INSIGHT :: ECONOMICS

[HITESH MEHTA]

INSIGHT :: ECONOMICS

The real engines of India's economic growth

Conventional wisdom is that liberalisation and resulting inflow of foreign capital to corporate India are the primary reasons for India's rapid growth in the past decade. The recent fall in the growth rate has led to much discussion in business media and economic circles on the stimulus required for corporate India.

 

Increase in household savings and growing domestic demand have been the been primary drivers of Indian economic growth.

The contribution of Proprietorship and Partnership (P&P) firms and self-employed persons to India's economic growth hardly finds a mention. Professor R. Vaidyanathan's analysis of the National Accounts Statistics reveals some startling facts about the primary drivers of India's growth. He concludes that the non-corporate sector of India's economy, consisting of unregistered units in the manufacturing sector, typically partnership/proprietorship firms and self-employed persons in trade, transport, construction, hotels and other services have been the unsung heroes of India's economic growth. A steady increase in household savings and domestic demand have spurred India's growth hitherto attributed to liberalisation and resulting inflow of foreign capital to corporate India.

 

Indian economy is dominated by Proprietorship and Partnership firms with nearly 100% share in agriculture, 50% in manufacturing and more than 60% in service sector.

The Indian government contributes around 23% to the Net Domestic Product (NDP), a measure of our national income. Organized or corporate sector contributes another 17% to the NDP. The remaining 60% of our national income comes from the non-corporate sector. Out of this 60% contribution by the non-corporate sector, agriculture accounts for nearly 19%, manufacturing 4.5% and services sector 36%. Ironically, the service sector in India is often interpreted to mean business services such as those provided by companies like Wipro or Infosys. Such corporate business services however, contribute less than 2% of India's national income. The non-corporate sector, in contrast, has a huge share in service activities, ranging from 60% in construction to 80% in trade. The phenomenal growth achieved by these services in the nineties needs recognition, Prof Vaidyanathan argues.

 

Household sector, with more than 70% of national savings is responsible for financing the growth witnessed by India.

Savings rate in India or Gross Domestic Savings (GDS) has nearly tripled from 12% in the 1960's to 32% in the decade. 70% of this savings comes from the household sector that includes consuming households as well as the P&P sector. The much vaunted foreign direct investoment and portfolio investments constitute only 5% of the GDS. It is this high level of savings in the household sector, points out Vaidyanathan, that has financed India's economic growth. That may be the only silver lining in the cloud, though.

 

Not only are the household savings not accorded due recognition for their contribution to India's economic growth, these savings are frittered away through poor utilization by the government. The financial savings of India Uninc, primarily in the form of bank deposits, life insurance funds and provident and pension funds – mostly government owned – are deployed inefficiently. These government-owned instruments often provide an average rate of return that barely covers the inflation rate. The government is, effectively, acting as a grabber of these savings which are supposed to fund healthcare, primary education and old age expenses of the household.

 

The financial savings of India Uninc, are being ill-served by the low returns of government instruments, such as provident & pension funds.

It is time to give credit to the real engines of India's economic growth – non-corporate sector . This sector typically has low levels of organization and the workers are largely unaware of their rights and negotiating power. Policies to better the conditions of all stakeholders in India Uninc might be the right first step in recognizing the contribution of India Uninc.

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REGARDS,

HITESH MEHTA

988 18 95 288

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