Dismiss Notice
Welcome to IDF- Indian Defence Forum , register for free to join this friendly community of defence enthusiastic from around the world. Make your opinion heard and appreciated.

Hyped Up importance of Corporates in India

Discussion in 'World Economy' started by Paliwal Warrior, Jul 20, 2014.

Thread Status:
Not open for further replies.
  1. Paliwal Warrior

    Paliwal Warrior Lt. Colonel ELITE MEMBER

    Joined:
    Aug 4, 2013
    Messages:
    6,186
    Likes Received:
    903
    The good is in the detail

    S. Gurumurthy


    Commentators see facts hidden in budgets as the “devil’s in the detail.” This presumes that only wrong things are buried in the detail. But Gregory Titelman — in the Random House Dictionary of Popular Proverbs and Sayings , Random House Reference March 5, 1996 — finds that “God is in the detail” is the original source of the idiom, “the devil’s in the detail.” Here is something in Union Finance Minister Arun Jaitley’s budget speech which accords with the original idiom — the good is in the detail.

    A profound idea of the new government which has the stamp of Prime Minister Narendra Modi is expressed, but not elaborated, in paragraph 102 of the speech. It says: “SMEs form the backbone of our Economy. They account for a large portion of our industrial output and employment. The bulk of service sector enterprises are also SMEs. Most of these SMEs are Own Account Enterprises. Most importantly a majority of these enterprises are owned or run by SCs, STs and OBCs. Financing to this sector is of critical importance, especially as it benefits the weakest sections. There is need to examine the financial architecture for this sector. I propose to appoint a committee with representatives from the Finance Ministry, Ministry of MSME, RBI to give concrete suggestions in three months.” In the budget discourse monopolised by corporates, the financial world and the elite, this profound idea has been completely ignored. That Small and Micro Enterprises (SME) form the backbone of our economy is a slogan that has been a part of the national economic discourse for long. But beyond oral compliments, nothing great has been done for them. Also, there is very little awareness about this vital segment of our economy — within and outside the government. What then does this “God is in the detail” paragraph 102 comprehend?

    Corporates and the economy

    A helicopter view of the nation’s economy and its major components is needed in order to grasp what Mr. Jaitley has said. The Asia/Pacific Equity Research paper of Crédit Suisse — which manages $1.3 trillion worth of assets — says that corporates constitute just “the tail” of the Indian economy. This report is dated July 2013, after two decades of celebration of the corporate sector. The paper titled “India’s better half: The Informal Economy” adds: “The intuitive habit of drawing macroeconomic conclusions [about India] from the corporate feedback (and vice versa) is fraught with risk. After all, only half of India’s GDP and 10 percent of India’s employment are in the formal sector. Further, only a fraction of the formal sector is listed.” It also exposes the emperor’s new clothes story — that the corporate sector generates only 15 per cent of national consumption, with the share of the listed ones in it just a fraction, four per cent. Moreover, the celebrated private corporates, with the IT and auto revolution, have added just 3.7 million jobs in 20 years from 1991. The Crédit Suisse report rightly concludes that the corporate “tail is unlikely to wag the dog,” namely the national economy

    Unregistered business is legitimate

    If the formal — read corporate — sector is so marginal and provides just over 14 million jobs, then what is the core of the Indian economy? And who provides jobs for the hundreds of million people? It is the informal economy of India, says the Crédit Suisse paper.

    What is the informal economy? In the West, the informal economy represents illegal business. But the paper says: “nlike in the developed economies where informality is purely a deliberate choice to avoid taxation or regulations, in India it is more structural: a reflection of the lack of development and limited government reach.” The informal economy in India is genuine business. Yet, the Indian media, policymakers and economic experts look at the legal informal economy like how the West sees its illegal informal economy. This has acted as a mental block in the system against what paragraph 102 describes as “the backbone of the Indian economy.” The informal economy in India represents the unincorporated — namely unregistered — business. What is the size of the Indian unincorporated sector?

    The Crédit Suisse study says that unincorporated businesses account for 84 per cent of the non-formal employment in India — against 4-6 per cent in “Developed” nations, according to World Bank. What the study sees as the informal economy, the National Sample Survey Organisation (NSSO) Survey 2011 presents as comprising 57.7 million non-corporate business units outside the huge construction sector. And 70 per cent of them are unregistered, says NSSO. They are the fastest growing since 1991, almost doubling since 1998. In contrast, and post-liberalisation, the share of jobs in the organised sector came down from 8 to 7 per cent.

    The first change in the government’s approach to this vital segment, so far derided as the “informal economy,” has been to adopt, in paragraph 102, the NSSO’s description of them — as “Own Account Enterprises” (OAE), that is self-employment units; 85 per cent of 57.7 million units are OAEs. The rest are “Establishments” employing outside labour.

    Caste-based entrepreneurship

    Here is the unknown picture of this huge sector. A majority of the 57.7 million units operate in rural areas, the most difficult terrain for the government to provide non-farming jobs. They add an aggregate value of Rs.6.28 lakh crore to the national economy, 70 per cent of them in the rural areas, and employ 108 million; 53 million in the rural areas. Their value addition per unit is Rs.1.09 lakh; per worker it is Rs.58,000, and per hired worker it is Rs.47,000, which equals the average per capita income in 2009-10 and is higher than the rural per capita income. The fixed capital employed per unit is Rs.2 lakh, which is not insignificant. More than two-thirds of them are engaged in trade and services and a fourth, in manufacturing.

    Another vital, but unknown truth is that it is dominated by the disadvantaged sections — the Other Backward Classes (OBCs) the Scheduled Castes (SC) and Scheduled Tribes (ST). A Harvard Business School (HBS) study titled “Caste and Entrepreneurship in India” links this sector to caste-based entrepreneurship. The NSSO survey says that two-thirds of the sector is owned by STs, SCs and OBCs who operate 71 per cent of manufacturing units and 60 per cent of trading. In rural areas, 72 per cent of OAEs are run by them. The OBCs run 48 per cent of the 57.7 million units and SC units have risen from 10 to 14 per cent in the six year period 2005-2011. This sector generates OBC, SC and ST entrepreneurs almost like an open air university. In contrast, the elite Indian Institutes of Technology and the Indian Institutes of Management generate job seekers, not entrepreneurs.

    The Economic Census 2005 revealed that this massive sector which provides 90 per cent of non-farming employment could access — believe it or not — only 4 per cent of institutionalised finance, leaving the rest to usurious money lenders. Banks in India almost monopolise national cash savings. The bank deposit to GDP ratio in India has more than doubled to 71 per cent from 1991 to 2014. With over 70 per cent of the 57.7 million units unregistered, banks, perhaps rightly, do not finance them. Banks are unable to finance even the registered small units whose share of bank credit had halved to just 7 per cent between 1994 and 2008. The bank credit to them now is still less than what it was in 1994. Increasing the ownership of SCs, STs and OBCs in this sector is the best way to ensure social justice. It is doable. Through an affirmative policy launched in the 1970s, Malaysia could increase ownership of discriminated groups in private enterprises from only just 2 per cent in 1970 to 20 per cent in 1990. How? By a systematic redistribution of ownership of private capital in favour of discriminated groups over a period of two decades ( The Hindu , November 30, 2011). This is precisely the agenda of paragraph 102 of Mr. Jaitley’s budget speech.

    Cont... (due to 10000 char limit )
     
  2. Paliwal Warrior

    Paliwal Warrior Lt. Colonel ELITE MEMBER

    Joined:
    Aug 4, 2013
    Messages:
    6,186
    Likes Received:
    903
    Cont....

    Finance to formalise

    Experts think that it will take half a century for OAEs to become a part of the formal economy. Till then can credit be denied to the sector that provides 90 per cent of non-farming jobs and half of the nation’s GDP? Actually, as The Economist magazine (September 28, 2013) wrote, providing finance to them is the best way of formalising them. And not providing credit to them is criminal neglect of half the economy and its greatest job creator. Paragraph 102 of Mr. Jaitley’s speech intends to undo this criminal neglect of the most vital sector of the Indian economy. The national discourse is so superficial that it only talks of foreign direct investment (FDI), investment allowance, tax sops and the like which are just about a twentieth to a sixth of the national economy. It did not even notice paragraph 102 which is about half of India’s economy. The paragraph indicates out-of-the-box thinking. Mr. Modi seems to have discovered the secret to growth and social justice — namely providing the lifeline of finance to the most job productive segment of the national economy operated by the disadvantaged sections of Indian people. The words “there is need to examine the financial architecture for this sector” in paragraph 102 are significant. They imply that the present financial architecture is just not the answer — and it cannot be. A new one is needed. Mr. Modi’s diagnosis is a potential game changer. But the big “if” is whether he will have the willpower to drive the agenda through the headwinds of structuralists in the financial system, the Reserve Bank of India in particular which is against all forms of a non-bank financing model.

    (S. Gurumurthy is a chartered accountant, a visiting faculty member at IIT Bombay and a distinguished research professor, legal anthropology, at SASTRA University.)

    Increasing ownership of SCs, STs and OBCs in the informal sector is the best way to ensure social justice. It is doable.

    The national discourse is so superficial that it only talks of foreign direct investment, investment allowance, tax sops and the like which are just about a twentieth to a sixth of the national economy. It did not even notice paragraph 102 in the Union budget speech which is about half of India’s economy.

    The good is in the detail - The Hindu
     
  3. Paliwal Warrior

    Paliwal Warrior Lt. Colonel ELITE MEMBER

    Joined:
    Aug 4, 2013
    Messages:
    6,186
    Likes Received:
    903
    A readers open letter & reply to the above piece of S Gurumurthy

    Opinion » Letters
    July 16, 2014
    Updated: July 16, 2014 00:34 IST
    Informal economy


    The serious commentary by Professor S. Gurumurthy on the implications of the budget for India’s informal economy was commendable (“The good is in the detail,” July 14). I’d like to add support for his good challenge.

    Most of the enterprises in the Indian economy aren’t “SMEs”; they aren’t “small,” they are “micro” enterprises with under Rs.25 lakh of investment for those dealing with goods and under Rs.10 lakh for services. According to India’s Economic Census, about 95 per cent of firms have fewer than five employees. And the average fell from about 2.9 in 1990 to 2.4 in 2005. In India, liberalisation has unleashed a mighty torrent of tiny firms. Anushree Sinha’s work showed some seven years ago that it is the informal economy that drives both growth and jobs.

    Very few of these tiny firms grow from rags to riches — we read about the exceptions. The vast majority are unable to save or to grow by reinvesting: the economy expands through the multiplication of these tiny units. They don’t accumulate because of adverse terms and conditions in the marketplace. It isn’t just a matter of prices, they often face delays in payment for their output while being required to pay promptly for inputs. Some — it isn’t known what proportion — are not really independent units at all but are called “disguised wage-workers.” Others don’t maximise profit, they toil to maximise production on what funds they have.

    For sure, credit is important — the NCEUS stressed this way back in 2007, and the Reserve Bank says that, as of today micro and small industries can get loans up to Rs.5 crore. But without collateral and legal registration, you won’t be eligible. You are left with the problems of either the savings groups, or of being on the end of onward lending at ever higher interest by webs of credit spun by collateralised businesses with access to multiple bank accounts.

    Over and above credit, tiny businesses need safe sites and infrastructure: not just roads, transport and communications but reliable power, water, drainage and sewerage. That means attending to local municipal governments, their revenues and their politics.

    It is also known that “informal,” unregistered, unregulated activity has become complex. A typical firm will be registered with a municipality but will flout labour and environmental laws and pay tax with great reluctance and as late as possible in the tax-year. The informal economy isn’t confined to small enterprise: big corporations and government departments are not above employing labour on verbal contracts and illegal terms and conditions.

    Returning to small self-employed firms, over and above the economic and infrastructural support they need, it’s important to understand that economic agents are not free to invest wherever they might like — there are powerful social obstacles. Although the founding fathers reckoned that the animal spirits of markets or the rationalities of planning would dissolve archaic forms of exchange, this hasn’t happened. Something more complicated is developing in India’s informal economy. For sure, markets are opening up opportunities to some people but at the same time and sometimes in the same place they also discriminate against others and prevent entry.

    There is overwhelming evidence from rural and small-town India that it isn’t just caste that structures the informal economy, as Prof. Gurumurthy has shown. It is also gender, ethnicity, religion and language that persist in shaping the opportunities that are available. And thousands of small business associations keep tight order in the so-called unorganised sector. Any interventions in this day and age will have to negotiate with what is on the ground. I wish the Finance Ministry good luck in sorting this out in the three months they have given themselves in Paragraph 102 of the Budget. Some of us have struggled through our working lives to understand it!

    Barbara Harriss-White,

    Emeritus Professor of Development Studies,

    Oxford University

    Informal economy - The Hindu
     
  4. Paliwal Warrior

    Paliwal Warrior Lt. Colonel ELITE MEMBER

    Joined:
    Aug 4, 2013
    Messages:
    6,186
    Likes Received:
    903
  5. Paliwal Warrior

    Paliwal Warrior Lt. Colonel ELITE MEMBER

    Joined:
    Aug 4, 2013
    Messages:
    6,186
    Likes Received:
    903
    Will General Budget Fuel the Real Growth Engine?
    By S Gurumurthy

    Published: 30th June 2014 06:00 AM

    Last Updated: 30th June 2014 11:28 AM

    [​IMG]


    The intuitive habit of drawing macroeconomic conclusions (about India) from the corporate feedback (and vice versa) is fraught with risk. After all, only half of India’s GDP and 10% of India’s employment are in the formal sector. Further, only a fraction of the formal sector is listed.” This is not any Swadeshi ideologue speaking. This is what the Asia Pacific/India Equity Research paper of Credit Suisse titled “India’s better half: The Informal Economy” says about the most unique aspect of Indian economy. The paper points out that corporate sector accounts for only one-fourth of the national capital formed - the share of listed corporates in it is even less, just 13%. Again corporate sector generates only 15% of the national consumption - the share of the listed corporates in it is just a fraction, just 4%. The Credit Suisse actually compares the corporate sector, which is the celebrity segment of the national economy since 1991, to the tail that “cannot wag the dog”. The Credit Suisse’s study bares the truth that the star corporate sector in India is just the tail - a fact others were too afraid to say, like in the popular Danish fairy tale of “Emperor’s New Clothes” where every one saw the king without clothes but was afraid to tell the truth.


    [​IMG]
    Informal is not illegal

    When the Credit Suisse study dismisses the formal - read corporate - sector as marginal what does it find as the core of the Indian economy. The title of the study itself says it is the informal economy of India. In economic discourse informal economy is not a complimentary term. A World Bank study talks of two kinds of informal economy: one survival activities: casual jobs, temporary jobs, unpaid jobs, subsistence agriculture, multiple job holding and two unofficial earning strategies unregistered business for tax evasion, avoidance of government or institutional regulations. But the Indian informal sector is neither. Credit Suisse says that the Indian informal economy is not contraband. It says: “Unlike in the developed economies where informality is purely a deliberate choice to avoid taxation or regulations, in India it is more structural: a reflection of the lack of development and limited government reach.” This is significant. The informal economy in India should carry no stigma. Yet the media, elite thinkers and economic experts in India look down upon the informal economy in India like it is viewed in the West. This is one of the reasons for the mental block against this most productive segment of the Indian economy.

    Non-corporates employ 84% of

    What is informal economy in Credit Suisse is the non-corporate sector in Indian dictionary. What is the size of the Indian non-corporate sector? Credit Suisse study says that it constitutes 84% of the non-formal employment in India. How about other countries. It is about 4-6% according to World Bank in ‘Developed’ nations. In developing Turkey it is 31%, South Africa 33%, and Brazil and Thailand 42%. The Credit Suisse study says: “India’s informal GDP, i.e., economic activity by unincorporated enterprises, is half of total GDP, among the highest ratios in the world.” Three significant facts emerge now. First, in developed nations, the informal economy escapes the state; in India the state has not reached it. Second, in developed nations, it is a marginal player; in India it is the main drive. Three, despite the obvious differentials the Indian economists and policy makers, imitating the West where it is marginal, hate the non-corporate sector and are working to wipe it out. The question is whether they can wipe it out?

    Staggering Size

    The size of India’s non-corporate sector is staggering. The National Sample Survey Organisation (NSSO) Survey 2011 says that there are 57.7 million non-corporate business units excluding those in the huge construction sector. Seven out of ten of them are unregistered. The non-corporate units have almost doubled since 1998. The NSSO says that 85% of them “Own Account Enterprises” (OAE) - meaning self-employment units and the rest are “Establishments” employing outside labour. Here is the picture of this core sector in brief. The aggregate value addition by these units is `6.28 lakh crore - 70% of it in rural areas. Value addition per unit is not trivial. It is `1.09 lakh. And value addition per worker is `58,000 and per hired worker is ` 47,000, which equals the average per capita income of India in 2009-10 and higher than the rural per capita income. They employ 108 million - rural 53 million. The units do employ capital that is not insignificant. The value of fixed assets per unit is `2 lakhs. A fourth of these units is engaged in manufacturing, more than two thirds in retail trade and services. A majority of them operate in rural areas, the most difficult terrain for the government to reach. During the liberalisation period this sector grew faster than the organised sector whose employment came down from 8% in 1991 to 7% in 2011

    OBC SC ST Entrepreneurs

    The most significant part of the story is that the non-corporate sector is dominated by disadvantaged sections of Indian society - the Other Backward Castes (OBCs) Scheduled Caste (SCs) and Scheduled Tribes (STs). A study Caste and Entrepreneurship in India by Lakshmi Iyer Tarun Khanna Ashutosh Varshney Harvard Business School (HBS) links the non-corporate sector to caste-based entrepreneurship. The NSSO Survey says that two-thirds of the sector is owned by ST (5%), SCs (14%) and Other Backward Classes (48%), including 71% of the manufacturing, and 60% of the trading, units. The Survey shows that the disadvantaged castes are increasingly into trade and manufacturing. In rural areas, 72 per cent of OAEs are run by them. The HBS study said that while, in case of OBCs, their share of the business matched their population, in the case of SCs and STs it was less. But the SC share improved from 10% in 2005 to 14% in 2011. In India entrepreneuship is not a product of IITs and IIMs. They are generated by non-corporate sector. The non-corporate business units actually constitute the open the air university of entrepreneurship for the OBCs, SCs and STs. The non farming enterprises hold huge prospect for the promotion of entrepreneurship, self-employment and livelihood among the weaker sections. The advent of Dalit entrepreneur in Agra and Kanpur could become an all Indian phenomenon.

    4% credit for 50% GDP, 90% for jobs

    Yet, shockingly, according to the Economic Census 2005, institutionalised finance is available only to less than 4% of the 57.7 million units. More than 90% of the units rely on own or traditional sources including usurious money lenders. Banks garner most of the savings with the bank deposit to GDP ratio doubling from 34% in 1991 to 68% now. But they, perhaps rightly, do not finance unregistered businesses. With over seven out of 10 of the 57.7 million non-corporate business units unregistered, no bank would ever finance them. The banks are unable to finance even the registered MSME units, whose share in bank credit had halved to just 7.2% between 1994 and 2008. Though it improved to 13.4% in 2009-10, it was still less than in 1994. It does not need a seer to say that for ensuring social justice it is necessary to increase the ownership of SCs and STs and also OBCs in this sector. It is doable. Malaysia has done it. Through its affirmative action policy launched in the 1970s, Malaysia managed to increase ownership in private enterprises for the discriminated group of Malaya from only 2 per cent in 1970 to 20 per cent in 1990. The government brought about a systematic redistribution of ownership of private capital in favour of discriminated groups in a period of two decades. (The Hindu dt 30.11.2011)

    Credit will formalise the sector

    The Indian economic establishment detests devising policies for providing finance to them because they are not formalised. But it now needs to think differently. Providing finance to them is really the best way to formalise them. Says that Economist Magazine (Sept 28, 2013)”At the present rate, it will take half a century before India’s economy is fully formal. The best way to speed up the process is to extend the reach of the financial system.” Undeniably, it is the non-corporate sector, not the corporate sector, which is the back-bone of the Indian economy, employment, trading and manufacturing. Also it is the only practical escalator to lift the backward sections out of poverty. But blinded by the love of the corporate sector and hatred for the informal sector there has been criminal neglect of this sector in the past. And yet, despite being left to fend for itself, it has saved India from socio-economic anarchy by employing 90% of the non-farm labour. It desperately needs a new financial architecture which will finance small businesses. The banks working on global banking norms are structurally disqualified to lend to these units. This requires indigenous, non-Western out the box thinking. Will the budget 2014-15 fuel this real growth engine?

    Will General Budget Fuel the Real Growth Engine? -The New Indian Express
     
  6. Paliwal Warrior

    Paliwal Warrior Lt. Colonel ELITE MEMBER

    Joined:
    Aug 4, 2013
    Messages:
    6,186
    Likes Received:
    903
    [​IMG] S Gurumurthy @sgurumurthy · Jun 29
    In my article today in NIE the 2.2 m jobs between 1991-2011 referred are in formal sector ….60 m jobs referred are in the informal sector.
     
  7. Paliwal Warrior

    Paliwal Warrior Lt. Colonel ELITE MEMBER

    Joined:
    Aug 4, 2013
    Messages:
    6,186
    Likes Received:
    903
  8. vigour

    vigour FULL MEMBER

    Joined:
    May 22, 2011
    Messages:
    99
    Likes Received:
    59
    Good points raised and I agree that there should be a process to finance small / root units.

    But, one thing I want to suggest here - when the economy is informal, how do you expect a formal/bank loans for it from the bank/government?

    If someone is planning to stay out of the legal framework that means he/she is skipping hoops to set-up things, which is well and right for starting business, but why to expect backing of government.

    Banks can't take such risks as it is very difficult to assess these assets and prospects, that is why a lot of micro-finance organizations have pop-up recently. Government should facilitate the mechanism to make it easier for credits/finance these upcoming units but risk should be borne by the organization lending; that is why the rates are high for these loans as very risky.

    My reasons for the government to not back it up are - Government has already waived loans for farmers, the financial process is very difficult to control , and liability factor may put up a too large a burden on budget in case of large failures than success. We should take lesson from sub-prime market crash.
     
  9. Paliwal Warrior

    Paliwal Warrior Lt. Colonel ELITE MEMBER

    Joined:
    Aug 4, 2013
    Messages:
    6,186
    Likes Received:
    903
    See Corporates gets loans at 10.5 to 12%, that too at 5% -10% of collataral (security) cover

    While these small units (which can be financed under the current system) gets loans at 14-16% that too at 100-150% security / collataral cover

    There is this imbalance of security cover as well as Interest Rates which should be narrowed

    Then consider the JOB GENERATION, EMPLOYMENT POTENTIAL, as per the article in both these sectors

    Also besides these benefits that corporates enjoy, pl consider the Tax Breaks, Incentives, etc they get.
    What does the informal sector get - NOTHING

    Still they top the corporates in employment generation & driving the economy


    Then we come to security of banks money

    Out of all the NPAs (Net. Gross & CDR, BIFR, writtenoff all ) in INDIA in the banking sector where a study is conducted which classifies NPAs as under

    1. Corporates - No of units, Total Amount, Avg amount per Unit
    2. Medium Scale Enterprise - No of units, Total Amount, Avg amount per Unit
    3. Small Scale Units - No of units, Total Amount, Avg amount per Unit
    4. Micro Units - No of units, Total Amount, Avg amount per Unit

    when this excersice is done only then we will get a true picture of where the money is more risky and where they are going down the drain until then it is just speculation

    Third the problem is

    These BIG Corporates(not all) always purchases on credit for say 1 month - from t1 supplier who again does the same from T2 and so on, but not all make payments on time

    In tough economic conditions - The smallest Unit at the end of the line may be paid 5-6 months.
    IT is these small end of the chain units which bear the maximum burnt
     
Thread Status:
Not open for further replies.

Share This Page