Indian Economy for Dummies - I

Look at some of the obvious facts about the Indian economy. Household savings have been rising post-liberalisation despite average interest rates falling since the 1990s. Most of household savings get into low-yielding bank deposits even though the Indian stock market has been growing at a compounded rate of 14 per cent a year since 1991. The growth in Indian per capita spending is slower as compared to the rising per capita income despite the intense consumerist agenda powered by liberalisation. Indian households trust banks, gold and properties and not stocks as much. Indian public and private — domestic and foreign, listed and unlisted — corporates put together improved their share of national GDP from a mere 12% in 1991 to a mere 15% — by just 3% in over two decades of a policy regime that red-carpeted the corporates, particularly foreign. The share of listed corporates in the national GDP is just about 5% even now. And the share of the companies figuring in the Sensex is minuscule. These obvious facts hide some basic truths about the Indian economy. But economists tend not to see the hidden truth behind obvious facts. They even blame the obvious facts for the economic ills of India. They fault Indians for not investing in stocks and for not producing risk capital. Indians invest in gold, thus making their savings unproductive, they charge. And yet, they turn blind to the under-performance of corporates altogether. Hidden truths behind obvious facts are the most difficult to detect. Because unless one asks why it is so, the truth behind the obvious will remain hidden. Only critical minds can ask why and get at the truth — like only Isaac Newton did not blame the apple for falling but asked why apples were falling and brought out the truth of gravitational pull hidden in the obvious fact of the falling apple. The truths hidden in facts about India that are obvious to the naked eye are missed in Indian economic discourse. And therefore in policy and budget making in India. The elitist nature of the guild of economists in India, who look to the West for handling the problems of India, is the reason for their ignorance about the hidden truth behind obvious facts.

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Insulated, arrogant

The profession of economists had become so respectable in the 20th century West that economists became more respected than elected leaders, who even fear them. After the 2008 crisis, The Economist magazine [July 19-24, 2009] wrote, “On the public stage, economists were seen as far more trustworthy than politicians” but added, “in the wake of the biggest economic calamity in 80 years that reputation had taken a beating. In the public mind, the arrogant profession has been humbled.” But despite that, economists still have an intimidating influence over politicians. But who are economists and what is economics? Decades ago [1973] J K Galbraith, a celebrated economist himself and a diplomat, wrote that economic services are ‘ideological’ and ‘consist in instructing several hundred thousand students every year’; the instruction is ‘inefficient’ but nevertheless ‘implants imprecise, but serviceable, set of ideas’ in the minds ‘of even those who are opposed to it’; they are ‘led to accept what they might otherwise criticise’. Galbraith concluded: “As such, it serves as a surrogate for the reality for legislators, civil servants, journalists, television commentators, professional prophets, — all, indeed, who speak, write or act on economic questions”. The subject of economics and the guild of economists could not have been demystified more eloquently. What Galbraith meant is that the profession of economists is an oligarchy which perpetuates its own agenda by enforcing conformity within, not just to dominate over the elected political system, but to direct the whole public discourse. Is it not time then that the subject, economics, which has been monopolised by a self-perpetuating set of experts, is demystified, made less intimidating and less elitist? Is it not time that all intelligent people are made to understand the hidden truth behind obvious facts? The popular book series ‘For Dummies’, which claims to present non-intimidating guides for readers new to different subjects, deals with all subjects under the sun. With more than 200 million books sold, the series now covers over 2,700 titles, but surprisingly the subject of economics is not one of them! Therefore, economics for dummies is long overdue. Here is a first edition of it — an essay on Indian economy for dummies to start with. Just take one obvious and undisputed fact and see how the economic establishment looks the other way.

Jobless corporate growth

A study [July 2013] by Credit Suisse Asia Pacific India Equity Research Investment Strategy revealed that after more than two decades of economic liberalisation, the share of the formal sector, (namely the public and private corporate sectors together) in national GDP stood at just 15 per cent and that of listed corporates was just 5 per cent. Despite all the pampering by the government and economists, the formal sector's share of the nation’s GDP improved by just 3 per cent in more than two decades. In this period, the sector had received foreign investment by debt and equity of over $550 billion and also drew over Rs 18 lakh crore from banks as credit. But how many jobs did it add in this period? Believe it, just 2.8 million! Economists would never mention the huge investment into the formal sector nor the insignificant number of jobs added by it, so that they need not answer either why it produced such jobless growth or ask who else provided the jobs. When I brought this to his notice, a shocked N R Narayanamurthy told me that as the software sector itself had added 3.5 million jobs, it meant that the rest of the corporate sector had actually cut jobs by over 700,000, rather than adding any. Did any economist or prime minister ever speak this hard truth that the big corporates do not provide jobs to the people? Prime Minister Narendra Modi spoke this truth when he unveiled the Mudra finance scheme to the non-corporate sector on April 9, 2015. He said: “People think it’s big industries and corporate houses that provide higher employment. The truth is, only 12.5 million people are employed by big corporates, against 120 million by MSME sector.” He reiterated it when he wrote to small businessmen on April 15, 2015.

Unfunded job rich sector

And where from then did the jobs and people’s livelihood come? The Credit Suisse study says that 90 per cent of the total of 474 million jobs in India is generated by the non-corporate sector which contributes half the national GDP. The study labels this sector in the global language as the informal sector. But it adds that unlike in the West, where the informal sector is largely an illegal sector, in India it is legal business which remains informal only because the government has been unable to reach out to it. The Economic Census (2013-14) says that some 57.7 million non-farming and non-construction businesses yield 128 million jobs. The census classifies them as Own Account Enterprises (OAEs), implying it is self-employment. The census finds that over 60 per cent of OAEs are run by entrepreneurs belonging to Other Backward Castes, Scheduled Castes and Scheduled Tribes; more than half the OAEs and as many jobs provided by them are in rural areas; and nine out of 10 OAEs are unregistered. But this sector, which ensures both social justice and is rich in generating jobs, gets just 4 per cent of its credit needs from the formal banking system and the rest at usurious rates of interest. Here is a paradox. The banks fund corporates which add very little jobs. They are unable to fund the OAEs which generate ten times the jobs the corporates provide.

Citing the Credit Suisse study, The Economist magazine (August 2013) wrote that the best way the Indian informal economy may be formalised is to provide formal finance to them. The capital employed in the 57.7 million units is about Rs 11.4 lakh crore, according to the Economic Census. This informal (cash) financing takes place outside the formal monetary system supervised by the Reserve Bank. The Mudra finance scheme is based on the experience that banks cannot fund this sector. It has devised an innovative method of associating existing large Non Banking Finance Companies providing finance to this sector as National and State Level Coordinators and the small ones as Last Mile Lenders. Without co-opting the existing non-formal finance players, the OAEs cannot be funded.

This innovative effort is being effectively thwarted by a warped bureaucracy — Reserve Bank and the Department of Financial Services acting together. They are effectively scuttling the new Mudra Law promised in the 2015-16 Budget to institute the new financing model. Their objection is that if informal financing is formalised, that would add to the systemic risk. Is allowing close to Rs 12 lakh crore sub-monetary cash economy sourced in black and illegal monies to operate and gain interest rates ranging from 24 to 360 per cent, distorting formal savings, investment, and interest rates not systemic risk? Will the Raghuram Rajans and Department of Financial Services answer? Result, the Prime Minister’s Mudra finance scheme is being delayed, if not stymied by professionals who just want to keep their CV good for their career progress within the guild of economists.

(To be continued)

The author is a well-known commentator on economic and political affairs.