Doing Business in India - The Macro Economics

Doing Business in India - The Macro Economics

Macroeconomics is something that most people ignore when building a business. But having a clear idea about macroeconomics can play a huge role in helping you navigate uncertainties as you build and grow your business.

One of the biggest factors in business is the economic climate of the country. India is still a "developing" country. And the US Dollar is still the world reserve currency. In such a country, where imports of certain goods are high, the country has to balance the trade with enough exports.

When the central bank of India manipulates the price of the currency to make it cheaper against the dollar, exports are encouraged in the country. If one US Dollar was just 10 INR, people would focus on providing products and services to local consumers and businesses. If one US Dollar is 100 INR, people would be more motivated to export services.

If you consider the entire country as one company, it makes money when it exports and spends money when it imports. And all these transactions are in dollars. Because for imports, you cannot pay many people using the Indian rupee yet.

Other countries do not accept the Indian rupee because they do not know what to do with it. Unless more countries are ready to sell goods and services for Indian rupees, US Dollar dominance will continue for a long time to come.

Before we make the case for why exporting is a better idea than selling locally, let's have a look at the size of the Indian market.

How Big is the Indian Market?

India might look like a big market with its population. But there are only 8.22 crore taxpayers out of the 136 crore population. That's just 6% of the population. 82 Million people.

57% of the taxpayers have filed returns of less than 2.5 Lakhs. That means only 43% (or 35 million) have reported that they make more than 2.5 Lakhs per annum (~$3200 USD).

The potential customers for most of the startups will come from these 35 million people. That's less than the population of Canada which is not considered a very big market.

If you look at people who reported more than 10 lakh INR ($12,500) in income, that's just 65 Lakh people (6.5 million). And the people who reported having an income of more than 50 Lakh INR ($64,000) is less than 1 million!

If you are selling something that is going to be for the top 1% of the country in terms of Income, like a luxury real estate or a luxury car, the target market is less than 1 million. Let that sink in for a second.

The stats from income tax correlates with the stats like:

  • In India, there are around 60 million credit card users.
  • Total car owners in India are around 40 million (3% of the population).
  • The total number of Amazon Prime subscribers (paying around $10 per year) is only 22.3 million. Netflix which costs 10x more than Prime has 5.5 million subscribers in India.
  • Around 15 million iPhone users.

If your product or service for India is more than $500 (35,000 rupees) and you are targeting anyone with a little bit of discretionary spending capacity, you are talking about 10 million at best. That's just one crore potential customers.

The growth of startups in India has been fuelled by the narrative that India is a big market, but in reality, the buyer market is not that big. Most of the real India is in Tier 2 and Tier 3 cities. The rest are in villages. We are still "developing" and we have a long way to go.

But India is a great place to find human capital. And many companies have leveraged this human capital to export goods and services to the world.

Why Export Services and Products?

One of the best parts about exporting services is that there is no consumption tax (like GST) or service tax. Because indirect tax is applied to the consumer and when the consumer or the buyer is outside the country, there is no indirect tax.

In B2C transactions in India, the GST component discourages them to buy because the cost increases significantly. So most businesses make the final price inclusive of GST when selling to the end consumer. That just reduces the margin for the business and increases the cost for the consumer.

I would say that the benefit of not having an indirect tax is incentive enough to focus on exports. But obviously, there are more benefits.

If you are building in India, for the world, you are leveraging the lower cost of living in India and the lower cost of human capital in return. I can hire a highly skilled content writer or a web developer for $20,000 a year. And he/she would give a similar US-skilled person a run for their money.

Digital products and services (such as software and agencies) are easy to build and export because it doesn't need a merchant ship to export. It can just go through in seconds through the magic of the internet.

That's why a lot of SaaS companies in India focus on the global market and largely ignore the Indian market. Many profitable companies from India that have bootstrapped without the need for external funding are SaaS companies.

There are also many services companies with a wide range of offerings that primarily focus on exporting services. On the supply side, many of them operate through the gig economy where you have contractual gig workers earning based on tasks and work done.

Digital Freelancing & Agency

One of the best ways for anyone to leverage the benefit of the global purchasing power arbitrage is to become a freelancer and then scale it into an agency.

According to Wikipedia, there are around 15 million (1.5 crore) freelancers in India. They include both exports and local service providers. They do not work full-time in any company. They earn contractually based on the scope and volume of the work.

"Globally, India ranks as the 7th largest freelance workforce after the US and Bangladesh with people working independently in various sectors such as IT and programming, finance, sales and marketing, designing, animation, videography, content, and academic writing." - Wikipedia

If you start out as a freelancer, making $1,000 a month is a no-brainer. You just need a client or two in the US to make that much. If you can scale your income to more than $5,000, you can convert your freelancing practice into an agency and scale with human capital. You can hire a team and scale the delivery of your services by building processes and systems.

We are still selling to the Indian market, and are profitable, but we know our numbers and we get a reality check once in a while.

Considering the macro-economic factors, unless you have a very high competitive advantage over what you are selling in India, you will find it difficult to get traction. There are very few companies built in India, selling to the Indian market and making healthy profits (Zerodha is one example).

Recently it was in the news that only 73 unicorns of the 100 unicorn startups in India are profitable. Most of the other loss-making startups are continuing their loss-making habits in the hope of capturing the market share now so that they can profit sometime in the imaginary future. Only time will tell if that's a good strategy.

If you are doing business in India, and want to continue focusing on the Indian market, have realistic numbers in place for your total market size and figure out how much you can earn by capturing a percentage of that market. Work backward from the numbers that you see on the top and you will be much more grounded. You will be able to navigate through uncertainties in a much better way.

Deepak Kanakaraju