Small businesses contribute 45% to India’s national income and big businesses only 15%. But it is the latter that the media fawns over
Until India embarked on economic liberalisation, government officials, especially in Delhi, took a perverse pleasure in keeping industrialists waiting in their corridors for an appointment. Dhirubhai Ambani had famously said in an interview that he would salaam anybody to get his work done—even a peon—because that is how the government treated industry during the licence-permit-raj.
Post 1992, India Inc has done better. Politicians, especially finance ministers, craved for their approval ratings as Union Budgets turned into televised reality shows.
Over the past decade, a nice crony club of politicians and industrialists have worked
together to hatch policies to enable large-scale loot of national resources and bank funds, so much so that many industrialists found it profitable to move right into parliament as elected or nominated members.
Then, instead of waiting in the corridors, they ordered bureaucrats and bankers about, until the massive scams finally began to be exposed by the comptroller & auditor general.
The rapid growth of India Inc, and the fawning media coverage it receives, would lead you to believe that its contribution to national income would be in proportion to the wealth that it flaunted.
Well, here is a shocker. Professor R Vaidyanathan, in his latest book India UnInc says that India Inc contributes only 15% of national income while India Uninc is the real growth engine which contributes 45% of national income. But the treatment meted out to the two could not be more starkly different. Just one example should suffice. The share of bank credit of India UnInc is 36%, while the huge non-performing assets (NPAs) are largely generated by India Inc.
Prof Vaidyanathan, who has taught at IIM Bangalore for over three decades and is invariably rated one of its most popular teachers, has coined the term India Uninc for the largest component of the Indian economy comprising small entrepreneurs, household
enterprises, proprietorship and partnership firms, small manufacturers, kirana stores and all others.
He has rendered invaluable service to India’s true growth engine by explaining, with facts and numbers, their contribution to the nation. This sector is otherwise mindlessly lumped under the head ‘non-corporate sector’ or unorganised, informal sector or even the household sector, when it comes to data on earning and savings.
Prof Vaidyanathan explores flaws in various classifications, including those of agriculture and service sector, adopted by the national accounts statistics to conclude that most of these terminologies are borrowed from Western experience and are not appropriate in the Indian context.
At a time when India is fed up of scams and exploitation, Prof Vaidyanathan’s book is a timely discussion on how the real contributors to the India’s growth are harassed by ‘taxtortion’ and a plethora of maddening regulation at the local, state and national level which do not attract the attention of planners and policymakers.
In fact, the first four chapters of the book argue, after a clinical analysis, that we need a national debate on how the government compiles and classifies its data, if India wants to get the best out of small entrepreneurs.
Prof Vaidyanathan then goes on to bust some myths about the contribution of the service sector and the post-1992 reforms. He says that the growth in India’s information technology (IT) is largely believed to be the biggest contributor to service sector growth.
In fact, large IT companies, he says, are separately classified under the head ICT (information & communication technology) and contribute around 5% of the national income, but a much bigger chunk of mindshare. It is also important to note that the share of foreign direct investment and foreign institutional investment has only been 8% of national income in any year over the past two decades.
Prof Vaidyanathan establishes how wrong classification leads to policymakers ignoring the contribution of India Uninc to savings or leads to false conclusions about the contribution of retail trade and other businesses. He argues that the neighbourhood kirana shop, which remains open 16 hours a day and 365 days a year (using family labour), has turned highly efficient with the help of mobile phones and is able to service its customers far better than large, organised retail stores.
Sadly, such contributors to growth have been shut out of the market for cheaper bank finance by ever-more onerous KYC (know your customer) requirements, documentation and compliance needs. They are forced to borrow from less regulated and more expensive chit funds and informal financiers. Also, at the lowest end of the chain, entrepreneurs, such as hawkers and street vendors, face harassment and extortion by the police and municipal officers.
Prof Vaidyanathan says that 85% of India is self-employed and does not have any social security, or even products like reverse mortgage, which will allow them to extract value from their physical assets in times of need. Some of these are issues that Moneylife and Moneylife Foundation have tried to highlight over the past four years. The need for a workable, correctly taxed and priced reverse mortgage product is one of them.
Unfortunately, the UPA government has limited its engagement to the crony club and large industry associations.
The many independent regulators that have been set up in the past two decades also took their cue from the government and have chosen not to engage with stakeholders. As a consequence, those who constitute India Uninc, who could have been the biggest beneficiaries of sensible insurance, or inflation-beating mutual fund products or equity, actually shun these products.
The Reserve Bank of India (RBI), while paying lip-service to ‘financial inclusion’, has no plan or strategy to engage with stakeholders, to ensure that such inclusion does not lead to more mis-selling of products or usurious interest extracted by microfinance firms. This is evident from the treatment of non-banking financial companies and the failure to recognise their role. Consequently, the biggest source of exploitation of India Uninc, which is Ponzi schemes that proliferate across India, is only beginning to receive some attention from the government after some mega-scandals such as SpeakAsia, Saradha, QNet and Sahara.
Prof Vaidyanathan points out how many of these, including 160 entities of Saradha, posed as legal chit funds (which, when well-run, are beneficial to people) but were not registered as such. RBI has been reluctant to regulate this sector and plans to phase out ‘deposit-taking’ by non-banking finance companies. But that has not stopped borrowers from being exploited by large microfinance companies which mis-sold loans as well as insurance and caused a globally-infamous scandal under RBI’s watch.
Whether it is enforcement of contracts, fair access to credit at reasonable terms, safe savings and retirement security, taxation or rent-seeking by government officials, the odds are stacked against India Uninc.
The question is: Will a change in government lead to any re-think about framing policies to get the best out of India Uninc? We believe that it will require a lot of public debate and systematic advocacy, based on every chapter of this path-breaking book, before we can nudge the government to even start thinking differently. Prof Vaidyanathan has provided the intellectual framework for this discussion backed by hardcore research. It is now up to us to take the debate forward with his help.
Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]
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