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‘India Inc. does not drive the economy, entrepreneurs and the informal sector do’

‘India Inc. does not drive the economy, entrepreneurs and the informal sector do’

Tuesday April 15, 2014 , 5 min Read

What if I ask you, where is the economic growth of India coming from? Most of my readers would vouch for the corporate sector and then a few would claim that FDIs and FIIs have been instrumental too!

But what if I tell you that just about 18 percent of India’s GDP comes from the entire corporate sector, and the figure for foreign investors stands at below 10 percent? For those who still believe that Sensex is indeed sensitive index, what if the matter of the fact is that shares of just 25 scripts command over 40 percent trade in our stock markets, touching just a miniscule number of investors and companies in the country?


So is our excitement with India Inc. misplaced?Professor R Vaidyanathan of IIM Bangalore believes so, and after reading his latest treatise the aptly named, India Uninc., I can’t entirely disagree. This well researched, highly readable book offers amazing facts about the Indian economy, and brings to fore the much ignored segment of our economy and society: the small entrepreneurs. One could read this book as written on economy or entrepreneurship or the informal sector in India, but the essence is that this book is a real eye opener.

It indeed goes without saying that you must take time out to read this book, for it is worth tens of editorial essays and op-eds. Let me summarize the book for you in the following seven snippets.

I. India remains an informal economy: The non-corporate, un-organized sector, mainly composed of ‘proprietorship and partnership (P&P) forms of organization’ or as the author calls it ‘India Uninc.’, is the largest employer in our country (next only to agriculture), and contributes the highest to our national income. The contribution of this sector is as high as 45 percent, yet it remains largely ignored by our policy makers, researchers, youth and banks alike. The Uninc sector is almost 70 percent of all the services sector, which itself is two-thirds of our national income. So if India’s growth story is services sector led, the P&P sector is the driver.

II. We save our way to growth: The growth in Indian economy is not entirely owing to reforms we saw in the 90s, but instead due to the household savings and capital formation, which today has grown to one third of our national income, making India a ‘savings economy’, quintessential for a sustained growth. The household savings contribute a whopping 70 percent of our national savings, and this doesn’t even include gold. The contribution to capital formation is almost 50 percent. As for the impact of savings on growth, the heuristics is – for a GDP growth of 10 percent, we need a savings rate of 40 percent.

III. Banks have short changed entrepreneurs: Banks have done a disservice to the India Uninc., firstly by diverting household savings to the large corporate and government agencies, and secondly, by showing a cold shoulder when it comes to offering loans for smaller business activities. This results into a systematic bias against self-employment. Our entrepreneurs naturally resort to personal savings, investments by extended families and clans, and several of the thriving non-banking financial institutions, including chit funds. With over half of India’s population being self-employed, the formal banking system hasn’t been of much help.

IV. Government is over expansive in India: The bribe to government officials, or the so called ‘own- account’ collection, is estimated at six to eight percent of our GDP, and this added to the already low tax collection makes the problem severe for the self- employed who are subject to exploitation at several levels. The author suggests that the scope of government activities must be shrunk to the minimum and let private players and philanthropic organization take over. The Uninc sector pays far more tax than the Inc., by a factor of two, yet the benefits are far from visible.

V. Gold needs to get its due: Indian is the world’s largest private economy, for there exists almost no state security for a large chunk of our population, and out-of-pocket expenses on healthcare are the highest in the world. Almost 90 percent of our working population, mostly self-employed, is deprived of any state security, and it’s only their private savings that come to rescue under adversities. Gold and land ownership are the two most effective insurance schemes we have in India for the old age, and thanks to Indian women, our government is saved from going bankrupt (if they were to offer state coverage). Our traditional values of thrift and savings, coupled with the demographic dividend, puts India in a very strong position in the world economy.

VI. Sensex is not sensitive after all: Not only is the corporate sector a small part of what is organized, but also stock markets touch a miniscule share of India’s population. For instance just under one percent of household savings are directed to stock markets, and as for liquidity in the market, last year, just 3,700 of 9,000 listed scripts were traded even once. As the entry barriers are low and exits are almost impossible from the illiquid stock markets, the creditors in the unorganized sector are the worst hit. The author proposes several innovative mechanisms to safeguard interest of the self-employed, and help them continue support India’s growth.

VII. Let us reinterpret caste: The caste system in India has its own dynamics. Over 50 percent of the India Uninc. is owned by SCs and STs, and 90 percent of them are self-funded or funded by extended families and communities. Perhaps instead of focusing only on reservations in the government and private sector, we should also look at enabling more self employment. The banks, our policy measures, education systems, and society at large must rally around the less privileged and enable the best at what they are: enterprising.

While you may not agree with the inferences and propositions, the book still makes a fascinating and informative read, which I have summarised in this article and elsewhere.