From: Vaidyanathan R
The India growth story is propelled by black money
DNA / R Vaidyanathan / Tuesday, December 21, 2010 2:44 IST
Post-Nira Radia, many economists and experts have been wondering whether our reforms, which are supposed to be facilitating growth, are giving raise to crony capitalism. These experts look at India with western lens and cannot think beyond received wisdom from Oxford and Harvard. They do not realise that the corporate sector has a relatively small share of GDP — not more than 15%. We are a nation of the self-employed.
The service sector, which constitutes more than 60% of GDP, is the engine of our economic growth. It is predominantly driven by partnership and proprietor-owned firms engaged in construction, trade, transport, hotels, and other services provided by the likes of plumbers and painters. It is this self-employed sector that is propelling our 9% growth story even though corporate bodies and government ministers appropriate praise for the economy's performance. It is estimated that at least 10% (some suggest 30%) of our national income could be black money. It implies that out of nearly Rs60,00,000 crore of estimated GDP in the current year, more than Rs6,00,000 crore could be black money. A substantial portion is due to corruption by government employees. This money is not kept in cupboards or under the bed, though one '90s telecom minister (Sukh Ram) did stuff it inside pillows.
Put another way, the growth rate of the last decade is not related to the credit mechanisms of the banking sector. This is banking with significant structural distortions. The share of the private corporate sector in national income is around 12-15% but it takes away nearly 40% of the credit provided by the banking sector. The fastest growing non-corporate sector gets a lesser share, which suggests that the non-institutional financial sector is playing an important role in credit delivery.
We find that 43% of rural household and 25% of urban household debt relates to moneylenders . So, where does the unorganised sector get the funds? According to our absurd laws, moneylenders cannot borrow, but can only lend. The huge amount of black money generated by nearly 30% of government employees (the previous CVC, Pratyush Sinha, suggested a 30% corruption rate) is probably used in the unorganised credit market. Given the regulations pertaining to KYC (know your customer) norms, it is difficult to save with banks or mutual funds. So the entire black money is finding avenues in the unorganised market where interest rates are very attractive. The crime news in many towns is about violence between small-time moneylenders and enforcers. One can infer that policemen are entering the market both as lenders and collection agents. This has implications for our governance system since the duty of the cop is definitely not to support unorganised banking.
How do we deal with it? Since we are a relationship-based society, it is not possible to surgically remove the cancer of corruption. If we do that, our growth will suffer in the short term. The best way is to integrate the unorganised sector with the general financial architecture and enlarge the availability of credit and funding to all instead of restricting it to corporate 'thieftains'. We have to think beyond the 15% of our corporate economy to understand economic growth. Balancing the need for probity with growth of the economy is the big challenge of the coming decade. In other words, crooks do help in economic growth but society has to decide what price we are paying for this and strive to balance growth with probity and order.
The author is professor of finance and control, IIM-B. Views expressed are personal.
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