FINANCIAL SECTOR REFORMS
2009-10
FINANCIAL SECTOR REFORMS 2009
INDEX SR. NO. 1 Introduction PARTICULARS PAGE NO. 3
2
Reforms in Banking Sector
5
3
Reforms in Insurance Sector
8
4
Reforms in Capital Market
27
5
Reforms in Manufacturing Sector
38
6
Reforms in Import
49
7
Reforms in Export
53
8
Overview of Indian Economy
54
9
Conclusion
56
10
Weblography
59
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INTRODUCTION
The last decade witnessed the maturity of India’s financial markets. Since 1991, every governments of India took major steps in reforming the financial sector of the country. Bank norms liberalized and banks given the freedom to decide levels of holding of individual items of inventories and receivables
• Ceiling on term loans raised to Rs. 10,000 million for projects involving expansion/modernization of power generation capacities • Banks allowed to set their own interest rate • On post-shipment export credit (in Rupees) for over 90 days. • Deregulation of interest rates on loans over Rs. 200,000 against term deposits and on domestic deposits with maturity periods over two years • Banks freed to fix their own foreign exchange open position limit subject to RBI approval • Guidelines issued to banks to ensure qualitative improvement in their customer service. • Loan system introduced for delivery of bank credit.
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Competition
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Decades of non-commercial orientation, direct lending, loan waivers and increasing non-performing assets had initially made banks difficult to adjust to a market environment having strict prudential norms. However, the emerging results suggest that banks are beginning to adapt to the competitive environment and facing the challenge.
Decontrol Many steps were taken in 1995-96 to reduce controls and remove operational constraints in the banking system. These include interest rate decontrol, liberalization and selective removal of Cash Reserve Ratio (CRR) stipulation, freedom to fix foreign exchange open position limit and enhanced refinance facilities against government and other approved securities
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REFORMS IN BANKING SECTOR
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The banking system in India has undergone significant changes during last 15 years. There have been new banks, new instruments, new windows, new opportunities and along with all this new challenges. While deregulation has opened new vistas for banks to augment revenues, it has also entailed greater competition and consequently greater risks. The traditional face of banks as mere financial intermediaries has since altered and risk management has emerged as the defining attribute. Financial sector reforms introduced in the early 1990’s as a part of the structural reforms have touched upon almost all aspects of banking operations. For a few decades preceding the onset of banking and financial sector reforms in India, banks operated in an environment that was heavily regulated and characterized by sufficient barriers to entry which protected them against too much competition. This regulated environment set in complacency in the manner in which banks operated and responded to the customer needs. The administered interest rate structure, both on the liability and the asset side, allowed banks to earn reasonable spread without much efforts. Despite this, however banks profitability was low and NPL’s level was high reflecting lack of efficiency. Although banks operated under regulatory constraints in the form of statutory holding of Government securities (Statutory liquidity ratio or SLR) and the cash reserve ratio or CRR and lacked functional autonomy and operational efficiency, the fact was that most banks did not operate efficiently.
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Financial sector reforms were carried out in two phases:
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1. The first phase of reforms was aimed at creating productive and profitable financial institutions operating within the environment of operational flexibility functional autonomy. 2. The focus of the second phase financial sector reforms starting from the second half of 1990’s has been on strengthening of the financial system consistent with the movement towards global integration of financial services. The deregulation of interest rates constituted an integral part of financial sector reforms. The interest rate regime has been largely de-regulated with a view to achieving better price discovery and efficient resource allocation. Banks now have flexibility to decide their deposit and lending rate structures and manage their assets and liabilities accordingly. At present, apart from interest rates on savings deposits and NRI deposits on the deposit side, and export credit and small loans up to Rs. 2 lakh on the lending side, all other interest rates have been deregulated. Indian banking system operated for a long time with high reserve requirements both in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). This was mainly to accommodate the high fiscal deficit and its monetization. The efforts in the recent period have been to lower both the CRR and SLR. The SLR has been gradually reduced from a peak of 38.5 percent to 25 percent. The CRR was reduced from its peak level of 15 percent maintained during 1989 to 1992 to 4.5 percent. Although the Reserve Bank continues to pursue its medium-term objective of reducing the CRR, in the recent years, on a review of macroeconomic and monetary conditions, the CRR has been revised to 6 percent.
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RECESSION IN INDIAN BANKING SECTOR
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Banks act as important players in the financial markets. They play a vital role in the economy of a country. The Recession that began in December 2007 impacted the revenues and profitability of businesses worldwide. We are in a globalised world and no more immune to the things happening outside our country. Built on strong financial fundamentals, strict vigil on risk appetite and firm monetary guidelines, Indian banks have proved among the most resilient and sound banking institutions in the world. But there has been considerable divergence in the performance of the various banking institutions in the country as also among the public, private and foreign banks operating in India. The Indian banking system is relatively insulated from the factors leading to the turmoil in the global banking industry. Going by the performance for the calendar year 2008, Indian public sector banks have not only been able to weather the storm of global recession but have been able to moderate its impact on the Indian economy as well, compared to its peers among the foreign and private banks. The banking sector faces profitability pressures due to higher funding costs, mark-to-market requirements on investment portfolios, and asset quality pressures due to a slowing economy. But Indian banks’ global exposure is relatively small, with international assets at about 6 per cent of the total assets. The strong economic growth in the past, low defaulter ratio, absence of complex financial products, regular intervention by central bank, proactive adjustment of monetary policy and so called close banking culture has favored the banking industry in India in recent global financial turmoil.
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REFORM IN INSURANCE SECTOR
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Insurance in India started without any regulation in the Nineteenth Century. It Was a typical story of a colonial era: a few British insurance companies dominating the market serving mostly large urban centres. After the
independence, it took a dramatic turn. Insurance was nationalized. First, the life insurance companies were nationalized in 1956, and then the general insurance business was nationalized in 1972. Only in 1999 private insurance companies have been allowed back into the business of insurance with a maximum of 26% of foreign holding. In what follows, we describe how and why of regulation and deregulation. The entry of the State Bank of India with its proposal of bancassurance brings a new dynamics in the game. We study the collective experience of the other countries in Asia already deregulated their markets and have allowed foreign companies to participate. If the experience of the other countries is any guide, the dominance of the Life Insurance Corporation and the General Insurance Corporation is not going to disappear any time soon.
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Insurance during the British era
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Life insurance in the modern form was first set up in India through a British Company called the Oriental Life Insurance Company in 1818 followed by the Bombay Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829. All of these companies operated in India but did not insure the lives of Indians. They were there insuring the lives of Europeans living in India. Some of the companies that started later did provide insurance for Indians. But, they were treated as "substandard" and therefore had to pay an extra premium of 20% or more. The first company that had policies that could be bought by Indians with "fair value" was the Bombay Mutual Life Assurance Society starting in 1871. The first general insurance company, Triton Insurance Company Ltd., was established in 1850. It was owned and operated by the British. The first indigenous general insurance company was the Indian Mercantile Insurance Company Limited set up in Bombay in 1907. By 1938, the insurance market in India was buzzing with 176 companies (both life and nonlife). However, the industry was plagued by fraud. Hence, a comprehensive set of regulations was put in place to stem this problem. By 1956, there were 154 Indian insurance companies, 16 non-Indian insurance companies and 75 provident societies that were issuing life insurance policies. Most of these policies were centered in the cities (especially around big cities like Bombay, Calcutta, Delhi and Madras). In 1956, the then finance minister S. D. Deshmukh announced nationalization of the life insurance business.
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MILESTONES OF INSURANCE REGULATIONS IN THE 20TH CENTURY 1912: -The Indian Life Insurance Company Act
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1938:- The Insurance Act: Comprehensive Act to regulate insurance business 1956:- Nationalization of life insurance business in India 1972:- Nationalization of general insurance business in India 1993:- Setting up of Malhotra Committee 1994:- Recommendations of Malhotra Committee 1995:- Setting up of Mukherjee Committee 1996:- Setting up of (interim) Insurance Regulatory Authority Recommendations of the IRA 1997:- Mukherjee Committee Report submitted but not made public 1997:- The Government gives greater autonomy to LIC, GIC and its subsidiaries 1998:- The cabinet decides to allow 40% foreign equity in private insurance Companies-26% to foreign companies and 14% to NRI’s, OCB’s & FII’s 1999:- The Standing Committee headed by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority (IRDA) Bill 1999:- Cabinet clears IRDA Bill (IRA)
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2000:- President gives Assent to the IRDA Bill
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The nationalization of life insurance was justified mainly on three counts:1. It was perceived that private companies would not promote insurance in rural areas. 2. The Government would be in a better position to channel resources for saving and investment by taking over the business of life insurance. 3. Bankruptcies of life insurance companies had become a big problem (at the time of takeover, 25 insurance companies were already bankrupt and another 25 were on the verge of bankruptcy). The experience of the next four decades would temper these views.
Malhotra Committee Reports Although Indian markets were privatized and opened up to foreign companies in a number of sectors in 1991, insurance remained out of bounds on both counts. The government wanted to proceed with caution. With pressure from the opposition, the government (at the time, dominated by the Congress Party) decided to set up a committee headed by Mr. R. N. Malhotra (the then Governor of the Reserve Bank of India). Liberalization of the Indian insurance market was recommended in a report released in 1994 by the Malhotra Committee, indicating that the market should be opened to private-sector competition, and ultimately, foreign private-sector competition. It also investigated the level of satisfaction of the customers of the LIC. Curiously, the level of customer satisfaction seemed to be high. The union of the LIC made political capital out of this finding.
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The following are the purposes of the committee:1. To suggest the structure of the insurance industry, to assess the strengths and weaknesses of insurance companies in terms of the objectives of creating an efficient and viable insurance industry, to have a wide coverage of insurance services, to have a variety of insurance products with a high quality service, and to develop an effective instrument for mobilization of financial resources for development. 2. To make recommendations for changing the structure of the insurance industry, for changing the general policy framework etc. 3. To take specific suggestions regarding LIC and GIC with a view to improve the functioning of LIC and GIC. 4. To make recommendations on regulation and supervision of the insurance sector in India. 5. To make recommendations on the role and functioning of surveyors, intermediaries like agents etc. in the insurance sector. 6. To make recommendations on any other matter which are relevant for development of the insurance industry in India.
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The committee made a number of important and far-reaching recommendations:1. The LIC should be selective in the recruitment of LIC agents. Train these people after the identification of training needs. 2. The committee suggested that the Federation of Insurance Institute, Mumbai should. Start new courses and diploma courses for
intermediaries of the insurance sector. 3. The LIC should use an MBA specialized in Marketing (a similar suggestion for the GIC subsidiaries). 4. It suggested that settlement of claims were to be done within a specific time frame without delay. 5. The committee has several recommendations on product pricing, vigilance, systems and procedures, improving customer service and use of technology. 6. It also made a number of recommendations to alter the existing structure of the LIC and the GIC. 7. The committee insisted that the insurance companies should pay special attention to the rural insurance business. 8. In the case of liberalization of the insurance sector the committee made several recommendations, including entry to new players and the minimum capital level requirements for such new players should be Rs. 100 crores (about USD 24 million). However, a lower capital requirement could be considered for a co-operative sectors' entry in the insurance business. 9. The committee suggested some norms relating to promoters’ equity and equity capital by foreign companies, etc.
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Insurance Regulatory Act (1999) After the report of the Malhotra Committee came out, changes in the insurance Industry appeared imminent. Unfortunately, instability in Central Government, changes in insurance regulation could not pass through the parliament. The dramatic climax came in 1999. On March 16, 1999, the Indian Cabinet approved an Insurance Regulatory Authority (IRA) Bill that was designed to liberalize the insurance sector. The bill was awaiting ratification by the Indian Parliament. However, the BJP Government fell in April 1999. The deregulation was put on hold once again. An election was held in late 1999. A new BJP-led government came to power. On December 7, 1999, the new government passed the Insurance Regulatory and Development Authority (IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in 1956 and to the General Insurance Corporation in 1972. The authority created by the Act is now called IRDA. It has ten members. New licenses are being given to private companies (see below). IRDA has separated out life, non-life and reinsurance insurance businesses. Therefore, a company has to have separate licenses for each line of business. Each license has its own capital requirements (around USD24 million for life or non-life and USD48 million for reinsurance).
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Some Details of the IRDA Bill On July 14, 2000, the Chairman of the IRDA, Mr. N. Rangachari set forth a set of regulations in an extraordinary issue of the Indian Gazette that detail of the regulation. Regulations 1. It covers the Insurance Advisory Committee that sets out the rules and regulation. 2. Stipulates that the "Appointed Actuary" has to be a Fellow of the Actuarial Society of India. Given that there has been a dearth of actuaries in India with the qualification of a Fellow of the Actuarial Society of India, this becomes a requirement of tall order. As a result, some companies have not been able to attract a qualified Appointed Actuary (Dasgupta, 2001). The IRDA is also in the process of replacing the Actuarial Society of India by a newly formed institution to be called the Chartered Institute of Indian Actuaries (modeled after the Institute of Actuaries of London). Curiously, for life insurers the Appointed Actuary has to be an internal company employee, but he or she may be an external consultant if the company happens to be a non-life insurance company. 3. The Appointed Actuary would be responsible for reporting to the IRDA a detailed account of the company. 4. Insurance agents should have at least a high school diploma along with training of 100 hours from a recognized institution. More than a dozen institutions have been recognized by the IRDA for training insurance agents (the list appears online at http://www.irdaonline.org/press.asp).
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5. The IRDA has set up strict guidelines on asset and liability management of the insurance companies along with solvency margin requirements. Initial margins are set high (compared with developed countries). The margins vary with the lines of business (for example, fire insurance has a lower margin than aviation insurance). 6. The disclosure requirements have been kept rather vague. This has been done despite the recommendations to the contrary by the Mukherjee Committee recommendations. 7. All the insurers are forced to provide some coverage for the rural sector. (1) In respect of a life insurer, a) Five percent in the first financial year; b) Seven percent in the second financial year; c) Ten percent in the third financial year; d) Twelve percent in the fourth financial year; e) Fifteen percent in the fifth year (of total policies written direct in that year). (2) In respect of a general insurer, a) Two percent in the first financial year; b) Three percent in the second financial year; c) Five percent thereafter (of total gross premium income written direct in that year).
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New Entry Immediately after the passage of the Act, a number of companies announced that they would seek foreign partnership. In mid-2000, the following companies made public statements that they already were in the process of setting up insurance business with foreign partnerships. However, not all the partnerships panned out in the end. INDIAN COMPANIES WITH FOREIGN PARTNERSHIP 1. Indian Partner International Partner 2. Alpic Finance Allianz Holding, Germany 3. Tata American Int. Group, US 4. CK Birla Group Zurich Insurance, Switzerland 5. ICICI Prudential, UK 6. Sundaram Finance Winterthur Insurance, Switzerland 7. Hindustan Times Commercial Union, UK 8. Ranbaxy Cigna, US 9. HDFC Standard Life, UK 10. Bombay Dyeing General Accident, UK 11. DCM Shriram Royal Sun Alliance, UK 12. Dabur Group Allstate, US 13. Kotak Mahindra Chubb, US 14. Godrej J Rothschild, UK 15. Sanmar Group Gio, Australia 16. Cholamandalam Guardian Royal Exchange, UK 17. SK Modi Group Legal & General, Australia 18. 20th Century Finance Canada Life 19. M A Chidambaram Met Life
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1. HDFC Standard Life. This will be jointly set up by India's Housing Development Finance Company - the largest housing finance company in India and the Scotland based Standard Life. 2. Sundaram Royal Alliance Insurance Company. It is a partnership created by Sundaram Finance and three other companies of the TVS Group of Chennai (Madras) and the London based Royal & Sun Alliance. 3. Reliance General Insurance. This company is fully owned by Mumbai based Reliance Industries which has operations in textile, petrochemicals, power and finance industries. There are three other companies with "in principal" approvals: 1. Max New York Life. It is a partnership between Delhi based pharmaceutical company Max India and New York Life; the New York based Life Insurance Company. 2. ICICI Prudential Life Insurance Company. This is a joint venture between Mumbai based Industrial Credit & Investment Corporation and the London based Prudential PLC. 3. IFFCO Tokyo General Insurance Company. It is a joint venture between Indian Farmers' Fertilizer Cooperative and Tokio Marine and Fire of Japan. To date (end of April 2001), the following companies have thus been granted licenses: ICICI -Prudential, Reliance General, Reliance Life, Tata-AIG General, HDFC Standard Life, Royal-Sundaram, Max-New York Life, IFFCO-Tokio Marine, Birla- Sun Life, Bajaj-Allianz General, Tata-AIG Life, ING - Vyasa, BajajAllianz Life, SBI Cardiff Life. Note that all of these companies are either in the life insurance business or in the non-life insurance business. No license has been granted for reinsurance business so far (the size of the reinsurance business
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can be 10-20% of the total revenue). No stand-alone health insurance company has been granted license so far.
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Enter the Dragon
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On December 28, 2000, the State Bank of India (SBI) announced a joint venture partnership with Cardif SA (the insurance arm of BNP Paribas Bank). This partnership won over several others (with Fortis and with GE Capital). The entry of the SBI has been awaited by many. It is well known that the SBI has long harbored plans to become a universal bank (a universal bank has business in banking, insurance and in security). For a bank with more than 13,000 branches all over India, this would be a natural expansion. in the first round of license issue, the SBI was absent. There were several reasons for this delay. First, the SBI was seeking a foreign partner to help with new product design. Second, it did not want the partner to become dominant in the long run (when the 26% foreign investment cap is eventually lifted). It wanted to retain its own brand name. Third, it wanted a partner that is well versed in the universal banking business. This ruled out an American partner (where underwriting insurance business by banks have been strictly forbidden by law). Cardif is the third largest insurance company in France. More than 60% of life insurance policies in France are sold through the banks. Fourth, the Reserve Bank of India (RBI) needed to clear participation by the SBI because in India banks are allowed to enter other businesses on a "case by case" basis. Over the course of the next twelve months, the SBI will sell insurance in 100 branches. Over a period of 2-3 years it will expand operation in 500 branches. Initially it will hold 74% ownership of the joint venture company with Cardif. Over time, it will dilute its holding to 50-60%. The SBI entry is groundbreaking for several reasons. This was the first for a bank to
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enter the insurance market. This kind of synergy between a bank and an insurance company is extremely rare in many parts of the world. In Continental Europe, it is called bancassurance (in France) or allfinanz (in Germany). Second, even though the regulators have said that banks would not (generally) be allowed to hold more than 50% of an insurance company, the SBI was allowed to do so (with a promise that its share would be eventually diluted). Future: Swaraj with a Foreign Twist At present, 312 million middle class consumers in India have enough financial resources to purchase insurance products like pension, health care, accident benefit, life, property and auto insurance. Only 2.5 per cent of this insurable population, however, has insurance coverage in any form. The potential premium income is estimated at around US $80 billion. This will place India as the sixth largest market in the world (after the US, Japan, Germany, UK and France). Lessons from China China is the most populous country in the world (at 1.2 billion); India is a close second (just over a billion). Both have followed the path of deregulation and privatization - China started it in 1979 and India in 1991. The insurance business in India has a premium volume of $8.3 billion in 1999 whereas in China the premium volume is $16.8 billion in 1999. However, premium per capita is not all that dissimilar: $13.7 per person in China and $8.5 in India in 1999. As a percent of GDP, insurance is 1.93% in India and 1.63% in China in 1999 (all data from Sigma, 2000). In China, the People's Insurance Company of China (PICC) had a monopoly between 1949 and 1959. In 1959, insurance business was deemed capitalistic and all forms of insurance were suspended (and the insurance business was
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taken over by the Peoples Bank of China). The insurance business reopened in 1979, the PICC reassumed its old role as the monopoly. There are many differences in the way China and India have handled deregulation. First, in China, the China Insurance Regulatory Commission (CIRC) was set up in November 1998, well after the first Insurance Law was promulgated in 1995. In India, the IRDA was launched first with the authority to issue licenses. It took almost a year before it issued licenses for the first set of private insurance companies. Second, in China, foreign insurers need to have a representative office for three years before they can submit a proposal for operation. In India, there is no such requirement. Third, foreign insurers can only own 25% of the total value of the market. In India, the limit is set at 26% per company. In China, there is no limit at the company level. Thus, a foreign company can own 100% of an approved insurance company in China. Fourth, in India, the licenses are national. A company with a license can operate in any part of the country. In China, on the other hand, foreign companies are restricted to operation in two metropolitan areas: Shanghai and Guangzhou. Fifth, the IRDA is a law-implementing body. It can only interpret the laws that have been passed by the Indian Parliament. On the other hand, it seems that the CIRC has been a lawmaking body, it is setting up rules as it sees fit. Sixth, China seems to have been forced to issue insurance licenses to a host of foreign companies by the end of 2000 simply because it wanted an assured entry into the World Trade Organization (WTO). In India, there is no such pressure as India is already a part of the WTO.
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Areas of Future Growth Life Insurance The traditional life insurance business for the LIC has been a little more than a savings policy. Term life (where the insurance company pays a predetermined amount if the policyholder dies within a given time but it pays nothing if the policyholder does not die) has accounted for less than 2% of the insurance premium of the LIC (Mitra and Nayak, 2001). For the new life insurance companies, term life policies would be the main line of business. Health Insurance Health insurance expenditure in India is roughly 6% of GDP, much higher than most other countries with the same level of economic development. Of that, 4.7% is private and the rest is public. What is even more striking is that 4.5% are out of pocket expenditure (Berman, 1996). There has been an almost total failure of the public health care system in India. This creates an opportunity for the new insurance companies. Thus, private insurance companies will be able to sell health insurance to a vast number of families who would like to have health care cover but do not have it. Pension The pension system in India is in its infancy. There are generally three forms of plans: provident funds, gratuities and pension funds. Most of the pension schemes are confined to government employees (and some large companies). The vast majority of workers are in the informal sector. As a result, most workers do not have any retirement benefits to fall back on after retirement. Total assets of all the pension plans in India amount to less than USD 40 billion.
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Therefore, there is a huge scope for the development of pension funds in India. The finance minister of India has repeatedly asserted that a Latin American style reform of the privatized pension system in India would be welcome (Roy, 1997). Given all the pros and cons, it is not clear whether such a wholesale privatization would really benefit India or not. Other Non-Life Insurance The flurry of activities of the new companies in the life insurance market has not been repeated in other types of insurance. The reason is basic: lack of data. Unless the new companies have access to reliable data on accidents of different kinds under Indian conditions, it would be hard to offer a competitive menu of policies.
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RECESSION 2009 Global recession is not likely to rock the Indian insurance industry in a big way; therefore, there is nothing to panic about, says a Senior Research Analyst at RNCOS. However, most of the life insurance players are expecting their new business premium collection to ease down in the remaining financial year. Citing reason for the moderation in premium collection, analyst stated that consumer sentiments are affecting the insurance industry because most of the prospective customers are putting their buying plans on hold. However, buying insurance products is a long-term investment and the ongoing crisis is not going to impact the returns on the assets. Low consumer sentiments are signaling just a temporary phase and likely to continue for another six to nine months, and thus, things will be different by this time next year. Moreover, the Indian insurance market has joined the league of the fastest growing insurance markets in the Asian region, with the total insurance premium projected to grow at a CAGR of more than 50% between 2008-09 and 2010-11. A new research report - “Booming Insurance Market in India (2008-2011)” from RNCOS - also says that the Indian insurance industry will show upward trend in future as it has displayed in the last few years owing to large population and vast untapped market. After analyzing the growth potential of the Indian insurance market, the report says that many foreign investors have shown interest in the industry because the markets in most of the developed countries have reached saturation. Thus, foreign players have turned their attention to the emerging economies, and India is more lucrative as compared to other emerging economies, with more
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favorable environment for insurance expansion as the country has low insurance penetration.
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CAPITAL MARKET REFORMS
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Capital market is vital for the development and strength of economy. A strong and vibrant capital market assists corporate world initiatives, finance and exploration of new processes and instruments facilitates management of financial risk. Investor i.e. individual investor, mutual funds, Foreign Institutional Investor and insurance companies place their money in various instruments of capital market. They are the soul of the capital market. An investor is very much needed because he is the major (rather the only) source of providing risk capital. As portfolio manager fill their baskets on the basis of subjective evaluation of scrip and FIIs are busy in pocketing profit by only investing in profitable companies. Hence none of them is interested in injecting much needed risk capital. Thus the task is only left to retail investors. With the globalization of economy, scams and anomalies are also multiplies. After various scams in related to security market (like 1992 scam of Harshad Mehta, JVG scam etc.) the level of investment volume and number of investors is continuously declining due to the following reasons. 1. Whenever any retail investor faces an institutional failure he does not get help from any quarter and has to accept it as a bad luck. 2. The scams remain under investigation with no concrete steps taken against default companies. 3. Regulators only highlight the value addition of new intermediaries, new instruments and new system of trading but nobody discloses inherent risk.
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Therefore, in a global environment, capital market regulator assumes more significance and regulator has to be dynamic and responsive to changes. There is often no single regulatory approach to an issue. Several instruments may bring desired results. The most important issue kept in mind is investor’s interest. Regulation is not a static and it is vary dynamic one. Capital market is a fulcrum consisting of investor, intermediaries, companies, self regulatory organization (SROs), exchange facilitators and regulators. Therefore, regulators fine tune their policies towards encouraging and protecting investors. The prospect of any market is investor’s confidence. An informed investor always contributes to the orderly development of market. Regulatory organization should empower investor and also enable them to make informed decisions in the capital market.
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Primary market Reforms
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For the fulfilment of the basic task of securities market to help in process of capital formation in the economy, this can only is possible by series of systematic measures which would build their confidence in the systems and processes and protect their interest fully. The rising of capital issues were controlled by the office of the controller of capital issues (CCI) established under the capital issues control Act-1947. The Capital Issues Control Act-194, repealed, office of the controller of capital issues abolished and initial share pricing decontrolled. In 1991-92 Finance Minter announced the repeal of the act and transfer of powers from CCI to SEBI from control to disclosure based regulation. The SEBI, the capital market regulator, established in 1992, the primary function of SEBI is to regulate the capital market and protect the interest of the investors. The other important functions of SEBI are:
? Regulating the business in stock exchanges and any other securities
markets.
? Registering and regulating the working of collective investment schemes,
including mutual funds.
? Prohibiting fraudulent and unfair trade practices relating to securities
markets.
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Therefore SEBI put some guidelines they are:
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1. Disclosure and Investor Protection (DIP) guidelines: as per this regulation all the information pertaining to and available with an issuer is provided so as the investor takes an informed decision whether to invest or not to invest. 2. Eligibility Criteria for issuers (DIP-2000): Companies eligible to make an issue can decide on their standard denomination and price of a security. Some parameters that need to be in offer documents are minimum holding by promoters, size of public issue, issue expenses, information disclosure and advertisement etc. 3. Transparency: SEBI makes available all the offer documents filed with it on its website and also through process release. Companies are invited from the public within 21 days of filing. 4. Free Pricing of Securities: issuer is free to determine the level of security price. The process of Book-building helps discover price and assist small investor to take an investment decision. 5. Number of Financial Instruments: issuer would like to have an optimum capital structure that reduces cost of capital. Today Indian capital market consists of almost all financial products available in most of the developed capital market, thus the choice to both issuer and investor has become wider.
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6. Issue process: Following process is used in the Indian capital market:
? Public issue – an invitation by a company to public to subscribe to
the securities offered through prospects.
? Right Issue- issue of capital under Sec-I (81) of Companies act
1956 to be offered to existing shareholders.
? Offer for Sale- it refers to securities by existing shareholder of a
company to the public for subscription.
? Book-building- it refers to a process of ascertaining demand for and
price of securities through bids, before the actual issue. Book building process is mandatory when the company doses not have track record for three out of preceding five years. 60% allotment to qualified institutional buyers is mandatory under the book building process.
? Compulsory Demat- All Initial public offerings will be compulsory
traded in dematerialized form. But the investors have been allowed to exercise option of either subscribing to securities in its physical or dematerialized form.
? Employee stock option – means option given to the whole time
employee of a company right to purchase or subscribe securities at a future date.
? Buy-back – section 77 (A) companies act and SEBI regulation are
allowed companies to buy back of share to enhance the wealth of shareholder.
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7. Prohibiting insider trading in securities, with the imposition of monetary penalties, on eroding market intermediaries. 8. Foreign Institutional Investors are allowed to invest in Indian capital markets after registration with the SEBI. 9. Indian companies permitted to access international capital markets through Euro issues. 10. The National stock exchanges, (NSE) with nationwide stock trading and electronic display, clearing and settlement facilities, established several regional stock exchanges change over from floor based grading to screen based trading.
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Secondary Market Reforms Several reforms have been introduced in stock exchange administration, security trading, settlement, delivery V/s Payment, security transfer, trading in derivatives, investor protection fund etc. are explained in the following paragraphs. 1. Stock exchanges: Membership of governing boards of stock exchanges was changed to include 50% outside (non-broker) representatives. SEBI has constituted a group to review and examine the present structure of stock exchanges and examine the legal and financial issues involved in demutualising stock exchanges. 2. Depth and Breadth in the market: India has a unique distinction of having highest number of companies listed on the stock exchanges. But all companies’ shares are not traded. Policy makers have to explore new options to increase depths and breadth in the Indian stock exchanges. 3. Dematerialization: Power was granted to SEBI to register and regulate depositories and custodians through an amendment to SEBI Act in 1995. There has been substantial progress in dematerialization. Number of companies available for Demat with NSDL has increased from 23 in 1997 to 4172 in 2002. 4. Institutionalization: Indian capital market was dominated by individual investors till early part of the 1990’s. Earlier institutional investor like LIC, GIC, DFIs, banks etc. used to take minor role. SEBI permitted private funds, Non-resident Indians, NBFCs and overseas corporate
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bodies to trade in securities. Of the above mentioned only three classes of investors are very active, individuals, mutual funds and FIIs.
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5. Development of Financial infrastructure: It involves development of informed investor class, legal and regulatory environment, institutional investors, world class security trading and payment and settlement systems. It also includes promoting investor associations, SROs, setting up of depository’s surveillance system. As another step towards this SEBI has introduced new financial instruments. 6. Derivatives: These can play a vital role in promoting market efficiency through better price discovery and risk transfer. SEBI granted approval to NSE and BSE to start trading in index futures contract in April 2000 and May 2000 respectively. SEBI also approved the proposal of NSE and BSE to start trading in index options contracts in June 2001.
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SEBI Efforts towards Investors’ Education
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1. It has launched intensive investor education exercises. 2. Help investor in redressal of complaints. 3. Disseminates information through its websites. 4. Published number of booklets on policy developments for educating the investors. 5. It distributed booklets titled “A quick reference guide for investor”. 6. Issued a series of advertisements/ public issues in national as well as regional news papers to educate and caution the investor about the risks associated with the collective investment schemes. 7. SEBI registered investor associations organized seminars for educating investors on various aspects relating to market. In the reform process it is clearly defined the various authorities that will be accountable for and will be redressing various kinds of the grievances. Some other steps for investors’ grievances redressed are;
? Investor Grievances Cell. ? Investor Protection Fund. ? Investor Service Fund. ? Complaints with consumer’s disputes redressal forums suits in the
court of law.
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8. Investor empowerment: timely available of quality and reliable information increases confidence of the investor. Over the past one decade many regulatory requirements have been imposed on issuers to disclose relevant information to public. Thus investor’s empowerment has become possible. 9. Transparency: Market transparencies refer to the ability of market participants to observe information about the trading process. Information can include prices volumes, sources of order, identification of counter party to trade etc. 10. Mutual Funds: the period between1987-1992 witnessed the broadening of the base of the industry by the entry of mutual funds sponsored by nationalized banks and public financial institutions. SEBI has been empowered to regulate mutual funds.
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SEBI Regulation for Stock Brokers
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1. SEBI act 1992 issued regulation for stock brokers in India. 2. Need for Minimum educational qualification.
? Regulation 3 every stock broker of an exchange can apply for grant
of SEBI registration.
? No qualification prescribed for registration as trading member,
clearing member, self clearing member 16A (1) and (2).
? To make the system to stand of its own qualification required.
3. Time limit to process the applications
? Regulation 3 stock exchanges to forward application within 30
days to SEBI.
? No time limit for SEBI to accept or reject. ? Only time limit is refusal to be communicated within 30days of
decision to reject. 4. Daily marking –to-Market: Regulation 16 © 3 and 4 which require the clearing and self clearing members- net worth of at least Rs.50 lacs or 100 lacs. 5. Time limit for SEBI orders in case of default by stock brokers: Regulation 25 default by a stock broker dealt under enquiry and penalty regulations. No time limit for SEBI to pass orders. 6. Clarify the issues leading to conflict of interest: in the event of a conflict interest, the broker shall not consider clients’ interest inferior to his own.
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REFORMS IN MANUFACTURING SECTOR
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India have identified three important growth phases. The early years of Indian planning, from 1950 to the mid-1960s, constitutes the first growth phase. Indian industry grew at respectable rates during this period. In the second growth phase between the mid-1960s and the late 1970s, Indian industry experienced a long period of stagnation. The third phase began with India’s industrial sector staging a revival of growth in the 1980s. India's industrial policy framework began to be liberalized from the late 1970s, and this process accelerated with the major economic reforms initiated in the year 1991. The measures to liberalize India’s industrial policy framework from the late 1970s included deregulation and delicensing in certain industries, according a greater role to the private sector, and a gradual shift from direct physical controls to indirect controls. Wide
ranging measures for economic liberalization were initiated in India after 199192. According to Ahluwalia, the changes that the reforms after 1991 brought in were “fundamental” in nature compared to the “marginal” changes only in the previous decade. Import licensing was done away with for most goods except consumer goods; import-weighted tariff declined to 27 per cent from the pre-1991 level of 87 per cent; and exchange rates were devalued by 20 per cent. Many have argued that industrial deregulation and liberalization have opened up greater opportunities for growth. In India, registered factories comprise all factories that employ more than ten workers and operate with the aid of electric power as well factories that employ more than twenty workers without the aid of electric power. All registered factories constitute the factory sector. Manufacturing activities of registered factories are classified under registered manufacturing. All other manufacturing activities are classified under unregistered manufacturing. Annual Survey
of Industries (ASI) published by the Central Statistical Organization (CSO) is the major source of statistics on registered factories.
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Industrialization in India has not been successful as regards generation of
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employment. Many scholars have written on the failure of Indian industry to provide employment to the large labour reserves in the country. Even in 2000-01, the total number of workers employed in India’s factory sector was only 8 million. Factory sector employment was just 1.98 per cent of India’s total working population of 402 million in 2001. Factory sector also accounted for only 15.6 per cent of the 51 million employed in the manufacturing sector. The rest of the manufacturing employees worked in the unregistered manufacturing sector. Studies have shown that the bulk of unregistered manufacturing in India employ traditional technologies. Also, workers in the unregistered manufacturing sector survive largely under exploitative and poor working conditions. India’s manufacturing sector output has grown at relatively fast rates from the 1980s. However, on a closer analysis, we find many signs of weaknesses in India’s post-1980 manufacturing growth experience. First, annual rate of
growth of manufacturing incomes in India is seen to have declined in the period between 1991-91 and 2004-05 compared to the period between 1980-81 and 199091. If we consider manufacturing sector growth in the whole period after 1991-92, a clearer picture emerges. Growth over the previous year of manufacturing sector in India was negative in 1991-92 and only 4.1 per cent in 1992-93. Year-on-year growth of manufacturing sector rose to very high levels in the next three years, peaking at 14.9 per cent in 1995-96. These were also the initial years of liberalization in India. However, India’s manufacturing sector entered a period of relative stagnation in growth in the period between 1996-97 and 2001-02. Growth of manufacturing sector appears to have climbed to higher levels again after 2002-03. Secondly, the post-1980 period has had a poor record in employment generation. The 1980s is often called the decade of "jobless growth" in Indian
manufacturing. The revival in growth of output witnessed in this period was not accompanied by adequate generation of employment. Only 484,000 jobs were generated in India's registered factory sector between 1979-80 and 1990-91. Several explanations have been offered. It is argued that labour retrenching
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was difficult after the introduction of job security regulations in the late 1970s, and this forced employers to adopt capital-intensive production techniques. According to another view, capital-intensive techniques were adopted because of the increase in real wages in the 1980s. According to Nagaraj (1994), the "overhang" of employment that existed in the 1970s was intensively used in the 1980s, thus generating only a few additional employment opportunities in the later decade. Compared to the 1980s, manufacturing growth in the 1990s was more employment generating. 1763,000 new jobs were created in India's registered manufacturing between 1991-92 and 1997-98 compared to 484,000 jobs only in the earlier decade. Goldar (2000) attributes two major reasons for this positive change: slowdown in growth of real wages and faster growth of small and medium-sized factories, which are more labour intensive than large sized factories. Nagaraj (2000)
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contested the views of Goldar, and argued that faster employment generation in the 1990s was due to the investment boom in that decade. At the same time, Nagaraj (2001) pointed out that faster employment generation in the 1990s was only in registered manufacturing, whereas the unregistered sector witnessed negative employment growth between the mid-1980s and mid-1990s. This is an important finding because almost 3/4th employment is in the unregistered sector. There is clear evidence of a decline in manufacturing employment in India in recent years. Factory sector employment in India was 10.1 million in 1997-98 but it declined to 7.9 million in 2003-04. Correspondingly, employment in India’s organized sector (of which factory sector is a component) declined from 28.2 million in 1997-98 to 26.5 million in 2003-04. India’s experience with respect to generation of factory employment between 1981-82 and 2003-04. Growth of employment in India’s factory sector was stagnant in the 1980s, showed some improvement in the 1990s, but declined again after 1997-98.
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of India’s manufacturing
Thirdly, there has also been a slowdown in the growth of the number of factories in
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India’s factory sector in the post-1980 compared to the decades before that. The generation of new firms within the factory sector has been especially slow since the mid-1990s. At the same time, there are signs of growing capital and skill intensity within the factory sector in India, and this is the fourth major aspect of the post-1980 manufacturing growth experience. As fixed capital per employee and fixed capital per factory show a constantly upward trend. The rise in capital intensity has been more rapid after the 1980s. A decline in the number of workers per factory and a simultaneous increase in the number of supervisors per factory is a good indicator of the growth of capital and skill intensity in India’s factory sector . Number of workers per factory in India’s factory sector declined from 80 in the late 1950s to 70 in the late 1960s. Between 1985-86 and 1997-98, number of workers per factory ranged between 58 and 56, after which this number fell sharply to 47 in 2003-04. Between 1985-86 and 1995-96, number of supervisors per factory increased from 16 to 18; this number subsequently declined to 13 by 2003-04. There has been a growing divergence between the real earnings of workers and supervisors in India’s factory sector. Average wages of workers have been rather stagnant from the 1980s, whereas average salaries of supervisors have grown much faster. Therefore, an analysis of data from the factory sector indicates that generation of employment and growth of new firms have been stagnant from the 1980s. At the same time, output growth has been fast from the 1980s except for a period of slow growth between 1996-97 and 2001-02. There has also been increasing capital and skill intensity in India’s factory sector. The dichotomous nature of India’s manufacturing sector can be understood fully only through a thorough analysis of the unregistered sector. We have not attempted this in the present paper. Yet, a plot of incomes from registered and unregistered sectors over the period from 1950-51 to 2002-03 clearly indicate a growing divergence in growth of incomes from the registered and unregistered sectors.
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The unregistered sector consisting small-scale enterprises are lagging behind in growth especially after the 1980s. The rest of this paper attempts to understand how financial sector reforms in India, which gained momentum from the 1990s, contributed to the dichotomous nature of growth in India’s manufacturing sector
CREDIT POLICY REFORMS AND THEIR IMPACT ON INDUSTRIAL GROWTH How has the monetary policy fared with respect to increasing credit availability in the Indian economy, particularly for the industrial sector? After all, the key objective of the monetary- fiscal reform package in India was to restrict the flow of bank’s funds to the Government by fiat and thereby free a larger volume of resources for credit creation. Over the years after 1993-94, the gap between deposit rates and lending rates has also come down in India. However, the Indian experience, so far, with respect to increasing credit creation in the economy has not been very encouraging. First, RBI (2003) points out that the “simultaneity of the processes of money and credit creation” was weakened in India during the 1990s. As the share of foreign assets of the banking sector in M3 rose, the share of domestic credit in M3 correspondingly declined: from 115.7 per cent in 1989-90 to 89.6 per cent in 2001-02. More importantly, even after the monetary-fiscal reforms, net bank credit to the Government as a proportion of total domestic credit did not decline in the 1990s compared to the 1980s and 1970s. Although the net Reserve Bank support to the Government declined, investments by the banking system in government securities showed an upward trend. Therefore, even as SLR was brought down to 25 per cent, scheduled commercial banks’ investments in government securities increased from 25.3 per cent of deposits
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as in March 1990 to 37.3 per cent of deposits in March 2002 – that is, almost 12 percentage points above the statutory requirements. At the same time, credit disbursed by scheduled commercial banks showed a deceleration in growth during the years between 1996-97 and 2001-02 (growing at 15.1 per cent compared to 19.5 per cent during the years between 1992- 93 to 1995-96) Several factors originating from demand and supply side have been attributed to the slowdown in bank credit in the second half of the 1990s. On the supply side, banks have been highly risk averse in regard to expanding their loan portfolio. The introduction of prudential norms in the mid-1990s, which revealed relatively high level of non-performing assets (NPAs) with banks, and the revised requirements of capital adequacy ratio (8.7 per cent at end-March 1996) were factors that limited bank’s ability to lend. Given the constraints they faced, banks found that government securities, which offer risk- adjusted returns, are an attractive option for investments. Consequently, banks’ investments in government securities continued to rise even after the withdrawal of SLR requirements. At the same time, there were many demand-side factors too that constrained credit expansion of banks. During the latter part of the 1990s, India’s corporate sector was facing intense competitive pressures and, as a consequence, focussed its energies on restructuring rather than expansion of existing capacities. As part of their restructuring plans, Indian firms began to meet their financing needs increasingly through retained earnings and less through borrowings. Improvements in corporate profitability during this period also aided this trend. Debt-equity ratio of the corporate sector declined from an average of 85.5 per cent during the period from 1990-91 to 1994-95 to 65.2 per cent during the period from 1995-96 to 1999-2000. Another reason for the slow growth of credit demand was the rise in real interest rate.
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Despite the reduction in CRR, bank rate and reverse repo rate measures that were part of an accommodative monetary policy pursued by RBI -- nominal interest rates in India refused to climb down. This along with the falling inflation rate resulted in rising real interest rates. Industrial slowdown during the period from 1996-97 to 2001-02 was another reason for the reduced demand for bank credit during this period . India’s corporate firms now have improved access to the domestic and international capital markets, and this is yet another factor behind the slow growth of demand for bank credit. Indian companies have raised large capital through the issue of commercial paper, external commercial borrowings (ECBs), global depository receipts (GDRs) and American depository receipts (ADRs) . As, credit channelled to the industrial sector was at a slower pace during the 1990s and through the period 2000-01 to 2004-05 compared to the 1980s. As a proportion of total outstanding credit, credit extended to the industrial sector fell down considerably, from 48.7 per cent as in March 1990 to 38.8 per cent in March 2005. There was a similar decline in agriculture’s share in total outstanding credit . It is important to note that while the shares of agriculture and industrial sectors in total bank credit in India declined
between 1990 and 2005, the corresponding share of personal loans and professional services showed an increase, from 9.4 per cent to 27 per cent. Especially noteworthy is the fast growth of housing loans during this period, whose share in total credit rose from 2.4 per cent in March 1990 to 11 per cent in March 2005. There was a significant drop in credit channelled to the priority sectors.
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As a proportion of non-food gross bank credit, priority sector advances declined from 40.1 per cent in March 1990 to 36.3 per cent in March 2006. Within the priority sector advances, the share of agriculture fell from 40.9 per cent in March 1990 to 33.8 per cent in March 2006. Going by various indicators, it is clear that credit flow to the small scale industry (SSI) sector has clearly decelerated in recent years. Average annual growth of advances to the SSI sector slowed down from 13.6 per cent during the 1990s to 9.5 per cent during 2001-06. The share of the SSI sector in total priority sector advances fell from 44 per cent in March 1998 to 18 per cent in March 2006. The proportion of SSI credit in net bank credit (NBC) was 15.7 per cent in March 1990 but declined to 8.6 per cent in March 2004.
OVERVIEW OF INDIAN MANUFACTURING SECTORS India is fast emerging as a global manufacturing hub. India has all the requisite skills in product, process and capital engineering, thanks to its long manufacturing history and higher education system. India's cheap, skilled manpower is attracting a number of companies, spanning diverse industries, making India a global manufacturing powerhouse. India with its vast design skills has attracted a lot of outsourcing technological orders. According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009, India ranks among the top 12 producers of manufacturing value added (MVA). In textiles, the country is ranked fourth after China, USA and Italy, while in electrical machinery and apparatus, it is
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ranked fifth. It holds sixth position in the basic metals category; seventh in chemicals and chemical products; 10th in leather, leather products, refined petroleum products and nuclear fuel; twelfth in machinery and equipment and motor vehicles. India's manufacturing sector is on an uptrend with the majority of sectors recording positive trends in the first half of fiscal year 2009-10, as compared with the corresponding period in 2008-09, according to a Confederation of Indian Industry (CII) survey. The buoyant manufacturing growth in the first half is led by a rise in production of basic goods, intermediate goods and consumer durables. Quarterly estimate of GDP for July-September (Q2) 2009-10, according to data released by the Central Statistical Organisation (CSO), for manufacturing stood at US$ 46.42 billion at current prices, 9.4 per cent higher than during the same period in 2008-09. The Indian economy clocked a robust 7.9 per cent growth in the second quarter (Q2) ended September 2009, catapulted by a stimulus packages-powered strong industrial growth. Manufacturing sector grew by 9.2 per cent in Q2 of 2009-10 against 4.9 per cent in Q2 of 2008-09, according to the latest CSO estimates available on the Index of Industrial Production (IIP). Growth Trends Major indicators Nomura's Composite Leading Index (CLI), UBS' Lead Economic Indicator (LEI) and ABN Amro' Purchasing Managers' Index (PMI), variety of indices that track activity in vital economic sectors, indicate an upward trend in economy owing to growth in the manufacturing sector.
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The HSBC Markit Purchasing Managers' Index (PMI), the most reliable indicator of manufacturing activity in the country based on a survey of 500 companies, climbed to its highest level in one-and-half years to 57.6 in January, 2010. The index had stood at 55.6 in December 2009. Companies reaped the benefit of increasing new orders which led them to step up their production levels. According to the HSBC Markit report, Indian manufacturers sharply raised their output levels during the month in line with the increase in new orders and the latest gains have been above the pre downturn averages. "The pick-up in exports is extremely heartening and it does point towards a sustainable trend of growth in manufacturing. Growth in industrial output will stay in double digits till the end of this financial year (2009-10) and the encouraging bit is that the composition of lead indicators of the economy are now becoming more and more broad- based," said Jyotinder Kaur an economist with HDFC. Exports from special economic zones (SEZs) rose 33 per cent during the year to end-March 2009, far outpacing the country's overall exports growth of just 4 per cent, according to the Commerce Department. According to the data, exports from such tax-free manufacturing hubs totalled US$ 18.16 billion last year. Between April to June 2009, exports from SEZs totalled US$ 8.7 billion.
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LG is looking at making India its global manufacturing hub for its mobile handsets. The company will soon be exporting mobile phones to Europe and the Commonwealth Independent States (CIS) from India.
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Luxury brands like Louis Vuitton and Frette are looking at India as a manufacturing base for their products.
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Aircraft manufacturer, Airbus is considering India as one of the key centres for design and development of its long haul A 350 plane.
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Samsung plans to invest US$ 100 million over a period of four years in its manufacturing plant near Chennai and make it its global hub.
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Hyundai has made India the manufacturing and export hub for its small cars. The i10 is being manufactured only in India and exported to the world. India is Hyundai's largest base outside Korea.
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Suzuki too is making India its manufacturing hub for small cars. The Ritz is being manufactured solely in India and exported to Europe.
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Taiwan-based Feng Tay Group which is setting up a US$ 61.5 million footwear manufacturing unit in its own SEZ in Tamil Nadu plans to invest an additional US$ 41 million.
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Panasonic India plans to invest US$ 100 million in its new plasma TV production facility in 2011.
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GE Healthcare is drawing up plans to grow its India business and develop the country as a global hub for manufacturing low-cost medical devices.
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Volkswagen AG will make India a low-cost manufacturing hub catering to select export markets. Volkswagen will export from the second quarter of next fiscal fully-built models and completely knocked-down kits of its hatchback, Polo, to South East Asia, Middle East and Africa from its Pune plant.
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REFORMS IN IMPORT SECTOR
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The import sector of Indian economy is one of the most important sector of India's economic health. The performance of the import sector of Indian economy determines the Export policy of India and most importantly the export import policy of India. Further, it is one of the most important part of the India's foreign trade policy. The current EXIM policy of India covers policy statements for the period covering 2002 to 2007. The basic laws that governs the import sector of Indian economy are as follows
? Imports shall be free, except in cases where they are regulated by the
provisions of this Policy or any other law for the time being in force
? The item wise import policy shall be, as specified in published and
notified by Director General of Foreign Trade, as amended from time to time.
? Every importer shall comply with the provisions of the Foreign Trade
(Development and Regulation) Act, 1992, the Rules and Orders made there under, the provisions of this Policy and the terms and conditions of any license / certificate / permission granted to him, as well as provisions of any other law for the time being in force.
? All imported goods shall also be subject to domestic Laws, Rules, Orders,
Regulations, technical specifications, environmental and safety norms as applicable to domestically produced goods.
? No import of rough diamonds shall be permitted unless the shipment
parcel is accompanied by Kimberley Process Certificate required under the procedure specified by the Gem & Jewelery Export Promotion Council.
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? Duty credit allowed for import of capital goods, spare parts, office
equipment, office furniture and consumables that are importable under ITC (HS). Such imports cover all items of the service sector.
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? The Customs Act of India governs the process of levying of tariffs on
imports and frames the rules and it also specifies the tariffs rates and provides for the imposition of anti-dumping and compensation charges.
? Tariff rates, excise duties, regulatory duties are revised in each annual
budget of India.
? Total duties on imports now consist of basic duty which ranges from zero
to 65% plus additional or countervailing duties.
? On manufactured "luxury" items, total import taxes may amount to
whooping 150%.
? Import duties are product specific and can be revised in mid-year.
The latest export import policy of India have led to growth of India's Import on the following lines – The Government of India latest export policy for the exporters will help in stabilizing the export growth levels attained in the 1st quarter of 2007-2008. The Indian imports shoot up by 34.30% during the 1st quarter of 2007-2008. Today, India ranks second in the manufacture of small passenger car segment. It is the world largest producer of generic pharmaceutical and its Information Technology sector is registering three figure growths consistently. Moreover, it is the most preferred destination for business process outsourcing. The world's knowledge process outsourcing business is valued at US$ 15 billion out of which US$ 12.5 billion worth of business is expected to be outsourced to India alone by 2010. According to reports, productivity growth rate of Indian economy is estimated to be around 8% and above until 2020.
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Foreign Trade Policy of India
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To become a major player in world trade, a comprehensive approach needs to be taken through the Foreign Trade Policy of India. Increment of exports is of utmost importance, India will have to facilitate imports which are required for the growth Indian economy. Rationality and consistency among trade and other economic policies is important for maximizing the contribution of such policies to development. Thus, while incorporating the new Foreign Trade Policy of India, the past policies should also be integrated to allow developmental scope of India’s foreign trade. This is the main mantra of the Foreign Trade Policy of India. Objectives of the Foreign Trade Policy of India Trade propels economic growth and national development. The primary purpose is not the mere earning of foreign exchange, but the stimulation of greater economic activity. The Foreign Trade Policy of India is based on two major objectives, they are – 1. To double the percentage share of global merchandise trade within the next five years. 2. To act as an effective instrument of economic growth by giving a thrust to employment generation.
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Strategy of Foreign Trade Policy of India
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Removing government controls and creating an atmosphere of trust and transparency to promote entrepreneurship, industrialization and trades. Simplification of commercial and legal procedures and bringing down transaction costs. Simplification of levies and duties on inputs used in export products. Facilitating development of India as a global hub for manufacturing, trading and services. Generating additional employment opportunities, particularly in semi-urban and rural areas, and developing a series of ‘Initiatives’ for each of these sectors. Facilitating technological and infrastructural up gradation of all the sectors of the Indian economy, especially through imports and thereby increasing value addition and productivity, while attaining global standards of quality. Neutralizing inverted duty structures and ensuring that India's domestic sectors are not disadvantaged in the Free Trade Agreements / Regional Trade Agreements / Preferential Trade Agreements that India enters into in order to enhance exports. Up gradation of infrastructural network, both physical and virtual, related to the entire Foreign Trade chain, to global standards. Revitalizing the Board of Trade by redefining its role, giving it due recognition and inducting foreign trade experts while drafting Trade Policy. Involving Indian Embassies as an important member of export strategy and linking all commercial houses at international locations through an electronic platform for real time trade intelligence, inquiry and information dissemination. Partnership -
Foreign Trade Policy of India foresees merchant exporters and manufacturer exporters, business and industry as partners of Government in the achievement of its stated objectives and goals.
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REFORMS IN EXPORT SECTOR
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During the Five Years Plans initiated in the 1950s, the economic reforms of India somewhat followed the democratic socialist principle with more emphasis on the growth of the public and rural sector. Most of the policies were meant towards the increase of exports compared to imports, central planning, business regulation and also intervention of the state in the finance and labor markets. Economic Reforms during 1960s and 1980s During the mid 1960"s effort was made to make India self sufficient and also increase the production and export of the food grains. To make the plan a success, huge scale agricultural development was undertaken. The government initiated the ‘Green Revolution’ movement and stressed on better agricultural yield through the use of fertilizers, improved seed and lots more. New irrigation projects were undertaken and the rural banks were also set up to provide financial support to the farmers. Economic Reforms during 1990s to the present times Due to the fall of the Soviet Union and the problems in balance of payment accounts, the country faced economic crisis and the IMF asked for the bailout loan. To get out of the situation, the then Finance Minister, Manmohan Singh initiated the economic liberation reform in the year 1991. This is considered to be one of the milestones in India economic reform as it changed the market and financial scenario of the country. Foreign investments have come in various sectors and there has been a good growth in the standard of living, per capital income and Gross Domestic Product. Due to the global meltdown, the economy of India suffered as well. However, unlike other countries, India sustained the shock as an important part of its financial and banking sector is still under government regulation. Nevertheless, to cope with the present situation, the Indian government has taken a number of decisions like strengthening the banking and tertiary sectors, increasing the quantity of exports and lots more.
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OVERVIEW OF INDIAN ECONOMY
• The Indian economy is set to grow between 7 per cent and 7.5 per cent in the current fiscal, according to Dr C Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council (PMEAC). The mid-year review has projected a growth rate of 7.75 per cent for the fiscal. • India's local currency rating outlook has been raised to ‘positive' from ‘stable' by Moody's Investors Service on the back of the country's demonstrated resilience to the global crisis and expectation that it will resume its high growth path. • The government has taken a number of steps in recent months to revive the economy, including slashing interest rates, lowering factory levies and more than doubling the limit on foreign investment in corporate bonds. • Qualified Institutional Placements (QIPs) QIP is a capital raising tool, whereby a listed company can issue equity shares, fully and partly convertible debentures, or securities other than warrants, which are convertible into equity shares, to a qualified institutional buyer (QIB). • Stock markets India’s market capitalization (m-cap) touched US$ 1.04 trillion in June 2009 making it the ninth largest in the world. According to data from Bloomberg, India’s market cap as a percentage of worlds market cap was 2.8 per cent on December 31, 2009.
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In 2009, there were 21 IPOs that raised US$ 4.25 billion as compared to 36 IPOs in 2008 that raised US$ 3.68 billion. • Insurance India is the fifth largest life insurance market in the emerging insurance economies globally and the segment is growing at a healthy 32-34 per cent annually. According to a report by research firm RNCOS—'Booming Insurance Market in India (2008-2011)'—the total life insurance premium in India is projected to grow to US$ 259.72 billion by 2010-11. Life Insurance Corporation (LIC) is bullish on growth and is targeting business in excess of US$ 59.14 billion by 2011-12. The government is planning to ease restrictions on foreign investments in insurance, banking and pensions, and allow foreign direct investment (FDI) of 49 per cent from the present 26 per cent. The ‘Mall assurance’ delivery channel is first of its kind in India's insurance sector, selling life and general insurance policies through all Future Group retail outlets across the country. • Banking services During 2008-09, State Bank of India (SBI) and associate banks advanced US$ 16.8 billion for infrastructure projects such as power plants and petroleum refineries. The big-sized credits have made SBI and group one of the largest project financiers in the country.
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CONCLUSION
Banking Sector The Banking sector in India has experienced a rapid transformation. Just about a decade back this sector was limited to the sarkari (read nationalized) and cooperative banks. Then came the multi-national banks, but these were confined to serving an elite few. The opening up of the Indian banking sector to private players acted as 'the tipping point' for this transformation. The deregulatory efforts prompted many financial institutions (like HDFC and ICICI) and non-financial institutions enter the banking arena. With the entry of private players into retail banking and with multi-nationals focusing on the individual consumer in a big way, the banking system underwent a phenomenal change. Multi-channel banking gained prominence. For the first time consumers got the choice of conducting transactions either the traditional way (through the bank branch), through ATMs, the telephone or through the Net. Technology played a key role in providing this multi-service platform. The entry of private players combined with new RBI guidelines forced nationalized banks to redefine their core banking strategy. And technology was central to this change.
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Insurance Sector
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It seems unlikely that the LIC and the GIC will shrivel up and die within the next decade or two. The IRDA has taken a "slowly slowly" approach. It has been very cautious in granting licenses. It has set up fairly strict standards for all aspects of the insurance business (with the probable exception of the disclosure requirements). The regulators always walk a fine line. Too many regulations kill the incentive for the newcomers; too relaxed regulations may induce failure and fraud that led to nationalization in the first place. India is not unique among the developing countries where the insurance business has been opened up to foreign competitors. From Table 4, we observe that the openness of the market did not mean a takeover by foreign companies even in a decade. Thus, it is unlikely that the same will happen in India, especially when the foreign insurers cannot have a majority shareholding in any company. Capital Market Keeping in track with the global markets the SEBI has undertaken various reforms from time- to – time to safe guard the interests of the investors, shareholders, employees & the government. It has been taking timely & effective reforms so that number potential investors become actual investors. It has also passed latest bill saying that the funds with PPF & Pension be diverted to the Stock Market so as to decrease the dependency on Foreign Direct Investment.
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Manufacturing Sector
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The rapid growth of the Indian economy is likely to make India the fifth largest consumer market in the world by 2025 from twelfth in 2005, according to a study by McKinsey Global Institute. Aggregate Indian consumer spending is likewise estimated to more than quadruple to approximately US$ 1.5 trillion by 2025, on the back of a ten-fold increase in middle class population and a threefold jump in household income. The manufacturing sector is estimated to have a US$ 180-billion investment opportunity over the next five years, according to the Investment Commission of India. Import Sector This Foreign Trade Policy of India is a stepping stone for the development of India’s foreign trade. It contains the basic principles and points the direction in which it propose to go. A trade policy cannot be fully comprehensive in all its details it would naturally require modification from time to time with changing dynamics of international trade. Export Sector Government should take suitable measures to further boost export sector. It is going to frame monetary policies which are going to ease pressure on export sector. From the growth of the export sector of Indian economy, it is expected that India will become the second largest economy in the world after China.
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WEBLOGRAPHY
www.business.mapsofindia.com www.ibef.org www.sebi.gov.in www.finance.indiamart.com www.economywatch.com
Search engine www.google.com
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PRESENTED BY:
? Kunal ? Pratik ? Sankalp ? Laxman ? Dipti ? Urvashi ? Vandana ? Kashmira
46 19 38 22 40 12 56 49
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SPECIAL THANKS KANTHI MA’AM
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doc_621019764.pdf
2009-10
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INDEX SR. NO. 1 Introduction PARTICULARS PAGE NO. 3
2
Reforms in Banking Sector
5
3
Reforms in Insurance Sector
8
4
Reforms in Capital Market
27
5
Reforms in Manufacturing Sector
38
6
Reforms in Import
49
7
Reforms in Export
53
8
Overview of Indian Economy
54
9
Conclusion
56
10
Weblography
59
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INTRODUCTION
The last decade witnessed the maturity of India’s financial markets. Since 1991, every governments of India took major steps in reforming the financial sector of the country. Bank norms liberalized and banks given the freedom to decide levels of holding of individual items of inventories and receivables
• Ceiling on term loans raised to Rs. 10,000 million for projects involving expansion/modernization of power generation capacities • Banks allowed to set their own interest rate • On post-shipment export credit (in Rupees) for over 90 days. • Deregulation of interest rates on loans over Rs. 200,000 against term deposits and on domestic deposits with maturity periods over two years • Banks freed to fix their own foreign exchange open position limit subject to RBI approval • Guidelines issued to banks to ensure qualitative improvement in their customer service. • Loan system introduced for delivery of bank credit.
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Competition
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Decades of non-commercial orientation, direct lending, loan waivers and increasing non-performing assets had initially made banks difficult to adjust to a market environment having strict prudential norms. However, the emerging results suggest that banks are beginning to adapt to the competitive environment and facing the challenge.
Decontrol Many steps were taken in 1995-96 to reduce controls and remove operational constraints in the banking system. These include interest rate decontrol, liberalization and selective removal of Cash Reserve Ratio (CRR) stipulation, freedom to fix foreign exchange open position limit and enhanced refinance facilities against government and other approved securities
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REFORMS IN BANKING SECTOR
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The banking system in India has undergone significant changes during last 15 years. There have been new banks, new instruments, new windows, new opportunities and along with all this new challenges. While deregulation has opened new vistas for banks to augment revenues, it has also entailed greater competition and consequently greater risks. The traditional face of banks as mere financial intermediaries has since altered and risk management has emerged as the defining attribute. Financial sector reforms introduced in the early 1990’s as a part of the structural reforms have touched upon almost all aspects of banking operations. For a few decades preceding the onset of banking and financial sector reforms in India, banks operated in an environment that was heavily regulated and characterized by sufficient barriers to entry which protected them against too much competition. This regulated environment set in complacency in the manner in which banks operated and responded to the customer needs. The administered interest rate structure, both on the liability and the asset side, allowed banks to earn reasonable spread without much efforts. Despite this, however banks profitability was low and NPL’s level was high reflecting lack of efficiency. Although banks operated under regulatory constraints in the form of statutory holding of Government securities (Statutory liquidity ratio or SLR) and the cash reserve ratio or CRR and lacked functional autonomy and operational efficiency, the fact was that most banks did not operate efficiently.
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Financial sector reforms were carried out in two phases:
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1. The first phase of reforms was aimed at creating productive and profitable financial institutions operating within the environment of operational flexibility functional autonomy. 2. The focus of the second phase financial sector reforms starting from the second half of 1990’s has been on strengthening of the financial system consistent with the movement towards global integration of financial services. The deregulation of interest rates constituted an integral part of financial sector reforms. The interest rate regime has been largely de-regulated with a view to achieving better price discovery and efficient resource allocation. Banks now have flexibility to decide their deposit and lending rate structures and manage their assets and liabilities accordingly. At present, apart from interest rates on savings deposits and NRI deposits on the deposit side, and export credit and small loans up to Rs. 2 lakh on the lending side, all other interest rates have been deregulated. Indian banking system operated for a long time with high reserve requirements both in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). This was mainly to accommodate the high fiscal deficit and its monetization. The efforts in the recent period have been to lower both the CRR and SLR. The SLR has been gradually reduced from a peak of 38.5 percent to 25 percent. The CRR was reduced from its peak level of 15 percent maintained during 1989 to 1992 to 4.5 percent. Although the Reserve Bank continues to pursue its medium-term objective of reducing the CRR, in the recent years, on a review of macroeconomic and monetary conditions, the CRR has been revised to 6 percent.
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RECESSION IN INDIAN BANKING SECTOR
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Banks act as important players in the financial markets. They play a vital role in the economy of a country. The Recession that began in December 2007 impacted the revenues and profitability of businesses worldwide. We are in a globalised world and no more immune to the things happening outside our country. Built on strong financial fundamentals, strict vigil on risk appetite and firm monetary guidelines, Indian banks have proved among the most resilient and sound banking institutions in the world. But there has been considerable divergence in the performance of the various banking institutions in the country as also among the public, private and foreign banks operating in India. The Indian banking system is relatively insulated from the factors leading to the turmoil in the global banking industry. Going by the performance for the calendar year 2008, Indian public sector banks have not only been able to weather the storm of global recession but have been able to moderate its impact on the Indian economy as well, compared to its peers among the foreign and private banks. The banking sector faces profitability pressures due to higher funding costs, mark-to-market requirements on investment portfolios, and asset quality pressures due to a slowing economy. But Indian banks’ global exposure is relatively small, with international assets at about 6 per cent of the total assets. The strong economic growth in the past, low defaulter ratio, absence of complex financial products, regular intervention by central bank, proactive adjustment of monetary policy and so called close banking culture has favored the banking industry in India in recent global financial turmoil.
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REFORM IN INSURANCE SECTOR
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Insurance in India started without any regulation in the Nineteenth Century. It Was a typical story of a colonial era: a few British insurance companies dominating the market serving mostly large urban centres. After the
independence, it took a dramatic turn. Insurance was nationalized. First, the life insurance companies were nationalized in 1956, and then the general insurance business was nationalized in 1972. Only in 1999 private insurance companies have been allowed back into the business of insurance with a maximum of 26% of foreign holding. In what follows, we describe how and why of regulation and deregulation. The entry of the State Bank of India with its proposal of bancassurance brings a new dynamics in the game. We study the collective experience of the other countries in Asia already deregulated their markets and have allowed foreign companies to participate. If the experience of the other countries is any guide, the dominance of the Life Insurance Corporation and the General Insurance Corporation is not going to disappear any time soon.
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Insurance during the British era
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Life insurance in the modern form was first set up in India through a British Company called the Oriental Life Insurance Company in 1818 followed by the Bombay Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829. All of these companies operated in India but did not insure the lives of Indians. They were there insuring the lives of Europeans living in India. Some of the companies that started later did provide insurance for Indians. But, they were treated as "substandard" and therefore had to pay an extra premium of 20% or more. The first company that had policies that could be bought by Indians with "fair value" was the Bombay Mutual Life Assurance Society starting in 1871. The first general insurance company, Triton Insurance Company Ltd., was established in 1850. It was owned and operated by the British. The first indigenous general insurance company was the Indian Mercantile Insurance Company Limited set up in Bombay in 1907. By 1938, the insurance market in India was buzzing with 176 companies (both life and nonlife). However, the industry was plagued by fraud. Hence, a comprehensive set of regulations was put in place to stem this problem. By 1956, there were 154 Indian insurance companies, 16 non-Indian insurance companies and 75 provident societies that were issuing life insurance policies. Most of these policies were centered in the cities (especially around big cities like Bombay, Calcutta, Delhi and Madras). In 1956, the then finance minister S. D. Deshmukh announced nationalization of the life insurance business.
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MILESTONES OF INSURANCE REGULATIONS IN THE 20TH CENTURY 1912: -The Indian Life Insurance Company Act
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1938:- The Insurance Act: Comprehensive Act to regulate insurance business 1956:- Nationalization of life insurance business in India 1972:- Nationalization of general insurance business in India 1993:- Setting up of Malhotra Committee 1994:- Recommendations of Malhotra Committee 1995:- Setting up of Mukherjee Committee 1996:- Setting up of (interim) Insurance Regulatory Authority Recommendations of the IRA 1997:- Mukherjee Committee Report submitted but not made public 1997:- The Government gives greater autonomy to LIC, GIC and its subsidiaries 1998:- The cabinet decides to allow 40% foreign equity in private insurance Companies-26% to foreign companies and 14% to NRI’s, OCB’s & FII’s 1999:- The Standing Committee headed by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority (IRDA) Bill 1999:- Cabinet clears IRDA Bill (IRA)
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2000:- President gives Assent to the IRDA Bill
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The nationalization of life insurance was justified mainly on three counts:1. It was perceived that private companies would not promote insurance in rural areas. 2. The Government would be in a better position to channel resources for saving and investment by taking over the business of life insurance. 3. Bankruptcies of life insurance companies had become a big problem (at the time of takeover, 25 insurance companies were already bankrupt and another 25 were on the verge of bankruptcy). The experience of the next four decades would temper these views.
Malhotra Committee Reports Although Indian markets were privatized and opened up to foreign companies in a number of sectors in 1991, insurance remained out of bounds on both counts. The government wanted to proceed with caution. With pressure from the opposition, the government (at the time, dominated by the Congress Party) decided to set up a committee headed by Mr. R. N. Malhotra (the then Governor of the Reserve Bank of India). Liberalization of the Indian insurance market was recommended in a report released in 1994 by the Malhotra Committee, indicating that the market should be opened to private-sector competition, and ultimately, foreign private-sector competition. It also investigated the level of satisfaction of the customers of the LIC. Curiously, the level of customer satisfaction seemed to be high. The union of the LIC made political capital out of this finding.
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The following are the purposes of the committee:1. To suggest the structure of the insurance industry, to assess the strengths and weaknesses of insurance companies in terms of the objectives of creating an efficient and viable insurance industry, to have a wide coverage of insurance services, to have a variety of insurance products with a high quality service, and to develop an effective instrument for mobilization of financial resources for development. 2. To make recommendations for changing the structure of the insurance industry, for changing the general policy framework etc. 3. To take specific suggestions regarding LIC and GIC with a view to improve the functioning of LIC and GIC. 4. To make recommendations on regulation and supervision of the insurance sector in India. 5. To make recommendations on the role and functioning of surveyors, intermediaries like agents etc. in the insurance sector. 6. To make recommendations on any other matter which are relevant for development of the insurance industry in India.
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The committee made a number of important and far-reaching recommendations:1. The LIC should be selective in the recruitment of LIC agents. Train these people after the identification of training needs. 2. The committee suggested that the Federation of Insurance Institute, Mumbai should. Start new courses and diploma courses for
intermediaries of the insurance sector. 3. The LIC should use an MBA specialized in Marketing (a similar suggestion for the GIC subsidiaries). 4. It suggested that settlement of claims were to be done within a specific time frame without delay. 5. The committee has several recommendations on product pricing, vigilance, systems and procedures, improving customer service and use of technology. 6. It also made a number of recommendations to alter the existing structure of the LIC and the GIC. 7. The committee insisted that the insurance companies should pay special attention to the rural insurance business. 8. In the case of liberalization of the insurance sector the committee made several recommendations, including entry to new players and the minimum capital level requirements for such new players should be Rs. 100 crores (about USD 24 million). However, a lower capital requirement could be considered for a co-operative sectors' entry in the insurance business. 9. The committee suggested some norms relating to promoters’ equity and equity capital by foreign companies, etc.
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Insurance Regulatory Act (1999) After the report of the Malhotra Committee came out, changes in the insurance Industry appeared imminent. Unfortunately, instability in Central Government, changes in insurance regulation could not pass through the parliament. The dramatic climax came in 1999. On March 16, 1999, the Indian Cabinet approved an Insurance Regulatory Authority (IRA) Bill that was designed to liberalize the insurance sector. The bill was awaiting ratification by the Indian Parliament. However, the BJP Government fell in April 1999. The deregulation was put on hold once again. An election was held in late 1999. A new BJP-led government came to power. On December 7, 1999, the new government passed the Insurance Regulatory and Development Authority (IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in 1956 and to the General Insurance Corporation in 1972. The authority created by the Act is now called IRDA. It has ten members. New licenses are being given to private companies (see below). IRDA has separated out life, non-life and reinsurance insurance businesses. Therefore, a company has to have separate licenses for each line of business. Each license has its own capital requirements (around USD24 million for life or non-life and USD48 million for reinsurance).
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Some Details of the IRDA Bill On July 14, 2000, the Chairman of the IRDA, Mr. N. Rangachari set forth a set of regulations in an extraordinary issue of the Indian Gazette that detail of the regulation. Regulations 1. It covers the Insurance Advisory Committee that sets out the rules and regulation. 2. Stipulates that the "Appointed Actuary" has to be a Fellow of the Actuarial Society of India. Given that there has been a dearth of actuaries in India with the qualification of a Fellow of the Actuarial Society of India, this becomes a requirement of tall order. As a result, some companies have not been able to attract a qualified Appointed Actuary (Dasgupta, 2001). The IRDA is also in the process of replacing the Actuarial Society of India by a newly formed institution to be called the Chartered Institute of Indian Actuaries (modeled after the Institute of Actuaries of London). Curiously, for life insurers the Appointed Actuary has to be an internal company employee, but he or she may be an external consultant if the company happens to be a non-life insurance company. 3. The Appointed Actuary would be responsible for reporting to the IRDA a detailed account of the company. 4. Insurance agents should have at least a high school diploma along with training of 100 hours from a recognized institution. More than a dozen institutions have been recognized by the IRDA for training insurance agents (the list appears online at http://www.irdaonline.org/press.asp).
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5. The IRDA has set up strict guidelines on asset and liability management of the insurance companies along with solvency margin requirements. Initial margins are set high (compared with developed countries). The margins vary with the lines of business (for example, fire insurance has a lower margin than aviation insurance). 6. The disclosure requirements have been kept rather vague. This has been done despite the recommendations to the contrary by the Mukherjee Committee recommendations. 7. All the insurers are forced to provide some coverage for the rural sector. (1) In respect of a life insurer, a) Five percent in the first financial year; b) Seven percent in the second financial year; c) Ten percent in the third financial year; d) Twelve percent in the fourth financial year; e) Fifteen percent in the fifth year (of total policies written direct in that year). (2) In respect of a general insurer, a) Two percent in the first financial year; b) Three percent in the second financial year; c) Five percent thereafter (of total gross premium income written direct in that year).
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New Entry Immediately after the passage of the Act, a number of companies announced that they would seek foreign partnership. In mid-2000, the following companies made public statements that they already were in the process of setting up insurance business with foreign partnerships. However, not all the partnerships panned out in the end. INDIAN COMPANIES WITH FOREIGN PARTNERSHIP 1. Indian Partner International Partner 2. Alpic Finance Allianz Holding, Germany 3. Tata American Int. Group, US 4. CK Birla Group Zurich Insurance, Switzerland 5. ICICI Prudential, UK 6. Sundaram Finance Winterthur Insurance, Switzerland 7. Hindustan Times Commercial Union, UK 8. Ranbaxy Cigna, US 9. HDFC Standard Life, UK 10. Bombay Dyeing General Accident, UK 11. DCM Shriram Royal Sun Alliance, UK 12. Dabur Group Allstate, US 13. Kotak Mahindra Chubb, US 14. Godrej J Rothschild, UK 15. Sanmar Group Gio, Australia 16. Cholamandalam Guardian Royal Exchange, UK 17. SK Modi Group Legal & General, Australia 18. 20th Century Finance Canada Life 19. M A Chidambaram Met Life
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1. HDFC Standard Life. This will be jointly set up by India's Housing Development Finance Company - the largest housing finance company in India and the Scotland based Standard Life. 2. Sundaram Royal Alliance Insurance Company. It is a partnership created by Sundaram Finance and three other companies of the TVS Group of Chennai (Madras) and the London based Royal & Sun Alliance. 3. Reliance General Insurance. This company is fully owned by Mumbai based Reliance Industries which has operations in textile, petrochemicals, power and finance industries. There are three other companies with "in principal" approvals: 1. Max New York Life. It is a partnership between Delhi based pharmaceutical company Max India and New York Life; the New York based Life Insurance Company. 2. ICICI Prudential Life Insurance Company. This is a joint venture between Mumbai based Industrial Credit & Investment Corporation and the London based Prudential PLC. 3. IFFCO Tokyo General Insurance Company. It is a joint venture between Indian Farmers' Fertilizer Cooperative and Tokio Marine and Fire of Japan. To date (end of April 2001), the following companies have thus been granted licenses: ICICI -Prudential, Reliance General, Reliance Life, Tata-AIG General, HDFC Standard Life, Royal-Sundaram, Max-New York Life, IFFCO-Tokio Marine, Birla- Sun Life, Bajaj-Allianz General, Tata-AIG Life, ING - Vyasa, BajajAllianz Life, SBI Cardiff Life. Note that all of these companies are either in the life insurance business or in the non-life insurance business. No license has been granted for reinsurance business so far (the size of the reinsurance business
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can be 10-20% of the total revenue). No stand-alone health insurance company has been granted license so far.
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Enter the Dragon
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On December 28, 2000, the State Bank of India (SBI) announced a joint venture partnership with Cardif SA (the insurance arm of BNP Paribas Bank). This partnership won over several others (with Fortis and with GE Capital). The entry of the SBI has been awaited by many. It is well known that the SBI has long harbored plans to become a universal bank (a universal bank has business in banking, insurance and in security). For a bank with more than 13,000 branches all over India, this would be a natural expansion. in the first round of license issue, the SBI was absent. There were several reasons for this delay. First, the SBI was seeking a foreign partner to help with new product design. Second, it did not want the partner to become dominant in the long run (when the 26% foreign investment cap is eventually lifted). It wanted to retain its own brand name. Third, it wanted a partner that is well versed in the universal banking business. This ruled out an American partner (where underwriting insurance business by banks have been strictly forbidden by law). Cardif is the third largest insurance company in France. More than 60% of life insurance policies in France are sold through the banks. Fourth, the Reserve Bank of India (RBI) needed to clear participation by the SBI because in India banks are allowed to enter other businesses on a "case by case" basis. Over the course of the next twelve months, the SBI will sell insurance in 100 branches. Over a period of 2-3 years it will expand operation in 500 branches. Initially it will hold 74% ownership of the joint venture company with Cardif. Over time, it will dilute its holding to 50-60%. The SBI entry is groundbreaking for several reasons. This was the first for a bank to
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enter the insurance market. This kind of synergy between a bank and an insurance company is extremely rare in many parts of the world. In Continental Europe, it is called bancassurance (in France) or allfinanz (in Germany). Second, even though the regulators have said that banks would not (generally) be allowed to hold more than 50% of an insurance company, the SBI was allowed to do so (with a promise that its share would be eventually diluted). Future: Swaraj with a Foreign Twist At present, 312 million middle class consumers in India have enough financial resources to purchase insurance products like pension, health care, accident benefit, life, property and auto insurance. Only 2.5 per cent of this insurable population, however, has insurance coverage in any form. The potential premium income is estimated at around US $80 billion. This will place India as the sixth largest market in the world (after the US, Japan, Germany, UK and France). Lessons from China China is the most populous country in the world (at 1.2 billion); India is a close second (just over a billion). Both have followed the path of deregulation and privatization - China started it in 1979 and India in 1991. The insurance business in India has a premium volume of $8.3 billion in 1999 whereas in China the premium volume is $16.8 billion in 1999. However, premium per capita is not all that dissimilar: $13.7 per person in China and $8.5 in India in 1999. As a percent of GDP, insurance is 1.93% in India and 1.63% in China in 1999 (all data from Sigma, 2000). In China, the People's Insurance Company of China (PICC) had a monopoly between 1949 and 1959. In 1959, insurance business was deemed capitalistic and all forms of insurance were suspended (and the insurance business was
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taken over by the Peoples Bank of China). The insurance business reopened in 1979, the PICC reassumed its old role as the monopoly. There are many differences in the way China and India have handled deregulation. First, in China, the China Insurance Regulatory Commission (CIRC) was set up in November 1998, well after the first Insurance Law was promulgated in 1995. In India, the IRDA was launched first with the authority to issue licenses. It took almost a year before it issued licenses for the first set of private insurance companies. Second, in China, foreign insurers need to have a representative office for three years before they can submit a proposal for operation. In India, there is no such requirement. Third, foreign insurers can only own 25% of the total value of the market. In India, the limit is set at 26% per company. In China, there is no limit at the company level. Thus, a foreign company can own 100% of an approved insurance company in China. Fourth, in India, the licenses are national. A company with a license can operate in any part of the country. In China, on the other hand, foreign companies are restricted to operation in two metropolitan areas: Shanghai and Guangzhou. Fifth, the IRDA is a law-implementing body. It can only interpret the laws that have been passed by the Indian Parliament. On the other hand, it seems that the CIRC has been a lawmaking body, it is setting up rules as it sees fit. Sixth, China seems to have been forced to issue insurance licenses to a host of foreign companies by the end of 2000 simply because it wanted an assured entry into the World Trade Organization (WTO). In India, there is no such pressure as India is already a part of the WTO.
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Areas of Future Growth Life Insurance The traditional life insurance business for the LIC has been a little more than a savings policy. Term life (where the insurance company pays a predetermined amount if the policyholder dies within a given time but it pays nothing if the policyholder does not die) has accounted for less than 2% of the insurance premium of the LIC (Mitra and Nayak, 2001). For the new life insurance companies, term life policies would be the main line of business. Health Insurance Health insurance expenditure in India is roughly 6% of GDP, much higher than most other countries with the same level of economic development. Of that, 4.7% is private and the rest is public. What is even more striking is that 4.5% are out of pocket expenditure (Berman, 1996). There has been an almost total failure of the public health care system in India. This creates an opportunity for the new insurance companies. Thus, private insurance companies will be able to sell health insurance to a vast number of families who would like to have health care cover but do not have it. Pension The pension system in India is in its infancy. There are generally three forms of plans: provident funds, gratuities and pension funds. Most of the pension schemes are confined to government employees (and some large companies). The vast majority of workers are in the informal sector. As a result, most workers do not have any retirement benefits to fall back on after retirement. Total assets of all the pension plans in India amount to less than USD 40 billion.
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Therefore, there is a huge scope for the development of pension funds in India. The finance minister of India has repeatedly asserted that a Latin American style reform of the privatized pension system in India would be welcome (Roy, 1997). Given all the pros and cons, it is not clear whether such a wholesale privatization would really benefit India or not. Other Non-Life Insurance The flurry of activities of the new companies in the life insurance market has not been repeated in other types of insurance. The reason is basic: lack of data. Unless the new companies have access to reliable data on accidents of different kinds under Indian conditions, it would be hard to offer a competitive menu of policies.
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RECESSION 2009 Global recession is not likely to rock the Indian insurance industry in a big way; therefore, there is nothing to panic about, says a Senior Research Analyst at RNCOS. However, most of the life insurance players are expecting their new business premium collection to ease down in the remaining financial year. Citing reason for the moderation in premium collection, analyst stated that consumer sentiments are affecting the insurance industry because most of the prospective customers are putting their buying plans on hold. However, buying insurance products is a long-term investment and the ongoing crisis is not going to impact the returns on the assets. Low consumer sentiments are signaling just a temporary phase and likely to continue for another six to nine months, and thus, things will be different by this time next year. Moreover, the Indian insurance market has joined the league of the fastest growing insurance markets in the Asian region, with the total insurance premium projected to grow at a CAGR of more than 50% between 2008-09 and 2010-11. A new research report - “Booming Insurance Market in India (2008-2011)” from RNCOS - also says that the Indian insurance industry will show upward trend in future as it has displayed in the last few years owing to large population and vast untapped market. After analyzing the growth potential of the Indian insurance market, the report says that many foreign investors have shown interest in the industry because the markets in most of the developed countries have reached saturation. Thus, foreign players have turned their attention to the emerging economies, and India is more lucrative as compared to other emerging economies, with more
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favorable environment for insurance expansion as the country has low insurance penetration.
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CAPITAL MARKET REFORMS
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Capital market is vital for the development and strength of economy. A strong and vibrant capital market assists corporate world initiatives, finance and exploration of new processes and instruments facilitates management of financial risk. Investor i.e. individual investor, mutual funds, Foreign Institutional Investor and insurance companies place their money in various instruments of capital market. They are the soul of the capital market. An investor is very much needed because he is the major (rather the only) source of providing risk capital. As portfolio manager fill their baskets on the basis of subjective evaluation of scrip and FIIs are busy in pocketing profit by only investing in profitable companies. Hence none of them is interested in injecting much needed risk capital. Thus the task is only left to retail investors. With the globalization of economy, scams and anomalies are also multiplies. After various scams in related to security market (like 1992 scam of Harshad Mehta, JVG scam etc.) the level of investment volume and number of investors is continuously declining due to the following reasons. 1. Whenever any retail investor faces an institutional failure he does not get help from any quarter and has to accept it as a bad luck. 2. The scams remain under investigation with no concrete steps taken against default companies. 3. Regulators only highlight the value addition of new intermediaries, new instruments and new system of trading but nobody discloses inherent risk.
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Therefore, in a global environment, capital market regulator assumes more significance and regulator has to be dynamic and responsive to changes. There is often no single regulatory approach to an issue. Several instruments may bring desired results. The most important issue kept in mind is investor’s interest. Regulation is not a static and it is vary dynamic one. Capital market is a fulcrum consisting of investor, intermediaries, companies, self regulatory organization (SROs), exchange facilitators and regulators. Therefore, regulators fine tune their policies towards encouraging and protecting investors. The prospect of any market is investor’s confidence. An informed investor always contributes to the orderly development of market. Regulatory organization should empower investor and also enable them to make informed decisions in the capital market.
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Primary market Reforms
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For the fulfilment of the basic task of securities market to help in process of capital formation in the economy, this can only is possible by series of systematic measures which would build their confidence in the systems and processes and protect their interest fully. The rising of capital issues were controlled by the office of the controller of capital issues (CCI) established under the capital issues control Act-1947. The Capital Issues Control Act-194, repealed, office of the controller of capital issues abolished and initial share pricing decontrolled. In 1991-92 Finance Minter announced the repeal of the act and transfer of powers from CCI to SEBI from control to disclosure based regulation. The SEBI, the capital market regulator, established in 1992, the primary function of SEBI is to regulate the capital market and protect the interest of the investors. The other important functions of SEBI are:
? Regulating the business in stock exchanges and any other securities
markets.
? Registering and regulating the working of collective investment schemes,
including mutual funds.
? Prohibiting fraudulent and unfair trade practices relating to securities
markets.
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Therefore SEBI put some guidelines they are:
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1. Disclosure and Investor Protection (DIP) guidelines: as per this regulation all the information pertaining to and available with an issuer is provided so as the investor takes an informed decision whether to invest or not to invest. 2. Eligibility Criteria for issuers (DIP-2000): Companies eligible to make an issue can decide on their standard denomination and price of a security. Some parameters that need to be in offer documents are minimum holding by promoters, size of public issue, issue expenses, information disclosure and advertisement etc. 3. Transparency: SEBI makes available all the offer documents filed with it on its website and also through process release. Companies are invited from the public within 21 days of filing. 4. Free Pricing of Securities: issuer is free to determine the level of security price. The process of Book-building helps discover price and assist small investor to take an investment decision. 5. Number of Financial Instruments: issuer would like to have an optimum capital structure that reduces cost of capital. Today Indian capital market consists of almost all financial products available in most of the developed capital market, thus the choice to both issuer and investor has become wider.
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6. Issue process: Following process is used in the Indian capital market:
? Public issue – an invitation by a company to public to subscribe to
the securities offered through prospects.
? Right Issue- issue of capital under Sec-I (81) of Companies act
1956 to be offered to existing shareholders.
? Offer for Sale- it refers to securities by existing shareholder of a
company to the public for subscription.
? Book-building- it refers to a process of ascertaining demand for and
price of securities through bids, before the actual issue. Book building process is mandatory when the company doses not have track record for three out of preceding five years. 60% allotment to qualified institutional buyers is mandatory under the book building process.
? Compulsory Demat- All Initial public offerings will be compulsory
traded in dematerialized form. But the investors have been allowed to exercise option of either subscribing to securities in its physical or dematerialized form.
? Employee stock option – means option given to the whole time
employee of a company right to purchase or subscribe securities at a future date.
? Buy-back – section 77 (A) companies act and SEBI regulation are
allowed companies to buy back of share to enhance the wealth of shareholder.
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7. Prohibiting insider trading in securities, with the imposition of monetary penalties, on eroding market intermediaries. 8. Foreign Institutional Investors are allowed to invest in Indian capital markets after registration with the SEBI. 9. Indian companies permitted to access international capital markets through Euro issues. 10. The National stock exchanges, (NSE) with nationwide stock trading and electronic display, clearing and settlement facilities, established several regional stock exchanges change over from floor based grading to screen based trading.
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Secondary Market Reforms Several reforms have been introduced in stock exchange administration, security trading, settlement, delivery V/s Payment, security transfer, trading in derivatives, investor protection fund etc. are explained in the following paragraphs. 1. Stock exchanges: Membership of governing boards of stock exchanges was changed to include 50% outside (non-broker) representatives. SEBI has constituted a group to review and examine the present structure of stock exchanges and examine the legal and financial issues involved in demutualising stock exchanges. 2. Depth and Breadth in the market: India has a unique distinction of having highest number of companies listed on the stock exchanges. But all companies’ shares are not traded. Policy makers have to explore new options to increase depths and breadth in the Indian stock exchanges. 3. Dematerialization: Power was granted to SEBI to register and regulate depositories and custodians through an amendment to SEBI Act in 1995. There has been substantial progress in dematerialization. Number of companies available for Demat with NSDL has increased from 23 in 1997 to 4172 in 2002. 4. Institutionalization: Indian capital market was dominated by individual investors till early part of the 1990’s. Earlier institutional investor like LIC, GIC, DFIs, banks etc. used to take minor role. SEBI permitted private funds, Non-resident Indians, NBFCs and overseas corporate
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bodies to trade in securities. Of the above mentioned only three classes of investors are very active, individuals, mutual funds and FIIs.
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5. Development of Financial infrastructure: It involves development of informed investor class, legal and regulatory environment, institutional investors, world class security trading and payment and settlement systems. It also includes promoting investor associations, SROs, setting up of depository’s surveillance system. As another step towards this SEBI has introduced new financial instruments. 6. Derivatives: These can play a vital role in promoting market efficiency through better price discovery and risk transfer. SEBI granted approval to NSE and BSE to start trading in index futures contract in April 2000 and May 2000 respectively. SEBI also approved the proposal of NSE and BSE to start trading in index options contracts in June 2001.
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SEBI Efforts towards Investors’ Education
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1. It has launched intensive investor education exercises. 2. Help investor in redressal of complaints. 3. Disseminates information through its websites. 4. Published number of booklets on policy developments for educating the investors. 5. It distributed booklets titled “A quick reference guide for investor”. 6. Issued a series of advertisements/ public issues in national as well as regional news papers to educate and caution the investor about the risks associated with the collective investment schemes. 7. SEBI registered investor associations organized seminars for educating investors on various aspects relating to market. In the reform process it is clearly defined the various authorities that will be accountable for and will be redressing various kinds of the grievances. Some other steps for investors’ grievances redressed are;
? Investor Grievances Cell. ? Investor Protection Fund. ? Investor Service Fund. ? Complaints with consumer’s disputes redressal forums suits in the
court of law.
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8. Investor empowerment: timely available of quality and reliable information increases confidence of the investor. Over the past one decade many regulatory requirements have been imposed on issuers to disclose relevant information to public. Thus investor’s empowerment has become possible. 9. Transparency: Market transparencies refer to the ability of market participants to observe information about the trading process. Information can include prices volumes, sources of order, identification of counter party to trade etc. 10. Mutual Funds: the period between1987-1992 witnessed the broadening of the base of the industry by the entry of mutual funds sponsored by nationalized banks and public financial institutions. SEBI has been empowered to regulate mutual funds.
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SEBI Regulation for Stock Brokers
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1. SEBI act 1992 issued regulation for stock brokers in India. 2. Need for Minimum educational qualification.
? Regulation 3 every stock broker of an exchange can apply for grant
of SEBI registration.
? No qualification prescribed for registration as trading member,
clearing member, self clearing member 16A (1) and (2).
? To make the system to stand of its own qualification required.
3. Time limit to process the applications
? Regulation 3 stock exchanges to forward application within 30
days to SEBI.
? No time limit for SEBI to accept or reject. ? Only time limit is refusal to be communicated within 30days of
decision to reject. 4. Daily marking –to-Market: Regulation 16 © 3 and 4 which require the clearing and self clearing members- net worth of at least Rs.50 lacs or 100 lacs. 5. Time limit for SEBI orders in case of default by stock brokers: Regulation 25 default by a stock broker dealt under enquiry and penalty regulations. No time limit for SEBI to pass orders. 6. Clarify the issues leading to conflict of interest: in the event of a conflict interest, the broker shall not consider clients’ interest inferior to his own.
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REFORMS IN MANUFACTURING SECTOR
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India have identified three important growth phases. The early years of Indian planning, from 1950 to the mid-1960s, constitutes the first growth phase. Indian industry grew at respectable rates during this period. In the second growth phase between the mid-1960s and the late 1970s, Indian industry experienced a long period of stagnation. The third phase began with India’s industrial sector staging a revival of growth in the 1980s. India's industrial policy framework began to be liberalized from the late 1970s, and this process accelerated with the major economic reforms initiated in the year 1991. The measures to liberalize India’s industrial policy framework from the late 1970s included deregulation and delicensing in certain industries, according a greater role to the private sector, and a gradual shift from direct physical controls to indirect controls. Wide
ranging measures for economic liberalization were initiated in India after 199192. According to Ahluwalia, the changes that the reforms after 1991 brought in were “fundamental” in nature compared to the “marginal” changes only in the previous decade. Import licensing was done away with for most goods except consumer goods; import-weighted tariff declined to 27 per cent from the pre-1991 level of 87 per cent; and exchange rates were devalued by 20 per cent. Many have argued that industrial deregulation and liberalization have opened up greater opportunities for growth. In India, registered factories comprise all factories that employ more than ten workers and operate with the aid of electric power as well factories that employ more than twenty workers without the aid of electric power. All registered factories constitute the factory sector. Manufacturing activities of registered factories are classified under registered manufacturing. All other manufacturing activities are classified under unregistered manufacturing. Annual Survey
of Industries (ASI) published by the Central Statistical Organization (CSO) is the major source of statistics on registered factories.
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Industrialization in India has not been successful as regards generation of
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employment. Many scholars have written on the failure of Indian industry to provide employment to the large labour reserves in the country. Even in 2000-01, the total number of workers employed in India’s factory sector was only 8 million. Factory sector employment was just 1.98 per cent of India’s total working population of 402 million in 2001. Factory sector also accounted for only 15.6 per cent of the 51 million employed in the manufacturing sector. The rest of the manufacturing employees worked in the unregistered manufacturing sector. Studies have shown that the bulk of unregistered manufacturing in India employ traditional technologies. Also, workers in the unregistered manufacturing sector survive largely under exploitative and poor working conditions. India’s manufacturing sector output has grown at relatively fast rates from the 1980s. However, on a closer analysis, we find many signs of weaknesses in India’s post-1980 manufacturing growth experience. First, annual rate of
growth of manufacturing incomes in India is seen to have declined in the period between 1991-91 and 2004-05 compared to the period between 1980-81 and 199091. If we consider manufacturing sector growth in the whole period after 1991-92, a clearer picture emerges. Growth over the previous year of manufacturing sector in India was negative in 1991-92 and only 4.1 per cent in 1992-93. Year-on-year growth of manufacturing sector rose to very high levels in the next three years, peaking at 14.9 per cent in 1995-96. These were also the initial years of liberalization in India. However, India’s manufacturing sector entered a period of relative stagnation in growth in the period between 1996-97 and 2001-02. Growth of manufacturing sector appears to have climbed to higher levels again after 2002-03. Secondly, the post-1980 period has had a poor record in employment generation. The 1980s is often called the decade of "jobless growth" in Indian
manufacturing. The revival in growth of output witnessed in this period was not accompanied by adequate generation of employment. Only 484,000 jobs were generated in India's registered factory sector between 1979-80 and 1990-91. Several explanations have been offered. It is argued that labour retrenching
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was difficult after the introduction of job security regulations in the late 1970s, and this forced employers to adopt capital-intensive production techniques. According to another view, capital-intensive techniques were adopted because of the increase in real wages in the 1980s. According to Nagaraj (1994), the "overhang" of employment that existed in the 1970s was intensively used in the 1980s, thus generating only a few additional employment opportunities in the later decade. Compared to the 1980s, manufacturing growth in the 1990s was more employment generating. 1763,000 new jobs were created in India's registered manufacturing between 1991-92 and 1997-98 compared to 484,000 jobs only in the earlier decade. Goldar (2000) attributes two major reasons for this positive change: slowdown in growth of real wages and faster growth of small and medium-sized factories, which are more labour intensive than large sized factories. Nagaraj (2000)
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contested the views of Goldar, and argued that faster employment generation in the 1990s was due to the investment boom in that decade. At the same time, Nagaraj (2001) pointed out that faster employment generation in the 1990s was only in registered manufacturing, whereas the unregistered sector witnessed negative employment growth between the mid-1980s and mid-1990s. This is an important finding because almost 3/4th employment is in the unregistered sector. There is clear evidence of a decline in manufacturing employment in India in recent years. Factory sector employment in India was 10.1 million in 1997-98 but it declined to 7.9 million in 2003-04. Correspondingly, employment in India’s organized sector (of which factory sector is a component) declined from 28.2 million in 1997-98 to 26.5 million in 2003-04. India’s experience with respect to generation of factory employment between 1981-82 and 2003-04. Growth of employment in India’s factory sector was stagnant in the 1980s, showed some improvement in the 1990s, but declined again after 1997-98.
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of India’s manufacturing
Thirdly, there has also been a slowdown in the growth of the number of factories in
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India’s factory sector in the post-1980 compared to the decades before that. The generation of new firms within the factory sector has been especially slow since the mid-1990s. At the same time, there are signs of growing capital and skill intensity within the factory sector in India, and this is the fourth major aspect of the post-1980 manufacturing growth experience. As fixed capital per employee and fixed capital per factory show a constantly upward trend. The rise in capital intensity has been more rapid after the 1980s. A decline in the number of workers per factory and a simultaneous increase in the number of supervisors per factory is a good indicator of the growth of capital and skill intensity in India’s factory sector . Number of workers per factory in India’s factory sector declined from 80 in the late 1950s to 70 in the late 1960s. Between 1985-86 and 1997-98, number of workers per factory ranged between 58 and 56, after which this number fell sharply to 47 in 2003-04. Between 1985-86 and 1995-96, number of supervisors per factory increased from 16 to 18; this number subsequently declined to 13 by 2003-04. There has been a growing divergence between the real earnings of workers and supervisors in India’s factory sector. Average wages of workers have been rather stagnant from the 1980s, whereas average salaries of supervisors have grown much faster. Therefore, an analysis of data from the factory sector indicates that generation of employment and growth of new firms have been stagnant from the 1980s. At the same time, output growth has been fast from the 1980s except for a period of slow growth between 1996-97 and 2001-02. There has also been increasing capital and skill intensity in India’s factory sector. The dichotomous nature of India’s manufacturing sector can be understood fully only through a thorough analysis of the unregistered sector. We have not attempted this in the present paper. Yet, a plot of incomes from registered and unregistered sectors over the period from 1950-51 to 2002-03 clearly indicate a growing divergence in growth of incomes from the registered and unregistered sectors.
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The unregistered sector consisting small-scale enterprises are lagging behind in growth especially after the 1980s. The rest of this paper attempts to understand how financial sector reforms in India, which gained momentum from the 1990s, contributed to the dichotomous nature of growth in India’s manufacturing sector
CREDIT POLICY REFORMS AND THEIR IMPACT ON INDUSTRIAL GROWTH How has the monetary policy fared with respect to increasing credit availability in the Indian economy, particularly for the industrial sector? After all, the key objective of the monetary- fiscal reform package in India was to restrict the flow of bank’s funds to the Government by fiat and thereby free a larger volume of resources for credit creation. Over the years after 1993-94, the gap between deposit rates and lending rates has also come down in India. However, the Indian experience, so far, with respect to increasing credit creation in the economy has not been very encouraging. First, RBI (2003) points out that the “simultaneity of the processes of money and credit creation” was weakened in India during the 1990s. As the share of foreign assets of the banking sector in M3 rose, the share of domestic credit in M3 correspondingly declined: from 115.7 per cent in 1989-90 to 89.6 per cent in 2001-02. More importantly, even after the monetary-fiscal reforms, net bank credit to the Government as a proportion of total domestic credit did not decline in the 1990s compared to the 1980s and 1970s. Although the net Reserve Bank support to the Government declined, investments by the banking system in government securities showed an upward trend. Therefore, even as SLR was brought down to 25 per cent, scheduled commercial banks’ investments in government securities increased from 25.3 per cent of deposits
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as in March 1990 to 37.3 per cent of deposits in March 2002 – that is, almost 12 percentage points above the statutory requirements. At the same time, credit disbursed by scheduled commercial banks showed a deceleration in growth during the years between 1996-97 and 2001-02 (growing at 15.1 per cent compared to 19.5 per cent during the years between 1992- 93 to 1995-96) Several factors originating from demand and supply side have been attributed to the slowdown in bank credit in the second half of the 1990s. On the supply side, banks have been highly risk averse in regard to expanding their loan portfolio. The introduction of prudential norms in the mid-1990s, which revealed relatively high level of non-performing assets (NPAs) with banks, and the revised requirements of capital adequacy ratio (8.7 per cent at end-March 1996) were factors that limited bank’s ability to lend. Given the constraints they faced, banks found that government securities, which offer risk- adjusted returns, are an attractive option for investments. Consequently, banks’ investments in government securities continued to rise even after the withdrawal of SLR requirements. At the same time, there were many demand-side factors too that constrained credit expansion of banks. During the latter part of the 1990s, India’s corporate sector was facing intense competitive pressures and, as a consequence, focussed its energies on restructuring rather than expansion of existing capacities. As part of their restructuring plans, Indian firms began to meet their financing needs increasingly through retained earnings and less through borrowings. Improvements in corporate profitability during this period also aided this trend. Debt-equity ratio of the corporate sector declined from an average of 85.5 per cent during the period from 1990-91 to 1994-95 to 65.2 per cent during the period from 1995-96 to 1999-2000. Another reason for the slow growth of credit demand was the rise in real interest rate.
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Despite the reduction in CRR, bank rate and reverse repo rate measures that were part of an accommodative monetary policy pursued by RBI -- nominal interest rates in India refused to climb down. This along with the falling inflation rate resulted in rising real interest rates. Industrial slowdown during the period from 1996-97 to 2001-02 was another reason for the reduced demand for bank credit during this period . India’s corporate firms now have improved access to the domestic and international capital markets, and this is yet another factor behind the slow growth of demand for bank credit. Indian companies have raised large capital through the issue of commercial paper, external commercial borrowings (ECBs), global depository receipts (GDRs) and American depository receipts (ADRs) . As, credit channelled to the industrial sector was at a slower pace during the 1990s and through the period 2000-01 to 2004-05 compared to the 1980s. As a proportion of total outstanding credit, credit extended to the industrial sector fell down considerably, from 48.7 per cent as in March 1990 to 38.8 per cent in March 2005. There was a similar decline in agriculture’s share in total outstanding credit . It is important to note that while the shares of agriculture and industrial sectors in total bank credit in India declined
between 1990 and 2005, the corresponding share of personal loans and professional services showed an increase, from 9.4 per cent to 27 per cent. Especially noteworthy is the fast growth of housing loans during this period, whose share in total credit rose from 2.4 per cent in March 1990 to 11 per cent in March 2005. There was a significant drop in credit channelled to the priority sectors.
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As a proportion of non-food gross bank credit, priority sector advances declined from 40.1 per cent in March 1990 to 36.3 per cent in March 2006. Within the priority sector advances, the share of agriculture fell from 40.9 per cent in March 1990 to 33.8 per cent in March 2006. Going by various indicators, it is clear that credit flow to the small scale industry (SSI) sector has clearly decelerated in recent years. Average annual growth of advances to the SSI sector slowed down from 13.6 per cent during the 1990s to 9.5 per cent during 2001-06. The share of the SSI sector in total priority sector advances fell from 44 per cent in March 1998 to 18 per cent in March 2006. The proportion of SSI credit in net bank credit (NBC) was 15.7 per cent in March 1990 but declined to 8.6 per cent in March 2004.
OVERVIEW OF INDIAN MANUFACTURING SECTORS India is fast emerging as a global manufacturing hub. India has all the requisite skills in product, process and capital engineering, thanks to its long manufacturing history and higher education system. India's cheap, skilled manpower is attracting a number of companies, spanning diverse industries, making India a global manufacturing powerhouse. India with its vast design skills has attracted a lot of outsourcing technological orders. According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009, India ranks among the top 12 producers of manufacturing value added (MVA). In textiles, the country is ranked fourth after China, USA and Italy, while in electrical machinery and apparatus, it is
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ranked fifth. It holds sixth position in the basic metals category; seventh in chemicals and chemical products; 10th in leather, leather products, refined petroleum products and nuclear fuel; twelfth in machinery and equipment and motor vehicles. India's manufacturing sector is on an uptrend with the majority of sectors recording positive trends in the first half of fiscal year 2009-10, as compared with the corresponding period in 2008-09, according to a Confederation of Indian Industry (CII) survey. The buoyant manufacturing growth in the first half is led by a rise in production of basic goods, intermediate goods and consumer durables. Quarterly estimate of GDP for July-September (Q2) 2009-10, according to data released by the Central Statistical Organisation (CSO), for manufacturing stood at US$ 46.42 billion at current prices, 9.4 per cent higher than during the same period in 2008-09. The Indian economy clocked a robust 7.9 per cent growth in the second quarter (Q2) ended September 2009, catapulted by a stimulus packages-powered strong industrial growth. Manufacturing sector grew by 9.2 per cent in Q2 of 2009-10 against 4.9 per cent in Q2 of 2008-09, according to the latest CSO estimates available on the Index of Industrial Production (IIP). Growth Trends Major indicators Nomura's Composite Leading Index (CLI), UBS' Lead Economic Indicator (LEI) and ABN Amro' Purchasing Managers' Index (PMI), variety of indices that track activity in vital economic sectors, indicate an upward trend in economy owing to growth in the manufacturing sector.
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The HSBC Markit Purchasing Managers' Index (PMI), the most reliable indicator of manufacturing activity in the country based on a survey of 500 companies, climbed to its highest level in one-and-half years to 57.6 in January, 2010. The index had stood at 55.6 in December 2009. Companies reaped the benefit of increasing new orders which led them to step up their production levels. According to the HSBC Markit report, Indian manufacturers sharply raised their output levels during the month in line with the increase in new orders and the latest gains have been above the pre downturn averages. "The pick-up in exports is extremely heartening and it does point towards a sustainable trend of growth in manufacturing. Growth in industrial output will stay in double digits till the end of this financial year (2009-10) and the encouraging bit is that the composition of lead indicators of the economy are now becoming more and more broad- based," said Jyotinder Kaur an economist with HDFC. Exports from special economic zones (SEZs) rose 33 per cent during the year to end-March 2009, far outpacing the country's overall exports growth of just 4 per cent, according to the Commerce Department. According to the data, exports from such tax-free manufacturing hubs totalled US$ 18.16 billion last year. Between April to June 2009, exports from SEZs totalled US$ 8.7 billion.
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LG is looking at making India its global manufacturing hub for its mobile handsets. The company will soon be exporting mobile phones to Europe and the Commonwealth Independent States (CIS) from India.
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Luxury brands like Louis Vuitton and Frette are looking at India as a manufacturing base for their products.
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Aircraft manufacturer, Airbus is considering India as one of the key centres for design and development of its long haul A 350 plane.
FINANCIAL SECTOR REFORMS 2009
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Samsung plans to invest US$ 100 million over a period of four years in its manufacturing plant near Chennai and make it its global hub.
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Hyundai has made India the manufacturing and export hub for its small cars. The i10 is being manufactured only in India and exported to the world. India is Hyundai's largest base outside Korea.
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Suzuki too is making India its manufacturing hub for small cars. The Ritz is being manufactured solely in India and exported to Europe.
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Taiwan-based Feng Tay Group which is setting up a US$ 61.5 million footwear manufacturing unit in its own SEZ in Tamil Nadu plans to invest an additional US$ 41 million.
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Panasonic India plans to invest US$ 100 million in its new plasma TV production facility in 2011.
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GE Healthcare is drawing up plans to grow its India business and develop the country as a global hub for manufacturing low-cost medical devices.
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Volkswagen AG will make India a low-cost manufacturing hub catering to select export markets. Volkswagen will export from the second quarter of next fiscal fully-built models and completely knocked-down kits of its hatchback, Polo, to South East Asia, Middle East and Africa from its Pune plant.
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REFORMS IN IMPORT SECTOR
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The import sector of Indian economy is one of the most important sector of India's economic health. The performance of the import sector of Indian economy determines the Export policy of India and most importantly the export import policy of India. Further, it is one of the most important part of the India's foreign trade policy. The current EXIM policy of India covers policy statements for the period covering 2002 to 2007. The basic laws that governs the import sector of Indian economy are as follows
? Imports shall be free, except in cases where they are regulated by the
provisions of this Policy or any other law for the time being in force
? The item wise import policy shall be, as specified in published and
notified by Director General of Foreign Trade, as amended from time to time.
? Every importer shall comply with the provisions of the Foreign Trade
(Development and Regulation) Act, 1992, the Rules and Orders made there under, the provisions of this Policy and the terms and conditions of any license / certificate / permission granted to him, as well as provisions of any other law for the time being in force.
? All imported goods shall also be subject to domestic Laws, Rules, Orders,
Regulations, technical specifications, environmental and safety norms as applicable to domestically produced goods.
? No import of rough diamonds shall be permitted unless the shipment
parcel is accompanied by Kimberley Process Certificate required under the procedure specified by the Gem & Jewelery Export Promotion Council.
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? Duty credit allowed for import of capital goods, spare parts, office
equipment, office furniture and consumables that are importable under ITC (HS). Such imports cover all items of the service sector.
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? The Customs Act of India governs the process of levying of tariffs on
imports and frames the rules and it also specifies the tariffs rates and provides for the imposition of anti-dumping and compensation charges.
? Tariff rates, excise duties, regulatory duties are revised in each annual
budget of India.
? Total duties on imports now consist of basic duty which ranges from zero
to 65% plus additional or countervailing duties.
? On manufactured "luxury" items, total import taxes may amount to
whooping 150%.
? Import duties are product specific and can be revised in mid-year.
The latest export import policy of India have led to growth of India's Import on the following lines – The Government of India latest export policy for the exporters will help in stabilizing the export growth levels attained in the 1st quarter of 2007-2008. The Indian imports shoot up by 34.30% during the 1st quarter of 2007-2008. Today, India ranks second in the manufacture of small passenger car segment. It is the world largest producer of generic pharmaceutical and its Information Technology sector is registering three figure growths consistently. Moreover, it is the most preferred destination for business process outsourcing. The world's knowledge process outsourcing business is valued at US$ 15 billion out of which US$ 12.5 billion worth of business is expected to be outsourced to India alone by 2010. According to reports, productivity growth rate of Indian economy is estimated to be around 8% and above until 2020.
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Foreign Trade Policy of India
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To become a major player in world trade, a comprehensive approach needs to be taken through the Foreign Trade Policy of India. Increment of exports is of utmost importance, India will have to facilitate imports which are required for the growth Indian economy. Rationality and consistency among trade and other economic policies is important for maximizing the contribution of such policies to development. Thus, while incorporating the new Foreign Trade Policy of India, the past policies should also be integrated to allow developmental scope of India’s foreign trade. This is the main mantra of the Foreign Trade Policy of India. Objectives of the Foreign Trade Policy of India Trade propels economic growth and national development. The primary purpose is not the mere earning of foreign exchange, but the stimulation of greater economic activity. The Foreign Trade Policy of India is based on two major objectives, they are – 1. To double the percentage share of global merchandise trade within the next five years. 2. To act as an effective instrument of economic growth by giving a thrust to employment generation.
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Strategy of Foreign Trade Policy of India
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Removing government controls and creating an atmosphere of trust and transparency to promote entrepreneurship, industrialization and trades. Simplification of commercial and legal procedures and bringing down transaction costs. Simplification of levies and duties on inputs used in export products. Facilitating development of India as a global hub for manufacturing, trading and services. Generating additional employment opportunities, particularly in semi-urban and rural areas, and developing a series of ‘Initiatives’ for each of these sectors. Facilitating technological and infrastructural up gradation of all the sectors of the Indian economy, especially through imports and thereby increasing value addition and productivity, while attaining global standards of quality. Neutralizing inverted duty structures and ensuring that India's domestic sectors are not disadvantaged in the Free Trade Agreements / Regional Trade Agreements / Preferential Trade Agreements that India enters into in order to enhance exports. Up gradation of infrastructural network, both physical and virtual, related to the entire Foreign Trade chain, to global standards. Revitalizing the Board of Trade by redefining its role, giving it due recognition and inducting foreign trade experts while drafting Trade Policy. Involving Indian Embassies as an important member of export strategy and linking all commercial houses at international locations through an electronic platform for real time trade intelligence, inquiry and information dissemination. Partnership -
Foreign Trade Policy of India foresees merchant exporters and manufacturer exporters, business and industry as partners of Government in the achievement of its stated objectives and goals.
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REFORMS IN EXPORT SECTOR
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During the Five Years Plans initiated in the 1950s, the economic reforms of India somewhat followed the democratic socialist principle with more emphasis on the growth of the public and rural sector. Most of the policies were meant towards the increase of exports compared to imports, central planning, business regulation and also intervention of the state in the finance and labor markets. Economic Reforms during 1960s and 1980s During the mid 1960"s effort was made to make India self sufficient and also increase the production and export of the food grains. To make the plan a success, huge scale agricultural development was undertaken. The government initiated the ‘Green Revolution’ movement and stressed on better agricultural yield through the use of fertilizers, improved seed and lots more. New irrigation projects were undertaken and the rural banks were also set up to provide financial support to the farmers. Economic Reforms during 1990s to the present times Due to the fall of the Soviet Union and the problems in balance of payment accounts, the country faced economic crisis and the IMF asked for the bailout loan. To get out of the situation, the then Finance Minister, Manmohan Singh initiated the economic liberation reform in the year 1991. This is considered to be one of the milestones in India economic reform as it changed the market and financial scenario of the country. Foreign investments have come in various sectors and there has been a good growth in the standard of living, per capital income and Gross Domestic Product. Due to the global meltdown, the economy of India suffered as well. However, unlike other countries, India sustained the shock as an important part of its financial and banking sector is still under government regulation. Nevertheless, to cope with the present situation, the Indian government has taken a number of decisions like strengthening the banking and tertiary sectors, increasing the quantity of exports and lots more.
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OVERVIEW OF INDIAN ECONOMY
• The Indian economy is set to grow between 7 per cent and 7.5 per cent in the current fiscal, according to Dr C Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council (PMEAC). The mid-year review has projected a growth rate of 7.75 per cent for the fiscal. • India's local currency rating outlook has been raised to ‘positive' from ‘stable' by Moody's Investors Service on the back of the country's demonstrated resilience to the global crisis and expectation that it will resume its high growth path. • The government has taken a number of steps in recent months to revive the economy, including slashing interest rates, lowering factory levies and more than doubling the limit on foreign investment in corporate bonds. • Qualified Institutional Placements (QIPs) QIP is a capital raising tool, whereby a listed company can issue equity shares, fully and partly convertible debentures, or securities other than warrants, which are convertible into equity shares, to a qualified institutional buyer (QIB). • Stock markets India’s market capitalization (m-cap) touched US$ 1.04 trillion in June 2009 making it the ninth largest in the world. According to data from Bloomberg, India’s market cap as a percentage of worlds market cap was 2.8 per cent on December 31, 2009.
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In 2009, there were 21 IPOs that raised US$ 4.25 billion as compared to 36 IPOs in 2008 that raised US$ 3.68 billion. • Insurance India is the fifth largest life insurance market in the emerging insurance economies globally and the segment is growing at a healthy 32-34 per cent annually. According to a report by research firm RNCOS—'Booming Insurance Market in India (2008-2011)'—the total life insurance premium in India is projected to grow to US$ 259.72 billion by 2010-11. Life Insurance Corporation (LIC) is bullish on growth and is targeting business in excess of US$ 59.14 billion by 2011-12. The government is planning to ease restrictions on foreign investments in insurance, banking and pensions, and allow foreign direct investment (FDI) of 49 per cent from the present 26 per cent. The ‘Mall assurance’ delivery channel is first of its kind in India's insurance sector, selling life and general insurance policies through all Future Group retail outlets across the country. • Banking services During 2008-09, State Bank of India (SBI) and associate banks advanced US$ 16.8 billion for infrastructure projects such as power plants and petroleum refineries. The big-sized credits have made SBI and group one of the largest project financiers in the country.
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CONCLUSION
Banking Sector The Banking sector in India has experienced a rapid transformation. Just about a decade back this sector was limited to the sarkari (read nationalized) and cooperative banks. Then came the multi-national banks, but these were confined to serving an elite few. The opening up of the Indian banking sector to private players acted as 'the tipping point' for this transformation. The deregulatory efforts prompted many financial institutions (like HDFC and ICICI) and non-financial institutions enter the banking arena. With the entry of private players into retail banking and with multi-nationals focusing on the individual consumer in a big way, the banking system underwent a phenomenal change. Multi-channel banking gained prominence. For the first time consumers got the choice of conducting transactions either the traditional way (through the bank branch), through ATMs, the telephone or through the Net. Technology played a key role in providing this multi-service platform. The entry of private players combined with new RBI guidelines forced nationalized banks to redefine their core banking strategy. And technology was central to this change.
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Insurance Sector
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It seems unlikely that the LIC and the GIC will shrivel up and die within the next decade or two. The IRDA has taken a "slowly slowly" approach. It has been very cautious in granting licenses. It has set up fairly strict standards for all aspects of the insurance business (with the probable exception of the disclosure requirements). The regulators always walk a fine line. Too many regulations kill the incentive for the newcomers; too relaxed regulations may induce failure and fraud that led to nationalization in the first place. India is not unique among the developing countries where the insurance business has been opened up to foreign competitors. From Table 4, we observe that the openness of the market did not mean a takeover by foreign companies even in a decade. Thus, it is unlikely that the same will happen in India, especially when the foreign insurers cannot have a majority shareholding in any company. Capital Market Keeping in track with the global markets the SEBI has undertaken various reforms from time- to – time to safe guard the interests of the investors, shareholders, employees & the government. It has been taking timely & effective reforms so that number potential investors become actual investors. It has also passed latest bill saying that the funds with PPF & Pension be diverted to the Stock Market so as to decrease the dependency on Foreign Direct Investment.
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Manufacturing Sector
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The rapid growth of the Indian economy is likely to make India the fifth largest consumer market in the world by 2025 from twelfth in 2005, according to a study by McKinsey Global Institute. Aggregate Indian consumer spending is likewise estimated to more than quadruple to approximately US$ 1.5 trillion by 2025, on the back of a ten-fold increase in middle class population and a threefold jump in household income. The manufacturing sector is estimated to have a US$ 180-billion investment opportunity over the next five years, according to the Investment Commission of India. Import Sector This Foreign Trade Policy of India is a stepping stone for the development of India’s foreign trade. It contains the basic principles and points the direction in which it propose to go. A trade policy cannot be fully comprehensive in all its details it would naturally require modification from time to time with changing dynamics of international trade. Export Sector Government should take suitable measures to further boost export sector. It is going to frame monetary policies which are going to ease pressure on export sector. From the growth of the export sector of Indian economy, it is expected that India will become the second largest economy in the world after China.
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WEBLOGRAPHY
www.business.mapsofindia.com www.ibef.org www.sebi.gov.in www.finance.indiamart.com www.economywatch.com
Search engine www.google.com
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FINANCIAL SECTOR REFORMS 2009
PRESENTED BY:
? Kunal ? Pratik ? Sankalp ? Laxman ? Dipti ? Urvashi ? Vandana ? Kashmira
46 19 38 22 40 12 56 49
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SPECIAL THANKS KANTHI MA’AM
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doc_621019764.pdf