Article below from Dr. Vaidyanathan of IIM Bangalore gives altogether a different point of view with regards to economic reforms and what needs to be done. Read on……..
Regards
Virendra Goel
http://rvaidya2000.wordpress.com/wp-admin/post.php?post=489&action=edit&message=6&postpost=v2
My NEW web site is http://prof-vaidyanathan.com/
FATCAT OBSESSION:REFORM INDIA UNINC NOT INDIA INC
September 29, 2012 · by · in First Post
Prime Minister Manmohan Singh, in his address to the nation on 21 September, has clearly enunciated the need for reforms to achieve the desired economic growth and not go back to the situation obtaining in the early nineties. Unfortunately, his focus is on reforms which are dictated by US business interests and supported by local crony capitalists. The latter occupy a small space in our economy but their voice is loud since they control all major media and have effective lobbies in Delhi.
If we look at the structure of our economy, we find that nearly 20 percent of GDP is contributed by the government and another 18 percent comes from agriculture, which is also in private hands. The corporate sector, which gets a regular audience with the Prime Minister, accounts for just around 15 percent. The rest, which include partnership and proprietorship firms (called non-corporate businesses), constitute more than 45 percent of our GDP. (Source: National Accounts Statistics, CSO-2011).
In the US, the share of corporate business is more than 75 percent in GDP.
In India, the share of non-corporate business even in the manufacturing sector is nearly 50 percent.
As for services, which includes sectors such as construction, trade (wholesale and retail), transport (other than railways), hotels and restaurants, real estate, and other services (professional), the share of the non-corporate sector is more than 70 percent; these activities are the fastest growing activities with more than 8 percent compounded average growth rate in the last decade. These are the drivers of our economic growth.
Reuters
In savings, households contribute more than 70 percent of our domestic savings — and domestic savings is the prime driver of our investment and growth. In the case of savings data, households include the non-corporate sector.
What this means is simple. The main thrust of our reforms should be focused on our non-corporate sector, but this is the sector that faces the twin devils of credit starvation and corruption (the result of unchecked inspector and permit raj). Even though the non-corporate sector is fastest growing, its credit needs are not met by the banking sector but by private moneylenders and their cost of borrowing is as high as 5-6 percent per month — that is, around 70 percent per annum.
The share of the non-corporate sector in bank credit, which was nearly 60 percent in the early nineties, has come down to 36 percent in 2011, showing a consistent decline. The share of the corporate sector has gone up from around 30 percent to 44 percent and that of the government from 10 percent to 20 percent.
Table-1 Distribution of Outstanding Bank Credit by Categories [%]
Category | March 1990 | March 1996 | March 2004 | 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 |
Total | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100 |
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 are starved of bank credit, forcing them to depend on moneylenders and other non-bank sources. The crony capitalists who default on bank loans get a larger share of wasteful lending. The solution to this problem — of credit starvation in the most dynamic sectors — is to create a separate body to monitor the non-bank financial sector and free it from bureaucratic clutches.
Not only that, the non-corporate sector also pays huge sums as bribes — sometimes as high as 10-15 percent of its gross turnover. So the misery index of small and medium businesses in India is a combination of interest rates and bribe rates — which comes to an annual rate of nearly 80 percent.
This misery index needs to be tackled and reforms should focus on alleviating this anti-business skew instead of worrying about whether Wal-Mart should enter India or not. Wal-Mart, in its search for new markets, needs us more than we need it.
For the India Story to rebound, the reforms we really need are in the areas of commercial taxes, road taxes, entertainment tax, excise duty on liquor, urban land ceiling regulations, the Shops and Establishments Act, laws governing educational and medical institutions, money lending regulations, stamp duty, food and adulteration laws (involving municipalities), water and drainage regulation, and the registration and contract laws.
These regulations pertaining to activities in which the 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 concerns.
We do not want to have basic and more path-breaking reforms – in fact, we do not even discuss it – because they are not “sexy” enough and do not appeal to the audiences of the business TV channels and the chambers of commerce. Actually, FII and FDI sources have always contributed less than 10 percent of our investments, which are largely driven by domestic savings. Yet we think giving more incentives to foreign investors will solve all problems. That is not a sign of free market thinking, but a sepoy’s sellout to global capital.
Until and unless we focus on reforms at the state and lower levels, we are not going to sustain our growth rates. We must come out of our focus on the big corporate sector — the Sensex economy — and focus on the sectors that really create jobs and growth. Our corporate sector is only an “item number” in our economy, full of glamour and oomph, but there is less substance below.
We as a nation have the uncanny ability to focus on the inconsequential and immaterial and waste lots of time and effort on them. We even have the gall to criticise those who point out these hometruths as Swadeshi loonies or even Luddites.
Delhi-centric reforms can only benefit fatcats 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 have to deal with corruption at the lower, and less controllable, levels in our system. What India needs is to reform our reform process itself to focus on the real India and not the India which the Yankees and Yankee-minded reformers are imagining!
______________________________________
R.VAIDYANATHAN
PROFESSOR OF FINANCE
INDIAN INSTITUTE OF MANAGEMENT
BANNERGHATTA ROAD
BANGALORE
INDIA_560076
TEL: 91-80-2699-3086
FAX:91-80-2658-4050
E mail:vaidya@iimb.ernet.in
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