Uninc.India story. Rescuing Abhimanyus from the share bazaar -- R. Vaidyanathan

To R. Vaidyanathan, professor of finance at the Indian Institute of Management, Bangalore, it seems absurd that the largest component of the national economy is often “not an area of focus for planners and economists”. This “non-corporate” segment—comprising partnerships, proprietorships and the self-employed set—accounts for around 40% of national income, he writes in his forthcoming book, India Uninc. Yet the share of outstanding bank credit to these businesses is just 36%. Prof. Vaidyanathan argues that the odds are often stacked against these businesses, in terms of government policies, taxation, and support in terms of credit.

In an email interview, he explains why this segment should no longer be neglected, and the impact of what he calls the “Abhimanyu effect”. Edited excerpts:

It is the non-corporate or India Unincorporated—consisting mainly of partnership and proprietorship and household type of organizations from the ownership point of view. They are organized or unorganized, depending upon regulations/reporting, etc. They may have a regular labour force or an informal type (of workforce), depending on the size. Some partnership firms—say, in beedi-making or even manufacturing—are very large, with more than `100-crore turnover, so non-corporate does not necessarily mean “small”.

They have more than 40% share in our national income and they are the fastest growing (category). They dominate the service sector—retail trade, hotels, restaurants, transport, construction and all other business services like plumbers and painters, etc.—and they have been growing at nearly 8% CAGR (compound annual growth rate) in the last decade. They are responsible for our good growth rates in the last 20 years.

Take the share of foreign institutional investors (FII) and foreign direct investment (FDI) in India—it has never been more than 8% in any given year in the last two decades. The share of the Uninc. is nearly 40% of our investment rate. Yet there’s so much discussion about FII and FDI, which should be treated as pickle to curd rice and not as the main dish itself. The main dish is India Uninc., which is neglected.

The two major problems faced by them are corruption due to large-scale government regulations at the state and municipal levels, and the lack of availability of credit. If credit is available, it is at exorbitant rates.

Indian banks, including private sector ones, are not geared to serve these segments. They tend to go for the big companies, and sometimes even write off those loans. To fund these people (Uninc.), you need to know the products and markets, etc. Many big banks use non-banking financial companies to finance small businesses to fulfil priority sector lending.

Nearly 85% of India is self-employed. These people do not have social security cover for old age. If products like reverse mortgage could be developed based on gold, it will help a number of middle- and lower-class couples in their old age.

In the share market in India, entry is easy but exit is difficult. So we have a million Abhimanyus in the Indian share bazaar. Nearly two-thirds of trade is done by day traders and more than half of listed scrips are not even traded once a year. Of the nearly 8,000 or so scrips listed, hardly 300 or so are actively traded. So many individuals get stuck in the share bazaar with dud stocks. Actually, some 700 or so listed companies are “missing” or called “vanishing” companies and searched for by several committees.