Prime Minister Manmohan Singh in his address to the nation on the 21st September 2012 has clearly enunciated the need for reforms to achieve desired economic growth and not go back to the situation of the early nineties. Unfortunately his focus is on the reforms which are dictated by the US business interests and supported by local crony capitalists who occupy a small space on in our economy but whose voice is loud since they control all major media and has effective lobbies in Delhi.
If we look at the structure of our economy we find that nearly 20 % is contributed by government to our GDP and another 18% by Agriculture in the private hands. Corporate sector which gets audience with PM at the drop of a hat has nearly 15%and the rest consisting of Partnership and proprietorship firms [called non-corporate business] constitute more than 45% of our GDP. [National Accounts Statistics- CSO-2011]. In the USA the share of corporate business is more than 75% in its GDP [table 1.3.5 BEA-US Dept of commerce 2011]
Even in manufacturing the share of non –corporate business is nearly 50%.
In the service sectors consisting of
- Trade—Whole Sale/ Retail
- Transport [other than Railways]
- Hotels / Restaurants
- Real Estate /Ownership of Dwellings and business services
- Other services [professional etc]
the share of non-corporate sector is more than 70%; these activities are the fastest growing activities with more than 8 % compounded average growth rate in the last decade. These are the drivers of our economic growth.
On the savings household savings constitute more than 70% of our domestic savings and our domestic savings of around 35 % is the primary driver of our investment and growth. In the case of savings data households include non-corporate sector.
The main thrust of reforms should be focused on our non-corporate sector that is facing the twin devils of credit issues and bribery. Even though the non-corporate sector is fastest growing its credit needs are not met by the banking sector but by private money lenders etc and the cost of borrowing us as high as 5 to 6 % per month-namely around 70 % per annum.
Their share of bank credit which was nearly 60% in the early nineties has become 36 % in 2011 showing a consistent decline. The share of corporate sector has gone up from around 30% to 44% and Government from 10% to 20%.
Table-1 Distribution of Outstanding Bank Credit by Categories [%]
|Category||March 1990||March 1996||March2004||March 2008||March 2009||March 2010||March 2011|
|Household sector (1)||58.3||51.1||47.6||36.6||32.8||32.8||36.3|
|Private Corporate sector (2)||31.3||38.6||38.0||46.7||48.2||48.6||44.0|
|Public sector (3)||10.2||10.3||14.3||16.7||19.0||18.6||19.7|
Note: (1) Household sector includes Partnership, Proprietorship concerns, joint families, associations, clubs, Societies, trusts, groups and individuals for all accounts. (2) Private Corporate sector includes private Sector and cooperative sector excluding those mentioned in (1). (3) Public Sector, that is all Government activities, includes joint sector undertakings.
Source: Extracted from table –1.15; Outstanding Credit of Scheduled Commercial Banks according to Organizations; Basic statistical returns; various years; RBI
In other words the most productive and growing sectors of our economy is starved of bank credit so that they depend on money lenders and other non-bank sources. The crony capitalists who default bank loans get larger share for their wasteful expenditure The solution for it is to create a separate body to monitor Non-banking Finance Sector and free it from the bureaucratic clutches.
Not only that, non-corporates also pays huge sums of bribes sometime as high as 10 to 15% of gross turnover. So the misery index of Small and Medium businesses in India is interest rate and bribe rate which comes to annual rate of nearly 80%
This misery index needs to be tackled and reforms should focus on it instead of worrying about profits of Wal-Mart which is in desperate search if new markets Reforms Needed
The actual areas where reforms are needed are
- Commercial Tax
- Road Tax
- Entertainment Tax
- Excise duty on liquor
- Urban land ceiling and regulations (ULCRA)
- Shops and establishments Act
- Laws governing educational, medical etc institutions
- Money lending regulations.
- Stamp duties Act
- Food and Adulteration acts—municipalities
- Water/Power/Drainage regulations—Acts
- Registrations / Contracts act
These regulations pertaining to the activities in which non-corporate sector dominates and are partly in the realm of State Governments. There is a need to have an Inter State council meet only to focus on reforms in all the above mentioned areas instead of just being obsessed with FDI and FII and pink paper Rudalis.
We do not want to have basic and important reforms and do not even discuss it since they are not “sexy” and sadly unimportant to the CNBC/CII crowd. Actually FII and FDI have always contributed less than 10 % of our investments which are driven by domestic savings. Yet we think having more funds from abroad will solve all problems. That is not a sign of free marketer but a sign of sold out sepoy of global capital.
Unless and until we focus on the reforms at the State and lower levels we are not going to sustain our growth rates. We must come out of our thinking on the corporate or put it colorfully “Sensex” economy. Our corporate sector is only an “item number” in our economy full of glamour and that “ooch” factor. But from substance point of view it does not have much importance. Still we as a nation have an uncanny ability to focus on the inconsequential and immaterial and spend lots of time and effort on them and abuse others as Swadeshi or worst Luddite!
Delhi centric reforms can only benefit fat cats and not the most productive sectors and engines of our economic growth namely India “Unincorporated”. They are struggling to get adequate credit at reasonable rates of interest and deal with corruption at the lower levels of our system. What India needs is reforming our reform process to focus on the real India and not the India which the Yankees and Yankee minded reformers are imagining!