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  • 1. Module – 1 Business Environment Reference: Economic Environment Misra & Puri Pg no:5-60Characteristics / Nature of Modern Business• Large size• Oligopolistic character• Diversification• Global reach• Technology orientation• Change• Government controlEnvironment of BusinessEnvironment by definition is something external to an individual or an organization.Business environment refers to all external factors which have direct or indirect bearingon the activities of business. The business environment is divided into • Internal environment • External environment a. Micro environment b. Macro environmentDiagrammatic Representation of Business Environment Micro/ macro Internal External Environment Business EnvironmentInternal Environment• Value system,• goals and objectives,• management structures,• relationship among the various constituents,• physical assets,• technological capabilities and human, 1
  • 2. • financial and marketing resources make the internal environment of business.External EnvironmentExternal environment of business consists of institutions, organizations and forcesoperating outside the company. External environment can be classified into • Micro Environment • Macro Environment(1) Micro environmentThe micro environment refers to such players whose decisions and actions have a directbearing on the company. Since modern business broadly has two aspects, viz., Productionand 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 environmentMacro environment comprises large societal and physical forces which affect thecompany and also the players in the company’s micro-environment.Macro environment of a company refers to all those economic and non- economic factorswhich exercise their influence on the business activity in general and thus determineopportunities that a company may have to promote its business.Macro environment can be classified into • Economic environment • Non-economic environmentDiagrammatic representation Dia r m a ic r p e e t t n ga m t e r s n a io National Global Business l itica Na tu a pol e T r l o l ch ci ra no So ltu De og phic m ra lo cu gic al 2
  • 3. Economic EnvironmentSince 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. Socialism2. 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. DeficitsPhases of business cycle a. Prosperity b. Recession c. Depression d. StagflationFinancial SystemEconomic Policies a. Industrial policy b. Trade policy c. Monetary policy d. Fiscal policyNon-Economic EnvironmentThe non- economic environment of business can be classified as: • Political environment • Legal environment • Socio-cultural environment • Demographic environment • Technological environment • Natural environment 3
  • 4. (a) Political Environment(b) Legal EnvironmentThe governments sets the legal framework within which business operate.Legislations defining property and business organizations, laws of contracts andbankruptcy, mutual obligations of labour and management and a multitude of laws andregulations constraining the way business activities are carried out constitute legalenvironment 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 EnvironmentThe Social environment is made up of the attitudes, desires, expectations, degrees, ofintelligence 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 waymembers interact with one another and with outsiders – and how they achieve what theydo.Socio-cultural environment is made up of attitudes, desires, expectations, beliefs, faiths,customs of people besides their set of material practices through which people producegoods and services that they need for satisfying their wants.Globalization of cultureMulticulturalism a. Caste b. Race c. Ethnic issuesDemographic EnvironmentDemographic factors like the Size and Growth rate of population, Life Expectancy, Ageand sex composition of population, Work participation rate, Employment status, Rural-urban distribution, Educational levels, Religion, Caste, Ethnicity and Language are allrelevant to business.Some of the issues are: • Size and growth of population 4
  • 5. • Age structure of population • Urban-rural population • Burden of population on environment Module – 3 Economics Of DevelopmentMeaning of Economy (or) Economic SystemAn economy or economic system refers to the manner in which the various economicactivities relating to production, distribution, exchange and consumption of goods andservices are organised in a country, and the way in which the people of a country earntheir living.It comprises the farms ,factories, mines, shops, offices, banks, schools and colleges,transport systems, hospitals, defence, etc The economy of a country is divided into threesectors: 1. Primary Sector – agriculture, mining, forestry, fishing, etc. 2. Secondary Sector – large scale and small scale industries. 3. Tertiary Sector – services like transport, banking, insurance, trade, public administration, defence, etc.Classification of Countries (economy)The World Bank in its World Development Report (2005) has classified various countriesof the world on the basis of their per capita Gross National Income (GNI) or (GNP). Theyare1.Low income countries – with per capita GNP of $765 and below. Ex : Myanmar,India, Ghana, Sudan, Nepal, Uganda.2.Middle income countries – with per capita GNP between $766 and $9,385. Ex : China, Fiji, Brazil, Cuba, Egypt, Iran, Iraq, etc.3. High income countries – with per capita GNP higher than $9,386. Ex : Australia, USA, UK, UAE, Canada, Spain, Germany, France, etc.Types of EconomiesAn economy or economic systems can be classified into two types on the basis of thelevel of economic development attained by them. They are 1. Developed economy (advanced) 2. Under-developed economy (backward)Developed economyThe United Nations Experts in 1971have classified countries with per capita real nationalincome of $1000 and $4000 a year as developed countries.A developed economy is one which is economically advanced and whose economy is 5
  • 6. characterized by large industrial and service sectors and high levels of income per head.Under-developed / developing economyAn economy where the per capita real income is less than $1000 a year is considered anunder-developed economy.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 - B.S.Raman: pg 19-21 HRK: pg 11-14Meaning of a Developing Economy Developing economy, no doubt, refers to an under-developed economy. But thisterm is mostly used to refer to that under-developed economy which is not stagnant, buthas started developing by making use of its natural and human resources. The following changes in the Indian Economy over the last five decades clearlyprove that India is a developing economy.Increase in national income 1950-51 – Rs. 9,142 crores 2001-02 – Rs. 18,64,292 croresIncrease in per capita income 1950-51 – Rs. 255 2001-02 – Rs. 17,978Increase in investment 1950-51 – Rs. 1,960 crores 2001-02 – Rs.15,25,639 croresIncrease in agricultural production (food grains) 1950-51 – 50.8 mn. tonnes 2001-02 – 212 mn. tonnesIncrease in industrial ProductionIncrease in social over-headsStructural changesProgress in Science and TechnologyProgress in Banking and Financial sectorReduction in inequalities in income and wealthImprovement in living standardsDesirable changes in societyDeterminants of Economic Development ( Reference – Ruddar Dutt and 6
  • 7. Sundaram: pg12-14 )Economic development implies the process of securing levels of productivity in allsectors of economy and this in turn, is a function of the level of technology.Economic development thus depends upon two sets of factors: 1. Non-Economic Factors 2. Economic FactorsNon-Economic FactorsNon-economic Factors includes social attitudes, political conditions, human endowmentsand efficient governance. • Religious beliefs • Political Instability • Family System • Development of Education • Nature of PeopleEconomic Factors • Capital Formation • Capital-output Ratio • Growth of Population • Building Human Capital • Availability of Natural Resources • Climatic Conditions • Level of TechnologyMajor 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, 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 inequalitiesBusiness CyclesThe business cycle is an alternate expansion and contraction in overall business activity,as evidenced by fluctuations in aggregate economic activity such as GNP, industrialproduction, employment and income.According to J.M.Keynes “ A trade cycle is composed of periods of good tradecharacterized by rising prices and low unemployment percentages, alternating with 7
  • 8. periods of bad trade characterized by fall in prices and high unemployment percentages.”Phases of a Business CycleA business cycle will have 5 different phases or stages. They are 1. Depression 2. Recovery 3. Prosperity or full employment 4. Boom or overfull employment 5. Recession(1) DepressionDuring this period business activity in the country will be much below normal level. It is characterized by a short fall in production, mass unemployment, fall in prices,low wages, contraction of credit, a high rate of business failures and an atmosphere of allround pessimism. The USA experienced 2 longest depressions in the history i.e during 1873-1879 and1929-1932.(2) RecoveryDuring this period business activity increases. The industrial production and volume ofemployment steadily increases. The prices and wages increases. The recovery may takeplace 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) ProsperityThis stage is characterized by high capital investment in basic industries, expansion ofbank credit, high prices , high profits, high rate of formation of new business enterprisesand the full employment. The longest sustained period of prosperity occurred in the USA between 1923 and1929.(4) BoomIt is the stage of rapid expansion in business activity resulting in high stocks andcommodity prices, high profits and over-full employment. A situation develops in which the no. of jobs exceeds the no. of workers in the market.Such a situation is known as over-full employment. Profits will further increase. This will lead to more investment and in turn further raisein price level and inflation.(5) RecessionIn this stage more business enterprises fail, prices collapse and confidence is shaken.Building construction slows down and unemployment increases. There is fall in income, 8
  • 9. expenditure, demand, prices, and profits. The recession will have cumulative effect on theworking of the economy. USA experienced recession in 1957-1958.Diagrammatic RepresentationCharacteristics of Business CyclesBusiness cycle is a wave like movement.• The cyclical fluctuations are recurrent in nature.• The upward or downward swing of the business cycle is self reinforcing.• Business cycle contains self generating forces.• They are all pervasive in their effects.• The peak and the trough of a business cycles are not symmetrical.• In cyclical fluctuations the prices and the production generally rise or fall together.• The cyclical upward and downward swings move parallel with production and monetary demand.• The cyclical fluctuations are felt more in capital goods industries than in consumer goods industries.• They are not periodical in nature.• Prices of manufactured goods are comparatively rigid while that of agricultural goods are normally flexible.• The cyclical fluctuation tend to be not only national but also international in character.Importance of Agriculture to Indian Economy 1.Provides largest employment 60 % of working population 2. Greater share in national income 23 % of national income 3. Supply of food to people 212.22 mn tonnes of food grains in 2003-04 4. Industrial development 9
  • 10. 5. Contribution to foreign trade Share of agricultural exports in total exports is 10% 6. Source of revenue to government 7. Source of capital formation 8. Market for industrial products 9. Good national defence 10. Price Stability Agricultural commodities account for 80% of total consumption expenditure 11. Development of tertiary sector 12. Influence on government budgets 13. Supply of fodder 14. Influences general price level 15. Involves low capital 16. Supplier of raw materials 17. Main role in consumption basket 60% of household consumption and 85% of household commodity consumption is of agricultural products. 18. Source of revenue and also exports 19. Political and social significanceImportance of Industrialisation in India 1. Employment generation 2. Larger production 3. Increase in national income and per capita income 4. Promotion of agriculture 5. Development of agriculture 6. Increase in productive capacity 7. Use of potential resources 8. Contribution of export trade 9. National defence 10. Balanced development 11. More revenue to government 12. Changes in the outlook of people 13. Expansion of markets 14. Economic stability and self sufficiency 15. Proper balance between industry, agriculture and tertiary sector 16. Urbanisation 17. Stable growth of the economyThe 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
  • 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 developmentImportance of Foreign Trade in the Economic Development of India• helps India to import plant and machinery, raw materials and technical know-how.• helps to import goods like petroleum, metals, etc.• helps India to export goods which are in surplus.• widens the market for our products.• contributes to expansion of domestic industries.• contributes to growth of national income.• contributes to improvement in the civilisation of our people. 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.• 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, 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
  • 12. Reference : Ahuja – Pg 15-35National Income  According to J.R Hicks, “National income consists of a collection of goods and services reduced to a common basis by being measured in terms of money”.  According to the National Income Committee of India-1951, “A national income estimate measures the volume of commodities and services turned out during a given period, counted without duplication”.Important Points • National income refers to the income of a country, Ex: India • Its measurement refers to a specified period of time, say 1year • National income includes all goods and services which have exchange value, counting each one of them only one.Different Concepts of National Income 1. Gross Domestic Product (GDP) 2. Net Domestic Product (NDP) 3. Gross National Product (GNP) 4. Net National Product (NNP) 5. National Income at Factor Cost (NI) 6. Personal Income (PI) 7. 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. • It is a geographical or territorial concept. • GDP = GNP – net factor income from abroadNet 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. • NDP = GDP – DepreciationGross National Product • GNP is defined as the total market value of all final goods and services produced during a year in a country. • GNP is a monetary measure. • GNP includes the market value of only final goods and services. • It is a flow measure of output of goods and services during a year / currently produced goods. • GNP refers to the value of goods and services currently produced by normal residents of a country. 12
  • 13. • The depreciation or replacement value of the fixed assets is not deductedNet National Product • This refers to the net production of goods and services in a country during a year. • NNP = GNP – the value of capital depreciated during the year. • NNP is a highly useful concept in the study of growth economics.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, wages, interest, and profit during a given year. • NI = NNP – Indirect Taxes + subsidyPersonal Income • It is that income which is actually received by the individuals and households in a country during a year from all sources. • PI = NI – Corporate income tax -- social security contributions -- undistributed corporate profits + transfer payments This concept is useful in estimating the potential purchasing power of theindividuals in an economy.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.• DPI = PI – Personal direct taxes• DPI = Consumption + SavingUses / 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 economyDifficulties 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
  • 14. • Non- 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-consumptionDifficulties 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 dataTrends in National Income Growth and Structure I. Trends in net national product and per capita income II. Annual growth rates during the plans III. Trends in distribution of national income by industrial origin IV. Trends in the share of the public sector V. Urban and rural income break-up VI. Share of organised and unorganised sector in NDPNational Income Estimates in IndiaAccording to the National Income Committee, “ A national income estimate measures thevolume of commodities and services turned out during a given period, counted withoutduplication”.  Pre-independence period estimates  Post-independence period estimates  National income committee and C.S.O estimatesCircular 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
  • 15.  Four Sector Model Firm + Household + Government income and Expenditure + Exports and Imports S+T+M=I+G+X Module: 5(a) Capital StructureMeaning of Capital StructureCapital Structure refers to the various sources from which the long-term funds are raised.The Capital Structure refers to the proportion of equity capital, preference capital,reserves, 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 securitiesForms/Patterns of Capital Structure • Equities only • Equities and preference shares • Equity shares and debentures • Equities, preference shares and debenturesFactors determining capital structureTwo types • Internal factors or controllable factors • External factors or uncontrollable factorsInternal factors • Financial leverage • Growth & stability • Cost of capital • Asset structure • Retaining control • Purpose of financeExternal factors 15
  • 16. • Size of the company • Nature of company • Cost of floatation • Interest rates • Taxation policy • Fluctuation in stock market • Availability of fundsPecking order theory Internal Debt Issue of Debt Equity SharesBusiness risk Uncertainty about – demand, sales, price, costs, etc.Leverage:- Meaning and DefinitionThe Dictionary meaning: “An increased means for accomplishing some purpose”.In financial analysis: Leverage is ability of using fixed costs to enhance the potentialreturns to a firm.There are 2 types of fixed costs:1) Fixed operating costs(rent, depreciation, etc.)2) Fixed financial costs(interest, cost of debt, etc.)Is also called ‘GEARING’ in USAJames Horne has defined “Leverage as the employment of an asset or funds for which the firm paysa fixed cost or fixed return”.Christy and Roder defined 16
  • 17. “Leverage as the tendency for profits to change at a faster rate than sales”.Types of leverageFinancial leverageThe use of long term fixed interest and dividendBearing securities like debentures and preference shares along with equity is calledfinancial leverage or trade on equity. FL = EBIT EBTDFL = Percentage change in EPS Percentage change in EBITOperating leverageThe operating leverage occurs when a firm has fixed cost which must be recoveredirrespective of sales volume. The fixed cost remaining the same the percentage change inoperating revenue will be more than the percentage more than the salesOL = contribution EBITDOL=Percentage change in EBIT Percentage change SALESCombined leverageCombined leverage shows the relationship between the change in sales andcorresponding variation in taxable income.Combined leverage = operating leverage X financial leverageContribution = EBIT X EBIT EBIT/operating profit EBT = contribution earnings before taxDCL = Percentage change in EPS Percentage change in SALESFINANCIAL LEVERAGEQ 1. A Ltd. Company has equity share capital of Rs. 5,00,000 dividend into share of Rs.100 each. It wish to raise further Rs. 3,00,000 for expansion cum modernization plans.The company plans the following financing schemes. 17
  • 18. (a) all common stock . (b) Rs. One lakhs in common stock and Rs. 2 lakh in 10% debentures. (c) All through debentures at 10 % interest pa. (d) All debt in common stock and Rs. 2 lakh in preference capital with the rate ofdividend at 8% The Company’s existing earnings before interest and tax (EBIT) is Rs.1,50,000. Thecorporate rate of tax is 50%.You are required to determine the earnings per share (EPS) in each plan and comment onFinancial Leverage.SOLUTION PLAN 1 PLAN 2 PLAN 3 PLAN 4earnings before interest and tax 1,50,000 1,50,000 1,50,000 1,50,000Less : Interest _ 20,000 30,000 __1,50,000 1,30,000 1,20,000 1,50,000Less : tax @ 50% 75,000 65,000 60,00075,000 _______ _______ _____________Earnings after tax 75,000 65,000 60,000 75,000Less : preference dividend at 8% __ __ __16,000 _______ _______ _______ ______Earnings available for common 75,000 65,000 60,000 59,000 stockholdersNo. of common shares 8,000 6,000 5,000 6,000Earnings per share (EPS) Rs. 9.375 Rs. 10.83 Rs. 12 Rs. 9.83Financial leverage = EBIT 1 1.15 1.25 1 EBTCOMMENTSSince EPS as well as degree of financial leverage is highest in financial plan 3 it shouldbe accepted. The company should raise Rs. 3 lakh only through debt.Problems on Leverages:A simplified income statement of Zenith Ltd. is given below. Calculate the Operatingleverage, Financial leverage, & combined leverage. Sales 10,50,000/- 18
  • 19. Variable cost 7,67,000/- Fixed cost 75,000/- Interest 1,10,000/- Tax 30%Soln :-Sales 10,50,000(-)Variable cost 7,67,000Contribution 2,83,000(-)Fixed cost 75,000EBIT 2,08,000(-)Interest 1,10,000EBT 98,000(-)TAX(30%) 29,400NET Income 68,000Operating leverage = contribution EBIT = 2,83,000 2,08,000 = 1.36Financial leverage = EBIT EBT = 2,08,000 98,000 = 2.12Combined leverage = Operating Leverage X Financial Leverage =1.36 X 2.12 =2.88 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,reaping the benefits of division of labour and producing goods on a large scale involvingfixed capital investment of more than Rs.10 Cr but less than Rs.100 Cr. 19
  • 20. Medium Scale Industries : Medium Scale Industries are those industries which are organised on a mediumscale, and produce goods on a medium scale by using machines, hired labour and powerinvolving fixed capital investment of more than Rs.1 Cr but less than Rs.10 Cr.Small Scale Industries: Small-scale industries are those industries which are organised on a small-scale, andproduce goods on a small scale by using machines, hired labour, and power. Ex: Ready garments, paper, electrical goods, etc.Agro-industries and Ancillary Industries: Industries which produce goods by using agricultural raw-materials are called agro-industries. Ex: jute, oil, sugar, cotton textiles, etcIndustries which produce spare parts, components, etc required by the large industries arecalled ancillary industries.Cottage Industries: A cottage industry is one which is carried on mainly in a house with the help of themembers of the family and with the help of simple and hand-operated tools. Ex: pottery, toy-making, weaving, carpet-making, wood work, agarbhatti, etc.Manufacturing Industries:Any industry which is engaged in the conversion of raw materials into finished goods fitfor consumption with the help of men and machines is generally known as manufacturingindustry. Ex: conversion of iron ore into iron and steel, wood pulp into paper, etcIndustrial Development Under Five Year Plans( B S Raman – 258-267 Dutt & Sundaram – 636-640)  India implemented five year plans and industrial development became an integral part of India’s development planning.  High priority was given to programmes of Industrialization on account of following reasons: o 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. o Productivity of labour is the highest in manufacturing Industries. o Development of the industrial sector is a pre-condition for agricultural development. o Industrialization induces development of other sectors. Development of transport, communications and energy is still more dependant on industrial growth. o Despite the secondary importance given to industry, the annual rate of growth of 20
  • 21. industrial output was about 6%. o The overall production of industrial goods increased by 39%. o Capital goods industries like iron and steel were expanded. o A number of public sector industries like HMT, penicillin factory, etc were established. o A number of industries like petroleum-refining, cement, penicillin, etc were set up. o Infrastructural facilities like power, transport and communication were expanded considerably.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. • It was really an industrial plan. • Total investment in industries was Rs. 1,180 crores (27% of total plan). • The annual rate of growth was 7.25%. • Industrial production increased by 46%. • Three major public sector steel plants were set up at Rourkela in Orissa, Bhilai in MP and Durgapur at WB. • This plan witnessed a major diversification of the industrial spectrum. • Most of the investments were in Heavy and Basic Industries. • Tractors, motor cycles, scooters, etc were produced for first time in India. • Good progress was also recorded in modernization and re-equipment of jute, cotton textiles and sugar industries. • Good progress was made in the production of consumer goods like fans,radio,etc. • About 60 industrial estates comprising 1000 small factories were set up. Third Five-year plan (1961-66) • Rs.1726 crores(20% of total plan) was allotted for the development of industries and mining. • The annual rate of growth was 7.9%. • UTI and IDBI were set up in 1964. • A no. of industries like aluminium, automobiles, textiles, etc achieved rapid growth. • Mining and extractive industries also showed progress. • 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. • Mining and extractive industries also showed progress. • 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.Fourth Five-year plan (1969-74) 21
  • 22. • This plan was based on the industrial policy of 1977.• Rs 5298 crores (23%) was allotted.• The actual growth rate was 5% as against 8%.• This plan aimed to enlarge capacities in export promotion and import substitution industries.• Public sector enterprises had started earning profits. Fifth Five-year plan (1974-78) • This plan was formulated to achieve the twin objectives of self-reliance and growth with social justice. • Rs.16,660 cr (26%) was allocated. • 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 IndiaSixth Five-year plan (1980-85)• This plan was a very ambitious plan.• It was based on the industrial policy of1980.• Rs.22,200 cr (22.8%) was provided.• Actual growth rate was only 3.7% as against 7%.• There was a shortfall in the production of many industrial goods like cement, iron and steel, etc.• Industrial progress during this period was most disappointing.Seventh Five-year plan ( 1985-90)• This plan laid emphasis on the development of infrastructural facilities, modernisation, upgradation of technology, reduction in cost, accelerated growth in selected industries.• This plan was a success as annual growth rate was 8%.• Total outlay for industries was Rs. 22,460 cr.• The govt had liberalised industrial licensing policy to provide incentives to industries.• Encouragement of ‘Sunrise’ industries such as telecom, bio-tech, computers, etc.• Industries were encouraged to adopt technologies like laser, robotics, fibre-optic, etc for enhancing productivity.• About 30% of industries had installed Pollution Control systems.Eighth Five-year Plan (1992-97)• This plan was formulated under Economic Liberalisation and was based on the industrial policy of 1991.• During this period, the private sector has developed considerable managerial, technological, financial and marketing strengths. 22
  • 23. • The outlay was Rs. 40,670 cr (19% of total plan).• Over all 9.5% growth rate has been achieved.• The factors for the slow growth fo industrial sector:• Could not face foreign competition as a reduction of import duties.• Under utilisation of domestic capacity• Dumping by foreignersNinth five-year plan (1997-2002• This plan was a failure as the actual growth rate was only 5% as against 8% of target.• This plan allocated Rs. 69,972 cr for industry.• The internal and external factors are responsible for slowdown.• The failure can be attributed to the fall in public sector investment .• Lack of external demand resulting from slowdown in world economy decelerated the growth of industrial sector.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 13.3% in 1950-51 to 24.6% in 2003-04.• Building up of Heavy and Capital Goods Industries:• Growth of Infrastructure Industries: Infrastructure industries include: i. Electricity ii. Coal iii. Steel iv. Crude petroleum v. Petroleum refinery vi. Cement  A Well Diversified Industrial Structure: o Machinery: 1950-59--- 1.2% 1990-99 --- 12.7% o Chemicals: 1950-59 --- 5.7% 1990-99 --- 12.4% o Non metallic Mineral products: 1.6% to 4.6% o Transport Equipment: 3.4% to 6.5% o Rapid Growth of Consumer Durables: o The rate of growth of this industry in 1980-85 was 14.4% and in 2003-04 was 11.6%. o Emphasis on Chemicals, Petrochemicals and Allied Industries in 1980s: o Emergence of Public Sector: 1950 – 5 PSUs with Capital of Rs.29 Crore 23
  • 24. 2003 – 227 PSUs with Capital of Rs. 4,18758 CroreChange 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 -- 213-221,HRK • The Industrial Policy Resolution of 1956 gave the public sector a strategic role in the Indian economy. • 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. • Forms or Types of Public Enterprises: i. Departmental undertakings : Railways, Defence, etc ii. Statutory Corporations : LIC, the Indian Airlines Corporations, etc iii. Government Companies : Heavy Electricals Ltd, HMT Ltd, etc iv. Holding Company : Steel Authority of India Ltd.Objectives of Public Sector a. To promote rapid economic development through creation and expansion of infrastructure b. To generate financial resources for development c. To create employment opportunities d. To promote redistribution of wealth and income e. To promote balanced regional growth f. To promote exports and import substitution g. To encourage SSIsRole of Public Sector in Indian Economy • Capital Formation • Development of Infrastructure • Development of Defence Industries • Development of Basic and Key industries: • Iron and steel, cement, etc • Development of Power projects • Development of Banking and Insurance • Balanced Regional development • Balanced Economic Growth • Strong Industrial Base 24
  • 25. • 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 ProjectsProblems 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 PowerRemedies / 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,B S Raman- 224-225• Joint Sector Enterprises refer to economic enterprises or industries which are owned and managed jointly by the Government and the Private sector.• Ex: Madras Fertilizers, the Cochin Refineries, etc. 25
  • 26. • Rationale behind Joint Sector Enterprises: To combine the financial resources of the Government with the managerial skill ofthe private entrepreneurs for the successful running of the economic enterprises.Types of Joint Sector Enterprises 1. Existing Private Enterprises : through the conversion of bonds or debentures into equity shares. 2. Existing Public Sector : through the sale of equity shares of such enterprises to private entrepreneurs. 3. New enterprises set up by the Government jointly with the Private entrepreneurs.Role / Benefits of Joint Sector Enterprises in India a. Social Control over Industries b. Better Industrial Growth c. Broad-basing of Industrial Entrepreneurship d. Prevent monopolies and concentration of Economic power e. Mobilisation of Financial Resources f. Mobilisation of Techno-managerial Resources g. State-sponsored Industrialisation h. Extension of Public Control i. Failure of Public and Private Sectors j. Acceleration of Economic Growth k. Run on Efficient lines and earn sufficient Profits l. 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.• 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.• Private sector is purely profit motive.Role of Private Sector in India 1. Help third world countries in their economic development 2. Agriculture : this sector which is completely managed by the private enterprises contributes 25% of GNP an 60% of employment in 2001. 3. Dominates the Trading Sector 4. Dominant in forestry, fishing, railways, construction, etc. 5. Contribution to national income of country 6. Development of large no. of small scale and cottage industries 7. Production of a variety of goods 8. Efficient managementLimitations Of Private Sector 26
  • 27. I. Emphasis on Non-priority Industries II. Emergence of monopoly power and concentrationIII. Industrial disputesIV. 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, hired labour and power.  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.Significance of SSIs in the Economic Development of India 1. Expansion of SSI sector and its share in Industrial Output :  No of SSI units rose from 79.6 lakhs in 1994-95 to 114.0 lakhs in 2003-04.  The rate of growth of output exceeded 10% from 1994 to 1997. 2. Employment Generation: 1994-95 – 191.4 lakh people 2003-04 – 271.4 lakh people 3. Efficiency of Small-Scale Industries: At the all-India level, the SSI is more efficient than the large scale sector. 4. Equitable distribution of National Income 5. Mobilisation of capital and Entrepreneurial Skills 6. Regional dispersal of Industries 7. Contribution to Exports 8. Sustains Agricultural Development 9. Less Industrial Disputes 10. Decentralisation of Industries 11. Contribution to National Income 12. Foreign Exchange Earnings Problems of SSIs Misra & Puri – 582-585 i. Finance and Credit ii. Inverted tariff structure and raw material availability iii. Machines and other equipment iv. Problems of marketing v. Infrastructural constraints vi. Delayed paymentsvii. Problem of sicknessviii. Poor database ix. Adverse effects of economic reforms and globalisation x. Inefficient management 27
  • 28. xi. Competition from large scale industriesxii. Burden of local taxesMeasures to Reduce Sickness among SSI  Credit and Finance  Marketing Assistance  Allocation of Raw materials, Imported Component and Equipment  Technical Assistance  Industrial Estates Small-scale Industrial Policy,1991 Misra & Puri-579The main features of policy were: 1. Investment for Tiny Enterprises was raised from Rs.2 lakh to Rs.5 lakh. 2. Proposed a separate package for the promotion of SSIs. 3. Provided Equity Participation by other industrial units in the SSIs not exceeding 24% of the total shareholdings. 4. Introduction of new Legal form of organisation of business, namely restricted or limited partnership. 5. Proposed to meet the entire credit demand of SSIs. 6. Scope of National Equity Fund and Single Window Scheme was enlarged. 7. Provided priority to SSIs in the Government Purchase Programme. 8. Accorded in allocation of indigenous raw materials. 9. Envisaged market promotion of SSI products to be undertaken by Cooperatives, PSUs and other agencies. 10. Proposed a scheme of Integrated Infrastructure Development for SSI to facilitate location of industries and to promote co-ordination b/w Industry and agriculture. Multinational Corporations Ishwar C Dingra – 552-560  An MNC is one which undertakes FDI, i.e., it owns or controls income generation assets in more than one country, and in doing so produces goods or services outside its country of origin ,i.e, engages in international production.Characteristics of MNCsThe MNCs are multi-process, multi-product and multi-national composite enterprises. 1. Giant size 2. International Operations 3. Oligopolistic Character 4. Spontaneous Evolution 5. Collective Transfer of ResourcesSignificance Of MNCs Impact area Potential benefits 1. Capital 1. Provision of scarce capital 28
  • 29. resources. 2. Technology 2. Provision of sophisticated technology not available in host 3. Exports and balance of payments country 4. Diversification 3. Access to superior distribution and marketing systems 4. MNCs command technology and skill required for diversification of industrial base and for the creation of backward and forward linkagesActual impact of MNCs 1. Capital 1. Insignificant net flow Large dividend remittances 2. Technology Large technical payments 2. Costly ‘over-import’ Problems with advanced technology 3. Exports and balance of Problems with technical support payments 3. Higher import propensity than domestic 4. Diversification companies Negative BOP effects 4. Increased foreign influence in key sectors Module – 7 - Money and BankingCommercial Banking Structure In India• Indian commercial banks are called Joint Stock Banks as they are organized in the form of joint stock companies.• Under the Reserve bank Of India Act,1934, the commercial banks in India are classified into: i. Scheduled Commercial banks ii. Non-scheduled Commercial BanksScheduled Commercial Banks• Scheduled commercial banks are those banks which are included in the second schedule of the Reserve Bank of India, having a paid-up capital and reserve together Rs.5 lakh and above.• As on March 2004, there were 286 schedule commercial banks in the countryNon-scheduled Commercial Banks• Non-scheduled banks are those whose total paid-up capital and reserve fund is less than Rs.5 lakh and whose name is not included in the second schedule of RBI 29
  • 30. Act,1934.• At present, there are only two non-scheduled banks in the country.Diagrammatic Representation Diagrammatic Representation Scheduled Commercial Banks Public sector banks Private sector banks Indian private Foreign Nationalised SBI and sector banks banks banks its associates Old private New private sector banks sector banksNationalisation Of banks• Nationalisation of banks is nothing but the government taking control of those banks which were owned by private people.• This was the milestone in the history of Indian Banking.• There are 20 nationalised banks which carry out 90% of banking business in the country.Nationalisation on 19 July 1969 1. Central Bank of India 2. Bank of India 3. Punjab National bank 4. Bank of Baroda 5. United Commercial Bank 6. Canara Bank 7. United Bank of India 8. Dena Bank 9. Syndicate Bank 10. Union Bank Of India 11. Allahabad Bank 12. Indian Bank 13. Bank of Maharashtra 14. Indian Overseas BankNationalisation on 15 April 1980 30
  • 31. 1) New Bank of India 2) Vijaya Bank 3) Andhra Bank 4) Corporation Bank 5) Punjab and Sidh bank 6) Oriental Bank of CommerceCauses of Nationalisation a. Concentration of Economic Power b. Neglect of Agricultural Sector c. Misuse of Power by Directors d. Credit to Anti-social Elements e. Neglect of Small Units f. Plan Objectives Ignored g. Insufficient Mobilisation of Resources h. Unbalanced GrowthObjectives of Nationalization  To prevent concentration of wealth and economic power in the hands of few people.  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.Arguments Against Nationalisation a. Results in the political interference in the functioning of banks. b. Leads to bureaucratic dictatorship. c. Results in inefficiency d. Banks suffer losses e. Results in corruption f. Leads to flow of funds to unworthy sectors g. Results in the disclosure of banking secretsAchievements Of Nationalisation  Branch Expansion In 1969 – 8,260 bank branches In 2002 – 67,284 bank branches  Deposit Mobilisation 31
  • 32. In 1969 – 4,665 crores In 2002 – 16,22,579 crores  Developmental Functions  Finance to Priority Sectors In 1969 – 505 crores (2% of total bank credit) In 2002 – 3,41,291 crores (43.7%)  Increase in Total Transactions In 1969 – 4,664 crores of Deposits In 2002 – 12,59,128 crores of Deposits  Differential Rate of Interest  Profit Making During 1999-2000 – Rs.13,064 crores of profits.  Safety  Finance to Public SectorsFunctions of the Reserve Bank of India• Bank of Issue• Banker to Government• Bankers’ Bank and lender of the last resort• Controller of Credit a. Quantitative Methods 1. Bank rate 2. Variable cash reserve ratio (CRR) 3. Statutory liquidity ratio (SLR) 4. Open market operations (OMO) b. Qualitative Credit controls/selective credit control 1. Minimum margin for lending 2. Ceiling on amount of credit 3. Discriminatory rate of interest• Custodian of Foreign Exchange Reserves• Supervisory Functions• Promotional Functions Recommendations of the Narasimhan Committee, 1991 Reference: Dutt and Sundaram Pg:853• Aimed At : 1. Ensuring a degree of operational feasibility 2. Internal autonomy for the public sector banks in their decision making process 3. Greater degree of professionalism in banking operationsImportant Recommendations :1. Directed Investment a. Statutory Liquidity Requirements: The committee recommended that the government should reduce SLR from 32
  • 33. 38.5% to 25%. b. Cash Reserve Ratio CRR should be reduced from 15% to 3-5%.2. Directed Credit Programmes3. The Structure Of Interest rates4. Structural Reorganization of the Banking Structure5. Nationalisation of banks6. Setting up of New banksForeign Banks8. Bad and Doubtful Debts9. Removal of Dual Control10. Autonomy to Banks11. Disinvestment12. Rural Banking Subsidiaries13. Recruitment of Staff14. Computerization Reform Of the Banking Sector Dutt and Sundaram Pg:8551. Statutory Liquidity Ratio (SLR) SLR on incremental net demand and time liabilities (DTL) has been reduced from38.5% to 25% in 1997.2. Cash Reserve Ratio (CRR) RBI reduced CRR from 15% to 5.5% in 2001. the purpose was to release funds lockedup with RBI for lending to the industrial sectors .3.Deregulation of Interest Rates Interest rates slabs were gradually reduced from 20 to 2 by 1995.4. Prudential Norms The purpose was that commercial banks should reflect their financial positions moreaccurately and in accordance with international accounting practices.5. Capital Adequacy Norms: were fixed at 8% by RBI in 1992.6. Access to Capital Market: SBI was the first to raise through public issue over Rs. 1,400 crores as equity andRs. 1,000 crores as bonds.7. Freedom of Operation8. New Private Sector Banks9. Local Area Banks: LABs help to mobilise rural savings and to channelise them into investment in localareas.10. Supervision of Commercial Banks RBI has set up a Board of Financial Supervision with an Advisory Council under thechairmanship of the Governor to strengthen the Supervisory and Surveillance system of 33
  • 34. banks and FIs11. Recovery of Debts: The Government of India passed “Recovery of Debts due to banks and FIs Act,1993”. Six Special Recovery Tribunal have been set up.12. Phasing out of Directed Credit13. Competition Measures of Money Supply Reference : Ahuja – 301--303 • From April 1977, the Reserve Bank of India has adopted four concepts of money supply in its analysis of the quantum of and variations in money supply. • The four concepts of money supply are: 1. Money Supply M1 or Narrow Money 2. Money Supply M2 3. Money Supply M3 or Broad Money 4. Money Supply M4 Money Supply Chart Money Supply Chart Money Supply and its determinants M1 M2 M3 M4 = = = = Currency M1 M1 M3 + + + + Demand Deposits Savings deposits Time Deposits with Total Deposits of + with the Banks Post Office Savings Other deposits of Post-office Savings Organisation RBI Banks (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. Notes in Circulation 2. Circulation of rupee coins asa well as small coins 3. Cash Reserves on hand with all banks 34
  • 35. Money Supply M2• M2 = M1 + Savings Deposits with the post office savings bank• M2 is a broader concept of money supplyMoney 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.• M3 has become a popular measure of one supply.• M3 is used for monetary planning of the economy and setting target of growth of money supply.• M3 also called as Aggregate Monetary Resources (AMR).Money Supply M4M4 = M3 + Total deposits with Post Office Savings Organization. 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. Net Bank Credit to Government (A+B) A. RBIs net credit to Government i. Claims on Government ii. Govt deposits with RBI B. Other Bank’s credit to Government 2. Bank Credit to Commercial Sector ( A+B) A. RBIs credit to commercial sector B. Other bank’s credit to commercial sector 3. Net Foreign Exchange Assets of Banking Sector (A+B) A. RBIs net foreign exchange assets B. Other bank’s net foreign exchange assets 4. Government’s Currency Liabilities to the Public 5. Net Non-monetary Liabilities of the Banking Sector (A+B) A. Net Non- monetary liabilities of RBI B. Net Non- monetary liabilities of banks. Thus, 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- Inflationary Monetary Policy since 1972.• Entry of RBI into Foreign Exchange Market Major weapons of Monetary Policy / Control Measures 35
  • 36. • Credit Control:1. General Credit Controls a. Bank rate b. Cash reserve ratio c. Statutory Liquidity Requirements d. Open market Operations Of RBI2. Selective and Direct Credit Controls• Credit Authorization Scheme (CAS)• Credit Monitoring Arrangement (CMA) Module 8 CURRENT ECONOMIC ISSUESTOPICS• PUBLIC ACCOUNTS COMMITTEE• COMPTROLLER AND AUDITOR GENERALPUBLIC ACCOUNTS COMMITTEComposition The Public Accounts Committee consists of fifteen Members elected by Lok Sabha every year 36
  • 37.  Seven members of Rajya Sabha elected by that House in like manner are associated with the CommitteeAppointment of ChairmanThe Chairman of the Committee is appointed by the Speaker from amongst themembers of Lok Sabha elected to the Committee.As a convention, starting from the Public Accounts Committee of 1967-68, a memberof the Committee belonging to the main opposition party/group in the House isappointed as the Chairman of the CommitteeA Minister is not eligible to be elected as a member of the Committee and if amember, after his election to the Committee, is appointed as a Minister, he ceases tobe a member of the Committee from the date of such appointmentThe term of office of the members of the Committee is one yearFUNCTIONS 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, expenditure by various Ministries/ Departments of Government and accounts of autonomous bodies. To ascertain that money granted by Parliament has been spent by Government "within the scope of the demand". 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.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, monitors and controls all activities concerned with audit, 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, corporations and autonomous bodies Offices of the Principal Directors of Audit are responsible for audit of the activities of the Union Government including Defence, Railways ,Postal, Telecommunications etc..The present Comptroller and Audit General of India isMr. Vijayendra.N.KaulFUNCTIONS 37
  • 38. 1. He can engage consultants and/or obtain professional services in conducting audit 2. He can make rules for maintenance of accounts 3. Make regulations for carrying out the provisions relating to the scope and extent of audit 4. To supervise and regulate external auditors work under the Indian Companies Act 5. Appointment of external auditors. 6. Access the computer systems of the auditees and suggest changes if any. 7. CAG assists the Public Accounts Committee in examination of Accounts and Audit reports.COMMITTEE ON PUBLIC ACCOUNTS 8. 15 members elected from lok sabha by every year 9. 7 are elected from rajya sabha to associate with the committeeProcess of electing  Appointment of chairman  Minister not to be Member of CommitteeTerm of the officeFunctions  Showing the appropriate of sums  Examines the audit reports  Usage of money  Identifies loopholes in taxation laws  Recommends in order to check leakage of revenueFunctions • 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 reportsPublic Disinvestment Board 38
  • 39. Privatisation v/s disinvestment• The words privatisation and disinvestment are often used interchangeably.• Disinvestment leads to privatisation when the Government held equity is reduced to a level when the company no longer remains a Government companyPrivatisation has different nomenclature in different countries• Disinvestment.• Peopalisation.• Popular capitalism .• Denationalisation.• Prioritisation.• Industrial transition.• Economic democratisation.• Partners in development.• Transformation and restructuring.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. • To reduce the public debt. • Transferring the commercial risk to the private sector wherever it is willing to. • Releasing other tangible & intangible resources such as man power etc.Emergence of disinvestment policy • Industrial policy 1991. • Rangarajan Committee 1993. • Disinvestment commission recommendations 1999. • Budget speech: 1998-99. • Budget speech: 2000-01.Strategic and non-strategic classification• Arms and ammunitions.• Atomic energy.• Railway transport.• All other public sector enterprises to be considered as non-strategic.The Department of Disinvestment• The Department of Disinvestment was formed on the10th December 1999.• With a view to establish a systematic policy approach to disinvestment and privatisation.• To give a fresh impetus to the Government’s disinvestment programme.TARGETED AND ACTUAL DISINVESTMENTYEAR TARGET ACTUAL RECEIPTS RECEIPTS 39
  • 40. 1991-92 2500 30381993-94 3500 NIL1994-95 4000 48531995-96 7000 3621996-97 5000 3801997-98 4800 9021999-00 10000 18292000-01 10000 18702002-03 12000 33482003-04 14500 15547Economic Survey (2004-05Changing profile of PSUsPSUs Net profit 01-02 Net profit 02-03ONGC 6198 10529IOC 2885 6115SAIL -304 1498GAIL 1186 1739SCI 242 275BSNL 5740 1444All 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 lowerGovernment’s promiseGovernment would continue to ensure that disinvestment does not result in alienation ofnational assets, which, through the process of disinvestment, remain where they are. Itwill also ensure that disinvestment does not result in private monopolies.Criticisms • Privatisation of profit making public enterprises.Mr. George Fernandes in NDA Govt. • Basic criticism – that the funds raised by selling family silver were used to pay the butler.To set up disinvestment proceeds fund. • Methodology for disinvestment. 40
  • 41. Open auction sale during 94-95 to allow NRIs to participate in the offer. • Creation of private monopoly in place of public monopoly.Public sector monopoly is accountable for the parliament but private need not be…… • Valuation of PSUs slated for disinvestment.Eg: PAC quantified the loss to be of the order of Rs.3000 crores in 91-92 out of Rs.4950crores raised.Disinvestment policy and the future of PSUsThe recent changes in the culture of the PSUs as mentioned above also reinforces the factthat by disinvesting highly profitable PSUs, the government is trying to kill the goosewhich lays golden eggs. OPERATING LEVERAGE• % change in operating revenue will be more than the % change in sales (FC remains the same)• Any increase in sales, FC remaining the same, will magnify the operating revenueformulas…… contribution = sales- VC operating profit (EBIT) = sale - VC – FC or OP = contribution – FCExampleFollowing is the cost information of a firm:FC = 50,000VC = 70% of salesSales = 2,00,000 in previous year 2,50,000 in current yearFind out % change in sales and operating profits when:i) FC are not there (no leverage) 41
  • 42. ii) FC are there ( with leverage)Solution:(i) Previous year Current year % change (Rs) (Rs) (Rs)Sales 2,00,000 2,50,000 25 %Less: VC(70% of sales) 1,40,000 1,75,000 25 %Profit from operations 60,000 75,000 25 %(ii) Previous year Current year % change (Rs) (Rs) (Rs)Sales 2,00,000 2,50,000 25 %Less ; VC(70% of Sales) 1,40,000 1,75,000 25 %Contribution 60,000 75,000 25 %Less : FC 50,000 50,000Profit from operations 10,000 25,000 150 %Comments:• In case (i) %change in sales & %change in OP is the same i.e. 25%• In case (ii) % change in profit (150%) is much more than the %change in sales (25%).• The FC element has helped in increasing profits.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 concernComposite Leverage = operating leverage * financial leverage.EX: The following figures relate to two companies P LTD Q LTDSales 500 1000Variable costs 200 300Contribution 300 700Fixed costs 150 400 150 300Interest 50 100Profit before tax 100 200 i) Calculate the OL, FL, CL. ii) Comment on the relative risk position of them. 42
  • 43. Calculation of Leverages P.Ltd Q.Ltd O.P = contribution 300 700 EBIT 150 300 =2 =2.333 F.L = EBIT 150 300 EBT 100 200 = 1.5 = 1.5 C.L = OL*FL 300 700 100 200 =3 = 3.5a) OL : As the OL for Q Ltd is higher than that of P Ltd ; Q ltd has a higher degree ofoperating risk. The tendency of profit to vary disproportionately with sales is higher forQ Ltd as compared to P Ltd. b) F.L : Since FL for the two companies is the same both the companies have the samedegree of financial risk, i.e. the tendency of net disproportionately is the same for P Ltdand Q Ltd.C) C.L : As the combined leverage for Q Ltd is higher than P Ltd has overall higher riskas compared to P Ltd. 43