Unorganized Sector and Indian Gross Domestic Product

May 15, 2014 | Posted by bobbysrinivasan << back to blog

The real Indian gross domestic product (GDP) is grossly underestimated. The government and RBI are not in a position to study the unorganized sector and its contribution to the GDP. We have nearly 90 banks and 1 lakh branches in India and this to serve a population of 1.25 billion people. More than the 80 percent of the Indians do not have a bank account. They have large amounts of physical cash which they use it to transact among themselves. For example billions and billions of rupees are paid out through the MGNREGA scheme will never enter the banking system. While the velocity of money in the bank and other deposits are easily calculable, it is next to impossibility to track the flow of funds among people. Even in the city I have come across of vendors of tender coconut taking a loan of Rs 1800 in the morning and returning Rs 2000 in the evening. Therefore we should not get stuck up with GDP and feel that we are lagging behind in improving the GDP per capita. Our black money transaction runs into trillions of rupees and the amounts of money gambled illegally in sports and other activities also amounts to huge sums of money. Lets face it. All the monies created by RBI since its inception is circulating somewhere. Ownership through hoarding of cash have long existed even before the inception of banks. If the government decides to put transaction tax for funds withdrawn from the bank even more monies would move outside the banking system. Keeping money away from the banks and tax authorities is not unique to India. This practice is more or less universal. For example the money supply in China has gone up to 110.65 trillion Yuan ($ 17.77 trillion US) more than four times compared to ten years earlier but the consumer price index over the last few years have been in the range of 2 to 3 percent. Why didn’t the increased money supply failed to trigger a higher rate of inflation? Like in India a very large amounts of money have stayed with individuals. This money have been acquired through illegal means like tax evasion, bribes betting etc and so the citizen owning the funds hesitate to leave the funds with the banks.

The current inflation rate which we are observing in India is possibly due to the hidden money coming into the market to buy goods and services. The new government will do well if they revisit our taxation system. A sensible taxation system should be all inclusive with no special privileges to agriculture and long term capital gains. They can bring down their budget deficit from nearly 5 percent to 2 percent if taxation system is shifted away from income to consumption and bank withdrawals.

The new government should carefully study the unorganized sector carefully, identify the source and use of funds, its velocity and its impact on the national inflation rate. RBI using all its tools to curb inflation cannot do the job because too much money is outside their control.

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