It’s time to think about the Indian economy not as some prize stud bull that has vital statistics we can all be proud of, but as an instrument of improving the lives of all Indians, steadily, year on year, and giving them the resilience to withstand the inevitable down cycles and shocks. Growing faster than others or breaching a GDP growth target number does not automatically achieve this. The test of a good economy is also not what heights the Sensex has scaled, especially when the gap between it and the real economy is so wide.
Today, most Indians do not have regular monthly-salary paying jobs. They have some form of self-employed livelihood on which they live—modestly in good times and badly in bad times. Most don’t work in the formal sector (though the share of noise of the formal corporate sector is far greater than its miniscule share of employment). Most do not have social security in any form or savings or access to pension or healthcare. Most are not favoured customers for banks: The cost-income ratio they offer and their lack of collateral for loans makes them dull, and their vulnerable financial situation makes them high risk. Most will not be customers served by the new FDI, which will mostly come into modern high-end manufacturing and not create a large number of jobs for these people either. A quarter of urban India lives in slums and the urbanisation we are so pleased about is merely de-ruralisation, based on Census definitions of urban and not urban.
Policy to boost investment and consumption is increasingly aimed at the richest 20 percent of Indian households. Almost 50 million in number, they are the attractive market for most companies, especially MNCs who bring in the FDI. They are the so-called middle class who have almost 55 percent (and growing) of India’s household income and are well heeled at almost $4,000 per capita. ‘Why bother with the rest’ is a sensible business strategy question. Below these are another almost-100 million households who account for about 30 percent of Indian household income and have a GDP per capita of under $1,000; the bottom almost-100 million have only 15 percent of India’s household income and a per capita income of under $500 annually.
Policy so far—and much of the retail finance activity—has worked hard for the top 50-70 million households. It has barely helped the remaining 150 to 190 million households. To take advantage of policy-created opportunities, they must graduate to becoming upper class. Such graduation needs money, education and financial inclusion that they don’t usually get. Much-touted policy initiatives such as abolishing FDI caps in, say, private insurance companies will, if truth be told, not really improve the financial well-being of people below the top 50 million. Plenty has been said about how FDI in retail will benefit the small farmer and the small-scale supplier. A proper calculation will show (and we demonstrated this in a previous article in this magazine, Decoding the Detail in Retail , October 2012) that the number of suppliers and farmers would be a small proportion of the total number that exists. Slaying beautiful hypotheses about the trickle-down magic of the market economy with ugly facts elicits the label “lefty”.
However, the ‘lefty’ welfare state hasn’t touched too many Indians either. MNREGA has reached 45 million households, which add up to around 20 percent of Indians and only provided them with a meagre additional annual income of Rs 5,000. Yet it cost Rs 33,000 crore and has not created anything sustainable by way of equipping people to earn on their own after a while.