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character • Diversification • Global reach • Technology orientation • Change • Government control Environment of Business Environment by definition is something external to an individual or an organization. Business environment refers to all external factors which have direct or indirect bearing on the activities of business. The business environment is divided into • Internal environment • External environment a. Micro environment b. Macro environment Diagrammatic Representation of Business Environment
Micro/ macro External Environment
Internal Environment • Value system, • goals and objectives, • management structures, • relationship among the various constituents, • physical assets, • technological capabilities and human,
financial and marketing resources make the internal environment of business.
External Environment External environment of business consists of institutions, organizations and forces operating outside the company. External environment can be classified into • Micro Environment • Macro Environment (1) Micro environment The micro environment refers to such players whose decisions and actions have a direct bearing on the company. Since modern business broadly has two aspects, viz., Production and selling of goods, the micro environment of business can be divided accordingly. The most prominent performers in the micro environment are: • Suppliers of inputs • Workers and their unions • Customers market intermediaries • Competitors • Publics (2) Macro environment Macro environment comprises large societal and physical forces which affect the company and also the players in the company’s micro-environment. Macro environment of a company refers to all those economic and non- economic factors which exercise their influence on the business activity in general and thus determine opportunities that a company may have to promote its business. Macro environment can be classified into • Economic environment • Non-economic environment Diagrammatic representation
Dia g r a m m a t ic r e p r e s e n t a t io n
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Na tu ra l e ch no lo De m og ra phic g ic a l
Economic Environment Since business is basically an economic activity, economic environment of business – both national and global – is of strategic importance. In the economic environment of the country, • country’s economic system, • macroeconomic scenario , • phase of business cycle through which the company is passing, • organization of the financial system and • economic policies of the government are the most important elements. 1.Economic System a. Capitalism b. Socialism 2. Macro-economic Scenario a. High rates of growth b. Inflation c. High rates of savings and investment d. Fiscal imbalance e. Balances of payments f. Deficits Phases of business cycle a. Prosperity b. Recession c. Depression d. Stagflation Financial System Economic Policies a. Industrial policy b. Trade policy c. Monetary policy d. Fiscal policy Non-Economic Environment The non- economic environment of business can be classified as: • Political environment • Legal environment • Socio-cultural environment • Demographic environment • Technological environment • Natural environment
(a) Political Environment
(b) Legal Environment The governments sets the legal framework within which business operate. Legislations defining property and business organizations, laws of contracts and bankruptcy, mutual obligations of labour and management and a multitude of laws and regulations constraining the way business activities are carried out constitute legal environment of business. Economic legislations, as these, are often called, have a direct bearing on the business. Economic legislations can be classified into two categories: Legislations which have a facilitatory role. Ex: The Contract Act provides the rules for systematic exchange transactions. Legislations which are restrictive in nature. Ex: MRTP Act and FERA. (c) Socio-cultural Environment The Social environment is made up of the attitudes, desires, expectations, degrees, of intelligence and education, beliefs and customs of people in a group or a society. Culture is the heart of a particular group or society – what is distinctive about the way members interact with one another and with outsiders – and how they achieve what they do. Socio-cultural environment is made up of attitudes, desires, expectations, beliefs, faiths, customs of people besides their set of material practices through which people produce goods and services that they need for satisfying their wants. Globalization of culture Multiculturalism a. Caste b. Race c. Ethnic issues Demographic Environment Demographic factors like the Size and Growth rate of population, Life Expectancy, Age and sex composition of population, Work participation rate, Employment status, Ruralurban distribution, Educational levels, Religion, Caste, Ethnicity and Language are all relevant to business. Some of the issues are: • Size and growth of population
Ex : Australia. Iran. It comprises the farms . offices.factories. Tertiary Sector – services like transport. Brazil. shops. distribution. France. Primary Sector – agriculture. Ex : China. Spain.Middle income countries – with per capita GNP between $766 and $9. banking. Classification of Countries (economy) The World Bank in its World Development Report (2005) has classified various countries of the world on the basis of their per capita Gross National Income (GNI) or (GNP). Iraq. They are 1. exchange and consumption of goods and services are organised in a country. trade.• • • Age structure of population Urban-rural population Burden of population on environment Module – 3 Economics Of Development Meaning of Economy (or) Economic System An economy or economic system refers to the manner in which the various economic activities relating to production. and the way in which the people of a country earn their living. UAE. insurance. 2. transport systems. Cuba. Under-developed economy (backward) Developed economy The United Nations Experts in 1971have classified countries with per capita real national income of $1000 and $4000 a year as developed countries. They are 1. India. Canada. banks. Nepal. mining. etc. 3. Germany.385. etc The economy of a country is divided into three sectors: 1. hospitals. Uganda. mines. schools and colleges.Low income countries – with per capita GNP of $765 and below. High income countries – with per capita GNP higher than $9. Fiji. etc. A developed economy is one which is economically advanced and whose economy is 5 . etc. Secondary Sector – large scale and small scale industries. Egypt. Ghana.386. Sudan. UK. defence. public administration. USA. 3. defence. forestry. Ex : Myanmar. 2. Types of Economies An economy or economic systems can be classified into two types on the basis of the level of economic development attained by them. etc. fishing. Developed economy (advanced) 2.
9.639 crores Increase in agricultural production (food grains) 1950-51 – 50. tonnes Increase in industrial Production Increase in social over-heads Structural changes Progress in Science and Technology Progress in Banking and Financial sector Reduction in inequalities in income and wealth Improvement in living standards Desirable changes in society Determinants of Economic Development ( Reference – Ruddar Dutt and 6 .25.8 mn.142 crores 2001-02 – Rs. Increase in national income 1950-51 – Rs.characterized by large industrial and service sectors and high levels of income per head. The following changes in the Indian Economy over the last five decades clearly prove that India is a developing economy. 17. no doubt. but has started developing by making use of its natural and human resources.292 crores Increase in per capita income 1950-51 – Rs.960 crores 2001-02 – Rs. Under-developed / developing economy An economy where the per capita real income is less than $1000 a year is considered an under-developed economy. But this term is mostly used to refer to that under-developed economy which is not stagnant.B. A under-developed economy is characterised by • Low per capita income • Chronic mass poverty • Predominance of agriculture • Obsolete methods of production and social organisation • Under-utilization of manpower and natural resources India as a Developing Economy Reference . 1.Raman: pg 19-21 HRK: pg 11-14 Meaning of a Developing Economy Developing economy. 18.978 Increase in investment 1950-51 – Rs. refers to an under-developed economy. tonnes 2001-02 – 212 mn.64. 255 2001-02 – Rs.15.S.
M. • Religious beliefs • Political Instability • Family System • Development of Education • Nature of People Economic Factors • Capital Formation • Capital-output Ratio • Growth of Population • Building Human Capital • Availability of Natural Resources • Climatic Conditions • Level of Technology Major Issues of Developments (Reference – Ruddar Dutt and Sundaram: pg 10-12) • Low per capita income and low rate of economic growth • High proportion of people below the poverty line • Low level of productive efficiency due to inadequate nutrition and malnutrition • Imbalance between population size. industrial production. political conditions.Sundaram: pg12-14 ) Economic development implies the process of securing levels of productivity in all sectors of economy and this in turn. Economic Factors Non-Economic Factors Non-economic Factors includes social attitudes. According to J. alternating with 7 . Economic development thus depends upon two sets of factors: 1.Keynes “ A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment percentages. resources and capital • Problem of employment • Instability of output of agriculture and related sectors • Imbalance between heavy industry and wage goods • Imbalance in distribution and growing inequalities Business Cycles The business cycle is an alternate expansion and contraction in overall business activity. Non-Economic Factors 2. is a function of the level of technology. human endowments and efficient governance. employment and income. as evidenced by fluctuations in aggregate economic activity such as GNP.
high profits. The recovery may take place due to the following reasons: • New government expenditure • Exploitation of new sources of energy • Innovations • Investment in new areas • Changes in the techniques of production (3) Prosperity This stage is characterized by high capital investment in basic industries. Profits will further increase. Depression 2. high profits and over-full employment. Prosperity or full employment 4. contraction of credit. low wages. Such a situation is known as over-full employment. of workers in the market. Boom or overfull employment 5.periods of bad trade characterized by fall in prices and high unemployment percentages. Recession (1) Depression During this period business activity in the country will be much below normal level.” Phases of a Business Cycle A business cycle will have 5 different phases or stages. The prices and wages increases. The industrial production and volume of employment steadily increases. expansion of bank credit. Recovery 3. high rate of formation of new business enterprises and the full employment. fall in prices. A situation develops in which the no. There is fall in income. mass unemployment. The longest sustained period of prosperity occurred in the USA between 1923 and 1929. It is characterized by a short fall in production. prices collapse and confidence is shaken. high prices . The USA experienced 2 longest depressions in the history i. (2) Recovery During this period business activity increases.e during 1873-1879 and 1929-1932. (4) Boom It is the stage of rapid expansion in business activity resulting in high stocks and commodity prices. of jobs exceeds the no. (5) Recession In this stage more business enterprises fail. a high rate of business failures and an atmosphere of all round pessimism. 8 . Building construction slows down and unemployment increases. This will lead to more investment and in turn further raise in price level and inflation. They are 1.
• The cyclical fluctuations are felt more in capital goods industries than in consumer goods industries. USA experienced recession in 1957-1958. Diagrammatic Representation Characteristics of Business Cycles Business cycle is a wave like movement. The recession will have cumulative effect on the working of the economy. demand. • The cyclical upward and downward swings move parallel with production and monetary demand. • Prices of manufactured goods are comparatively rigid while that of agricultural goods are normally flexible. prices. Greater share in national income 23 % of national income 3. • They are not periodical in nature. • Business cycle contains self generating forces. • The cyclical fluctuations are recurrent in nature. and profits. • The peak and the trough of a business cycles are not symmetrical.22 mn tonnes of food grains in 2003-04 4. Industrial development 9 . Importance of Agriculture to Indian Economy 1. • They are all pervasive in their effects. • The upward or downward swing of the business cycle is self reinforcing.Provides largest employment 60 % of working population 2. • In cyclical fluctuations the prices and the production generally rise or fall together.expenditure. Supply of food to people 212. • The cyclical fluctuation tend to be not only national but also international in character.
Involves low capital 16. Development of agriculture 6. Supplier of raw materials 17. Main role in consumption basket 60% of household consumption and 85% of household commodity consumption is of agricultural products. Balanced development 11. Changes in the outlook of people 13. Influence on government budgets 13. Source of revenue and also exports 19. Economic stability and self sufficiency 15. Contribution to foreign trade Share of agricultural exports in total exports is 10% 6. Expansion of markets 14. Increase in productive capacity 7. Source of revenue to government 7. Contribution of export trade 9. agriculture and tertiary sector 16. Price Stability Agricultural commodities account for 80% of total consumption expenditure 11. Proper balance between industry. Market for industrial products 9. Supply of fodder 14. Political and social significance Importance of Industrialisation in India 1. Larger production 3. Urbanisation 17. Stable growth of the economy The Importance of Transport in the Economic Development of India • Development of market • Large scale of production • Facilitates territorial division of labour • Price stability • Mobility of labour and capital 10 . 18. Employment generation 2. Good national defence 10. Use of potential resources 8. More revenue to government 12. Increase in national income and per capita income 4.5. Promotion of agriculture 5. National defence 10. Influences general price level 15. Development of tertiary sector 12. Source of capital formation 8.
• helps India to export goods which are in surplus. raw materials and technical know-how. etc. • widens the market for our products. commerce and trade • Development of transport • Bringing buyers and sellers together • Accelerating the growth rate • Easy contact • Improving global competitiveness • Attracting foreign direct investment Module – 4 National Income Accounting 11 .• • • • • • • • • • • • • • • • Growth of towns and cities Employment generation Facilities agricultural development Helps industrial development Social benefits National defence Efficient administration Unity Meeting emergencies Place and time utility Breaking the isolation Development of trade and commerce Solution to population problem Revenue to government Efficient use of resources Facilitates balanced regional development Importance of Foreign Trade in the Economic Development of India • helps India to import plant and machinery. • contributes to improvement in the civilisation of our people. • contributes to growth of national income. metals. • helps to import goods like petroleum. • Gives encouragement to the exploitation of unexploited resources of the country. The Role of Communication System in the Economic Development • Supply of necessary information • Motivation • Development of industries. International Trade is an index of civilisation. • contributes to economic co-operation between India and other countries. • Gives employment to a large number of people. • contributes to expansion of domestic industries.
Reference : Ahuja – Pg 15-35 National Income According to J. National Income at Factor Cost (NI) 6. “National income consists of a collection of goods and services reduced to a common basis by being measured in terms of money”. Net Domestic Product (NDP) 3. • GNP is a monetary measure. counted without duplication”.R Hicks. • GNP includes the market value of only final goods and services. Disposable Personal income (DPI) Gross Domestic Product • GDP is the aggregate money value of all final goods and services produced by normal residents as well as non-residents in the domestic territory of a country during a year. Personal Income (PI) 7. • NDP = GDP – Depreciation Gross National Product • GNP is defined as the total market value of all final goods and services produced during a year in a country. “A national income estimate measures the volume of commodities and services turned out during a given period. Gross National Product (GNP) 4. say 1year • National income includes all goods and services which have exchange value. Important Points • National income refers to the income of a country. • GNP refers to the value of goods and services currently produced by normal residents of a country. • It is a flow measure of output of goods and services during a year / currently produced goods. counting each one of them only one. According to the National Income Committee of India-1951. Ex: India • Its measurement refers to a specified period of time. • GDP = GNP – net factor income from abroad Net Domestic product • NDP refers to the market value of all final goods and services produced during a period of one year after making allowance for depreciation changes. 12 . Net National Product (NNP) 5. • It is a geographical or territorial concept. Different Concepts of National Income 1. Gross Domestic Product (GDP) 2.
• PI = NI – Corporate income tax -.• The depreciation or replacement value of the fixed assets is not deducted Net National Product • This refers to the net production of goods and services in a country during a year. wages. Disposable personal Income • It is that part of personal income which is left behind after the payment of personal direct taxes is called disposable personal income. • NI = NNP – Indirect Taxes + subsidy Personal Income • It is that income which is actually received by the individuals and households in a country during a year from all sources. interest. and profit during a given year.social security contributions -. • NNP is a highly useful concept in the study of growth economics.undistributed corporate profits + transfer payments This concept is useful in estimating the potential purchasing power of the individuals in an economy. • DPI = PI – Personal direct taxes • DPI = Consumption + Saving Uses / Practical Importance of National Income Estimates • Economic Position • Contribution of Different Sectors • Distribution of National Income among the Factors of Production • Economic Planning • International Comparison • International Payments • Help to Backward Countries • Role of Public and Private Sectors • Grant-in Aids to States • Anti-Inflationary and Deflationary Measures • Reveals the Cyclical behavior of an economy Difficulties in the Measurement of National income • Treatment of Non-monetary Transactions • Treatment of Government activities in national income accounts • Treatment of income generated by foreign firms • Illiteracy 13 . • NNP = GNP – the value of capital depreciated during the year. National Income at Factor Cost • It refers to the total of all income payments earned by the factors of production in the form of rent.
Urban and rural income break-up VI. Share of organised and unorganised sector in NDP National Income Estimates in India According to the National Income Committee. “ A national income estimate measures the volume of commodities and services turned out during a given period. Pre-independence period estimates Post-independence period estimates National income committee and C.S.O estimates Circular Flow of Income Two Sector Model Without Savings Households and Firms Two Sector Model With Savings S=Y–C Where Y = income S = savings C = consumption Case 1 : S > I Case 2 : S = I Case 3 : S < I Three Sector Model (Government) T = T1 + T2 14 . Trends in the share of the public sector V. counted without duplication”. Trends in distribution of national income by industrial origin IV. Annual growth rates during the plans III. Trends in net national product and per capita income II.availability of statistical data Existence of barter transactions Difficulty in calculating depreciation Lack of professional competency Problem of consideration of goods and services Commodities of self-consumption Difficulties of Measuring National Income in Developing countries • Prevalence of non-monetized transactions • Illiteracy • Incomplete Occupational specialisation • Agricultural and industrial production is unorganized • Lack of adequate statistical data Trends in National Income Growth and Structure I.• • • • • • Non.
Four Sector Model Firm + Household + Government income and Expenditure + Exports and Imports S+T+M=I+G+X Module: 5(a) Capital Structure Meaning of Capital Structure Capital Structure refers to the various sources from which the long-term funds are raised. preference shares and debentures Factors determining capital structure Two types • Internal factors or controllable factors • External factors or uncontrollable factors Internal factors • Financial leverage • Growth & stability • Cost of capital • Asset structure • Retaining control • Purpose of finance External factors 15 . The Capital Structure refers to the proportion of equity capital. debentures and other long-term debts to the total Capitalization. Characteristics of a sound Capital Structure • Simplicity • Profitability • Flexibility • Intensive use of funds • Conservation • Provision for meeting future contingencies • Control over the company • Economy in cost of maintaining different securities Forms/Patterns of Capital Structure • Equities only • Equities and preference shares • Equity shares and debentures • Equities. preference capital. reserves.
Christy and Roder defined 16 .) Is also called ‘GEARING’ in USA James Horne has defined “Leverage as the employment of an asset or funds for which the firm pays a fixed cost or fixed return”. depreciation. The Dictionary meaning: “An increased means for accomplishing some purpose”. Leverage:. sales. etc.) 2) Fixed financial costs(interest.• • • • • • • Size of the company Nature of company Cost of floatation Interest rates Taxation policy Fluctuation in stock market Availability of funds Pecking order theory Internal Debt Issue of Debt Equity Shares Business risk Uncertainty about – demand. price. etc. There are 2 types of fixed costs: 1) Fixed operating costs(rent. etc. In financial analysis: Leverage is ability of using fixed costs to enhance the potential returns to a firm.Meaning and Definition costs. cost of debt.
Combined leverage = operating leverage X financial leverage Contribution = EBIT X EBIT EBIT/operating profit EBT = contribution earnings before tax DCL = Percentage change in EPS Percentage change in SALES FINANCIAL LEVERAGE Q 1.00. The fixed cost remaining the same the percentage change in operating revenue will be more than the percentage more than the sales OL = contribution EBIT DOL=Percentage change in EBIT Percentage change SALES Combined leverage Combined leverage shows the relationship between the change in sales and corresponding variation in taxable income. It wish to raise further Rs. 100 each. Types of leverage Financial leverage The use of long term fixed interest and dividend Bearing securities like debentures and preference shares along with equity is called financial leverage or trade on equity.00. Company has equity share capital of Rs. 17 .“Leverage as the tendency for profits to change at a faster rate than sales”. 5.000 dividend into share of Rs.000 for expansion cum modernization plans. 3. A Ltd. The company plans the following financing schemes. FL = EBIT EBT DFL = Percentage change in EPS Percentage change in EBIT Operating leverage The operating leverage occurs when a firm has fixed cost which must be recovered irrespective of sales volume.
(b) Rs. (d) All debt in common stock and Rs.000 1. of common shares Earnings per share (EPS) Financial leverage = EBIT EBT 75.83 1.000 5. (c) All through debentures at 10 % interest pa.000 1.000 ______ 59. You are required to determine the earnings per share (EPS) in each plan and comment on Financial Leverage.000/- 18 .000 75.000 1.000 Earnings available for common stockholders No.000 Less : tax @ 50% 75.50. The company should raise Rs.000 Rs.000 PLAN 1 1. 3 lakh only through debt. 10.15 60.000 __ _______ 75.000 30.1. is given below.(a) all common stock . Financial leverage. & combined leverage.375 1 PLAN 2 PLAN 3 PLAN 4 1.50. Calculate the Operating leverage.000 _______ 60.000 __ 1.20. 9.000 Rs. One lakhs in common stock and Rs.50.000 _______ 65. 2 lakh in preference capital with the rate of dividend at 8% The Company’s existing earnings before interest and tax (EBIT) is Rs.000 __ _______ 65.000 20. 2 lakh in 10% debentures.30.50.50. 12 1.25 COMMENTS Since EPS as well as degree of financial leverage is highest in financial plan 3 it should be accepted. The corporate rate of tax is 50%.000 6.000 Rs.000 65.50.83 1 Rs.50.000 _______ ______ Earnings after tax Less : preference dividend at 8% 16. Problems on Leverages: A simplified income statement of Zenith Ltd.000 75.50.000. 9. Sales 10.000 __ _______ 60.000 6.000 _ 1. SOLUTION earnings before interest and tax Less : Interest 1.000 8.
000/75.10.100 Cr.36 X 2.83.36 Financial leverage = EBIT EBT = 2.10. 19 .000 98.50.08.83. reaping the benefits of division of labour and producing goods on a large scale involving fixed capital investment of more than Rs.000 7.000 75.10 Cr but less than Rs.67.400 68.67.000 2.000 2.12 =2.000/30% Operating leverage = contribution EBIT = 2.000 = 2.000 2.08.000 7.000 1.12 Combined leverage = Operating Leverage X Financial Leverage =1.000 = 1.000 98.Variable cost Fixed cost Interest Tax Soln :Sales (-)Variable cost Contribution (-)Fixed cost EBIT (-)Interest EBT (-)TAX(30%) NET Income 10.000/1.08.000 29.88 Module – 5 Structure Of Industries ( References: Dutt & Sundaram Misra & Puri B S Raman HRK) Structure / Classification of Industries (HRK – 204-209) Large Scale Industries : Large Scale Industries are those industries which invest huge amounts of capital.
cotton textiles. electrical goods. sugar. Manufacturing Industries: Any industry which is engaged in the conversion of raw materials into finished goods fit for consumption with the help of men and machines is generally known as manufacturing industry. Ex: conversion of iron ore into iron and steel. Ex: pottery. Ex: jute. oil.10 Cr. Productivity of labour is the highest in manufacturing Industries. wood work. Cottage Industries: A cottage industry is one which is carried on mainly in a house with the help of the members of the family and with the help of simple and hand-operated tools. Agro-industries and Ancillary Industries: Industries which produce goods by using agricultural raw-materials are called agroindustries. etc. hired labour.Medium Scale Industries : Medium Scale Industries are those industries which are organised on a medium scale.1 Cr but less than Rs. Small Scale Industries: Small-scale industries are those industries which are organised on a small-scale. carpet-making. Industrialization induces development of other sectors. paper. High priority was given to programmes of Industrialization on account of following reasons: The country was industrially backward and the establishment of new industries of industries on a big scale and development of the traditional industries was an imperative necessity. Development of transport. etc required by the large industries are called ancillary industries. and produce goods on a small scale by using machines. etc. hired labour and power involving fixed capital investment of more than Rs. and power. Despite the secondary importance given to industry. wood pulp into paper. communications and energy is still more dependant on industrial growth. Ex: Ready garments. etc Industries which produce spare parts. components. Development of the industrial sector is a pre-condition for agricultural development. etc Industrial Development Under Five Year Plans ( B S Raman – 258-267 Dutt & Sundaram – 636-640) o o o o o India implemented five year plans and industrial development became an integral part of India’s development planning. weaving. the annual rate of growth of 20 . and produce goods on a medium scale by using machines. toy-making. agarbhatti.
• Industrial production increased by 46%. • A no. • UTI and IDBI were set up in 1964. • • • • • • • Three major public sector steel plants were set up at Rourkela in Orissa. etc were produced for first time in India. motor cycles. Second Five-year plan (1956-61) • This plan was based on the Industrial Policy Resolution of 1956 which envisaged a big expansion of Public sector. penicillin factory. penicillin. Good progress was made in the production of consumer goods like fans. Bhilai in MP and Durgapur at WB. textiles. • Mining and extractive industries also showed progress. Most of the investments were in Heavy and Basic Industries. 1.1726 crores(20% of total plan) was allotted for the development of industries and mining. A number of public sector industries like HMT. • Mining and extractive industries also showed progress.etc.radio. The overall production of industrial goods increased by 39%. • Despite the over-all under-achievement of targets this plan reflected the first stage of intensive development leading to a self –reliant and self-generating economy. scooters. Infrastructural facilities like power. cement.25%. transport and communication were expanded considerably. etc achieved rapid growth. • The annual rate of growth was 7. Good progress was also recorded in modernization and re-equipment of jute. Fourth Five-year plan (1969-74) 21 . Tractors.9%. cotton textiles and sugar industries. • Total investment in industries was Rs. Capital goods industries like iron and steel were expanded. • Despite the over-all under-achievement of targets this plan reflected the first stage of intensive development leading to a self –reliant and self-generating economy. This plan witnessed a major diversification of the industrial spectrum. etc were set up. automobiles. • It was really an industrial plan.180 crores (27% of total plan). etc were established. Third Five-year plan (1961-66) • Rs. • The annual rate of growth was 7. About 60 industrial estates comprising 1000 small factories were set up. of industries like aluminium.o o o o o industrial output was about 6%. A number of industries like petroleum-refining.
• The govt had liberalised industrial licensing policy to provide incentives to industries.7% as against 7%. upgradation of technology.660 cr (26%) was allocated. • About 30% of industries had installed Pollution Control systems. • Actual growth rate was 6% as against 8% • This plan took many bold steps such as • Removing the restriction on the private sector • Monopolistic undertakings • Foreign investments in India Sixth Five-year plan (1980-85) • This plan was a very ambitious plan. 22. 22 . The actual growth rate was 5% as against 8%.22. reduction in cost.8%) was provided.16. • It was based on the industrial policy of1980. • Encouragement of ‘Sunrise’ industries such as telecom. bio-tech. accelerated growth in selected industries. • During this period. fibre-optic. Fifth Five-year plan (1974-78) • This plan was formulated to achieve the twin objectives of self-reliance and growth with social justice. computers. financial and marketing strengths. robotics. modernisation. • Industrial progress during this period was most disappointing. Public sector enterprises had started earning profits. Seventh Five-year plan ( 1985-90) • This plan laid emphasis on the development of infrastructural facilities. • Rs. This plan aimed to enlarge capacities in export promotion and import substitution industries. • Actual growth rate was only 3. • Rs. • Total outlay for industries was Rs. • This plan was a success as annual growth rate was 8%.• • • • • This plan was based on the industrial policy of 1977. etc. • There was a shortfall in the production of many industrial goods like cement. Rs 5298 crores (23%) was allotted. the private sector has developed considerable managerial. technological.200 cr (22. Eighth Five-year Plan (1992-97) • This plan was formulated under Economic Liberalisation and was based on the industrial policy of 1991.460 cr. • Industries were encouraged to adopt technologies like laser. iron and steel. etc. etc for enhancing productivity.
670 cr (19% of total plan).4% and in 2003-04 was 11. Electricity ii.12. Cement A Well Diversified Industrial Structure: o Machinery: 1950-59--.5.2% 1990-99 --. Over all 9. The factors for the slow growth fo industrial sector: Could not face foreign competition as a reduction of import duties.7% o Chemicals: 1950-59 --.• • • • • • The outlay was Rs. • The internal and external factors are responsible for slowdown.5% growth rate has been achieved.5% o Rapid Growth of Consumer Durables: o The rate of growth of this industry in 1980-85 was 14.6%.6% o Transport Equipment: 3.7% 1990-99 --.12. Petrochemicals and Allied Industries in 1980s: o Emergence of Public Sector: 1950 – 5 PSUs with Capital of Rs.972 cr for industry. • Lack of external demand resulting from slowdown in world economy decelerated the growth of industrial sector. Steel iv. 40. • This plan allocated Rs.6% to 4.29 Crore 23 . o Emphasis on Chemicals. 69. Petroleum refinery vi. • Building up of Heavy and Capital Goods Industries: • Growth of Infrastructure Industries: Infrastructure industries include: i.6% in 2003-04.4% o Non metallic Mineral products: 1.4% to 6. Under utilisation of domestic capacity Dumping by foreigners Ninth five-year plan (1997-2002 • This plan was a failure as the actual growth rate was only 5% as against 8% of target. Crude petroleum v. • The failure can be attributed to the fall in public sector investment .1. Changes in Industrial Structure During the Planning Period (Misra & Puri – 479-481) • Increase in the Share of industrial Sector in GDP: • The share of industry in GDP at factor cost increased from 13. Coal iii.3% in 1950-51 to 24.
etc iv. Defence. Statutory Corporations : LIC. To promote balanced regional growth f. To generate financial resources for development c. 4. Departmental undertakings : Railways.HRK • The Industrial Policy Resolution of 1956 gave the public sector a strategic role in the Indian economy. • Forms or Types of Public Enterprises: i. To promote redistribution of wealth and income e. Objectives of Public Sector a. To encourage SSIs Role of Public Sector in Indian Economy • Capital Formation • Development of Infrastructure • Development of Defence Industries • Development of Basic and Key industries: • Iron and steel.18758 Crore Change in Industrial Structure in 1990s • Shifts in favour of consumer goods and intermediate goods • Structural changes within basic industries and capital goods industries • Changes within the consumer goods sector • Changes within the intermediate goods sector • Declining role of public sector Public Sector Enterprises Reference: Dutt and Sundaram – 188-204 B S Raman -. cement. To create employment opportunities d. the Indian Airlines Corporations. • Public enterprises or public sector refers to that sector which is owned and managed by the central government or the state government or a body set up by the government to direct the undertaking in the public interest. Holding Company : Steel Authority of India Ltd. etc iii.213-221. Government Companies : Heavy Electricals Ltd. etc • Development of Power projects • Development of Banking and Insurance • Balanced Regional development • Balanced Economic Growth • Strong Industrial Base 24 . To promote rapid economic development through creation and expansion of infrastructure b.2003 – 227 PSUs with Capital of Rs. HMT Ltd. etc ii. To promote exports and import substitution g.
25 .224-225 • • Joint Sector Enterprises refer to economic enterprises or industries which are owned and managed jointly by the Government and the Private sector.B S Raman. Ex: Madras Fertilizers. the Cochin Refineries. etc.• • • • • • • • • Economies Of Scale Removal of Regional Disparities Import Substitution Export Promotion Expansion of Employment Opportunities Source of Revenue to the Government Saving in Foreign Exchange Better Allocation and Utilisation of Resources Diversity of Projects Problems and Shortcomings of the Public Sector o Mounting Losses o Price Policy of Public Enterprises o Delay in Completion of the Projects o Increase in Costs of Construction o Poitical factors influence decision about Location o Over-Capitalization o Under-Utilization of Capacity o Unfavourable Input-output Ratio o Use of Manpower Resources in excess of actual requirements o Faulty Planning and Controls o Inefficient Management o Bureaucratic Procedures and Red-tapism o Labour Problem resulting in Strikes and Lockouts o Higher Capital Intensity -.Low Employment Generation o Shortage of Raw materials and Power Remedies / Measures to be taken for the Performance of Public Sector o Reduction in Unproductive Expenditure o Utilisation of Installed Capacity o Better Utilisation of manpower and materials o Proper Planning and Control o Improvement of Efficiency of Management o Suitable Price Policy o Making them Autonomous o Improvement of Industrial Relations o Motivation of Staff and Workers Joint Sector Reference: D&S-222-226.
railways. Acceleration of Economic Growth k. 3. of small scale and cottage industries 7. Help third world countries in their economic development 2. A private enterprise is controlled either by an individual investor or a joint stock company or a group of individuals or public or private limited companies. Development of large no. Dominates the Trading Sector 4. State-sponsored Industrialisation h. Contribution to national income of country 6. Production of a variety of goods 8. Existing Private Enterprises : through the conversion of bonds or debentures into equity shares. Prevent monopolies and concentration of Economic power e. Dominant in forestry. Agriculture : this sector which is completely managed by the private enterprises contributes 25% of GNP an 60% of employment in 2001. Run on Efficient lines and earn sufficient Profits l. fishing. Failure of Public and Private Sectors j. Types of Joint Sector Enterprises 1. etc.• Rationale behind Joint Sector Enterprises: To combine the financial resources of the Government with the managerial skill of the private entrepreneurs for the successful running of the economic enterprises. 5. Existing Public Sector : through the sale of equity shares of such enterprises to private entrepreneurs. Efficient management Limitations Of Private Sector 26 . New enterprises set up by the Government jointly with the Private entrepreneurs. Broad-basing of Industrial Entrepreneurship d. 3. construction. Role / Benefits of Joint Sector Enterprises in India a. Mobilisation of Financial Resources f. Mobilisation of Techno-managerial Resources g. Role of Private Sector in India 1. Extension of Public Control i. Social Control over Industries b. Effective instrument for ensuring Balanced Regional Growth Private Sector Dutt & Sundaram – 217-221 B S Raman – 222-224 • • • Private Sector or Private Enterprises refers to that sector which is owned and managed by private individuals. Better Industrial Growth c. Private sector is purely profit motive. 2.
Emphasis on Non-priority Industries Emergence of monopoly power and concentration Industrial disputes Industrial sickness Small Scale Industries (SSI) Misra & Puri – 571-585 Small-scale industries are industries which are organised on a small-scale and produce goods with the help of small machines. iii. hired labour and power.4 lakh people 2003-04 – 271.6 lakhs in 1994-95 to 114. ix. Contribution to Exports 8. v. Decentralisation of Industries 11. Expansion of SSI sector and its share in Industrial Output : No of SSI units rose from 79. viii. x.I. III. ii. Less Industrial Disputes 10.0 lakhs in 2003-04. IV. Employment Generation: 1994-95 – 191. 4. Efficiency of Small-Scale Industries: At the all-India level. Foreign Exchange Earnings Problems of SSIs Misra & Puri – 582-585 i. II. The investment limit for a SSI is Rs 1 crore SSIs plays a pivotal role in India in terms of employment and growth has recorded a high rate of growth. Equitable distribution of National Income 5. vii. Finance and Credit Inverted tariff structure and raw material availability Machines and other equipment Problems of marketing Infrastructural constraints Delayed payments Problem of sickness Poor database Adverse effects of economic reforms and globalisation Inefficient management 27 . 2.4 lakh people 3. The rate of growth of output exceeded 10% from 1994 to 1997. Significance of SSIs in the Economic Development of India 1. Contribution to National Income 12. vi. Regional dispersal of Industries 7. iv. Sustains Agricultural Development 9. Mobilisation of capital and Entrepreneurial Skills 6. the SSI is more efficient than the large scale sector.
. Provided priority to SSIs in the Government Purchase Programme.5 lakh. Accorded in allocation of indigenous raw materials. Capital Potential benefits 1. 2. it owns or controls income generation assets in more than one country. Proposed to meet the entire credit demand of SSIs. Provided Equity Participation by other industrial units in the SSIs not exceeding 24% of the total shareholdings. 6. Giant size 2. 3. i.e. Characteristics of MNCs The MNCs are multi-process. 9.e.i. 5. Collective Transfer of Resources Significance Of MNCs Impact area 1. 7. International Operations 3. Envisaged market promotion of SSI products to be undertaken by Cooperatives. and in doing so produces goods or services outside its country of origin . Oligopolistic Character 4.xi. Spontaneous Evolution 5. Imported Component and Equipment Technical Assistance Industrial Estates Small-scale Industrial Policy. Introduction of new Legal form of organisation of business. engages in international production. xii. 8.2 lakh to Rs. Competition from large scale industries Burden of local taxes Measures to Reduce Sickness among SSI Credit and Finance Marketing Assistance Allocation of Raw materials. multi-product and multi-national composite enterprises. 4. Provision of scarce capital 28 . Scope of National Equity Fund and Single Window Scheme was enlarged. namely restricted or limited partnership. 1. Proposed a scheme of Integrated Infrastructure Development for SSI to facilitate location of industries and to promote co-ordination b/w Industry and agriculture. Investment for Tiny Enterprises was raised from Rs. Proposed a separate package for the promotion of SSIs.1991 Misra & Puri-579 The main features of policy were: 1. 10. Multinational Corporations Ishwar C Dingra – 552-560 An MNC is one which undertakes FDI. PSUs and other agencies.
Money and Banking Commercial Banking Structure In India • Indian commercial banks are called Joint Stock Banks as they are organized in the form of joint stock companies. Exports and balance of payments 4. Access to superior distribution and marketing systems 4. Diversification resources. Technology 3.2. there were 286 schedule commercial banks in the country Non-scheduled Commercial Banks • Non-scheduled banks are those whose total paid-up capital and reserve fund is less than Rs. Exports and balance of payments 4.5 lakh and above. Higher import propensity than domestic companies Negative BOP effects 4. having a paid-up capital and reserve together Rs. Provision of sophisticated technology not available in host country 3. Scheduled Commercial banks ii. • As on March 2004. • Under the Reserve bank Of India Act.5 lakh and whose name is not included in the second schedule of RBI 29 . Increased foreign influence in key sectors Actual impact of MNCs 1. MNCs command technology and skill required for diversification of industrial base and for the creation of backward and forward linkages 1. the commercial banks in India are classified into: i. Technology 3. Diversification Module – 7 . Capital 2.1934. Insignificant net flow Large dividend remittances Large technical payments 2. Costly ‘over-import’ Problems with advanced technology Problems with technical support 3. 2. Non-scheduled Commercial Banks Scheduled Commercial Banks • Scheduled commercial banks are those banks which are included in the second schedule of the Reserve Bank of India.
Indian Bank 13. Punjab National bank 4. • There are 20 nationalised banks which carry out 90% of banking business in the country. Bank of India 3. Dena Bank 9. United Commercial Bank 6. Bank of Maharashtra 14. United Bank of India 8. At present. Indian Overseas Bank Nationalisation on 15 April 1980 30 .• Act. Union Bank Of India 11. Bank of Baroda 5. Central Bank of India 2. Syndicate Bank 10. • This was the milestone in the history of Indian Banking. Diagrammatic Representation Diagrammatic Representation Scheduled Commercial Banks Public sector banks Nationalised banks SBI and its associates Private sector banks Indian private sector banks New private sector banks Foreign banks Old private sector banks Nationalisation Of banks • Nationalisation of banks is nothing but the government taking control of those banks which were owned by private people. there are only two non-scheduled banks in the country. Nationalisation on 19 July 1969 1.1934. Allahabad Bank 12. Canara Bank 7.
c. Leads to flow of funds to unworthy sectors g. Neglect of Agricultural Sector c.284 bank branches Deposit Mobilisation 31 . Credit to Anti-social Elements e. Plan Objectives Ignored g. b. Neglect of Small Units f. Results in the disclosure of banking secrets Achievements Of Nationalisation Branch Expansion In 1969 – 8. Leads to bureaucratic dictatorship.1) 2) 3) 4) 5) 6) New Bank of India Vijaya Bank Andhra Bank Corporation Bank Punjab and Sidh bank Oriental Bank of Commerce Causes of Nationalisation a. Results in inefficiency d.260 bank branches In 2002 – 67. Results in the political interference in the functioning of banks. Insufficient Mobilisation of Resources h. Arguments Against Nationalisation a. Unbalanced Growth Objectives of Nationalization To prevent concentration of wealth and economic power in the hands of few people. Banks suffer losses e. Misuse of Power by Directors d. To prevent control and administration of banks by few people To prevent misuse of funds To provide required finance to priority sectors To provide banking facilities to unbanked and rural areas To provide deposit security to deposit holders To mobilise resources of the country To make the banks respond to plan objectives To bring banks under the control of RBI To prevent the flow of bank credit to anti-social elements To provide atmosphere for balanced growth of banking in the country. Results in corruption f. Concentration of Economic Power b.
064 crores of profits. Variable cash reserve ratio (CRR) 3.128 crores of Deposits Differential Rate of Interest Profit Making During 1999-2000 – Rs. Statutory Liquidity Requirements: The committee recommended that the government should reduce SLR from 32 . In 1969 – 4. Qualitative Credit controls/selective credit control 1.7%) Increase in Total Transactions In 1969 – 4.13.291 crores (43. Open market operations (OMO) b.664 crores of Deposits In 2002 – 12. Discriminatory rate of interest • Custodian of Foreign Exchange Reserves • Supervisory Functions • Promotional Functions Recommendations of the Narasimhan Committee. Greater degree of professionalism in banking operations Important Recommendations : 1. Safety Finance to Public Sectors Functions of the Reserve Bank of India • Bank of Issue • Banker to Government • Bankers’ Bank and lender of the last resort • Controller of Credit a. Ensuring a degree of operational feasibility 2.41.665 crores In 2002 – 16.579 crores Developmental Functions Finance to Priority Sectors In 1969 – 505 crores (2% of total bank credit) In 2002 – 3. Statutory liquidity ratio (SLR) 4. Minimum margin for lending 2. 1991 Reference: Dutt and Sundaram Pg:853 • Aimed At : 1.59. Internal autonomy for the public sector banks in their decision making process 3. Ceiling on amount of credit 3. Quantitative Methods 1.22. Directed Investment a. Bank rate 2.
Rural Banking Subsidiaries 13. Freedom of Operation 8. Supervision of Commercial Banks RBI has set up a Board of Financial Supervision with an Advisory Council under the chairmanship of the Governor to strengthen the Supervisory and Surveillance system of 33 . 1. Autonomy to Banks 11. The Structure Of Interest rates 4. Capital Adequacy Norms: were fixed at 8% by RBI in 1992.400 crores as equity and Rs. Bad and Doubtful Debts 9.5% to 25%. Nationalisation of banks 6. 4. Setting up of New banks Foreign Banks 8. b. Cash Reserve Ratio (CRR) RBI reduced CRR from 15% to 5. Cash Reserve Ratio CRR should be reduced from 15% to 3-5%. Removal of Dual Control 10. Recruitment of Staff 14.000 crores as bonds. 10. Disinvestment 12. 7. 2. Structural Reorganization of the Banking Structure 5. Directed Credit Programmes 3. Statutory Liquidity Ratio (SLR) SLR on incremental net demand and time liabilities (DTL) has been reduced from 38.Deregulation of Interest Rates Interest rates slabs were gradually reduced from 20 to 2 by 1995. the purpose was to release funds locked up with RBI for lending to the industrial sectors . Computerization Reform Of the Banking Sector Dutt and Sundaram Pg:855 1. Local Area Banks: LABs help to mobilise rural savings and to channelise them into investment in local areas.38. New Private Sector Banks 9. 3. 6. Access to Capital Market: SBI was the first to raise through public issue over Rs. 1.5% in 2001. 5. 2.5% to 25% in 1997. Prudential Norms The purpose was that commercial banks should reflect their financial positions more accurately and in accordance with international accounting practices.
Recovery of Debts: The Government of India passed “Recovery of Debts due to banks and FIs Act. Notes in Circulation 2. Cash Reserves on hand with all banks 34 . Circulation of rupee coins asa well as small coins 3. the Reserve Bank of India has adopted four concepts of money supply in its analysis of the quantum of and variations in money supply. Money Supply M2 3. The four concepts of money supply are: 1. Money Supply M3 or Broad Money 4. Six Special Recovery Tribunal have been set up. Money Supply M4 Money Supply Chart • • Money Supply Chart Money Supply and its determinants M1 = Currency + Demand Deposits + Other deposits of RBI M2 = M1 + Savings deposits with Post-office Savings Banks M3 = M1 + Time Deposits with the Banks M4 = M3 + Total Deposits of Post Office Savings Organisation (excluding NSC) Money Supply M1 or Narrow Money • Liquid measure of money supply • M1 = C + DD + OD • C = Currency with the public • DD = Demand deposits with the public in the commercial and Co-operative Banks • OD = Other deposits held by the public with the Reserve Bank of India • C (Currency with the Public) consists of the following: 1. Phasing out of Directed Credit 13. 12. 1993”. Money Supply M1 or Narrow Money 2.banks and FIs 11. Competition Measures of Money Supply Reference : Ahuja – 301--303 From April 1977.
Other bank’s net foreign exchange assets 4. Net Non. M1 = 1+2+3+4+5 Monetary Policy Of the RBI / Measures of Control Imposed by RBI to Regulate Monetary Systems in India (Dutt and Sundaram – 902) Controlled expansion ( 1951-72) RBIs Anti.Money Supply M2 • M2 = M1 + Savings Deposits with the post office savings bank • M2 is a broader concept of money supply Money Supply M3 or Broad Money • M3 = M1 + Time deposits with the banks • Time deposits serve as store of value and represent savings of the people • Time deposits are very liquid.monetary liabilities of banks. Sources of Broad Money (M3) or Factors affecting Money Supply In India (Dutt & Sundaram-823) • There are Five Factors / sources which contribute to the Aggregate Monetary Resources in the country: 1. RBIs net foreign exchange assets B. • M3 also called as Aggregate Monetary Resources (AMR). Net Bank Credit to Government (A+B) A. Net Foreign Exchange Assets of Banking Sector (A+B) A. Govt deposits with RBI B. Bank Credit to Commercial Sector ( A+B) A.monetary liabilities of RBI B. Other Bank’s credit to Government 2. Other bank’s credit to commercial sector 3. Net Non. RBIs credit to commercial sector B.Inflationary Monetary Policy since 1972. RBIs net credit to Government i. Net Non-monetary Liabilities of the Banking Sector (A+B) A. • M3 is used for monetary planning of the economy and setting target of growth of money supply. • M3 has become a popular measure of one supply. Thus. Government’s Currency Liabilities to the Public 5. Claims on Government ii. Entry of RBI into Foreign Exchange Market Major weapons of Monetary Policy / Control Measures 35 • • • . Money Supply M4 M4 = M3 + Total deposits with Post Office Savings Organization.
General Credit Controls a. Selective and Direct Credit Controls • Credit Authorization Scheme (CAS) • Credit Monitoring Arrangement (CMA) Module 8 CURRENT ECONOMIC ISSUES TOPICS • PUBLIC ACCOUNTS COMMITTEE • COMPTROLLER AND AUDITOR GENERAL PUBLIC ACCOUNTS COMMITTE Composition The Public Accounts Committee consists of fifteen Members elected by Lok Sabha every year 36 . Statutory Liquidity Requirements d. Bank rate b. Open market Operations Of RBI 2. Cash reserve ratio c.• Credit Control: 1.
Railways .N. expenditure by various Ministries/ Departments of Government and accounts of autonomous bodies. after his election to the Committee. As a convention. corporations and autonomous bodies Offices of the Principal Directors of Audit are responsible for audit of the activities of the Union Government including Defence. Telecommunications etc. The Committee examines various aspects of Government’s tax administration. The Committee identifies loopholes in the taxation laws and procedures and make recommendations in order to check leakage of revenue.. monitors and controls all activities concerned with audit. Seven members of Rajya Sabha elected by that House in like manner are associated with the Committee Appointment of Chairman The Chairman of the Committee is appointed by the Speaker from amongst the members of Lok Sabha elected to the Committee. a member of the Committee belonging to the main opposition party/group in the House is appointed as the Chairman of the Committee A Minister is not eligible to be elected as a member of the Committee and if a member. Vijayendra. The present Comptroller and Audit General of India is Mr.Kaul FUNCTIONS 37 . is appointed as a Minister. he ceases to be a member of the Committee from the date of such appointment The term of office of the members of the Committee is one year FUNCTIONS The Public Accounts Committee examines the accounts showing the appropriation of the sums granted by Parliament to meet the expenditure of the Government of India Committee also examines the various Audit Reports of the Comptroller and Auditor General on. accounts and functions of the Department Offices of the Accountants General (Audit) are responsible for audit of all receipts and expenditure of the State governments and audit of State Government companies. starting from the Public Accounts Committee of 1967-68. To ascertain that money granted by Parliament has been spent by Government "within the scope of the demand". COMPTROLLER AND AUDITOR GENERAL The Comptroller and Auditor General of India is the head of the Indian Audit and Accounts Department CAG is an office which directs.Postal.
15 members elected from lok sabha by every year 9. Access the computer systems of the auditees and suggest changes if any. 7. Appointment of external auditors. Make regulations for carrying out the provisions relating to the scope and extent of audit 4.1. 7 are elected from rajya sabha to associate with the committee Process of electing Appointment of chairman Minister not to be Member of Committee Term of the office Functions Showing the appropriate of sums Examines the audit reports Usage of money Identifies loopholes in taxation laws Recommends in order to check leakage of revenue Functions • Showing the appropriate of sums • Examines the audit reports • Usage of money • Identifies loopholes in taxation laws • Recommends in order to check leakage of revenue • Assistance by comptroller • Sub-committees • Evidence of officials • Ministers are not called before committee Reports Action taken on reports Public Disinvestment Board 38 . CAG assists the Public Accounts Committee in examination of Accounts and Audit reports. 6. He can engage consultants and/or obtain professional services in conducting audit 2. He can make rules for maintenance of accounts 3. COMMITTEE ON PUBLIC ACCOUNTS 8. To supervise and regulate external auditors' work under the Indian Companies Act 5.
• Denationalisation. The Department of Disinvestment • The Department of Disinvestment was formed on the10th December 1999. • Releasing other tangible & intangible resources such as man power etc. • Rangarajan Committee 1993. • Budget speech: 1998-99. • To give a fresh impetus to the Government’s disinvestment programme. • Disinvestment commission recommendations 1999. • All other public sector enterprises to be considered as non-strategic. Objectives of Ministry of Disinvestment • Releasing the large amount of public resources locked up in the non-strategic PSEs for re-deployment in areas of high social priority. • Popular capitalism . Emergence of disinvestment policy • Industrial policy 1991. • Peopalisation. • Atomic energy. • Transformation and restructuring. • Industrial transition. • Disinvestment leads to privatisation when the Government held equity is reduced to a level when the company no longer remains a Government company Privatisation has different nomenclature in different countries • Disinvestment. TARGETED AND ACTUAL DISINVESTMENT YEAR TARGET ACTUAL RECEIPTS RECEIPTS 39 . • Railway transport. • Transferring the commercial risk to the private sector wherever it is willing to. • Partners in development. • Prioritisation. • Economic democratisation. • With a view to establish a systematic policy approach to disinvestment and privatisation. • Budget speech: 2000-01.Privatisation v/s disinvestment • The words privatisation and disinvestment are often used interchangeably. • To reduce the public debt. Strategic and non-strategic classification • Arms and ammunitions.
• Basic criticism – that the funds raised by selling family silver were used to pay the butler. It will also ensure that disinvestment does not result in private monopolies. through the process of disinvestment.1991-92 1993-94 1994-95 1995-96 1996-97 1997-98 1999-00 2000-01 2002-03 2003-04 2500 3500 4000 7000 5000 4800 10000 10000 12000 14500 3038 NIL 4853 362 380 902 1829 1870 3348 15547 Economic Survey (2004-05 Changing profile of PSUs PSUs Net profit 01-02 ONGC IOC SAIL GAIL SCI BSNL 6198 2885 -304 1186 242 5740 Net profit 02-03 10529 6115 1498 1739 275 1444 All through the years now The Government’s approach to PSUs has a three-fold objective: • revival of potentially viable enterprises • closing down of those PSUs that cannot be revived and • bringing down Government equity in non-strategic PSUs to 26 percent or lower Government’s promise Government would continue to ensure that disinvestment does not result in alienation of national assets. George Fernandes in NDA Govt. Criticisms • Privatisation of profit making public enterprises. To set up disinvestment proceeds fund. remain where they are. • Methodology for disinvestment. which. Mr. 40 .
VC – FC or OP = contribution – FC Example Following is the cost information of a firm: FC = 50.00.VC operating profit (EBIT) = sale . Public sector monopoly is accountable for the parliament but private need not be…… • Valuation of PSUs slated for disinvestment.000 VC = 70% of sales Sales = 2. will magnify the operating revenue formulas…… contribution = sales.4950 crores raised.3000 crores in 91-92 out of Rs. • Creation of private monopoly in place of public monopoly. the government is trying to kill the goose which lays golden eggs. FC remaining the same. Eg: PAC quantified the loss to be of the order of Rs.Open auction sale during 94-95 to allow NRIs to participate in the offer. OPERATING LEVERAGE • % change in operating revenue will be more than the % change in sales (FC remains the same) • Any increase in sales. Disinvestment policy and the future of PSUs The recent changes in the culture of the PSUs as mentioned above also reinforces the fact that by disinvesting highly profitable PSUs.000 in previous year 2.000 in current year Find out % change in sales and operating profits when: i) FC are not there (no leverage) 41 .50.
00. EX: The following figures relate to two companies P LTD Q LTD Sales 500 1000 Variable costs 200 300 Contribution 300 700 Fixed costs 150 400 150 300 Interest 50 100 Profit before tax 100 200 i) Calculate the OL.00.000 75.000 1.000 1.000 75.75. FL. 42 .40.75.000 50.000 Current year (Rs) 2. • The FC element has helped in increasing profits.000 50.000 % change (Rs) 25 % 25 % 25 % % change (Rs) 25 % 25 % 25 % 150 % Comments: • In case (i) %change in sales & %change in OP is the same i. CL.000 1.40.e.000 1.50.000 Previous year (Rs) 2. COMPOSITE LEVERAGE • Operating leverage affects the income which is the result of production • Financial leverage is the result of financial decisions • Composite leverage focuses attention on the entire income of the concern Composite Leverage = operating leverage * financial leverage. ii) Comment on the relative risk position of them.000 60.000 Current year (Rs) 2.000 60. VC(70% of Sales) Contribution Less : FC Profit from operations Previous year (Rs) 2.ii) FC are there ( with leverage) Solution: (i) Sales Less: VC(70% of sales) Profit from operations (ii) Sales Less .50.000 25. 25% • In case (ii) % change in profit (150%) is much more than the %change in sales (25%).000 10.
333 300 200 = 1.5 700 200 = 3.5 Q.Ltd O.Calculation of Leverages P. The tendency of profit to vary disproportionately with sales is higher for Q Ltd as compared to P Ltd.5 300 100 =3 700 300 =2. i. Q ltd has a higher degree of operating risk. C) C.L : As the combined leverage for Q Ltd is higher than P Ltd has overall higher risk as compared to P Ltd.Ltd a) OL : As the OL for Q Ltd is higher than that of P Ltd .L = EBIT EBT C. 43 .L = OL*FL 300 150 =2 150 100 = 1.e.L : Since FL for the two companies is the same both the companies have the same degree of financial risk. the tendency of net disproportionately is the same for P Ltd and Q Ltd. b) F.P = contribution EBIT F.