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Understanding Indian financial system
Understanding Indian financial system
Understanding Indian financial system
Understanding Indian financial system
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Understanding Indian financial system

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Understanding Financial System in India, Investment cycle and Economical Impact

Understanding Financial System in India, Investment cycle and Economical Impact

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  • 1. Understanding the financial system, investment cycle and their impact from the perspective of economy and economical growth in the Indian and International Scenario: The objective of this article is to get a basic & broad understanding of the financial system and related issues in the context of Indian financial system; the investment cycle and perspectives of a company, banking and financial institutions, government and as an Individual in the financial system. Firstly we shall look into the common financial terms and secondly understand the general investment cycle and thirdly the general correlation of the investment cycle of different entities on the economy. The common financial terms used in the financial system are: Revenue / Income, Investments, Funds, Loans, Taxes • Tax – VAT, Service Tax, Excise Duty, Income Tax, Wealth Tax • Loans – Business Loans, Debtors, Loans through World Bank and IMF • Funds – Deposits, Shares (stocks), Mutual Funds, Insurance (general & personal) and other instruments • Investments – Retails Investors, Private Equity Investors, Financial Institutions, NBFCs, FDI and FII, Governments, World Bank and IMFs Means of Transactions – Monetary, Financial Instruments and Commodities exchange The financial system comprising of various organizations, institutions and the government involving different kinds of transactions would be: Banks, Financial Institutions, Insurance, NBFCs Government Companies (All industries & PSUs) Imports Exports Financial System Indian companies Controlled by Foreign Investments Investing in Foreign Ministry of Finance, Commerce & in India markets Regulatory authorities - RBI, SEBI, IRDA, CBDT Individuals Unorganized Business Sector Agriculture Schematic representation of the financial system
  • 2. The below representation depicts the general investment cycle. Depending upon the context there may be additional factors influencing the cycle in case of organizations, institutions, agriculture or unorganized business sector. Resources Human Investment Resource Business (Services) Operations Profits Investment Cycle Revenue Taxes Less Operational Expenses Interest on Loans Representation of General Investment Cycle Having understood the general investment cycle, replicating the same to organizations, institutions and other entities, the investment cycle would go through a similar process with few other factors influencing the cycle. The performance of the financial system would basically depend upon the investment cycle of the entities forming as part of the financial system across the size, regions and industry segments. The degree of impact of each of these entities may vary with in the system. The complexity, scale of investments, timing and need will basically determine the correlation between the entities on the financial system. Understanding the correlation between investment cycle of different entities in the financial system and the demand for the products and services offered by these in the domestic and international market; calculated, rationalized investment plans will yield improved overall economic growth in the current scenario. The economic growth majorly depends upon the collective performance of the above entities; domestic & international demand for the products and services offered by companies including all the industries; domestic and international financial risks; agriculture, services and industrial outputs. After the opening up of economy in 1992 and looking at the rebuild of economy after the recession period across the world, India will continue to be one of the prime focuses of investments; in addition to markets including Brazil, China, Russia, African nations by developed countries. Hence well planned investments addressing the basic issues of the economy will help ensure a steady and sustainable growth rate of the economy.
  • 3. The major contribution to the Indian economy comes through agriculture, domestic growth of industrial goods and services, natural resources of the country and the international demand for the agricultural products, goods and services and natural resources. The growing rate of import of the goods because of the demand does concern the economic growth. In the international context it is important to closely monitor and regulate the investments & flow of resources into the international markets and vice versa to ensure a gradual, sustainable growth so that the economy does not take a beating because of irrational investments. Perspective of Funds, Expenses, Investments, Taxes from the view point as a company, government, banks and financial institutions and as a common man. Perspective of Funds / Investments Expenses Taxes Other Savings / organization / regulatory Revenue/ individual Income Banks & Deposits Loans to Salary to Income RBI, IRDA & Interest Financial through companies, employees Tax SEBI statute earned Institutions salary / Individuals, and other norms from Loans business Housing,Gold, fixed and income Tourism, variable and term Education Expenses, deposits Interest Company Loans, Into the Salary to Income SEBI Operational (including Shares, company employees Tax, Excise revenues public sector Debts operations on and fixed Duty, and companies) Fixed and and variable Service Investment variable expenses Tax revenues assets depending upon the assets, Interest Government World Infrastructure Subsidies, None National Bank and Projects and fixed and resources IMFs, Taxes other variable investments assets, Interest on loans Unorganized Loans Deposits, Operational Income IT / VAT Revenue Business Sector Shares, MFs Expenses, tax, VAT through Insurance & Wages, Tax Business back in Salary , Operations business Interest Agriculture / Loans Bank Deposits Farming None Revenue Farmer & Insurance expenses through and wages sale of agricultural products
  • 4. Common Man Term Personal and Income IT Dept Salary / Deposits, family tax Wages Insurance, expenses Shares, MFs Additional factors influencing the financial system in the International scenario are fluctuations in Currency exchange rates, Hedging, Futures and Options, Letter of Credits, Market Risks (non financial) and other policies and instruments. The above table signifies the cycle within each of the organizations in each financial year or each of financial transactions. The cycle between these bodies will broadly depend upon the regulations, economy; performance of different industries, international financial conditions, agriculture, government policies; international trade practices and projects. The author is Mr. Ganesh, Founder, Smart Consulting (www.smartconsulting.in).

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