This column from Business Standard of 6 May 2003 pinpoints a peculiarity of the Indian economy - that much enterprise is unincorporated. Little is known about it because the Central Statistical Office has not investigated who the entrepreneurs are.
THE ADVENT OF GRASS-ROOTS CAPITALISM
I was browsing the Economic
Survey when my eye fell on a footnote in the Tables on savings and
investment: adjusted for errors and omissions. That was strange, I thought; why
did one have to adjust for errors and omissions? All one has to do is to give
the actual errors in an additional row. Reserve Bank of India does this all the
time in the balance of payments figures, which it does not reconcile even after
50 years; why did the finance ministry have to do it differently? So I began
investigating, and a number of skeletons stumbled out of its cupboard.
AS PROPORTION OF GDP (%), YEARS ENDING 31 MARCH OF
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1997
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1998
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1999
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2000
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2001
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2002
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2003
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Savings
|
23.2
|
23.1
|
21.5
|
24.2
|
23.4
|
24.0
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||
Government
|
1.7
|
1.3
|
-1.0
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-1.0
|
-2.3
|
-2.5
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||
Private
|
21.5
|
21.8
|
22.5
|
25.2
|
25.7
|
26.5
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||
Corporate
|
4.5
|
4.2
|
3.7
|
4.4
|
4.1
|
4.0
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||
Non-corporate
|
17.0
|
17.6
|
18.8
|
20.8
|
21.6
|
22.5
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||
Financial
|
10.4
|
9.6
|
10.5
|
10.7
|
10.4
|
11.2
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Physical
|
6.7
|
8.0
|
8.4
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9.6
|
11.2
|
11.3
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||
Investment
|
24.5
|
24.6
|
22.6
|
25.2
|
24.0
|
23.7
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||
Mistakes
|
3.1
|
-0.1
|
-0.6
|
-2.7
|
-1.3
|
-1.1
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||
Changes in stocks
|
-1.0
|
0.9
|
-0.1
|
1.9
|
0.7
|
0.8
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||
Government
|
6.8
|
6.5
|
6.6
|
7.0
|
6.4
|
6.2
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||
Private
|
15.6
|
17.3
|
16.7
|
19.0
|
18.2
|
17.8
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||
Corporate
|
8.7
|
9.0
|
7.6
|
7.7
|
5.8
|
5.5
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||
Non-corporate
|
6.9
|
8.3
|
9.1
|
11.3
|
12.4
|
12.3
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Investment - savings
|
1.3
|
1.5
|
1.1
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1.0
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0.6
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-0.3
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Mistakes
|
3.1
|
-0.1
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-0.6
|
-2.7
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-1.3
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-1.1
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Government
|
5.1
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5.2
|
7.6
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8.0
|
8.7
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8.7
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||
Private
|
-5.9
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-4.5
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-5.8
|
-6.2
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-7.5
|
-8.7
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Corporate
|
4.2
|
4.8
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3.9
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3.3
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1.7
|
1.5
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Non-corporate
|
-10.1
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-9.3
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-9.7
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-9.5
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-9.2
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-10.2
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Central taxes
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9.4
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9.1
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8.3
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8.9
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9.0
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8.1
|
9.6
|
|
Personal income tax |
1.3
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1.1
|
1.2
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1.3
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1.5
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1.4
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1.7
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|
Corporation tax |
1.4
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1.3
|
1.4
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1.6
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1.7
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1.6
|
2.6
|
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Excise
|
3.3
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3.2
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3.1
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3.2
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3.3
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3.2
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3.7
|
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Customs
|
3.1
|
2.6
|
2.3
|
2.5
|
2.3
|
1.8
|
1.8
|
|
Central debt
|
51.1
|
51.2
|
52.7
|
55.5
|
58.1
|
61.4
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Interest
|
4.3
|
4.5
|
4.7
|
4.7
|
4.6
|
4.8
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Av rate of interest
|
8.4
|
8.8
|
8.9
|
8.5
|
7.9
|
7.8
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Look first at the last column,
giving the ratio of tax revenue to GDP. It fell from 9 per cent in 2000-01 to
8.1 per cent in 2001-02; the Survey
expects it to jump to 9.6 per cent in 2002-03. This is of a piece with the
ministry’s eternal optimism. In Yashwant Sinha’s time, revenue was routinely
overestimated. He always planned to bring down the fiscal deficit. But the
plans were all in the air; revenue was always lower than budgeted, the deficit
was always higher, and the debt went up. How much up? Sinha was cautious in the
first three years; the ratio of central debt to GDP went up from 51.1 per cent
in 1997-98 to 52.7 per cent in 1999-2000. (I suspect he kept it down by passing
on the burden of small savings to the states.) Then he became reckless: the
ratio went up to 61.4 per cent by 2002-03. The East India Company introduced a
single-entry system of book-keeping in the 18th century which
records only current cash flows and ignores assets and liabilities. Our
government conveniently sticks to it in the 21st century. So the
debt does not enter the budget; only interest on it does. And the government
kept the ratio of interest to GDP from rising by reducing interest rates. It
could do so because the rising foreign exchange reserves removed its fear of a
payments crisis, and it could bring down the average interest rate on the debt
by 13 per cent.
The debt-GDP ratio rose faster
because the government stopped doing any net savings. When Sinha took over,
government savings were 1.7 per cent of GDP; in 2001-02 they were minus 2.5 per
cent. In other words, it was taking away 2.5 per cent of private savings and blowing
them up on consumption.
Private savings, in the
meanwhile, showed an enormous increase from 21.5 per cent of GDP in 1996-97 to
26.5 per cent in 2001-02. Corporate savings changed little; but non-corporate
savings went up from 17 to 22.5 per cent of GDP. Non-corporates’ financial
savings rose little – from 10.4 to 11.2 per cent of GDP. These financial
savings continued to finance government investment, and less and less,
corporate investment. But non-corporates’ physical savings went up from 6.7 to 11.3
per cent of GDP.
Physical savings mean savings
directly used to buy houses, plant, machinery etc. An increase in them must be
reflected in investment. It is: non-corporate investment went up from 6.9 to
12.3 per cent. Corporate investment fell sharply from 8.7 per cent of GDP in
1996-97 to 5.5 per cent in 2001-02; government investment changed little. The
big change over the six years was that the share of non-corporates in total
investment went up from 28 to 52 per cent. Till the 1980s the government pre-empted
most of the savings and was the dominant investor. For a short while in the
early 1990s, corporates’ share in investment went up. In the late 1990s we have
an unprecedented phenomenon – non-corporates have raised their share of
domestic investment to over a half.
Which means that the share of
non-corporates’ financial savings in their total savings fell – from 61 per
cent in 1996-97 to 50 per cent in 2001-02. Non-corporates – which means
individuals and partnerships – have always been passionate investors in bank
deposits and government securities, mostly indirectly through government
financial institutions. In the 1990s they acquired a taste for corporate
shares. Their tryst with corporate enterprise rapidly soured as companies
disappeared with their money; in the late 1990s, they raised direct physical
investment.
What were these physical
investments? The view of my expert friends is that the non-corporates have been
building houses. They point to the rise in cement consumption. They observe the
blossoming of the mortgage loan market, the increase in competition and the
shift in banks’ preference towards mortgage loans. They think that Indians have
become consumptionist, and luxurious houses are only a part of this consumption
boom; they are called investment only by economic convention.
They may be right, but there is
also another possibility. While corporates, stuck in traditional industries
like steel and textiles, are bleeding, maybe many new entrepreneurs are
investing in potato chips, phone shops and private water supply. In other
words, it is possible that the industrial slump after 1996 was not
economy-wide, but was confined to old industry which had misinvested in the
early 1990s – and that much private investment continued to flow into new
areas. But it was not corporate investment, it did not pass through any
financial institutions, and so we failed to recognize it.
Thus, what we see is not so much
the failure of investment and growth, but the failure of corporate enterprise.
Entrepreneurs used the corporate legal entity to cheat savers on a large scale,
and the savers are no longer prepared to trust their money to corporates. But
they have also ceased to be couch potatos; they have increasingly gone out and
set up their own businesses – except that they do not incorporate and raise
capital in the market. They form private limited companies to limit risk –
which is why corporate tax revenue has been buoyant – but otherwise keep
outside investors out of their hair.
The only doubt about this story
lies in the mistakes in the statistics, and they are big – so big that they
throw doubt on the CSO’s competence. They imply that either investment is lower
than the detailed figures for government, corporates and non-corporates
suggest, or that their savings are higher. Which is the case? I do not know.
But even if the errors were entirely deducted from non-corporates’ physical
investment, it would still show a large increase. So my story would hold even
after correction.
If it did, would it be such a bad
thing? The government has so misused its financial institutions that the people
have lost faith in them. SEBI has cleaned up the capital market, but there is
no one to make corporates more responsible to the investor, so the public has
lost faith in corporates as well. So the people have begun to develop the
country without the government, the financial institutions and the corporates.
It is grass-roots capitalism. I do not think it is such a bad thing at all.