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WELCOME to Senior Management Program

Dr. Suniti Nagpurkar

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Understanding The Structure of The Economy, Govt. Policies and Impact

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Economic Environment of Business

To be successful over time, an organization needs to be in tune with its external environment.There must be a strategic fit between what the environment wants and what the corporation has to offer; between what the corporation needs and what the environment can provide.

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Dynamics of External Environment

Environmental Uncertainty: It is the degree of complexity plus the degree of change existing in an organisations external environment. It is both a threat and opportunity. Environmental Complexity: Multiple and mutually affecting subsects.

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Task Environment: It includes those elements or groups that directly affect the corporation and are affected by it. These are Governments, local, communities, suppliers, competitors, customers, creditors, employees etc.

SHARE IN GLOBAL GDP,% (Y= DEVELOPED, B = EMERGING ECONOMIES)

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__________________________75 _____________ ___________________________50 _______________ ____________________________25 ___________________________________

1820 70 1913 50 73 2005 (AT PPP)
THE ECONOMIST

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EMERGING ECONOMIES as PERCENTAGE OF WORLD TOTAL

POPULATION FOREX RESERVES GDP at PPP EXPORTS GDP at MKT EXCHANGE RATE

85% 70% 50% 44% 25%

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RDEs GROWTH EXPERIENCE

(IMF,BCG ANALYSIS)
China ITEM U.S. West. Europe India Mexico Brazil

GDP $tn 2004 CAGR in GDP 2004-10 (%)

10.5

9.1

1.2

0.6

0.5

0.9

2.25

2.0

8.0

6.8

6.0

7.0

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Some Additional Facts on Indian Economy

GDP share of Indian economy in the world output in 2010 was 5.4% measured in terms of PPP. Investment to GDP was 37.875 Governments Gross Debt to GDP was 69.17% Current Balance A/c deficit as % of GDP was 3.18% Organised Retail in 2011 is $450billion

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NATIONAL INCOME TRENDS IN INDIA

YEAR NNP in crores 1993-94=100

1990-91
1996-97 1997-98 1999-00

614206
852085 890890 1007743

2000-01

1044915
GOI Economic survey 2001

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NATIONAL INCOME TRENDS IN INDIA

YEAR NNP in crores INDEX NO OF NNP 1993-94=100

1990-91
1996-97 1997-98 1999-00

614206
852085 890890 1007743

464
643.7 673.0 761.3

2000-01

1044915

789.4
GOI Economic survey 2001

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NATIONAL INCOME TRENDS

YEAR
2004-5 2005-06 2006-07 2007-08 2008-09 2009-10

NDP@ FACTORCOST
(Rscro)

POPULATION (mn)
1089 1106 1122 1138 1154 1170

2623995 3006469 3487172 4031882 4632305 5188361

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Sectoral GDP Growth Rates

Year
1971 to 1980 181 to 1990 1991 to 2000 1985 to 1990 1991 to 1995 1995 to 2002 2002 to 2003

Primary
2.2 3.37 3.30 5.72 3.77 2.55 0.73

Secondar Tertiary y
4.64 6.94 6.99 8.66 8.04 5.01 5.33 4.87 6.74 8.35 8.83 6.40 8.16 6.50

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Sectoral Growth Rates(%)

Ix th Plan Agriculture Industry Tertiary 2.5 4.3 7.9 XIIth Plan(targetted) 4.0 9.6 10.0

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SECTORAL CONTRIBUTION TO NI IN INDIA 1983 ,1999,2006 2011 (RBI,MOF)

Sector %of GDP %of LABOUR

AGRICULTURE
INDUSTRY SERVICE

39 , 26.2, 21.2, 15
23, 25.9, 27,22 38. ,47.9, 51.8,63

70,59,56,53
13,18,20, 22 17,23,26,35

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capital formation employment elasticity :

Source: India in new Millenium (Mungekar, Nachane)

Mfg. (2-3) Agriculture Industry Non Agriculture Industry

0.225 0.182

0.244

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HUMAN IMPACT OF DEVELOPMENT

Period GDP growth % aggregate Growth rate % per capita. years to double

1972-82 1982-92

3.5 5.2

1.2 3.0

57 23

1992-02
2002-06 2006-2009

6.0
7.5 8

3.9
4.2 6.2

18
15 About 10 yrs

The range of spending power

Household income classes Real annual household income (avg size of household=5.4), figures in $ Segment size Million of househols

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Common occupations

Assets Owned

Global India

>10,000

Business people in small to midsize enterprises Corporate/govt employee Rich Farmers Salaried employees New-services employees (eg IT media) shopkeepers

1-2 bedroom house Colour TV, mobile phone, refrigerator, washing machines Car worth $5,000$10,000

Aspiring India

4,000-10,000

Colour TV, refrigerators telephone Scooter, motorcycle, or small car worth$4,000

Struggling India

1,500-4,000

Shopkeepers Service workers (eg. Waiters, drivers, maids) Farmers

Bicycle Radio, Black-andwhite TV

Destitute India

<1,500

Subsistence farmers Farm workers

Watch

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Kin-Chi 4 stage consumption pattern

Stage-I Increased spending on food, clothing, footwear etc. Stage-II Hotels, restaurants, utensils, transport. Stage-III Housing, two wheelers, electronic goods Stage-IV Four wheelers, travel and tourism, vacation, lifestyle products.

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POLICY PERCEPT

PHILOSOPHY---POLICY---PERFORMANCE
Philosophy---economic ideology Policy---reflects philosophy

Performance is the outcome of policy

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Philosophy, Policy cont

Philosophy : Neheruvian,Socialist, Mixed Economy philosophy of initial about 3 decades 1050 to 1985. A brief interface with stray de regimentation Liberalisation, Privatisation ,Globalisation since 1991

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INDIAS P-P-P

Mixed economy L-P-R to L-P-G Slow growth to Fast growth Crony Capitalism? Nexus between Industry, Politicians, Bureaucracy and Crime 4pillors? Challenges: sustainability, equity issues

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Growth Scenarios
Global Conditions Favourable ?? 2003-08 (8.9%) Unfavourable 2008-10-7.4% 2012-

2010-12-6.0% ? Unfavourable Favourabl e Domestic Conditions

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Policy paralysis, policy deficit and policy adhocism Policy requirements for sustained growth: Right Policy and Good governance Some success stories: Trade policy:Globalisation Monetary Policy Financial sector reforms

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What is Globalization

The Globalization refers to the way in which commerce,information and culture are exchanged and managed on a worldwide basis.
It refers to the process of integration of the economy of a country with the rest of the world.

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Three levels of Integration.

Firm it is the smallest unit through

which integration can take place. But when integration occurs, this small unit may actually become a large MNC.

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World investment report 2003.

No of MNCs No of Foreign Affiliates Affiliates in China Affiliates in India

65,000 8 Lakhs 3.6 Lakhs 1,400

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World investment report 2003.

No of MNCs No of Foreign Affiliates Affiliates in China Affiliates in India

71,000 12 Lakhs 5.6 Lakhs 1800

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given product line get integrated, it results in sector level integration. Different Countries will have different sectors taking a lead in the process of integration. Eg. IT , ITES, BPO. (In India)

Sector When a large no of firms in a

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Domestic Economy This is the

National level integration. When many sectors of the economy get globally integrated, it results in overall economic integration. This overall economic integration is measured in terms of trade : GDP ratio.

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PARAMETERS
Global Integration is measured through :

Trade Rate of growth in world trade has

been faster than rate of growth in world output during Globalization. Labor This is measured in 2 ways. 1. Migration. 2. Outsourcing.

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PARAMETERS
Global Integration is measured through :
Globalization Index
199899 X+M/GDP 20 200809 41 112

Two way 44 capital+current flows)/GDP

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Types of Capital Inflows in US $ Million

Year
1990-1991
1991-1992 1992-1993 1993-1994 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 FDI
PROTFOLIO

ECBS
2248
1456 -358 607 1030 1275 2848 3999 4362 313

NRI
1536
290 2001 1205 172 1103 3350 1125 1744 2140

FORIGN AID
2210
3037 1859 1901 1526 883 1109 907 820 901

97
129 315 586 1228 1943 2938 3525 2380 2093

6
4 244 3567 3824 2748 3025 1828 -68 4990

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Mergers and Acquisitions in India

2000 2001 2002 2003 2004 2005 2006 2007 1,338 1,246 1,244 1,486 1,622 1,725 1,688 1,906

2008

1,776

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PARAMETERS
Global Integration is measured through :

Labor This is measured in 2 ways.

1. Migration. 2. Outsourcing.

Remittances received by Developing Countries, 2003

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All developing countries Total remittances (US$ billion) Percentage of GDP Percentage of merchandise imports Percentage of domestic investment Percentage of FDI inflows Percentage of official flows Outward remittances (US$ billion) 116.0 1.7 6.2 6.7 76.4 365.6 33.5

Lowincome countries 36.7 3.3 18.5 15.3 228.0 2.1

Lowermiddleincome countries 54.9 1.3 5.1 4.8 55.1 8.6

Uppermiddleincome countries 24.4 1.3 4.0 7.1 67.6 22.8

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Top 10 Developing-Country Recipients of Remittances,2003 (Billions of Dollars)

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Indias Remittance Receipts (Billions of Dollars)

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Balance of Payments Summary (India)

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Balance of Payment

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In economics, the balance of payments, (or BOP) measures the payments that flow between any individual country and rest of the world. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits). Balance of payments is one of the major indicators of a country's status in international trade, with net capital outflow

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The IMF definition: "Balance of Payments is a statistical statement that summarizes transactions between residents and nonresidents during a period." The balance of payments comprises the current account the capital account , and the financial account . "Together, these accounts balance in the sense that the sum of the entries is conceptually zero.

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Some Highlights of Indias BoP

India has a chronic deficit on current accounts

India's total external debt in 2001 was estimated at $100.6billion. In 2000, the external debt-GDP ratio stood at around 20.7%, down from 41% in 1991/92. In the early 2000s, India's exports to East and Southeast Asia increased. High growth rates were registered for textiles, chemicals and related products, engineering goods, and leather and manufactures

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Structure of BoP

Current Account: Trade in Merchandise Trade in Invisibles Capital Account: Govt: borrowings, equity Private : borrowings, equity

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Items

90-91 18477 27915 -242 -9680 101

00-01 45452 57912 9794 -2666 5862

01-02 44703 56277 14974 3400 6686

02-03 53774 64464 17035 6345 4181

03-04 66285 80003 27801 14083 13744

04-05 82150 118779 31229 -5400 12147

Exports Imports Invisibles (net) Current A/c balance Foreign Investment (net)

(a) FDI
(b) FII (c) Euro equities & others

96
0 5

3272
1847 743

4734
1505 447

3217
377 567

2388
10918 438

3240
8280 627

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continued

Trade policy: Fixed exchange rate

Import, Export licensing BOP deficit

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Current account convertibility

Introduced in India in August 1994 Permits free inflows and outflows for all purposes other than for capital purposes. Allows residents to make and receive traderelated payments Aimed at boosting India's exports

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Capital Account Convertibility

Freedom to convert local financial assets into foreign financial assets Capital Asset Liberation

Free exchangeability of currency Unrestricted mobility of capital

Partial capital account convertibility in India

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Capital Account Convertibility

The First Tarapore Committee set up for execution of CAC Prerequisites: - Fiscal deficit needs to be reduced to 3.5% of the GDP - Inflation between 3-5% - NPAs brought down to 5%, - CRR needs to be reduced to 3% - Monetary exchange rate band of + - 5% The Second Tarapore Committee- 2006 Increase investments from $25000 to $200000

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Business policy decisions: Import or Import substitute When to remit and when to surrender How to cover currency risks What are the instruments to cover the risks?

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Service sectors in traded talks

Countries are negotiating for access in WTO services talks in the following areas:
Business services Communication services Construction and related engineering services Distribution services Educational services Environmental services Financial services Health-related and social services Tourism and travel-related services Recreational, cultural and sporting services Transport services Other services not included elsewhere

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MACRO ECONOMIC POLICY

MONETARY POLICY FISCAL POLICY TRADE POLICY SECTOR SPECIFIC: - Industrial Policy Resolution - Policy Of Land Reforms - Nationalisation Of Com. banks

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Priority Sectors under XIIth Plan

1. Sectors that will create large employment Textiles and Garments Leather and Footwear Gems and Jewellery Food Processing Industries Handlooms and Handicrafts 2. Sectors that will deepen technology capabilities in Manufacturing Machine tools IT Hardware and Electronics

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3. Sectors that will provide Strategic Security Telecommunication equipment Aerospace Shipping Defence Equipment 4. Manufacturing-Technology sectors for Energy Security Solar Energy Clean Coal Technologies Nuclear power generation

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6. Sectors where India has competitive advantage Automotive Sector Pharmaceuticals and Medical Equipment 5. Capital equipment for Indias Infrastructure Growth Heavy electrical equipment Heavy transport, earth moving and mining equipment

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Energy Requirements for XIIth plan

2011 Total OIL Import component in total 522.81 Mn tons 162.32 190.97 12th plan 738.07 Mn tons 204.80 280.12

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Continued ---Monetary policy: pre1991 - Highly regulatory framework - Fixed interest rate structure - Fixed exchange rate regime - Lack of autonomy to FIs

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Monetary policy: post1991 Restructuring the regulatory framework Financial sector reforms Prudential Norms Flexible Interest rate structure Flexible Exchange rate Mechanism

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Monetary policy Tools and Mechanism

Bank rate/Discount rate CRR and SLR OMO REPO, Reverse REPO

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Types of Monetary policy Mechanism Credit availability Channel

Interest rate Channel

Asset price Channel

Balance sheet Channel

Exchange rate Channel

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Tight Money Policy Monetary policy

Bank Rate & Repo Rate

Short Term %

Traders & Manufactures reduce stock

Inv Emp Demand Price

Price Stability

EMP

BR & RR

STRI

Traders & Manufactures increase stock

I E D P

I- Investment. E- Employment D- Demand P- Price STRI Short term rate of interest

Recession under control

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TMP Monetary policy

Mkt rate %

Mkt Price of Asset

Inv Y Dmd

Inflation under control

EMP

Mkt rate %

Mkt Price of Asset

Inv Y D

Economic Development

Inv- Investment. Y- Income

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TMP MP

Domestic Rate of Interest

Interest rate arbitrage take place

Capital Inflow

Exchang e rate falls

Domestic currency appreciat e

I E

Surplus corrected

EMP

Domestic Rate of Interest

Interest rate arbitrage

Capital outflow

Exchange rate go up

Domestic currency depreciat e

I- Import E- Export MP - Monetary policy

I E

Deficit corrected

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Borrowing power down

Interest

TMP

Mkt rate %

Expenses

Profit

Net Worth

I, E, O, Y

MP

Market price of Asset

Investment

Monetary policy objectives achieved Net Worth

Borrowing power up

EMP

Mkt rate %

Interest Expenses

Profit

I, E, O, Y Market price of Asset

Investment

Monetary policy objectives

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TMP Monetary policy

Bank Credit

I , O , Y , ED , P etc.

Price under control

EMP

Bank Credit

I , O , Y , ED , P etc.

Economic Development

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SAVING PATTERN

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SAVING TO NATIONAL INCOME RATIO

YEAR
1950 1960 1990

SAVING RATE as % of NDP

6.2% 9.3% 14%

2000
2010

20.7%
33.8%

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COMPOSITION OF SAVINGS(1980)
HOUSEHOLDS SAVING
PRIVATE CORPORATE SAVINGS GOVT SECTOR TOTAL

75%
8% 17% 100

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COMPOSITION OF SAVINGS(1990)
HOUSEHOLDS SAVING PRIVATE CORPORATE SAVINGS GOVT SECTOR TOTAL 84.5% 14.8% .17% 100

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COMPOSITION OF SAVINGS(2000)
HOUSEHOLDS SAVING PRIVATE CORPORATE SAVINGS GOVT SECTOR TOTAL 82.7% 17.2% .15% 100

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LIFE CYCLE HYPOTHESIS

Income, consumption
Debt accumulation

Saving

Dissaving

Working yrs.

Retirement yrs. Time

Youth yrs.

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Savings Portfolio

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Savings Portfolio
Underdeveloped Predominance

structure

of unproductive

assets

Relatively

small share of financial assets

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HOUSEHOLD FIN. INVESTMENT CASH BANK DEPOSITS LIC FUND

% IN TOTAL (2003) (SourceRBI) 10 42 15

CLAIMS ON 31 GOVT,PF,PENSION FUND

SHARES AND DEBENTURES

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How India Earns, Spends & Saves

81% of the households save 1/3 of households still prefer to stash cash at home 58% of the laborers and 20% of the salary earners prefer to keep their savings at home Poor households save despite being in debt 51% of the households park their savings in banks 2% buy insurance policies 0.5% invest in equity policies

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Figure1.1

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Cross border service exports by economic group

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Facilitators of Globalization

Transportation Revolution.
Telecommunication & Technology. Economic Negotiations.

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A Quick Test

1.Define the following briefly: (12) Globlisation BoP Globalisation Index Bank-rate Repo rate CRR

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A Quick Test

2.High component of house hold saving in total savings of a country is undesirable because: (Marks 2)
3.Mention any4 challenges before the Indian economy today (Marks 4) 4.how will you use these knowledge inputs in your work?(Marks 2)