INDIA UNINC.

Author: VAIDYANATHAN, PROF. R.

• 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 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.

• 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.

• The unincorporated or the non-corporate sector in India is the largest contributor to national income, savings and investments and taxes and accounts for the largest share in manufacturing and service activities and employment. Yet, it is a victim of the myth of superiority surrounding the corporate sector.

• It is perhaps part of our tradition to define a thing based on the concept of Na Ithi — ‘that which is not’. We can perhaps take comfort from the fact that — for instance — under some of the constitutional provisions, a Hindu is defined as any person who is not a Muslim, Christian, Parsi or Jew by religion.

• “Generally, all enterprises which are either registered or come under the purview of any one of the Acts like the Indian Factories Act, 1948, Mines and Minerals (Regulation and Development) Act, 1957, The Company Law, Central/State Sales Tax Acts, The Shops and Establishment Acts of the state governments, are defined as part of the organized sector.

• all unincorporated enterprises and household industries which are not regulated by any Acts of the type mentioned above and which do not maintain any annual reports presenting the profit and the loss and balance sheets are classified as unorganized.”

• But there are large partnership/proprietorship firms having regular accounts in trade type service activities. They are part of organized services but unincorporated. Hence, the unincorporated sector is much larger than the unorganized sector.

• If an unit is unregistered [not having ten or more workers with power and twenty or more without power], then the unit cannot be said to have the status of a company form of organization since the cost of having a corporate form is significant for such entities.

• we can define Uninc. or the non-corporate sector as those non-corporate entities which belong to non-agricultural and non-government [departments and non-departmental enterprises] activities.

• The Department of Planning and Statistics is dysfunctional in many States and the person appointed as Minister in such a department feels he has been given an ‘unimportant’ portfolio.

• It is told in studies pertaining to databases that when the past is imperfect, the present is tense and the future uncertain.

• India deserves a better database and this is something India can and should achieve as it is a sine qua non for orderly growth and meaningful policy formulations.

• The unincorporated sector in India contributes about 45% of the national income, which, by far, surpasses the corporate sector’s contribution of around 15%

• One needs to remember that the unorganized sector is only a large subset of the non-corporate sector.

• Even in the case of service activities large partnership/proprietorship firms who keep account books and are subject to certain regulations are present. They would be part

• Even in the case of service activities large partnership/proprietorship firms who keep account books and are subject to certain regulations are present. They would be part of the non-corporate but organized sector.

• find that the corporate sector dominates the US economy to the extent of having around 70% of the share of GDP. This is in contrast to our country where the corporate sector has around 18% of the share in the national income.

• We find that the corporate sector dominates the US economy to the extent of having around 70% of the share of GDP. This is in contrast to our country where the corporate sector has around 18% of the share in the national income.

• This, combined with the unorganized sector [all non-corporate], of 34% [table-2.3] gives us estimation that nearly 41% of the value addition in the manufacturing activity is due to the non-corporate sector.

• An enterprise which is run without any hired worker employed on a fairly regular basis — that is for a major part of the period when operations of are carried out during a reference period — is termed as an own account enterprise.

• An establishment is an enterprise which is employing at least one hired worker on a fairly regular basis.

• 62% of unincorporated non-agricultural enterprises were owned by persons belonging to Scheduled Tribes (ST), Scheduled Castes (SC) and Other Backward Classes (OBC).

• To sum up, the share of the non-corporate sector in our national income is more than 45% and that of the private corporate sector is less than 18%.

• To sum up, the share of the non-corporate sector in our national income is more than 45% and that of the private corporate sector is less than 18%. The remaining is shared by the government and private agriculture more or less equally.

• Within manufacturing, the share of the non-corporate sector is nearly 41%.

• We observe that the non-corporate sector dominates service activities, which, in turn, constitutes nearly two thirds of our economy.

• We observe that the non-corporate sector dominates service activities, which, in turn, constitutes nearly two thirds of our economy. These are also the fastest growing activities. So justifiably, it is the non-corporate sector that should be termed ‘the engine of our economic growth’ and the Indian economy be called the partnership and proprietorship economy

• As pointed out by National Statistical Commission (NSC), although the service sector plays such a pivotal role in our economy, the database of this sector is highly disorganized.

• The services sector can be broadly classified into three segments, namely, the public sector, private corporate and the ‘household’ sector. The first two are considered as ‘organized’ and the rest consists of unincorporated enterprises including all kinds of proprietorship and partnerships run by individuals.

• There is a witty saying in the army, that to move up the ranks what needs to be done is “Salute all things moving and paint all things standing.” In the same vein, governments attempt to control and regulate an economic activity if it does not understand it and tax it if it is growing fast.

• The contribution of the Proprietorship and Partnership firms (unincorporated sector) to National Savings has not received the recognition it deserves. Once again, this aberration is largely, if not wholly, due to the terminology which labels the non-corporate sector as the ’household’ sector, though many of them notch up turnover running into hundreds of crores.

• In the sixties, our savings rate used to be around 8% to 10% and the theory of the vicious cycle of poverty, namely, a low savings rate implies low investment, and hence, low income which, in turn, once again leads to a low savings rate etc., was made popular using India as an example.

• Around 70-80% of savings in the country is due to the household sector that consists of pure consuming (wage earning) households as well as non-corporate (mixed income households).

• In spite of the noise made about the importance of foreign investment in our economy, we find that their role is less than 10%.

• FDI/FII in our economy is like pickles to curd rice and not the main dish. Still, so overpowering is our Anglophilia that it is made to appear that the entire Indian economy is dependent on foreign investment.

• The logic for the importance of foreign inflows in our economic growth can be summarized as follows. If India plans to grow at 10%, then it requires nearly 40% as the savings rate, since Incremental Capital Output Ratio [ICOR] is nearly 4. Our savings rate is around 32% and hence we need to strive to get foreign inflows to bridge the gap. That is, our own savings plus foreign inflows will be the investments in the economy sustaining 10% growth.

• The logic for the importance of foreign inflows in our economic growth can be summarized as follows. If India plans to grow at 10%, then it requires nearly 40% as the savings rate, since Incremental Capital Output Ratio [ICOR] is nearly 4. Our savings rate is around 32% and hence we need to strive to get foreign inflows to bridge the gap. That is, our own savings plus foreign inflows will be the investments in the economy sustaining 10% growth. These types of arguments have several assumptions. First and foremost is the assumption regarding the capital output ratio of 4. Is this mandated by God? 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 on what are known as old economy industries. In new economy industries like the software sector, incremental output is more a function of adding more brain power rather than capital.

• There have been a thousand conferences where the role of foreign inflows [less than 10%] has been extolled, and our growth attributed to it, but the role of the household sector has rarely been talked about.

• The absence of superannuation benefits in the household sector and a dramatic rise in educational and healthcare expenses has aggravated the sector’s future uncertainties.

• The household sector savings consists of physical savings and financial savings. Net additions to the physical assets of the households comprising investment in fixed assets of construction and machinery and equipment and change in stocks, is taken to constitute households’ saving in physical assets.

• Savings in the form of financial assets, are (1) currency, (2) bank deposits, (3) shares and debentures, (4) small savings represented as net claims on the government by households, (5) life insurance funds and (6) provident and pension funds.

• In our context, individuals have to depend on their own savings and or joint family support in old age. Hence, there is a dire necessity for families to save in the context of increasing life expectancy and the decline in the joint family system.

• We find that the physical savings, mainly houses etc. constitute more than 50% of the household savings

• In the year 2011-12, deposits with banks (59%), life insurance (20%) and provident funds (14%) constituted the bulk of Finance Savings.

• All savings done by households for education is to enhance the ‘equalizer’ quotient on an inter-generational basis. It is based on the attitude of — let my child be in a better profession/earn more than I do. Hence, any attempt to lure people to ‘Shop till you drop’ will aggravate social tensions, and it is imperative we stress the traditional virtues of frugality and thrift to safeguard the social cohesion and welfare of families in the future.

• Tax impositions — levied by the Centre to bail out the states — will go up as they usually do when governments go broke.

• A very significant fact is that 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.

• The share of physical savings [capital formation] was of the order of 90% in the fifties and is now around 50%. In other words, a substantial portion of household savings is taken away by the government and the private corporate sector for their capital formation.

• In other words, a vast army of government employees [Central, state and local government] of around 20 million are taken care by the remaining 380 million of the workforce, which also meets the extortionate and rent-seeking demands of the government employees.

• Since the state governments have no political will to increase their income by taxes, the Centre steps in. The idea of service tax arises out of such desperation, which only increases the dowry index for the male employees of indirect tax departments as compared to income tax employees.

• In this chapter we question the rationale behind linking the growth of the last two decades to the Narasimha Rao government initiated reforms which were later sustained by other governments and gives concrete facts and figures to prove that the growth should be ascribed to the unincorporated sector’s phenomenal contribution to savings and service sector activities.

• More importantly, the growth in the economy during the last two decades was due to proprietorship and partnership firms in service activities like construction, trade [wholesale and retail], hotels and restaurants, non-railway transport, real estate, business and other services.

• A significant part of the savings has been appropriated by the governments [the Centre and states] through banks, postal schemes, provident fund, etc., for their unproductive expenditure.

• There is a Tamil proverb about a crow sitting on a palm tree and the fruit falling at that point of time and the onlookers ascribing the fall of the fruit to the crow.

• The kirana shops adjacent to most Indian homes open at 7 am and close at 10 pm every day for 365 days of the year. The shopkeeper is very efficient, has an efficient home delivery system and knows the tastes and price considerations of his customers. But he is labelled ‘unorganized’ by our experts and national income data and his contribution thereby diminished.

• It is like clubbing housewives along with prostitutes in our Census data to show them that they are involved in ‘unproductive’ activities.

• The retail trade suffers from two major issues. One is the non-availability of credit at reasonable rates from institutions and another is the bribe given to extortionist Government babus and their minions.

• The Government including the PM has been talking of improving the living standards of SC/STs and OBCs and Muslims. It is pertinent to note that substantial portions of Muslims who are in business are in retail trade. In a sense, one part of Government does not seem to know what the other part is doing. The impact on the community will be phenomenal.

• The argument is that the MNCs bring ‘funds’, ‘efficiency’ and ‘cost effective’ solutions. The consumer should therefore be happy!! But the fact is that MNCs do not normally bring funds from their home countries or any other external sources, since they can access funds in our domestic market by brandishing ‘comfort letters’ from their parent companies.

• Remember Enron which was supposed to bring in Rs.10,000 crore. The final result is that our domestic government institutions today hold more than Rs. 6000 crore of worthless paper courtesy the money lent to Enron.

• What technology? Do we want to ‘dumb down India’ as Wal-Mart has done to the US? Should we replace the street corner shopkeeper who can add fifty items without a calculator with a counter girl [no sexist bias] who cannot add five numbers without a machine?

• In developing countries with weak ownership records the real estate sharks will lead the retail revolution.

• The argument so far cited in not to be construed as an argument against globalization or against foreign companies in Indian trade.It seeks to draw attention to the fact that the process is not transparent. It is ad hoc, haphazard, and full of discretions and improvisations on the way.

• Our government’s policies are likely to displace the self-employed and render them unemployable.

• As previously discussed, it is actually 45% for Uninc. and 18% for Corporate sector. The P&P sector is dominant in service sectors like construction, trade, non-railway transport, hotels and restaurants and other services. These are the fastest growing sectors in the economy.

• Hence many policies pertaining to labour, which are appropriate in the Western context, may not be appropriate in our situation.

• Millions of persons who were earlier painting and/or engraving these licence plates will become redundant. About 240 to 400 million-man hours of work will be made redundant [assuming that it takes 3 to 5 hours per plate] in the next few years, since these are re-done at least once in four years. There has not been any attempt to re-train or impart newer skills to the affected persons currently engaged in these activities to face the challenges of the reforms demanded by the metropolitan elites. In the fifties, kitchens used to have mainly brass and copper vessels.

• Two opposite groups, namely the crusaders of globalization and leftist intellectuals interestingly appear to support the slow death of the self-employed groups.

• The labyrinthine course our legal processes take makes enforcing contracts impossible. Particularly hard hit by our protracted court procedures which totally ignore the time value of money concept is our non-corporate sector with its limited financial flexibility. It is high time that the legal system is innovatively revamped.

• Significant portions of transactions are ‘relationship based’ and not ‘contract based’.

• A ‘Mahant’ who is a keeper of a temple, filed a suit in Pune in 1205 A.D and the case was decided in 1966 — a full 761 years later

• Even well-established multinational banks are engaging ‘Re-possession agents’ and recently, even the local police or their proxies as collection agents. This has far reaching implications for the financial system. The reforms should have addressed this issue, since the maximum impact is felt by the P&P sector.

• We need to remember that we have less than ten thousand police stations in our country but more than two million temples, i.e., places of worship. In other words, by and large, contract compliance is more due to the fear of God than of legal processes.

• The credit available from banking sector is not adequate for India Uninc. Banks are more focussed on the corporate sector and investing in gilts. The role of the Non-Banking Financial sector should be acknowledged and integrated with mainstream financial markets.

• The levels of risk undertaken by the NBFS is significant, since they lend with the least paper work.

• The share of the private corporate sector in national income is around 18% but it takes away nearly 45% of the credit provided by the banking sector.

• The traditional public sector banker is not geared for such risk management. He is not promoted or given extra incentives for taking risks. Rather, his promotion is a result of a number of years of ‘unblemished’ service.

• The non-banking financial services organizations have emerged as highly resourceful credit delivery channels, especially for the unorganized sector. Given their extensive network, their penchant for quality credit appraisal and their level of acceptability among their customers, they are far from receiving their due recognition.

• In other words, more than 70% of the financial requirement of the non-corporate sector in trade is met by non-banking sources.

• Hence, nearly 45% of private construction activity is financed by the non-banking sector. The non-corporate sector has a large presence, more than 60% of this industry.

• The Non-Banking Finance Sector (NBFS) is much larger than Non-Bank Finance Companies (NBFCs) since the former includes many non-company forms of organizations like chits, moneylenders [Unincorporated Bodies — UIB’s] etc.

• In Bangalore, one recent scheme by Vini-Vic, which cheated a large number of people, gave ‘receipts’ to customers which clearly indicated that they were providing donations to a temple!

• Financial systems are fascinating learning tools where the input/throughput/output mechanism in terms of borrowing, processing and lending enhances and enriches the institutions. If any one node is missing, they do not learn and then, they mostly fail.

• Already, we find that in truck financing, the large domestic and foreign banks are utilising the NBFCs as channel partners. Hence, the public sector banks could finance the non-bank financial institutions on a wholesale basis, and they, in turn, could fund the requirements of the non-corporate sectors in a chain of retailing credit and recovery functions.

• Globalizing our financial sector without domestic integration of the financial markets may lead to a situation of cherry picking by the global players and/or linkages created only at the ‘creamy layer’ level without adequate strengthening of the base of the system.

• We estimate that for all categories, the revenue generated in one city on ‘Own Account’ could be around Rs. 100 lakh per day.

• At an average price of say Rs. 25000 for ten grams, we can estimate that more than Rs. 215,000 crore has been spent in buying gold in 2012 by Indian households, which is much larger than the aggregate capital raised from the stock markets.

• The purchase of gold by households is not treated as savings in our statistics. It is treated as consumption by households, which is curious since households treat purchase of gold as ‘investments,’ whatever the economists in the government may think.

• The so-called superstition that mandates a woman not to remove the mangalsutra around her neck till the death of the husband is an insurance protection to the woman against rapacious relatives and children.

• The era of gold standard has come to an end and with the development of the derivative markets. It has lost its earlier attraction for hedging.

• Under such a situation, the most entrepreneurial and hard-working, self-employed groups of the Uninc. sector in India are facing a huge challenge to protect their future. Their position is that of a nut caught in the nutcracker with the Socialists and Globalizers acting as the two arms.

• The other issue is regarding the culture, language, eating habits, sexual attitudes and family values of this mass of men and women. Already there are several reports to suggest that fast food is the norm and casual attitude to sex and family is seeping into the system of these youngsters.

• Thomas Babington Macaulay in his now infamous ‘Minutes’ talks of creating men with Indian Bodies and British Souls, but in the emerging scenario, unless we are alert and active, we may end up with men with no soul and only obese Western bodies built up through the consumption of untimely fast food.

• Similarly, the contribution made by the self-employed to the construction and maintenance of old age homes can be exempt from taxes to the extent of say Rs. 1 lakh per annum. This will help in directly using their surplus for the cause of the socially handicapped.

• The old age homes can offer discounts or free service to the current donors when they grow old. This will increase the pool of facilities available for elderly people.

• In the US, Reverse Annuity Mortgages are gaining popularity among elderly homeowners. In the US, a Reverse Annuity Mortgage typically involves an elderly person entering into an agreement with a financial institution, such as a bank. The individual receives a lifetime, fixed monthly income in return for phased surrender of the ownership of, say, his home, which is substantially debt free. The financial institution gains title to the property, at the owner’s death, which it can sell for a profit.

• We can introduce such a scheme using gold ornaments as the underlying asset and this can be offered by the mutual funds, banks, proposed pension fund providers and life insurance companies. It can be used not only as an annuity for pension purposes; it can even be used for credit delivery purposes if appropriate mechanisms/regulations and instruments are evolved.

• We can use a thumb rule to conclude that whenever the savings rate of a society is less than 10% of its disposable income [with stable taxation and inflation] then the society is bound to get into difficulties.

• The increasing number of children born out of wedlock to younger girls and single mothers creates additional dependency numbers for the State.

• The slogan of ‘Shop till you drop’ is slowly changing to ‘Shop and get dropped’.

• Shopping is made a virtue and life style. Indian women are encouraged to go out and buy and buy till their hands bleed. The hidden persuaders [kings of advertising] are in the open. Plastic credit cards are offered for the asking [many times without even asking!] and consumption is now the modern mantra.

• The fourth point is about samskaras or what are known as family obligations to birth/marriage/death etc. of relatives and expenses thereon. Actually poorer segments spend more on these. So old age security, old age health needs, school education of children, samskaras are the four major reasons for saving by households

• We need to evolve a third way which is environment friendly and take into account intergenerational equity not by the fiat of the State but by the suasion of social norms.

• It is perhaps time to move away from consumption-driven economy to a savings-nurturing society. Otherwise, we will prove that the only lesson we learnt from the economic history of the plastic card addicted debt ridden Western society is our refusal to learn any lessons at all.

• The value-destroying list is long, and those interested can go through the business journals of the last 20 years (particularly the cover stories) that detail how these ‘whizkids’ and ‘visionaries’ were going to build a modern, industrialised India.

• Our Finance Minister knows this story — I am sure — and so, instead of wasting his time in Frankfurt and Tokyo, he should focus on Indian housewives and help them balance their budgets by reducing inflation and the fiscal deficit. Unfortunately, our housewives do not have access to the Nashik note printing press like our FM. The solution to India’s problems lie inside, not in wooing FII and FDI inflows.

• For the benefit of the MTV generation, let me explain by saying that Abhimanyu, the son of Arjuna in Mahabharata, learnt the art of entering the Vyuha when he was in his mother’s womb. But before he could be taught the exit technique, he was born. He could not double-click on a mouse then!

• These gentlemen are very much part of the dining and ‘wining’ circuit in Bombay and Delhi.

• This chapter explores the economic growth constituents and catalytic components. It also identifies the role of caste in the growth process among the emerging entrepreneurial groups.

• The same is true regarding the Nadar community in the Virudhunagar area, again in Tamil Nadu and an area associated with the match-box and printing industry

• In the light of the new Companies Act which specifies a sum of 2% of the profit to be distributed for Corporate Social Responsibility [CSR] activities, they may not require FCRA anymore since domestic donations will be more than adequate for meeting the requirements of genuine NGOs.

• We should recognize that for most of the Indian elite, their umbilical cords are linked to the west.

• Due to colonial genes, acceptance/recognition by the west is critical for average middle class Indians.

• Ten years ago, America had Steve Jobs, Bob Hope and Johnny Cash. Now it has no Jobs, no Hope and no Cash.

• In this current economic scenario countries like India are also being made to feel that they are in a crisis. Since the white man says it, we swallow it hook, line and sinker.

• The crisis faced by the West is primarily due to forgetting a six letter word called ‘saving’ which is a result of forgetting another six letter word called ‘family’.

• When family is a ‘burden’ and children an ‘encumbrance’, society can be said to be in a state that should cause concern.