success of unorganised services

7/30/2019 Success of Unorganised Services

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Success of unorganised servicesThe Hindu Business line, Thursday, Jul 01, 2004

R. Vaidyanathan

The growth of the economy in the 1990s was due to the partnership and proprietorship firms in

service activities and not due to reforms pertaining to the government or the minuscule

corporate sector. The non-corporate sector dominates the service activities and is the fastest

growing sector in the economy. The size of this sector in service activities and the phenomenal

growth rates achieved in the 1990s need recognition, says R. Vaidyanathan.

IN THE third part of this series, we find that the non-corporate sector dominates the service

activities which constitute half the economy. These are also the fastest growing activities and,

hence, the non-corporate sector can be termed the engine of economic growth and the Indian

economy can be called Partnership and Proprietorship economy (P&P economy). The growth ofthe economy in the 1990s was due to the partnership and proprietorship firms in service activities

and not due to reforms pertaining to Government or the minuscule corporate sector. This

remarkable contribution of the P&P sector has not been adequately documented and appreciated.

Whenever the term service sector is mentioned, many think of IT services and recall companies

such as Wipro or Infosys. Factually, all software-related activities come under business services,

which itself is less than 2 per cent of the national income. Service sector covers a much largercanvas and is the fastest growing sector in the economy with a large employment. The activities

comprising the service sector are give in Table 1. This sector encompasses diverse activities

carried on by large multinationals as well as street-side entrepreneurs.


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Nearly half the GDP is due to the service sector (Table 2). In 1997-98 to 200-01, the service

sector grew at 8.83 per cent, much higher than other sectors. Between 1950-51and 1990-91, the

share of the services sector to GDP rose by only 13.07 percentage points, an increase of about0.33 percentage points per annum. However, between 1990-91and 1999-2000, the share had

increased by 7.29 percentage points, which is an increase of 0.81 percentage points per annum.

Clearly, the growth rate is very significant in the 1990s (NSC 2001:186).

It is generally accepted that the economic reforms were initiated in the early 1990s but most of

the policy changes were pertaining to manufacturing and financial sector dealing with the

corporate activities. The regulations and control pertaining to the service activities are with the

State governments and there are no reforms in these. Hence, it is difficult to ascribe the growth

of the service sector and that of the entire economy during the 1990s, to the reform measures

initiated. The role of non-corporate sector is very significant in seven of the activities, listed inTable 1, namely (1) construction, (2) trade, (3) hotels and restaurant, (4) non-railway transport,

(5) storage, (6) real-estate ownership of dwellings and business services, and (7) other services.


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The share of these seven major service sectors in the NDP for different years has consistently

gone up from 30 per cent in 1960-61 to 41 per cent in 2000-2001, showing an increase in the role

of these activities in the economy during the period but, more particularly, in the 1990s(Table 3)

As pointed out by the National Statistical Commission (NSC), although the services sector has

such a pivotal role in the economy,the database of this sector is highly disorganised. There is no

well-organised mechanism for maintaining a regular and proper database for this sector.

The services sector can be broadly classified into three segments the public sector, private

corporate and the `household' sector. The first two are considered `organised' and the rest

consists of all unincorporated enterprises, including all kinds of proprietorship and partnerships

run by individuals. The database for the organised sector is mainly the published accounts of the

corporate and government entities. The NSC points out that the estimates of gross value added

per worker, based on the follow-up enterprise surveys of Economic Census (EC) periodically

conducted by the Ministry of Statistics and Programme Implementation (MoS&PI), are often too

low.

Also, the estimates of the number of workers in different sub-sectors, as per these surveys, differ

widely with those available from other sources such as the employment-unemployment surveys

of the National Sample survey organisation (NSSO) and decennial population census.

Table 4 shows the share of non-corporate sector in the seven activities such as wholesale and

retail trade, hotels and restaurant, road transportation, real-estate and business services such as

medical, legal and so on. The share of the unorganised sector is more than 80 per cent in trade

(wholesale and retail) hotels and restaurant, and business services. It is more than 75 per cent in

non-Railway transport and more than 50 per cent per cent in construction and storage.

It is pertinent to point out that the estimates of non-corporate sector in these activities needsubstantial improvement. As already noted, for instance, the report of the NSC 2001 points out

**that the estimates of the non-corporate service sector is based on data which suffer from an

inadequacy in terms of sampling frame and sample size. Unlike the developed countries, the

likes of Wal-Mart, Sears, or Marks and Spencer in retail trade, or Greyhound or Federal Express

in transportation, or McDonalds or Burger Kings and Pizza Huts in restaurants, are not as yet the

order of the day here. The issue of entry of MNCs in these activities will be dealt with later.


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The size of the non-corporate sector in service activities and the phenomenal growth rates

achieved in the 1990s needs recognition. In a sense, the Indian economy can be called

Partnership and Proprietorship (P&P) economy. There are some moves to enhance the taxation

on these activities through income-tax or service tax in the coming Budget. There is a witty

saying in the army that to move up the ranks what needs to be done is "Salute all things moving

and paint all things standing". In the same vein, governments attempt to control and regulate an

economic activity if they do not understand it and tax it if they are growing faster. This only

shows the ever-increasing needs of the government mostly for salary and pension of its

employees. But gargantuan government goes against the grain of our civilisational ethos and

negates the entrepreneurship of the P&P economy.

The Communists are arguing for de-toxification of the text-books but what is really needed is the

de-taxification of the economy. The growth and development of the P&P sector needs to be

calibrated taking into account issues of credit delivery, labour markets, social security, savings

and investments, globalisation, cohesion of civil society, and so on. In the following parts of this

series, these aspects of our P&P economy will be discussed.

(The author is Professor of Finance, Indian Institute of Management, Bangalore, and can be

contacted at [email protected]. The views are personal and do not reflect that of the

organisation.)

success of unorganised services

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