By R Vaidyanathan
The growth rate of our economy has declined from around 8-9 percent in the middle of the decade to around 5-6 percent now. Experts are wondering why this is happening. Government economists such as C Rangarajan and Raghuram Rajan ascribe this to the global slowdown as well as delayed decisions in acquiring land and providing clearances for major infrastructure projects. They are right - but only to a very small extent.
The main drivers of growth in our economy are services, whose share in GDP is around 65 percent. Whenever the term 'service sector' is mentioned, the immediate recall is about information technology and companies like Infosys or Wipro. Factually, all software-related activities come under business services, which itself is less than 5 percent per cent of our national income.
The services sector covers a much larger canvas and is not only the fastest growing, but also a big generator of jobs. In Table 1, we have shown the activities that constitute the services sector. As can be seen, this sector encompasses diverse activities carried on by large multinationals as well as roadside entrepreneurs.
Normally construction is included in the secondary sector along with manufacturing in developed countries. But given the labour-intensive nature of the construction business and the use of small contractors to build houses, we have included it in the service sector; the national statistical commission has included construction as part of services.
We find that the services sector had a share of 60 percent of GDP in 2004-05, which increased to nearly 65 percent by 2011-12 - a compounded annual growth rate (CAGR) of 17 percent during this period. This is higher than the industry CAGR of 15 percent and the overall growth of 16 percent. We find that services had a larger share as well as greater growth during the last seven years. (See Table 2).
Within the services sector, we find that 1)construction, 2) trade, 3)hotels and restaurants, 4) non-railway transport, 5)business services, and 6)other services are major components and these businesses are dominated by the non-corporate sector - namely partnerships, proprietorships and household enterprises. The share of what is called the "unorganised" sector in these activities is nearly 80 percent in non-railway transport in 2010-11 and 77 percent in trade, hotels and restaurants. Real estate and business services also have shares of more than 65 percent, though this has declined from around 74 percent in 2004-05 (See Table 3).
Data on bank credit categorise the "unorganised" sector under the household sector. It consists of partnerships, proprietorships, joint families, associations, clubs, societies, trusts, groups and individuals for all accounts. Their share of bank credit, which was nearly 60 percent in the early nineties, has become 33 percent in 2010, showing a consistent decline. The share of the corporate sector has gone up from around 30 percent to 49 percent and the government from 10 percent to 20 percent. (See Table 5).
It is interesting that the corporate sector, which has less than 12 percent of our national income, gobbles up nearly half the bank credit.
Even though the unorganised, or non-corporate sector, is the fastest growing segment, its credit needs are not met by the banking sector but by private money lenders, etc. And the cost of borrowing is as high as 5-6 percent per month - or around 70 percent per annum.
In other words, the most productive and growing sectors of our economy are starved of bank credit, forcing them to depend on moneylenders and other such usurious sources (including Saradha-type Ponzi schemes). We estimate that more than 70 percent of retail trade needs were met by moneylenders/chits, etc, in 2010-11.The crony capitalists who default on bank loans get a larger share for their wasteful expenditure.
Instead of meeting the credit requirements of our kirana stores we find that our Finance Minister is going around with a begging bowl to New York and Tokyo for FII funds. An aura has been created that FII and FDI flows are our Annalakshmi - even though in the last decade they have met only 6-8 percent of our investment needs.
Our kiranas and Udupi restaurants and one-truck operators and barbers, plumbers, masons and small-time contractors are crying for credit at reasonable rates. But we will not bother about them. They are not sophisticated enough to argue at the Confederation of Indian Industry or Ficci conferences. They are pan-chewing, dhoti-clad and English-illiterate entrepreneurs. They are the real engines of our economic growth.
The current slowdown is directly linked to the choking of these activities. The huge black money generated in our economy used to be partly financing them. Now that has also dried up since that money is more in to real estate and gold.
It is imperative that we look at the credit starvation of these groups and the regulatory strangulation that comes with it to understand the slowdown in our economy.
The solutions lie not in New York or Paris but have to be found out from Kottayam to Kohima and Ahmedabad to Agartala. We will find more Saradha-type institutions going through the cycle of rise and fall unless we understand our reality without the lens of Harvard and Wharton.
The solution is to create a separate body to develop a robust non-banking financial sector and free it from the RBI as well as the bureaucratic clutches of state governments. The RBI's hands are full and so there is no point in complaining that it is not alert about the crores coming from non-bank sources - leading to dubious use and abuse. The developmental authority for the non-bank sector should primarily focus on helping partnership and proprietorship firms in the economy through appropriate credit mechanisms and non-strangulating regulations.
Will our powerful ministers and mandarins listen to the cries of our most productive sectors or the hot money purveyors sitting in New York, Longon and Hongkong?
The author is Professor of Finance, Indian Institute of Management, Bangalore, The views are personal and do not reflect that of the organisation.