The least acknowledged big savers

The dominant share of Partnership and Proprietorship firms in the national saving has not been adequately recognised. These P&P firms are considered households in the savings data of the Centre, though many have turnover running into thousands of crores of rupees. Policy-makers and economists must become alive to this anomaly.

IN THE 1960s the country’s savings rate used to be around 10 per cent and the theory of vicious cycle of poverty, namely low saving rate means low investment and hence low income which give raise to low savings rate etc., was made popular, using India as an example. From the 1980s the savings rate has shown significant increase and averaged 20-24 percent through the 1990s. The single largest contributor to savings is the household sector. Partnership and Proprietorship firms (P&P sector) are treated as households in the savings data.

In other words, when we talk of households we need to remember that they include both pure consuming or wage earning households as well as mixed households having production activities. For instance, a couple of years ago Nirma was a group of partnership firms, before it became a company. In the earlier period, the savings and investments made by them would be shown as ” household savings” in our National Income Data. Hence, whenever household savings are mentioned, we need to be alert to the fact that they contain P&P firms performing large manufacturing and service activities. There are many P&P firms with turnover running into thousands of crores of rupees, but still they would be classified as households in our system.

Table 1 provides the savings of the different sectors of the economy — government, private corporate sector and households from the 1950s. We find that the savings rate of our economy have doubled from the 1950s to the 1980s, from around 9 per cent to around 18 per cent and it has increased to around 24 per cent in 2000-2001. This phenomenal increase in savings has been achieved through the efforts of the household sector which accounts for nearly 90 per cent of the national savings. This savings rate of the households is without considering their investments in gold as that is considered as consumption by government economists. Actually purchase of gold is an insurance and pension product for lower income groups and if we include that, the savings rate will be higher by another two percentage points.

The substantial growth in the national income achieved in the 1980s and the 1990s is due to the increased savings rate in the economy, particularly the savings rate of the household sector. Around 90 per cent of savings in the country is due to the household sector that consists of pure consuming (wage-earning) households as well as non-corporates (mixed income households). A portion of the savings is due to farm households, the details of which are not separately available. The proportion of unorganised agriculture and other such activities in 1999-2000 are 45 per cent and 55 per cent respectively.

Assuming that savings of the farm sector are similar to income proportions, 45 per cent of household sector savings could be attributed to farm households. This may be and over estimation and to that extent, it will only strengthen our thesis. On this basis, savings from the non-agricultural households works out to be nearly 50 per cent of the total (derived as non-agricultural share of 55 per cent of the total household savings of 90 per cent). The non-corporate share in this is not separately available from our national income statistics. It is important to separate and exclude the savings of the pure salary-earning households so that comparison with savings figures from corporate and government sectors, could be on a like-for-like basis.

This may be possible using available Income Tax statistics pertaining to salaried and non-salaried categories. It must be remembered that agricultural income in India is not taxed in the hands of individuals. The share of salaried category in the returned income is around 20 per cent of the non-corporate categories consisting of salaried and non-salaried individuals and partnership/Hindu Undivided Family form of activities (All India Income Tax Statistics, 1998-99, Directorate of Statistics, New Delhi).

If it is assumed that the proportion of the savings is similar to that of the proportions of returned income for these categories, then nearly 80 per cent of the household (non-agricultural) savings are in a sense attributable to the non-corporate sector. That is, the household (non-agricultural) sector savings, can be disaggregated into their two constituent parts of pure (consuming) households and producing households, using the proportions of salary income and mixed income in the tax data.

This could provide a rough indicator of the possible non-corporate share in the household savings. On this basis, around 40 per cent (80 per cent of 50 per cent) of the savings is attributable to the non-corporate sector, while the corporate sector share in savings is around 15 per cent and government has minus 5 per cent of the savings. Therefore, non-corporate sector (P&P firms) is a significant wealth creator in our economy and also a major engine of growth in the 1990s.

Table 2 gives the savings by the household sector in the 1990s and that of the foreign investment flows, both direct and portfolio. In spite of the noise made about the importance of foreign investment in our economy, we find that its role is less than 5 per cent. Still, it is made to appear that the entire Indian economy is dependant on foreign investment and hence yawning or sneezing by Indians in public should be controlled since it may upset the foreign investors. Why it is so? The logic for the importance of foreign inflows in our economic growth can be summarised as follows: If India plans to grow at eight percent then it requires nearly 32 per cent as the savings rate since incremental capital output ratio (ICOR) is nearly 4.

Our savings rate is around 24 per cent and hence we need to strive to get foreign inflows to bridge the gap. That is, our own savings plus foreign flows will be the investments in the economy sustaining 8 per cent growth. These types of arguments have several assumptions. First and foremost is the assumption regarding the capital output ratio of 4. Is it good given? Can we not take steps to reduce it since we are a capital starved nation.

Second, the implied ICOR is mainly based on manufacturing activities. And that also, what are known as old economy industries. In the new economy industries like software sector incremental output is more a function of adding more brain power rather than capital. In the case of many service industries, the incremental capacity or output is created based on the ingenuity of the P&P sector. For instance, any one who has travelled by road in our country knows that more number of persons travel outside any bus than inside and in that sense extra capacity/output is created. Many a taxi in Bihar/UP/Bengal carries a couple of passengers to the right side of the driver, thereby creating a doubt as to who is driving the vehicle.

A barber in a saloon needs two more hands to shave an extra person rather than four more chairs. In other words, the concept of capacity is cosmic and unlimited in our situation unlike Western notions of limited capacity and increasing output by only increasing capital. We need to recognise the fact that the growth of the 1980s and the 1990s has come on the extraordinary savings generated by the P&P sector. There are thousand conferences extolling the role of foreign flows (less than 5 per cent) for our growth but not even a small talk on the role of the household sector.

This in spite of the fact that daily balancing of the budget is an impossible task for the housewives without access to the Nashik printing press unlike the Finance Minister and these days private operators like Telgi.We will elaborate on the pattern of household savings and the trigger for growth in the 1980s in the future sections.

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