Abstract
India Uninc. by Professor R. Vaidyanathan is a well-written, concise book which engulfs major concerns about proprietorship and partnership firms and other unincorporated businesses. Though these small businesses play a dominant role in the economy through national savings and capital formation, provide significant employment in the service sector and are growth drivers, they face huge costs for running the business in the form of bribes, weaker contract enforcements and high credit market frictions. They neither enjoy social security nor get their due recognition of contribution towards the country’s economic growth. The author has wittingly condensed the various practical aspects of these businesses in a very lucid and rhetorical way with vivid examples from his experiences.
This book focuses on the role, regulations and various reforms pertaining to the India Uninc., which refers to the unincorporated non-corporate sector of our economy. This sector mainly consists of the unregistered proprietorship/partnership firms (the non-corporate entities which undertake non-agricultural and non-government activities including co-operative forms of organizations, which are not under the government) and self-employed persons (barbers, cobblers, carpenters, plumbers, electricians, commission agents, cycle-rikshaw pullers, chartered accountants, architects, lawyers and priests). The author highlights that although this unincorporated sector has the highest share of national income, manufacturing activities, services, savings, investment, direct and indirect taxes, the credit market, employment, forex earnings, etc., it has not been adequately focused in terms of reforms and discussions by experts. There are 8 broad sections in the book.
Section 1 highlights that the informal sector has a low level of organization, small in scale and employs fewer workers including family members, heterogeneity in activities, entry and exit is easier than in the formal sector, minimal capital investment with little or no division between labour and capital, labour relations based on social relationships on casual employment basis without formal contracts, workers unaware of their rights, unorganized and have little negotiating power with their employers. The author emphasizes the importance of the non-corporate sector by quoting data from various surveys conducted by organizations such as NSSO. A survey of 8,296 villages (from 647,970 villages) and 7,602 urban blocks (from 441,538 urban blocks) indicated that 49% of enterprises surveyed are from rural areas, belong to own account enterprises (which are run without any hired workers), outnumbers all other establishments in trade, manufacturing and other services and do not have any formal company accounts. 62% of such enterprises are owned by SC/ST and OBCs, whereas 26.4% are run by women. Micro firms hold 95% of the MSME sector. Maximum savings come from this sector as there is the absence of superannuation benefits, a dramatic rise in educational and healthcare expenses and the decline in the joint family system which increases the uncertainties. The non-corporate sector is the largest contributor to national income (approximately 45%), contributes two and a half times more than the corporate sector in NDP, contributes 41% of the value added in the manufacturing industry, contributes 40% of the national savings and dominates nearly two-third of the Indian economy in the service sector. The author challenges the generally accepted idea of attributing India’s economic growth to the 1991 reforms and corporate section. He argues that the policy changes that were made focussed on the manufacturing and financial sectors related only to government/corporate and not to the non-corporate sector.
In Section 2, the author questions the rationale behind linking the growth of the last two decades to Narasimha Rao government-initiated reforms and gives facts and figures that the growth should be ascribed to the unincorporated sector’s contribution to national savings and service sector activities. He argues that most of the regulations focused primarily on areas pertaining to the government itself, large corporate sector and global companies. Thus, according to the author, attribution of the growth in the last twenty years to the government reforms and large corporates needs a serious re-look and critical examination. Further, the author highlights that trade is the second largest segment of our economy and the clamour for FDI in retail trade, which is currently dominated by the non-corporate sector. Not many seem to be worrying about the 30 million people involved in small retail trade and at least 120 million dependents who will get marginalized. The author highlights that the small retailers who have an efficient home delivery system and know the price considerations of their customers are labelled unorganized by our national income data and their contribution is diminished. The author opines that these are economic constructs imposed by the West and calls it a form of terminological terrorism. Some of the other major limitations faced by people working in the unincorporated sector are that they have to pay very high interest rates to get a loan and they have to pay up to 10% of their income to minions of the State. The author criticizes our planners for not focusing on the constraints faced by the fast-growing non-corporate sector and opening it up to global sharks in the name of liberalization which will make a huge population of self-employed workers unemployed. He uses examples from Germany, Japan, France, etc., to show how they protect their local businesses in the community and at the end gives some suggestions for the government to act upon.
Continuing the discussion, the author focuses on the bias of the policymakers against the self-employed. The non-corporate sector consisting of proprietorship and partnership firms constitutes nearly 40% of our national income which is almost equal to the corporate sector and government combined. Although 70% of the national savings has come from self-employed groups, their share in bank credit has declined significantly in the last few decades. In other words, commercial banks have turned their backs on self-employed groups, and the government is impoverishing most of our workforce by not adopting policies that support these groups. Contract enforcement is a major challenge in India. A case takes on average seven to 15 years to conclude in an Indian court. The system in practice does not accept asset ownership as natural. Collection agents and other types of strongarm tactics are becoming rampant in enforcing contracts. Even multinational banks are engaging with such agents. The maximum impact of this problem is faced by the non-corporate sector. Unlike large corporates or the government, their financial flexibility is lower and, hence, the waiting time is crucial for their survival.
In Section 3, the author indicates that the share of the service sector has increased from 49% to 66% from 1993–1994 to 2011–2012. This growth contributes significantly to the larger economic growth rate. The credit to the unincorporated sector comes from the money lender, whose rates are twice that of a PSU bank rate. These lending are cash-based lending rather than asset-based lending. The main credit availed by the proprietor and partnership (P&P) sector comes in the form of factoring of payables/receivables from bank sources or the non-banking financial sector (NBFS). 70% of the financing requirement of the unincorporated sector is met by NBFS. The organized non-banking sector is more into asset-based lending; they take significant risks with less paperwork. On the other hand, banks invest 45% to 50% of their resources in government securities. The lending pattern for the P&P sector has plummeted (58%–36% in the last 20 years) although the non-corporate sector is the fastest-growing sector in the economy. The private corporate sector contributes 18% of the national income but takes away 45% of the bank credit. Although NBFS plays an important role in the credit delivery mechanism, it has not been given its due focus by the planners. Instead of nurturing and enhancing the credit delivery mechanisms, planners focus on control and regulations. The author is of the view that a typical PSU bank manager has to look after foreign exchange, administration, agricultural finance, personal finance, training, industrial lending, etc., during his stint in a particular branch. Such a person is more tuned to lend based on paper financial ratios. However, activities of the unincorporated sector include trade, transport, hotels and restaurants, construction, etc., which have significant fluctuations in the daily cash flows. These settings require different mindset and approach, and the typical bank manager is not geared for such risk taking, nor is he rewarded for taking such risks.
The author highlights that chit funds are one of the important components of NBFS. However, due to abysmal ignorance in finance matters, the politicians, media and public referred to the Saradha muti-level marketing scam as the Saradha chit fund scam. None of the 160 activities/entities of the Saradha group was registered under the Chit Funds Act of 1982. The author highlighted that the primary use of chit funds addressed consumption needs such as marriage, education, property purchase, paying off costlier loans from money lenders, address working capital for expansion, start-up capital, emergency needs and savings for the future. It has to be borne in mind that in many parts of India, chit funds address gaps left by the traditional banking sector, mobilize huge amounts of savings and allow members to have access to lump sum amounts for various pressing needs.
Section 4 starts with the author’s argument that there is a myth that India is an undertaxed economy. The contribution of direct taxes to total taxes has increased from 19% in 1990–1991 to 55% in 2011–2012, whereas there is a decline in the share of indirect taxes from 78% to 44% during the same period. While the contribution of excise duties has declined from 43% to 16% from 1991 to 2012, the share of personal tax has increased from 9% to 19%. The author is of the opinion that government employees are net gainers, as their income increased more in proportion to inflation in the last 40 years. While government employees put less effort into effective work, they also collect taxes in their ‘own account’ (referred to as bribes, corruption, speed money, grease, rent seeking, etc.). When we add this additional so-called ‘own account’ taxes, the taxes become quite large.
In Section 5, the author emphasizes the importance of gold in our economy. He highlights that the amount spent to buy gold in 2012 was greater than the total capital raised on the stock market. He criticizes the government’s position of treating gold as consumption rather than investment in our statistics. Gold, which is a highly liquid, transferable and inexpensive asset to acquire, serves as social security for almost 90% of the Indian workforce and households who view the purchase of gold as an investment. Gold jewellery is also used as collateral in unincorporated credit markets. Hence, the government should play an active role in shaping gold-related policy. The author also criticizes policy-makers and planners who worry about reforming the state pension system to accommodate India Inc’s retirement. But the unincorporated sector’s most enterprising self-employed groups face a major challenge to secure their future. He urges that the government should not ignore the impending old-age security crisis and understand the role of gold.
The government should focus on the healthcare and old age needs of the self-employed, who do not have any medical insurance or pension facilities According to the author, the government should reconsider the income tax aspects of the self-employed because they bear nearly 45% of the tax burden but their share in GDP is 30%. Therefore, the government should modify the income tax and put in place tools to make its surplus available to the general public. The author also talks about the lack of social security benefits for the self-employed and the fact that the state is not even able to meet the pension obligations of its own employees. He suggests using reverse mortgage instruments to leverage gold and provide annuity payments to individuals, instead of being kept in bank lockers because the younger generation is not too fond of gold jewellery.
Continuing the discussion, the author talks about a nation’s demographic dividend. He explains how populations in developed countries are aging rapidly and will soon have to outsource much of their work to people in developing countries, where the average age is much lower. But there are many problems with outsourcing labour as it will greatly increase the cost of local labour at the dollar level and a lot of land is also needed to create these offshore hubs. The author highlights that the savings rate in developed economies has declined significantly in the last decade, whereas in India it has gone up significantly. Household savings as a percentage of household disposable income have declined drastically, which has raised questions among economists who used to argue for consumption-driven growth. The author corroborates that the growth in India’s economy is not driven by FDI/FII but by our own savings. Hence, it is time to move away from consumption-driven economy to a savings-nurturing society.
In Section 6, the author points out that there are some gross myths about the Indian stock market. The first myth is that the listed corporate sector is critical to the economy and has a dominant role in it. This is untrue given the fact that 45% of our national income comes from the non-corporate sector which comprises partnership and proprietorship firms. The corporate sector contributes around 18%. The share of domestic savings is less than 10% from the corporate sector and 70% from the household sector. The second myth is that the stock market is the barometer for assessing the past and future performance of the corporate sector. This is untrue because out of 7.2 lakh companies incorporated under the Companies Act (as of 2011), only around 5,000 of them are listed. While 3,000 out of these shares trade once a year, only 100 shares remain active throughout the year. Fifty out of these 100 shares constitute 65% of the market. About 70% of trading of the listed scrips is not for delivery but due to squaring off purposes and speculations. The third myth is that stock markets help to channel savings in the Indian economy. As per the author, this is false as Indian citizens prefer to invest with the banks, post offices, provident funds and life insurance funds. The percentage of financial savings in stocks and debentures was only 5% in 2009 and less than 1% in 2011. The fourth myth is that foreign investments are critical to our growth story. This is not right as FDI and FII inflows are less than 10% of our investments, whereas household savings of 70% cater to our growth story.
The financial market should facilitate entry and exit at all points in time. Liquidity is an important measure of the efficiency and effectiveness of the market. Dissemination of awareness about the stock market has lured small investors. However, they have four problems. First, the stock market in India is illiquid and hence there are no takers for most shares at any price. Only 25 securities command more than 40% turnover. Second, a high level of speculation activity is happening in the market where brokers do most of the trading on their account and not on the client’s account. Third, our market did not have the facility of two-way quotes. Merchant bankers and brokers are undercapitalized and cannot perform their roles effectively. Fourth, small investors do not have timely protection against non-payment and non-delivery of shares by brokers. Contract enforcement is cumbersome and time-consuming. The situation of the Indian credit market is not very different from the stock market.
To ensure the participation of socially and educationally disadvantaged sections of society and enhance social justice and equity, the author highlighted that the government envisaged introducing reservations in the private sector in Section 7. The author highlights the fact that the Mandal Commission allocation of 50% of seats in government service and educational institutions is based on census data of 1931. The author corroborates that the collection of complete caste data was stopped with the aim of a casteless society and, hence, no strong database is available. He opines that assuming the caste situation to be static is not appropriate as successful members of a particular caste work consistently for improving economic/social conditions of their caste fellows. Therefore, 50% reservation for SC/ST and OBCs may not be currently appropriate. The author focuses that while organized sector does not indicate the number of employees and their castes, the unorganized sector cannot even ensure enforcement of minimum wage. He further opines that since most of the unincorporated firms are owned by SC/STs and most of the SC/STs are self-employed, such reservation legislation may lead to inspection raj and corruption. Though SC/ST girl students are the most dropouts from primary schools, most of the top rankers in higher education are from SC/STs.
The author further highlights that rather than replicating the public sector reservation system to the private sector, it makes more sense in developing the entrepreneurial skill sets of the SC/STs. Further, he corroborates that the private sector has limited job opportunities and even if all such jobs are reserved for Sc/STs, it would not solve the problem. The author opines that caste has been taught to be considered as bad during the British rule in India. Instead, he is of the view that caste should be considered as a social capital which has played an important role in the consolidation of businesses, upward mobility of masses and enhanced entrepreneurship in India. Caste-based system and cluster provided adequate financing through the establishment of informal credit institutions, savings and credit institutions. It ensured contract enforcement, mutual self-help and discouraged deviant behaviour. Such caste systems engaged in the establishment of community networks through organization of economic, social and religious activities together for their respective communities.
In Section 8, the author speaks of a large number of small businesses that funded academic voyages, sports, schools, etc., and provided for necessities such as water and medical care to the masses. Information technology (mobile phones in particular) has increased the reachability, income and customer base of small entrepreneurs. Two major obsessions of the average Indian (sports and cinema) used to be driven by entrepreneurs earlier and have taken the corporate structure in the recent past. The NGO sector is a significant participant in the unincorporated sector taking care of a variety of activities in age care, agriculture, art and craft, culture and heritage, animal welfare, microfinance, disaster and waste management, environment, health, rural transformation, etc.
Professor R Vaidyanathan’s book is not only compelling, but also immensely valuable and a nice read for students, academicians and practitioners. He has beautifully synthesized how caste has been used as social capital, the biases against the self-employed and the critical role that NBFS for such businesses. If we were to criticize the book, we may say that some of the aspects could have been explained using data visualization rather than tables. Further, though the author highlights that these businesses never get the benefit of reforms, we believe that various reforms taken by the incumbent government such as Start-up India Scheme, Make in India, Atal Innovation Mission, Ministry of Skill Development and Entrepreneurship, etc., will go a long way in focusing on the India Uninc. The book deserves a word of praise for its contextual clarity and comprehensive coverage.