India’s informal economy: Hidden value; Activities out in the sticks may add more to GDP than was thought

India’s informal economy: Hidden value; Activities out in the sticks may add more to GDP than was thought

Sep 28th 2013 | MUMBAI |From the print edition

THE chief architect of India’s constitution, B.R. Ambedkar, once said its villages were “a den of ignorance, narrow-mindedness and communalism”. Now some think they are the strongest bit of the economy. Neelkanth Mishra, an analyst at Credit Suisse, reckons that, if activity in informal industries and rural areas were properly measured, India’s GDP would look bigger and more stable and the present slump less severe. This is a source of comfort at a time when India is fighting a financial panic.India’s villages and towns, far from the gaze of foreigners and the urban elite, have been on a tear. Over the past decade new roads have been built. Almost everybody these days has a mobile phone. Electricity has become more common, as have computerised land records. Fewer people have to spend time collecting firewood, using bottled gas instead. New houses built with walls and floors of brick or cement are more durable than wooden huts, and need less maintenance.

It means people can turn their energy to starting businesses and escaping subsistence farming. Poultry production is booming, as it has India’s informal economy: Hidden value; Activities out in the sticks may add more to GDP than was thought

become easier to get chickens to market. Villagers eat more processed food—India’s artery-clogging pudding, gulab jamun, now comes in packets, made in small factories in nearby towns. Better communications are vital. Mr Mishra compares two villages 15 kilometres (9 miles) apart, near the city of Bhopal in central India. One has been connected to the road network since 2009. The other just has a dirt track. In the first, land prices are three times higher, wages are 50% higher, and far more people commute and engage in market gardening.

Official figures occasionally offer glimpses of the transformation. For instance, fewer than half of workers now say they are farmers. Yet statisticians struggle to capture the change. Measuring an economy in which the informal sector generates half of output and over nine-tenths of jobs is a tough task. The GDP data depend on infrequent surveys of productivity.

Soon, however, the figures will go through one of their periodic rebasings. The last rejig was in 2004-05. Mr Mishra thinks the next one could revise India’s GDP up by 15%. Pronab Sen, chairman of the National Statistical Commission, reckons it will be perhaps 8%—in line with earlier revisions, although he adds that the spread of mobile phones and their economic effect makes things unusually uncertain this time. Raghuram Rajan, the new head of India’s central bank, reckons a revision of 10% is possible.

A bigger economy is good news, but it raises two questions. First, can the informal economy be insulated from the problems affecting the rest of India? Urbanites grumble that the rural boom is due to unsustainable handouts, in particular a government scheme to guarantee work for the rural poor. This seems unlikely—the annual budget of the scheme in question is worth just 0.3% of GDP. But there are signs the informal economy has slowed. Annual wage growth for unskilled rural men is down to 16% from a peak of over 20%. The hope is that heavy rains in July and August will mean a good harvest. In anticipation of this, tractor sales have been strong.

The second question is how swiftly India can bring its black economy into the daylight. Informality imposes costs. Few people pay tax, hurting the public finances. Because so many people rely on moneylenders to borrow, and gold to save, the central bank has little control over swathes of the economy, making it harder to fight inflation. Meanwhile, tiny informal firms, however perky, lack economies of scale. It limits their potential.

At the present rate, it will take half a century before India’s economy is fully formal. The best way to speed up the process is to extend the reach of the financial system. In return for coming into the formal economy and paying taxes, firms would get access to capital. Even entrepreneurs who have abandoned farming can recognise a carrot dangled in front of them.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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