Explaining India Unincorporated | R. Vaidyanathan
The ‘Uninc.’ story
To R. Vaidyanathan, professor of finance at the Indian Institute of Management, Bangalore, it seems absurd that the largest component of the national economy is often “not an area of focus for planners and economists”. This “non-corporate” segment—comprising partnerships, proprietorships and the self-employed set—accounts for around 40% of national income, he writes in his forthcoming book, India Uninc. Yet the share of outstanding bank credit to these businesses is just 36%. Prof. Vaidyanathan argues that the odds are often stacked against these businesses, in terms of government policies, taxation, and support in terms of credit.
In an email interview, he explains why this segment should no longer be neglected, and the impact of what he calls the “Abhimanyu effect”. Edited excerpts:
What is India Uninc.?
It is the non-corporate or India Unincorporated—consisting mainly of partnership and proprietorship and household type of organizations from the ownership point of view. They are organized or unorganized, depending upon regulations/reporting, etc. They may have a regular labour force or an informal type (of workforce), depending on the size. Some partnership firms—say, in beedi-making or even manufacturing—are very large, with more than Rs.100-crore turnover, so non-corporate does not necessarily mean “small”.
In the book you write that “India Uninc. is the engine of our economic growth”.
Take the share of foreign institutional investors (FII) and foreign direct investment (FDI) in India—it has never been more than 8% in any given year in the last two decades. The share of the Uninc. is nearly 40% of our investment rate. Yet there’s so much discussion about FII and FDI, which should be treated as pickle to curd rice and not as the main dish itself. The main dish is India Uninc., which is neglected.
Neglected in what way?
The two major problems faced by them are corruption due to large-scale government regulations at the state and municipal levels, and the lack of availability of credit. If credit is available, it is at exorbitant rates.
In the book you say that while non-corporate businesses account for a large part of the national income and national savings, they make up only 36% of the outstanding bank loans.
Indian banks, including private sector ones, are not geared to serve these segments. They tend to go for the big companies, and sometimes even write off those loans. To fund these people (Uninc.), you need to know the products and markets, etc. Many big banks use non-banking financial companies to finance small businesses to fulfil priority sector lending.
You also recommend a system to make reverse mortgage available on gold in the book.
Nearly 85% of India is self-employed. These people do not have social security cover for old age. If products like reverse mortgage could be developed based on gold, it will help a number of middle- and lower-class couples in their old age.
What is the “Abhimanyu effect”? How is this influencing our stock markets and the unorganized credit market?
In the share market in India, entry is easy but exit is difficult. So we have a million Abhimanyus in the Indian share bazaar. Nearly two-thirds of trade is done by day traders and more than half of listed scrips are not even traded once a year. Of the nearly 8,000 or so scrips listed, hardly 300 or so are actively traded. So many individuals get stuck in the share bazaar with dud stocks. Actually, some 700 or so listed companies are “missing” or called “vanishing” companies and searched for by several committees.
In the credit market, we are reading that most of the banks are running behind big borrowers who are suddenly “invisible”. About the “unorganized” credit market, the humongous problem is contract enforcement. It could take 8-10 years, and so many times they use “collection agents” to settle. This is not a desirable situation—in some cities, they even use serving or retired policemen as collection agents, which is not a desirable trend from the social cohesion point of view. So you can lend but are not able to enforce the contract to exit.