Linkages Between

Macroeconomic
Fundamentals and Capital
Market
Dr.Tarun Das, Eco.Adviser,
MOF

Capital Market Dr. Tarun Das 1

Contents of this presentation
I. Linkages Between Macroeconomic
Fundamentals and Capital Markets
II. Macro Economic Environment
1. Sustained Economic Growth
2. External Sector under control
4. Fiscal and Financial sectors
III. Strengths, challenges and Prospects
1. Strengths
2. Constraints
3. Economic Outlook

Capital Market Dr. Tarun Das 2

 I. Macroeconomic
Fundamentals and Capital
Markets

Capital Market Dr. Tarun Das 3

 1.1 Macroeconomic
Fundamentals
• Macroeconomic stability and efficient capital
markets depend on each other.
• Both promote savings, investment and effective
allocation of resources.
• Capital markets provide basic infra-structure to
access savings and promote investment.
• Both the real sector and financial sector are
crucial to promote overall economic growth.
• Sound macroeconomic policies are the first
defense against any financial crisis.

Capital Market Dr. Tarun Das 4

 1.2 Economic Reforms in
India
• Since July 1991 India has taken
credible reforms in industry, trade,
financial and fiscal sectors.
• To improve efficiency, productivity and
competitiveness of Indian industries
and to impart dynamism to the overall
growth process.
• Emphasis is on so-called LPG
(liberalisation, privatisation and
globalisation of the Indian economy).
Capital Market Dr. Tarun Das 5
 1.3 Basic Characteristics of
Reforms
 Gradual, Step by Step and Evolutionary
Approach, not a Big Bang, Shock Therapy or
Revolutionary Approach
 General political consensus
 Strong emphasis on “human face”
 Sovereignty constraint
 Agency constraint
 Government ownership of reforms
 Prioritisation and sequencing of reforms
 No write-off / rescheduling of external debt
 Practically no sacrifice made by people

Capital Market Dr. Tarun Das 6

 1.4 Financial Sector Reforms
 Capital markets
• Strengthening SEBI as regulator
• Liberalisation in primary/ secondary markets
 Banking
• Major Steps taken for tackling NPAs
• Reduction of government equity in banks
• Reduction in CRR, SLR & lending rates
 Pension, Provident, Insurance Funds
 Opened for private and foreign participation
Establishment of IRDA as a regulatory entity
Separate regulatory body for pensions

Capital Market Dr. Tarun Das 7

 1.5 Financial Sector Reforms
Est. of Clearing Corp.of India (Apr 2002)
Screen based trading in G-securities
Public Debt Act replaced by Govt Sec.Act
Setting up of Asset Reconstruction Co.
Legislation on securitisation
Legislation facilitating foreclosure in
banks
Real time gross settlement system
 Tax on long-term capital gains
abolished. Instead, a tax on transactions
in securities on stocks is levied at
variable rates.Capital Market Dr. Tarun Das 8
 1.6 Progress of Financial Sector Reforms

Status in June 1991 Status in June 2005

• CRR 25% • CRR 5%
• SLR 38.5% • SLR 25%
• Bank Rate 12% • Bank rate 6%
• Rev.Repo Rate- NA • Rev.repo rate 5%
• PLR above 21% • PLR 10.5% to 12%
• Deposit and interest • Deposit and interest
rates are liberalised
rates are controlled
• The office of CCI
• Capital issues and
abolished and SEBI
prices determined by established
the CCI in MOF

Capital Market Dr. Tarun Das 9

 1.7 Progress of Financial Sector Reforms

Status in June 1991 Status in June 2005

• Indian firms not • Indian firms allowed to
allowed to raise funds raise foreign funds by
from foreign stock GDR, ADR, FCCBs &
exchanges offshore funds
• Portfolio investment • FIIs, NRIs and OCBs
by foreign investors in allowed to buy stocks
Indian companies not in Indian markets s.t.
allowed overall limit of 49%
• Foreigners not • FIIs/ NRIs/ OCBs
allowed to buy G-secs allowed to buy G-secs
Capital Market Dr. Tarun Das 10
 1.8 Impact on Financial Sectors
Item Mar-96 Mar-98 Mar-04
1.No.of foreign banks 33 42 33
2.New private banks 9 9 10
3.Gross NPA ratio 24.8 16.0 7.2
4.Net NPAs ratio 10.7 8.2 3.0
5.Op. profits ratio 1.6 1.8 2.7
6.Net profits ratio 0.2 0.8 1.1
7.CRAR (Capital adequacy ratio) No. of Banks
-- Below 9% 31 6 2
-- 9 to 10% 10 16 1
-- Above 10% 43 71 87
8.Number of banks 84 93 90
.

Capital Market Dr. Tarun Das 11

 1.9 Capital Market and
Macro-economic Variables
500
400 B S E N -In d e x
Index with 1993-

300 M S E -M .C a p
94=100

200 GD P
100 M3
0 GD I
1
3
5
7
9
11
GD S
Ye a r s s in c e 1 9 9 3 -9 4

Capital Market Dr. Tarun Das 12

 1.10 Comparative development in
India, China, Japan, USA in 2001
P P P A d ju s te d G N P ($9 7B8n1) 5027 3246 2913
M a rk e t C a p ($ B n ) 1 3 8 1 0 463 2252 131
M a rk e t C a p (% o f G1D3 7P ) 45 54 23
T u rn o v e r R a tio (% ) 2 1 0 86 81 226
N o .o f lis te d C o m p a n6ie3 s5 5 1235 2471 5650
P C G N P ($ ) 34280 890 35610 460
F E R ($ B n ) 130 220 402 49
A d u lt lite ra c y (% ) 1 0 0 91 100 61

Capital Market Dr. Tarun Das 13

 1.11 Factors influencing capital
market
 (a) Sound macroeconomic management,
 (b) Sustained economic and industrial growth,
 (c) Strict fiscal prudence & monetary discipline,
 (d) Control of inflation rates,
 (e) Liberalisation of Industry, Trade, Investment,
 (f) Liberal policy of FDI and portfolio investment,
 (h) Gradual convertibility on capital account,
 (g) Successful management of external sector,
 (g) Control on short-term external borrowing.

Capital Market Dr. Tarun Das 14

2.1 Sustained
Economic
Growth

Capital Market Dr. Tarun Das 15

 2.1 I ndia emerged as one of the fastest growing economies
in 1990-2001
12.0
10.0
10.0
Average growth rate in 1990s (% )

8.0 7.7
6.7
7.4
6.5
6.0
6.3
6.8
4.0
6.2 6.0 5.9
2.0

0.0

ia
i le
ina

ia

p
da

s ia
r

Ind
lan

ma

Re
er
Ch
i qu
Ch

an

l ay

Li b
Ire

m.
an

mb
Ug

Ma

Do
My

za
Mo

Country

Capital Market Dr. Tarun Das 16

 2.2 India moved on a higher growth
path
9 (Real GDP growth rate
8.5
in per cent)
8 7.8
7 7.3 7.3 6.9
6 5.9 6.5
5.6 6.1 5.8
5 5.1 4.8
4 4.4 4.0

3
2
1.3
1
0
19 -9 8
19 - 9 6

19 -99
20 -00
19 -92

19 - 9 7

2 0 1- 0 2
19 -91

20 - 0 1
19 -94
19 -95

5
20 -0 4
19 -93

20 -0 3

-0
96
90

00
91

99
95

98
93

97

03
92

94

02

04
0
19

Capital Market Dr. Tarun Das 17

 2.3 Recovery in Industry
(Production growth rate in per
14.0
cent)
13.0
12.0
10.0
9.1
8.5
8.0 8
7
%

6.7 6.7
6.0 6.1 5.7
5.0
4.0 4.1

2.3 2.7
2.0
0.6
0.0
19 9 6

19 9 9

20 0 0
19 9 8

5
20 - 0 2
2

19 9 7

20 -0 1
4

20 -04
5
3

20 -0 3
-9

-9

-0
-9

-9

-
-

-
-

00
96

01
91

99
95

98
93

03

04
97
92

02
94
19
19

19

19

19

Capital Market Dr. Tarun Das 18

2.4 Sectoral growth rates in India (%)
Sectors 1980-90 1992-2000 2002-05
Agriculture 3.1 3.3 1.2
Industry 7.2 6.5 7.0
Mining 7.7 4.0 6.9
Manufacturing 7.4 5.9 7.4
Utilities 8.9 5.7 4.4
Construction 4.6 8.2 6.7
Services 6.5 8.3 8.6
Trade,hotels 6.2 8.5 9.4
Trans & Telecom 5.8 7.4 13.6
Financial services 9.4 8.8 7.6
Social ,personal 6.0 7.4 5.2
All Sectors 5.5 6.4 6.5
Capital Market Dr. Tarun Das 19
 2.5 Sectoral shares in India (% in
Sectors 1993-94 GDP)
2003-04 2004-05
Agriculture 32.9 24.0 21.1
Industry 23.9 23.8 27.2
Mining 2.1 2.3 2.8
Manufacturing 14.9 13.8 16.1
Utilities 1.3 1.1 2.1
Construction 5.6 6.6 6.2
Services 43.2 52.2 51 .7
Trade,hotels 13.8 16.3 16.3
Trans & Telecom 5.4 7.4 7.5
Financial services 11.5 13.6 13.7
Social 12.5 14.9 14.2
All Sectors 100.0 100.0 100.0

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 2.6 Trend of GDS as % of GDP
30.0

25.0

20.0
Ratio to GDP (%)

15.0

10.0

5.0

0.0

-5.0 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003-
91 92 93 94 95 96 97 98 99 00 01 02 03 04

Household Pvt.Corp Public Total

Capital Market Dr. Tarun Das 21

 2.7 Trend of GDI as % of GDP
3 0 .0
As % of GDP

2 0 .0 P vt.C o rp
P u b lic
1 0 .0 To ta l
0 .0
1
3
5
7
9
11
13
Ye a rs s inc e 1 9 9 0 -9 1

Capital Market Dr. Tarun Das 22

 2.8 Trends of Inflation (%)
and GR of Broad Money (M3)
25
20
Growth Rate (%)

C PI
15
WPI
10
5 M3

0
1
3
5
7
9
11
13
15
Ye a rs s inc e 1 9 9 0 -9 1

Capital Market Dr. Tarun Das 23

2.9 Employment growth rate in India
(%)
Sectors 1983-1993 1993-2000
Agriculture 2.2 0.0
Mining 3.7 -1.9
Manufacturing 2.3 2.6
Utilities 5.3 -3.6
Construction 4.2 5.2
Trade 3.8 5.7
Trans & Telecom 3.4 5.5
Financial 4.6 5.4
Social 3.6 -2.1
All Sector 2.7 1.1

Capital Market Dr. Tarun Das 24

 2.10 Sectoral Employment as % of
Total
Sectors 1983 1993-94 1999-2000
Agriculture 63.2 60.4 56.7
Industry 15.6 15.9 17.5
Mining 0.7 0.8 0.7
Manufac. 11.6 11.1 12.1
Utilities 0.3 0.5 0.3
Construction 3.0 3.5 4.4
Services 21.2 23.7 25.8
Trade,hotels 7.6 8.3 11.1
Trans/Telecom 2.9 3.2 4.1
Fin. services 0.9 1.1 1.4
Social /per 9.8 11.1 9.2
All Sectors 100.0 100.0 100.0
25
2.11 Composition of sectoral GDI (%)

1990-91 2002-03
A. Agriculture & allied 8.4 8.9
B. Industry 53.0 46.9
C. Services 38.5 44.2
--Trade, hotels 3.9 0.6
--Transport, comm. 11.7 10.8
--Finacial sectors 14.4 13.6
-- Govt, social 8.5 19.2
D. Total GDI 100.0 100.0

Capital Market Dr. Tarun Das 26

 2.12 Sectoral GDI as percentage of
GDP
1990-91 1995-96 2002-03
A.Agriculture 2.4 1.7 2.1
B.Industry 12.1 16.1 10.9
C.Services 9.6 9 10.3
6. Trade, hotels 1 0.8 0.1
7. Transport & comm. 2.9 2.8 2.5
8. Finacial sectors 3.6 3.4 3.2
9. Govt., social 2.1 2 4.5
10. Total GCF 23.1 26.8 23.3

Capital Market Dr. Tarun Das 27

 2.13 Industrial Growth
Rates
by Broad Sectors
Sectors 2002-03 2003-04 2004-05
(Weight)
Mining (10.5) 5.8 5.2 4.3
Manuf (79.4) 6.0 7.4 8.8
Elect (10.2) 3.2 5.1 5.2
OVERALL (100) 5.7 7.0 8.0

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 2.14 Industrial Growth
Rates
By Use-based
Classification
Sectors 2002-03 2003-04 2004-05
[Weight]
Basic (35.6) 4.9 5.4 5.5
Capital (9.3) 10.5 13.6 12.6
Intermed. (26.5) 3.9 6.4 5.8
Consumer(28.7) 7.1 7.1 11.3
-Durables (5.4) -6.3 11.8 14.0
-Non-dur (23.3) 12.0 5.8 10.4
Capital Market Dr. Tarun Das 29
2.15 GR of Infrastructure
sectors
Sectors 2002-03 2003-04 2004-05

Rail Traffic 5.3 7.5 8.0

Ports cargo 9.0 10.0 11.3
Cell phones 21.5 115.1 10.4
Air-Exp cargo 13.3 1.0 12.6
Air-Imp cargo 18.6 13.4 24.4
Air-Int.Pass 4.8 6.5 14.0
Air-Dom.Pass 9.6 13.1 23.6
Highways Up, .. -16.6 161

Capital Market Dr. Tarun Das 30