India Uninc

Back of the Book

While the nation’s newspapers, journals, business magazines, TV channels and the internet continue to churn out reams, airtime and gigabytes of information about India’s business houses-India Inc.-in this one-of-its kind book, Prof. R. Vaidyanathan delves deep into India Uninc, and presents a persuasive case for why the latter is really what is at the heart of our economy, and why any growth story about India is incomplete if that real engine of our growth is ignored.

The author argues that the real India story, over generations, lies with the many proprietorship and partnership firms, small manufacturing units, kirana stores, single entrepreneurs and household enterprises. That they are being finally given their due, in this important study, is the result of many years of cutting-edge research, which lays bare the lopsided viewpoints of policy-makers and ‘experts’, and urges a broader vision of the country’s economy. The small entrepreneur says Prof. Vaidyanathan, should prevail over crony capitalism.

Scholarly yet accessible, and offering a wealth of information on an uncharted territory, India Uninc. is a must-read for anybody who aspires to understand the Indian economy -as well as India itself.

About the Author

Prof. R. Vaidyanathan has been teaching at IIM, Bangalore for close to three decades. Immensely popular with his students, he is also on the boards of several corporate. He is a member of committees of regulatory bodies such as the SEBI, RBI, IRDA and PFRDA, and is a regular commentator on economic matters in the nation’s leading newspapers.

Foreword

I have known Prof. R. Vaidyanathan for nearly fifteen years. He did an exhaustive study on the Non-Banking Finance Sector a decade ago which was in a sense an eye-opener for many of us in the industry. The study established that the Non-Banking Financial Sector involving large companies and small moneylenders plays a very important role in the economy of India. The Non-Banking Finance Sector plays an important role in meeting the credit requirements of the small businesses in timely fashion at appropriate risk adjusted rates. He also showed us that a larger portion of credit requirements of sectors like trade, transport, hotels etc. are met by the Non-Banking Finance Sector.

While most of our discussions used to revolve around Non-Banking Finance Companies or NBFCs, Prof. Vaidyanathan enlarged the scope of his study by introducing the role of UIBs or Unincorporated (Uninc.) bodies like money lenders, chits etc. to consider Non- Banking Finance Sector or the NBFS as a whole.

Prof. Vaidyanathan has been associated with a number of regulatory bodies and also sits on the boards of many large corporates as independent Director. But he has retained his abiding interest in small and medium businesses and their financing.

Prof. Vaidyanathan is a prolific writer in business journals and magazines. He has consistently highlighted the role of non-corporate India as well as the non-banking finance sector of our Economy. He has also dwelt on the salient differences between the Indian Economy and that of US in terms of structure, employment, institutions, instruments and regulations. He argues that Indian paradigms need Indian answers and not ‘solutions’ copied blindly from western text books.

In this seminal work, he brings out the salient aspects of the Unincorporated or Non-Corporate India primarily consisting of Partnership and Proprietorship firms, what is termed as the P&P sector.

He estimates their share in National Income - more than 40% - in savings/capital formation and employment. He explains that they occupy a significant part of the service sector and also have greater real growth rates. In a sense, they have been the engines of our economic growth in the last two decades. He argues that they occupy a fairly large space in our economy but get lesser attention due to our focus on the corporate sector. From that point of view he calls for re-focusing our reform process to facilitate the growth of these small and medium enterprises. India Uninc. is the victim of corruption and bribery by government agencies and lack of timely availability of credit at reasonable interest rates.

In that context, there is a need to reform regulatory and governance mechanisms at the state level. He also highlights the role of caste as social capital in some clusters of economic activity in India. It provides a refreshing perspective on the role of caste in capital formation, risk taking, facing failures and credit transactions with trust. He brings out the importance of a separate developmental and regulatory agency for Non-Banking financing entities which would go a long way in facilitating orderly and faster growth of the Unincorporated sector.

He brings out the issues of Charity and giving as practised by these small businesses from times immemorial and how without a CSR regulatory framework they have been performing acts of charity as part of their ethos.

An important point about his writing is that he backs up his claims with statistics and a generous dose of wit! I am confident that this book will be in a sense a ‘tipping point’ in discussions pertaining to our economy and reform process. Hence it is critical that policy planners, bankers, government officials, corporate denizens and academics go through this book to understand the economic issues of real India and its strengths and weaknesses.

I wish Prof R. Vaidyanathan all the best in this endeavour.

Introduction

The largest component of the national economy namely, proprietorship and partnership firms is not an area of focus for planners and economists. The non-corporate sector is sometimes subsumed as part of household sector as in the case of data pertaining to savings, sometimes considered as the unorganized sector as in the case of service activities and sometimes treated as unregistered sector as in the case of manufacturing. When it comes to labour and employment, it is considered as the informal sector. Since this non-corporate sector mainly consists of Proprietorship and Partnership forms of organizations, we sometimes refer to it as the ‘P & P’ sector. The focus of this book is the non-government, non- agricultural, non-corporate activities which are dominant in services like trade, transport, construction, hotels and restaurant and other services. These organizations are also significant in manufacturing activities. With the increase in out sourcing of activities done by large corporates, we find that the so-called unorganized sector is playing a more important role in many areas of manufacturing. The non- corporate sector also plays a significant role in savings and capital formation and is also the largest employer in the country next only to agriculture.

The Unincorporated or non-corporate sector of our economy [consisting of partnership/proprietorship firms and self-employed persons] has the largest share in our national income, manufacturing activities, services, savings, investment, both direct and indirect taxes, credit market, employment, forex earnings etc. It is important that we understand the nature and role of this sector, which as stated earlier is also referred to as the ‘un-organized’, ‘informal’ or ‘residual’ sector. All these terminologies are based on concepts pertaining to Western experiences, which are perhaps not appropriate in the Indian context.

Research shows that the fastest growing activities are those activities in which non-corporate India - Unincorporated companies - is a dominant player. In other words, it would not be wrong to say that India Uninc. is the engine of our economic growth.

An important observation is that a substantial number of regulations and taxation related issues of India Uninc. is in the hands of the state governments and not many reforms have been undertaken in these regulations. Hence, it would not be wrong to say that the growth in our economy is not entirely due to the reforms undertaken by the Central Government in the nineties. They are also due to increased savings rate in the economy substantially due to India Uninc. The reforms have not focussed on the activities of India Uninc. and unfortunately, we find that many policy formulations are not conducive for their growth.

In Section One, we discuss the issues of terminology and the share of India Uninc. in the national income, manufacturing and service activities. We find that they have a significant share in national income and manufacturing activities. They are also dominant in service activities. We also bring out their significant contribution to savings and capital formation. In Section Two, we focus on the travails of the non-corporate sector in terms of government regulations, level playing field due to Foreign Direct Investment (FDI) and the bias against the self-employed in policy formulations. Section Three elaborates on this issue with respect to credit delivery to India Uninc. Section Four highlights the issues of tax coverage and bribe rate which also should be considered in considering tax rates. Section Five deals with issues of social security and gold which can be used for reverse mortgage in the Indian context which would also benefit the P&P sector. Section Six focusses on the stock market and explains how the stock markets are not the barometers of our economy. It highlights how Stock markets dominate our discussions when in fact, the Uninc. is the dominant factor of the economy. It also deals with the issue of liquidity in the market. Section Seven pertains to issues of social equity, particularly caste and entrepreneurship. The role of caste as social capital for the Uninc. sector is highlighted. It highlights the importance of making the weaker sections entrepreneurs instead of stressing on reservations in jobs. Section Eight deals with different types of issues ranging from the impact of the mobile revolution to the sports sector and the film industry.

The idea of this book is to generate discussion regarding the largest but least focussed component of our economy namely, the non-corporate sector - India Uninc. The current stress on globalization has had an impact on this sector and the type of developmental model we choose will decide the future of this sector. Will millions of firms wither away and the current owners/employees become proletariat in the corporatised capitalist activities? Time alone will tell. But it is required for planners and experts to consider the implications of such changes on our savings, employment, social security and other related issues.

The book seeks to provide an initial thrust for such a discussion.

Contents