Environment+ +Word+File

Introduction to Business Environment
Semester- III
July – 2010
Instructions
 15 sessions
 Semester End Exam - 60 marks
 Class Participation and Attendance - 10 Marks
 Class Test & Case Study - 20 marks
 Individual Presentations and Vivas - 10 marks
Course Content
 Introduction to Business Environment
o Nature of Modern Business
o Economic Factors
o Sociocultural Factors
o Technological Factors
o SWOT Analysis
o Porters Five Forces Model
 Macroeconomic Environment of Business : National
o Economic System
o Economic Fluctuations
o Economic Indicators
o Macroeconomic Policies: Fiscal & Monetary
 Financial Environment of Business: National
o Indian Financial System
o Financial Markets
o Current trends in Banking
 Industrial Environment: National
o New Industrial Policy-1991
o Privatization & Disinvestment
o Industrial sickness
o Role of Small Scale Industries
 Global Environment
o Technology Transfer & Multinational Companies
o Strategies for going global
o Foreign Investments
o India & BOP
o India & WTO
o Economic Integration
 Business & Society
o Ecology & Business
o Corporate Social Responsibility
o Business Ethics
Business Environment – Pooja Dave Page 1

o Corporate Governance
o Family Business Houses
References
 Business Environment by Vivek Mittal
 Business Environment – Managing in a Strategic Context by John Kew & John
Stredwick
 International Business Environment- Francis Cherunilam
 Business Environment – Misra & Puri
 Essentials of Business Environment – K. Aswathappa
 Business Environment - Francis Cherunilam
What is Business???
Business may be understood as the organized efforts of enterprises to supply
consumers with goods and services for a profit
Contemporary Business goals

Characteristics of Business
Porter’s five generic descriptions of industries:

Fragmented
Emerging
Mature
Declining
Global
Large Indian companies – Fortune 500

7 Indian companies have made it to Fortune 500 list
 Indian Oil Corporation
 Reliance Industries
 Tata Steel
 Bharat Petroleum
 Hindustan Petroleum
 State Bank of India

 Oil & Natural Gas
 IOC has the highest rank of 105 among the featured Indian companies,
followed by Tata Steel at the 258th spot, RIL (264), BPCL (289), HPCL (311),
SBI (363) and ONGC (402).
 The league of 500 elite companies for 2009 is topped by oil giant Royal Dutch
Shell, followed by another oil major Exxon Mobil and US retailer Wal-Mart
Stores in that order.
BUSINESS CHALLENGES
 Managing Bottom line
 Meeting stakeholders expectations
 Developing and retaining top talent
 Creating a customer responsive organisation
 Diminishing time to market
 Market agility
 Pricing and quality
What do you mean by Business Environment???

The environment of any organization is “ the aggregate of all conditions, events and
influences that surround and affect it.”
Characteristics of Business Environment:

o Complex
o Dynamic
o Multi-faceted
o Far- reaching impact
Why Study Business Environment

• Development of broad strategies
• To foresee the impact of socio-economic changes at the national and
international levels on firm’s ability
• Analysis of competitor’s strategies and formulation of effective counter
measures
• To keep oneself dynamic
Types of Environment
 Internal Environment
 External Environment
o Micro environment
o Macro environment
 Economic
 Non Economic

Internal Environment
 Refers to all the factors that are within an organization which impart strengths
or cause weaknesses of strategic nature.
 Controllable factors
 These include:
o Value system
o Mission and Objectives
o Management Structure and Nature
 Human Resources
 Company Image and Brand Equity
 Other Factors
o Physical Assets and Facilities
o R & D and Technological Capabilities
o Marketing Resources
o Financial Resources
External Environment
 Includes all factors outside the organization which provide opportunities or pose
threats to the organization
 Uncontrollable factors
 Consists of Micro and Macro environment
Micro Environment
“It consists of the factors in the company’s immediate environment that
affect the performance of the company”.
Micro Environment Factors

 Suppliers
 Customers
 Marketing Intermediaries
 Competitors
 Publics
 Financial Community
Micro Environment of a typical car manufacturer

Refer Slide 21
Macro Environment
It comprises general trends and forces that may not immediately affect the
organization but sooner or later will alter the way organization operates.
Macro Environment :-
1. Economic
2. Non Economic

Economic Environment
 Economic stages that exists at a given time in a country
 Economic system that is adopted by a country for example. Capitalistic,
Socialistic or Mixed Economy
 Economic planning, such as five year plans, budgets, etc.
 Economic policies for example, monetary, industrial and fiscal policies
 Economic Indices such as National Income, Per Capital Income, Disposable
Income, Rate of growth of GNP, Distribution of Income, Rate of savings,
Balance of Payments etc.
 Economic Problems
 Functioning of economy
Non Economic Environment

 Regulatory Environment
 Socio- Cultural Environment
 Demographic Environment
 Technological Environment
 Political Environment
Non- Economic Environment

Cultural Environment
 Social Customs & Rituals and practices
 Lifestyle patterns
 Family structure
 Role & position of men, women, children and aged in family & society
Non- Economic Environment

Demographic Environment
 Growth of population
 Age Composition
 Life Expectancy
 Sex Ratio
 Fertility and Mortality rates
 Inter-state migration
Macro Environment
Technological Environment
 Sources of technology
 Technological development
 Impact of technology
Political Environment
 Political parties in power
 Political Philosophy

Regulatory Environment
 Constitutional framework
 Policies relating to pricing and foreign investment
 Policies related to the public sector, SSIs, development of backward areas
and control of environmental pollution
International environment
Important factors that operate at global level which have an impact on
organization are:
 Growth of world economy
 Distribution of world GDP
 International institutions IMF,WTO ILO
 Economic relations between nations
 Global human resource-nature and quality of skills, mobility of labor
 Global technology and quality standards
 Global demographic patterns
WTO and its relevance for Indian companies

The main guidelines of WTO are:
 Trade without discrimination
 Growing market access
 Promotion of fair competition
The response of Indian government to WTO constitutes the following actions

 Reduction of tariffs
 Opening Indian markets for Global Players
 Rationalizing industrial licensing and removal of controls on the size of
operations
WTO and its relevance for Indian companies

The impact of WTO on Indian companies is likely to include the following :
 Increasing competition
 Consolidation of activities in core competence areas
 Improvements in infrastructure to negate structural disadvantages.
 Shake out of minor players and M&As to gain global scale.

Overview of Business Environment
Environmental Analysis & Strategic Management

Environmental Scanning
The process by which organizations monitor their opportunities and threats
affecting their business is known as environmental scanning
SWOT Analysis
Tools for Analyzing the Environment

 PEST Analysis
 PESTLE
 STEEPLE
• S - Social
• T - Technological
• E - Economic
• E - Environmental
• P - Political
• L - Legal
• E - Ethical

Critical Success Factors (CSFs)
 CSFs are those areas in which good results will help ensure an organization’s
success against competition and where poor results usually lead to declining
performance
 A strategy is defined as a unified, comprehensive and integrated plan relating
the strategic advantages of the firm to the challenge of the environment.
Competitive Environment- Michael Porter’s Five Forces Model
Competitive Environment- Michael Porter’s Five Forces Model

Threat of the entry of new competitors
 Existence of Barriers to Entry
• Economies of scale
• Product differentiation
• Brand Equity
• Capital requirements
• Access to distribution channels
• Absolute cost advantages
• Government policies
The intensity of competitive rivalry

 Number of Firms and their Relative Market Share, Strengths
• Rate of industry growth –Demand conditions
• High Fixed cost
• Exit barriers
• Product Standardization
• Informational complexity and asymmetry

Threat of Substitutes
Bargaining power of customers:

• buyer concentration to firm concentration ratio
buyer volume
• buyer switching cost relative to firm switching costs
• buyer information availability
• ability to integrate backward
• availability of existing substitute products
• buyer price sensitivity
• price of total purchase
Bargaining power of suppliers

• supplier switching costs relative to firm switching costs
• degree of differentiation of inputs
• presence of substitute inputs
• supplier concentration to firm concentration ratio
• threat of forward integration by suppliers relative to the threat of backward
integration by firms
• cost of inputs relative to selling price of the product
Sixth Force in Michael Porter Model

According to Andrew Grove- former CEO of Intel sixth force are complementary
goods
Michael Porter’s International Competitiveness Model- PORTER DIAMOND

• Why a nation achieves success in a particular industry?
o Why Japan -- automobile, cameras
o Why Germany -- engineering
Porter Diamond
Four broad attributes of a nation shape the environment in which local firms
compete, and these attributes promote or impede the creation of competitive
advantage (Diamond of four mutually reinforcing factors)
Porter Diamond
1. Factor Endowments – A nation’s position in factors of production such as skilled
labor, capital, infrastructure necessary to compete in a given industry
2. Demand Conditions
3. Related and Supporting Industries
4. Firm Strategy, Structure, Rivalry – the conditions in the nation that govern how
companies are created, organized and managed and the nature of domestic
rivalry

Macroeconomic Environment of Business
Module - 2
Economic Environment
• Economic stages that exists at a given time in a country
• Economic system that is adopted by a country for example. Capitalistic,
Socialistic or Mixed Economy
• Economic planning, such as five year plans, budgets, etc.
• Economic Indices such as National Income, Per Capital Income, Disposable
Income, Rate of growth of GNP, Distribution of Income, Rate of savings,
Balance of Payments etc.
• Economic policies for example, monetary, industrial and fiscal policies
• Phases of business cycle
• Structure of economy
Types of Economic System

• Capitalism
• Communism/Socialism
• Mixed Economy
What is Capitalism?
"Capitalism is a system of economic organization featured by private ownership
and its use for private profit of man-made and nature-made capital."
Features of Capitalism
• Right to Private Property
• Freedom of Enterprise
• Freedom of Choice by Consumer
• Profit Motive
• Competition
• Importance of Price System
Socialism
"The important essentials of socialism are that all the great industries and the land
should be public or collectively owned, and that they should be conducted (in
conformity with a national economic plan) for the common good instead of private
profit."
Features of Socialism
• Social Ownership of Means of Production
• No Private Enterprise
• Economic Planning
• Classless Society
• Consumer is not sovereign
Mixed Economy
• Co- Existence of Public and Private Property
• Price System and Government Directives
• Government Regulates and Controls the Private Sector
• Consumers' sovereignty is protected
• Government Protects Labor Interest

Economic Planning & Budget
Objectives of Five Year Plans
1st Plan (1951-56)
It gave importance to agriculture, irrigation and power projects to decrease the
countries reliance on food grain imports, resolve the food crisis The focus was to
maximize the output from agriculture, which would then provide the impetus for
industrial growth.
2nd Plan (1956-61)

The second five year plan mainly focused on hydroelectric projects, steel Mills,
production of coal, railway tracks.
8th Plan (1992-97)-Post Economic Reforms

The eighth plan was initiated just after a severe balance of payment crisis, which was
intensified by the Gulf war in 1990.several structural modification policies were brought
in to put the country in a path of high growth rate. They were devaluation of rupees,
dismantling of license prerequisite and decrease trade barriers.
The plan targeted an annual growth rate of 5.6% in GDP and at the same time keeping
inflation under control.
9th Plan (1997-2002)

It was observed in the eighth plan that, even though the economy performed well, the
gains did not percolate to the weaker sections of the society. The ninth plans therefore
laid greater impetus on increasing agricultural and rural incomes and alleviate the
conditions of the marginal farmer and landless laborers.
The main objectives of the ninth five year plan were agriculture and rural development,
food and nutritional security, empowerment of women, accelerating growth rates,
providing the basic requirements such as health, drinking water, sanitation etc.
10th Plan (2002-2007)

The aim of the tenth plan was to make the Indian economy the fastest growing economy
in the world, with a growth target of 10%.It wanted to bring in investor friendly market
reforms and create a friendly environment for growth. It sought active participation by
the private sector and increased FDI's in the financial sector. Emphasis was also on
improving the infrastructure.
Eleventh Five-Year Plan- (2007-12)

• The major objectives of the eleventh five year plan are income generation,
poverty alleviation, education, health, infrastructure, environment , agriculture etc.
• The chief thrust of the plan, that will run from 2007-08 to 2011-12, will be
agriculture, education and infrastructure -- all areas that remain a concern in a rapidly
growing economy.
• ‘Towards Faster and More Inclusive Growth’ is the central theme of the plan that
seeks to lower poverty by 10%, generate 70 million new jobs, and reduce
unemployment to less than 5%.

What is Union Budget?
• The Union Budget gives the details of income and expenditure planned by the
government of India.
• Income are those that will be generated by taxation and expenditure is which
that the government is going to make.
• Government's expenditure includes money spent on running various government
services, subsidies, interest charges etc..
• The union budget also announces policies and it tells about the government's
economic thinking. It also determines activities such as exports and foreign
direct investment. The Union Budget has both short and long term effect.
Economic Indicators
What is an Economic Indicator???
• An economic indicator is a statistic about the economy.
• Economic indicators allow analysis of economic performance and predictions
of future performance.
• Nature of Economic indicators can be described in two ways:
o Relation with the economy
o Timing
Nature of Economic indicators

• Relation to the Business cycle or Economy
o Procyclic: A procyclic economic indicator is one that moves in the same
direction as the economy. So if the economy is doing well, this number is
usually increasing, whereas if we're in a recession this indicator is
decreasing. The Gross Domestic Product (GDP) is an example of a
procyclic economic indicator.
o Countercyclic: A countercyclic economic indicator is one that moves in
the opposite direction as the economy. The unemployment rate gets
larger as the economy gets worse so it is a countercyclic economic
indicator.
• Timing: Economic Indicators can be leading, lagging, or coincident which
indicates the timing of their changes relative to how the economy as a whole
changes.
o Leading: Leading economic indicators are indicators which change before
the economy changes. Stock market returns are a leading indicator, as
the stock market usually begins to decline before the economy declines
and they improve before the economy begins to pull out of a recession.
Leading economic indicators are the most important type for investors as
they help predict what the economy will be like in the future.
• Examples
 Stock price
 Housing Markets
 Inflation
 Interest rates

o Lagged: trail behind the general economic activity. Example:
Unemployment rate GDP (sometimes)
o Coincident: A coincident economic indicator is one that simply moves at
the same time the economy does. The Gross Domestic Product is a
coincident indicator.
General Economic Indicators

• Total Output, Income, and Spending (GDP, Consumer Spending)
• Employment, Unemployment, and Wages
• Production and Business Activity (Index of Industrial production)
• Prices (Inflation rate)
• Money, Credit, and Security Markets (Interest rates)
• Federal Finance (Fiscal deficit)
• International Statistics (BOP status, Exchange rate)
What is National Income??

• It represents the total income accrued to all factors of production
• Wages + Interest + Rent + Profit
Measures of Aggregate Income

• Gross Domestic Product (GDP)
• Gross National Product (GNP)
• Net National Product (NNP)
Calculating Aggregates
• At Market Price
• At Factor Cost
o Factor costs are really the costs of all the factors of production such as
labor , capital, energy, raw materials like steel etc that are used to
produce a given quantity of output in an economy.
o Factor costs are also called factor gate costs since all the costs that are
incurred to produce a given quantity of goods and services take place
behind the factory gate ie within the walls of the firms, plants etc in an
economy.
Gross Domestic Product

• The GDP of a country is defined as the market value of all final goods and
services produced within a country in a given period of time usually a year
o Includes only goods and services purchased by their final users, so
GDP measures final production.
o Counts only the goods and services produced within the country's
borders during the year, whether by citizens or foreigners.
o Excludes transfer payments since they do not represent current
production.

• It provides the measure of aggregate output and its comparison over time
enables us to calculate the rate of growth (usually calculated both at current
and constant prices)
GDP at Market Price
GDP@ market price = GDP@ factor cost – Subsidies + Indirect Taxes
GDP@ market price refers to the total final output of all final goods and services
produced within the national frontiers of a country by its citizens and the
foreign residents who reside within those frontiers that are sold at market prices in
various markets.
GDP at factor Cost
GDP@ factor cost = GDP@ market price + Subsidies - Indirect Taxes
GDP@ factor cost refers to the total final output of all final goods and services
produced within the national frontiers of a country by its citizens and the foreign
residents who reside within those frontiers that are assessed at production or factor
cost prior to leaving the irrespective factory gates for various markets where they
are bought and sold.
IMF's GDP forecast same as Govt's: Arvind Virmani

• The International Monetary Fund’s (IMF) recent 9.4% GDP growth forecast for
the current year surprised economy watchers as its far upbeat version of what
the traditionally pessimistic fund has had to say for the growth of the Indian
economy. The government reacted with caution and said India would be happy
with 8.5% growth.
• Explaining the difference Arvind Virmani, India's Executive Director at the fund
said these forecasts were for the calendar year. “Our forecasts are for GDP at
market prices as against the official forecasts which are for GDP at factor cost,”
he said adding, a 9.4% GDP at market price implies a 8.5% GDP at factor cost.
Nominal GDP
• Nominal GDP is the value of the total flow of goods and services produced in an
economy over a specified period of time (usually a year] at current market price
• At current prices, GDP growth is partly due to increase in output and partly due
to increase in prices so that GDP at current prices can give misleading
conclusions on growth
Real GDP
• GDP data is also calculated at constant prices taking the year in the past as base
year to filter our the impact of current prices.
• Real GDP is the physical quantity of goods and services produced in a given
period changes in real GDP measure changes in living standard
Example

• Assume economy only produces apples and pears. The price for an apple is $2 in
2000, whereas the price for a pear is $3. Same year we produce 100 apples and
50 pears. In 2005, because of the inflation the price for an apple goes up to $3,
whereas the price for a pear is $4 at the same production levels.
• The nominal GDP in 2000 is $350 and the nominal GDP in 2005 is $500.
However real GDP did not change, because real GDP only changes with the
changing production level and therefore is a better size measure for economy.
Gross National Product (GNP)

• Total market value of all final goods and services produced by citizens of a
country no matter where they are residing
• Is total Income received by residents for their contributions as factors of
production anywhere in the world
• GDP measures output within the borders of a country no matter regardless of
citizenship of the producer, GNP measures output of the country’s citizens
regardless where they live
• GNP at factor cost =GDP at factor cost + Net Income from abroad
Examples - GNP
• The income of an Indian working in Bahrain is part of Bahrain's GDP as well as
India's GNP
• Suppose Toyota owns a plant in Bahrain to produce Camry's using Bahraini
workers. How to count the product of this plant in the GDP and GNP of Bahrain
and Japan?
• With GDP, Bahrain gets all of it, because the plant and the workers are all
located in Bahrain.
• With GNP, the capital share goes to Japan
Net National Product

• NNP equals GNP less replacement investment
• NNP = GNP – Depreciation
• This is an estimate of how much the country has to spend to maintain the
current GNP
• If the country is not able to replace the capital stock lost through depreciation,
then GNP will fall.
• In addition, a growing gap between GNP and NNP indicates increasing
obsolescence of capital goods, while a narrowing gap would mean that the
condition of capital stock in the country is improving.
• NNP at factor cost = GNP at factor cost- Depreciation which is accurate
measure of National Income
Approaches used to calculate GDP

Production Approach
Income Approach
Expenditure Approach

Expenditure Approach
• Considers total spending on all final goods & services during the year
• It is a demand based concept
• Includes:
o Personal Consumption
o Durable Goods & Non-Durable Goods and Services
o Gross Private Investment
o Government Consumption and Gross Investment
o Net Exports of Goods and Services
• So, GDP = C + I + G + (X-M)
Income Approach
Measures by summing the following components
• Employee Compensation
• Proprietor’s Income
• Corporate Profits
• Rent
• Interest Income
• Indirect Business Taxes
• Net Income from foreigners
Major Limitations of GDP

The GDP fails to measure or express changes in a nation's:
• Quality of life
• Unpaid labor
• Wealth distribution
• Underground economy
• Externalities
Money Supply
• Money supply is another important indicator of macroeconomic environment
• This refers to the total volume of money circulating in the economy, and
conventionally comprises currency with the public and demand deposits
(current account + savings account) with the public.
• Money supply in an economy determines liquidity conditions in the market,
which in turn impacts interest rate structure and hence the cost of capital to the
firms.
• Money supply is basically determined by the central bank of a country (e.g.
Reserve Bank of India) and the commercial banking network.
• RBI has adopted four measures of money supply viz.-Ml, M2, M3 and M4 .
• M3 (broad money) is most popular from operational point of view. M3 includes
time deposits (fixed deposits), savings deposits with post office saving banks
and all the components of M1.
Factors affecting Money supply

• Bank credit
• Deficit financing

• Foreign exchange reserves
Inflation
• A sustained increase in the general level of prices so that a given amount of
money buys less and less.
• Reasons of inflation
1. inflation caused by monetary expansion (monetary inflation)
2. inflation caused by real demand expansion
3. inflation caused by aggregate supply contraction
Money supply & Inflation – Monetary inflation

It was Milton Friedman who famously quipped, “Inflation is always and everywhere
a monetary phenomenon.” If the quantity of money grows at a pace greater than
warranted by the growth of the economy, then the excess money supply drives up
prices.
Types of Inflation
• Demand pull inflation: Arises when aggregate demand outpaces aggregate
supply in an economy. It involves inflation rising as the real gross domestic
product rises and unemployment falls
• Cost Push inflation: This is because of large increases in the cost of important
goods or services where no suitable alternative is available. A situation of this
kind has been cited during oil crisis in 1970s
• Hyperinflation: Hyperinflation is also known as runaway inflation or galloping

inflation. This type of inflation occurs during or soon after a war
Remedies - Real Demand Inflation

• If inflation is caused by strong real demand, the best response may be to
support aggregate supply growth. Part of the solution may be to let prices rise.
Suppliers need incentives to invest in new capacity.
• Stimulating aggregate supply include encouraging business investment;
reducing input costs; and increasing competitive intensity.
• If aggregate supply is sufficiently stimulated, inflation may be converted into
balanced economic growth:
• If instead money supply is tightened in the face of strong real demand,
the result will be a surge in interest rates, which may be
counterproductive in this case, as it will be harder for aggregate supply
to expand when borrowing costs are high.
• If the cause of inflation is instead monetary expansion, aggregate supply should
still be stimulated, but the focus of effort should be constraining further
monetary expansion.
Real v/s Money Inflation

To distinguish real demand inflation from monetary inflation is to look at interest
rates. When inflation is caused by strong real demand, interest rates will tend to
be high. When inflation is caused by excessive monetary growth, in contrast,
interest rates will tend to be low.

Measurement of Inflation
• Inflation is measured by the
o Wholesale Price Index (WPI)
o Consumer Price Index (CPI)
• A Wholesale Price Index (WPI) is the price of a representative basket of
wholesale goods.
• Some countries use the changes in this index to measure inflation in their
economies, in particular India – The Indian WPI figure is released weekly
WPI as a measure of inflation in India

• WPI is preferred to CPI
o wider commodity coverage
o available on weekly basis
o computed at all-India basis
• WPI Inflation is divided into three broad categories
o Primary Articles
o Fuel Products and
o Manufacturing Items.
Headline inflation
• Headline inflation is a measure of the total inflation within an economy and is
affected by certain components which may experience sudden inflationary spikes such as
food or energy. As a result, headline inflation may not present an accurate picture of the
current state of the economy.
• WPI is the measure of headline inflation in India
Core inflation
• Core inflation has emerged as an alternative for measuring inflation. In this,
volatile items like food prices and fuel items are excluded.
• The first two categories include food articles and fuel items which can be excluded.
The third category – Manufacturing also includes food products which tends to be volatile
as well and moves in line with prices of primary articles. So after excluding food products
from manufacturing sector, we get non-food manufactured products inflation. This can
also be called as core inflation for India
Consumer Price Index

CPI, also retail price index is a statistical measure of a weighted average of prices of a
specified set of goods and services purchased by wage earners in urban areas. It is a
price index which tracks the prices of a specified set of consumer goods and services,
providing a measure of inflation.
CPI in India based on different economic groups.

• CPI UNME (Urban Non-Manual Employee)
• CPI AL (Agricultural Labourer)
• CPI RL (Rural Labourer)
• CPI IW (Industrial Worker).

• While the CPI UNME series is published by the Central Statistical Organization,
the others are published by the Department of Labor.
Effects of inflation
• Wealth costs – inflation affects those on fixed incomes and redirects wealth to
other (physical) assets
• Planning costs – businesses uncertain about future price changes may be
reluctant to invest – hits economic growth
• Competitiveness – inflation at a higher rate in the UK than elsewhere hits
domestic competitiveness and affects the balance of payments
• Social stability - At very high rates, confidence in the currency is eroded and
production and exchange can be stifled – can lead to food riots, looting and violence
Real & Nominal Interest rates

• Real Interest Rate = Nominal Interest Rate – Inflation
• Real interest rate, is one where the effects of inflation have been factored in. A
nominal variable is one where the effects of inflation have not been accounted for.
Economic Policies
Economic Policies
• Monetary Policy
• Fiscal Policy
• Industrial Policy
• Foreign Trade Policy
Monetary policy
Monetary policy is one of the tools used to influence its economy. Using its monetary
authority to control the supply and availability of money, a government attempts to
influence the overall level of economic activity in line with its political objectives. Usually
this goal is "macroeconomic stability" - low unemployment, low inflation, economic
growth, and a balance of external payments. Monetary policy is usually administered by
a Government appointed "Central Bank“.
What is Monetary Policy??

It is the process by which the central bank or monetary authority of a country regulates
(i) the supply of money (ii) availability of money and (iii) cost of money or rate of
interest in order to attain a set of objectives oriented towards the growth and stability of
the economy
Monetary policy provides

a) an overview of economy
b) specifies measures that RBI intends to take to influence such
• key factors like…money supply….interest rates….inflation
c) lays down norms for financial institutions like banks, financial companies etc. relating
to CRR, capital adequacy

Monetary policy & Inflation
When inflationary pressures build up:
• raise the short-term interest rate (the policy rate)
• which raises real rates across the economy
• which squeezes consumption and investment.
Monetary Policy Instruments
• Open Market Operations
• Bank rate
• Cash Reserve Ratio
• Statutory Liquidity Ratio
• Repo rate
• Reverse Repo rate
Open Market Operations

OMOs are the means of implementing monetary policy by which a central bank
controls the nation’s money supply by buying and selling government securities, or
other financial instruments
What is the outcome on account of OMO?

• When the RBI buys bonds from the market and infuses liquidity, the
consequences are:
o It tends to soften the interest rates
o It enables corporates to borrow at favorable interest rates
o It prevents the rupee from strengthening unnecessarily and thereby
protects the interest of exporters
o It may tend to increase inflation
• Consequently… If the RBI were to sell bonds instead and suck in liquidity, the
effect would exactly be the opposite!!
Bank rate
• Rate at which Central Bank lends money to commercial Banks
• The bank rate signals the central bank's long-term outlook on interest rates. If
the bank rate moves up, long-term interest rates also tend to move up, and
vice-versa.
• Any increase in Bank rate results in an increase in interest rate charged by
Commercial banks which in turn leads to low level of investment and low
inflation
Cash Reserve Ratio

• It refers to the cash which banks have to maintain with RBI as certain
percentage of their demand and time liabilities
• An increase in CRR reduces the cash with commercial banks which results in
low supply of currency in the market, higher interest rate and low inflation
Statutory Liquidity Ratio

Commercial Banks have to maintain liquid assets cash, gold and approved
securities equal to not less than 25% of their total demand and time deposit
liabilities
Objectives of SLR
• To restrict expansion of Bank credit
• To augment bank’s investment in government securities
• To ensure solvency of banks
Meaning of Repo
The term Repo is used as an abbreviation for Repurchase Agreement or Ready
Forward. A Repo involves a simultaneous "sale and repurchase" agreement.
It enables collateralized short term borrowing and lending through sale/purchase
operations in debt instruments
Repo Rate
• In current monetary policy RBI raised repo rate by 25 basis points to 5.75%
• Repo rate is the interest rate charged by the Central bank when banks borrow
money from it against pledging its securities
• If the RBI wants to make it more expensive for the banks to borrow money, it
increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow
money, it reduces the repo rate.
Reverse Repo
• The rate at which RBI borrows money from the banks (or banks lend money to the
RBI) is termed the reverse repo rate.
• If the reverse repo rate is increased, it means the RBI will borrow money from the
bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep
their money with the RBI (which is absolutely risk free) instead of lending it out (this
option comes with a certain amount of risk)
• Consequently, banks would have lesser funds to lend to their customers. This helps
stem the flow of excess money into the economy
• Reverse repo rate signifies the rate at which the central bank absorbs
liquidity from the banks, while repo signifies the rate at which liquidity is
injected.
Importance of Repo & Reverse Repo

• It helps borrower to raise funds at better rates
An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of
adjusting SLR/CRR positions simultaneously.
• RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the
system
• Reverse Repo is undertaken to earn additional income on idle cash.
Major Players in Repos/Reverse Repos

• The major players in the repo and reverse repurchase market tend to be banks who
have substantially huge portfolios of government securities as approved by RBI (Treasury
Bills, Central/State Govt securities).

• Besides these players, primary dealers who often hold large inventories of tradable
government securities are also active players in the repo and reverse repo market.
• DFHI is very active in the Repo Market. It has been selling and purchasing on repo
basis T-Bills and eligible dated Government Securities.
Call Rate – Short term Inter bank rate

Call rate is the interest rate paid by the banks for lending and borrowing for daily fund
requirement. Since banks need funds on a daily basis, they lend to and borrow from
other banks according to their daily or short-term requirements on a regular basis.
Liquidity Adjustment Facility

• A tool used in monetary policy that allows banks to borrow money through
repurchase agreements. This arrangement allows banks to respond to liquidity pressures
and is used by governments to assure basic stability in the financial markets.
Liquidity adjustment facilities are used to aid banks in resolving any short-term cash
shortages during periods of economic instability or from any other form of stress caused
by forces beyond their control. Various banks will use eligible securities as collateral
through a repo agreement and will use the funds to alleviate their short-term
requirements, thus remaining stable.
• Objective : The funds under LAF are used by the banks for their day-to-day
mismatches in liquidity.
• Tenor :Under the scheme, Reverse Repo auctions (for absorption of liquidity) and
Repo auctions (for injection of liquidity) are conducted on a daily basis (except
Saturdays).
• Eligibility : All commercial banks (except RRBs) and PDs having current account
and SGL account with RBI.
• Minimum bid Size : Rs. 5 cr and in multiple of Rs.5 cr
• Eligible securities: Repos and Reverse Repos in transferable Central Govt. dated
securities and treasury bills.
• Discretion to RBI : Under the revised Scheme, RBI will continue to have the
discretion to conduct overnight reverse repo or longer term reverse repo auctions at
fixed rate or at variable rates depending on market conditions and other relevant
factors. RBI will also have the discretion to change the spread between the repo rate
and the reverse repo rate as and when appropriate. (As per an IMF 1997 publication,
“the sale and repurchase transactions (reverse repo), are sales of assets by the central
bank under a contract providing for their repurchase at a specified price on a given
future date; they are used to absorb liquidity”. On the contrary, prior to above change,
in the Indian context, “repo” denotes liquidity absorption by the Reserve Bank and
“reverse repo” denotes liquidity injection).
Highlights of RBI Monetary Policy Review for first quarter of the financial year
FY2010-11
• The Bank Rate has been retained at 6.0%
• Repo rate increased by 25 bps from 5.5% to 5.75% with immediate effect
• Reverse repo rate increased by 50 bps from 4.0% to 4.50% with immediate effect

• Cash Reserve Ratio (CRR) of scheduled banks has been retained at 6.0% of their
net demand and time liabilities (NDTL)
• The projection for WPI inflation for March 2011 has been raised to 6.0% from
5.5%
• Baseline projection of real GDP growth for FY2010-11 is revised to 8.5%, up from
8.0% with an upside bias
• The move was aimed to moderate inflation by reining in demand pressures and
reduce the volatility of short-term rates, RBI governor Subbarao was quoted as
saying. "Inflation is now being significantly driven by demand-side factors," Subbarao
said. "It is imperative that we continue in the direction of normalizing our policy
instruments to a level consistent with the evolving growth and inflation scenarios."
• The RBI said that the Monetary Policy actions are expected to:
o Moderate inflation by reining in demand pressures and inflationary expectations.
o Maintain financial conditions conducive to sustaining growth.
o Generate liquidity conditions consistent with more effective transmission of policy
actions.
Public Finance
and
Fiscal Policy
Public Finance
• Study of State Finance is called Public Finance
• Deals with the income and expenditure of central, state and local
governments.
• Raising of necessary funds for incurring expenditure for public goods
constitutes the subject matter of Public Finance
• Components of Public Finance
o Public Revenue
o Public Expenditure
o Public Debt
o Fiscal Policy
Meaning of Fiscal Policy

• Fiscal policy is also called Budgetary policy. It is primarily concerned with the
receipts and expenditures of the Central government; it also relates to the
study of economic effects of these receipts and expenditures
• Fiscal policy refers to government policy that attempts to influence the
direction of the economy through changes in taxation, public borrowing and
public expenditure with specific objectives in view.
• Changes in the level and composition of taxation and government spending
can impact on the following variables in the economy:
o Aggregate Demand and the level of economic activity
o The pattern of resource allocation
o The distribution of income.

Importance of Fiscal Policy –Post Great Depression
• The ineffectiveness of monetary policy as a means of overcoming the
severe unemployment of the Great Depression
• The development of the new economics by Keynes with its emphasis on

aggregate demand. Fiscal policy is based on the theories of British economist John
Maynard Keynes. Also known as Keynesian Economics, this theory basically states that
governments can influence macroeconomic productivity levels by increasing or
decreasing tax levels and public spending. This influence, in turn, curbs inflation
(generally considered to be healthy when at a level between 2-3%), increases
employment and maintains a healthy value of money.
Main Concern of Fiscal Policy in LDCs

• Development
• Allocation of resources for development
• Reduction in economic inequality
• Inducing savings and investment
• Control of inflation
• Reduction in regional inequalities
Budget
• The main instrument of fiscal policy is the budget, presented annually by the
Minister of finance to Parliament.
• Budget means ‘plans of government finances submitted for the approval of the
Legislature’
• It is a time bound financial program systematically worked out and ready for
execution in the ensuing fiscal year. It is a comprehensive plan action which brings
together in one consolidated statement all
financial requirements of the government.
Budget has four major Functions-Prof Musgrave

• Proper allocation of resources or the provision of social goods
• Equitable distribution of income and wealth
• Securing economic stability or full employment
• Long term economic growth

Public Revenue :Major Sources For Centre
Revenue Receipts Capital Receipts

Tax revenue: Direct Taxes  Market Borrowing-internal debt
 Income Tax  Disinvestment of PSUs
 Corporate Tax  Recoveries of loans
 Wealth Tax  Borrowing from external markets
Indirect Taxes External loans/Debts from world
 Customs institutions
 Excise
 Others
Non tax Revenue
 Interest receipts
 Dividend
 Profits of PSUs
 Revenue from social
services like education and
hospitals
 External Grants
Public Revenue :Major Sources For States
Revenue Receipts Capital Receipts

Tax revenue  Market Borrowing
 land revenue,  Loans which flow from
 stamp duties and registration fees, Centre
 Urban immovable property tax
Indirect Taxes
 Sales tax on goods
 Entertainment tax
 Luxury tax
 Interest receipts
 Dividend from state enterprises
 Share in Central taxes
 Grants in aid from Centre
 And other contributions from
Centre Like those given for central
schemes

Public Expenditure
Revenue Expenditure Capital Expenditure
• Plan Expenditure • Plan Expenditure
• Central Plan such as • Developmental Projects
agriculture, rural
development, social service
and others
• Central Assistance for plans
to States and UTs
• Non – Plan Expenditure • Non – Plan Expenditure
• Interest Payments • Loans to PSUs
• Subsidies • Loans to states and UTs
• Debt relief to farmers • Defense
• Grant to states and UTs
• Others
Meaning of Public Debt

• It represents government borrowing from public.
• Government debt can be categorized as internal debt, owed to lenders within
the country, and external debt, owed to foreign lenders.
• Internal Debt is comprised of market borrowings, special securities issued to
RBI, Provident funds, Small savings collections, Treasury bills, Ways and
Means Advances
• Government Borrowing leads to Crowding out effect
Crowding out Effect

• In economics, when the government expands its borrowing to finance
increased expenditure, crowding out occurs of private sector investment by
way of higher interest rates
• If increased borrowing leads to higher interest rates by creating a greater
demand for money and loanable funds and hence a higher "price" (ceteris
paribus), the private sector, which is sensitive to interest rates will likely
reduce investment due to a lower rate of return. This is the investment that is
crowded out.
• More importantly, a fall in fixed investment by business can hurt long-term
economic growth of the supply side, i.e., the growth of potential output.
Features of Public Debt

• Size of debt has been on increase
• Internal debt constituted a larger proportion in first and Second Plans and
position was reversed in Third Plan where external loans contributed to a
larger proportion
• However from 4th till 10th plans greater reliance has been placed on internal
borrowings
• Market Borrowings form a significant portion
Indicators of Fiscal Imbalances

• Revenue Deficit
• Fiscal Deficit
Revenue Deficit
Current revenue expenditure of the central government is composed of plan and
non-plan expenditure of the government. Revenue expenditure is met out of
current revenue receipts
Revenue Deficit = Revenue expenditure – Revenue receipts
Fiscal Deficit
• It is the difference between the government's total receipts (excluding
borrowing) and total expenditure. Fiscal deficit gives the signal to the
government about the total borrowing requirements from all sources.
Components of fiscal deficit

• revenue deficit and
• capital expenditure.
Fiscal Deficit
• In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of
India, called deficit financing. The fiscal deficit is also financed by obtaining
funds from the money market (primarily from banks)
Methods of raising funds or financing Deficit

• Borrowing from market or external sources
• Government may print currency or govt issue adhoc treasury bills to
RBI(deficit financing)
Ad hoc Treasury bills

• Under this old system started in 1955 government was allowed to draw
money from RBI automatically and to an unlimited extent
• It stipulated that whenever the government’s cash balances with went below
Rs 50 crore adhoc treasury bills would be issued to raise the cash balance Rs
50 crore. It became an attractive source of financing since it was available at
interest rate of 4.6% since 1974
• However over a period of time the limit got extended to an ever increasing
amount
• According to C.Rangarajan this operational arrangement opened up the
floodgates of automatic monetization which changed the entire course of
monetary history for the next 40 years
Monetized Deficit
It is net increase in net Reserve Bank credit to Central government which is
sum of increase in RBI’s holdings of govt of India dated securities, treasury bills,
rupee coins and loans and advances from Reserve Bank to Centre since April 1,
1997
Ways and Means Advances-New Scheme

• Under the new scheme RBI provides facilities for temporary accommodation up
to a ceiling fixed in advance
• The limit for WMA and rate of interest on WMA will be mutually agreed to
between the Reserve Bank and govt from time to time
• The credit thus drawn has to be repaid or in technical language Govt vacates
WMA from time to time.
• As a result WMA will be reduced to zero at the end of financial year
• Scheme of Ways and Means Advances (WMA) to State Governments for

the fiscal year 2007-08
On a review of the State-wise limits of Normal Ways and Means Advances for
the year 2006-07, the Reserve Bank of India has decided to keep these limits
unchanged for the year 2007-08. Accordingly, the aggregate Normal WMA limit
would be retained at Rs.9,875 crore in 2007-08. Other terms and conditions of
the Scheme would also continue to remain unchanged for 2007-08.
Deficit Financing in India

• In first plan it was modest at Rs 333 crore
• Second Plan to Rs 954 crore
• Third- 1,133 crore
• Fourth – 2060
• Fifth- 15684 crore
• Eight plan – 33,037 crore
The FRBM Act, 2003

It became effective from July 5, 2004 eliminate revenue deficit by March, 2009 and
to reduce fiscal deficit to an amount equivalent to 3 per cent of GDP by
March,2008.
BUDGET ESTIMATES 2010-11

• The Gross Tax Receipts are estimated at Rs. 7,46,651 crore
• The Non Tax Revenue Receipts are estimated at Rs. 1,48,118 crore.
• The total expenditure proposed in the Budget Estimates is Rs. 11,08,749 crore,
which is an increase of 8.6 per cent over last year.
• The Plan and Non Plan expenditures in BE 2010-11 are estimated at Rs.
3,73,092 crore and Rs. 7,35,657 crore respectively. While there is 15 per cent
increase in Plan expenditure, the increase in Non Plan expenditure is only 6 per
cent over the BE of previous year.
• Fiscal deficit for BE 2010-11 at 5.5 per cent of GDP, which works out to
Rs.3,81,408 crore.
• Taking into account the various other financing items for fiscal deficit, the
actual net market borrowing of the Government in 2010-11 would be of the
order of Rs.3,45,010 crore. This would leave enough space to meet the credit
needs of the private sector.

Fiscal Consolidation- Budget -2010 -11
• With recovery taking root, there is a need to review public spending, mobilize
resources and gear them towards building the productivity of the economy.
• Fiscal policy shaped with reference to the recommendations of the Thirteenth
Finance Commission, which has recommended a calibrated exit strategy from
the expansionary fiscal stance of last two years.
• It would be for the first time that the Government would target an explicit
reduction in its domestic public debt-GDP ratio.
Meaning of Business Cycle

• The business cycle or economic cycle refers to the fluctuations of economic
activity about its long term growth trend.
• The cycle involves shifts over time between periods of relatively rapid growth of
output (recovery and prosperity), and periods of relative stagnation or decline
(contraction or recession).
• Phases of Business Cycle
o Prosperity
o Recession
o Depression
o Recovery
Prosperity Phase
• Unemployment rate declines
• Income tends to rise
• Investment increases
• Investors become more optimistic
• Consumption tends to rise
• Share price index tends to rise
• Money Supply increases
Recessionary Phase
• Recession is turning point ie when prosperity ends recession begins
• Liquidation in stock market, fall in prices are symptoms
• Banks & People try to gain greater liquidity so credit sharply contracts
• Business expansion stops
Depression Phase
• Shrinkage in volume output
• Rise in level of unemployment
• Fall in aggregate demand
• Contraction of Bank credit
• Fall in prices
Recovery Phase
• Rise in demand for consumption goods which in turn lead to demand for
capital goods and new investment is induced
• This will give rise to increase in income and employment

• Phases of Business Cycle
Phases of Business Cycle
Peak
Peak
Peak Prosperity
Trough Trough
2005 2010 2015

Year

FINANCIAL ENVIRONMENT OF BUSINESS
Module – 3
References
Indian Financial System by Bharati V. Pathak
Financial Markets and Institutions by Anthony Saunders
Indian Financial System by M Y Khan
Fundamentals of Indian Financial System by Vasant Desai
Financial Institutions and Markets by L M Bhole
What is a Financial System?

• It implies a set of complex and closely connected or interlinked institutions, agents,
practices, markets, transactions, claims, and liabilities in the economy.
• The financial system is concerned about these three terms: money, credit and
finance
• The objective of Financial System is to “supply funds to various sectors and
activities of economy in ways that promote fullest possible utilization of resources”
Financial System
Financial
System
Savings Finance Investment
Capital Formation
Economic Growth
Primary function of financial system is mobilizing savings, their distribution for
industrial investment and stimulating capital formation to accelerate the process
of economic growth.
Indian Financial System

• Can be broadly classified into organized and unorganized
• Organized Financial System comes under the purview of Ministry of Finance, RBI,
SEBI and other regulatory bodies
• Unorganized Financial System consists of individual money lenders, groups of
persons operating operating as unregistered chit fund, etc

Chit Funds
• Chit Funds is in practice in India, Central African countries, China, Pakistan and
other south-east asian countries. Chit Funds is popular among the low-income group, self-
employed and salaries class.
• The interest charged per annum ranged from 8% to 28%, though higher than bank
loans, was lower compared to 24 to 36% charged by other private financiers. Plus, the
chit funds provided better returns on the investment than other options available to
members.
• It said people find the chits more advantageous as they require less collateral and
documentation. The chit amount is collected from the participants at their doorstep on a
flexible when the participants are able to pay.
• there are about 9,900 chit fund companies in India. The leading players include
Shriram Chits, Margadarsi Chit Fund Pvt Ltd and Balussery Benefit Chit Fund.
• As per Section 2(b) of the Chit Fund Act, 1982, “a chit means a transaction whether
called chit, chit fund, chitty, kuri or by any other name by or under which a person enters
into an agreement with a specified number of persons that every one of them shall
subscribe a certain sum of money (or a certain quantity of grain instead) by way of
periodical instalments over a definite period and that each such subscriber shall, in his
turn, as determined by lot or by auction or by tender or in such other manner as may be
specified in the chit agreement, be entitled to the prize amount.”
Components of Organized Financial System

• Financial Intermediaries
• Financial Markets
• Financial Instruments
• Financial Services
Indian Financial System - Organized

Financial Intermediaries
• Banks
o Commercial - Private, Public & Foreign
o Cooperative
o Regional Rural Banks (RRBs)
• Non Banking Financial Companies (NBFCs)
• Development Financial Institutions (DFIs)
Cooperative Banks
• Co operative Banks in India are registered under the Co-operative Societies Act.
The cooperative bank is also regulated by the RBI.
• Under the Banking Regulation Act 1949, only State Cooperative Apex Banks,
District Central Cooperative Banks and select Urban Credit Cooperatives are qualified to
be called as banks in the cooperative sector. In other words, only these banks are licensed
to conduct full-fledged banking business.
• At the National Level there is NABARD to organize the Agricultural Co-operatives.
NABARD
• NABARD is set up as an apex Development Bank with a mandate for facilitating
credit flow for promotion and development of agriculture, small-scale industries, cottage
and village industries, handicrafts and other rural crafts.
• It also has the mandate to support all other allied economic activities in rural areas,
promote integrated and sustainable rural development and secure prosperity of rural
areas.
• In discharging its role as a facilitator for rural prosperity NABARD is entrusted with
1. Providing refinance to lending institutions in rural areas
2. Bringing about or promoting institutional development and
3. Evaluating, monitoring and inspecting the Regional Rural banks
Cooperative Banks
• Classified into urban credit cooperatives and rural credit cooperatives.
• There are about 2090 urban credit cooperatives and these societies together
constitute for about 10 percent of the aggregate banking business and therefore
regarded as an important segment of the banking system.
• The rural credit cooperatives may be further divided into short-term credit
cooperatives and long-term credit cooperatives. With regard to short-term credit
cooperatives, at the grass-root level there are around 92,000 Primary
Agricultural Credit Societies (PACS) dealing directly with the individual
borrowers. At the central level (district level) District Central Cooperative Banks
(DCCB) function as a link between primary societies and State Cooperative Apex
Banks (SCB).
Regional Rural Banks (RRBs)

• The Narsimham committee conceptualised the creation of RRBs in 1975 as a
new set of regionally oriented rural banks, Subsequently, the RRBs were set up
through the promulgation of RRB Act1 of 1976.

• Their equity is held by the Central Government, concerned State Government
and the Sponsor Bank in the proportion of 50:15:35.
• RRBs were supposed to evolve as specialised rural financial institutions for
developing the rural economy by providing credit to small and marginal farmers,
agricultural labourers, artisans and small entrepreneurs.
• Over the years, the RRBs, which are often viewed as the small man’s bank, have
taken deep roots and have become a sort of inseparable part of the rural credit
structure . They have played a key role in rural institutional financing in terms of
geographical coverage, clientele outreach and business volume as also
contribution to development of the rural economy .

Maharashtra
Marathwada Gramin Bank
Aurangabad-Jalna Gramin Bank
Wainganga Kshetriya Gramin Bank
Vidharbha Kshetriya Gramin Bank
Solapur Gramin Bank
Thane Gramin Bank
Ratnagiri-Sindhudurg Gramin Bank
Gujarat
Dena Gujarat Gramin Bank
Baroda Gujarat Gramin Bank
Saurashtra Gramin Bank
Why are they in the news?

The Reserve Bank of India in its discussion paper on grant of bank licences to corporate
houses said that if corporate were keen on improving financial inclusions, they could look
at taking over some of the weaker RRBs and strengthen them through capital and
technology infusion.
Is this likely to happen?

There are several impediments. Firstly, the RRB Act will need to be amended. Secondly,
there will be resistance from employee unions and state governments. Thirdly, corporates
themselves may not be inclined to get into rural banking where the payback may take
many more years.
Current Status (RRBs)

The worst appears to be behind the RRBs, a large number of which were in the red for
most of the previous decades. The process of consolidation through amalgamation of
RRBs is now almost complete, resulting in a decline in the total number of RRBs to 84 as
on August 31, 2009 .The process of recapitalisation of RRBs with negative net worth as on
March 31, 2007, is also almost complete, with 27 RRBs fully recapitalised with an amount
of Rs 1,796 crore as on July 31, 2009. The assets in the consolidated balance sheets of
RRBs have increased by 16.5% in March 2009 to Rs 1.46 lakh crore.
They now open no-frills accounts and issue general credit cards. An RBI working group on

technology in RRBs has observed that RRBs could not remain isolated from the
technological developments sweeping the banking sector. The group has set a target date
of September 2011 for all RRBs to move to a core banking solution platform.
Non Banking Financial Companies (NBFCs)

It is a financial intermediary in a variety of ways, like accepting deposits, making loans
and advances, leasing, hire purchase, etc. They advance loans to the various wholesale
and retail traders, small-scale industries and self-employed persons. Thus, they have
broadened and diversified the range of products and services offered by a financial sector.
Gradually, they are being recognized as complementary to the banking sector due to their
customer-oriented services; simplified procedures; attractive rates of return on deposits;
flexibility and timeliness in meeting the credit needs of specified sectors; etc.
The working and operations of NBFCs are regulated by the RBI within the framework of
the Reserve Bank of India Act 1934.For the registration with the RBI, a company
incorporated under the Companies Act,1956
Some of the important regulations relating to acceptance of deposits by the

NBFCs are:-
• They are allowed to accept/renew public deposits for a minimum period of 12
months and maximum period of 60 months.
• They cannot accept deposits repayable on demand.
• They cannot offer interest rates higher than the ceiling rate prescribed by RBI from
time to time.
• They cannot offer gifts/incentives or any other additional benefit to the depositors.
• They should have minimum investment grade credit rating.
• Their deposits are not insured.
• The repayment of deposits by NBFCs is not guaranteed by RBI.
NBFCs accepting public deposits

• Bajaj Auto Finance Ltd.
• Mahindra & Mahindra Financial Services Ltd
• Muthoot Capital Services Ltd.
• Gujarat Lease Financing Ltd.
• Maximum NBFCs - A located in Chandigarh, New Delhi and Kanpur
Types of NBFCs registered with the RBI

• Equipment leasing company:- is any financial institution whose principal
business is that of leasing equipments or financing of such an activity.
• Loan company:- means any financial institution whose principal business is that of
providing finance, whether by making loans or advances or otherwise for any activity
other than its own (excluding any equipment leasing or hire-purchase finance activity).
• Investment company:- is any financial intermediary whose principal business is

that of buying and selling of securities.

Development Financial Institutions
• NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)
• EXPORT IMPORT BANK OF INDIA
• SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)
• NATIONAL HOUSING BANK (NHB)
• INDUSTRIAL FINANCE CORPORATION OF INDIA Ltd (IFCI)
Indian Financial System - Organized

Functions of Financial Markets
• Enabling economic units to exercise their time preference
• Separation, distribution, diversification and reduction of risks
• Providing information about companies
• Enhancing liquidity of financial claims through trading in securities
Characteristics of Financial Markets

• Are characterized by a large volume of transactions and a speed with which
financial resources move from one market to another
• There is scope of instant arbitrage among various market and types of instruments
• Financial Markets are highly volatile and susceptible to panic and distress selling as
the behavior of limited group of operators can get generalized
• Negative externalities are associated with financial markets. A failure in any one
segment of these market may affect many other segments of the market, including the
non-financial markets
• Domestic financial markets are getting integrated with worldwide financial markets.
What is Money Market?

• It is a market for dealing in financial instruments of short-term nature generally
less than a year
• It enables raising up of short term funds for meeting temporary shortage of cash
and temporary deployment of excess funds for earning returns
Characteristics of Money Market

• It is not a single market but a collection of markets for several instruments
• It is a wholesale market of short-term debt instruments
• Its principle feature is honour where the creditworthiness of the participants is
important
• It is dichotomous in nature consisting of organized and unorganized sector
• Unorganized Sector consisting of Money Lenders, Nidhis, unregisteredChit funds
etc.
• RBI occupies a strategic position in Indian Money market- acts as a regulator
Functions of Money Market

• A focal point of Central Bank (RBI) intervention for influencing liquidity in
the economy- A developed money market contributes to an effective monetary policy
• To ensure that liquidity and short term interest rates are maintained at the levels
consistent with the monetary policy objectives of maintaining price stability
• A reasonable access to the users of short-term funds to meet their requirements at
realistic / reasonable price / cost
Link between Money Market and Capital Market

• Money Market is the institutional source of working capital to the industry, focus of
capital market being on financing fixed investments
• Often, FIIs actively involved in the capital market are also involved in the market
• Funds raised in the money market are used to provide liquidity for longer term
investment and redemption of funds raised in the capital market

• In the development process of financial markets, the development of money market
typically precedes the development of the capital market
Money Market Instruments

• Call/Notice Money
• Inter-Bank Term Money
• Certificate of Deposits
• Treasury Bills
• Inter Corporate Deposits
• Commercial Papers
• Commercial Bills
• Repos
Call Money Market

• The loans made in this market are short-term nature, their maturity varying
between one day to a fortnight
• When it is borrowed / lent for a day it is called call or overnight money and
when it is for more than a day and up to fourteen days it is known as Notice
Money
• Day to day surplus funds, mostly of banks, are traded. These loans are highly liquid
as they are repayable on demand
• No collateral security is required to cover these transactions
• It is basically over the counter market without intermediation of brokers
• In view of the short tenure of such transactions, both the borrowers and the lenders
are required to have current accounts with the Reserve Bank of India.
• Banks borrow in this market for the following purpose
o To fill the gaps or temporary mismatches in funds
o To meet the CRR mandatory requirements as stipulated by the Central bank
o To meet sudden demand for funds arising out of large outflows.
Thus call money usually serves the role of equilibrating the short-term liquidity position of
banks
Call Rate
• Interest rate paid on Call Money / Notice Money
• Sensitive to changes in demand – supply of Call Loans
• Call Rates are influenced by number of factors:
Liquidity Conditions:
o Supply side is governed by Deposit Mobilization, Capital Flows and Reserve
Requirements
o Demand side is governed by tax outflows and Government borrowing program and
seasonal fluctuations
• Asymmetrical nature of Participants in terms of few lenders and large borrowers
• Volatile forex market conditions (Banks & RBI Intervention)

Inter-bank Term Money
• Inter bank market for deposits of maturity beyond 14 days and up to three months
is referred to as the term money market.
• MIBOR –Mumbai Inter bank offer rate
• Used as reference rate in money for various money market instruments
Participants in Call Money Market

• Participants in call/notice money market currently include banks, Primary Dealers
(PDs), development finance institutions, insurance companies and select mutual funds.
• Of these, banks can operate both as borrowers and lenders in the market.
• But non-bank institutions (such as all-India FIs, select Insurance Companies or
Mutual Funds), which have been given specific permission to operate in call/notice money
market can, however, operate as lenders only.
• It is a completely inter-bank market hence non-bank entities are not allowed access
to this market.
Certificate of Deposit
• CDs are short-term borrowings in the form of Usance Promissory Notes having a
maturity of not less than 15 days up to a maximum of one year.
• These are bearer and therefore freely negotiable instruments and are often referred
to as Negotiable Certificate of Deposits
• CDs may be issued at a discount on face value
• State Bank of India sells Rs 6 bn of CDs It sold three-month certificates of
deposit (CDs) yielding 6.95 percent, 26th AUG
Features of CD
• CDs can be issued by all scheduled commercial banks except RRBs
• Minimum period 15 days
• Maximum period 1 year
• Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac
• CDs are transferable by endorsement
• CDs can be subscribed by individuals/companies/funds/trusts.
Commercial Paper
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note.
Who can issue Commercial Paper (CP)

Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and
all-India financial institutions (FIs)
Eligibility for issue of CP

(a) the tangible net worth of the company, as per the latest audited balance sheet, is
not less than Rs. 4 crore;
(b) the working capital (fund-based) limit of the company from the banking system is
not less than Rs.4 crore
(c) and the borrowal account of the company is classified as a Standard Asset by the
financing bank/s.

Rating Requirement
• All eligible participants should obtain the credit rating for issuance of Commercial
Paper
• Credit Rating Information Services of India Ltd. (CRISIL)
• Investment Information and Credit Rating Agency of India Ltd. (ICRA)
• Credit Analysis and Research Ltd. (CARE)
Maturity
• CP can be issued for maturities between a minimum of 15 days and a maximum
upto one year from the date of issue.
• If the maturity date is a holiday, the company would be liable to make payment on
the immediate preceding working day.
To whom issued
CP is issued to and held by individuals, banking companies, other corporate bodies
registered or incorporated in India and unincorporated bodies, Non-Resident Indians
(NRIs) and Foreign Institutional Investors (FIIs).
Repo
Uses of Repo
It helps borrower to raise funds at better rates
An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of
adjusting SLR/CRR positions simultaneously.
RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system
Meaning of Repo
• It is a transaction in which two parties agree to sell and repurchase the same
security. Under such an agreement the seller sells specified securities with an agreement
to repurchase the same at a mutually decided future date and a price
• The Repo/Reverse Repo transaction can only be done at Mumbai between parties
approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt
securities).
Treasury Bills
• Treasury bills, commonly referred to as T-Bills are issued by Government of India
against their short term borrowing requirements with maturities ranging between 14 to
364 days.
• All these are issued at a discount-to-face value. For example a Treasury bill of Rs.
100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs.
100.00.
Who can invest in T-Bill

Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions,
Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in
T-Bills.

What is auction of Securities
Auction is a process of calling of bids with an objective of arriving at the market price. It is
basically a price discovery mechanism
OMO (Open Market Operations)

OMO or Open Market Operations is a market regulating mechanism often resorted to by
Reserve Bank of India. Under OMO Operations Reserve Bank of India as a market
regulator keeps buying or/and selling securities through it's open market window. It's
decision to sell or/and buy securities is influenced by factors such as overall liquidity in the
system,
Primary Dealers & Satellite Dealers

Primary Dealers can be referred to as Merchant Bankers to Government of India,
comprising the first tier of the government securities market. Satellite Dealers work in
tandem with the Primary Dealers forming the second tier of the market to cater to the
retail requirements of the market.
These were formed during the year 1994-96 to strengthen the market infrastructure
Objectives of Primary Dealers

• To strengthen the infrastructure in Govt securities market, including money market
• To improve secondary market for govt securities
• To make PDs an effective conduit for conducting OMOs
Participants in Money Market

• Banks, primary dealers, financial institutions, mutual funds, non-bank financial
companies, manufacturing companies, State Governments, provident funds, non-resident
Indians, overseas corporate bodies, foreign institutional investors and trusts.
• However, participants do not have a uniform status in dealing in different
instruments. For instance, financial institutions and mutual funds are allowed only as
lenders in the call money market but are permitted to buy and sell CP. Similarly, in
respect of repos, banks and Primary Dealers (PDs) in Government securities are allowed
to borrow and lend while others are allowed only to enter into reverse repos (i.e., as
lenders).

Current News
• Call money stays near reverse repo; cash ample
• Indian overnight cash rates stayed near the central bank's main borrowing rate of
4.5 percent
• Banks parked 76.6 billion rupees with the central bank via the reverse repo route
on Wednesday.
• Call rates are expected to range between 4.50% and 5.00%. Call rates were steady
around the reverse repo rate
• Brokers hurt as FIIs go for Direct Market Access (DMA)route
• In DMA a fund manager sitting abroad can plan an order to buy or sell shares
directly on the bourse’s trading system using his broker’s trading platform.
• Transaction cost is 7-8% in DMA ow it is 25-30%. This was approved by SEBI in
2008 but it was only in 2009 that fund managers abroad started availing this facility.
• Main DMA providers- Citibank, MorganStanley, Goldman sachs
• By next year 20% of business would be via DMA route
• Banks to review their Business model which has put stress on few MFIs .
• Poor tend to borrow from MFIs at 24-28% per year and at time 35% and infact
MFIs are allowed to lend not more than 5% over the lending rate of banks.
• Banks conduct surprise checks and squeeze limits if MFI is found ethically misfit
• SBI limit to MFIs is 2000 cr
• Foreign inflows $10 bn in equties during first seven mmonths of the year2010
compared to $3 bn last year
• These inflows has really boost market sentiments
• Stock markets in India are better than China
• Indian stocks seen as hot buys in Asia. Top 10 Asian companies with max buy
ratings are TCS, PNB, Axis bank, HCL, Infosys, BoB, Hyundai motor, Wipro, Tata motors:
According to CEO of CR Choksey securities, Nearly 6,66000 cr worth of investment is
planned in sectors like power, roads and ports in next five years and approx half of that
will go to capital goods.
• Global investments to dive India : Corporate capacity expansion and investments in
infrastructure and robust capital goods production, strong credit growth are expected to
drive growth. Moreover US economy still struggling with unemployment, eurozone’s fiscal
austerity measures and China moderate growth makes India a favorable destination.
• HDFC venture funds has bought 10% stake in Lodha’s residential projectandraised
Rs 500cr. This deal is the 2nd largest PE investment in India’s realty space and puts the
valuation 2 and half times its cost

Industrial Environment of Business
Module -4
Evolution of Economic LPG
Phases of Indian Economy

1947-1980
Command and Control Economy
• Allocation of resources by the Government (budgetary grants)
• Government took active part in setting priorities for the economy
• Self-Reliance was the buzz word
• Nationalization of Banks
• Limited scope for private participation
1991-2000
Liberalization and Globalization of Indian Economy
• Increased emphasis on private sector participation
• Limited extent of FDI participation
• Gradual improvement in the enabling environment
Objectives of New Industrial Policy-1991

• The key objective was rapid industrialization of the country
• To increase employment opportunities in private sector
• To improve balance of payments by promoting export - oriented industries
• Ensure profitability in the public sector
• Encourage entrepreneurship
• To invite foreign capital for industrialization and to boost exports
• To encourage R&D and to bring new technology to produce world class products
and services
• To link Indian economy with the global economy
• To encourage big business houses and projects to achieve economies of scale
• Increase competitiveness of the industry to benefit the common man and the
nation
• Rapid development of infrastructure, specially roads and electricity, with active
participation of the private sector and FDI
NEW INDUSTRIAL POLICY, 1991

The major objectives of the new policy are
"to build on the gains already made, correct the distortions or weaknesses that might
have crept in, maintain a sustained growth in productivity and gainful employment, and
attain international competitiveness."
• Abolition of Industrial Licensing
• Public Sector’s Role Diluted
• MRTP Limit Goes
• Free Entry to Foreign Investment and Technology

Competition Act -2002
• Commission to prevent practices having adverse effect on competition, to promote
and sustain competition in markets, to protect the interests of consumers and to ensure
freedom of trade carried on by other participants in markets, in India
• Setting up of CCI to eliminate practice having adverse effects on competition.
• Spirit behind this act is big is no more bad, hurting consumer interest is.
The Industrial Policy -1991

Industrial Licensing
• All Industrial undertakings exempt from obtaining an industrial license to
manufacture, except for:
o Industries reserved for the Public Sector
o Industries retained under compulsory licensing
o Items of manufacture reserved for the Small Scale Sector
o If the proposal attracts locational restriction
• Industries reserved for the Public Sector: (1) Atomic Energy and (2) Railway
Transport
• Compulsory licensing needed in the following industries:
o Distillation and brewing of alcoholic drinks
o Cigars and cigarettes and manufactured tobacco substitutes
o Electronic aerospace and defence equipment of all types
o Industrial explosives including detonating fuses, safety fuses, gun powder,
nitrocellulose and matches
o Certain hazardous chemicals
The Industrial Policy

Locational Policy
• Industrial undertakings are free to select the location
• Location to be 25 km away from any city with a million strong population
• Exceptions:
o When located in an area designated as an “Industrial Area” before the 25th July,
1991.
o Electronics, Computer Software and Printing (and any other industry which may be
notified in future as ‘non polluting industry’).
The Industrial Policy

Small Scale Industries: Various items reserved exclusively for SSIs.
• As on 10 October 2008, following items are reserved for exclusive manufacture by
micro and small enterprise sector:
• Food and Allied Industries: Pickles & Chutneys, Bread, Mustard Oil (except
solvent extracted), Ground nut oil (except solvent extracted).
• Wood and Wood Products: Wooden furniture and fixtures
• Paper Products: Exercise books and registers
• Injection Moulding Thermo Plastic Product: PVC Pipes, including conduits upto
110 mm dia, Fittings for PVC pipes
• Other Chemicals & Chemical Products: Wax candles, Laundry soap, Safety
matches, Fire works, Agarbatties
• Glass & Ceramics: Glass Bangles
• Mechanical Engg. Excluding Transport Equipment: Steel almirah, Rolling
shutters, Steel chairs – all types, Steel tables – all other types, Steel furniture – all other
types, Padlocks, Stainless steel utensils, Domestic utensils - Aluminium

Phases of Indian Economy
post 2000
• Political Coalitions have started providing stable governments
• Government to get out of owning and managing businesses: Disinvestment Policy
• Gradual relaxation in the FDI Policy
Entry Process
The Entry Process
The Entry Process: Automatic Route

• All items/activities for FDI investment up to 100% fall under the Automatic Route
except the following:
• All proposals that require an Industrial Licence.
• All proposals in which the foreign collaborator has a previous venture/ tie up
in India.
• All proposals relating to acquisition of existing shares in an existing Indian
Company by a foreign investor.
• All proposals falling outside notified sectoral policy/ caps or under sectors in
which FDI is not permitted.
The Entry Process: FIPB Approval –Foreign Investment Promotion Board

• In circumstances where there is ambiguity or a conflict of interpretation, the FIPB
has stepped in to provide solutions.
• Government has approved 24 Proposals of Foreign Direct Investment amounting to
` 2727.413 crore approximately.
Forms in which Business can be conducted in India

• Foreign companies can also to set up wholly owned subsidiary in sectors where
100% foreign direct investment is permitted under the FDI policy
• Foreign investors can enter into the business in India either as a foreign company in
the form of a liaison office or project office by registering themselves with Registrar of
Companies (ROC), New Delhi within 30 days of setting up a place of business in India or

as an Indian company in the form of a Joint Venture and wholly owned subsidiary by
incorporating a company under the Companies Act,1956
FDI norms in India

• FDI in Hotel & Tourism sector in India
o 100% FDI is permissible in the sector on the automatic route.
• FDI in Insurance sector in India
o FDI up to 26% in the Insurance sector is allowed on the automatic route subject to
obtaining license from Insurance Regulatory & Development Authority (IRDA)
• FDI In Power Sector in India
o Up to 100% FDI allowed in respect of projects relating to electricity generation,
transmission and distribution, other than atomic reactor power plants. There is no limit on
the project cost and quantum of foreign direct investment.
• Drugs & Pharmaceuticals
o FDI up to 100% is permitted on the automatic route for manufacture of drugs and
pharmaceutical
• Roads, Highways, Ports and Harbors
o FDI up to 100% under automatic route is permitted in projects for construction and
maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and
harbors.
• Business Process Outsourcing BPO in India
o FDI up to 100% is allowed subject to certain conditions.
• FDI in banking sector
o In the private banking sector of India, FDI is allowed up to a maximum limit of 74
% of the paid-up capital of the bank which includes portfolio investment [ie, foreign
institutional investors (FIIs) and non-resident Indians (NRIs)], IPOs, private placement,
ADRs or GDRs and acquisition of shares from the existing shareholders.
On the other hand, Foreign Direct Investment and Portfolio Investment in the public or
nationalized banks in India are subjected to a limit of 20 % in totality.
• Telecommunication sector
o 74% to 100% FDI permitted for various telecom services
o FIPB approval required for foreign investment exceeding 49% in all telecom
services
o 100% FDI permitted in telecom equipment manufacturing
• FDI in retail sector
o 100% FDI is allowed in Cash and Carry Wholesale formats. Franchisee
arrangements are also permitted in retail trade
o 51% FDI is allowed in single brand retailing
SECTORS ATTRACTING HIGHEST FDI INFLOWS:

SERVICES SECTOR - 21 %
COMPUTER SOFTWARE & HARDWARE - 9 %
TELECOMMUNICATIONS - 8 %
HOUSING & REAL ESTATE - 8 %
Department of Industrial Policy and Promotion (DIPP) – Ministry of Commerce

• The Department is responsible for facilitating and increasing the FDI inflow in the
country. Foreign Investment Promotion Board (FIPB), now located in Department of

Economic Affairs, Ministry of Finance, provides a time bound, transparent and pro-active
FDI regime for approval of FDI investment proposals.
• The Department also plays a pro-active role in resolution of the problems faced by
foreign investors in implementation of their projects through Foreign Investment
Implementation Authority (FIIA), which interacts directly with the Ministry/State
Government concerned.
• Department of Industrial Policy and Promotion is also responsible for Intellectual
Property Rights relating to Patents, Designs, Trade Marks and Geographical Indication of
Goods and oversees the initiative relating to their promotion and protection. These include
the outlining of policy and its implementation through the Office of the Controller General
of Patents, Designs and Trade Marks
• It is the nodal Department in Government of India for coordinating and
implementing programs with United Nations Industrial Development Organization
(UNIDO) in India. UNIDO is a specialized agency of United Nations with a mandate to act
as the central coordinating body for industrial activities within the United Nations system.
Small Scale Units

 Small Scale Industrial Undertakings
 Ancillary Industrial Undertakings (ANCs)
 Tiny Enterprises
 Small Scale Service Enterprises (SSSEs)
 Artisans, Village and Cottage Industries
 Women Entrepreneur Enterprises
Problems of Public Sector units

• Pricing policy
• Under utilization of capacity
• Personnel and management
• Lack of efficiency
Policy towards public sector since 1991

• Dereservations
• Policy regarding sick units: BIFR
• Memorandum of Understanding
• Policy for Navratnas

• Disinvestment of shares
• Setting up Board for Restructuring of Public Sector Enterprises (BRPSE)
Policy for Navratnas

• Navaratna companies could invest up to Rs 1,000 crore without government
approval.
1. Bharat Electronics Limited
2. Bharat Heavy Electricals Limited
3. Bharat Petroleum Corporation Limited
4. Coal India Limited
5. GAIL (India) Limited
6. Hindustan Aeronautics Limited
7. Hindustan Petroleum Corporation Limited
8. Mahanagar Telephone Nigam Limited
Navratnas
1. National Aluminium Company Limited
2. NMDC Limited
3. Oil India Limited
4. Power Finance Corporation Limited
5. Power Grid Corporation of India Limited
6. Rural Electrification Corporation Limited
7. Shipping Corporation of India Limited
Maharatna status for mega PSUs gets nod : 25 Dec,2009

• The main objective of the Maharatna scheme is to empower mega CPSEs to
expand their operations and emerge as global giants
• The coveted status empowers the boards of these firms to take investment
decisions up to Rs 5,000 crore as against the present Rs 1,000 crore limit without
seeking government approval.
1. Indian Oil Corporation Limited
2. NTPC Limited
3. Oil & Natural Gas Corporation Limited
4. Steel Authority of India Limited
Mini ratna Category - I

• This designation applies to PSEs that have made profits continuously for the last
three years or earned a net profit of Rs. 30 crore or more in one of the three years. These
mini ratnas granted certain autonomy like incurring capital expenditure without
government approval up to Rs. 500 crore or equal to their net worth, whichever is lower.
• This category includes 47 PSEs
• NHPC Limited
• Airports Authority of India
• Goa Shipyard Limited
• Hindustan Copper Limited
Mini ratna Category - II

• Category II Miniratnas have autonomy to incurring the capital expenditure without
government approval up to Rs. 300 crore or up to 50% of their net worth whichever is
lower.
• This category includes 15 PSEs
• Bharat Pumps & Compressors Limited

• Central Mine Planning & Design Institute Limited
• HMT (International) Limited
Industrial Sickness
Sick industrial company’ means
• Accumulated losses in any financial year which are equal to 50 percent or more of
its average net worth during four years immediately preceding such financial year
• Or failed to repay its debts within a period of nine months on demand made in
writing for its repayment by a creditor of such company
SICA
• The SICA had been enacted in the public interest to deal with the problems of
industrial sickness with regard to the crucial sectors where public money is locked up.
• It contains special provisions for timely detection of sick and potentially sick
industrial companies, speedy determination and enforcement of preventive, remedial and
other measures with respect to such companies.
• Those measures are to be taken by a body of experts (BIFR)
• The measures are mainly
(a) Legal
(b) Financial restructuring
(c) Managerial
Meaning of Privatization
It is the process of involving the private sector in the ownership or operation of a state-
owned or public sector undertaking.
In a broader sense, it connotes private ownership (or even without change of ownership)
the induction of private control and management in the PSUs.
Privatization can take three forms

• Ownership Measures: The degree of privatization is judged by the extent of
ownership transferred from the public enterprise to the private sector. It can take the
following forms:
• Total Denationalization: It is a complete transfer of a public enterprise to the
private sector. As done in BALCO, which was acquired by Sterlite industries. Modern Foods
was acquired by Hindustan Lever . VSNL by Tata group
• Joint Venture: This implies partial introduction of private ownership. The range of
private ownership can vary; it can be as low as 25% and even as high as 75% or more.
As in the case of Maruti Suzuki where earlier the majority share were with Maruti but after
liberalization, Suzuki increased its stake and became the majority stake holder
• Liquidation: The assets are sold to someone who may use those assets for the
same purpose or for any other purpose
• Workers Co-operative: Here ownership of the enterprise is transferred to workers
who may form a co-operative to run the enterprise
• Operational Measures: The objective of operational measures is to improve
efficiency of the organization.
o Grant of autonomy to public enterprise in decision making
o Provision of incentives for workers and executives consistent with increase in
efficiency and productivity
o Freedom to acquire certain inputs from the market
o Development of proper criteria for investment planning

o Permission to public enterprises to raise resources from the capital market to
execute plans of diversification and expansion
Meaning of Disinvestment
Disinvestments connote reducing government stake in the public sector. It may or may
not lead to privatization i.e., transfer of control in private hands. As in case of Maruti
Suzuki and BALCO disinvestments led to transfer of control into private hands but in case
of Public sector banks and most of oil companies disinvestments resulted in issue of
shares through IPO route to general public and financial institutions, and therefore
majority stake and control remained with the government.
The Problems with Disinvestment

• Absence of Strategy
• Unclear Objectives
• Improper Timing
• Difference of Opinion
• Lack of Proper labor Strategy
• Wrong Objectives
• Opaque
• Lack of Marketing
Targeted and Actual Disinvestment from April 1991 onwards (Rs. Crores)
Year Targeted Receipts Actual receipts

1991-92 2,500 3038
1992-93 2,500 1913
1993-94 3,500 nil
1994 - 95 4000 4843
1995-96 7000 168
1996-97 5000 380
1997-98 4,800 910
1998-99 5000 5371
1999 -2000 10000 1860
Targeted and Actual Disinvestment from April 1991 onwards (Rs. Crores)
Year Targeted Receipts Actual receipts

2000-01 10,000 1,871
2001-02 12,000 5,658
2002-03 12,000 3,348
2003-04 14,500 15,547
2004-05 4,000 2,765
2005-06 No target 1,570
2006-07 No target Nil
2007-08 No target 2,367
Total 96,800 51,609
Low Disinvestment proceeds

Table shows that except for a few years, the realized proceeds have been much below the
targeted amount. In the year 2003-2004, the realization was Rs.15,547 crore which

exceeded the target of Rs. 14,500 crore. Again in 2004-05, Proceeds realized were only
RS.2,765 crore against a target of RS.4,000.

List of main Public Sector Units in which partial/ full disinvestment has already
been made
• Shipping Credit and Investment Corporation of India
• Container Corporation of India Ltd.
• Videsh Sanchar Nigam Ltd. (VSNL)
• Oil and Natural Gas Corporation (ONGC)
• Gas Authority of India Ltd. (GAIL)
• Steel Authority of India Ltd. (SAIL)
• Mahanagar Telephone Nigam Ltd. (MTNL)
• Indian Petrochemicals Corporation Ltd. (IPCL)
• Power Grid Corporation
• Shipping Corporation of India
• National Aluminum Company (NALCO)
• National Fertilizers' Ltd. (NFL)
• Indian Airlines
• Dredging Corporation
• LNG Petro Net
• Madras Refineries Ltd.
• Hindustan Zinc Ltd.
• Maruti Udyog Ltd.
• Modern Food Industries (India) Ltd.
Disinvestment : Road Ahead

• Steel Authority of India Ltd.(SAIL)
o PIB Press Release dated 8th April, 2010.
o Raising of additional Equity by the Steel authority of India Limited(SAIL) and
disinvestment of a portion of government equity in SAIL through Offer for Sale.
• Hindustan Copper Limited(HCL)

o PIB Press Release dated 15th June, 2010.
o Disinvestment of 10 Percent paid up equity capital of Hindustan Copper Limited out
of Government of India's shareholding
• Power Grid Corporation of India Limited (PGCIL)

o PIB Press Release dated 22nd July, 2010.
o Follow-on Public Offer for Power Grid Corporation of India Limited
• Coal India Limited (CIL)

o PIB Press Release dated 15th June, 2010.
o Disinvestment of 10 Percent paid up equity capital in COAL INDIA LIMITED (CIL)
out of Government of India shareholding of 100 %

Global Business Environment
Module -5
What is Balance of Payments???

• Records all financial transactions between a country and the rest of the world over
a year
• The accounts that record a nation’s international financial transactions are called its
balance of payments (BP)
• The BP is maintained on a double-entry bookkeeping system
BOP : Macroeconomic indicator

• The balance of payments statement is to inform government authorities of the
international position of the country to assist them with monetary-fiscal questions as well
as trade and payments policies.
Types of Account
• Current Account
o Trade Account
o Service Account
o Unilateral transfers
• Capital Account
• Official Reserve Account
o Foreign exchange
o Gold
o Special Drawing Rights
What is current account deficit?

A country’s current account consists of merchandise trade (exports and imports of goods)
and the invisible trade — income and expenditure from export and import of services,
profits earned on investments or interest payments and remittances by workers. A deficit
would occur when total imports are greater than exports. A deficit implies that the country
is a net debtor to the world.

Current account deficit
Where does it stand?
According to the , India’s current account deficit is likely to increase to 3% of the GDP
from 2.9% last fiscal. This is largely because of the rising and high trade deficit — excess
of merchandise exports over imports. It stood at 23-month high of $13 billion in August.
The full year could see a trade deficit of around $135 billion, which is about 10% of the
country’s GDP, the highest in recent years.
What are the reasons for high current account deficit?

The current account deficit is financed by a combination of portfolio investment inflows,
long-term capital inflows, remittances from non-residents and overseas borrowings.
What are the risks posed by a widening current account deficit?

An increasing current account can pose serious problems for an economy. Payments are
dependent on long-term capital inflows, which, in turn, depend on the growth prospects of
an economy. A pause in these flows can lead to payment problems and pressures on the
local currency. It can then encourage outflow of foreign capital.
Capital Account
• The capital account is the net change in foreign ownership of domestic assets
• Records transactions which involve residents of a country concerned changing their
assets and liabilities with resident of the foreign country
o Direct Investment: an act of purchasing an asset and acquiring a control over it
o Portfolio Investment: refers to acquisition of assets like shares or bonds of a
company in foreign country
Balance of Trade and Balance of Payments

• The Balance of Trade takes into account only the transactions arising out of the
exports and imports of the visible terms;
• It does not consider the exchange of invisible terms such as the services rendered
by shipping, insurance and banking; payment of interest, and dividend; expenditure by
tourists, etc.
• The balance of payments takes into account the exchange of both the visible and
invisible terms. Hence, the balance of payments presents a better picture of a country’s
economic and financial transactions with the rest of the world than the balance of trade
Balance of payments
• If foreign ownership of domestic assets has increased more quickly than domestic
ownership of foreign assets in a given year, then the domestic country has a financial
account surplus
• The accounting entries in the financial account record the purchase and sale
of domestic and foreign assets.
• These assets are divided into categories such as Foreign Direct Investment
(FDI), Portfolio Investment (which includes trade in stocks and bonds), and Other
Investment (which includes transactions in currency and bank deposits).
Current Account + Capital Account = Change in Official Reserve Account

Factors that can affect the balance of trade
• Prices of goods manufactured at home
• Exchange rates
• Barriers
• Business cycle at home or abroad.
Definition: Globalization-IMF
• “the growing economic interdependence of countries worldwide through increasing
volume and variety of cross border transactions in goods and services, freer international
capital flows and more rapid and widespread diffusion of technology”.
Meaning of Globalization
Refers to a process of deepening economic integration, increasing economic and growing
economic interdependence between countries in the world economy.
Characteristics of Globalization
• Rapid growth in international financial transactions
• Fast growth in trade, especially among multinational corporations (MNCs)
• Surge in foreign direct investment, largely contributed by MNCs
• Emergence of global markets
• and Diffusion of technologies and ideas rapid extension of a globalised
transportation and communication system
Why Companies go global?

• Survival
• Growth of Overseas Market (Sales)
• Diversification
• Resources
• To Protect Market Share
• Tariff and Non-Tariff Barrier
• Technology Expertise

Definition: MNC
• the essential nature of the multinational enterprises lies in the fact that its
managerial headquarters are located in one country (Refer to as home country) while the
enterprise carries out operations in the number of other countries as well (host countries)
Merits of MNCs
• Help increase the investment level and thereby income and employment in the host
country
• Become vehicles for the transfer technology especially to developing countries
• Enable the host countries to increase their exports and decrease their import
requirements
• Equalize the cost of factors of production around the world
• Stimulate domestic enterprise
• Increase competition and break domestic monopolies
• Help to improve the standard of living in their host countries
• Provide impetus in diversification
• contribute towards professionalisation of management in the host countries
• contribute towards the national exchequer by way of duties and taxes
• play a vital role in developing ancillaries in host countries.
Demerits of MNCs
• Main objectives are profit maximization and not the development needs of poor
countries
• Through their power and flexibility MNCs inflict heavy damage in the host countries
through suppression of domestic entrepreneurship, extension of oligopolistic practices
passing on unsuitable technology and unsuitable products, worsening income distribution
and so on
• Interfere directly and indirectly in the internal political and other affairs of the
country
• The tremendous power of the global corporations may pose a threat to the
sovereignty of the nations in which; they do business
• They cause harm; by faulty technology transfer to capital intensive in nature
affecting employment in a labour supply economy
• They cause fast depletion of some of the non renewable natural resources in
the host country
• MNCs can have an unfavourable effect on the balance of payments
Foreign market entry strategies

• Exporting
• Contract manufacturing
• Licensing / franchising
• Management Contracting
• Fully owned manufacturing facilities
• Joint venturing
• Mergers and acquisitions
• Strategic alliance

Entering Foreign Markets
• Non equity modes of market entry
o Exporting
 Indirect exporting
 Direct exporting
o Contract manufacturing
o Turnkey project
o Licensing
o Franchising
o Management Contracting
• Equity modes of market entry

o Wholly owned subsidiary
o Joint venture
o Strategic alliance
o Merger $ Acquisition
Turnkey Project
• Exporter of a turnkey project may be
o Contractor that specializes in designing and constructing plants in a particular
industry
o Company that wishes to earn money from its Management expertise
o Technology
• After trial run, facility is turned over to purchaser
Licensing
o A contractual arrangement: one firm sells access to its patents, trade secrets, or
technology to another
o Licensee pays fixed sum and sales royalties (2%-5%)
Franchising
• Form of licensing in which one firm contracts with another to operate a certain type
of business under an established name according to specific rules
Contracts
• Management Contract
o Arrangement by which one firm provides management in all or specific areas to
another firm
• Contract Manufacturing
o Arrangement in which one firm enter into contract with another firm to produce
products according its specifications but assumes responsibility for marketing
Equity-Based Modes of Entry

• Wholly Owned Subsidiary
• Joint Venture
• Strategic Alliance
• Merger and Acquisition

Wholly Owned Subsidiary
 build a new plant (green field investment)
 acquire a going concern
Joint Venture…
• Cooperative effort among two or more organizations that share common interest in
business enterprise
 corporate entity formed by international company and local owners
 corporate entity formed by two international companies for the purpose of doing
business in a third market
 a corporate entity formed by a government
Strategic Alliance
The alliance is a cooperation or collaboration which aims for a synergy where each partner
hopes to receive strategic benefits from the alliance.
Challenges for MNCs in India

• Political Climate
• Leveraging India’s Resources
• Affordability
• Customized Marketing Communication
• Penetrating Rural Markets
• Product differentiation
International Investments
• As said by Peter Drucker, “increasingly world investments rather than world trade
will be driving the international economy. Exchange rates, taxes and legal rules will
become more important than wage rates and tariffs.
Types of Foreign Investment
Foreign Investment
Foreign
Portfolio
Direct
Investment
Investment
Wholly owned Merger and Investment by

Joint Venture
Subsidiary Acquisition FIIs
Investment in
GDRs,
ADRs & FCCBs

Foreign Direct Investment (FDI)
• Foreign direct investment is investment of foreign assets into domestic structures,
equipment, and organizations.
• FDI refers to investment in a foreign country where the investor retains control over
the investment
• FDI are governed by long term considerations because these investments cannot be
easily liquidated. Hence factors like long term political stability, government policy,
industrial and economic conditions, etc.
Portfolio Investment (FII)

• “Foreign Institutional Investor” means an institution established or
incorporated outside India which proposes to make investment in India in
securities
• An act of investing capital in buying equities, bonds and other securities abroad it is
referred as portfolio investment
• It means that in portfolio investments capital is used to earn return but there is no
control over the use of capital
American Depository Receipt (ADR)

• A DEPOSITORY RECEIPT (DR) is a type of transferable financial security that is
traded on a local stock exchange but represents a security, usually in the form of equity,
that is issued by a foreign publicly listed company. The DR, which is a physical certificate,
allows investors to hold shares in equity of other countries.
• American Depository Receipts are financial instruments that allow investors in the
U.S to purchase shares of non-U.S companies.
• An ADR is a financial product that is issued by a domestic depository bank and is
traded on the domestic exchanges such as the NYSE
• Each ADR is issued by a U.S. depositary bank and represents one or more shares of
a foreign stock. The price of an ADR is often close to the price of the foreign stock in its
home market. The largest depositary bank is The Bank of New York.
How Does the DR Work?

• Say a gas company in Russia has fulfilled the requirements for DR listing and now
wants to list its publicly traded shares on the NYSE in the form of an ADR. A US broker
through local brokerage house in Russia, would purchase the domestic shares from the
Russian market and then have them delivered to the local (Russian) custodian bank of the
depository bank. The depository bank is the American institution that issues the ADRs in
America.
• In this example, the depository bank is the Bank of New York. Once the Bank of
New York's local custodian bank in Russia receives the shares, this custodian bank verifies
the delivery of the shares by informing the Bank of New York that the shares can now be
issued in the United States. The Bank of New York then delivers the ADRs to the broker
who initially purchased them.
Based on a determined ADR ratio, each ADR may be issued as representing one or more
of the Russian local shares, and the price of each ADR would be issued in U.S. dollars
converted from the equivalent Russian price of the shares being held by the depository
bank. The ADRs now represent the local Russian shares held by the depository, and can
now be freely traded equity on the NYSE.

After the process whereby the new ADR of the Russian gas company is issued, the ADR
can be traded freely among investors and transferred from the buyer to the seller on the
NYSE, through a procedure known as intra-market trading. All ADR transactions of the
Russian gas company will now take place in U.S. dollars and are settled like any other
U.S. transaction on the NYSE
GDRs/ADRs
• These are Instruments issued by Indian companies in foreign markets for mobilizing
foreign capital
• Indian companies are allowed to raise equity capital in the international market
through the issue of GDR/ADRs. These are not subject to any ceilings on investment. An
applicant company seeking Government's approval in this regard should have a consistent
track record for good performance (financial or otherwise) for a minimum period of 3
years
Factors influencing International investment

• Rate of interest
• Speculation
• Cost of Production
• Economic conditions
• Government Policies
• Political Factors
WTO and India

• FACT FILE
Location: Geneva, Switzerland
Established: 1 January 1995
Created by: Uruguay Round negotiations (1986-94)
Membership: 151 countries on 27 July 2007
Secretariat staff: 625
Functions:
• Administering WTO trade agreements
• Forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for developing countries
• Cooperation with other international organizations

Main Agreements of WTO under Uruguay Round
Agreement on Agriculture
o With an objective of introducing increased market orientation in agricultural trade.
o It provides for commitment in area of market access, domestic support and export
competition
o Member countries have to transform their quotas into equivalent tariff measures
and reduce them on an average by 36% in case of developed economies and 24 % by
developing economies
Agreement on trade in Textiles and Clothing (Multi Fibre Agreement)

o Provides for phasing out import quotas on textiles and manufacturing under MFA
since 1974 with a transition period of 10 years ie Jan 2005. As a result import quotas on
textiles and clothing have now been abolished
TRIPS (Trade Related Intellectual Property Rights)

o sets down minimum standards for most forms of intellectual property (IP)
regulation within all member countries of the World Trade Organization.
o Under TRIPS, all countries have to provide for protection of product patents from
January 1, 1995. But developing countries like India, which did not have a regime of
product patents, had a transition period of ten years-until January 1, 2005, to affect the
switch over.
o Product patents will be available for 20 years. In case of copyright and related
rights protection will be available for 50 years
o The transition period for least developed countries was extended to 2016, and could
be extended beyond that.
What is IPR?
• Intellectual Property Rights (IPRs) refers to the legal ownership of by a person or
business of an invention/ discovery attached to a particular product/ process which
protects the owner against unauthorized copying or limitation.
• Intellectual property rights are the rights given to persons over the creations of
their minds. They usually give the creator an exclusive right over the use of his/her
creation for a certain period of time.
TRIPS deals with the following IPRs

o Copyright and related rights
o Patents
o Trademarks
o Industrial designs
o Geographical origin
o Control of anti-competitive practices in contractual licenses
• TRIPS also specifies enforcement procedures, remedies, and dispute resolution
procedures

Meaning of Copyright
• A copyright is a legal device that provides the owner the right to control how a
creative work is used. A copyright is comprised of a number of exclusive rights, including
the right to make copies, authorize others to make copies, make derivative works, sell
and market the work and perform the work. Any one of these rights can be sold
separately through transfers of copyright ownership.
• A copyright is protection for a "creative work" - a painting, book, photo, piece of
music etc. It prohibits anyone but the holder from publishing or distributing it without his
consent.
Meaning of Trademark & Patent

• A trademark is a word, phrase, logo, symbol, color, sound or smell used by a
business to identify a product and distinguish it from those of its competitors.
• A trademark is a symbol used as a sign or logo under which a company does
business. When registered, no other business can use it. (McDonald's "Golden Arches", for
example, are a registered trademark)
• Company takes patents of it means that it own the formula of that product.
• It will be available for other to manufacture it but by paying some money. A patent
protects your rights in an invention
GATS (General Agreement in Trade & Service)

• Aims to encourage liberalization of trade in services. WTO Secretariat has divided
all services into the following 12 sectors
o Business services (including professional and Computer services)
Communication services
o Construction and Engineering services
o Distribution services (e.g. Commission agents, wholesale & retail trade and
franchising)
o Education services
o Environment services
o Finance (including insurance and banking) services
o Health services
o Tourism and Travel services
o Recreation, Cultural and Sporting Service
o Transportation Services,
o And Other services not elsewhere classified
• These 12 areas are further divided into 161 sub-sectors
Under GATS, four modes of supply exist:

o Mode 1: Cross-border supply, in which the service crosses the border, such as
distance learning
o Mode 2: Consumption abroad, in which the consumer moves to the country of the
supplier, as in study abroad
o Mode 3: Commercial presence, in which the service provider establishes facilities in
another country, as in branch campuses or arrangements with local institutions, wholly
owned subsidiaries, BPOs
o Mode 4: Presence of natural persons, in which people temporarily travel to another
country to provide service, as when professors or researchers work abroad

• TRIMS [Trade Related Investment Measures]
o It calls for national treatment of foreign investments and removal of quantitative
restrictions
o It identifies 4 investment measures which are inconsistent with the GATT provisions
on according national treatment and on general elimination of qualitative restrictions.
 These are measures which impose on the foreign investors the obligation to use
local inputs,
 to produce for exports as a condition to obtain imported goods as inputs,
 to balance foreign exchange outgo on importing inputs with foreign exchange
earnings through export, and
 not to export more than a specified proportion of the local production (Domestic
sales requirements)
Impact of WTO on India

• Expansion in Trade
• World Bank, OECD (Organisation for Economic Cooperation and Development) and
the GATT Secretariat have estimated that the income effects of the implementation of the
Uruguay Round package will add between 213 and 274 billion U.S. dollars annually to
world income.
• The GATT Secretarial further projects that the largest increases will be in the areas
of clothing (60 per cent), agriculture, forestry and fishery products (20 per cent) and
processed food and beverages (19 per cent).
• According to the Government of India, since our country's existing and potential
export competitiveness lies in these product groups, it is logical to believe that India will
obtain large gains in these sectors.
Phasing out of MFA

o The WTO agreement on textiles and clothing states that the Multi-Fibre Agreement
(MFA) will eventually be eliminated. MFA at present groups the major importer countries
-- the United States, Austria, Canada, the European Community, Finland and Norway --
who apply restrictions by way of quota.
o Exporting countries like India are a part to the MFA. The phasing out of MFA will
boost textile exports from India. It will also increase investment in textiles and joint
ventures. But the risk is that as India opens up its market from next month, import of
textiles and clothing will considerably increase from countries like China, the Unites
States, Taiwan and Indonesia.
o This will force many textile manufacturers to modernise their mills and improve
quality.
Improved prospects for agricultural exports

o Developed nations have committed to the WTO that they would reduce subsidies
and tariff. So then better overseas markets will be available for Indian agricultural
products.
o Another advantage for India is that the subsidy reduction requirement under WTO
is not applicable to our country. As per the WTO rules, countries having less than $1,000
per capita income annually do not fall under the subsidy reduction requirement.

Threat to food security system
o TRIPS is a clearly anti-developing country agreement contend the critics. Its
provisions seriously threaten self reliance in agriculture and the livelihoods of farmers, by
seeking to establish a monopoly
o A nation that does not produce its own seed and its own food can not be a secure
nation. The agriculture remains a crucial as well as a controversial subject in WTO
negotiations.
The services sector

o areas like banking, insurance, investment banking, health, and many other
professional services that are opened up will be bound by the WTO commitments.
o India will have to open up its services sector to other WTO member countries. The
result: many overseas service providers will enter into the services sectors in the country,
thereby reducing the chances of domestic enterprises.
o But experts believe India need not be frightened of the WTO rules on services
because the country at present has a distinct competitive advantage in many areas that
include health, engineering construction, computer software and other professional
services.
Information technology
o Under the Information Technology Agreement singed under the WTO, Indian
hardware and software companies can become major players in the value-added arena.
o Availability of high-skilled of IT personnel and low cost of labour and operation will
allow India to compete in the international market.
International Monetary Fund Objectives

o To promote international monetary cooperation through a permanent institution
which provides the machinery for consultation and collaboration on international monetary
problems.
o To promote exchange stability, to maintain orderly exchange arrangements among
members, and to avoid competitive exchange depreciation.
o To give confidence to members by making the Fund's resources available to them
under adequate safeguards, thus providing them with opportunity to correct
maladjustments in their balance of payments without resorting to measures destructive of
national or international prosperity.
Working of IMF
• The rights of the member countries to draw on the Fund, their contributions and
voting power has been determined according to their quotas.
• Each member country's quota has been negotiated with reference to its national
income, gold and foreign exchange reserves, and international trade. This explains why
quotas of the members are so Different.
• Since the voting power was linked with the contributions or 'quotas' of the
members, the IMF has come under clear domination of the rich Western countries.

Special Drawing Rights
• The SDR is an international reserve asset, created by the IMF in 1969 to
supplement the existing official reserves of member countries.
• SDRs are allocated to member countries in proportion to their IMF quotas.
• Various economic factors are considered in determining changes in quotas,
including GDP, current account transactions, and official reserves.
• The largest member of the IMF is the United States, with a quota of
SDR 37.1 billion
• The SDR value is based on a basket of key international currencies. consisting of
the euro, Japanese yen, pound sterling, and U.S. dollar.
Economic Integration
Meaning of Economic Integration
• Economic integration is the creation of most desirable structure of international
economy removing artificial barriers to the optimum operation and introducing
deliberately all desirable elements of coordination or unification.
• The level of integration defines the nature and degree of economic links among
countries
Reasons for Economic Integration

• Widening of market
• Economies of scale
• High degree of specialization
• Optimum reallocation of resources
• Increase in the volume of trade
• Mutual benefits
• Increase in economic development
• Overall increase in welfare
Degrees of Economic Integration -

Types of Regional Trade Agreements-RTAs
• Preferential Trade Agreement (PTA)
• Free Trade Area (FTA)
• Customs Union
• Common Market
• Economic Union
• Monetary Union
Preferential Trade Agreement (PTA)

• In a PTA countries agree to reduce tariffs to a set of partner countries in
some product categories.
• Higher tariffs, perhaps non-discriminatory tariffs, would remain in all remaining
product categories.
• The country is free to charge a higher tariff on imports from non-partner countries.
• A preferential trade agreement is perhaps the weakest form of economic
integration.
• Example: SAPTA, India and Mauritius, Nepal, Chile, Afghanistan, MERCOSUR

Free Trade Area (FTA)
• When all member countries agree to eliminate tariffs between themselves
on some items, but each country maintains its own external tariff on imports
from the rest of the world.
• Examples :
o NAFTA (North American FTA)
o EFTA ( European Free Trade)
o ASEAN (association of south east nations)- FTA
o GAFTA (Greater Arab FTA)
o SAFTA (South Asian FTA)
Customs Union
• A customs union occurs when a group of countries agree to eliminate
tariffs between themselves and set a common external tariff on imports from the
rest of the world.
• A custom union is a free trade plus a common policy of tariffs
• The European Union represents such an arrangement
• With a customs union, all member countries must be able to agree on tariff rates
across many different import industries.
• Example: SACU (South African Customs Union)
Common Market
• A common market establishes free trade in goods and services, sets
common external tariffs among members (customs union) and also allows for
the free mobility of capital and labor across countries.
• This is a step higher than customs union
• Examples:
• CARICOM (Caribbean Community)
• CACM (Central American Common Market)
• MERCUSOR (Southern Common Market)
Economic Union
• An economic union typically will maintain free trade in goods and services,
set common external tariffs among members, allow the free mobility of capital
and labor, and will also relegate some fiscal spending responsibilities to a supra-
national agency
• It is common market plus harmonization of national economic policies ie monetary
and fiscal policies
• The European Union is an example of a type of fiscal coordination indicative of an
economic union.
Monetary Union
• Monetary union establishes a common currency among a group of
countries.
• This involves the formation of a central monetary authority which will determine
monetary policy for the entire group.
• The Maastricht treaty signed by EU members in 1991 proposed the implementation
of a single European currency (the Euro) by 1999.

Main Regional Trading Blocs
• E.U.- European Union
• NAFTA – North American Free Trade Agreement
• ASEAN- Association of South East Asian Nations
• SAARC- South Asian Association for Regional Cooperation
Major Regional Trading Blocs

• NAFTA (North American Free Trade Agreement) : Canada, Mexico, US
• EU ( European Union) : Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, Portugal, Spain, Sweden, United Kingdom
• EFTA ( European Free Trade) : Iceland, Liechtenstein, Norway, Sweden
• CARICOM (Caribbean Community) : Anguilla, Antigua, Bahamas, Barbados, Belize,
Dominica, Grenada, Guyana, Jamaica, Montserrat Jamaica, St. Kitts-Nevis, St. Vincent
and the Grenadines, Trinidad
• CACM (Central American Common Market) : Costa Rica, El Salvador Guatemala,
Honduras, Nicaragua
• MERCOSUR (Southern Common Market) : Argentina, Brazil, Paraguay, Uruguay,
Bolivia, Chili, Peru, Ecuador, Colombia
• SACU (South African Customs Union) : Republic of South Africa, Botswana,
Lesotho and Swaziland & Namibia

• SAARC (South Asian Association for Regional Cooperation) : Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan, Sri Lanka
• ASEAN : Indonesia, Malaysia, Philippines, Singapore and Thailand Brunei
Darussalam , Cambodia Myanmar, Vietnam, Laos
Reasons Why Trade Blocs Get Formed

• Geographical proximity and often the sharing of common borders as in the
European Union and NAFTA
• Common economic and political interests as in the European Union and the ASEAN
• Similar ethnic and cultural backgrounds as in the Free Trade of the Americas
Reasons Why Trade Blocs Get Formed

• Similar levels of economic development as in the European Union
• Similar views on the mutual benefits of free trade as in NAFTA
Types of Trade Blocs

Level of No Common No Harmonized Unified Eco.
Integration Tariffs Tariffs Restrictions /unified & Political
and and on Factor Eco. Policies Policies &
Quotas Quotas Movements & Institutions
Institutions
Free Trade Yes No No No No
Area
Customs Yes Yes No No No
Union
Common Yes Yes Yes No No
Market
Economic Yes Yes Yes Yes No
Union
Political Yes Yes Yes Yes Yes
Union
RTAs
• Regional Trade Agreements (RTAs) have become in recent years a very prominent
feature of the Multilateral Trading System (MTS).
• The surge in RTAs has continued unabated since the early 1990s. Some 421 RTAs
have been notified to the GATT/WTO up to December 2008.
• Of these RTAs, free trade agreements (FTAs) and Preferential Trade agreements
account for over 90%, while customs unions account for less than 10 %.

G-Summit
• Group of five(G5) : USA, Great Britain, France, Germany, Japan
• Group of seven(G7) : G5 + Canada and Italy
• Group of ten(G10) : G7 + Sweden, Netherlands and Belgium
• G20
• S&ED constitutes an important part of the G2 relationship between the United

States and China
Transfer of Technology
• IP & Transfer of Technology
• In countries with weak patents, the quality of technologies transferred would be
obsolete and inferior
• Strong IP protection could facilitate technology transfer not only in qualitative
terms, but also qualitatively
• The incentive for foreign firms to license their best-practice technologies lay on the
degree of IP protection
• Empirical studies demonstrate that the strength of intellectual property rights and
the ability to enforce contracts have important effect on Multi -National Enterprises
decisions on where to invest and the level (sophistication) of the technology to be
transferred

Corporate Governance
Module-6
What is corporate Governance???

• The process and responsibility of the Board of Directors in ensuring the
management of a corporation conducts business in such a way as to meet the
expectations of its various stakeholders
• Besides financial returns for shareholders this also includes impact on employees
environment and community at large.
Definition-OECD
• Corporate governance is the system by which business corporations are directed
and controlled.
• The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation such as the board,
managers, shareholders and other stakeholders.
• Spells out the rules and procedures for making decisions on corporate affairs.
Definition
• The Kumar Mangalam Birla Committee constituted by SEBI has observed that:
• “Strong corporate governance is indispensable to resilient and vibrant capital
markets and is an important instrument of investor protection. It is the blood that fills the
veins of transparent corporate disclosure and high quality accounting practices. It is the
muscle that moves a viable and accessible financial reporting structure.”
Why is Corporate Governance important???

• As we are increasingly moving towards open and market driven economic systems,
a number of companies catering to international markets
• These companies are required to comply with enhanced disclosure and stringent
listing requirements.
• Institutional investors, both foreign and domestic are becoming important players
in the stock market.
• They are increasingly demanding more information and transparency in operations.
• Opening of Economy
• Rising importance of institutional investors
• Growth of private companies
• Insider Trading
• Growth and magnitude of corporate groups
• Rise in hostile takeovers
Objectives of Corporate Governance

• A properly structured Board capable of taking independent and objective decisions
is in place at the helm of affairs;
• The board is balanced as regards the representation of adequate number of Non-
executive and independent directors who will take care of the interests and well being of
all the stakeholders;
• The Board adopts transparent procedures and practices and arrives at decisions on
the strength of adequate information;
• Objectives of Corporate Governance
• The Board has an effective machinery to sub serve the concerns of stakeholders;

• The Board keeps the shareholders informed of relevant developments impacting the
company;
• The Board effectively and regularly monitors the functioning of the management
team; and
• The Board remains in effective control of the affairs of the company at all times.
• The overall endeavor of the Board should be to take the organization forward, to
maximize long term value and share holder’s wealth.
Mckinsey Study
• Almost 75% of investors believe that board practices are as important as financial
performance while taking investment decisions in the longer term
• Most institutional investors give high weight age to good corporate governance as
they have a long-term interest perspective.
Board Structures and Processes for Good Governance

STRUCTURES PROCESSES
Limit the size of Board Develop guidelines for committees
Separate the role of CEO and Rotate directors through various
Chairman committees
Avoid inside directors on the Ensure that outside directors meet alone
committees
Ensure a majority of outside directors Ensure efficient information flow
Limit the number of other boards on Insist on regular attendance at board
which the directors can serve meetings by all directors
Impose a retirement age Establish an orientation program for new
directors
Key Principles of Good Corporate Governance
Division of
responsibility
External Supply of
Audit Information
Appointment
Internal Key
To
Audit Principles
board
Director’s
Internal
Remuneratio
Control
n
Financial
Reporting

Benefits of Good Corporate Governance System
• Increased Employee motivation
• Better information System
• Effective ethical policies
• Stronger organisational Structure
• Conducive environment for achieving company objectives
Board Styles
International Developments
• Organization for Economic Cooperation and Development (OECD) has set certain
principles of corporate governance
o The Right of shareholders
o Equitable treatment of shareholders
o Role of stakeholders
o Disclosure and transparency
o The responsibilities of Board
Developments in UK
• Cadbury Committee Report- 1992 focused on accountability aspects
• Audit Committee to comprise of minimum three members
• Listed companies to publish full financial statements annually and half-yearly
reports interim.
• Code of Best Practices to incorporate
o Board to present assessment of company’s position
o Directors to report on effectiveness of internal control systems

Development in USA
• CG came into forefront through shareholder activism
• California Public Employees Retirement Systems (CalPERS) is in the forefront of
shareholder activisim and internationally credited as a torch bearer of CG
• CalPERS have brought out the good governance principles:
o Accountability
o Transparency
o Equity
o Voting Method improvements
o Long term vision
CACG Guidelines- Principles for Corporate Governance in the Common wealth (1999)
• Ensure that the corporation complies with all relevant laws, regulations and codes
of best business practice
• Ensure that the corporation communicates with shareholders and other
stakeholders effectively
• Serves the legitimate interests of the shareholders and account to them fully
• Regularly review the procedures and processes to ensure the effectiveness of its
internal systems and control
• Ensure annually that the corporation will continue as a going concern in its next
fiscal year
Developments in India
• Voluntary code of Corporate Governance for listed companies - CII - 1998
• Kumar Mangalam Birla committee by SEBI - 2000
• Companies (Amendment Act), 2000 & Clause 49 of listing agreement -2000
• Naresh Chandra Committee by SEBI - 2002
• Companies (Amendment) Bill of 2003
• N.R.Narayana Murthy Committee -2003
The Naresh Chandra Committee (appointed by Department of Company Affairs)

• It has suggested that the partners and at least 50% of the engagement team
responsible for either the audit of a listed company should be rotated every five years
• The committee also recommends that no partner or member of the engagement
team should be employed by or become a director of a client company with whom he
worked preceding two years.
• The committee has considered the need for reviewing the manner in which the
three professional bodies- the Institute of Chartered Accountants. Cost and Works’
Accountants, the Company Secretaries regulate their membership. It has recommended
the setting up of independent quality review boards (QRBs), one for each of the three
organizations.
• It has also recommended the setting up of Corporate Serious Fraud Office for
punishing erring professionals.

Corporate Governance and Corporate Excellence
• The essence of good corporate governance is transparency, accountability, investor
protection, compliance with statutory laws and regulations and value-creation for
shareholders and other stakeholders.
• A company’s most valuable asset is goodwill it enjoys with its stakeholders and
institutional investors are willing to pay 20% more on average for companies with a good
governance record.
Corporate Excellence
• Profitability
• Satisfied stakeholders such as shareholders, customers, employees
• Revenue and profit growth
• Growth in market share
• Growth in market value (Market capitalization)
Corporate Excellence and Corporate Governance

For Corporate governance to lead to corporate excellence it must be structured according
to Values enshrined in Vedas:
• Public good
• Dhanam
• Swatantrata
• Vishwastata
• Dharmyudh
• Vividhta

Environment+ +Word+File

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Environment+ +Word+File

Diunggah oleh

Hak Cipta:

Format Tersedia

Introduction to Business Environment

Business Environment – Pooja Dave Page 1

Contemporary Business goals

Business Environment – Pooja Dave Page 2

Porter’s five generic descriptions of industries:

Large Indian companies – Fortune 500

Business Environment – Pooja Dave Page 3

What do you mean by Business Environment???

Characteristics of Business Environment:

Why Study Business Environment

Business Environment – Pooja Dave Page 4

Micro Environment Factors

Micro Environment of a typical car manufacturer

Business Environment – Pooja Dave Page 5

Non Economic Environment

Non- Economic Environment

Non- Economic Environment

Business Environment – Pooja Dave Page 6

WTO and its relevance for Indian companies

The response of Indian government to WTO constitutes the following actions

WTO and its relevance for Indian companies

Business Environment – Pooja Dave Page 7

Environmental Analysis & Strategic Management

Tools for Analyzing the Environment

Business Environment – Pooja Dave Page 8

Competitive Environment- Michael Porter’s Five Forces Model

Competitive Environment- Michael Porter’s Five Forces Model

The intensity of competitive rivalry

Business Environment – Pooja Dave Page 9

Bargaining power of customers:

Bargaining power of suppliers

Sixth Force in Michael Porter Model

Michael Porter’s International Competitiveness Model- PORTER DIAMOND

Business Environment – Pooja Dave Page 10

Types of Economic System

Business Environment – Pooja Dave Page 11

2nd Plan (1956-61)

8th Plan (1992-97)-Post Economic Reforms

9th Plan (1997-2002)

10th Plan (2002-2007)

Eleventh Five-Year Plan- (2007-12)

Business Environment – Pooja Dave Page 12

Nature of Economic indicators

Business Environment – Pooja Dave Page 13

General Economic Indicators

What is National Income??

Measures of Aggregate Income

Gross Domestic Product

Business Environment – Pooja Dave Page 14

GDP@ market price = GDP@ factor cost – Subsidies + Indirect Taxes

GDP at factor Cost

GDP@ factor cost = GDP@ market price + Subsidies - Indirect Taxes

IMF's GDP forecast same as Govt's: Arvind Virmani

Business Environment – Pooja Dave Page 15

Gross National Product (GNP)

Net National Product

Approaches used to calculate GDP

Business Environment – Pooja Dave Page 16

Major Limitations of GDP

Factors affecting Money supply

Business Environment – Pooja Dave Page 17

Money supply & Inflation – Monetary inflation

• Hyperinflation: Hyperinflation is also known as runaway inflation or galloping