The share of the government in capital formation has fallen from 41 per cent to 31 per
cent, showing that it still appropriates significant portion of household savings to carry
on its capital formation activities, which mostly provide negative returns. If this
continues, it would create an extraordinary situation, wherein the States will become
much more predatory and since they have no political will to increase their income by
taxes, the Centre steps in, says R. Vaidyanathan.
THE data on capital formation present the maximum challenge to any person analysing
the economy. It is, to say the least, not very reliable and contain lots of inconsistencies
and adjustments. Proprietorship and Partnership (P&P) firms are part of the household
sector in the savings data and also in the data on domestic capital formation. In the
savings data on household sector, the capital formation is presented as savings in
physical assets by the households, which includes consuming or wage-earning
households, agricultural households and partnership/proprietorship firms or mixedincomehouseholds.
In the case of pure consuming or wage-earning household, the saving in physical assets
consists of mainly house construction. In the case of mixed household, it can be
construction or acquisition of plant and equipment or other type of assets such as
transportation properties. Table 1 indicates the share of the household sector, private
corporate sector and the Government in the savings and capital formation in the
economy for selected periods from 1970-2000. First a caveat. The estimates of total
savings plus net capital inflow from abroad and that of total domestic capital formation
by type of assets do not tally. The latter is prepared using the measure of fixed capital
formation in construction and machinery and equipment, and adding total estimated
change in stocks across various industries.
The estimates of saving are obtained for the public and private corporate sectors using
published information and the financial saving of the household sector is got using
information from banks, PF, LIC, etc. The saving in physical assets of the household
sector is obtained as a residual after netting public and private corporate sectors from
total capital formation by type of assets. The National Accounts Statistics (NAS) of the
Central Statistical Organisation (CSO) treats the estimates of saving to be more reliable
of the two and adjust for the difference (called errors and omissions) in the estimates of
gross domestic capital formation.
In the adjusted series on investments, the saving in the form of physical assets by the
household sector is the same as that of unadjusted capital formation. This implies that
the main burden of adjustment falls on the other two `organised’ segments, that is,
private corporate and government sector.
The NAS does not publish the adjusted GDCF series, sector-wise. In other words, the
savings and capital formation of the household sector, particularly P&P firms, might be
understated and, to that extent, our arguments will only be reinforced.
Table 1 shows that the share of household savings in total savings has risen from 70
per cent to more than 90 per cent between 1970 and 2000. The share of private
corporate sector has risen from 10 per cent to 18 per cent and that of government
fallen from 20 per cent to minus-10 per cent. Private corporate sector has shown
consistently higher share in capital formation compared to savings, indicating flow of
funds from the household sector through intermediation of banking and capital
The share of the government in capital formation has fallen from 41 per cent
to 31 per cent, showing that it still appropriates significant portion of household savings
to carry on its capital formation activities, which mostly provide negative returns. In
other words, the government has become a dis-saver during this period, rapaciously
appropriating the savings of the household sector through compulsory savings such as
EPF and intermediation like banking. Table 2 gives the share of households in savings
and the mix of physical and financial savings.
Household savings has risen from 60 per cent to 90 per cent of the total savings in the
economy. The share of physical savings (capital formation) was of the order of 90 per
cent in the 1950s, which is now around 50 per cent. In other words, substantial portion
of household savings are taken away by the government and private corporate sector
for their capital formation. Even then, nearly 48 per cent (52 per cent of the 92 per
cent) of the capital formation in the economy is due to the household sector.
The proprietorship and partnership (P&P) firms constitute large portion of the eight
• Unregistered manufacturing;
• Whole-sale and retail;
• Hotels and restaurants;
• Transport other than Railways;
• Real-estate ownership of dwellings and business services; and
• Other services.
In other words, we can identify these activities with the P&P sector and these are the
fastest growing in the last decade acting as engines of growth. If we consider these
eight sectors and then the share of capital formation to the share of the unorganised
sector NDP in these activities, we get a clue on the capital formation of the P&P sector.
It is to be noted that the national income data for the unorganised sector is available at
current prices and, hence, we use the capital formation figures also at current prices to
get the percentages.
Table 3 gives the share of Gross Domestic Capital formation (GDCF) of these eight
sectors to that of the unorganised NDP in these eight activities. It is to be remembered
that only factor incomes, that is, net domestic product (NDP) at factor cost at current
prices, are available for the `unorganised’ activities. The rate of capital formation by
the P&P sector is higher than the overall rate of capital formation in the economy. Also,
these eight activities (unorganised sector) have grown by more than 14 per cent CAGR
between 1993-94 and 2001-2002, which is one of the important reasons for the growth
in the economy during the 1990s.
The Government has become a dis-saver and its main role now is to feed its employees
in the form of salary wages and pensions. In other words, a vast army of government
employees (Centre, State and local government), of around 14 million, is taken care by
the remaining 330 million of the work force, which also meets the extortion and rentseekingdemands of the government employees. The private corporate sector dependson the government to facilitate appropriation of the savings of the household sectorthrough instrumentalities of banking and capital markets.
Governments, both at the Centre and in the States, more so at the later, are broke
and, hence, trying to find newer ways to appropriate household savings. The Central
Government pension payments have gone up from Rs 3,300 crore in 1990 to Rs 22,400
crore in 2000, showing a CAGR of nearly 21 per cent much higher than revenue growth.
In the case of State governments, the share of pension payments to own revenue rose
from 3 per cent in 1980 to 17 per cent in 2001. (Report of the Group to study the
Pension Liabilities of the State Governments” pp95, Reserve Bank of India October
2003.) Most State governments in the coming decade will be spending their entire
revenue only on salary wages and pensions and interest payments. This would create
an extraordinary situation, indications are already available, wherein the State will
become much more predatory in trying to tax all “human endeavours” as when the
governments go broke, they tend to become rapacious. Since the State governments
have no political will to increase their income by taxes, the Centre steps in.
The idea of service tax is arising out of such desperation, which only increases the
dowry index for the male employees of indirect tax departments compared to income
tax employees. Such types of taxes will increase and, in our tradition, it is called
Vinasha Kale Viparidha Buddhi, assuming one associates buddhi with any government.
Against this backdrop, the implications of the arrival of global corporations in sectors
such as retail trade, construction, restaurants and other services, where the P&P sector
is currently dominant will be dealt with later.