Economic and Business Affairs

Agenda:
Indian Financial System
The state of Indian Economy
Global Economic Meltdown its effects on India

Indian Financial System:

1. Monetary system
2. Banking system
3. Tax system
4. Share Market Fundamentals

Monetary System
o Reserve Bank of India (RBI) Central Bank of India
o RBI functions include
Control and regulation of money and credit
Issuer of Currency
Control of foreign exchange operations
Banker to the government
Bankers bank
Lender of the last resort

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

Monetary System
o REPO 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.
o Absorption of liquidity by the RBI is termed as reverse
repo and injection as repo.
o Reverse repo rate at present is 7% and the repo rate is 8%

Monetary System - FAQs

o When is monetary policy announced?
Twice a year
A slack season policy (AprilSeptember)
A busy season policy (October
March)
o Impact of CRR cut on interest rates?
When CRR is reduced, more cash
is available with the banks
As more money chases the same
number of borrowers, interest
rates come down

Monetary System - FAQs

o Difference between monetary policy and fiscal policy.
RBI is responsible for formulating and implementing
monetary policy
Fiscal policy is a broader tool with the government
Monetary 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 inflation
Fiscal policy decides the change in government revenue
and expenditure to influence the level of national output
and prices

Banking System
o Participants of the Indian financial
systems
Commercial Banks
Co-operative Banks
Financial Institutions (FI)
Investment Institutions
Specialised financial institutions
State-level development banks
Non-banking financial companies
(NBFC)
Market intermediaries stock
brokers and moneylenders

Commercial Banks
o Main functions
Acceptance of deposits
Giving loans
Overdrafts
Discounting bills of
exchange
Investment of funds
o RBI categorisation of commercial banks
Public sector banks
Private sector banks
Foreign banks

Money market
o Market for borrowing and lending of short-term funds
o Call money market inter-bank transactions on day-to-day
o Call money rate
High call money rate indicates scarcity of funds and
tight money market
Low call rate means easy availability of funds

Tax system
o Different heads of income for tax structure in India
Salary
House property
Profit in business or
profession
Capital gains
Other sources

Tax system important facts

o Laws on central government income tax collection and recovery
are governed by the Dept of Tax and Revenue under Min of
Finance, India
o System of taxation is completely based on the personal
assessment of income
o Penalties and interest are charged on the non-payment of taxes
and failure to file returns
o Filing date is not extended and any late filing is charged with
interest
o All large sized and medium sized taxpayers are subjected to
investigative assessment
o Designated due dates are ascertained for the purpose of filing of
returns
o The 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 facts

o Laws on central government income tax collection and recovery
are governed by the Dept of Tax and Revenue under Min of
Finance, India
o System of taxation is completely based on the personal
assessment of income
o Penalties and interest are charged on the non-payment of taxes
and failure to file returns
o Filing date is not extended and any late filing is charged with
interest
o All large sized and medium sized taxpayers are subjected to
investigative assessment
o Designated due dates are ascertained for the purpose of filing of
returns
o The tax is deducted at source by the employers on behalf of the
employees and from all kinds of defrayments to non residents

Tax incentives personal

o Exemption on income spent on higher educational
purpose
o Exemption on income spent for the treatment of a
diseased person who is dependent
o Exemption on income spent as contribution to provident
fund, insurance policies, etc
o Exemption on the income spent on buying NSC and
investments in other government based savings
schemes
o Exemption on the income of a disabled person
o Exemption on the income spent on the payment of
interest on home loan

Tax incentives - corporate

o Govt of India provides incentives for :
Corporate profit
Accelerated depreciation allowance
Deductibility of certain expenses subject to some
conditions
o Tax incentives are available for new investments :
Infrastructure
Power distribution
Certain telecom services
Rural hospitals
Food processing
Handling of food grains
Companies carrying on R&D, etc

GST
o Goods and Services Tax (GST)
o GST will avoid multiple layers of taxation that currently
exists in India.
o 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.
o Aim is to bring uniformity in the indirect tax structure
o Kelkar Task Force has recommended a standard rate of
20%
o Out of 20%, 12% will go to the Central government and
8% will go to the state government.
o Recommendation also included higher rate on non-merit
goods and lower rate on merit goods

Features of GST
o GST is a comprehensive tax levy on manufacture, Sale and
consumption of goods and services at national level.
o 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.
o Under GST, the taxation burden will be divided equitably
between manufacturing and services.
o It is expected to help built a transparent and corruption
free tax administration.
o GST will be levied only at destination point and not at
various points(from manufacturing to retail outlets).
o 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
o It is estimated that India will gain $15 billion a year by
implementing GST as it would promote export, raise
employment and boost growth.
o Some goods Namely Crude petroleum, diesel, petrol,
aviation turbine fuel, Natural gas and alcohol will not come
within the perview of GST.
o The date of implementation of GST is set on August 2012.
o Overall, One of the biggest Tax reforms in India, GST is all
set to integrate state economies and boost overall growth.
o Bihar Deputy CM Sushil Modi heads inter-state panel on
GST.

Share Market - Terms

o Stock Exchange
o Equity / Share
o Debt instrument
Bond Issued by central and state governments and
public sector organizations
Debenture Issued by private corporate sector
o Derivative 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.
o 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 Terms

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

Securities - Terms
o Face Value Nominal or stated amount assigned to a
security by the issuer
o For shares, it is the original cost of the stock
o For bonds, it is the amount paid to the holder at maturity
o Also known as par value
o When a security is sold above its face value, it is said to be
issued at a premium
o When it is sold at less than its face value, then it is said to
be issued at a discount.

Issue of Shares
o Initial 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.
o Rights Issue When a listed company proposes to issue fresh
securities to its existing shareholders.
o Market Capitalisation Market value of a quoted company;
calculated by the product of the current share price and the
number of shares in issue
o ADR (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.
o 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 company
o Industry Analysis Effects of govt policy, future demand of
products, etc
o Corporate Analysis Information on current operations,
managerial capabilities, growth plans, its past performance
vis--vis its competitors, etc
o Financial 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 health
Balance 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 Fund
o A corporate body registered with SEBI that pools money
from individuals/corporate investors and invests the same
in a variety of financial instruments or securities.
o Benefits of investing in Mutual Funds:
Small investments wide spectrum with small
investments
Professional Fund
Management
Spreading risk
Transparency
Choice
Regulations (SEBI protects
the interests of the investors)

Current Indian economy

o After 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 201112 has been challenging for the economy.
o High levels of inflation gave way to slow down in growth.
o As fiscal conditions worsened, exports declined leading to a
widening in trade deficit.
o 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 Economy

o After achiving 8.4% growth in past fiscal, indias economy

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

Global Winds

o Performance 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.
o Japan is trying to cope up with the economic impact of
natural calamities which is having impact on the exporting
partners.
o 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.
o By Contrast, emerging market economies have generally
shown reasonable robustness- mainly on account of their
domestic drivers and increasing linkages with each other.
o Nevertheless, a slowdown in advanced countries is a point
of concern as it impacts the investment and the exchange

State of Indian Economy

o Despite 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.
o 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.
o For the first time in 27 months the industrial growth recorded a
negative growth of 5.1% in October 2011.
o CSO expects industrial sector to grow at a rete of 3.6% as
compared to the last fiscal.
o

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.

State of Indian Economy

o

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.

o CAD was 4.5% for Quarter Jan-Mar 2012 and overall for FY 201112 its 4.2 % because of the high import of oil and gold as per RBI.

Monetary measures
o From 2010 to 2012, the central bank
started to ease liquidity and cut the
policy rates by several basis points many
times.
o 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.
o 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.
o The Reserve Bank of India (RBI) acted
aggressively from mid-October to ease

Fiscal stimulus
o The 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.
o 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.
o The total fiscal burden for these packages amounted to 1.8 per
cent of GDP.

Impact on Economy
o The 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.
o Growth improved slightly to 6.1 per cent in the first quarter
of 2009-10.

Indian Economy-GDP

Indian Economy - GDP

Impact on Economy - Sectors

o Industry, and particularly the manufacturing sector, was the most
severely affected by the crisis.
o 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.
o Industrial growth picked up to 5.0 per cent in the first quarter of
2009-10 and manufacturing to 3.4 per cent.
o 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 Stability
o Public finances had improved considerably
o 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 Stability
o The situation changed drastically in 2008-09
o The fiscal deficit shot up to 8.9 per cent of GDP (10.7 per
cent including off-budget bonds against 5 per cent in 200708) and the primary surplus turned into a deficit of 3.5 per
cent of GDP.
o 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.
o This has raised afresh the issue of Indias fiscal stability and
debt sustainability.

Fiscal Stability
o The 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.
o The growth is in nominal terms
and there is surely an option of
inflating our way out of debt.
o

However, this is not feasible

given the political sensitivity
regarding inflation.

Inflation
o In India, the year-on-year change in the wholesale price
index (WPI) is used as the measure of inflation.
o The wholesale price index has long been discarded by
countries for measuring inflation.
o 157 out of 181 countries in the IMF statistics use consumer
price index (CPI) for tracking inflation.
o 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.

Inflation
o Although 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.
o The negative inflation continues in the case of fuel and
metal groups.
o It appears that inflation is concentrated in food items and
what we have is food inflation and not a general inflation.
o 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 - Terms

o Current 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 makes a country a net debtor to the rest of the
world.
o 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 payments
o Indias balance of payments underwent major shifts in 2008-09
that resulted from the transmission of the direct impact of the
global crisis to India.
o 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.
o This is the highest level of current account deficit for India since
1990-91
o The 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.
o This is the lowest level of capital account surplus for India since
1981-82.
o 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 concern

o A sharp dip in the growth rate of private consumption.

o Four factors seem to have contributed to this slowdown.
o It could be due to the wealth effect, resulting from a
decline in the equity/property prices.
o The uncertainty in the labour market and some decline in
employment in Indias tradable sectors may have
moderated the growth in consumption expenditure.
o 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.
o 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 ahead

o The 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.
o The monsoon failure has created uncertainty as to whether
demand growth will be sustained.
o The fiscal stimulus has helped in substituting for lost
private demand to some extent and prevented a steeper
fall in GDP growth.
o 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 ahead

o In 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.
o 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.
o

Too early a tightening, however, can harm the fragile,

incipient industrial recovery.

o Policy can take comfort from some likely moderation of

inflation in August and September.

The way ahead

o The 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.
o However, the flow of bank finance to the economy has not
improved.
o The return flow of capital from abroad is taking place strongly,
particularly from foreign institutional investors.
o This, in turn, has put upward pressure on the rupee, which is
appreciating rapidly.
o Some appreciation may not be problematic as the real effective
exchange rate had depreciated steeply during 2008-09.
o 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 Meltdown

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

Reasons
o Boom in the Housing Market
o Speculation
o High-risk Mortgage Loans and Lending Practices
o Securitisation Practices
o Poor Regulation

Impact on India
o Information Technology
o Exchange Rate
o Foreign Exchange Outflow
o Investment
o Real Estate
o Stock Market
o Exports
o Banks
o Increase in Unemployment

How India faces it?

o 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.
o 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.
o 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?

o 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.
o The ambitious programme of infrastructure investment designed
for the Eleventh Five Year Plan period, which has now been frontloaded 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?

o 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.
o The steep decline in commodity prices in the second half of 200809 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 Economy

o Indian economy has slowed and has not shrunk unlike most OECD
and many emerging economies.
o A large domestic market, resilient banking system and a policy of
gradual liberalization of capital account have been a key factor.
o A number of forecasts and projections have been made on the
prospects of the Indian economy in 2009-10.
o 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.
o 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