Non-corporate India has powered the staggering growth of the economy.
In the Nineties, there were major debates about whether India was growing, or if it was a mirage of numbers. But in the new century, it is not about whether we are growing, but how fast. There has been significant growth in our national income in the last decade, more particularly in the last two years. We are now talking in terms of a more than eight per cent annual growth rate, and some even suggest sustaining a ten per cent growth rate.
What are the engines of our growth?
It is not our usual suspects, like information technology, or corporate giants, but non-corporate India, represented by millions of partnership and proprietorship firms. We find that, according to current data from the Central Statistical Organisation, nearly half our GDP comes from the service sector, which grew 8.2 per cent during the last decade, 1993-94 to 2003-2004, much higher than the other sectors.
The service sector is popularly associated with IT companies like Wipro or Infosys. Factually, all software related activities come under business services, which make up less than two per cent of our national income. The service sector covers a much larger canvas than IT, and this sector is growing fastest in our economy, generating huge employment.
The service sector includes activities like construction, trade, hotels and restaurants, transport, including tourist assistance activities, travel agencies and tour operators, storage and communications, banking and insurance, real estate and ownership of dwellings, business services and businesses in education, medical and health, religious and other community services, legal services, recreation and entertainment services, and so on. Many of these activities, like trade, hotels, transport (non-railways], and services provided by plumbers, carpenters, barbers and priests, have grown at more than eight per cent compounded annual growth rate (CAGR) during the last decade.
The role of the non-corporate sector (partnership and proprietorship firms) is very significant in most of these activities. The service sector can be broadly classified into three segments, the public sector, private corporate, and the “household” sector. The first two are considered “organised”, and the third comprises all manner of proprietorships and partnerships run by individuals. During 2002-2003, the share of this group was around seventy-five per cent in trade (wholesale and retail), hotels and restaurants, and business services. It was more than eighty per cent in non-railway transport and exceeded fifty per cent in construction and storage.
The credit requirements of these businesses are mainly met from non-banking sources. For instance, the share of trade at fifteen per cent of the national income (during 200-2004) was Rs 3.5 lakh crore. Of this, the share of the non-corporate sector (partnership and proprietorship firms) was more than eighty per cent, or Rs 2.8 lakh crore. Around thirty per cent of the credit needs of trade were met by banking channels, while nearly seventy per cent were met from non-banking sources. The rate of interest in non-banking channels is significantly higher than in banks. Hence, it is fascinating that the service sector with a higher rate of borrowing could consistently deliver a faster growth rate.
It speaks volumes about the entrepreneurial nature of non-corporate India.
Unlike the developed countries, retail brands like Wal-Mart, Sears and Marks and Spencer, Greyhound or Federal Express in transportation, or McDonalds, Burger King and Pizza Hut, have not become the order of the day, not yet. In a sense, the Indian economy can be called a partnership and proprietorship (P&P) economy.
The economic reforms were initiated in the early Nineties, during the term of P.V.Narasimha Rao, but most of the policy changes pertained to the manufacturing and financial sectors embracing corporate activities. The regulations and controls relating to service activities are with state governments, and they have not reformed. Hence, it is difficult to ascribe the growth of the service sector – and that of the entire economy during the last decade – to the reform measures initiated by the Central government.
In other words, the growth is not due to government policies, but independent of or to a large extent in spite of the government. The main push for growth has come from domestic savings. The savings rate, which used to be around seven per cent in the Sixties and Seventies, has grown to more than twenty-five per cent in the last decade. It is important to note that household savings constitute the largest component of savings of our economy. It is more than eighty per cent of our savings. Households consist of salary and wage-earning households as well as partnership and proprietorship firms. The average housewife in India deserves a Bharat Ratna for her sustained savings (despite rising taxes and inflation), because of which our economy is growing.
Both from the savings point of view, and from the investment and growth perspective, it is the smaller players, the partnership and proprietorship firms, who are engines of our growth. They may chew pan, wear a dhoti, and be deficit in English, but they are heroes. Unfortunately, the entire discussion on reforms focuses on government and big corporates. The elite need to recognise that the drivers of growth are not to be found in seven star properties but in small-town dhabas.
There should be focus on the growth and development of non-corporate India, relating to issues of credit delivery, labour markets, social security, savings and investments, globalisation, the cohesion of civil society, and connected matters. These alone can sustain the growth processes of our economy, and not populist policies that pander to the talent-deficit political class, which thinks at most a few weeks down the road.