On Friday, the election day in Singapore, I was working on a presentation (for own use) on the story of the Great Indian Fragmentation of the three factors of production – Land, Labour and Capital. It is a fascinating story and it explains the perennial potential and the perennial under-performance of the Indian economy and why it is perennially (deliberate overuse of the word) stagflation prone. Agriculture, Enterprise, Labour and Capital are massively fragmented. There are several implications of it.
At one level, it shows that there is scope for India’s GDP to be, if anything, understated and rather substantially. For example, in the so-called MSME space, over half of the enterprises are supposedly unregistered and over 90% of the total MSME are proprietary (sole?) businesses. How and if they do come into the National Accounting Framework is anybody’s guess. It also explains India’s low tax/GDP ratio. In the factories sector, the fascination with MSME seems ill-founded. They deploy very little capital, employ a minority of labour, contribute substantially less to output and value added. Data will be impossible to collect from these thousands of small units.
At one level, the factors of production are arranged in a primitive economic order. At another level, it shows that there is indeed enormous catch-up potential if only India could shed its romance with everything small and marginal. IT is human nature to progress the material ladder. Doubt if small and marginal farmers want to remain small and the micro-enterpreneur, in a vast majority of cases, wants to remain micro.
In any case, at Takshashila Institution, we want to flesh this out in a (or, in a series of) paper (s).
While putting this PPT deck together, I came across this interesting brief note by Ms. Kanika Mahajan of Indian Statistical Institute on the link between the rise in agricultural wages and the rise in agricultural yield. She says that the rise in wages is explained by higher land productivity. May be. Rural Employment Guarantee Programme is not the problem or the cause for the rise in agricultural wages.
These things should be analysed a bit more rigorously to isolate the causes. There could be more than one and all of them could be important or at least some of them. What she has done is to provide a good hypothesis to be tested.