Notes on Indian Business Enviornment

8/14/2019 Notes on Indian Business Enviornment

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Module 1

Business Environment

Reference: Economic Environment Misra & Puri Pg no:5-60

Characteristics / Nature of Modern Business

Large size Oligopolistic character

Diversification

Global reach

Technology orientation

Change

Government control

Environment of Business

Environment by definition is something external to an individual or an organization.

Business environment refers to all external factors which have direct or indirect bearingon the activities of business. The business environment is divided into

Internal environment

External environment

a. Micro environmentb. Macro environment

Diagrammatic Representation of Business Environment

Internal

Environment Business

Micro/ macro

External

Environment

Internal Environment Value system,

goals and objectives,

management structures,

relationship among the various constituents,

physical assets,

technological capabilities and human,

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financial and marketing resources make the internal environment of business.

External Environment

External environment of business consists of institutions, organizations and forcesoperating outside the company. External environment can be classified into

Micro Environment Macro Environment

(1) Micro environment

The micro environment refers to such players whose decisions and actions have a directbearing on the company. Since modern business broadly has two aspects, viz., Productionand selling of goods, the micro environment of business can be divided accordingly.

The most prominent performers in the micro environment are:

Suppliers of inputs

Workers and their unions

Customers market intermediaries

Competitors

Publics

(2) Macro environment

Macro environment comprises large societal and physical forces which affect thecompany and also the players in the companys micro-environment.

Macro environment of a company refers to all those economic and non- economic factorswhich exercise their influence on the business activity in general and thus determine

opportunities that a company may have to promote its business.

Macro environment can be classified into

Economic environment

Non-economic environment

Diagrammatic representation

Diagrammatic representationDiagrammatic representation

Business

politica

l

Socio

cultu

ral

Natural

Demographic

Technological

GlobalNational

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Economic Environment

Since business is basically an economic activity, economic environment of business both national and global is of strategic importance.

In the economic environment of the country, countrys economic system,

macroeconomic scenario ,

phase of business cycle through which the company is passing,

organization of the financial system and

economic policies of the government are the most important elements.

1.Economic System

a. Capitalismb. Socialism

2. Macro-economic Scenario

a. High rates of growthb. Inflationc. High rates of savings and investmentd. Fiscal imbalancee. Balances of paymentsf. Deficits

Phases of business cycle

a. Prosperityb. Recessionc. Depression

d. Stagflation

Financial System

Economic Policies

a. Industrial policyb. Trade policyc. Monetary policyd. Fiscal policy

Non-Economic Environment

The non- economic environment of business can be classified as:

Political environment Legal environment

Socio-cultural environment

Demographic environment

Technological environment

Natural environment

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(a) Political Environment

(b) Legal Environment

The governments sets the legal framework within which business operate.Legislations defining property and business organizations, laws of contracts andbankruptcy, mutual obligations of labour and management and a multitude of laws andregulations constraining the way business activities are carried out constitute legalenvironment of business.

Economic legislations, as these, are often called, have a direct bearing on the business.Economic legislations can be classified into two categories:

Legislations which have a facilitatory role.

Ex: The Contract Act provides the rules for systematic exchange transactions.Legislations which are restrictive in nature.

Ex: MRTP Act and FERA.

(c) Socio-cultural Environment

The Social environment is made up of the attitudes, desires, expectations, degrees, ofintelligence and education, beliefs and customs of people in a group or a society.

Culture is the heart of a particular group or society what is distinctive about the waymembers interact with one another and with outsiders and how they achieve what theydo.Socio-cultural environment is made up of attitudes, desires, expectations, beliefs, faiths,customs of people besides their set of material practices through which people producegoods and services that they need for satisfying their wants.

Globalization of culture

Multiculturalism

a. Casteb. Racec. Ethnic issues

Demographic Environment

Demographic factors like the Size and Growth rate of population, Life Expectancy, Ageand sex composition of population, Work participation rate, Employment status, Rural-urban distribution, Educational levels, Religion, Caste, Ethnicity and Language are allrelevant to business.Some of the issues are:

Size and growth of population

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Age structure of population

Urban-rural population

Burden of population on environment

Module 3

Economics Of Development

Meaning of Economy (or) Economic System

An economy or economic system refers to the manner in which the various economicactivities relating to production, distribution, exchange and consumption of goods andservices are organised in a country, and the way in which the people of a country earntheir living.

It comprises the farms ,factories, mines, shops, offices, banks, schools and colleges,transport systems, hospitals, defence, etc The economy of a country is divided into threesectors:

1. Primary Sector agriculture, mining, forestry, fishing, etc.2. Secondary Sector large scale and small scale industries.3. Tertiary Sector services like transport, banking, insurance, trade, public

administration, defence, etc.

Classification of Countries (economy)

The World Bank in its World Development Report (2005) has classified various countriesof the world on the basis of their per capita Gross National Income (GNI) or (GNP). Theyare1.Low income countries with per capita GNP of $765 and below. Ex : Myanmar,India, Ghana, Sudan, Nepal, Uganda.

2.Middle income countries with per capita GNP between $766 and $9,385.Ex : China, Fiji, Brazil, Cuba, Egypt, Iran, Iraq, etc.

3. High income countries with per capita GNP higher than $9,386.Ex : Australia, USA, UK, UAE, Canada, Spain, Germany, France, etc.

Types of Economies

An economy or economic systems can be classified into two types on the basis of thelevel of economic development attained by them. They are

1. Developed economy (advanced)2. Under-developed economy (backward)

Developed economy

The United Nations Experts in 1971have classified countries with per capita real nationalincome of $1000 and $4000 a year as developed countries.

A developed economy is one which is economically advanced and whose economy is

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characterized by large industrial and service sectors and high levels of income per head.

Under-developed / developing economy

An economy where the per capita real income is less than $1000 a year is considered anunder-developed economy.

A under-developed economy is characterised by

Low per capita income

Chronic mass poverty

Predominance of agriculture

Obsolete methods of production and social organisation

Under-utilization of manpower and natural resources

India as a Developing Economy

Reference - B.S.Raman: pg 19-21 HRK: pg 11-14

Meaning of a Developing EconomyDeveloping economy, no doubt, refers to an under-developed economy. But this

term is mostly used to refer to that under-developed economy which is not stagnant, buthas started developing by making use of its natural and human resources.

The following changes in the Indian Economy over the last five decades clearlyprove that India is a developing economy.

Increase in national income

1950-51 Rs. 9,142 crores2001-02 Rs. 18,64,292 crores

Increase in per capita income

1950-51 Rs. 2552001-02 Rs. 17,978

Increase in investment

1950-51 Rs. 1,960 crores2001-02 Rs.15,25,639 crores

Increase in agricultural production (food grains)

1950-51 50.8 mn. tonnes2001-02 212 mn. tonnes

Increase in industrial Production

Increase in social over-heads

Structural changes

Progress in Science and TechnologyProgress in Banking and Financial sectorReduction in inequalities in income and wealthImprovement in living standardsDesirable changes in society

Determinants of Economic Development ( Reference Ruddar Dutt and

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Sundaram: pg12-14 )

Economic development implies the process of securing levels of productivity in allsectors of economy and this in turn, is a function of the level of technology.

Economic development thus depends upon two sets of factors:1. Non-Economic Factors2. Economic Factors

Non-Economic Factors

Non-economic Factors includes social attitudes, political conditions, human endowmentsand efficient governance.

Religious beliefs

Political Instability

Family System

Development of Education

Nature of People

Economic Factors

Capital Formation

Capital-output Ratio

Growth of Population

Building Human Capital

Availability of Natural Resources

Climatic Conditions

Level of Technology

Major Issues of Developments (Reference Ruddar Dutt and Sundaram: pg 10-12)

Low per capita income and low rate of economic growth

High proportion of people below the poverty line

Low level of productive efficiency due to inadequate nutrition and malnutrition

Imbalance between population size, resources and capital

Problem of employment

Instability of output of agriculture and related sectors

Imbalance between heavy industry and wage goods

Imbalance in distribution and growing inequalities

Business Cycles

The business cycle is an alternate expansion and contraction in overall business activity,as evidenced by fluctuations in aggregate economic activity such as GNP, industrialproduction, employment and income.

According to J.M.Keynes A trade cycle is composed of periods of good tradecharacterized by rising prices and low unemployment percentages, alternating with

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periods of bad trade characterized by fall in prices and high unemployment percentages.

Phases of a Business Cycle

A business cycle will have 5 different phases or stages. They are1. Depression

2. Recovery3. Prosperity or full employment4. Boom or overfull employment5. Recession

(1) Depression

During this period business activity in the country will be much below normal level.It is characterized by a short fall in production, mass unemployment, fall in prices,

low wages, contraction of credit, a high rate of business failures and an atmosphere of allround pessimism.

The USA experienced 2 longest depressions in the history i.e during 1873-1879 and

1929-1932.

(2) Recovery

During this period business activity increases. The industrial production and volume ofemployment steadily increases. The prices and wages increases. The recovery may takeplace due to the following reasons:

New government expenditure

Exploitation of new sources of energy

Innovations

Investment in new areas

Changes in the techniques of production

(3) Prosperity

This stage is characterized by high capital investment in basic industries, expansion ofbank credit, high prices , high profits, high rate of formation of new business enterprisesand the full employment.

The longest sustained period of prosperity occurred in the USA between 1923 and1929.

(4) Boom

It is the stage of rapid expansion in business activity resulting in high stocks andcommodity prices, high profits and over-full employment.

A situation develops in which the no. of jobs exceeds the no. of workers in the market.Such a situation is known as over-full employment.

Profits will further increase. This will lead to more investment and in turn further raisein price level and inflation.

(5) Recession

In this stage more business enterprises fail, prices collapse and confidence is shaken.Building construction slows down and unemployment increases. There is fall in income,

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expenditure, demand, prices, and profits. The recession will have cumulative effect on theworking of the economy.

USA experienced recession in 1957-1958.

Diagrammatic Representation

Characteristics of Business Cycles

Business cycle is a wave like movement.

The cyclical fluctuations are recurrent in nature.

The upward or downward swing of the business cycle is self reinforcing.

Business cycle contains self generating forces.

They are all pervasive in their effects.

The peak and the trough of a business cycles are not symmetrical.

In cyclical fluctuations the prices and the production generally rise or fall together.

The cyclical upward and downward swings move parallel with production andmonetary demand.

The cyclical fluctuations are felt more in capital goods industries than in consumer

goods industries.

They are not periodical in nature.

Prices of manufactured goods are comparatively rigid while that of agricultural goods

are normally flexible.

The cyclical fluctuation tend to be not only national but also international in

character.

Importance of Agriculture to Indian Economy

1.Provides largest employment60 % of working population

2. Greater share in national income23 % of national income

3. Supply of food to people212.22 mn tonnes of food grains in 2003-04

4. Industrial development

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5. Contribution to foreign tradeShare of agricultural exports in total exports is 10%

6. Source of revenue to government7. Source of capital formation8. Market for industrial products

9. Good national defence10. Price StabilityAgricultural commodities account for 80% of total consumption

expenditure11. Development of tertiary sector12. Influence on government budgets13. Supply of fodder14. Influences general price level15. Involves low capital16. Supplier of raw materials17. Main role in consumption basket

60% of household consumption and 85% of household commodityconsumption is of agricultural products.18. Source of revenue and also exports19. Political and social significance

Importance of Industrialisation in India

1. Employment generation2. Larger production3. Increase in national income and per capita income4. Promotion of agriculture5. Development of agriculture6. Increase in productive capacity7. Use of potential resources8. Contribution of export trade9. National defence10. Balanced development11. More revenue to government12. Changes in the outlook of people13. Expansion of markets14. Economic stability and self sufficiency15. Proper balance between industry, agriculture and tertiary sector16. Urbanisation17. Stable growth of the economy

The Importance of Transport in the Economic Development of India

Development of market

Large scale of production

Facilitates territorial division of labour

Price stability

Mobility of labour and capital

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Growth of towns and cities

Employment generation

Facilities agricultural development

Helps industrial development

Social benefits

National defence

Efficient administration

Unity

Meeting emergencies

Place and time utility

Breaking the isolation

Development of trade and commerce

Solution to population problem

Revenue to government

Efficient use of resources Facilitates balanced regional development

Importance of Foreign Trade in the Economic Development of India

helps India to import plant and machinery, raw materials and technical know-how.

helps to import goods like petroleum, metals, etc.

helps India to export goods which are in surplus.

widens the market for our products.

contributes to expansion of domestic industries.

contributes to growth of national income.

contributes to improvement in the civilisation of our people. International Trade is anindex of civilisation.

contributes to economic co-operation between India and other countries.

Gives employment to a large number of people.

Gives encouragement to the exploitation of unexploited resources of the country.

The Role of Communication System in the Economic Development

Supply of necessary information

Motivation

Development of industries, commerce and trade

Development of transport

Bringing buyers and sellers together

Accelerating the growth rate

Easy contact

Improving global competitiveness

Attracting foreign direct investment

Module 4

National Income Accounting

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Reference : Ahuja Pg 15-35

National Income

According to J.R Hicks, National income consists of a collection of goods andservices reduced to a common basis by being measured in terms of money.

According to the National Income Committee of India-1951, A national incomeestimate measures the volume of commodities and services turned out during agiven period, counted without duplication.

Important Points

National income refers to the income of a country, Ex: India

Its measurement refers to a specified period of time, say 1year

National income includes all goods and services which have exchange value,

counting each one of them only one.

Different Concepts of National Income

1. Gross Domestic Product (GDP)2. Net Domestic Product (NDP)3. Gross National Product (GNP)4. Net National Product (NNP)5. National Income at Factor Cost (NI)6. Personal Income (PI)7. Disposable Personal income (DPI)

Gross Domestic Product

GDP is the aggregate money value of all final goods and services produced by

normal residents as well as non-residents in the domestic territory of a

country during a year.

It is a geographical or territorial concept.

GDP = GNP net factor income from abroad

Net Domestic product

NDP refers to the market value of all final goods and services produced during a

period of one year after making allowance for depreciation changes. NDP = GDP Depreciation

Gross National Product

GNP is defined as the total market value of all final goods and services produced

during a year in a country. GNP is a monetary measure. GNP includes the market value of only final goods and services. It is a flow measure of output of goods and services during a year / currently

produced goods.

GNP refers to the value of goods and services currently produced by normal

residents of a country.

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The depreciation or replacement value of the fixed assets is not deducted

Net National Product

This refers to the net production of goods and services in a country during a year. NNP = GNP the value of capital depreciated during the year.

NNP is a highly useful concept in the study of growth economics.

National Income at Factor Cost

It refers to the total of all income payments earned by the factors of production in

the form of rent, wages, interest, and profit during a given year. NI = NNP Indirect Taxes + subsidy

Personal Income

It is that income which is actually received by the individuals and households in a

country during a year from all sources. PI = NI Corporate income tax

-- social security contributions-- undistributed corporate profits+ transfer payments

This concept is useful in estimating the potential purchasing power of theindividuals in an economy.

Disposable personal Income

It is that part of personal income which is left behind after the payment of personal

direct taxes is called disposable personal income. DPI = PI Personal direct taxes DPI = Consumption + Saving

Uses / Practical Importance of National Income Estimates

Economic Position Contribution of Different Sectors

Distribution of National Income among the Factors of Production Economic Planning

International Comparison International Payments

Help to Backward Countries Role of Public and Private Sectors

Grant-in Aids to States

Anti-Inflationary and Deflationary Measures Reveals the Cyclical behavior of an economy

Difficulties in the Measurement of National income

Treatment of Non-monetary Transactions

Treatment of Government activities in national income accounts

Treatment of income generated by foreign firms

Illiteracy

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Non- availability of statistical data

Existence of barter transactions

Difficulty in calculating depreciation

Lack of professional competency

Problem of consideration of goods and services

Commodities of self-consumption

Difficulties of Measuring National Income in Developing countries

Prevalence of non-monetized transactions

Illiteracy

Incomplete Occupational specialisation

Agricultural and industrial production is unorganized

Lack of adequate statistical data

Trends in National Income Growth and Structure

I. Trends in net national product and per capita incomeII. Annual growth rates during the plans

III. Trends in distribution of national income by industrial originIV. Trends in the share of the public sectorV. Urban and rural income break-up

VI. Share of organised and unorganised sector in NDP

National Income Estimates in India

According to the National Income Committee, A national income estimate measures thevolume of commodities and services turned out during a given period, counted withoutduplication.

Pre-independence period estimates Post-independence period estimates

National income committee and C.S.O estimates

Circular Flow of Income

Two Sector Model Without SavingsHouseholds and Firms

Two Sector Model With SavingsS = Y C

Where Y = incomeS = savingsC = consumption

Case 1 : S > I

Case 2 : S = I

Case 3 : S < I

Three Sector Model (Government)T = T1 + T2

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Four Sector ModelFirm + Household + Government income and Expenditure + Exports and ImportsS + T + M = I + G + X

Module: 5(a)Capital Structure

Meaning of Capital Structure

Capital Structure refers to the various sources from which the long-term funds are raised.

The Capital Structure refers to the proportion of equity capital, preference capital,reserves, debentures and other long-term debts to the total Capitalization.

Characteristics of a sound Capital Structure

Simplicity

Profitability Flexibility

Intensive use of funds

Conservation

Provision for meeting future contingencies

Control over the company

Economy in cost of maintaining different securities

Forms/Patterns of Capital Structure

Equities only

Equities and preference shares Equity shares and debentures

Equities, preference shares and debentures

Factors determining capital structure

Two types

Internal factors or controllable factors

External factors or uncontrollable factors

Internal factors

Financial leverage

Growth & stability

Cost of capital

Asset structure

Retaining control

Purpose of finance

External factors

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Size of the company

Nature of company

Cost of floatation

Interest rates

Taxation policy

Fluctuation in stock market

Availability of funds

Pecking order theory

Internal DebtIssue of DebtEquity Shares

Business risk

Uncertainty about demand, sales, price, costs, etc.

Leverage:- Meaning and Definition

The Dictionary meaning: An increased means for accomplishing some purpose.

In financial analysis: Leverage is ability of using fixed costs to enhance the potentialreturns to a firm.

There are 2 types of fixed costs:

1) Fixed operating costs(rent, depreciation, etc.)

2) Fixed financial costs(interest, cost of debt, etc.)Is also called GEARING in USA

James Horne has defined

Leverage as the employment of an asset or funds for which the firm paysa fixed cost or fixed return.

Christy and Roder defined

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Leverage as the tendency for profits to change at a faster rate than sales.

Types of leverage

Financial leverage

The use of long term fixed interest and dividend

Bearing securities like debentures and preference shares along with equity is calledfinancial leverage or trade on equity.FL = EBIT

EBT

DFL = Percentage change in EPSPercentage change in EBIT

Operating leverage

The operating leverage occurs when a firm has fixed cost which must be recovered

irrespective of sales volume. The fixed cost remaining the same the percentage change inoperating revenue will be more than the percentage more than the sales

OL = contributionEBIT

DOL=Percentage change in EBITPercentage change SALES

Combined leverage

Combined leverage shows the relationship between the change in sales andcorresponding variation in taxable income.

Combined leverage = operating leverage X financial leverage

Contribution = EBIT X EBITEBIT/operating profit EBT

= contributionearnings before tax

DCL = Percentage change in EPSPercentage change in SALES

FINANCIAL LEVERAGE

Q 1. A Ltd. Company has equity share capital of Rs. 5,00,000 dividend into share of Rs.100 each. It wish to raise further Rs. 3,00,000 for expansion cum modernization plans.The company plans the following financing schemes.

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(a) all common stock .(b) Rs. One lakhs in common stock and Rs. 2 lakh in 10% debentures.(c) All through debentures at 10 % interest pa.(d) All debt in common stock and Rs. 2 lakh in preference capital with the rate of

dividend at 8%

The Companys existing earnings before interest and tax (EBIT) is Rs.1,50,000. Thecorporate rate of tax is 50%.

You are required to determine the earnings per share (EPS) in each plan and comment onFinancial Leverage.

SOLUTION PLAN 1 PLAN 2 PLAN 3 PLAN 4

earnings before interest and tax 1,50,000 1,50,000 1,50,000 1,50,000

Less : Interest _ 20,000 30,000 __1,50,000 1,30,000 1,20,000 1,50,000Less : tax @ 50% 75,000 65,000 60,00075,000

_______ _______ _____________Earnings after tax 75,000 65,000 60,000 75,000Less : preference dividend at 8% __ __ __16,000

_______ _______ _______ ______Earnings available for common 75,000 65,000 60,000 59,000

stockholders No. of common shares 8,000 6,000 5,000 6,000

Earnings per share (EPS) Rs. 9.375 Rs. 10.83 Rs. 12 Rs. 9.83

Financial leverage= EBIT 1 1.15 1.25 1

EBT

COMMENTS

Since EPS as well as degree of financial leverage is highest in financial plan 3 it should be accepted. The company should raise Rs. 3 lakh only through debt.

Problems on Leverages:

A simplified income statement of Zenith Ltd. is given below. Calculate the Operatingleverage, Financial leverage, & combined leverage.

Sales 10,50,000/-

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Variable cost 7,67,000/-Fixed cost 75,000/-Interest 1,10,000/-Tax 30%

Soln :-

Sales 10,50,000(-)Variable cost 7,67,000

Contribution 2,83,000(-)Fixed cost 75,000

EBIT 2,08,000(-)Interest 1,10,000

EBT 98,000

(-)TAX(30%) 29,400

NET Income 68,000

Operating leverage = contributionEBIT

= 2,83,0002,08,000

= 1.36

Financial leverage = EBITEBT

= 2,08,00098,000

= 2.12Combined leverage = Operating Leverage X Financial Leverage

=1.36 X 2.12=2.88

Module 5

Structure Of Industries

( References: Dutt & Sundaram Misra & Puri B S Raman HRK)

Structure / Classification of Industries (HRK 204-209)

Large Scale Industries :

Large Scale Industries are those industries which invest huge amounts of capital,reaping the benefits of division of labour and producing goods on a large scale involvingfixed capital investment of more than Rs.10 Cr but less than Rs.100 Cr.

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Medium Scale Industries :

Medium Scale Industries are those industries which are organised on a mediumscale, and produce goods on a medium scale by using machines, hired labour and powerinvolving fixed capital investment of more than Rs.1 Cr but less than Rs.10 Cr.

Small Scale Industries:

Small-scale industries are those industries which are organised on a small-scale, andproduce goods on a small scale by using machines, hired labour, and power.

Ex: Ready garments, paper, electrical goods, etc.

Agro-industries and Ancillary Industries:

Industries which produce goods by using agricultural raw-materials are called agro-industries.

Ex: jute, oil, sugar, cotton textiles, etc

Industries which produce spare parts, components, etc required by the large industries arecalled ancillary industries.

Cottage Industries:

A cottage industry is one which is carried on mainly in a house with the help of themembers of the family and with the help of simple and hand-operated tools.

Ex: pottery, toy-making, weaving, carpet-making, wood work, agarbhatti, etc.

Manufacturing Industries:

Any industry which is engaged in the conversion of raw materials into finished goods fitfor consumption with the help of men and machines is generally known as manufacturingindustry.

Ex: conversion of iron ore into iron and steel, wood pulp into paper, etc

Industrial Development Under Five Year Plans

( B S Raman 258-267 Dutt & Sundaram 636-640)

India implemented five year plans and industrial development became an integralpart of Indias development planning.

High priority was given to programmes of Industrialization on account offollowing reasons:

o The country was industrially backward and the establishment of new industries of

industries on a big scale and development of the traditional industries was animperative necessity.o Productivity of labour is the highest in manufacturing Industries.o Development of the industrial sector is a pre-condition for agricultural

development.o Industrialization induces development of other sectors. Development of transport,

communications and energy is still more dependant on industrial growth.o Despite the secondary importance given to industry, the annual rate of growth of

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industrial output was about 6%.o The overall production of industrial goods increased by 39%.o Capital goods industries like iron and steel were expanded.o A number of public sector industries like HMT, penicillin factory, etc were

established.

o A number of industries like petroleum-refining, cement, penicillin, etc were setup.o Infrastructural facilities like power, transport and communication were expanded

considerably.

Second Five-year plan (1956-61)

This plan was based on the Industrial Policy Resolution of 1956 which

envisaged a big expansion of Public sector.

It was really an industrial plan.

Total investment in industries was Rs. 1,180 crores (27% of total plan).

The annual rate of growth was 7.25%.

Industrial production increased by 46%.

Three major public sector steel plants were set up at Rourkela in Orissa, Bhilai

in MP and Durgapur at WB.

This plan witnessed a major diversification of the industrial spectrum.

Most of the investments were in Heavy and Basic Industries.

Tractors, motor cycles, scooters, etc were produced for first time in India.

Good progress was also recorded in modernization and re-equipment of jute,

cotton textiles and sugar industries.

Good progress was made in the production of consumer goods like

fans,radio,etc. About 60 industrial estates comprising 1000 small factories were set up.

Third Five-year plan (1961-66)

Rs.1726 crores(20% of total plan) was allotted for the development of industries

and mining.

The annual rate of growth was 7.9%.

UTI and IDBI were set up in 1964.

A no. of industries like aluminium, automobiles, textiles, etc achieved rapid

growth.

Mining and extractive industries also showed progress. Despite the over-all under-achievement of targets this plan reflected the first stage

of intensive development leading to a self reliant and self-generating economy.

Mining and extractive industries also showed progress.

Despite the over-all under-achievement of targets this plan reflected the first stage

of intensive development leading to a self reliant and self-generating economy.

Fourth Five-year plan (1969-74)

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This plan was based on the industrial policy of 1977.

Rs 5298 crores (23%) was allotted.

The actual growth rate was 5% as against 8%.

This plan aimed to enlarge capacities in export promotion and import substitution

industries.

Public sector enterprises had started earning profits.

Fifth Five-year plan (1974-78)

This plan was formulated to achieve the twin objectives of self-reliance and

growth with social justice.

Rs.16,660 cr (26%) was allocated.

Actual growth rate was 6% as against 8%

This plan took many bold steps such as

Removing the restriction on the private sector

Monopolistic undertakings

Foreign investments in India

Sixth Five-year plan (1980-85)

This plan was a very ambitious plan.

It was based on the industrial policy of1980.

Rs.22,200 cr (22.8%) was provided.

Actual growth rate was only 3.7% as against 7%.

There was a shortfall in the production of many industrial goods like cement, iron and

steel, etc.

Industrial progress during this period was most disappointing.

Seventh Five-year plan ( 1985-90)

This plan laid emphasis on the development of infrastructural facilities,

modernisation, upgradation of technology, reduction in cost, accelerated growth inselected industries.

This plan was a success as annual growth rate was 8%.

Total outlay for industries was Rs. 22,460 cr.

The govt had liberalised industrial licensing policy to provide incentives to industries.

Encouragement of Sunrise industries such as telecom, bio-tech, computers, etc.

Industries were encouraged to adopt technologies like laser, robotics, fibre-optic, etc

for enhancing productivity. About 30% of industries had installed Pollution Control systems.

Eighth Five-year Plan (1992-97)

This plan was formulated under Economic Liberalisation and was based on the

industrial policy of 1991.

During this period, the private sector has developed considerable managerial,

technological, financial and marketing strengths.

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The outlay was Rs. 40,670 cr (19% of total plan).

Over all 9.5% growth rate has been achieved.

The factors for the slow growth fo industrial sector:

Could not face foreign competition as a reduction of import duties.

Under utilisation of domestic capacity

Dumping by foreigners

Ninth five-year plan (1997-2002

This plan was a failure as the actual growth rate was only 5% as against 8% of target.

This plan allocated Rs. 69,972 cr for industry.

The internal and external factors are responsible for slowdown.

The failure can be attributed to the fall in public sector investment .

Lack of external demand resulting from slowdown in world economy decelerated the

growth of industrial sector.Changes in Industrial Structure During the Planning Period

(Misra & Puri 479-481) Increase in the Share of industrial Sector in GDP:

The share of industry in GDP at factor cost increased from 13.3% in 1950-51 to

24.6% in 2003-04.

Building up of Heavy and Capital Goods Industries:

Growth of Infrastructure Industries: Infrastructure industries include:

i. Electricityii. Coal

iii. Steeliv. Crude petroleum

v. Petroleum refineryvi. Cement

A Well Diversified Industrial Structure:o Machinery:

1950-59--- 1.2%1990-99 --- 12.7%

o Chemicals:1950-59 --- 5.7%1990-99 --- 12.4%

o Non metallic Mineral products:1.6% to 4.6%

o Transport Equipment:3.4% to 6.5%o Rapid Growth of Consumer Durables:o The rate of growth of this industry in 1980-85 was 14.4% and in 2003-04 was

11.6%.o Emphasis on Chemicals, Petrochemicals and Allied Industries in 1980s:o Emergence of Public Sector:

1950 5 PSUs with Capital of Rs.29 Crore

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2003 227 PSUs with Capital of Rs. 4,18758 Crore

Change in Industrial Structure in 1990s

Shifts in favour of consumer goods and intermediate goods

Structural changes within basic industries and capital goods industries

Changes within the consumer goods sector Changes within the intermediate goods sector

Declining role of public sector

Public Sector Enterprises

Reference: Dutt and Sundaram 188-204 B S Raman -- 213-221,HRK

The Industrial Policy Resolution of 1956 gave the public sector a strategic role

in the Indian economy.

Public enterprises or public sector refers to that sector which is owned and

managed by the central government or the state government or a body set upby the government to direct the undertaking in the public interest.

Forms or Types of Public Enterprises:

i. Departmental undertakings : Railways, Defence, etcii. Statutory Corporations : LIC, the Indian Airlines Corporations, etc

iii. Government Companies : Heavy Electricals Ltd, HMT Ltd, etciv. Holding Company : Steel Authority of India Ltd.

Objectives of Public Sector

a. To promote rapid economic development through creation and expansion ofinfrastructure

b. To generate financial resources for developmentc. To create employment opportunitiesd. To promote redistribution of wealth and incomee. To promote balanced regional growthf. To promote exports and import substitutiong. To encourage SSIs

Role of Public Sector in Indian Economy

Capital Formation

Development of Infrastructure

Development of Defence Industries

Development of Basic and Key industries: Iron and steel, cement, etc

Development of Power projects

Development of Banking and Insurance

Balanced Regional development

Balanced Economic Growth

Strong Industrial Base

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Economies Of Scale

Removal of Regional Disparities

Import Substitution

Export Promotion

Expansion of Employment Opportunities

Source of Revenue to the Government

Saving in Foreign Exchange

Better Allocation and Utilisation of Resources

Diversity of Projects

Problems and Shortcomings of the Public Sector

o Mounting Losseso Price Policy of Public Enterpriseso Delay in Completion of the Projectso Increase in Costs of Construction

o Poitical factors influence decision about Locationo Over-Capitalizationo Under-Utilization of Capacityo Unfavourable Input-output Ratioo Use of Manpower Resources in excess of actual requirementso Faulty Planning and Controlso Inefficient Managemento Bureaucratic Procedures and Red-tapismo Labour Problem resulting in Strikes and Lockoutso Higher Capital Intensity -- Low Employment Generationo Shortage of Raw materials and Power

Remedies / Measures to be taken for the Performance of Public Sector

o Reduction in Unproductive Expenditureo Utilisation of Installed Capacityo Better Utilisation of manpower and materialso Proper Planning and Controlo Improvement of Efficiency of Managemento Suitable Price Policyo Making them Autonomouso Improvement of Industrial Relationso Motivation of Staff and Workers

Joint Sector

Reference: D&S-222-226,B S Raman- 224-225

Joint Sector Enterprises refer to economic enterprises or industries which are owned

and managed jointly by the Government and the Private sector.

Ex: Madras Fertilizers, the Cochin Refineries, etc.

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Rationale behind Joint Sector Enterprises:

To combine the financial resources of the Government with the managerial skill ofthe private entrepreneurs for the successful running of the economic enterprises.

Types of Joint Sector Enterprises

1. Existing Private Enterprises : through the conversion of bonds or debentures intoequity shares.

2. Existing Public Sector : through the sale of equity shares of such enterprises toprivate entrepreneurs.

3. New enterprises set up by the Government jointly with the Private entrepreneurs.

Role / Benefits of Joint Sector Enterprises in India

a. Social Control over Industriesb. Better Industrial Growthc. Broad-basing of Industrial Entrepreneurshipd. Prevent monopolies and concentration of Economic power

e. Mobilisation of Financial Resourcesf. Mobilisation of Techno-managerial Resourcesg. State-sponsored Industrialisationh. Extension of Public Controli. Failure of Public and Private Sectorsj. Acceleration of Economic Growthk. Run on Efficient lines and earn sufficient Profitsl. Effective instrument for ensuring Balanced Regional Growth

Private Sector

Dutt & Sundaram 217-221 B S Raman 222-224

Private Sector or Private Enterprises refers to that sector which is owned and

managed by private individuals.

A private enterprise is controlled either by an individual investor or a joint stock

company or a group of individuals or public or private limited companies.

Private sector is purely profit motive.

Role of Private Sector in India

1. Help third world countries in their economic development2. Agriculture : this sector which is completely managed by the private enterprises

contributes 25% of GNP an 60% of employment in 2001.

3. Dominates the Trading Sector4. Dominant in forestry, fishing, railways, construction, etc.5. Contribution to national income of country6. Development of large no. of small scale and cottage industries7. Production of a variety of goods8. Efficient management

Limitations Of Private Sector

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I. Emphasis on Non-priority IndustriesII. Emergence of monopoly power and concentration

III. Industrial disputesIV. Industrial sickness

Small Scale Industries (SSI)Misra & Puri 571-585

Small-scale industries are industries which are organised on a small-scale andproduce goods with the help of small machines, hired labour and power.

The investment limit for a SSI is Rs 1 crore

SSIs plays a pivotal role in India in terms of employment and growth has recordeda high rate of growth.

Significance of SSIs in the Economic Development of India

1. Expansion of SSI sector and its share in Industrial Output :

No of SSI units rose from 79.6 lakhs in 1994-95 to 114.0 lakhs in 2003-04. The rate of growth of output exceeded 10% from 1994 to 1997.2. Employment Generation:

1994-95 191.4 lakh people2003-04 271.4 lakh people

3. Efficiency of Small-Scale Industries:At the all-India level, the SSI is more efficient than the large scale sector.

4. Equitable distribution of National Income5. Mobilisation of capital and Entrepreneurial Skills6. Regional dispersal of Industries7. Contribution to Exports

8. Sustains Agricultural Development9. Less Industrial Disputes10. Decentralisation of Industries11. Contribution to National Income12. Foreign Exchange Earnings

Problems of SSIsMisra & Puri 582-585

i. Finance and Creditii. Inverted tariff structure and raw material availability

iii. Machines and other equipmentiv. Problems of marketingv. Infrastructural constraints

vi. Delayed paymentsvii. Problem of sicknessviii. Poor databaseix. Adverse effects of economic reforms and globalisationx. Inefficient management

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xi. Competition from large scale industriesxii. Burden of local taxes

Measures to Reduce Sickness among SSI

Credit and Finance

Marketing Assistance Allocation of Raw materials, Imported Component and Equipment

Technical Assistance

Industrial Estates

Small-scale Industrial Policy,1991

Misra & Puri-579

The main features of policy were:

1. Investment for Tiny Enterprises was raised from Rs.2 lakh to Rs.5 lakh.2. Proposed a separate package for the promotion of SSIs.3. Provided Equity Participation by other industrial units in the SSIs not exceeding

24% of the total shareholdings.4. Introduction of new Legal form of organisation of business, namely restricted or

limited partnership.5. Proposed to meet the entire credit demand of SSIs.6. Scope of National Equity Fund and Single Window Scheme was enlarged.7. Provided priority to SSIs in the Government Purchase Programme.8. Accorded in allocation of indigenous raw materials.9. Envisaged market promotion of SSI products to be undertaken by Cooperatives,

PSUs and other agencies.10. Proposed a scheme of Integrated Infrastructure Development for SSI to facilitate

location of industries and to promote co-ordination b/w Industry and agriculture.

Multinational Corporations

Ishwar C Dingra 552-560

An MNC is one which undertakes FDI, i.e., it owns or controls income generationassets in more than one country, and in doing so produces goods or servicesoutside its country of origin ,i.e, engages in international production.

Characteristics of MNCs

The MNCs are multi-process, multi-product and multi-national composite enterprises.1. Giant size

2. International Operations3. Oligopolistic Character4. Spontaneous Evolution5. Collective Transfer of Resources

Significance Of MNCs

Impact area Potential benefits

1. Capital 1. Provision of scarce capital

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2. Technology

3. Exports and balance of payments4. Diversification

resources.2. Provision of sophisticated

technology not available in hostcountry

3. Access to superior distribution and

marketing systems4. MNCs command technology andskill required for diversification ofindustrial base and for the creationof backward and forward linkages

Actual impact of MNCs

1. Capital

2. Technology

3. Exports and balance ofpayments

4. Diversification

1. Insignificant net flowLarge dividend remittancesLarge technical payments2. Costly over-import

Problems with advanced technologyProblems with technical support3. Higher import propensity than domestic

companiesNegative BOP effects4. Increased foreign influence in key

sectors

Module 7 - Money and Banking

Commercial Banking Structure In India

Indian commercial banks are called Joint Stock Banks as they are organized in the

form of joint stock companies.

Under the Reserve bank Of India Act,1934, the commercial banks in India are

classified into:i. Scheduled Commercial banks

ii. Non-scheduled Commercial Banks

Scheduled Commercial Banks

Scheduled commercial banks are those banks which are included in the secondschedule of the Reserve Bank of India, having a paid-up capital and reserve togetherRs.5 lakh and above.

As on March 2004, there were 286 schedule commercial banks in the country

Non-scheduled Commercial Banks

Non-scheduled banks are those whose total paid-up capital and reserve fund is less

than Rs.5 lakh and whose name is not included in the second schedule of RBI

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Act,1934.

At present, there are only two non-scheduled banks in the country.



Scheduled Commercial Banks

Public sector banks Private sector banks

Nationalised

banksSBI and

its associates

Indian private

sector banksForeign

banks

Old privatesector banks

New privatesector banks

Nationalisation Of banks

Nationalisation of banks is nothing but the government taking control of those banks

which were owned by private people.

This was the milestone in the history of Indian Banking.

There are 20 nationalised banks which carry out 90% of banking business in the

country.

Nationalisation on 19 July 1969

1. Central Bank of India2. Bank of India3. Punjab National bank4. Bank of Baroda5. United Commercial Bank6. Canara Bank7. United Bank of India8. Dena Bank

9. Syndicate Bank10. Union Bank Of India11. Allahabad Bank12. Indian Bank13. Bank of Maharashtra14. Indian Overseas Bank

Nationalisation on 15 April 1980

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1) New Bank of India2) Vijaya Bank3) Andhra Bank4) Corporation Bank5) Punjab and Sidh bank

6) Oriental Bank of Commerce

Causes of Nationalisation

a. Concentration of Economic Powerb. Neglect of Agricultural Sectorc. Misuse of Power by Directorsd. Credit to Anti-social Elementse. Neglect of Small Unitsf. Plan Objectives Ignoredg. Insufficient Mobilisation of Resourcesh. Unbalanced Growth

Objectives of Nationalization

To prevent concentration of wealth and economic power in the hands of fewpeople.

To prevent control and administration of banks by few people

To prevent misuse of funds

To provide required finance to priority sectors

To provide banking facilities to unbanked and rural areas

To provide deposit security to deposit holders

To mobilise resources of the country

To make the banks respond to plan objectives

To bring banks under the control of RBI To prevent the flow of bank credit to anti-social elements

To provide atmosphere for balanced growth of banking in the country.

Arguments Against Nationalisation

a. Results in the political interference in the functioning of banks.b. Leads to bureaucratic dictatorship.c. Results in inefficiencyd. Banks suffer lossese. Results in corruptionf. Leads to flow of funds to unworthy sectorsg. Results in the disclosure of banking secrets

Achievements Of Nationalisation

Branch ExpansionIn 1969 8,260 bank branchesIn 2002 67,284 bank branches

Deposit Mobilisation

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In 1969 4,665 croresIn 2002 16,22,579 crores

Developmental Functions

Finance to Priority SectorsIn 1969 505 crores (2% of total bank credit)

In 2002 3,41,291 crores (43.7%) Increase in Total Transactions

In 1969 4,664 crores of DepositsIn 2002 12,59,128 crores of Deposits

Differential Rate of Interest

Profit MakingDuring 1999-2000 Rs.13,064 crores of profits.

Safety

Finance to Public Sectors

Functions of the Reserve Bank of India

Bank of Issue

Banker to Government

Bankers Bank and lender of the last resort

Controller of Credit

a. Quantitative Methods

1. Bank rate2. Variable cash reserve ratio (CRR)3. Statutory liquidity ratio (SLR)4. Open market operations (OMO)

b. Qualitative Credit controls/selective credit control

1. Minimum margin for lending2. Ceiling on amount of credit3. Discriminatory rate of interest

Custodian of Foreign Exchange Reserves

Supervisory Functions

Promotional Functions

Recommendations of the Narasimhan Committee, 1991Reference: Dutt and Sundaram Pg:853

Aimed At :

1. Ensuring a degree of operational feasibility2. Internal autonomy for the public sector banks in their decision making process3. Greater degree of professionalism in banking operations

Important Recommendations :

1. Directed Investmenta. Statutory Liquidity Requirements:

The committee recommended that the government should reduce SLR from

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38.5% to 25%. b. Cash Reserve Ratio

CRR should be reduced from 15% to 3-5%.2. Directed Credit Programmes3. The Structure Of Interest rates

4. Structural Reorganization of the Banking Structure5. Nationalisation of banks6. Setting up of New banksForeign Banks8. Bad and Doubtful Debts9. Removal of Dual Control10. Autonomy to Banks11. Disinvestment12. Rural Banking Subsidiaries13. Recruitment of Staff14. Computerization

Reform Of the Banking Sector

Dutt and Sundaram Pg:8551. Statutory Liquidity Ratio (SLR)

SLR on incremental net demand and time liabilities (DTL) has been reduced from38.5% to 25% in 1997.

2. Cash Reserve Ratio (CRR)RBI reduced CRR from 15% to 5.5% in 2001. the purpose was to release funds locked

up with RBI for lending to the industrial sectors .

3.Deregulation of Interest RatesInterest rates slabs were gradually reduced from 20 to 2 by 1995.

4. Prudential NormsThe purpose was that commercial banks should reflect their financial positions more

accurately and in accordance with international accounting practices.5. Capital Adequacy Norms:

were fixed at 8% by RBI in 1992.6. Access to Capital Market:

SBI was the first to raise through public issue over Rs. 1,400 crores as equity andRs. 1,000 crores as bonds.7. Freedom of Operation8. New Private Sector Banks9. Local Area Banks:

LABs help to mobilise rural savings and to channelise them into investment in localareas.10. Supervision of Commercial Banks

RBI has set up a Board of Financial Supervision with an Advisory Council under thechairmanship of the Governor to strengthen the Supervisory and Surveillance system of

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banks and FIs11. Recovery of Debts:

The Government of India passed Recovery of Debts due to banks and FIs Act,1993. Six Special Recovery Tribunal have been set up.12. Phasing out of Directed Credit

13. Competition

Measures of Money SupplyReference : Ahuja 301--303

From April 1977, the Reserve Bank of India has adopted four concepts of money

supply in its analysis of the quantum of and variations in money supply.

The four concepts of money supply are:

1. Money Supply M1 or Narrow Money2. Money Supply M23. Money Supply M3 or Broad Money4. Money Supply M4

Money Supply Chart

Money Supply Chart

Money Supply andits determinants

M1=

Currency+

Demand Deposits+

Other deposits ofRBI

M2=

M1+

Savings depositswith

Post-office SavingsBanks

M3=

M1+

Time Deposits withthe Banks

M4=

M3+

Total Deposits ofPost Office Savings

Organisation(excluding NSC)

Money Supply M1 or Narrow Money

Liquid measure of money supply

M1 = C + DD + OD

C = Currency with the public

DD = Demand deposits with the public in the commercial and Co-operative Banks

OD = Other deposits held by the public with the Reserve Bank of India

C (Currency with the Public) consists of the following:

1. Notes in Circulation2. Circulation of rupee coins asa well as small coins3. Cash Reserves on hand with all banks

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Money Supply M2

M2 = M1 + Savings Deposits with the post office savings bank

M2 is a broader concept of money supply

Money Supply M3 or Broad Money

M3 = M1 + Time deposits with the banks Time deposits serve as store of value and represent savings of the people

Time deposits are very liquid.

M3 has become a popular measure of one supply.

M3 is used for monetary planning of the economy and setting target of growth of

money supply.

M3 also called as Aggregate Monetary Resources (AMR).

Money Supply M4

M4 = M3 + Total deposits with Post Office Savings Organization.

Sources of Broad Money (M3) or Factors affecting Money Supply In India

(Dutt & Sundaram-823)

There are Five Factors / sources which contribute to the Aggregate Monetary

Resources in the country:1. Net Bank Credit to Government (A+B)

A. RBIs net credit to Governmenti. Claims on Government

ii. Govt deposits with RBIB. Other Banks credit to Government

2. Bank Credit to Commercial Sector ( A+B)A. RBIs credit to commercial sectorB. Other banks credit to commercial sector

3. Net Foreign Exchange Assets of Banking Sector (A+B)A. RBIs net foreign exchange assetsB. Other banks net foreign exchange assets

4. Governments Currency Liabilities to the Public5. Net Non-monetary Liabilities of the Banking Sector (A+B)

A. Net Non- monetary liabilities of RBIB. Net Non- monetary liabilities of banks.

Thus, M1 = 1+2+3+4+5

Monetary Policy Of the RBI / Measures of Control Imposed by RBI to Regulate

Monetary Systems in India (Dutt and Sundaram 902)

Controlled expansion ( 1951-72)

RBIs Anti- Inflationary Monetary Policy since 1972.

Entry of RBI into Foreign Exchange Market

Major weapons of Monetary Policy / Control Measures

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Credit Control:

1. General Credit Controlsa. Bank rateb. Cash reserve ratioc. Statutory Liquidity Requirements

d. Open market Operations Of RBI2. Selective and Direct Credit Controls

Credit Authorization Scheme (CAS)

Credit Monitoring Arrangement (CMA)

Module 8

CURRENT ECONOMIC ISSUES

TOPICS

PUBLIC ACCOUNTS COMMITTEE COMPTROLLER AND AUDITOR GENERAL

PUBLIC ACCOUNTS COMMITTEComposition

The Public Accounts Committee consists of fifteen Members elected by LokSabha every year

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Seven members of Rajya Sabha elected by that House in like manner areassociated with the Committee

Appointment of ChairmanThe Chairman of the Committee is appointed by the Speaker from amongst the

members of Lok Sabha elected to the Committee.

As a convention, starting from the Public Accounts Committee of 1967-68, a memberof the Committee belonging to the main opposition party/group in the House isappointed as the Chairman of the Committee

A Minister is not eligible to be elected as a member of the Committee and if amember, after his election to the Committee, is appointed as a Minister, he ceases tobe a member of the Committee from the date of such appointment

The term of office of the members of the Committee is one year

FUNCTIONS

The Public Accounts Committee examines the accounts showing theappropriation of the sums granted by Parliament to meet the expenditure of theGovernment of India

Committee also examines the various Audit Reports of the Comptroller andAuditor General on, expenditure by various Ministries/ Departments ofGovernment and accounts of autonomous bodies.

To ascertain that money granted by Parliament has been spent by Government"within the scope of the demand".

The Committee examines various aspects of Governments tax administration.

The Committee identifies loopholes in the taxation laws and procedures and makerecommendations in order to check leakage of revenue.

COMPTROLLER AND AUDITOR GENERAL

The Comptroller and Auditor General of India is the head of the Indian Audit andAccounts Department

CAG is an office which directs, monitors and controls all activities concernedwith audit, accounts and functions of the Department

Offices of the Accountants General (Audit) are responsible for audit of all receiptsand expenditure of the State governments and audit of State Governmentcompanies, corporations and autonomous bodies

Offices of the Principal Directors of Audit are responsible for audit of theactivities of the Union Government including Defence, Railways ,Postal,Telecommunications etc..

The present Comptroller and Audit General of India is

Mr. Vijayendra.N.Kaul

FUNCTIONS

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1. He can engage consultants and/or obtain professional services in conducting audit2. He can make rules for maintenance of accounts3. Make regulations for carrying out the provisions relating to the scope and extent

of audit

4. To supervise and regulate external auditors' work under the Indian Companies Act5. Appointment of external auditors.6. Access the computer systems of the auditees and suggest changes if any.7. CAG assists the Public Accounts Committee in examination of Accounts and

Audit reports.

COMMITTEE ON PUBLIC ACCOUNTS

8. 15 members elected from lok sabha by every year9. 7 are elected from rajya sabha to associate with the committee

Process of electing

Appointment of chairman Minister not to be Member of Committee

Term of the office

Functions

Showing the appropriate of sums

Examines the audit reports

Usage of money

Identifies loopholes in taxation laws

Recommends in order to check leakage of revenue

Functions

Showing the appropriate of sums

Examines the audit reports

Usage of money

Identifies loopholes in taxation laws

Recommends in order to check leakage of revenue

Assistance by comptroller

Sub-committees Evidence of officials

Ministers are not called before committee

Reports

Action taken on reports

Public Disinvestment Board

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Privatisation v/s disinvestment

The words privatisation and disinvestment are often used interchangeably.

Disinvestment leads to privatisation when the Government held equity is reduced to a

level when the company no longer remains a Government company

Privatisation has different nomenclature in different countries Disinvestment.

Peopalisation.

Popular capitalism .

Denationalisation.

Prioritisation.

Industrial transition.

Economic democratisation.

Partners in development.

Transformation and restructuring.

Objectives of Ministry of Disinvestment Releasing the large amount of public resources locked up in the non-strategic

PSEs for re-deployment in areas of high social priority. To reduce the public debt.

Transferring the commercial risk to the private sector wherever it is willing to. Releasing other tangible & intangible resources such as man power etc.

Emergence of disinvestment policy

Industrial policy 1991.

Rangarajan Committee 1993.

Disinvestment commission recommendations 1999.

Budget speech: 1998-99. Budget speech: 2000-01.

Strategic and non-strategic classification

Arms and ammunitions.

Atomic energy.

Railway transport.

All other public sector enterprises to be considered as non-strategic.

The Department of Disinvestment

The Department of Disinvestment was formed on the10th December 1999. With a view to establish a systematic policy approach to disinvestment and

privatisation.

To give a fresh impetus to the Governments disinvestment programme.

TARGETED AND ACTUAL DISINVESTMENT

YEAR TARGETRECEIPTS

ACTUALRECEIPTS

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1991-92 2500 3038

1993-94 3500 NIL

1994-95 4000 4853

1995-96 7000 362

1996-97 5000 380

1997-98 4800 902

1999-00 10000 1829

2000-01 10000 1870

2002-03 12000 3348

2003-04 14500 15547

Economic Survey (2004-05

Changing profile of PSUs

PSUs Net profit 01-02 Net profit 02-03

ONGC 6198 10529

IOC 2885 6115

SAIL -304 1498

GAIL 1186 1739

SCI 242 275

BSNL 5740 1444

All through the years now

The Governments approach to PSUs has a three-fold objective: revival of potentially viable enterprises

closing down of those PSUs that cannot be revived and bringing down Government equity in non-strategic PSUs to 26 percent or lower

Governments promiseGovernment would continue to ensure that disinvestment does not result in alienation ofnational assets, which, through the process of disinvestment, remain where they are. It

will also ensure that disinvestment does not result in private monopolies.

Criticisms

Privatisation of profit making public enterprises.Mr. George Fernandes in NDA Govt.

Basic criticism that the funds raised by selling family silver were used to pay

the butler.To set up disinvestment proceeds fund.

Methodology for disinvestment.

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Open auction sale during 94-95 to allow NRIs to participate in the offer. Creation of private monopoly in place of public monopoly.

Public sector monopoly is accountable for the parliament but private need not be Valuation of PSUs slated for disinvestment.

Eg: PAC quantified the loss to be of the order of Rs.3000 crores in 91-92 out of Rs.4950

crores raised.

Disinvestment policy and the future of PSUsThe recent changes in the culture of the PSUs as mentioned above also reinforces the factthat by disinvesting highly profitable PSUs, the government is trying to kill the goosewhich lays golden eggs.

OPERATING LEVERAGE

% change in operating revenue will be more than the % change insales (FC remains

the same)

Any increase in sales, FC remaining the same, will magnify the operating revenue

formulas

contribution = sales- VCoperating profit (EBIT) = sale - VC FCor OP = contribution FC

ExampleFollowing is the cost information of a firm:FC = 50,000VC = 70% of salesSales = 2,00,000 in previous year

2,50,000 in current yearFind out % change in sales and operating profits when:i) FC are not there (no leverage)

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ii) FC are there ( with leverage)

Solution:

(i) Previous year

(Rs)

Current year

(Rs)

% change

(Rs)

SalesLess: VC(70% of sales)Profit from operations

2,00,0001,40,000

60,000

2,50,0001,75,000

75,000

25 %25 %25 %

(ii) Previous year

(Rs)

Current year

(Rs)

% change

(Rs)

SalesLess ; VC(70% of Sales)ContributionLess : FCProfit from operations

2,00,0001,40,000

60,00050,00010,000

2,50,0001,75,000

75,00050,00025,000

25 %25 %25 %

150 %

Comments:

In case (i) %change in sales & %change in OP is the same i.e. 25%

In case (ii) % change in profit (150%) is much more than the %change in sales (25%).

The FC element has helped in increasing profits.

COMPOSITE LEVERAGE

Operating leverage affects the income which is the result of production

Financial leverage is the result of financial decisions

Composite leverage focuses attention on the entire income of the concernComposite Leverage = operating leverage * financial leverage.

EX:The following figures relate to two companies

P LTD Q LTDSales 500 1000Variable costs 200 300Contribution 300 700Fixed costs 150 400

150 300

Interest 50 100Profit before tax 100 200

i) Calculate the OL, FL, CL.ii) Comment on the relative risk position of them.

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a) OL : As the OL for Q Ltd is higher than that of P Ltd ; Q ltd has a higher degree ofoperating risk. The tendency of profit to vary disproportionately with sales is higher forQ Ltd as compared to P Ltd.

b) F.L : Since FL for the two companies is the same both the companies have the samedegree of financial risk, i.e. the tendency of net disproportionately is the same for P Ltdand Q Ltd.

C) C.L : As the combined leverage for Q Ltd is higher than P Ltd has overall higher riskas compared to P Ltd.

Calculation of LeveragesP.Ltd Q.Ltd

O.P = contribution 300 700

EBIT 150 300=2 =2.333

F.L = EBIT 150 300EBT 100 200

= 1.5 = 1.5

C.L = OL*FL 300 700100 200

= 3 = 3.5

Notes on Indian Business Enviornment

Documents