Archives: Publication

Informal Economy

The serious commentary by Professor S. Gurumurthy on the implications of the budget for India’s informal economy was commendable (“The good is in the detail” July 14). I’d like to add support for his good challenge.

Most of the enterprises in the Indian economy aren’t “SMEs”; they aren’t “small” they are “micro” enterprises with under Rs.25 lakh of investment for those dealing with goods and under Rs.10 lakh for services. According to India’s Economic Census about 95 per cent of firms have fewer than five employees. And the average fell from about 2.9 in 1990 to 2.4 in 2005. In India liberalisation has unleashed a mighty torrent of tiny firms. Anushree Sinha’s work showed some seven years ago that it is the informal economy that drives both growth and jobs.

Very few of these tiny firms grow from rags to riches — we read about the exceptions. The vast majority are unable to save or to grow by reinvesting: the economy expands through the multiplication of these tiny units. They don’t accumulate because of adverse terms and conditions in the marketplace. It isn’t just a matter of prices they often face delays in payment for their output while being required to pay promptly for inputs. Some — it isn’t known what proportion — are not really independent units at all but are called “disguised wage-workers.” Others don’t maximise profit they toil to maximise production on what funds they have.

For sure credit is important — the NCEUS stressed this way back in 2007 and the Reserve Bank says that as of today micro and small industries can get loans up to Rs.5 crore. But without collateral and legal registration you won’t be eligible. You are left with the problems of either the savings groups or of being on the end of onward lending at ever higher interest by webs of credit spun by collateralised businesses with access to multiple bank accounts.

Over and above credit tiny businesses need safe sites and infrastructure: not just roads transport and communications but reliable power water drainage and sewerage. That means attending to local municipal governments their revenues and their politics.

It is also known that “informal” unregistered unregulated activity has become complex. A typical firm will be registered with a municipality but will flout labour and environmental laws and pay tax with great reluctance and as late as possible in the tax-year. The informal economy isn’t confined to small enterprise: big corporations and government departments are not above employing labour on verbal contracts and illegal terms and conditions.

Returning to small self-employed firms over and above the economic and infrastructural support they need it’s important to understand that economic agents are not free to invest wherever they might like — there are powerful social obstacles. Although the founding fathers reckoned that the animal spirits of markets or the rationalities of planning would dissolve archaic forms of exchange this hasn’t happened. Something more complicated is developing in India’s informal economy. For sure markets are opening up opportunities to some people but at the same time and sometimes in the same place they also discriminate against others and prevent entry.

There is overwhelming evidence from rural and small-town India that it isn’t just caste that structures the informal economy as Prof. Gurumurthy has shown. It is also gender ethnicity religion and language that persist in shaping the opportunities that are available. And thousands of small business associations keep tight order in the so-called unorganised sector. Any interventions in this day and age will have to negotiate with what is on the ground. I wish the Finance Ministry good luck in sorting this out in the three months they have given themselves in Paragraph 102 of the Budget. Some of us have struggled through our working lives to understand it!

NDA government might unveil reform agenda post budget?

If history is to be believed there is nothing bizarre in assuming that reform agenda is not confined to the Budget alone. Even though the big event of Budget has passed it is not unlikely that bold reform measures could be taken now.

The Narendra Modi-led government has also shown its propensity to announce reforms outside the Budget. It has hiked rail fares and maintained status quo on the excise duty for automobiles and white goods before presenting its maiden Budget.

Zee Research Group (ZRG) has listed some structural measures which can help the economy in regaining its lost momentum.

It was expected that this Budget would announce a deadline for the implementation of Goods and Services Tax (GST). This pending reform is supposed to have cascading effects on boosting tax efficiency collections and overall GDP growth. As per the NCAER study a complete implementation of the GST could lift GDP growth by 0.9-1.7 percentage points for all future years.

However GST was only given a cursory mention in the Budget speech and that too without a deadline for it. Arun Jaitley in his first Budget stated “Some States have been apprehensive about surrendering their taxation jurisdiction; others want to be adequately compensated. I have discussed the matter with the States both individually and collectively. I do hope we are able to find a solution in the course of this year and approve the legislative scheme which enables the introduction of GST.” Hence it is expected that during the course of this year the government will find a solution and will set a deadline for its implementation.

In sync with the view Ambit Capital in its report asserted “In its first major economic outing the NDA lost an opportunity to reset the tone and tenor of policy in India. On implementing the GST the minister recognised the need for this piece of reform but resisted committing to a date.”

Another disappointment was that the government failed to give a roadmap for the reduction of subsidies. While the finance minister proposed to overhaul the subsidy regime including food and petrol subsidies he failed to lay a roadmap for a cut in subsidies. With a decisive mandate in hand it is expected that going forward government can make bold announcements on price rationalisation of LPG and kerosene.

Further the cap on subsidised LPG cylinders could be reduced from 12 currently to 9 in order to limit the growth in fuel consumption. Currently LPG subsidy accounts for almost 50 per cent of total oil subsidy bill. The move could reduce fuel subsidy burden by nearly Rs 4000 crore.

Even the report by Espirito Santo India has shared its disappointments from the Budget. It includes: optimistic revenue estimates no timeline for the roll-out of GST no clear roadmap for subsidy reduction and a vague view on retrospective taxation.

The decisive election mandate of the newly elected government has raised expectations that the government would initiate bold measures in this Budget which can improve the macroeconomic environment. However the government has failed to outline tough policy changes in the Budget.

With regards to Land Acquisition Act the government is expected to tweak it to make it more business friendly. It is expected that consent requirement for PPP projects may be reduced from 70 per cent to 50 per cent of land owners. Further the BJP manifesto had hinted at reviewing the Act but one has to wait till the next session of the Parliament.

Likewise everybody was waiting for some announcement related to Labour reforms. There are at least 250 labour laws in the country which have created a complex network of laws regulating organised labour. Restrictive laws have inhibited growth of the economy. Recently Rajasthan took steps to reduce exit barriers for firms.

Taking cues from Rajasthan government’s move it was expected that in Budget government would provide an injection of flexibility into labour market regulation which can attract foreign capital create jobs and unleash higher growth.

Going down in history UPA-II government unleashed a slew of reforms outside the Budget under the leadership of P Chidambaram. The structural reforms started with the diesel price hike capping the limit of subsidised LPG cylinders allowing FDI in multi-brand retail and aviation. Further the Cabinet cleared the proposal related to 49 per cent FDI in insurance along with 26 per cent in pension funds. It also cleared the revised draft of the Companies Bill apart from upgrading five airports to international levels.

Now Modi being at the helm of the government it is expected that India will unlock its growth potential in the coming years.

India Policy Forum 2013-14

The IPFs 10th Anniversary Volume, 2013-14, comprises papers and highlights of the discussion at the India Policy Forum (IPF) held in New Delhi on July 16–17, 2013. The IPF, a joint venture of NCAER and the Brookings Institution in Washington, D.C. explores India’s rapidly evolving economic transition and the underlying policy frameworks and reforms using policy-relevant, empirical research. This Volume has been edited by Shekhar Shah, Barry Bosworth and Arvind Panagariya.

 

2013|14, Volume 10, Papers

 

 

 

 

 

The complete volume is available at the ‘Download’ link below

The complete set of IPF Volumes, can be viewed and downloaded here.

Agricultural Outlook and Situation Analysis Reports: Quarterly Agricultural Outlook Report January-March 2014

The nature of monsoon in terms of amount of rainfall received during the months of June-September and distribution of rainfall across regions of the country and over the four month period remains the most important determinant of annual agricultural harvest in the country. This year, there has been a significant deficiency in rainfall received in June. The present report provides a review of the developments in the food commodity sectors, covering both domestic and international markets for the period January-March 2014 and available data upto June 2014.

    Get updates from NCAER