Economic and Business Affairs

Agenda:

Indian Financial SystemThe state of Indian EconomyGlobal Economic Meltdown its effects on India

Indian Financial System:

Monetary systemBanking systemTax systemShare Market Fundamentals

Monetary SystemReserve Bank of India (RBI) Central Bank of IndiaRBI functions include Control and regulation of money and creditIssuer of CurrencyControl of foreign exchange operationsBanker to the governmentBankers bankLender of the last resort

Monetary SystemCRR (Cash Reserve Ratio) 4.25%SLR (Statutory Liquidity Ratio) 23%Bank Rate Rate at which banks borrow from RBI (currently at 9%)Open market operations Involves sale and purchase of government securities by the RBI (vis--vis banking system)

Monetary SystemREPO and Reverse REPO REPO transactions imply liquidity adjustment facility of the RBI whereby it injects and absorbs liquidity vis--vis the banking system to even out short term fluctuations in the money market.Absorption of liquidity by the RBI is termed as reverse repo and injection as repo.Reverse repo rate at present is 7% and the repo rate is 8%

Monetary System - FAQsWhen is monetary policy announced?Twice a yearA slack season policy (April-September)A busy season policy (October March)Impact of CRR cut on interest rates?When CRR is reduced, more cash is available with the banksAs more money chases the same number of borrowers, interest rates come down

Monetary System - FAQsDifference between monetary policy and fiscal policy.RBI is responsible for formulating and implementing monetary policyFiscal policy is a broader tool with the governmentMonetary policy brings about a change in the economy by changing money supply and interest rate.Fiscal policy can be used to overcome recession and control inflationFiscal policy decides the change in government revenue and expenditure to influence the level of national output and prices

Banking SystemParticipants of the Indian financial systems Commercial BanksCo-operative BanksFinancial Institutions (FI)Investment InstitutionsSpecialised financial institutionsState-level development banksNon-banking financial companies (NBFC)Market intermediaries stock brokers and moneylenders

Commercial BanksMain functions Acceptance of depositsGiving loansOverdraftsDiscounting bills of exchangeInvestment of funds

RBI categorisation of commercial banksPublic sector banksPrivate sector banksForeign banks

Money marketMarket for borrowing and lending of short-term fundsCall money market inter-bank transactions on day-to-dayCall money rate High call money rate indicates scarcity of funds and tight money marketLow call rate means easy availability of funds

Tax systemDifferent heads of income for tax structure in IndiaSalaryHouse propertyProfit in business or professionCapital gainsOther sources

Tax system important factsLaws on central government income tax collection and recovery are governed by the Dept of Tax and Revenue under Min of Finance, IndiaSystem of taxation is completely based on the personal assessment of incomePenalties and interest are charged on the non-payment of taxes and failure to file returnsFiling date is not extended and any late filing is charged with interestAll large sized and medium sized taxpayers are subjected to investigative assessmentDesignated due dates are ascertained for the purpose of filing of returnsThe tax is deducted at source by the employers on behalf of the employees and from all kinds of defrayments to non residents

Tax system important factsLaws on central government income tax collection and recovery are governed by the Dept of Tax and Revenue under Min of Finance, IndiaSystem of taxation is completely based on the personal assessment of incomePenalties and interest are charged on the non-payment of taxes and failure to file returnsFiling date is not extended and any late filing is charged with interestAll large sized and medium sized taxpayers are subjected to investigative assessmentDesignated due dates are ascertained for the purpose of filing of returnsThe tax is deducted at source by the employers on behalf of the employees and from all kinds of defrayments to non residents

Tax incentives personalExemption on income spent on higher educational purposeExemption on income spent for the treatment of a diseased person who is dependentExemption on income spent as contribution to provident fund, insurance policies, etcExemption on the income spent on buying NSC and investments in other government based savings schemesExemption on the income of a disabled personExemption on the income spent on the payment of interest on home loan

Tax incentives - corporateGovt of India provides incentives for :Corporate profitAccelerated depreciation allowanceDeductibility of certain expenses subject to some conditionsTax incentives are available for new investments :InfrastructurePower distributionCertain telecom servicesRural hospitalsFood processingHandling of food grainsCompanies carrying on R&D, etc

GSTGoods and Services Tax (GST)GST will avoid multiple layers of taxation that currently exists in India.GST will include CENVAT, VAT, Service tax, Turnover tax, Octroi, Central sales tax,entry tax,Stamp duty, Telecom Licence fees,Tax on consumption or sale of electricity etc.Aim is to bring uniformity in the indirect tax structureKelkar Task Force has recommended a standard rate of 20%Out of 20%, 12% will go to the Central government and 8% will go to the state government.Recommendation also included higher rate on non-merit goods and lower rate on merit goods

Features of GST

GST is a comprehensive tax levy on manufacture, Sale and consumption of goods and services at national level.Through a tax credit mechanism, this tax is collected on value added goods and services at each stage of sale or purchase in the supply chain.Under GST, the taxation burden will be divided equitably between manufacturing and services.It is expected to help built a transparent and corruption free tax administration.GST will be levied only at destination point and not at various points(from manufacturing to retail outlets).Currently, A manufacturer needs to pay tax when a finished product moves out from a factory, and it is again taxed when the product is sold at retail outlet.

Features of GST

It is estimated that India will gain $15 billion a year by implementing GST as it would promote export, raise employment and boost growth.Some goods Namely Crude petroleum, diesel, petrol, aviation turbine fuel, Natural gas and alcohol will not come within the perview of GST.The date of implementation of GST is set on August 2012.Overall, One of the biggest Tax reforms in India, GST is all set to integrate state economies and boost overall growth.Bihar Deputy CM Sushil Modi heads inter-state panel on GST.

Share Market - TermsStock Exchange Equity / ShareDebt instrumentBond Issued by central and state governments and public sector organizationsDebenture Issued by private corporate sectorDerivative Product whose value is derived from the value of one or more basic variables, called underlying, which can be equity, index, foreign exchange, commodity or any other asset.Index Shows how a specified portfolio of share prices is moving in order to give an indication of market trends, Snesex, Dow-Jones

Share Market More TermsDepository Like a bank wherein the deposits are securities (shares, etc) in electronic formDematerialization Process of conversion of physical share certificates to electronic form and crediting to the investors account with his Depository Participant (DP)Securities Market Regulator Dept of Economic Affairs, Dept of Company Affairs, RBI and SEBI (Securities and Exchange Board of India)

Securities - TermsFace Value Nominal or stated amount assigned to a security by the issuerFor shares, it is the original cost of the stockFor bonds, it is the amount paid to the holder at maturityAlso known as par valueWhen a security is sold above its face value, it is said to be issued at a premiumWhen it is sold at less than its face value, then it is said to be issued at a discount.

Issue of SharesInitial Public Offering (IPO) when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public.Rights Issue When a listed company proposes to issue fresh securities to its existing shareholders.Market Capitalisation Market value of a quoted company; calculated by the product of the current share price and the number of shares in issueADR (American Depository Receipt) physical certificate of ownership of ADS (American Depository Share). ADS is a US dollar denominated form of equity ownership in a non-US company.GDR (Global Depository Receipts) A global finance vehicle that allows an issuer to raise capital simultaneously in two or more markets through a global offering

Analysing a companyIndustry Analysis Effects of govt policy, future demand of products, etc Corporate Analysis Information on current operations, managerial capabilities, growth plans, its past performance vis--vis its competitors, etcFinancial Analysis- Used to check if at the current price the share is a good buy.Annual Report Best source of information about a companys financial healthBalance Sheet/ P&L account Balance sheet shows the financial position of the company at a particular point of time. P&L account shows the financial performance over a period of time.

Mutual FundA corporate body registered with SEBI that pools money from individuals/corporate investors and invests the same in a variety of financial instruments or securities.Benefits of investing in Mutual Funds:Small investments wide spectrum with small investmentsProfessional Fund ManagementSpreading risk TransparencyChoiceRegulations (SEBI protects the interests of the investors)

Current Indian economyAfter a promising start to the decade in 2010, with achivements like maintaining a GDP growth rate around 8%, bringing down the fiscal deficit to 4.8% of GDP and containing Current account deficit to 2.6%, the year 2011-12 has been challenging for the economy.High levels of inflation gave way to slow down in growth.As fiscal conditions worsened, exports declined leading to a widening in trade deficit.India is still growing at a rapid pace in comparison to other economies, however a lot needs to be done in terms of economic reforms, creation of infrastructure and generation of economic opportunities.

Current Indian EconomyAfter achiving 8.4% growth in past fiscal, indias economy has decelerated sharply to achieve 6.1%GDP growth in third quarter of 2011.It is worrying that growth is estimated to be less than 7% for the fiscal year ending march 31.High fiscal deficit, Lack of foreign investment, Tax and manufacturing reforms are some of the hindrances plaguing the indian economy.

Global WindsPerformance of Major advanced economies has been a point of concern as the economic outlook of euro Asia looks grim in shadow of protracted sovereign debt crisis.Japan is trying to cope up with the economic impact of natural calamities which is having impact on the exporting partners.Despite some modest signs of improvement in the U.S, the European debt crisis unquestionably has become a dominant global factor and a source of volatility in the assets and the currency markets all over the world.By Contrast, emerging market economies have generally shown reasonable robustness- mainly on account of their domestic drivers and increasing linkages with each other.Nevertheless, a slowdown in advanced countries is a point of concern as it impacts the investment and the exchange rate channel of the domestic economy.

State of Indian EconomyDespite signs of recovery from the global financial crisis, the GDP growth rate for the Indian economy is likely to be between 5.5 to 6.3 per cent in 20012-13, below the 6.9 per cent recorded in fiscal 2011-12. In 2011-12,The agricultural growth rate has declined to 3.2% for the first 9 months, perhaps due to high base effect. However the agricultural output in absolute volume is expected to rise owing to a good harvest of Kharif and Rabi and also strong growth in horticulture and animal husbandry.For the first time in 27 months the industrial growth recorded a negative growth of 5.1% in October 2011.CSO expects industrial sector to grow at a rete of 3.6% as compared to the last fiscal. In the current financial year, the major policy challenges for the government will come from the rather sharp rise in inflation and deteriorating public finances. The balance of payments situation may also require policy attention also a widening of the current account deficit and a considerable pressure on the economy because of the depreciation of the rupee is a big concern.

State of Indian Economy

In the current financial year, the major policy challenges for the government will come from the rather sharp rise in inflation and deteriorating public finances. The balance of payments situation certainly also requires policy attention also a widening of the current account deficit and a considerable pressure on the economy because of the depreciation of the rupee is a big concern.CAD was 4.5% for Quarter Jan-Mar 2012 and overall for FY 2011-12 its 4.2 % because of the high import of oil and gold as per RBI.

Monetary measuresFrom 2010 to 2012, the central bank started to ease liquidity and cut the policy rates by several basis points many times.As a result the current CRR stands to 4.25%(Previously 6%), changes in repo and reverse repo rate as took place so as to inject liquidity into the market and to boost growth.Inflation measured in terms of the wholesale price index (WPI) is at 7.5 per cent in early october 2012 and CPI is alarmingly high at around 10% as on october 2012.The Reserve Bank of India (RBI) acted aggressively from mid-October to ease the situation by a series of rate cutting and liquidity injecting measures.

Fiscal stimulusThe central government announced three successive fiscal stimulus packages: one in early December 2008, the second one in early 2009 and the last one in early March 2009. These included an across-the-board central excise duty reduction by 4 percentage points; additional plan spending of Rs.200 billion; additional borrowing by state governments of Rs.300 billion for plan expenditure; assistance to certain export industries in the form of interest subsidy on export finance, refund of excise duties/central sales tax, and other export incentives; and a 2 percentage-point reduction in central excise duties and service tax. The total fiscal burden for these packages amounted to 1.8 per cent of GDP.

Impact on EconomyThe growth in GDP dropped to 5.8 per cent (year-on-year) during the second half of 2008-09 from 7.8 per cent in the first half. Growth improved slightly to 6.1 per cent in the first quarter of 2009-10.

Indian Economy-GDP

Indian Economy - GDP

Impact on Economy - SectorsIndustry, and particularly the manufacturing sector, was the most severely affected by the crisis. Industrial growth plunged to 1.9 per cent in the second half of 2008-09 from 6.1 per cent in the first half and manufacturing growth collapsed to -0.3 per cent in the second half from 5.3 per cent in the first half. Industrial growth picked up to 5.0 per cent in the first quarter of 2009-10 and manufacturing to 3.4 per cent.The services sector as a whole had been resilient up to the third quarter of 2008-09 but later showed signs of weakness with its growth declining to 8.6 per cent in the last quarter of 2008-09 (average 10 per cent growth in the previous three quarters) and further to 7.8 per cent in the first quarter of 2009-10.

Impact on Economy - Sectors

Fiscal StabilityPublic finances had improved considerably The fiscal deficit (centre and states combined) came down to 4.2 per cent of GDP in 2007-08 (well below the permitted 6 per cent), the primary deficit (fiscal deficit net of interest payments) turned into a surplus of 1.3 per cent of GDP and total public debt as a proportion of GDP also came down from the peak of 81.4 per cent in 2003-04 to 75.1 per cent in 2007-08.

Fiscal StabilityThe situation changed drastically in 2008-09The fiscal deficit shot up to 8.9 per cent of GDP (10.7 per cent including off-budget bonds against 5 per cent in 2007-08) and the primary surplus turned into a deficit of 3.5 per cent of GDP. The public debt, however, declined marginally to 74.7 per cent of GDP. Budget estimates for 2009-10 indicate a further worsening in the current year with the fiscal deficit rising to 10.2 per cent of GDP, primary deficit to 4.5 per cent and debt ratio deteriorating to 76.6 per cent. This has raised afresh the issue of Indias fiscal stability and debt sustainability.

Fiscal StabilityThe policy implication is that we should strive to reduce primary deficit or achieve a primary surplus, raise the growth rate and reduce the interest rate. The growth is in nominal terms and there is surely an option of inflating our way out of debt. However, this is not feasible given the political sensitivity regarding inflation.

InflationIn India, the year-on-year change in the wholesale price index (WPI) is used as the measure of inflation.The wholesale price index has long been discarded by countries for measuring inflation.157 out of 181 countries in the IMF statistics use consumer price index (CPI) for tracking inflation.While WPI inflation is very low or negative from March 2009, CPI inflation was high and rising from April 2009. It touched about 12 per cent in July 2009.

InflationAlthough year-on-year WPI inflation was negative till August 2009, food items under both primary articles and manufactured products have shown rising and high inflation at double digit levels in recent months.The negative inflation continues in the case of fuel and metal groups.It appears that inflation is concentrated in food items and what we have is food inflation and not a general inflation. For products like personal care and effects and other miscellaneous items, the rates of inflation have touched 12 per cent and 20 per cent respectively in June 2009.

Balance of payments - TermsCurrent Account Deficit Occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers.This situation makesa country a net debtor to the rest of the world. Capital Account - The capital account is calculated by netting the public and private investments within the country with those the government and domestic companies are making outside the country.

Balance of paymentsIndias balance of payments underwent major shifts in 2008-09 that resulted from the transmission of the direct impact of the global crisis to India. The current account deficit shot up to 2.6 per cent of GDP in 2008-09 from 1.5 per cent of GDP in 2007-08. This is the highest level of current account deficit for India since 1990-91The impact on the capital account was more pronounced as the capital account surplus dropped from a record high of 9.2 per cent of GDP in 2007-08 to a meagre 0.8 per cent of GDP in 2008-09. This is the lowest level of capital account surplus for India since 1981-82. The year ended with a decline in reserves of US$ 20.1 billion (inclusive of valuation changes) against a record rise in reserves of US$ 92.2 billion for 2007-08.

A major concernA sharp dip in the growth rate of private consumption.Four factors seem to have contributed to this slowdown.It could be due to the wealth effect, resulting from a decline in the equity/property prices.The uncertainty in the labour market and some decline in employment in Indias tradable sectors may have moderated the growth in consumption expenditure.Cutbacks in consumer credit by private banks NBFCs and other lenders, because of their limited deposit base and difficulties in secondary market financing because of the knock on effect of global financial market freezing.During slowdown a dominance of precautionary motive may induce consumers to either defer their spending decisions or shift to unbranded lower quality alternatives.

The way aheadThe industrial sector which underwent a severe downturn in 2008-09 is beginning to recover from early 2009-10, but it is not yet clear that the pick-up is underpinned by a strong revival in real demand. The monsoon failure has created uncertainty as to whether demand growth will be sustained. The fiscal stimulus has helped in substituting for lost private demand to some extent and prevented a steeper fall in GDP growth.While the growth in the non-agricultural sector in the current year would be somewhat higher than last year, a marked decline in agricultural output is expected to bring down this years growth in GDP below last years level.

The way aheadIn this context, high inflation, which has emanated from the agricultural shock and may be spreading to non-food products, will pose a big policy challenge. At a time when last years aggressive monetary loosening measures seem to have just started boosting growth, the central bank may have to start tightening sooner than later. Too early a tightening, however, can harm the fragile, incipient industrial recovery.Policy can take comfort from some likely moderation of inflation in August and September.

The way aheadThe return of confidence to the financial market has pushed up stock prices and companies have been able to raise resources again from the capital market.However, the flow of bank finance to the economy has not improved.The return flow of capital from abroad is taking place strongly, particularly from foreign institutional investors.This, in turn, has put upward pressure on the rupee, which is appreciating rapidly.Some appreciation may not be problematic as the real effective exchange rate had depreciated steeply during 2008-09.But as we go forward, the central bank will be hard-pressed to balance the objectives of inflation control, exchange rate stability and growth.

Global Economic MeltdownThe first hint of the trouble came from the collapse of two Bear Stearns hedge funds early 2007. Subsequently a number of other banks and financial institutions also began to show signs of distress.Matters really came to the fore with the bankruptcy of Lehman Brothers, a big investment bank, in September 2008.

ReasonsBoom in the Housing MarketSpeculationHigh-risk Mortgage Loans and Lending PracticesSecuritisation PracticesPoor Regulation

Impact on IndiaInformation TechnologyExchange Rate Foreign Exchange OutflowInvestmentReal EstateStock MarketExportsBanksIncrease in Unemployment

How India faces it?Compared to other emerging economies, India has several strengths that can help an early mitigation of the adverse effects of the global financial crisis and the recession in major OECD economies.India has a relatively high share of services in GDP than many other emerging economies and developing countries. Historically, across countries, services tend to be less affected by cyclical downturns than manufacturing.Six years of average 4.4 per cent agriculture growth together with scaling up of rural development programmes, including the National Rural Employment Guarantee Scheme (NREGS), during the past year has kept the rural income and consumption strong.

How India faces it?Like other high-growth Asian economies, Indias domestic saving rate remains high and has risen sharply with higher growth during the last five years. In fact the increase in the gross domestic saving over the last five years was greater than the increase in gross domestic capital formation over the same period.The ambitious programme of infrastructure investment designed for the Eleventh Five Year Plan period, which has now been front-loaded as a part of the policy response to the growth slowdown, provides the basis for offsetting some decline in corporate investment in manufacturing by increased investment in infrastructure by government and by the private sector through the public-private partnership model.

How India faces it?India continues to retain its position as a preferred destination for investments. In a recent UNCTAD study on assessing the impact of the current financial and economic crisis on global flows, it was found that India achieved a growth of 85.1 percent in foreign direct investment flows in 2008, the highest increase across all countries.The steep decline in commodity prices in the second half of 2008-09 along with the likely slack in global demand or at least the next 12 months would not only help in cutting down the import bill, but also have a favourable impact in effecting a reduction in below the line deficit to less than the level in 2008-09.

Prospects Indian EconomyIndian economy has slowed and has not shrunk unlike most OECD and many emerging economies. A large domestic market, resilient banking system and a policy of gradual liberalization of capital account have been a key factor.A number of forecasts and projections have been made on the prospects of the Indian economy in 2009-10. These range from a low of 4.8 per cent (ICRIER, March 2009) to a high of 6.5 to 7.5 per cent (ICRA, April 2009). The RBIs April 2009 projection stands at 6 per cent and that of PMs Economic Advisory Council at 7-7.5 per cent. Among the international agencies, the March 2009 ADB forecast for 2009-10 is 6.5 per cent, IMF is 5.6 per cent and World Banks forecast for the calendar year 2009 is 4 per cent.

Thanks ratnabha.saha@careerlauncher.com

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