margin customers in India, they will have no option but to look at other segments of the population. "These are natural consequences of a well-regulated market at work. The problem really is: What is the optimal amount of regulation in a sector and who decides that? In my opinion, it is an iterative process. This is a journey that needs to be figured out by trial and error."

If regulatory reforms don't take place, "corporations will be forced to do inclusive capitalism. Otherwise, there will be social unrest. The issue then will be about the level of commitment of the corporates given that they always have to walk the thin line between their responsibilities toward the shareholders and the society at large."

Reforms are the key, Abraham says. As an example, he notes that various studies show that urban slum dwellers are willing to spend as much as 30% of their household income on educating their children in private schools. "This means that demand clearly exists. The reason that supply does not exist to meet this demand is because of regulations that don't allow profit-making in education."

While Abraham wants reform, deSouza of the Indian Institute of Advanced Studies doesn't see inclusive capitalism taking hold in any widespread way. "I think we are moving away from the desire for inclusive capitalism," he says. "The model of capitalism that we have worked with in the past 15 to 20 years is much more Anglo-Saxon. The role of the state is reduced. One does not worry so much about welfare. It rewards the winners and cares less about the losers. The model of the Nordic countries, on the other hand, is much more inclusive. It recognizes that there will be both winners and losers but it also cares about the losers. In every development strategy that they take up -- hospitals, housing or schools -- they make sure that there is a mechanism for the redistribution of the wealth that has been produced."

In order for inclusive capitalism to work, corporations "must start to realize that they are part of a larger society and part of a complex network and that all the wealth that they produce is not their own," deSouza says. "We need to move away from the Anglo-Saxon model and start looking at other models like the Scandinavian and German models. The first step toward this is to generate public discourse and debate. At the moment, there is only one hegemonic discourse, and that is we must be like America. But America has failed. So, obviously, that model is not working."

Pratap Bhanu Mehta, president of the Centre for Policy Research in New Delhi, sees it from a different perspective. "For me, inclusive capitalism fundamentally means whether people have equal opportunities," he says. "It is not about equal outcomes. And the structure that determines the opportunities that people have access to is clearly education. When one looks at inequality with regard to access to quality education, India has greater disparity than almost any other country in the world. I believe that inclusive capitalism will be realized only when there is a structure of equal opportunities and not just isolated examples of companies that have drawn workers into their fold.

"I think inclusive capitalism is a bit of a red herring," he continues. "I prefer the older concept: of capitalism whose resources can be harnessed toward creating structures of equal opportunities. This has not happened by a long stretch of the imagination. We can't get around the fact that no matter what industry or civil society does, in any society the wealth that is generated has to be translated into public goods like education, roads and health that are available for all. That mediation is fundamentally done by the government. Our Achilles' heel is that our government has not done this job of mediation adequately."

Harsha Moily, founder and chief executive officer of MokshaYug Access, a rural infrastructure and services company, says patience will be necessary. "I believe that inclusive capitalism will not see immediate commercial and social returns," he says. "It will only be in 10 to 15 years that one will see returns and be able to confidently say that these examples are working. Inclusive capitalism requires long-term commitment from all stakeholders -- employees, employers, investors, etc."

It may take time, but Moily is optimistic. "When you have 70% of India living in an environment that does not foster wealth creation, when you have a majority of your voter base in rural India, and when a rural India offers the volumes which businesses crave, there has got to be a great future for inclusive capitalism," he concludes. "It's a win-win for all stakeholders. I believe that the government should lead the way through policies that trigger inclusive capitalism. The private sector has the will and the resources; it only needs to be shown the way."