Finance minister should budget for the real India, for a change

DNA Money, Tuesday, June 16, 2009

Prof R Vaidyanathan
Its that time of the year when the finance minister meets with different interest groups and experts to take their suggestions in formulating his budget. To the best of my knowledge, no study has been undertaken to find out how much of these suggestions have been incorporated in the past budgets. The usual suspects have met him - captains of industry, Delhi-based experts (since all expertise is interestingly concentrated only in Delhi in India), farmers and trade unionists, etc. The breaking news mafia worries about the Sensex and the pink papers about tax breaks. But it is important not to encourage the tail wagging the dog, for that is harmful to our economy. The financial markets are not an end in themselves but only a mirror to the real economy. Our economy can be quickly summarised as 20% agriculture - mainly small and medium farmers; 20% government central, state, municipal, PSUs, etc; 15% corporate (companies governed by the 1956 Companies Act, of which some 8,000 are listed and 200 or so are traded and five or so are influencing the entire market); and 45% non-corporate sector, consisting of partnership and proprietorship firms. The first three groups have their shrill voices heard through farmers lobby/ government unions/ CII, etc. The last category is the real engine of Indias economic growth, but muted in their voices and abused on a daily basis. To start with, they are called the unorganised sector, which makes it appear they are disorganised and need to be modernised. Since they do not have a powerful lobby, they are not cared about even though they constitute the major chunk of the so-called service sector, which is more than 60% of our economy. Whenever service sector is mentioned immediately we think of IT industry. But it constitutes a very small portion of the service sector. The major activities under service sector are:

Construction Trade wholesale/ retail Transport Hotels/ restaurants Real estate/ ownership of dwellings and business services Other services (professional, etc) In all these activities, we find that the partnership/ proprietorship firms are the dominant players. Even in manufacturing, these firms have more than 40% of the value addition. The non-corporate sector is the dominant player in all these areas and clocked a compounded annual growth rate of more than 8% in the last decade. These players are the real engines of our economic growth - the millions of retail shops and restaurants and truck operators and private bus operators and plumbers, fitters, carpenters and priests. This growth of our economy is facilitated by the domestic savings rate, which touched 40% last year. Ours is a domestic-financing propelled growth story, with over 80% of the savings coming from the household sector. Hence, we should praise the ordinary housewives of this country for being great savers and facilitating the growth process, even though hardly any thought is given to her by our breaking-news kings and pink paper queens. The FM should actually budget for the partnership and proprietorship firms, which contribute more than 40% of our national income and which are our real economy. The CII seminars will not tell the FM the real India story, or the vested groups of experts and the usual suspects who throng his chambers to give him the same advice recycled from last year. He should ignore them and decide that Dalal Street is not India, nor is it a barometer of our economy. He should focus on the credit delivery mechanism for India unincorporated. He should minimise their tax burden - since they pay hefty bribe tax to his government employees - and facilitate their social security, contract enforcement and insurance requirements, both life and casualty, and recognise their role as the real engines of growth of our economy. Most of the rules/ regulations pertaining to them are in the realm of the state governments, such as commercial tax, road tax, entertainment tax, excise duty on liquor, urban land ceiling and regulations (Ulcra), Shops and Establishments Act, laws governing educational and medical institutions, money lending regulations, stamp duties Acts, food and adulteration Acts, municipality water/ power/ drainage regulations - Acts, registrations/ contracts Acts etc.

And it is good the FM is meeting state finance ministers as part of the process. He should advise/ persuade them to scrap most of these Acts since their primary purpose is bribery, which has been achieved to the suitcase/ locker full of many government employees in the last 60 years. They may be dhoti-clad and pan chewing, but they represent the critical constituency. The FM should budget for them since they are the real engines of our economic growth and can be called the real India along with farmers. Let the FM, for a change, look at them rather than the conventional vested interests. Give a big boost to the engines of our economic growth.