Saturday, February 22, 2014

The Neglected Portion of the Indian Economy: India Uninc.

Given the plethora of writing on the Indian economy, one would have thought that all important facets of its structure and dynamics would have been explored by now. But, Prof. R. Vaidyanathan (Vaidy) clearly establishes in his new book, India Uninc. (Westland Books, 2014), that our understanding of the Indian economy is far from complete. And, that our partial view may be leading us to take inappropriate policy decisions.

India Uninc. Is the Growth Engine of India

Vaidy’s core argument (based on a close look at India’s National Accounts Statistics and other data) is that small partnerships and proprietorships operating primarily in the services sector (but with some presence in manufacturing as well) are the growth engine of India. His math shows that these firms account for as much as 45% of national income, compared to only 18% for the incorporated firms. Not only have these grown at a fast clip, they are responsible for the high savings rate that is one of the positive features of the Indian economy. Vaidy believes that, in contrast, Foreign Direct Investment is over-hyped, accounting for less than 10% of the financial resources available for investment.

Vaidy points out that a sizeable proportion of our population is self-employed, often in micro businesses that involve only themselves, their family and, at most one or two others. He quotes data from the National Sample Surveys to show that this kind of commercial activity transcends caste and religious boundaries. He therefore questions the importance given to large investments and FDI which will offer primarily wage employment. (Needless to say, Vaidy is firmly against FDI in retail, believing that it would lead to the pauperization of India). But this may need further investigation. Studies in entrepreneurship in India (such as the Global Entrepreneurship Monitor report some years ago) have referred to such wide-ranging self-employment as necessity-based entrepreneurship, implying that people get into such activity for survival and not because they necessarily want to.

The Latin American economist Hernando de Sato is well known for arguing that the absence of property rights in the form of title to property leads to a lack of collateral and hence difficulty in raising capital for the poor. Vaidy argues that gold plays the role of such collateral in the Indian economy. He points to some of the additional benefits of gold such as divisibility and liquidity. He is therefore of the view that gold should not be considered as a consumption good or a non-productive asset as seen in the west. Vaidy is particulary critical of government policy that not only ignores India Uninc, but goes on to tax it heavily without providing it a safety net.

Vaidy is anti-consumerism and emphasizes the importance of India’s frugal past. But, given the growth of malls, multiplexes and consumer spending, it looks like he is on the losing side of this issue!

India Uninc. & Innovation

As a student of innovation, this book triggered an important question: What role is India Uninc. playing in innovation? I must confess that I don’t have a good answer to this question. Just as economists have tended to miss out this vibrant slice of the economy, observers of innovation in India have tended to focus on innovation in the corporate sector or start-ups. I suppose Professor Anil Gupta’s grassroot innovators might fall under the broad rubric of India Uninc., but the drivers of India Uninc’s impressive growth numbers are in areas like real estate, construction and restaurants which are not the sectors that our well-recognised grassroot innovators work in.

One exception is the interesting work on indigenous fast food chains like the famous Darshinis (stand-up fast food restaurants) of Bangalore. I wonder whether these darshinis fall under the organized sector or India Uninc. This needs further investigation.

There may, however, be a close link between jugaad and India Uninc. Many of the popular examples of jugaad like lassi being made in a modified washing machine would fit in with the fast-growing sectors identified by Vaidy’s work. Given the importance of India Uninc, it would be useful to know more about how productive the India Uninc firms are in using resources, and whether (and to what extent) innovation helps them use resources more productively leading to faster growth.

Another question that looks interesting is regarding the links between India Uninc and the so-called organized sector. We know, for example, that the software boom in Bangalore has triggered a boom in catering services, service apartments, “paying guest” accommodation, interior decoration, and similar services. Apart from large developers who are incorporated and sometimes even listed on the stock market, there are hundreds of small builders and contractors who are meeting the demand for housing as well. So, I wonder whether the growth of India Uninc. and the organized sector including multinationals are as unconnected as Vaidy’s book might suggest.


Vaidy has been developing these themes for several years now through his columns in the national press and digital media. Often times, Indian scholars do good work, but fail to consolidate and integrate their ideas, thus undermining the impact of their scholarship. So, I am really glad that he decided to put together all his writings on this subject in one volume. There is some repetition of ideas across the book, but I found that this helped to reinforce and underline the key themes.

We know from the field of innovation that good ideas take time to ripen and germinate. This one is no different. Vaidy attributes the trigger for this line of thought to talks given by Professor K.N. Raj at IIM Calcutta in the 1970s. Of course, it’s somewhat ironical given Vaidy’s contempt for communism and communists that he was inspired by a leftist economist like Professor Raj, but I suppose that’s what good scholarship is all about!.

An important contribution of this book is to underline the urgency of reform of our national statistics. Though the National Sample Survey and other economic and social data collection efforts of the government provide useful data (Vaidy has used this data extensively in this book), it’s clear that some changes are required in the categorization of economic entities if we are to track the progress of India better, and to come up with meaningful policy interventions.

[The views expressed in this blog are the personal views of the author.]

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