economic reforms cme

8/2/2019 Economic Reforms Cme

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HIMANSHU SHARMAHINA DHAWANKAVITA BISHTLOVELEEN KAURMBA (HR) II Semester


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Inflation Rate:10.3 % CPI: 11.2%

Gross Fiscaldeficit 6.6 % ofGDP Internal Debt49.8 % of GDP

Current AccountDebt: $ 9.7 Billion External Debt23% of GDP

Balance ofPayment FiscalCrisis

MountingInflationaryPressure

SteepDecline inCreditRating

199

0-9

1


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Economic CrisisEroded International Confidence on

Indian Economy Steep Decline in Indias Credit Rating

Fragile Balance of Payment Situation

High Inflation, Gulf CrisisLevel of Foreign Exchange not sufficient

to finance Imports for even 10 days !!!!

Serious Fiscal Crisis

Cavalier Macro Management Internal & External Debt


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EconomicReforms

Macro

EconomicStabilisation

Control ofInflation

FiscalAdjustments

Balance ofPayment

Adjustments

StructuralReforms


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FiscalCorrection

Improving Balanceof PaymentSituation.

Control ofInflation

Macro Economic Stabilisation Programme:

Import Liberalisations

Devaluation of Rupee


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Banking Reforms

ForeignDirect

Investment

Trade &Market

Reforms

IndustrialDeregulation

FiscalReforms &

PricingPolicy

Reforms

Public SectorDisinvestment

Structural Reforms


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The fiscal reforms: (To reduce Fiscal Deficit)

Lowered taxes (individual, corporate, excise and custom) Broadened the tax base;

Introduced various controls over public expenditure, reduced subsidies. Removed exemptions and concessions to reduce distortions;

Simplified laws and procedures to close loopholes and increase compliance,including using technology to better track tax payments.

Service Tax was levied in 1994-95 on 3 services- telephone, general insurance andstock brokerage. Now it covers 106 services flat rate 10 %.Revenue from service tax in 2008-09 stands at Rs.65,000 crore , while thegovernment earned Rs.51,301 crore from the tax in 2007-08State Value added Tax introduced from Apr,2005.

Central Sales Tax will be finally phased out by Mar 31, 2010.Combined national level Goods and Services Tax (GST) will be introduced fromApr 1, 2010


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Trade and Capital Flow Reforms:

Trade Reforms:

Devaluation of Money by 18-19 % in July 1991Depreciation against strong CurrencyConvertibility of Rupee on current account & Market determined exchange rateof rupee.Liberalisation of Import Regime :Reduction in tariffsDismantling of physical controlsSimple Import ProceduresSignificant number of items were shifted outside purview of Import Licensing.

Full Convertibility of Rupee on trade account and later entire current accounttransactions. (August 1994)Reduction in Custom tariff rates Peak rate of import duty from 300 % to 150 %(91-92) to 65% (95-96) to 50 % to 25 % (03-04) to 10 % (07-08)Decanalisation of items of trade- opening more areas of external Sector to

private sector


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Export Promotion Measure:

Introduction ofExport Oriented Units for promoting Exports from the agriculturaland allied sectors.Simplification ofExport Promotion Capital Goods Scheme.Adoption of more rational and convenient criterion for recognition of export houses/

Trading houses/ Star trading houses in 1994-95Advance licence system-Duty free imports for exports.Setting up ofSpecial Economic Zones (Mar 31, 2000). SEZ Act in 2005 & SEZ RulesFeb 10, 2006. During 2008-09 Exports from functioning SEZs were Rs.99,689 croreagainst Rs.66,638 crore in the 2007-08, an increase over 50 percent.Introduction of the Concept of Agriculture Export ZonesMarket Access Initiative Scheme (2001-02): Aims at in-depth Market Studies forselect products in Chosen Countries to generate data for promotion of exports fromIndia.

Concessions and Exemptions: Successive Budgets have extended a number of Taxbenefits and exemptions to the exporters. Reduction in Peak rate of Customs Duty to10%, 10 year tax holiday to SEZ developers, Reduction in Customs Duty to 10% onspecified equipment for Ports and Airports to encourage development of World ClassInfrastructure. Tax Benefits for CONVERGENCE REVOLUTION- IT,

Telecommunications and Entertainment Industry.


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Industrial Deregulation (New Industrial Policy, 1991)

1. Abolition of Industrial Licensing: To enable the entrepreneurs makeinvestment decisions on basis of their own commercial judgement. IndustrialLicensing was abolished for all but 18 industries. With passage of time most ofthese industries have been Delicensed. As of now industrial licensing iscompulsory for only 5 industries-

2. Public Sector Dilution: Initially 17 industries were reserved for public sector.

1991 Industrial Policy reduced these to 8, in1993 & 1998-99 four of theseindustries were opened up to private sector.On May 9, 2001 ARMS and AMMUNITION Sector was also opened to PrivateSector. Hence now only 3 industries are reserved exclusively for public sector-Atomic energy, Minerals associated to atomic energy and Rail Transport.

1. MRTP Limit Goes:MRTP firms (firms with assets above 100 crore) were permitted to enter selectedindustries only and this too on a case by case approval basis.

MRTP asset limit was scrapped, no more required prior government approval forinvestment in relicensed industries. MRTP act was amended to give more

emphasis on prevention and control of monopolistic, restrictive and unfair tradepractices to protect consumers from such practices.


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Pricing Policy Reforms:To reduce budgetary provision for subsidies and to promote moreflexible price structure, the government increased the administered

prices of various commodities and inputs (petroleum products andfertilizers) and gave greater freedom to set price as per market forces.The government reduced excise and customs duties on wide spectrumof goods to create a favourable impact on price front.


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Market ReformsFinancial Marketrefers to all those institutions which lend funds to

business enterprises and public authorities.

Money Market deals with provision of short term credit.

Capital Market deals in lending and borrowing of medium termand longterm credit.

Financial Market

Money Market Capital Market


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Money Market Reforms

Introduction of Money market Instruments 182 Day treasury Bills

364 Day Treasury BillsCertificates of DepositsCommercial Paper

Introduction of Repos (December 1992)

Repo : An instrument of repurchase agreement between RBI and commercial Banks ;asset used by Banks for short term liquidity. It is market determined and fluctuatessteeply. To further develop and widen REPOs, RBI introduced regulatory safeguardsin Apr 1991.

Sector specific Refinance Facilities

Refinance is used by central banks to meet liquidity shortage in the market, to controlmonetary and credit conditions and direct credit to selective sectors.


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Capital market Reforms:

Introduction of the auction system for the sale Government of Indiamedium and long term securities . (June 3, 1992)Government of India set up the Securities Trading Corporation ofIndia (STCI) to develop institutional structure for vibrant secondary

market in Government securities. (June 1994)Automatic Monetisation of Fiscal Deficit through the issue of ad hocTreasury Bills was phased out.Primary Dealers were introduced as market makers in GovernmentSecurities Markets.

The Delivery versus Payment system (DvP) was introduced in 1995 forsettlement of transactions in Government Securities.SEBI (setup in 1988) was given a statutory recognition in 1992. It wasmandated to regulate the business in stock markets and other

securities markets.


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National Stock Exchange of India Ltd. (NSE)There were two guiding principles that drove the design of the new exchange: first,that the price discovery process should be as transparent as possible; second, theexchange should support competition - there should be equal access for all equitymarket participants. The salient features that differentiated the design of the NSE

from the existing exchanges were:1. National platform that offered equal access to traders from all corners of awidespread geographical area,2. A competitive market in securities intermediation, with a steady pace of entry andexit,3. Orders matched electronically, on the basis of price-time priority,

4. Anonymous trading followed by guaranteed settlement,5. Demutualised governance structure, as opposed to being an association of brokers,with a professional management team running the operations of the exchange.

Capital market Reforms (contd.)


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Economic Meltdown

Poor Banking Regulations

Sub PrimeMortgage

Crisis

Sub PrimeCredit Card

Crisis

ConspicuousSpending

FiscalDeficit


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

Loan Agencies further relax loan conditions => SUBPRIME LOANS.

High Demand for Homes=> People take out second

mortgages against the added value (of home) to fundtheir Consumer Spending.

SUB PRIME LOANS : an excellent Investment option. =>

Big fund investors like hedge funds and mutual fundsbought such portfolios from the original lenders. Thelenders had fresh funds to lend, Major (American andEuropean) investment banks and institutions heavilybought these loans (known as Mortgage BackedSecurities, MBS) to diversify their investment portfolios

as CDOs (Collateralized Debt Obligations). .


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Housing Bubble Burst: A messy situation for SUB PRIMEBORROWERS: Their house prices were decreasing and theloan interest on these houses was soaring. Many of themopted to default on their home loans and vacated the house.

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

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

capital.

A loss in the net capital of banks meant a serious detriment intheir capacity to disburse loans for various businesses andindustries. This presented a serious cash crunch situation forcompanies who needed cash for performing their businessactivities. => Global economic meltdown.


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Decline in Share Market

Weak Rupee against Dollar

Banks faced severe Cash Crunch:Shortage of liquidity in the market

Impact on India

Fi l I


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Fiscal Impact :

No direct Impact

Governments Finances under pressureHigher expenditure outgoes due to(i) higher international crude oil prices (up to September 2008) and the incomplete

pass-through to domestic prices(ii) higher fertiliser prices and associated increase in fertiliser prices

(iii) the Sixth Pay Commission award and(iv) debt waiver scheme. The fiscal stimulus packages involving additional

expenditures and tax cuts have put further stress on the fisc.Reflecting these factors, the Central Governments fiscal deficit more than doubledfrom 2.7 per cent of GDP in 2007-08 to 6.0 per cent in 2008-09, reaching again the

levels seen around the end of the 1990s. The revenue deficit at 4.4 per cent of GDP .Current Expected fiscal Deficit 6.6% of GDP (Mar,2010).

Net market borrowings during 2008-09 almost trebled from the budgeted Rs.1,13,000crore to Rs.3,29,649 in the revised estimates (actual borrowings were Rs.2,98,536crore as per Reserve Bank records) and are budgeted at Rs.3,08,647 crore (gross

borrowings at Rs. 3,98,552 crore) in 2009-10.

h l


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Impact on the real economyReflecting the slowdown in external demand, and the consequences ofreversal of capital flows, growth in industrial production decelerated

to 2.8 per cent in 2008-09 (April-February) from 8.8 per cent in thecorresponding period of 2007-08. For 2009- 10 it is expected to grow by4.8% [Centre for Monitoring Indian Economy (CMIE)].Services sector activity has held up relatively well in 2008-09 so far(April-December) with growth of 9.7 per cent (10.5 per cent in the

corresponding period of 2007-08). Services sector activity was buoyedup by acceleration in community, social and personal services on theback of higher government expenditure.Real GDP growth has slowed to 6.9 per cent in the first three quarters

of 2008-09 from 9.0 per cent in the corresponding period of 2007-08.On the expenditure side, growth of private final consumptionexpenditure decelerated to 6.6 per cent from 8.3 per cent. On the otherhand, reflecting the fiscal stimuli and other expenditure measures,growth in government final consumption expenditure accelerated to13.3 per cent from 2.7 per cent.


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What Saved INDIA

High savingsand investment

rates

The globalcompetitivenessof its

manufacturingand services

A comfortable level of foreign exchange reserveswhich could be drawn to make up for anyshortfalls in capital inflows

The sustained growth in deposit accretion andcredit flows, and assured safety for depositors.

Sound financial sectorWell-regulated and well-

capitalised bankingsystem


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The Finance Minister hadreduced certain duties to giverelief to some of the affectedsectors like steel and aviation.

to minimise the adverse impactof global crisis on domesticeconomy

On budgetary side, higherallocations for social sectorsand rural employment andother flagship programmes

should

generate consumption whichcontributes to economysgrowth

The Reserve Bank of India had vigorously moved in Oct,2009 to bring down the cash reserve ratio from a peak of9 per cent to 5.5 per cent, reduce the key policy interest

rate (repo) from 9 to 7.5 per cent and also the statutoryliquidity ratio by one percentage point to 24 per cent oftheir net demand and time liabilities.

This injected Rs. 250,000 crores of liquidity for banks tofinance businesses and consumers. These measures, were

welcomed by the industry and other productive sectors.

Fiscal and Monetary measures taken by Government


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Economic Reforms in Foreign

Trade


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Reforms of 1991

Were aimed at

Driving India out of balance of payments crisis

Privatization of public sector

Opening up India to foreign trade

Opening up of Indias equity markets to investment by FIIS

Doing away with License Raj


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EXIM POLICY 1997-2002

Salient Features:-o Opening up of SEZS

o Imports Liberalization

o Duty On imported Capital Goods Under EPCG (Exports PromotionCapital goods) scheme reduced from 15% to 10%.

o Under Advance License Scheme the period for export obligation was

extended from12 months to 18 months. Further extension of 6 monthscould be given on payment of 1% of value of unfulfilled exports.


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EXIM Policy 2002-2007

Implications:

This policy focused on all round development of India whether itwas technology oriented or growth oriented.

The contribution of agriculture and allied sector was increased toexports with the help of certain privileges and incentives.

The cottage industry also started to contribute to exports.

It also focused on small and medium sector enterprises.

It also helped in developing the industrial sector by importing

capital and raw material goods duty free


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EXIM Policy 2004-2009

Handlooms and Handicraft:- specific funds earmarked forpromoting handloom and handicraft exports. Duty free importentitlement of specified trimmings and embellishments to be 5% ofFOB value of exports during the previous financial year..

Gems & Jewelry:- Import of gold of 18 carat and was to beallowed under the replenishment scheme. Duty free importentitlement of consumables for metals other than Gold, Platinumshall be 2% of FOB value of exports during the previous financialyear. Duty free re-import entitlement for rejected jewelry shall be

2% of the FOB value of exports


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Board of Trade: The Board of Trade to be revamped and given a clearand dynamic role in advising government on relevant issues connectedwith Foreign Trade Policy. There would be a process of continuousinteraction between the Board of Trade and Government in order toachieve the desired objective of boosting India

Export promotion scheme: A new scheme called target plusintroduced. Duty free credit entitled to exporters on incremental exports.For incremental growth of over 20%, 25% and 100%, the duty free creditwould be 5%, 10% and 15% respectively, of fob value of incrementalexport.

Service export: Scheme called served from india as a brand instantlyrecognized abroad in which individual service providers earning foreignexchange of Rs. 10 lakh would be elligible for 10% of total foreignexchange earning.


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Duty free import under EPGC (Export promotionCapital goods): The scheme allows import of capitalgoods for pre production, production and postproduction at 5% Customs duty. Capital goods wouldbe allowed at 0% duty for exports of agriculturalproducts.

Export Oriented unit (EOUs):- EOUs shall beexempted from service tax in proportion to theirexported goods and services.


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Outcomes


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etail


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Entertainment Industry


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Television

According to the study by FICCI and KPMG, thetelevision industry, which is currently valued atabout US$ 4.63 billion, will expand by 14.5 percent between 2009 and 2013

According to a PwC report, the televisionadvertising industry is expected to account for ashare of 41.0 per cent of the advertising industryin 2013, up from the present share of 39.0 per

cent. Further, television channels such as Cartoon

Network, Pogo, Disney, MTV and Star Plus areexpanding their product range to tap India'sgrowing US$ 125.9 million licensing andmerchandise market.

Indias national television broadcaster,Doordarshan, will be completely digitized by2017, according to Mr Zohra Chatterji, Joint

Secretary, Information and Broadcastingministry.


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Music

Current size US$149 Million

According to a PwC study,the industry is likely to growto become a US$ 164.56

million industry by 2012.


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Health Industry

Medical tourism is expected to become a US$2.2 billion industry by 2012


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p y y

100% FDI is permitted for all health-related services under the automatic route

Income tax exemption for 5 years to hospitals in rural areas, Tier II and Tier IIIcities

Indian hospitals are gaining reputation globally as quality service providers

Many Indian hospitals have secured accreditation from the British StandardsInstitute and Joint Commission on Accreditation of Healthcare Organisations

NHS, UK has indicated India to be a preferred destination for surgery

The industry is expected to grow to US$79 billion by 2012


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Power sector

100% FDI is allowed in the powersector under the automatic route in

India The government of India aims at

reaching 2, 00,000 MW by the year2012.

Already among top 5 powergenerating countries


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Real Estate India's property sector could begin to

improve from late 2009 and may attractup to US$ 12.11 billion in real estateinvestment over a five-year period.

India leads the pack of top real estateinvestment markets in Asia for 2010,according to a study byPricewaterhouseCoopers (PwC) andUrban Land Institute, a global non-profiteducation and research institute.

A McKinsey report reveals that theaverage profit from construction in Indiais 18 per cent, which is double theprofitability for a construction projectundertaken in the US

Foreign direct investment (FDI) intoIndia in the real estate sector for thefiscal year 2008-09 has been US$ 12.62

billion approximately,according to theDepartment of Policy and Promotion(DIPP).


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Facts and figures


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FDI INFLOWS( Financial year wise data)


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( y )

S.no Financial Year Total FDI Inflows %age growth overprevious year

1 1991-2000(Aug91-Mar00) 15843 --

2 2000-01 4029 --

3 2001-02 6130 (+)52%

4 2002-03 5035 (-)18%

5 2003-04 4322 (-)14%

6 2004-05 6051 (+)40%

7 2005-06 8961 (+)48%

8 2006-07 22826 (+) 146%

9 2007-08 34362 (+) 51%

10 2008-09 35168 (+) 02%

11 2009-10(uptoJuly09) 10492 ------------------


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Country wise FDI inflows in US$ Million

(From April 2000 to July 2009)

41418

8569 7220 5338 3865304705000

1000015000200002500030000350004000045000

Mauritiu

s

Sin

gapore

U.S.A U

K

Neth

erland

s

Japan

Amount of FDI inflows


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Sectors attracting Highest FDI

inflows (From April 2000 to July 2009)

21390

92347369 6951

3047

0

5000

10000

15000

20000

25000

ServicesSector

Computer

hardwarean

d

software

T

elecommunicatio

n

Housingandreal

Estate

Constructio

n

FDI Inflows(US$Million)


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he Road Ahead


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Foreign Trade Policy 2009-14

New foreign Trade policy was announced on 27th August2009 for period 2009-14 by Government Of India andMinistry of Commerce and industry. Earlier this policywas Known as EXIM Policy


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Targets

Export Target : $ 200 Billion for 2010-11

Export Growth Target: 15 % for nexttwo year and 25 % thereafter.

To Double India's exports of goodsand services by 2014.

To double India's share in globalmerchandise trade by 2020 as a longterm aim of this policy. India's sharein Global merchandise exports was

1.45% in 2008. To arrest and reverse declining trend

of exports is the main aim of thepolicy. This aim will be reviewed aftertwo years.


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Challenges

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

Political challenges:-The support of the political structure has tobe there towards the investing countries abroad

Equity challenge:- Growth not inclusive

Ease of doing business:- India ranked at 133 out of 183countries in Doing Business 2010 Report by International Financial Corporation

BANKING SECTOR IN INDIA


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BANKING SECTOR IN INDIA
http://4.bp.blogspot.com/_ASE4QSowCT0/SXG5k81VxhI/AAAAAAAAAto/2oqGIb93cQc/s1600-h/Top+Bank+in+India.jpg


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Banking system post independence


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Banking system post independence

Nationalization of the Reserve Bank of India in 1948 .

The Reserve Bank of India Act ,1949 In 1955, the Imperial Bank of India was nationalized

under the name of State Bank of India.

The scheme of social control was initiated by the

government in the year 1967. The government nationalized 14 major banks which

held a deposit of around Rs 50 crores on 19th July1969 and 6 more banks which held deposit of aroundRs 200 crores on 15th April 1980.


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Rapid expansion of branch network: no. of branches ,advances and deposit rates increased.

Specialized financial institutions :

Industrial development bank of India (IDBI)

Industrial credit and investment bank of India

NABARD

LIC Regional rural banks

Export import bank of India

Changing corporate


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environment

Since 1991 business environment altered radicallywith economic liberalization.

There was increased competition so it became

important to introduce reforms

Several committees have been appointed to suggest

certain measures.


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II THE KHAN COMMITTEE 1997


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II. THE KHAN COMMITTEE 1997

To study harmonization of roles of commercial banks

and financial institutions. Recommended that banks and developmental

financial institutions should be permitted to explore

and enter into gainful merger.

Not only recommended merger between banks but

also between banks and development financial

institution, between strong and weak banks and

between two strong banks and developmentfinancial institution


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III. VERMA COMMITTEE 1998

recommended that merger should take into account

synergies and complementariness of merging units to provide opportunities for pooling of strengths,

lead to overall reduction of cost.

recommended mergers only between strong banks

that lead to cost reduction and increase in businessand profit.


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l f l b k


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Role of RBI as central bank Established on April ,1935

Nationalised on January 1,1949

Functions

Issue of currency notes

Banker to the Government

Bankers bank Exchange management and control

Credit control

Agriculture finance

Collection and publication of dataActs as economic advisor to govt.


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Monetary policy of RBI Bank Rate

The Bank Rate has been retained at 6.0 per cent. Repo Rate

The repo rate under the Liquidity Adjustment Facility (LAF) hasbeen retained at 4.75 per cent.

Reverse Repo Rate

The reverse repo rate under the LAF has been retained at3.25 per cent.

Cash reserve ratio

increase the cash reserve ratio (CRR) of scheduled banks by 75

basis points from 5.0 per cent to 5.75.V. the first stage ofincrease of 50 basis points beginning February 13, 2010,followed by the next stage of increase of 25 basis pointsbeginning February 27, 2010


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BANKING IN RURAL

Banking in rural areas


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Banking in rural areas

The worlds second largest populated country, India ,

is being seen as a market with huge potential by the

world economies.

Ever since the reforms of 1991 of liberalization,

privatization and globalization Indian markets inurban areas have grown appreciably and are the

verge of saturation so it becomes important to tap

the rural market since 60 percent of population lives

in rural areas.

I di h b hi ld d f i i


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India has been shielded from recession since:

Less dependent on exports for GDP

Good consumer base in india Strong backbone of our banks

According to RBI only 39 percent of the adult

population in rural areas have bank accounts against

60 percent in urban areas(Jan 2009).


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So it becomes important to tap the rural sector

because it will lead to growth of not only banking

sector but also the industrial sector .so it becomesimp to keep banks at the top of the economic

growth, reasons being:

promote savings .

speed up capital formation and then become source

of finance of trade and credit for industry.

Provide credit to entrepreneurs for their ventures

which promote production and employment .Which further generates income and hence reduces

poverty.


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Problems

Limited access by rural poor to services especially

credit and insurance .Unorganized sectors of lending.


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B if i i i th 30%


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Because if in an economy, saving is more than 30%for 7 consecutive years, the GDP doubles and India

cant ignore the rural sector to increase our savings

Financial inclusion

the Committee on Financial Inclusion (Chairman: Dr.

C. Rangarajan) has suggested a National Mission on

Financial inclusion.

the State Level Bankers Committee(SLBC) has been

advised to identify one or more districts for 100 per

cent financial inclusion.


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The 100 per cent financial inclusion drive isprogressing all over the country.

So far, 431 districts have been identified by SLBCs for100 per cent financial inclusion.

As on March 31, 2009, 204 districts in 18 States and

5 Union Territories have reported having achieved

the target.


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What has been achieved

No. of rural branches -31,727 constituting 39.7% oftotal bank branches(as on 31 June 2009)

Number of ATMs -44,587(as on May 31, 2009)

Number of kisan credit cards -76 milllion(CMEpublications 2007-08)

Number of mobile phones -403 million(as on April 30

,2009)

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


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

Coverage

Infrastructure Technology

Participative efforts


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l b


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Policies to combat recession

The Indian financial sector was largely resilient to the

global turmoil during 2008-09.

During crisis the main policy initiatives were mainly

aimed at maintaining stability and ensuring liquidity

in the banking system and channeling adequatecredit to productive sectors of economy.

Priority sector lending


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Priority sector lending

The objective of priority sector lending guidelines is

to channelise credit to some of the vulnerablesectors of the economy, which may not be attractivefor the banks from the point of view of profitabilitybut are important for economic development.

Loans granted to agriculture, micro and small(manufacturing and service) enterprises, microcredit, education and housing fall under the ambit ofpriority sector lending by the Indian banks.


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Credit to Micro and Small Enterprises Sector


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Credit to Micro and Small Enterprises Sector

MSE sector assumes importance in the economy

owing to its employment potential and regionaldispersal.

This sector also mobilises capital from the lower-

middle class sections to invest in productive

economic activity.

Thus, it encourages the development of

entrepreneurial skills and enhances export earnings

through the production of a wide range of products.

The Union Budget for 2009-10 provided for a special


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The Union Budget for 2009 10 provided for a special

fund worth Rs.4,000 crore to Small Industries

Development Bank of India (SIDBI) to facilitate the

flow of credit at reasonable rates to MSE sector.


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CURRENT

SCENARIO

Current scenario


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Current scenario

The Indian banking system is financially stable and resilient to

the shocks The RBI has the tenth largest gold reserves in the world

New deposits have gravitated towards the public sector banks

According to RBI's 'Quarterly Statistics on Deposits and Credit ofScheduled Commercial Banks: June 2009', nationalized banks, asa group, accounted for 49.7 per cent of the aggregate deposits,while State Bank of India (SBI) and its associates accounted for24.2 per cent. The share of other scheduled commercial banks,foreign banks and regional rural banks in aggregate depositswere 17.5 per cent, 5.6 per cent and 2.9 per cent, respectively.


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Nationalized banks hold the highest share of 50.4 per

cent in the total bank credit, with SBI and its

associates at 23.5 per cent and other scheduledcommercial banks at 18.0 per cent

Foreign banks and regional rural banks had a share

of 5.7 per cent and 2.4 per cent respectively in the

total bank credit.

The confidence of non-resident Indians (NRIs) in the


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The confidence of non resident Indians (NRIs) in the

Indian economy is reviving again.

NRI deposits have increased by nearly US$ 3.7 billion

in the first four months of 2009-10

NRI fund inflows increased since April 2009 and

touched US$ 45.33 billion till July 2009 as per the

RBI's September bulletin.


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DEFINITION


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Disinvestment of PSUs simply means sale of shares of public

sector enterprises to outsiders.

Disinvestment is a wider term extending from dilution of the

stake of the government to a level where there is no change

in the control to dilution that results in the transfer of

management.


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METHODS OF

DISINVESTMENT

IPO (Initial Public Offering)


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IPO (Initial Public Offering)

An initial public offering (IPO)

occurs when a company first

sells common shares to

investors in the public.


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Employed in cases where govt wants to raise resources but not

want to lose control Likely to face less resistance from employees as there is a continuity

in management.

Can be used to offer shares to employees.

It would help in sharing the benefits of disinvestment with thepeople of India; it would improve support for the reforms process

Problem is valuation-what should be the price of the share?

FPO(Follow on Public Offering)


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FPO(Follow-on Public Offering)

Any company that is already listed with eitherthe NSE or BSE and want to raise more capital

from the market have to offer the FPO....

The first time the company raises the capital

is called IPO (initial public offer) henceforth

its FPO.


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Strategic Sales from 1999-00 to 2003-04


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No. NAME % Govt Equity sold Realisation(crore)

1. MFIL 99.99 149.52

2. Bharat Aluminium Co. 51 551.50

3. CMC 51 152

4. HTL 74 55

5. Lagan Jute Machinery Corporation 74 2.53

6. ITDC-19 hotels 90 404.767. IBP Co. 33.58 1153.68

8. Videsh Sanchar Nigam Limited 25 1439.25

9. Paradeep Phosphates 74 151.70

10. Hindustan Zinc 44.92 768.88

11. Indian Petrochemicals Corporation Ltd. 26 1490.84

12. Jessop and Co. 72 18.18

GRAND TOTAL 6337.84

Source: Indian Economy,27th

Edition


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BENEFITS

Govt. may realize a better price. Private partner introduces better

management practices.

In some situations, the buyer brings inessential new technology or expertise.

PROBLEMS


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PROBLEMS

Non-transparent process.

May lead to monopolistic or oligopolistic

situation harmful to consumer interests.

Risk of employees losing their job.

Problems of PSUs


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Problems of PSUs

The govt. of India observed some serious problems in publicsector like

Insufficient growth in productivity

Poor project management

Over-manning

Lack of continuous technological upgradation

Lack of autonomy


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Thus, in 1991 governmentadopted a new approach to

reform and improve the

public sector undertakings

performance i.e

'Disinvestment policy which

involves the sale of the public

sector equity to the privatesector and public at large.

RATIONALE FOR


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RATIONALE FOR

DISINVESTMENT1. Improved efficiency and performance.

2. No Political interference.

3. Faster decision making- Delayed decision making isoften equivaqlent to making no decision.

4. To encourage wider share of ownership.

5. Bankruptcy taken seriously in private sector-remedial measures taken earlier.

6. To reduce the financial burden on government.

Unstated Rationale


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Unstated Rationale

To reduce fiscal deficit9.4% in 1990-91

6.8% in 2008-09

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

Disinvestments in PSUs


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YEAR RECEIPTS

(in crore)

No. of companies in which

equity sold

1991-92 3037.74 47

1992-93 1912.51 29

1993-94 0.00 -

1994-95 4843.10 17

1995-96 168.48 5

1996-97 379.67 1

1997-98 910.00 1

1998-99 5371.11 5

1999-00 1860.14 5

2000-01 1871.26 52001-02 5657.69 8

2002-03 3347.98 8

2003-04 15547.41 2

Ctd


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as on 31st Jan,2010

YEAR RECEIPTS (in crore) No. of companies in which

equity sold

2004-05 2764.87 3

2005-06 1569.68 1

2006-07 - -

2007-08 4181.39 3

2008-09 - -

2009-10 4259.90 2(NHPC & OIL)

TOTAL 57682.93

Source: Indian Economy,27th Edition & divest.nic.in

Till 1999 2000 i il th h l f i it h i


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Till 1999-2000, primarily through sale of minority shares in

small lots.

From 1999-2000 till 2003-04, the emphasis of disinvestment

changed in favour of Strategic Sale.

The 2004-09 phase, only minority stake sales.In 2006, opposition by UPAs main constituent, disinvestment

programme suspended.

2009-10, second term of UPA started

[video]

The PSUs are the wealth of

the nation and part of this
http://dis%20videos/video%20(1).flvhttp://dis%20videos/video%20(1).flvhttp://dis%20videos/video%20(1).flv


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the nation, and part of this

wealth should rest in the

hands of the people.

I will retain 51% in

PSUs but I will

disinvest

I must state clearly that banks

and insurance companies will

remain in the public sector

Finance Minister Pranab Mukherjee came up


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with a formula that no one could argue with-

Govt would sell shares of only profit makingPSUs pleased investors.

Govt would sell small

stakes and wouldntrelinquish control

trade unions controlled.

Govt would use money to finance socialschemes silenced all political opposition.

CURRENT POLICY


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Approved by the Government on 5th November 2009

i) Already listed profitable PSUs, not meeting the mandatory publicshareholding of 10%, are to be made compliant

ii) All PSUs having positive net worth, no accumulated losses and

having earned net profit for the three preceding consecutive yearsare to be listed through Public Offerings

iii) The proceeds from disinvestment would be channelized into

National Investment Fund and during April, 2009 to March, 2012

would be available in full for meeting the capital expenditure

requirements of govt.

NIF


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National Investment Fund

Constituted by Govt. on 27Jan,2005

The proceeds from disinvestment of Central Public Sector Enterprises are

channelized into the National Investment Fund

The income from the Fund would be used for the following broad

investment objectives: -

a) Investment in social sector projects which promote education, health care

and employment.

b) Capital investment in selected profitable and revivable Public Sector

Enterprises.

Department of Disinvestment


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Department of Disinvestment

All matters relating to disinvestment of Central Governmentequity from PSUs.

Decisions on the recommendations of the Disinvestment

Commission on the modalities

of disinvestment, including restructuring. Implementation of disinvestment decisions, including

appointment of advisers, pricing of shares, and other terms

and conditions of disinvestment.

Financial policy in regard to the utilization of the proceeds ofdisinvestment channelised into the NIF.

The PSU Parade


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2009

TWO PSU DISINVESTED


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TWO PSUs DISINVESTED

NAME IPO in

% Govt equity sold %Present Govt

Holding

NHPC (National

Hydroelectric Power

Corporation)

AUG 09 10 86.36

OIL (Oil India Limited) SEP 09 10 78.43

Source: Outlook Business-jan23,2010 &

Economic Times

NHPC


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The company was set up in 1975 to plan, promote and develop

hydroelectric power, but later expanded its operations to include other

sources of energy including geothermal, tidal and wind. IPO from 7 to 11 aug,09

This was the first stake sale by a state-run company in 17 months after REC

went public in February 2008 to raise over Rs1,600 crore.

OIL In 1981, OIL became a wholly-owned Government of India enterprise

OIL is a premier national oil company, engaged in the business of

Exploration, Production and Transportation of Crude Oil and Natural Gas.

2010


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ONE PSU DISINVESTED

Name Approved on % Govt. Equitysold

%Present Govtholding

Issue AvailableFrom

NTPC 19Oct, 09 5 84.5 Feb 3-5, 10

NTPC


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NTPC is the largest player in the power sector that

contributed 28.5 per cent of the total electricity

generated in the country in 2009, with only 19 per

cent of the total capacity.

In 2004, the company had raised around Rs 2,700

crore through its IPO when the Government diluted a5.24% stake.

41.23 crore shares sold in the issue.

The FPO from Feb 3-5, 2010.

The share price as announced on Feb2,2010 was

Rs.201/share.

PSUs Approved for disinvestment31st D 2009


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as on 31st Dec, 2009

No. Name Approved

on

% Govt.

Equity to

be sold

%Present

Govt

holding

Issue

Available

From

Expected

Receipts

(in crore)

1. REC Ltd. 29 Oct, 09 15.1 81.90 (FPO) Feb19-23, 10 Rs.4500

2. NMDC Ltd. 03 Dec, 09 8.38 98.38 (FPO) Mar 10, 10 Rs.14000

3. SJVN Ltd. 19 Oct, 09 10 75.00 (IPO) Early May, 10 Rs.1200

Source: www.divest.nic.in

& Economic Times

THE BIG SALE
http://www.divest.nic.in/http://www.divest.nic.in/


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THE BIG SALE

"The 60-odd companies which we are tracking now, wehope a majority of these will come into our action plan

for disinvestment over the next few years,"

Disinvestment Secretary Sunil Mitra told private TV

channel CNBC-TV18 in an interview.

Disinvestment Action Plan of these PSUs will be ready byMarch,2010


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Navratnas


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Navratnas.

Navratna was the title given originally to nine PSUs, identified by theGovernment of India in 1997 as its most prestigious, which allowed them

greater autonomy to market.

This status empowers a PSU to invest up to Rs. 1000 crore or 15% of their

net worth on a single project without seeking government approval.

BHEL, BPCL, HPCL, IOC, IPCL, NTPC, ONGC, SAIL and VSNL, of which IPCL

and Videsh Sanchar Nigam Ltd (VSNL) were later privatised.

GAIL and MTNL joined the list in November 1997.

At present there are 18 PSUs with Navratna status.


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To be qualified as a Navaratna, the companymust obtain a score of 60 (of the total 100).

The score is based on six parameters which

include net profit to net worth, totalmanpower cost to total cost of production or

cost of services, PBDIT (Profit Before

Depreciation, Interest and Taxes) to capital

employed, PBIT to turnover, EPS (Earning per

share) and inter-sectoral performance. A

Maharatnas.


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Maharatnas.In 2009, the government established the Maharatna

status, which raises a company's investment ceilingfrom Rs. 1,000 crore to Rs. 5,000 crore.

Criteria

In order to qualify as a Maharatna, a company musthave: Three years with an annual net profit of over Rs. 5,000

crore

Net worth of Rs. 15,000 crore

Turnover of Rs. 25,000 croreThe only companies currently meeting the criteria areSAIL, ONGC and NTPC.

References


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References

Outlook Business, January23,2010

Business India, Jun28,2009

Indian Economy, by Mishra & Puri, 27thedition

Indian Economy, by Mishra & Puri, 26thedition

The Economic Times

http://divest.nic.in


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http://www thaindian com/newsportal/business/sez exports grew 50 percent in 2008

http://www.livemint.com/2009/07/17101937/Industrial-production-to-fall.html

Report on Trends and Progress in Banking

RBI bulletinIndian Economy by Misra PuriIndian Economy by P K Dhar

Indian Financial system by Bharti V Pathak

Outlook Business, January23,2010

Business India, Jun28,2009Indian Economy, by Mishra & Puri, 27th editionIndian Economy, by Mishra & Puri, 26th editionThe Economic Timeshttp://divest.nic.in

economic reforms cme

Documents