A weird tale which holds out hope

Is the unorganised sector laying the base for India’s growth?

Saumitra Chaudhuri

Many economic myths abound in this land of snake charmers. We have all heard the uplifting story of how centralised planning resolves the co-ordination problem; how markets fail and the reluctant babu has to take over; how private investment follows on public capex; and so on. The risk-less and magical version of free-markets charms did not cut much ice with the by now cynical Indian and thus, there are few tales of this flavour blowing discredit into the wind.

But here is a home-baked weird story. In India, government borrowing pre-empts nearly all of the economy’s financial savings. Bank credit shrinks, corporate top-lines wobble while bottom-lines wither, tax revenues, exports and imports are flat or declining, and prices are soft; capital inflows are anaemic, non-performing assets continue to rise in banks’ loan books, corporate investment is weak and the stock market is in doldrums. But Q2 GDP grows 5.3 per cent year-on-year.
From where does this growth spring forth? The problem with year-on-year quarterly GDP rates is that they provide no information on what happened in the intermediate period. The Central Statistical Organisation is yet to make available seasonally adjusted data series. But rough approximations are possible. In the accompanying chart, we present the increase/decrease in the quarter-on-quarter rates of GDP growth with respect to the corresponding quarter in the previous year.

Since agricultural GDP is subject to the vagaries of the weather gods, our focus is restricted to industry and services. Not surprisingly, the deceleration outweighs the accelerating trend, while the Pay Commission fallout created a good deal of volatility in 1999-00. The overall deceleration in non-agricultural GDP during the beginning of 1999-00 was partially masked at the aggregate level by a pick up in agriculture.

A slight deceleration in service sector growth in Q3 of 2000-01 was followed by a massive slump in industry in Q4, causing non-agricultural GDP to slump. The severity of the deceleration in industry evident in the last quarter is unprecedented. Whatever the reasons for this big loss of steam, the good news is that things seem to have been on the mend in the first two quarters of 2001-02, with change in both, industry and services, and in their total (non-agricultural GDP) moving back into positive territory. Even if the recovery seems slight, the trend is certain to continue into Q3 and Q4 of 2001-02.

The question that inevitably arises is, if the Indian economy is growing at around 5.5 to 6 per cent annually, where is this growth coming from? We know that the private corporate sector was not doing wonderfully well, and the government sector is currently dependent on the direct transfusion of the entirety of the nation’s financial savings.

The only possible conclusion must be that the source of growth is the non-corporate non-government sector — the informal, the unorganised sector, or whatever you wish to call it — on which the existing data systems capture very little information. If this conclusion is indeed true, it is critically important: that, no thanks to government, with no credit or other external financial resources, the unorganised sector is capable of laying the basis of a 5 to 6 per cent annual rate of growth, even in the presence of acute sluggishness in the organised sector. It would, therefore, mean that if only the structural constraints that bind down the private corporate sector and public sector assets were to be creatively addressed, targeting an overall growth rate of 7 per cent plus would certainly be no pipe dream.

Saumitra Chaudhuri is economic advisor to ICRA (Investment Information and Credit Rating Agency) and editor of Money and Finance, the ICRA bulletin