HIMANSHU SHARMA HINA DHAWAN KAVITA BISHT LOVELEEN KAUR MBA (HR) II Semester

Current Account Debt: $ 9.7 Billion External Debt 23% of GDP

Balance of Payment

1 9 9 0

Gross Fiscal deficit 6.6 % of GDP Internal Debt 49.8 % of GDP

9 1

Fiscal Crisis

Steep Decline in Credit Rating

Mounting Inflationary Pressure

Inflation Rate: 10.3 % CPI: 11.2%

Serious Fiscal Crisis

Cavalier Macro Management Internal & External Debt

Fragile Balance of Payment Situation

High Inflation, Gulf Crisis Level of Foreign Exchange not sufficient to finance Imports for even 10 days !!!!

Economic Crisis
Eroded International Confidence on Indian Economy Steep Decline in Indias Credit Rating

Economic Reforms

Macro Economic Stabilisation

Structural Reforms

Control of Inflation

Fiscal Adjustments

Balance of Payment Adjustments

Macro Economic Stabilisation Programme:

Control of Inflation

Fiscal Correction

Improving Balance of Payment Situation.

Import Liberalisations Devaluation of Rupee

Structural Reforms

Fiscal Reforms & Pricing Policy Reforms

Public Sector Disinvestment

Trade & Market Reforms Industrial Deregulation

Banking Reforms

Foreign Direct Investment

The fiscal reforms: (To reduce Fiscal Deficit)

Lowered taxes (individual, corporate, excise and custom)

Broadened the tax base; Introduced various controls over public expenditure, reduced subsidies. Removed exemptions and concessions to reduce distortions; Simplified laws and procedures to close loopholes and increase compliance, including using technology to better track tax payments. Service Tax was levied in 1994-95 on 3 services- telephone, general insurance and stock brokerage. Now it covers 106 services flat rate 10 %. Revenue from service tax in 2008-09 stands at Rs.65,000 crore , while the government earned Rs.51,301 crore from the tax in 2007-08 State Value added Tax introduced from Apr,2005. Central Sales Tax will be finally phased out by Mar 31, 2010. Combined national level Goods and Services Tax (GST) will be introduced from Apr 1, 2010

Trade and Capital Flow Reforms:

Trade Reforms:
Devaluation of Money by 18-19 % in July 1991 Depreciation against strong Currency Convertibility of Rupee on current account & Market determined exchange rate of rupee. Liberalisation of Import Regime : Reduction in tariffs Dismantling of physical controls Simple Import Procedures Significant number of items were shifted outside purview of Import Licensing. Full Convertibility of Rupee on trade account and later entire current account transactions. (August 1994) Reduction in Custom tariff rates Peak rate of import duty from 300 % to 150 % (91-92) to 65% (95-96) to 50 % to 25 % (03-04) to 10 % (07-08) Decanalisation of items of trade- opening more areas of external Sector to private sector

Export Promotion Measure:

Introduction of Export Oriented Units for promoting Exports from the agricultural and allied sectors. Simplification of Export Promotion Capital Goods Scheme. Adoption of more rational and convenient criterion for recognition of export houses/ Trading houses/ Star trading houses in 1994-95 Advance licence system-Duty free imports for exports. Setting up of Special Economic Zones (Mar 31, 2000). SEZ Act in 2005 & SEZ Rules Feb 10, 2006. During 2008-09 Exports from functioning SEZs were Rs.99,689 crore against Rs.66,638 crore in the 2007-08, an increase over 50 percent. Introduction of the Concept of Agriculture Export Zones Market Access Initiative Scheme (2001-02): Aims at in-depth Market Studies for select products in Chosen Countries to generate data for promotion of exports from India. Concessions and Exemptions: Successive Budgets have extended a number of Tax benefits and exemptions to the exporters. Reduction in Peak rate of Customs Duty to 10%, 10 year tax holiday to SEZ developers, Reduction in Customs Duty to 10% on specified equipment for Ports and Airports to encourage development of World Class Infrastructure. Tax Benefits for CONVERGENCE REVOLUTION- IT, Telecommunications and Entertainment Industry.

Industrial Deregulation (New Industrial Policy, 1991)

1. Abolition of Industrial Licensing: To enable the entrepreneurs make investment decisions on basis of their own commercial judgement. Industrial Licensing was abolished for all but 18 industries. With passage of time most of these industries have been Delicensed. As of now industrial licensing is compulsory for only 5 industries2. Public Sector Dilution: Initially 17 industries were reserved for public sector. 1991 Industrial Policy reduced these to 8, in1993 & 1998-99 four of these industries were opened up to private sector. On May 9, 2001 ARMS and AMMUNITION Sector was also opened to Private Sector. Hence now only 3 industries are reserved exclusively for public sectorAtomic energy, Minerals associated to atomic energy and Rail Transport. 1. MRTP Limit Goes: MRTP firms (firms with assets above 100 crore) were permitted to enter selected industries only and this too on a case by case approval basis. MRTP asset limit was scrapped, no more required prior government approval for investment in relicensed industries. MRTP act was amended to give more emphasis on prevention and control of monopolistic, restrictive and unfair trade practices to protect consumers from such practices.

Pricing Policy Reforms:

To reduce budgetary provision for subsidies and to promote more flexible price structure, the government increased the administered prices of various commodities and inputs (petroleum products and fertilizers) and gave greater freedom to set price as per market forces. The government reduced excise and customs duties on wide spectrum of goods to create a favourable impact on price front.

Market Reforms
Financial Market refers to all those institutions which lend funds to
business enterprises and public authorities.
Financial Market

Money Market

Capital Market

Money Market deals with provision of short term credit. Capital Market deals in lending and borrowing of medium term
and long- term credit.

Money Market Reforms

Introduction of Money market Instruments 182 Day treasury Bills 364 Day Treasury Bills Certificates of Deposits Commercial Paper Introduction of Repos (December 1992) Repo : An instrument of repurchase agreement between RBI and commercial Banks ; asset used by Banks for short term liquidity. It is market determined and fluctuates steeply. To further develop and widen REPOs, RBI introduced regulatory safeguards in Apr 1991. Sector specific Refinance Facilities Refinance is used by central banks to meet liquidity shortage in the market, to control monetary and credit conditions and direct credit to selective sectors.

Capital market Reforms:

Introduction of the auction system for the sale Government of India medium and long term securities . (June 3, 1992) Government of India set up the Securities Trading Corporation of India (STCI) to develop institutional structure for vibrant secondary market in Government securities. (June 1994) Automatic Monetisation of Fiscal Deficit through the issue of ad hoc Treasury Bills was phased out. Primary Dealers were introduced as market makers in Government Securities Markets. The Delivery versus Payment system (DvP) was introduced in 1995 for settlement of transactions in Government Securities. SEBI (setup in 1988) was given a statutory recognition in 1992. It was mandated to regulate the business in stock markets and other securities markets.

Capital market Reforms (contd.)

National Stock Exchange of India Ltd. (NSE) There were two guiding principles that drove the design of the new exchange: first, that the price discovery process should be as transparent as possible; second, the exchange should support competition - there should be equal access for all equity market participants. The salient features that differentiated the design of the NSE from the existing exchanges were: 1. National platform that offered equal access to traders from all corners of a widespread geographical area, 2. A competitive market in securities intermediation, with a steady pace of entry and exit, 3. Orders matched electronically, on the basis of price-time priority, 4. Anonymous trading followed by guaranteed settlement, 5. Demutualised governance structure, as opposed to being an association of brokers, with a professional management team running the operations of the exchange.

Economic Meltdown
Poor Banking Regulations Conspicuous Spending

Sub Prime Mortgage Crisis

Sub Prime Credit Card Crisis

Fiscal Deficit

Boom in Housing sector & Easy Conditions=>Increased Demand for home Loans.

Credit

Loan Agencies further relax loan conditions => SUB PRIME LOANS.

High Demand for Homes=> People take out second mortgages against the added value (of home) to fund their Consumer Spending.

SUB PRIME LOANS : an excellent Investment option. => Big fund investors like hedge funds and mutual funds bought such portfolios from the original lenders. The lenders had fresh funds to lend, Major (American and European) investment banks and institutions heavily bought these loans (known as Mortgage Backed Securities, MBS) to diversify their investment portfolios as CDOs (Collateralized Debt Obligations). .

Housing Bubble Burst: A messy situation for SUB PRIME BORROWERS: Their house prices were decreasing and the loan interest on these houses was soaring. Many of them opted to default on their home loans and vacated the house.

The lending companies were in a situation where amount exceeded the total cost of the house. Eventually, there remained no option but to write off losses on these loans.

The Mortgage Backed Securities (MBS), by that time had become parts of CDOs of giant investments banks of US & Europe, lost their value. Falling prices of CDOs dented banks investment portfolios and these losses destroyed banks capital.

A loss in the net capital of banks meant a serious detriment in their capacity to disburse loans for various businesses and industries. This presented a serious cash crunch situation for companies who needed cash for performing their business activities. => Global economic meltdown.

Impact on India

Decline in Share Market

Weak Rupee against Dollar Banks faced severe Cash Crunch:

Shortage of liquidity in the market

Fiscal Impact :

No direct Impact

Governments Finances under pressure Higher expenditure outgoes due to (i) higher international crude oil prices (up to September 2008) and the incomplete pass-through to domestic prices (ii) higher fertiliser prices and associated increase in fertiliser prices (iii) the Sixth Pay Commission award and (iv) debt waiver scheme. The fiscal stimulus packages involving additional expenditures and tax cuts have put further stress on the fisc. Reflecting these factors, the Central Governments fiscal deficit more than doubled from 2.7 per cent of GDP in 2007-08 to 6.0 per cent in 2008-09, reaching again the levels seen around the end of the 1990s. The revenue deficit at 4.4 per cent of GDP . Current Expected fiscal Deficit 6.6% of GDP (Mar,2010). Net market borrowings during 2008-09 almost trebled from the budgeted Rs.1,13,000 crore to Rs.3,29,649 in the revised estimates (actual borrowings were Rs.2,98,536 crore as per Reserve Bank records) and are budgeted at Rs.3,08,647 crore (gross borrowings at Rs. 3,98,552 crore) in 2009-10.

Impact on the real economy

Reflecting the slowdown in external demand, and the consequences of reversal of capital flows, growth in industrial production decelerated to 2.8 per cent in 2008-09 (April-February) from 8.8 per cent in the corresponding period of 2007-08. For 2009- 10 it is expected to grow by 4.8% [Centre for Monitoring Indian Economy (CMIE)]. Services sector activity has held up relatively well in 2008-09 so far (April-December) with growth of 9.7 per cent (10.5 per cent in the corresponding period of 2007-08). Services sector activity was buoyed up by acceleration in community, social and personal services on the back of higher government expenditure. Real GDP growth has slowed to 6.9 per cent in the first three quarters of 2008-09 from 9.0 per cent in the corresponding period of 2007-08. On the expenditure side, growth of private final consumption expenditure decelerated to 6.6 per cent from 8.3 per cent. On the other hand, reflecting the fiscal stimuli and other expenditure measures, growth in government final consumption expenditure accelerated to 13.3 per cent from 2.7 per cent.

What Saved INDIA

High savings and investment rates

A comfortable level of foreign exchange reserves which could be drawn to make up for any shortfalls in capital inflows
The sustained growth in deposit accretion and credit flows, and assured safety for depositors.

The global competitiveness of its manufacturing and services

Sound financial sector

Well-regulated and wellcapitalised banking system

 The Finance Minister had reduced certain duties to give relief to some of the affected sectors like steel and aviation.
to minimise the adverse impact of global crisis on domestic economy

On budgetary side, higher allocations for social sectors and rural employment and other flagship programmes should
generate consumption which contributes to economys growth

Fiscal and Monetary measures taken by Government The Reserve Bank of India had vigorously moved in Oct, 2009 to bring down the cash reserve ratio from a peak of 9 per cent to 5.5 per cent, reduce the key policy interest rate (repo) from 9 to 7.5 per cent and also the statutory liquidity ratio by one percentage point to 24 per cent of their net demand and time liabilities.
This injected Rs. 250,000 crores of liquidity for banks to finance businesses and consumers. These measures, were welcomed by the industry and other productive sectors.

Economic Reforms in Foreign Trade

Buridans Ass

Reforms of 1991
Were aimed at
Driving India out of balance of payments crisis
Privatization of public sector Opening up India to foreign trade

Opening up of Indias equity markets to investment by FIIS

Doing away with License Raj

EXIM POLICY 1997-2002

Salient Features:o Opening up of SEZS

o Imports Liberalization
o Duty On imported Capital Goods Under EPCG (Exports Promotion

Capital goods) scheme reduced from 15% to 10%.

o Under Advance License Scheme the period for export obligation was

extended from 12 months to 18 months. Further extension of 6 months could be given on payment of 1% of value of unfulfilled exports.

EXIM Policy 2002-2007

Implications:
This policy focused on all round development of India whether it

was technology oriented or growth oriented. The contribution of agriculture and allied sector was increased to exports with the help of certain privileges and incentives. The cottage industry also started to contribute to exports. It also focused on small and medium sector enterprises. It also helped in developing the industrial sector by importing capital and raw material goods duty free

EXIM Policy 2004-2009

Handlooms and Handicraft:- specific funds earmarked for promoting handloom and handicraft exports. Duty free import entitlement of specified trimmings and embellishments to be 5% of FOB value of exports during the previous financial year.. Gems & Jewelry:- Import of gold of 18 carat and was to be allowed under the replenishment scheme. Duty free import entitlement of consumables for metals other than Gold, Platinum shall be 2% of FOB value of exports during the previous financial year. Duty free re-import entitlement for rejected jewelry shall be 2% of the FOB value of exports

 Board of Trade: The Board of Trade to be revamped and given a clear

and dynamic role in advising government on relevant issues connected with Foreign Trade Policy. There would be a process of continuous interaction between the Board of Trade and Government in order to achieve the desired objective of boosting India
Export promotion scheme: A new scheme called target plus

introduced. Duty free credit entitled to exporters on incremental exports. For incremental growth of over 20%, 25% and 100%, the duty free credit would be 5%, 10% and 15% respectively, of fob value of incremental export.
Service export: Scheme called served from india as a brand instantly

recognized abroad in which individual service providers earning foreign exchange of Rs. 10 lakh would be elligible for 10% of total foreign exchange earning.

 Duty free import under EPGC (Export promotion

Capital goods): The scheme allows import of capital goods for pre production, production and post production at 5% Customs duty. Capital goods would be allowed at 0% duty for exports of agricultural products.
Export Oriented unit (EOUs):- EOUs shall be

exempted from service tax in proportion to their exported goods and services.

Outcomes

Retail

Key Players

Analysis of growth

Organized retail growing at estimated 25% . The Indian retail market, which is the fifth largest retail destination globally, has been ranked as the most attractive emerging market for investment in the retail sector by AT Kearney's eighth annual Global Retail Development Index (GRDI), in 2009. The share of retail trade in the country's gross domestic product (GDP) was between 810 per cent in 2007. It is currently around 12 per cent, and is likely to reach 22 per cent by 2010. E.g.: Bharti has invested 60 Billion with the largest retail Wal-Mart (last year).

By 2010 Indian retail sector would be generating 10 million employment opportunities.

Entertainment Industry

Television

According to the study by FICCI and KPMG, the television industry, which is currently valued at about US$ 4.63 billion, will expand by 14.5 per cent between 2009 and 2013 According to a PwC report, the television advertising industry is expected to account for a share of 41.0 per cent of the advertising industry in 2013, up from the present share of 39.0 per cent. Further, television channels such as Cartoon Network, Pogo, Disney, MTV and Star Plus are expanding their product range to tap India's growing US$ 125.9 million licensing and merchandise market. Indias national television broadcaster, Doordarshan, will be completely digitized by 2017, according to Mr Zohra Chatterji, Joint Secretary, Information and Broadcasting ministry.

Movies

100 per cent FDI is permitted in film industry (i.e. film financing, production, distribution, exhibition, marketing and associated activities relating to film industry)
Animation for special effects in Gladiator and Spiderman Done in India Tie Ups of Local Production companies with Columbia Tristar, Walt Disney, Warner Bros etc. "My Name Is Khan", which has been acquired by Fox Star for reportedly $20 million. The studio has also signed a twofilm deal each with Vipul Shah and A.R. Murugadoss.

Music
Current size US$149 Million
According to a PwC study,

the industry is likely to grow to become a US$ 164.56 million industry by 2012.

Health Industry

 Medical tourism is expected to become a US$2.2 billion industry by 2012 100% FDI is permitted for all health-related services under the automatic route Income tax exemption for 5 years to hospitals in rural areas, Tier II and Tier III

cities
Indian hospitals are gaining reputation globally as quality service providers Many Indian hospitals have secured accreditation from the British Standards

Institute and Joint Commission on Accreditation of Healthcare Organisations

NHS, UK has indicated India to be a preferred destination for surgery The industry is expected to grow to US$79 billion by 2012

Power sector

100% FDI is allowed in the power sector under the automatic route in
India The government of India aims at reaching 2, 00,000 MW by the year 2012. Already among top 5 power generating countries

Real Estate

India's property sector could begin to improve from late 2009 and may attract up to US$ 12.11 billion in real estate investment over a five-year period. India leads the pack of top real estate investment markets in Asia for 2010, according to a study by PricewaterhouseCoopers (PwC) and Urban Land Institute, a global non-profit education and research institute. A McKinsey report reveals that the average profit from construction in India is 18 per cent, which is double the profitability for a construction project undertaken in the US

Foreign direct investment (FDI) into India in the real estate sector for the fiscal year 2008-09 has been US$ 12.62 billion approximately, according to the Department of Policy and Promotion (DIPP).

Facts and figures

Forex Reserves(US$Billion) 300 250 200 150 100 50 0 2.2 1991 17 1995 2001 2005 2007 2008 2010 54.1 144.05 282.938 272.72 254.05

FDI INFLOWS( Financial year wise data)

S.no Financial Year Total FDI Inflows %age growth over previous year
---

1 2

1991-2000(Aug91-Mar00) 2000-01

15843 4029

3
4 5 6 7 8 9 10

2001-02
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

6130
5035 4322 6051 8961 22826 34362 35168

(+)52%
(-)18% (-)14% (+)40% (+)48% (+) 146% (+) 51% (+) 02%

11

2009-10(uptoJuly09)

10492

------------------

Country wise FDI inflows in US$ Million (From April 2000 to July 2009)
Amount of FDI inflows 45000 41418 40000 35000 30000 25000 20000 15000 8569 7220 10000 5338 3865 3047 5000 0

Sing ap or e

s Ne th erlan d

Mau r itius

U.S. A

Japa n

UK

Sectors attracting Highest FDI inflows (From April 2000 to July 2009)
FDI Inflows(US$Million) 25000 20000 15000 10000 5000 0 9234 7369 6951 3047 21390

Services Sector

Telecommunicatio n

Computer hardware and software

Housing and real Estate

Construction

The Road Ahead

Foreign Trade Policy 2009-14

New foreign Trade policy was announced on 27th August 2009 for period 2009-14 by Government Of India and Ministry of Commerce and industry. Earlier this policy was Known as EXIM Policy

Aim In general
The policy aims at developing

export potential, improving export performance, boosting foreign trade and earning valuable foreign exchange. FTP assumes great significance this year as India's exports have been battered by the global recession.
A fall in exports has led to the

closure of several small- and medium-scale export-oriented units, resulting in large-scale unemployment.

Targets

Export Target : $ 200 Billion for 201011 Export Growth Target: 15 % for next two year and 25 % thereafter. To Double India's exports of goods and services by 2014. To double India's share in global merchandise trade by 2020 as a long term aim of this policy. India's share in Global merchandise exports was 1.45% in 2008. To arrest and reverse declining trend of exports is the main aim of the policy. This aim will be reviewed after two years.

Challenges
Infrastructure:-Highways, modern bridges, world-class airports,
reliable power, and clean water are in desperately short supply

Political challenges:-The support of the political structure has to

be there towards the investing countries abroad

Equity challenge:- Growth not inclusive Ease of doing business:- India ranked at 133 out of 183
countries in Doing Business 2010 Report by International Financial Corporation

BANKING SECTOR IN INDIA

Since independence , banking system in India has evolved through four distinct stages : 1.Foundation stage from 1050s, 1960s and the 1969;
2. Expansion stage mid 1960's i.e. 1969 to 1984;

3. Consolidation stage from 1985 to 1990; and

4. Reform stage from 1991 onwards

Banking system post independence Nationalization of the Reserve Bank of India in 1948 . The Reserve Bank of India Act ,1949 In 1955, the Imperial Bank of India was nationalized under the name of State Bank of India. The scheme of social control was initiated by the government in the year 1967. The government nationalized 14 major banks which held a deposit of around Rs 50 crores on 19th July 1969 and 6 more banks which held deposit of around Rs 200 crores on 15th April 1980.

 Rapid expansion of branch network: no. of branches , advances and deposit rates increased. Specialized financial institutions : Industrial development bank of India (IDBI) Industrial credit and investment bank of India NABARD LIC Regional rural banks Export import bank of India

Changing corporate environment

Since 1991 business environment altered radically with economic liberalization. There was increased competition so it became important to introduce reforms Several committees have been appointed to suggest certain measures.

I. THE NARASIMHAM COMMITTEE 1991 AND 1999

The Narasimham Committee suggested Mergers among strong banks both in the public sector and private sector ,developmental financial institutions and nonbanking financial companies. Merger needs to be based on synergies, location and business making commercial sense. Mergers should be managerial, it should yield benefits to staff and branch network nationalization. Should lead to the emergence of a strong bank by way of increased capital base and with organizational strength.

II. THE KHAN COMMITTEE 1997

To study harmonization of roles of commercial banks and financial institutions. Recommended that banks and developmental financial institutions should be permitted to explore and enter into gainful merger. Not only recommended merger between banks but also between banks and development financial institution, between strong and weak banks and between two strong banks and development financial institution

III. VERMA COMMITTEE 1998

recommended that merger should take into account synergies and complementariness of merging units to provide opportunities for pooling of strengths, lead to overall reduction of cost. recommended mergers only between strong banks that lead to cost reduction and increase in business and profit.

Role of RBI as central bank

Established on April ,1935 Nationalised on January 1,1949 Functions Issue of currency notes Banker to the Government Bankers bank Exchange management and control Credit control Agriculture finance Collection and publication of data Acts as economic advisor to govt.

Monetary policy of RBI

Bank Rate The Bank Rate has been retained at 6.0 per cent. Repo Rate The repo rate under the Liquidity Adjustment Facility (LAF) has been retained at 4.75 per cent. Reverse Repo Rate The reverse repo rate under the LAF has been retained at 3.25 per cent. Cash reserve ratio increase the cash reserve ratio (CRR) of scheduled banks by 75 basis points from 5.0 per cent to 5.75.V. the first stage of increase of 50 basis points beginning February 13, 2010, followed by the next stage of increase of 25 basis points beginning February 27, 2010

BANKING IN RURAL

Banking in rural areas

The worlds second largest populated country, India , is being seen as a market with huge potential by the world economies. Ever since the reforms of 1991 of liberalization, privatization and globalization Indian markets in urban areas have grown appreciably and are the verge of saturation so it becomes important to tap the rural market since 60 percent of population lives in rural areas.

 India has been shielded from recession since: Less dependent on exports for GDP Good consumer base in india Strong backbone of our banks According to RBI only 39 percent of the adult population in rural areas have bank accounts against 60 percent in urban areas(Jan 2009).

 So it becomes important to tap the rural sector because it will lead to growth of not only banking sector but also the industrial sector .so it becomes imp to keep banks at the top of the economic growth, reasons being: promote savings . speed up capital formation and then become source of finance of trade and credit for industry. Provide credit to entrepreneurs for their ventures which promote production and employment . Which further generates income and hence reduces poverty.

 Problems Limited access by rural poor to services especially credit and insurance . Unorganized sectors of lending.

Measures
Project financial literacy by RBI : financial inclusion of the rural poor to tap the growth potential in rural markets by volume growth for banks through edutainment (education+entertainment). to disseminate knowledge about the central bank and general banking concepts to various target groups like children, women, self help groups etc., using development communication and increasing the habit of saving in rural poor

 Because if in an economy, saving is more than 30%

for 7 consecutive years, the GDP doubles and India cant ignore the rural sector to increase our savings Financial inclusion the Committee on Financial Inclusion (Chairman: Dr. C. Rangarajan) has suggested a National Mission on Financial inclusion. the State Level Bankers Committee(SLBC) has been advised to identify one or more districts for 100 per cent financial inclusion.

 The 100 per cent financial inclusion drive is

progressing all over the country. So far, 431 districts have been identified by SLBCs for 100 per cent financial inclusion. As on March 31, 2009, 204 districts in 18 States and 5 Union Territories have reported having achieved the target.

What has been achieved

No. of rural branches -31,727 constituting 39.7% of total bank branches(as on 31 June 2009) Number of ATMs -44,587(as on May 31, 2009) Number of kisan credit cards -76 milllion(CME publications 2007-08) Number of mobile phones -403 million(as on April 30 ,2009)

Major concerns (report on trends and progress in banking 2009)

Coverage Infrastructure Technology Participative efforts

 Economic recession

Policies to combat recession

The Indian financial sector was largely resilient to the global turmoil during 2008-09. During crisis the main policy initiatives were mainly aimed at maintaining stability and ensuring liquidity in the banking system and channeling adequate credit to productive sectors of economy.

Priority sector lending

The objective of priority sector lending guidelines is to channelise credit to some of the vulnerable sectors of the economy, which may not be attractive for the banks from the point of view of profitability but are important for economic development. Loans granted to agriculture, micro and small (manufacturing and service) enterprises, micro credit, education and housing fall under the ambit of priority sector lending by the Indian banks.

For Agriculture and Allied Activities

Several measures were taken during the year to increase the flow of credit to agriculture and allied activities. The Union Budget for 2009-10 set a target of Rs.3,25,000 crore for agricultural credit for the year. Agricultural Debt Waiver and Debt Relief Scheme, 2008

Credit to Micro and Small Enterprises Sector

MSE sector assumes importance in the economy owing to its employment potential and regional dispersal. This sector also mobilises capital from the lowermiddle class sections to invest in productive economic activity. Thus, it encourages the development of entrepreneurial skills and enhances export earnings through the production of a wide range of products.

 The Union Budget for 2009-10 provided for a special fund worth Rs.4,000 crore to Small Industries Development Bank of India (SIDBI) to facilitate the flow of credit at reasonable rates to MSE sector.

CURRENT SCENARIO

Current scenario
The Indian banking system is financially stable and resilient to the shocks The RBI has the tenth largest gold reserves in the world New deposits have gravitated towards the public sector banks According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: June 2009', nationalized banks, as a group, accounted for 49.7 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 24.2 per cent. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.5 per cent, 5.6 per cent and 2.9 per cent, respectively.

 Nationalized banks hold the highest share of 50.4 per cent in the total bank credit, with SBI and its associates at 23.5 per cent and other scheduled commercial banks at 18.0 per cent Foreign banks and regional rural banks had a share of 5.7 per cent and 2.4 per cent respectively in the total bank credit.

 The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI deposits have increased by nearly US$ 3.7 billion in the first four months of 2009-10 NRI fund inflows increased since April 2009 and touched US$ 45.33 billion till July 2009 as per the RBI's September bulletin.

DEFINITION
Disinvestment of PSUs simply means sale of shares of public sector enterprises to outsiders.

Disinvestment is a wider term extending from dilution of the stake of the government to a level where there is no change in the control to dilution that results in the transfer of management.

METHODS OF DISINVESTMENT

IPO (Initial Public Offering)

An initial public offering (IPO) occurs when a company first sells common shares to investors in the public.

 Employed in cases where govt wants to raise resources but not want to lose control Likely to face less resistance from employees as there is a continuity in management. Can be used to offer shares to employees. It would help in sharing the benefits of disinvestment with the people of India; it would improve support for the reforms process Problem is valuation-what should be the price of the share?

FPO(Follow-on Public Offering)

Any company that is already listed with either the NSE or BSE and want to raise more capital from the market have to offer the FPO....

The first time the company raises the capital is called IPO (initial public offer) henceforth its FPO.

STRATEGIC SALE
In the strategic sale of a company, the transaction has two elements: Transfer of a block of shares to a Strategic Partner Transfer of management control to the Strategic Partner

Strategic Sales from 1999-00 to 2003-04

No.
1. 2.

NAME
MFIL Bharat Aluminium Co.

% Govt Equity sold

Realisation(crore)

99.99 51

149.52 551.50

3.
4. 5. 6.

CMC
HTL Lagan Jute Machinery Corporation ITDC-19 hotels

51
74 74 90

152
55 2.53 404.76

7.
8. 9. 10.

IBP Co.
Videsh Sanchar Nigam Limited Paradeep Phosphates Hindustan Zinc

33.58
25 74 44.92

1153.68
1439.25 151.70 768.88

11.
12.

Indian Petrochemicals Corporation Ltd.

Jessop and Co. GRAND TOTAL

26
72

1490.84
18.18 6337.84

Source: Indian Economy,27th Edition

BENEFITS

Govt. may realize a better price. Private partner introduces better management practices. In some situations, the buyer brings in essential new technology or expertise.

PROBLEMS Non-transparent process. May lead to monopolistic or oligopolistic situation harmful to consumer interests. Risk of employees losing their job.

Problems of PSUs
The govt. of India observed some serious problems in public sector like Insufficient growth in productivity Poor project management Over-manning Lack of continuous technological upgradation Lack of autonomy

Thus, in 1991 government adopted a new approach to reform and improve the public sector undertakings performance i.e 'Disinvestment policy which involves the sale of the public sector equity to the private sector and public at large.

RATIONALE FOR DISINVESTMENT

1. Improved efficiency and performance. 2. No Political interference. 3. Faster decision making- Delayed decision making is often equivaqlent to making no decision. 4. To encourage wider share of ownership. 5. Bankruptcy taken seriously in private sectorremedial measures taken earlier. 6. To reduce the financial burden on government.

Unstated Rationale
To reduce fiscal deficit 9.4% in 1990-91 6.8% in 2008-09

Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated . It is the difference between the government's total receipts (excluding borrowing) and total expenditure.

Disinvestments in PSUs
YEAR 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 RECEIPTS (in crore) 3037.74 1912.51 0.00 4843.10 168.48 379.67 910.00 5371.11 No. of companies in which equity sold 47 29 17 5 1 1 5

1999-00 2000-01
2001-02 2002-03 2003-04

1860.14 1871.26
5657.69 3347.98 15547.41

5 5
8 8 2
Ctd

YEAR

RECEIPTS (in crore)

No. of companies in which equity sold

2004-05 2005-06 2006-07 2007-08 2008-09

2009-10 TOTAL

2764.87 1569.68 4181.39 4259.90 57682.93

3 1 3 2(NHPC & OIL)

as on 31st Jan,2010
Source: Indian Economy,27th Edition & divest.nic.in

 Till 1999-2000, primarily through sale of minority shares in small lots. From 1999-2000 till 2003-04, the emphasis of disinvestment changed in favour of Strategic Sale.
The 2004-09 phase, only minority stake sales. In 2006, opposition by UPAs main constituent, disinvestment programme suspended.

2009-10, second term of UPA started

[video]

The PSUs are the wealth of the nation, and part of this wealth should rest in the hands of the people.
I will retain 51% in PSUs but I will disinvest

I must state clearly that banks and insurance companies will remain in the public sector

Finance Minister Pranab Mukherjee came up with a formula that no one could argue with Govt would sell shares of only profit making PSUs pleased investors. Govt would sell small stakes and wouldnt relinquish control trade unions controlled. Govt would use money to finance social schemes silenced all political opposition.

CURRENT POLICY
Approved by the Government on 5th November 2009 i) Already listed profitable PSUs, not meeting the mandatory public shareholding of 10%, are to be made compliant ii) All PSUs having positive net worth, no accumulated losses and having earned net profit for the three preceding consecutive years are to be listed through Public Offerings iii) The proceeds from disinvestment would be channelized into National Investment Fund and during April, 2009 to March, 2012 would be available in full for meeting the capital expenditure requirements of govt.

NIF National Investment Fund

Constituted by Govt. on 27Jan,2005 The proceeds from disinvestment of Central Public Sector Enterprises are channelized into the National Investment Fund The income from the Fund would be used for the following broad investment objectives: a) Investment in social sector projects which promote education, health care and employment. b) Capital investment in selected profitable and revivable Public Sector Enterprises.

Department of Disinvestment
All matters relating to disinvestment of Central Government equity from PSUs. Decisions on the recommendations of the Disinvestment Commission on the modalities of disinvestment, including restructuring. Implementation of disinvestment decisions, including appointment of advisers, pricing of shares, and other terms and conditions of disinvestment. Financial policy in regard to the utilization of the proceeds of disinvestment channelised into the NIF.

The PSU Parade

2009 TWO PSUs DISINVESTED

% Govt equity sold NAME NHPC (National Hydroelectric Power Corporation) IPO in %Present Govt Holding

AUG 09

10

86.36

OIL (Oil India Limited)

SEP 09

10

78.43

Source: Outlook Business-jan23,2010 & Economic Times

NHPC
The company was set up in 1975 to plan, promote and develop hydroelectric power, but later expanded its operations to include other sources of energy including geothermal, tidal and wind. IPO from 7 to 11 aug,09 This was the first stake sale by a state-run company in 17 months after REC went public in February 2008 to raise over Rs1,600 crore.

OIL
In 1981, OIL became a wholly-owned Government of India enterprise OIL is a premier national oil company, engaged in the business of Exploration, Production and Transportation of Crude Oil and Natural Gas.

2010 ONE PSU DISINVESTED

Name Approved on % Govt. Equity sold 5 %Present Govt holding 84.5 Issue Available From Feb 3-5, 10 NTPC 19Oct, 09

NTPC
NTPC is the largest player in the power sector that contributed 28.5 per cent of the total electricity generated in the country in 2009, with only 19 per cent of the total capacity. In 2004, the company had raised around Rs 2,700 crore through its IPO when the Government diluted a 5.24% stake. 41.23 crore shares sold in the issue. The FPO from Feb 3-5, 2010. The share price as announced on Feb2,2010 was Rs.201/share.

PSUs Approved for disinvestment as on 31st Dec, 2009

No. Name Approved on % Govt. Equity to be sold
15.1 8.38 10

%Present Govt holding

81.90 (FPO) 98.38 (FPO) 75.00 (IPO)

Issue Available From

Feb19-23, 10 Mar 10, 10 Early May, 10

Expected Receipts (in crore)

Rs.4500 Rs.14000 Rs.1200

1. 2. 3.

REC Ltd. NMDC Ltd. SJVN Ltd.

29 Oct, 09 03 Dec, 09 19 Oct, 09

Source: www.divest.nic.in & Economic Times

THE BIG SALE

"The 60-odd companies which we are tracking now, we
hope a majority of these will come into our action plan for disinvestment over the next few years," Disinvestment Secretary Sunil Mitra told private TV channel CNBC-TV18 in an interview. Disinvestment Action Plan of these PSUs will be ready by March,2010

Navratnas.
Navratna was the title given originally to nine PSUs, identified by the Government of India in 1997 as its most prestigious, which allowed them greater autonomy to market. This status empowers a PSU to invest up to Rs. 1000 crore or 15% of their net worth on a single project without seeking government approval. BHEL, BPCL, HPCL, IOC, IPCL, NTPC, ONGC, SAIL and VSNL, of which IPCL and Videsh Sanchar Nigam Ltd (VSNL) were later privatised. GAIL and MTNL joined the list in November 1997. At present there are 18 PSUs with Navratna status.

 To be qualified as a Navaratna, the company must obtain a score of 60 (of the total 100). The score is based on six parameters which include net profit to net worth, total manpower cost to total cost of production or cost of services, PBDIT (Profit Before Depreciation, Interest and Taxes) to capital employed, PBIT to turnover, EPS (Earning per share) and inter-sectoral performance. A

Maharatnas.
In 2009, the government established the Maharatna status, which raises a company's investment ceiling from Rs. 1,000 crore to Rs. 5,000 crore.
Criteria In order to qualify as a Maharatna, a company must have:
Three years with an annual net profit of over Rs. 5,000 crore Net worth of Rs. 15,000 crore Turnover of Rs. 25,000 crore The only companies currently meeting the criteria are SAIL, ONGC and NTPC.

References
Outlook Business, January23,2010 Business India, Jun28,2009 Indian Economy, by Mishra & Puri, 27th

edition Indian Economy, by Mishra & Puri, 26th edition The Economic Times http://divest.nic.in

Report on Trends and Progress in Banking RBI bulletin Indian Economy by Misra Puri Indian Economy by P K Dhar Indian Financial system by Bharti V Pathak Outlook Business, January23,2010 Business India, Jun28,2009 Indian Economy, by Mishra & Puri, 27th edition Indian Economy, by Mishra & Puri, 26th edition The Economic Times http://divest.nic.in

http://www.livemint.com/2009/07/17101937/Industrial-production-to-fall.html http://www.thaindian.com/newsportal/business/sez-exports-grew-50-percent-in-200809_100223721.html http://smetimes.tradeindia.com/smetimes/in-depth/2008/Nov/07/indian-economy-canovercome-global-crisis.html