Tuesday, November 14, 2023
MSMEs in India: Nation’s Progress Depends on Them | Arun Kumar
Published in ’Communique’ Pp.35-39 Annual. September 2023. (Magazine of Apex Chamber of Commerce and Industries of NCT Delhi) also reproduced in Mainstream Weekly (November 11 & November 18, 2023)
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Introduction: Diverse Economy
Indian economy is the most diverse in the world. The usual sectors primary, secondary and tertiary are there but these are further sub-divided between public and private and organized and unorganized sectors. The primary, secondary and tertiary sectors are further sub divided into agriculture, manufacturing, finance and so on. So, there are roughly 27 sectors to contend with.
Beyond these sub-divisions there are the large, medium, small and the micro sectors in non-agriculture sector. In agriculture there are the large, medium, marginal farms and the landless. The technologies they use and the productivity they have are also vastly different so that the incomes differ widely across sectors. The divides are also between the rural and urban areas and backward and advanced states.
The largest sector in GDP is the tertiary sector, then the secondary and lastly the primary sector. Agriculture provides 46% of the employment but only contributes 14% of the GDP. Since it is largely in rural areas, they have a much lower income than the urban areas. Unorganized sector of which agriculture is an important part employs 94% of the work force but contributes 45% to the GDP. Thus, incomes here are very low compared to the organized sector where 6% of the workers work and produce 55% of the output.
Agriculture has a large amount of disguised unemployment since work on the farm is declining with mechanization in agriculture. More use of tractors, harvester combines and threshers are displacing labour. Such labour has nowhere to go since non-farm employment is not available. Unorganized sector in non-agriculture is often a residual sector because those who do not find work resort to some kind of self-employment to sustain their family.
Unorganized Sector: Issues
The share of employment in the unorganized sector has hardly changed in the last 30 years. This is a result of the increasing mechanization and automation in the modern organized sectors. While most of the investment goes there, it generates little work. So, people remain stuck in the unorganized sector. In this sector to, while investment is low it is also mechanizing, like, in agriculture. So, employment generation here is also inadequate.
The unorganized sector consists of the small and the micro sectors. The average employment in a micro sector unit is 1.7 workers. In agriculture every small farm (below 5 hectares) has the entire household involved. Consequently, there are no scale economies and they mostly depend on low technology, resulting in low productivity. They also do not have the wherewithal to upgrade technology. They also lack marketing and finance. Often, they have to borrow at high interest rates from the informal money markets. The result is high costs and low profits. To increase profits, they have to squeeze wages.
The unorganized sector producers supplying to the large and medium
scale businesses do not pay them in time and squeeze the sector,
resulting in working capital shortage. It could ultimately lead to
closure of the unit.
In brief, the unorganized sector constitutes a low profit and low wage
island in the economy. Due to the low per capita income, they consume
very little. This reduces demand in the economy. The impact is
substantial since it employs the vast majority. That slows down the
economic growth.
Role of Education and R&D
Imports from China are impacting the market for both the organized and the unorganized sectors. This is because the Chinese are able to produce at scale and their labour is highly productive so that they are able to produce cheaply. Not only are they producing high technology goods like APIs but also India’s cultural symbols, like Ganesh statues and Diwali lights.
Technological up gradation and entrepreneurship depend on the quality of education. The vast majority of children get poor education. This is testified to by the ASER reports since 2005. Many businesses say that youth is unemployable. According to NHFS-5 literacy has risen in the country to about 80%. Most children are in school but teaching and infrastructure are poor so that very few enter higher education and its quality is found wanting. The definition of literacy needs to be changed to `capacity to absorb modern technology’ and not just ability to read and write.
R&D is not only weak, investment in it is small by world standards. Consequently, we mostly import technology. That further sets back R&D in the country. It leads to a) inability to absorb modern technology, b) innovate, c) weak entrepreneurship and d) lack of employment. There is also `Jugad’ and poor quality production.
Mechanization and Artificial Intelligence are already posing a challenge to the unorganized sector. Due to their small scale of operations, they cannot afford to adopt it even if they had the skill to do so. This challenge is only going to grow in the coming years and one needs to prepare for it from now.
Policies
Of late, this sector has been hurt by policies. First, demonetization in 2016, then structurally faulty GST in 2017, NBFC crisis in 2018 and the sudden lockdown in 2020. Each of them damaged the unorganized sector while favouring the organized sector. It has not recovered from these shocks. Unfortunately, this decline in the contribution of this sector to GDP is not measured. It is assumed fallaciously that the unorganized sector is growing at the same rate as the organized sector. That may have been true prior to the shocks but not after that. The methodology of measurement of GDP needed to be changed but it has not happened. The result is that the contribution of the unorganized sector is overstated.
Since GDP growth is overstated it looks good. Consequently, the government has not taken special steps to boost the unorganized sector. The result is that this sector is marginalized in data and therefore in policy. Not only this, Government’s focus in on boosting big industry and businesses. That shows in the rise in stock markets which have become the barometer of the health of the economy. The unorganized sector is not represented in the stock market which consists of only a few thousand companies. The unorganized sector has 6 crore entities.
As demand shifts from the unorganized to the organized sector, it is like colonization by the organized sector. The result is the narrowing of the base of the economy’s growth. Consumption and private investment slow down. The economy then gets dependent on the other two engines of growth – net exports and public expenditures. These two helped in achieving high growth between 2003 and 2008. After that there is has see-sawed due incorrect policies.
Consequences of Neglect of Unorganized
The growth of the organized sector at the expense of the unorganized sector has huge consequences. Because the latter employs 94% of the workers, its decline has led to growing unemployment. Even before the pandemic, official data showed that unemployment had reached a 45 year high. Labour force participation rate is abysmally low. 190 million individuals in the relevant age group have stopped looking for work. The position of women and educated youth is particularly worrisome.
Consequence can also be seen in the dramatic rise in inequality in the economy with a large number of billionaires in a poor country. India is at 139 position in the world rankings of per capita income. The result is economic, social and political instability which spoils the investment climate. The government argues that the UN, IMF and Moody’s also certify that the economy is doing well. But these are not data gathering agencies. Their analysis is based on the official data and they replicate the errors in the official data.
Reforms required
The above points to the linkage between the various problems facing the economy and the decline in the unorganized sector. Most of these problems are policy induced. So, there is urgent need to change policies and support the unorganized sector. Currently policy is promoting the organized sector and doing little for the unorganized sector.
There is need to support the unorganized sector by promoting access to finance, technology and marketing. Cooperatives need to be formed to enable this to happen. Government’s steps in this direction are rather inadequate. Expenditures on education and R&D need to be sharply increased. GST is a last point tax. So, it should be collected at the last point only and not at each intermediate point of production and distribution. That will simplify the tax without causing any loss of revenue. As Arun Jaitley used to say 5% of the units pay 95% of the GST. The complications associated with ITC, e-way bill and so on will then get eliminated, business climate in the country would improve and the unorganized sector will revive.
(Author: Arun Kumar, is a retired Professor of Economics, JNU, New Delhi, and is the author of ’Ground Scorching Tax’. 2019)
Thursday, November 9, 2023
Four Videos in Hindi on -- Economy & unorganised sector, Indian Agriculture, Demonetisation & Politics
1. Video in Hindi on Issue of the state of the economy with reference to the unorganized sector.
https://youtu.be/5HIOr7gW0RE?si=nYWf_dbgSmAazxej
2. Video in Hindi on the problems of Indian agriculture and Reforms needed.
https://youtu.be/rUeTt1IuF0U?si=FdPsOFHkpfNq4n6Z
3. Video in Hindi on Policy Induced Crisis - demonetization and GST. And, Is population a burden?
https://youtu.be/LFz9npG9ZVw?si=W26P83CgK0UPP3hP
4. Video in Hindi on why Freebies are a result of loss of credibility of politicians and parties.
https://youtu.be/qAJjCJ2Bu8k?si=U7lbPD9VBKXjzFrX
Wednesday, October 25, 2023
Links to articles, discussions and interviews by Arun Kumar from July to September 2023
links to select recent articles, discussions and interviews after three months.
1. Challenges of becoming a developed economy by 1947. In the Leaflet Sept 17. It is at: https://theleaflet.in/technological-challenges-to-becoming-a-developed-country-by-2047/
2. Interview on India’s economic performance. Channel 4 PM September 17. It is at: https://youtu.be/j_ieEocgqzE
3. Interview on G20 outcome failure and Indian Economy. It is at Jeevansathi.com Sept 15. It is at: https://youtu.be/Ms3ITm1ypdo?si=wSyXvWmshRDdWJ3I
4. G20 serving the interest of the Global landlords. In the Wire Sept 14. It is at: https://thewire.in/world/g20s-new-delhi-declaration-serving-the-interest-of-the-global-landlords
5. Talk on `Adani Scandal - PM silence’. Organized by SundarayyaVignana Kendram. Sept 5, 2023. It is at: https://fb.watch/nr_kCJTdKX/?mibextid=RUbZ1f
6. GDP `discrepancies’ explained. Two articles
a. In News9live on Sept 3. It is at: https://www.news9live.com/opinion-blogs/decoding-the-significance-of-7-8-gdp-growth-for-indian-economy-expert-speaks-2270756
b. In the Wire on September 5. https://thewire.in/economy/understanding-gdp-growth-through-discrepancies-and-why-the-major-push-is-not-visible
7. Discussion on likely further revelations on Adani affair. On HindiSatya.com. August 25, 2023. It is at: https://www.google.com/search?sca_esv=569887179&tbm=vid&q=Hindi+Satya.com+With+Mukesh+Kumar+on+Adani+affair&sa=X&ved=2ahUKEwjr9uPixtWBAxWjS2wGHdZcC9sQ8ccDegQIDRAH&biw=1024&bih=710&dpr=1.25#fpstate=ive&vld=cid:4bc75314,vid:r4NglZUPOB8,st:0
8. Discussion on de-dollarization and the Emerging World Order with Air Marshal Matheswaran. Organized by the Peninsula Foundation. August 22, 2023. It is at: https://youtu.be/Fsrnh1QCyXM?si=K273Tfi74svjVZqQ
9. The truth of the official claims: Data is incorrect. In the Wire on August 18, 2023. It is at: https://thewire.in/economy/the-hollowness-of-modi-governments-tall-claims-and-self-praise-on-economy
10. What should G20 agenda should be from people’s perspective?. Talk at the Conference titled We20: People’s Summit on G20 in New Delhi. August 18. It is at: https://wgonifis.net/2023/08/18/economists-social-movements-political-leaders-give-clarion-call-to-stand-up-to-the-anti-people-policies-of-g20/
11. In Hindi How can India become 3rd largest economy soon? In the Hindustan. August 17, 2023. It is at: https://www.livehindustan.com/blog/latest-blog/story-hindustan-opinion-column-17-august-2023-8583185.html
12. Discussion on Hurdles to Becoming an Economic Superpower. Mint. August 16. It is at: https://www.youtube.com/live/YnF2N7FBORM?feature=share
13. In Hindi. What is wrong with Economic Policies? Analysis of the PM’s Address on Independence Day. ABP, Uncut. August 15. It is at: https://youtu.be/cj_eMbD71T4
14. In Hindi. Mood of the Nation: Economic Aspect. Public India August 12. It is at: (From 1 hour onward). https://www.youtube.com/watch?v=P2z7O4tjMOQ
15. Panel discussion on release of Neerja’s book, `How Prime Minister’s Decide’. August 8. It is at: https://youtube.com/live/BgFG-cfmLUs?feature=share
16. Reduction in Multi-dimensional Poverty in India: Is it for real? In the Leaflet, August 6, 2023. It is at: https://theleaflet.in/is-the-decline-in-multidimensional-poverty-in-india-real/
17.Minimum Guarantee Bill of Rajasthan Govt. – an Analysis. In the Wire, August 5, 2023. It is at: https://thewire.in/rights/rajasthan-minimum-guaranteed-income-bill-intent-marginalisation
18. India for Democracy Conclave. Talk on economic inequality and other aspects. August 4. It is at: https://youtube.com/live/GyZxHbYrdmw?feature=share
19. In Hindi. Why India will not the 3rd largest economy anytime soon. Article in the Print on the 28th July and interview in The Public on 27th July. It is at:
a. https://youtu.be/yCDD2k6GTHg
20. Long article on ‘Intricacies of GST’ and why it has not fulfilled its promises. In Mainstream, July 29. It is at: http://www.mainstreamweekly.net/article13636.html
21. Development gone rogue – Underlying causes of high floods in Delhi. In the Wire, July 20. It is at: https://thewire.in/environment/development-rogue-flood-delhi
22. Why 28% tax on Online Gaming is justified. At News9live, July 12. It is at: https://www.news9live.com/deep-dive/imposing-28-gst-on-online-gaming-will-not-lead-to-the-collapse-of-the-industry-expert-opines-2210136
23. Interview on technology from US under the Indo-US Accord during PM’s visit. The Public on July 2, 2023. It is at: https://www.youtube.com/watch?v=ZXHVv-uPHsM
24. Assessing Impact of Six Years of GST. In the Leaflet. July 1, 2023. It is at:
https://theleaflet.in/a-taxing-tale-assessing-the-impact-of-six-years-of-gst/
25. Long Article: Modi Rule vs Nehru’s Era: Comparing the Incomparable. In Mainstream. July 1. It is at: http://www.mainstreamweekly.net/article13565.html
26. How much employment needs to be generated in India? In the Hindu. June 29. It is at:https://www.thehindu.com/data/data-how-much-employment-generation-does-the-economy-need/article67030514.ece
27. Asymmetric technology relation between India and US and what it tells about our R&D. In the Wire. June 28. It is at: https://thewire.in/tech/indias-weak-r-and-d-culture-behind-asymmetric-indo-us-deal.
28. Brief talk on decoding current inflation. At Lallantop. June 28. It is at: https://www.youtube.com/watch?v=vs8RhVOyF_4
29. Interview on Rich Indians leaving India and Broader Issues at HW News. June 20. It is at: https://youtu.be//SutPv0MCCuQ
30. Short Interview in Hindi on why rich Indians are leaving the Country in large numbers. In the Wire, June 17. It is at: https://youtu.be/CJPllYj8vtk
31. Article on Why PLI scheme is sub-optimal. In the Wire. June 16, 2023. It is at: https://thewire.in/government/pli-scheme-subsidies-demand-shortage-jobs
32. Panel discussion in Hindi on India’s federal structure being damaged. It is at News Time, June 16. At https://www.youtube.com/live/k9nisfsVw7Q?feature=share
33. Article in Hindi on strengthening Indo-US relations. Hindustan June 15, 2023. It is at: https://www.livehindustan.com/blog/latest-blog/story-hindustan-opinion-column-15-june-2023-8305724.html
Monday, January 30, 2023
Electoral bonds: No solution to illegal political funding | Arun Kumar (Jan 30, 2023, The Leaflet)
Electoral bonds: No solution to illegal political funding
How do donations via electoral bonds funded by legal or illegal money help curb undue influence on policy makers? Electoral bonds provide an additional of such funds.
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THE Union Government initiated the Electoral Bonds scheme, which was announced in the Union Budget 2017–18, on January 2, 2018. The aim was “to cleanse the system of political funding in the country”. While many other issues are also germane, the moot question is will this goal be achieved.
These are bearer bonds that private entities can buy from a designated bank (presently the State Bank of India) and donate them to a political party. They are supposedly an anonymous way of donating funds to political parties, since the identity of the donor is not disclosed. The bonds become available around the time of elections, presumably to provide ‘legitimate’ funds to political parties.
Data shows that most of the funds go to the ruling party and help them consolidate their hold over power.
The scheme
To maintain anonymity of donations, the income tax department cannot investigate the donations, the Election Commission cannot ask for their details, and the public will not know who is donating. The then Election Commission was not in favour of such non-transparency. The Reserve Bank of India did not approve of such a scheme. In fact, neither of the two were consulted prior to the announcement of the scheme. In the Parliament, the Finance Minister had mentioned that people wanted anonymity but when asked through the Right to Information Act who these people were, there was no response.
Given the opacity of the bonds (for the public), a quid pro quo is possible between the ruling party and the donor for favours bestowed. In effect, it can be a bribe in white.
While the public and the Election Commission cannot find out who is donating to whom, the party in power can access this information. The bank issuing the bonds has a record of the entity donating and the party encashing the bond. Given that the bank managements are largely under the control of the Union Ministry of Finance, the information can be accessed by the ruling party.
Further, given the opacity of the bonds (for the public), a quid pro quo is possible between the ruling party and the donor for favours bestowed. In effect, it can be a bribe in white. Since there will be no investigation, the donated money could be illegal.
Given these asymmetries and the opacity, public spirited entities went to court against the scheme in 2018. Since then, the matter has been sub judice. The Supreme Court, in its wisdom, has refused to grant an interim stay on the scheme.
Black money in elections
To fight Indian elections, whether for local bodies or state or national legislatures, much illegal funds are used. In a survey of 14 successful Parliamentarians in the 1998 Lok Sabha Elections, this author found that the average expenditure was eight times the allowed expenditure. This multiple has increased over time. The Parliamentarians interviewed added that the donors expected favours from them if they won.
Since any expenditure above the election expenditure limit is illegal, it has to be surreptitious. It cannot enter into the book of accounts, and has to be from illegal sources/black incomes. The Election Commission’s checking during elections has made little dent.
The quid pro quo results in subversion of policies and marginalisation of the common voters, who usually receive a bribe to vote for certain candidates. However, what the voters get at the time of elections is peanuts compared to their loss when policies are subverted against them. In contrast, the vested interests funding the candidates make a multiple of their illegal donation. It is the best investment for businesses since they get favourable policies, contracts, and protection from prosecution for wrong doing, among other things.
Clearly, the welfare of the nation and the common people requires freeing the politicians running the government from the influence of the black economy. How do donations via electoral bonds funded by legal or illegal money help curb undue influence on policy makers? The bonds provide an additional of such funds.
Why the bonds?
Can the use of Electoral Bonds serve the larger purpose of curbing black income generation in the country? A couple of lakh crore rupees are used in various elections in a five year cycle – about Rs. 40,000 crores per annum. Of the current Gross Domestic Product (GDP) of about Rs. 270 lakh crores, it comes to 0.15 per cent. The electoral bonds of a few thousand crore rupees issued annually are an even smaller percentage, both of the GDP and of the black economy. Since electoral bonds are only an addition, they cannot be the solution to the problem of use of black incomes in elections.
Election expenditures over and above the election limits have to be via illegal funds. The electoral bonds can neither be used to fill this need nor do they accrue to the individual candidates, so the need for illegal funds does not disappear.
Auditing of accounts of political parties can hardly stop the use of black incomes in elections. Companies’ accounts are audited, yet they generate black incomes through various means. Political parties also adopt the same devices to hide the actual sums surreptitiously received. Thus, even if the electoral bonds are based on legitimate funds, they cannot prevent the use of illegal funds raised by political parties.
Crucially, election expenditure limits are applied to the candidates and not political parties. The Electoral bonds can only be donated to political parties and not individual candidates. So, the individual candidate’s huge expenditures over and above the election expenditure limit has to be met through illegal funds. The winning candidates will have to continue to honour the quid pro quo and illegality will persist – bonds or no bonds.
Also read: Electoral Bonds: How compromised is our democracy
What makes Indian elections expensive?
The rich who donate substantial sums to politicians and parties do so in black since they do not want their name to be up front. They donate to all parties but don’t want the ruling party to know this. The political parties also do not want the public to know which businessmen are obliging them since in a poor country that could tarnish their image. Why do candidates need so much money to fight elections?
Electoral democracy has come to India when feudal consciousness persists. People vote for a variety of reasons, and not just on the basis of the candidate’s performance in the constituency. Often, people vote for candidates of their caste and community, however corrupt they may be. They expect this person to do their right or wrong work. Nowadays, work, whether right or wrong, requires pull. Often, bullies get elected because they can deliver. People say that they do not want to waste their vote, irrespective of the performance or the honesty of the candidates.
Seldom do NGO leaders who help people in myriad ways win elections. At times, candidates who do not even belong to a constituency win because of their equations within the constituency. Clearly, the public is looking for something other than performance when voting.
Candidates try to demonstrate to the people in their constituency that they have clout and can deliver. To show clout, big rallies, road shows, posters, cut-outs, flooding of social media, maintenance of vote banks, and so on are required. Cash and gifts are distributed just before Election Day. All these require a lot of funds.
Delhi Chief Minister Arvind Kejriwal has advised people to take gifts from political parties, but vote for his Aam Aadmi Party’s supposedly honest candidates, but this did not succeed because of the prevailing feudal consciousness: ‘namak khaya hai’.
Electoral bonds cannot achieve their ostensible goal
Indian elections have become expensive since feudal consciousness prevails in society and voting is seldom based on the performance of candidates. So, elections become expensive. Election expenditures over and above the election limits have to be via illegal funds. The electoral bonds can neither be used to fill this need nor do they accrue to the individual candidates, so the need for illegal funds does not disappear.
For political parties, the bonds give additional funds over and above what they collect illegally. Auditing of party accounts cannot help since that is only of the declared funds. Thus, the electoral bonds scheme cannot succeed in cleansing political funding.
Sunday, June 11, 2017
- Article in the Hindu on the Income Tax notices issued to 18 lakh
entities and why those deposits may not be black. http://www.thehindu.com/opinion/op-ed/painting-it-all-black/article17834428.ece
- Interview published in the Pioneer on
Black Economy in India: file:///C:/Users/Dr.%20Arun%20Kumar/Downloads/23ag05.pdf
- Interview on black economy, globalization
and Indian economy in Newslaundry: https://www.newslaundry.com/2017/03/18/nl-interviews-arun-kumar-on-indias-black-economy-and-black-money-blurb-abhinandan-sekhri-speaks-to-the-economist-to-figure-out-black-from-white
- Analyzing the 6 months of
Demonetization; the economy sputtering while a political dividend has
accrued. In the Wire: https://thewire.in/136455/demonetisaion-economy-political-dividend/
- Analyzing Arvind Subramanian’s statement
of on why experts are sycophantic and that makes for poor policy making.
In Catch News: http://www.catchnews.com/india-news/policy-making-and-autonomous-intellectuals-who-wants-genuine-debates-63127.html
6. Article in the Indian Express suggests that the
methodology that works in normal times is not applicable when the economy has
suffered a shock. So, why is government still talking of 7% rate of growth http://indianexpress.com/article/opinion/columns/unusual-times-usual-ways-demonetisation-gdp-growth-economy-employment-4560881/
7. Article in the DNA explains the
link of black money and elections in India and why voters do not seem to care
about it. http://www.dnaindia.com/analysis/column-politicians-voters-and-the-doublespeak-on-black-money-2334012
8. A more detailed article analyzing the
budget than the previous one. It appeared in the Mainstream a few
days back.
It analyses why the assumptions underlying the budget
arithmetic are incorrect so that the revenue projections are likely to go
wrong.
Also why more should have
been done to take care of the developing crisis due to demonetization.
9. Budget article in Firstpost.
10. Wire Article on analysis of the
Economic Survey
11. Scroll.in article on the rupture between reality and government data.
12. Firstpost article on pre-budget
expectations
http://www.firstpost.com/business/budget-during-the-times-of-demonetisation-fm-has-a-tough-task-to-rejuvenate-the-slowing-economy-3217790.html
13. Article in the Citizen
analysing the impact of demonetization on banks and pointing out that
recessionary conditions are beginning to take hold.
It is available at: http://www.thecitizen.in/index.php/NewsDetail/index/1/9457/39-Days-Demonetisation--Recessionary-Conditions-Take-Hold
14. Article from The Scroll points out that the
government is trying to claim success by shifting goal posts but not
succeeding. It is at: http://scroll.in/article/824129/demonetisation-shifting-goalposts-to-show-success-has-kept-focus-away-from-real-issues
16. Article on measuring the size of the black economy in India in Economic
and Political Weekly.
It is available at: http://www.epw.in/journal/2016/48/estimation-size-black-economy-india-1996-2012.html
I have tried a different way of estimating the size of
the black economy.
This piece was written much before demonetization was
announced.
17. An article based on an interview in India Legal. It is a general take on demonetization –
what is wrong with it and why it would not work but cause a lot of pain to the
poor, etc.. http://www.indialegallive.com/commercial/special-story/demonetization-will-adversely-impact-97-percent-indians-15912
18. An article in the Wire looks at why cash does not mean black and why
cashless economy would not lead to less of the black economy, etc. Its link is:
http://thewire.in/83480/choking-money-supply-not-the-way-to-tackle-black-economy/ .
Here are two early articles on demonetization published within days of the announcement.
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