The formal-informal divide
The Hindu
The
slowdown in private investments is visible chiefly in the informal sector, not
the corporate sector
It is now well
recognised that there is an investment slowdown in India, which is delaying a
full-blooded recovery in the economy. Private investments, the principle
engine of growth, are out of steam. The fall is so severe that it has more than
offset the government’s macroeconomic stimulus of increased public investments.
The slowdown started
five years ago, and is, as Economic Survey 2018 notes, the most severe in
India’s history. Investments peaked 11 years ago. The Survey recommends urgent
prioritisation of investment revival to arrest more lasting growth impacts,
with policy focus on both big and small companies, creating a conducive environment
for the smaller industries to prosper and invest, with their ‘animal spirits’
conjured back. That will not be enough to restart the private investments
cycle.
Why the slowdown
A day after the
Survey came out, estimates of investments and savings in the financial year
ended March 2017 were released. The private investments slowdown is
statistically visible chiefly in the informal segment of the economy. The
corporate sector is not the source of the decline.
Corporate investments
have been on the upswing, rising through the five-year slowdown. Financial
stress on company balance sheets and the severe bad debt problem is visible
only once, when, in 2014-15, companies applied brakes on their investments. The
rate rebound the subsequent year. By 2016-17, corporate investments were
greater than at the time the slowdown started.
There is negligible
change in the investment behaviour of public and private finance corporations.
Public non-financial corporations reduced investments marginally. The
government stepped up its investments, but its share of the pie is small (with
multiplier effects on the rest of the economy).
The sharpest pullback
has been by the household sector, its investments are down 6.6 percentage
points since the start of the slowdown. Economy-wide investments are down 5.8
percentage points. The slowdown is mainly because of the household sector’s
troubles.
The private
investments slowdown, then, is a slowdown in the household sector’s
investments. The bad bank loans mess appears to have restricted the funds
supply to this sector, not corporates.
When will the
slowdown end? The estimates show that the slowdown did not deepen in 2016-17,
as investment rates for the household sector and the overall economy held
steady. If and how demonetisation and the goods and services tax (GST) roll-out
altered this, it remains to be seen. Because of the lag in estimation, only
some of demonetisation’s initial impact could have got measured. The GST was
rolled out in July 2017; the estimates cannot say anything about its impact.
Policy implications
What is the household
sector? Households can be producing or non-producing, in which case they are
consuming households. The 73rd round of the survey by the National Sample
Survey Office had found about 6.34 crore unincorporated non-agricultural
enterprises in the country. A chunk of private investments is undertaken by
these firms that often operate out of homes, with, typically, less than 10
workers.
The investments
estimates (Gross Fixed Capital Formation) cover physical investments in plants,
machinery and equipment, and dwellings and buildings, but not land. The two
largest investing segments in the economy, households and private non-financial
corporations, correspond roughly to the informal and formal economies.
The formal-informal
divide shows up also in savings. Corporate savings are rising consistently,
while those of the household sector are slowing.
What has made the
informal sector more vulnerable than the rest of the economy? Consuming
households tend to be net savers. The government, corporates and unincorporated
enterprises are net debtors. The savings are mainly held with banks and
insurance companies, etc. Through bank loans, bonds, etc, the net debtors raise
funds from the savings pool. When the government (Centre plus the States) mops
up larger portions of what net savers can provide, corporates can still access
capital, but the unincorporated are left without recourse.
Corporates can, and
have, borrowed overseas and raised funds from the capital markets. The informal
sector has not had the sophistication or resources required. It depends solely
on the domestic pool of savings, largely through bank loans, to finance its
investments.
The government’s
borrowings from the savings pool, after the surge in the fiscal deficit during
the United Progressive Alliance government’s tenure, followed by recklessness
also of some States, seem to have crowded out the unincorporated enterprises or
the informal sector. Banks, hit by the bad loan problem, have played safe. They
have lent more than they are statutorily required to the government. As
government borrowings dried up the bank credit supply to the informal sector,
it has struggled to find funds and has had to cut back its investments.
Given the anatomy of
the private investments slowdown, a macroeconomic stimulus may not be the best
policy choice. Urgent fiscal deficit reduction, quick clean-up of the bad loans
mess, and restoration of banks’ health are more likely to revive private
investments.
The informal sector’s
character and constraints are different from those of incorporated firms. A
policy skew in favour of the vocal and the organised who are able to make
themselves heard and seen is natural, but must be shed. The government’s
mandarins must pay attention to the unorganised.
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