Wednesday, May 27, 2015

Prof. Vaidyanthan's ideas - 3. India Unincorporated

Indian academic discourse tends to copy American terminologies verbatim.

In US out of total businesses 80 % is due to big corporates. The remaining, i.e. small businesses are therefore called residual.

However in our country the share of so called "residual" or "unorganized" sector is more than 70 %.

India's is the only country where more than 50 % is called "residual" or derisively called "Unorganized Sector".

The so called "Unorganized sector" contributes more than 60 % of India's GDP.

Also note that two major passions of Indians: Bollywood and Cricket both are considered to be "unorganized".

Government bodies and archaic regulatory bodies are "Organized"

Let us talk a bit about so called "Organized sector" or India Incorporated.

There are around 7.8 - 8 lakh companies that together contribute around 15 % of our GDP. Out of these only 8000 are listed in stock market. out of these 8000, more than 50 % did not even have a single transaction.

So much for media obsession with stock market.

for all practical purpose, only 150-200 companies are active on share market and their contribution to economy is not more than 5-6 % to India's GDP.

Two major problems that affect India's UnInc (New name given by Prof. Vaidyanathan):

1. Lack of cheap credit
2. Harassment due to archaic laws.

Credit requirement:
The small shopkeepers / Juice vendors etc: Their requirement is primarily that of working capital. It may be noted that this segment has a requirement of around 12 Lakh crores annually, out of which 10 lakh crores is required as credit. The default rate is extremely negligible in these cases.

Since no banks / institutional mechanism exist to give credit to this large segment, they are forced to take credit at as high as 0.5 % interest per day that works out to  15 % per month, which is huge.  

Some if they are lucky get credit from Chit-funds or moneylenders at extremely high rate of 3-4 %, which also amounts to a very high interest rate of 36-48 %.

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