Save, encourage 'un-organised' sector for India's future, says Prof Vaidyanathan

Speaking at an interactive session organised by Moneylife Foundation in Mumbai, Prof R Vaidyanathan said women savers and the so-called 'unorganised sector' are keeping India on the growth track and not the large corporate sector or foreign investments

Indian women are responsible for the country's growth with their humoungous ability to save money at all times. Similarly, contrary to views expressed by experts, India's growth is primarily driven by partnership and proprietorship firms and not the corporate sector. And we need to respect these women savers and the so-called 'unorganised sector' for keeping us on the growth track, says R Vaidyanathan, the professor of Finance at Indian Institute of Management, Bangalore (IIM-B).


He was speaking at an interactive session organised by Moneylife Foundation in Mumbai. Prof Vaidyanathan, who has coined the term 'India Uninc' for the largest component of the Indian economy comprising small entrepreneurs, households, said, the arguments that the multi-national companies (MNCs) bring in ‘funds, efficiency and cost effective solutions are totally a mirage and lead to failed models.


"They (MNCs) access funds at a low cost from overseas and even from our domestic financial institutions by brandishing their parent company’s ‘letters of comfort’, which fetch them funds even below prime rates. While large corporates obtain large lines of credit with highly suspect credit appraisals, at prime lending rate (PLR) or base rates, soft loans and exotic facilities, a poor flower vending girl cannot open a no-frills account. To exapand her business she may be borrowing from a usurious money lender at 50%, or getting Rs45,000 up front for a loan amount of Rs50,000. More than 70% of the retail working capital requirements come from such non-bank sources," he said.


Non-corporate sector –consisting of partnership, proprietorship and household enterprises constitute nearly 50% of Indian GDP while contribution of corporate sector or companies is just 15% of the GDP. The share of foreign direct investment (FDI) and foreign financial institutional investors (FFII) in Indian investment is not more than 7%. This means, 93% of the investment in India comes from domestic savings, out of which household saving contribute almost 80%.


These savings mainly come from the household sector; the role of institutional capital is limited. Explaining the reasons for such a large household saving, Prof Vaidyanathan said, "There are four basic reasons why Indian households, especially women save money. First is for the old age. Then, there are costs involved with education, healthcare as most of these people have to spend money from their own pocket. Indian 'sanskar' also plays a vital role in savings. This includes handing over wealth to next generation."


"Day by day education is becoming more expensive. In fact, you need more money to secure admission in under KG or junior KG than higher education. Not to mention the 'special terms and conditions', like mother should be graduate or post-graduate and the family must be speaking English at home etc., implied upon needy parents," he said.


Poking fun at education practices and loans, the Professor said, "I often argue with banks that they should provide such loans to parents seeking admission for their kids in under KG or KG classes rather than IIM or IIT. I mean, what is the point to provide loan for second and third floors when there is no money to build a foundation!"


According to Prof Vaidyanathan, another most important but hidden reason for household saving is corruption or bribery. "The phenomenal bribes extorted by police, municipal babus and their minions are nothing but ‘organized dacoity’ and there is no escape from this, for businesspeople. In fact, small vendors and shopowners have to pay as much high as Rs20 on a daily income of Rs200 as bribe or hafta. That is 10% of gross income of these people."


World economy and India

Earlier, speaking about the world economy, Prof Vaidyanathan said, based on the purchasing power parity, the share of emerging and developing economies is increasing, while the same for developed countries, like the G7 economies is falling.

According to The World Economy: A millennial Perspective—Angus Maddison OECD Development Centre Studies --2007, till 1820, China and India contributed more than 50% to the world GDP. However, after that, the share of both these contries started to fall while contribution from Western Europe, USSR, US, Latin America to world GDP increased till 1998.


But all these developed economies are burdened with huge debts due to non-saving culture. While India's overall debt percentage of GDP is 122%, the same for Britain jand Japan is over 500%. The US (289%), Germany (287%), South Korea (315%), France (349%), Spain (366%), Italy (310%), Brazil (494%) are the other countries from 'developed world' that have huge debt to GDP ratio.


One of the major reasons for such kind of huge debt is the high household debt percentage of GDP in countries like Britain, Canada, US, South Korea and Spain.

According to Prof Vaidyanathan, another issue before these developed world is dwindling birth rate. Almost all these countries have a population that is growing in age or retiring from active earning. At the same time, there is no replacement or same numbers are not being replaced by new work force. This is leading to migration and then there are other issues emerging related with this.


Quoting The Economist, he said, during 2010, 40.8% of all births in the US were to unmarried mothers. What was illegitimate has become new normal. In UK, there are more households with TV sets than fathers. This means, sovereignty of family is disappearing and is being replaced by single parent, mostly women, family.


Another issue in these developed countries is rising unemploment. "Spain’s jobless rate for people ages 16 to 24 is approaching 50%. Greece’s is 48%, and Portugal’s and Italy’s, 30%. In Britain, the rate is 22.3%, the highest since such data began being collected in 1992. The comparable rate for Americans is 18%. and most of the unemployed youth do not have skills. Such scenario definitely create social problems, the Professor said.


Importance of India UnInc

According to Prof Vaidyanathan, the growth of the economy in the nineties should be attributed to the partnership and proprietorship (P&P) firms in service activities and not due to the reforms carried out by the government or the miniscule contribution of the corporate sector, but ironically this remarkable contribution of the P&P sector has not been documented and appreciated.


He said, unfortunately, the governments control and regulate an economic activity of these P&P firms or the unincorporated economy that it does not understand and tax it, if it is growing fast. This gargantuan appetite of the government goes against the grain of our civilisation ethos and negates the entrepreneurship of the non-corporate sector designated mini, small and medium enterprises. Its contribution to national savings hasn’t received the recognition because the aberration is due to it being wrongly labeled “household sector, though many of them notch turnovers running into hundreds of crores. The concept of capacity is cosmic and unlimited unlike western notions of limited capacity and possibility of increasing output only by increasing capital, Prof Vaidyanathan added.


FDI in retail trade- facts and fiction

Dissecting the myths and reality about FDI in retail trade, the Professor said, the trade is dominated by P&P firms. "The retail revolution that is applauded by planners, encouraged the government and eagerly talked by experts but not many seem to be worrying about the millions of retail traders, who will get marginalised. There is not much debate, let alone informed debate, among academics and other policy-makers about the far reaching implications that the entry of global retailers has on our economy, where the level playing field argument is meaningful and significant too," he said.


Wholesale and retail trade contributes 16.6% to India's GDP, which is next only to agriculture's 17.5%. Livelihood of 30 million, including children and others, is involved in retail trade. About 120 million will be directly impacted by the so-called retail revolution (read FDI in retail), when real estate sharks will corner prime land to construct large malls by evicting retailers, Prof Vaidyanathan cautioned.


He said, "Many householders will then create small retail shops inside their homes with the help of surplus self-employed in-house labour with mini refrigerators to store just-in-time stock of cola and bundles of toilet paper rather than a major retail revolution with the razzle-dazzle of shopping in comfortable surroundings, computer generated unreadable printouts as a panacea for all problems. The arguments that the new outlets will remain open for longer hours unlike those in the West where they close early and on Sundays falls flat as the local next door mom-n-pop kirana shops manned by the efficient owner knowing and his family the customers’ tastes, requirements, price considerations offers free home deliveries and also extends credit. He opens at 7am and closes at 10pm every day for 365 days, but labeled ‘unorganized’ by our experts and the national income data to diminish his contribution. The customers don’t need to blow up fuel to drive miles away to go to the malls. The footfalls in these shops cannot be measured using western models [since there is no place to keep anybody’s foot inside his shop!] and so he is derided and abused. It is like clubbing housewives with prostitutes in our Census data to show them that they are involved in ‘unproductive’ activities."


He said, Indian laws are being amended a thousand times to facilitate the grand entry of global malls and hypermarkets, some to permit the retail giants to procure directly from farmers at the agricultural market yards and not to trade in commodities, where transparency is doubtful. Indian brands like Reliance have encountered opposition in states like UP. In India, with mounting pressure presently 100% FDI is permitted in single brand and up to 50% in multi-brand. Wal-mart faces US Congressional investigations into allegations of bribery and corruption in India. Today, it is a hot election issue with parties like Bharatiya Janata Party (BJP) and Aam Admi Party (AAP) stoutly opposing the entry of retails giants in India.


Prof Vaidyanathan said he considers these economic constraints imposed by the West to be terminological terrorism mouthed ad-nauseam by economists and policy planners without understanding its implications, they want to open it up to global sharks in the name of liberalisation and kill the fast growing, productive, efficient and effective retail trade. “The sooner we strengthen our small business, the better for employment and society,” Prof Vaidyanathan concluded.

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    5 years ago

    excellent observations.need of the hour to have an economic thinking based on observed and actual facts rather than western academic theories promoted cut ,copy and paste proposals as ground realities only will help strengthen economy and I am glad people like vaidy sir are around to make policy makers think originally. Kudos to your continuous work sir. I attended your lecture on GOLD at P.S.High school chennai and my perception of gold changed before that whenever my asked for gold I used to say in Tamil. Enakku Neeye Thangam why another artificial thangam

    Amol Shah

    5 years ago

    Fantastic analysis, if only our government can act on it consciously with a perfect strategy in place. Really missed the session.

    Amol Shah


    Nagesh Kini

    In Reply to Amol Shah 5 years ago

    Amol bhai,
    Indeed you miss this great talk.
    Not and the houseful with the interesting Q&A that followed.
    Suggest you read the book!

    How to use the RTI Act to Empower Yourself
    RTI is the only act that allows  you to enforce your rights without moving out of your home, says Shailesh Gandhi, former Central Information Commissioner (CIC)

    Sometimes, simple Right to Information (RTI) applications lead to significant results, said Shailesh Gandhi, former Central Information Commissioner (CIC) addressing Moneylife Foundation members today. The key is to keep trying different things, you never know what may work, he said, giving the example of how his simple RTI request seeking information led to decisive action agaisnt a police official who was accused of rape.

    Mr Gandhi went though the key provisions of the act and provided important tips on how to file effective applications and carry forward the demand for information through first and second appeals. He explained at length the rationale behind various provisions as well as what information can be provided under the act and what cannot. For intance, he said, the RTI act is only meant to provide information to a citizen as her right, but one cannot demand an explanation for various actions or decisions. Similarly, information that is already available on record can be provided, but a citizen cannot ask for information to be gathered or collated under the act.

    Mr Gandhi pointed out that the RTI Act derived its power from the short and succint Section 3 which states, “Subject to the provisions of this Act, all Citizens shall have the Right to Information.” He explained how Section 4 gives a person to right to inspection of documents and was “the heart of the RTI Act” . Mr Gandhi, who evangelises the use of RTI by ordinary people, firmly believes that when a larger number of citizens demand information, the government will be under pressure to put out a lot more information out in the public domain and on their website, leading to a substantial reduction in inefficiency and corruption.

    Mr Gandhi also explained what sort of information cannot be obtained under the act and the exemptions to disclosure of information  set out in section 8 and section 9 of the act which allows some applications to be rejected.

    This time, Mr Gandhi also informed his audience about another important statute in Maharashtra that could empower citizens tremendously, when used in conjunction with the RTI Act. He said most people were not even aware of the existence of this legislation called the ‘Government Servants Regulation of Transfers and Prevention of Delay in Discharge of Official Duties Act (Act 21 of 2006)’, whose strict provisions of action could lead to better governance and delivery of timely services if citizens filed application under its provisions.

    In case if any RTI application is not taken, false information is given, there is non-compliance with section 4,  excessive fees are asked for etc a first appeal to the First appellate authority can be made within 30 days and the second appeal within 90 days of the order.  

    According to Mr Gandhi, certain bottlenecks which impede the effectiveness of this act are lack of a culture of transperancy, awareness of the law and the slow pace of  the Information Commission mainly.

    RTI is an act which provides public information and brings transparency and efficiency in the system. It leads to  SWARAJ- a true participatory democracy. It is a tool which can be used to bring about a difference sitting at home. So its time that enough of us try and make democracy more meaningful.

    At the closing, Mr Shailesh Gandhi emphasised that we all need  to work together to make our nation a perfect place. He said, "Mera Bharat mahan nahi hai, Per yeh dosh mera hai!"  inspiring the audience to start taking action.
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    5 years ago

    RTI applicant if denied information is entitled compensation under Consumer Protection Act

    praveen sakhuja

    5 years ago

    i fully agree with Gandhi,"Mera Bharat mahan nahi hai, Per yeh dosh mera hai!" We cater to service of those who do not deserve respect, it is our ill fate. Chronology given by Gandhi to get information fails in the hands of CIC, when you are ill treated by those occupying the posts with their past sins.They do not hesitate in harassing citizens to please the Respondents. until or unless transparency travels from CIC first, respondnats cannot be blamed as they enjoy protection from CIC.

    Will, probate and use of trust for specific beneficiaries
    Speaking at a Moneylife Foundation interactive seminar, Advocate Sachin Gupta, explained the importance of a Will, what is a probate and what is the role played by Trusts for specific beneficiaries

    A Will is a legally valid document that allows you to choose who gets your self-earned assets after your death. Any person who is not a minor and is of sound mind can make a Will and a person who dies without making a Will is considered Intestate. What is important while making a “good” Will is the content of the Will. After organising several sessions on Wills, Moneylife conducted another seminar on “The Essentials of a Good Will”. 
    Sachin Gupta, an advocate and partner at Negandhi Shah and Himayutullah, Advocates and Solicitors, who has wide ranging experience in matters of litigation, was the speaker of the event. He covered the topics related to intestate Succession, legal terms used while making a Will, types of Wills, including Conditional Wills, Joint Wills and Mutual Wills. He also discussed why it is important to make a Will, what probate is, and what the role of Trusts is. 
    While talking about the laws governing Intestate Succession, he pointed out Acts which are followed in different religions. The Hindu Succession Act, 1956 applies to Hindus, Buddhists, Jains and Sikhs. The Indian Succession Act, 1925 applies to Christians. Parsis have their own Succession Laws. Muslim succession laws are not codified but are based on their religious texts. Shias and Sunnis have different inheritance laws. Muslims can make an oral Will and it does not need attestation. Armed forces engaged in war, or an expedition and Seafarers are permitted to make an oral Will or Privileged Will. 
    Explaining the simple reason of creating a Will, Mr. Gupta pointed out that a Will ensures proper distribution of assets as per your wishes and appoints executors or creating trusts for specific beneficiaries. Further, talking about the Trusts, he mentioned Trust can be registered under the Indian Trusts Act. Testator, who is making the Will, can transfer funds and property to the Trust which becomes the holding vehicle. Trustee manages the trust as per the trust deed. Further, testator can access and control assets while alive and decide on distribution too.  A Trust is especially useful when you have to provide for a special child or have multiple families due to divorce/ re-marriage. It remains out of creditors’ clutches; confidentiality is maintained since beneficiaries are not disclosed. Trust carries highest taxes in India, plus administrative expenses. A trust protects assets from probate. 
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