Economy

Vinit Khandelwal

Economic Policy1. Fiscal

1. Budget and Budgetary Provisions2. Government Income/Expenditure3. Budget Deficit4. Public Debts/Borrowings5. Subsidies/Grants6. Tax Structure7. Balance of Trade/Payment8. Social Sector Priorities/Activities9. Role of Government10. Foreign Investments

Economic Policy (MI BCCI)2. Monetary

1. Devised/Designed by Central Banking Authority (RBI)2. Money Supply3. Interest Rates4. Bank Rate5. Cash Reserve Ratio (CRR)6. Capital Adequacy7. Inflation etc

Economic Goals (GC PELE)1. Growth2. Competitiveness3. Price Stability4. Equitable distribution of Income5. Low rate of Un-employment6. Efficiency and Effectiveness

Domestic Product• Domestic Product = Personal Consumption

Expenditure (C)+ Domestic Investment (I)+ Govt. Expenditures for

current G&S (G)+ Exports of G&S (X)- Imports of G&S (M)

• DP = C + I + G + X – M

Domestic Product• GDP: Total Value of Final Output of Goods and

Services produced within a country’s domestic economy by residents and non-residents.

• GNP: Total Domestic and Foreign output claimed by residents of a country.

• NDP: GDP – Depreciation• NNP: GNP – Depreciation• National Income: Sum of all income derived from

supplying the factors of production.Wages, Salaries, Rents, Interests and Profits.

Indian Economy: CSO• CSO classifies Indian Economy in 6 Broad Sectors

1. Primary1. Agriculture2. Forestry & Logging3. Fishing4. Mining & Quarrying

2. Secondary (MCS)1. Manufacturing2. Construction3. Supply of Electricity, Gas, Water

Indian Economy: CSO3. Transport/Communication/Trade (ST RTC)

1. Storage2. Transport3. Railways4. Trade, Hotels and Restaurants5. Communication

4. Finance & Real Estate (BIBR)1. Banking2. Insurance3. Business Services4. Real Estate

5. Community and Personal Services (POD)1. Public Administration2. Defense3. Other Services

6. Foreign Sector

National Income• Combined Gross output in Sector 1 to 5 is called GDP

at Factor Cost• GNP = Net Factor Income from Abroad

+ GDP at Factor Cost• National Income Measurement Approches

1. Income Approach• Wages, Salaries, Profits, Rent, Capital Consumption

2. Expenditure Approach• Govt. Expenditure, Investments, Consumption

3. Output Approach• Output from 1 to 5 sectors

National Income• National Income Data is used for:

1. Economic Planning2. Regulation of Economy3. Comparing Per Capita Income / Standards of Living4. Measuring National Economic Growth

Per Capita Income• Per Capita Income = National Income/Population• Rise in Per Capita Income indicates rise in

availability of Goods and Services• Hence it is used as an Index of welfare of people

Difficulties in Estimating National Income

• Conceptual1. To Include Services in National Income?2. To Include Administrative Services in National Income?

• Practical Problems– Presence of Large non-monetized sector– Lack of Reliable and appropriate data– Unreported Illegal Incomes– Regional Disparities– Difficulty in classification of working population

Inflation• Inflation is Increase in Average Level of Prices• Deflation is Decrease in Average Level of Prices• Types

1. Creeping2. Galloping3. Hyper

1. Push Factors2. Pull Factors• Impact of Inflation

1. Condition of Poor deteriorates2. Inequality increases3. Economic development gets a set back as saving and

investments reduce

Business Cycle• Expansion– National Output : Rise– Consumer and Capital Expenditure : Rise– Employment : Rise– Expansion in Bank Credit

• Peak/Boom– Supply higher than Demand– Wage Rates : Rise– Cost of Inputs : Rise– Demand for Capital Goods : Low

Business Cycle• Recession/Depression– Demand : Fall– Supply very high than Demand– Starts from few industries, moving through the economy– Income : Fall

• Trough– National Income and Expenditure : Fall– Employment : Fall– Demand for Capital Goods : Fall– Liquidity and Profitability Problems

• Recovery and Expansion– Renovation/Modernization Starts– Investments starts coming in

Banking Sector

Vinit Khandelwal

Banking Sector Reforms – Basic Structure LN PPPPP BCCD GG QSTN

1. Initiated Post LPG2. Got boost from Narasimham Committee3. 1969 - Entry of Private Banks, Indian & Foreign4. Movement away from Activity to

Professionalization5. Reduced Government intervention6. Re-Organizing: Global, National, Regional7. Balance Sheet Transparency8. CRR and SLR Reduction9. Partial Deregulation of Interest Rates on Advances

and Deposits (own PLR/Lending/Deposit Rates)

Banking Sector Reforms – Basic Structure10.Partial Deviation from Directed Lending (Priority

Sector Lending: 40% to 25% of Total Advances)11.Qualitative than Quantitative approach12.Special Tribunals – speed up the recovery of loans13.Prudential Norms introduced to ensure financial

health of Banking/Financial Institutions14.Profitability Norms15.Capital Adequacy Norms16.Technology Up gradation17.NPA Management

4 Steps to NPA Management1. Assessment2. Provisioning3. Recovery4. Prevention

1. Assessment(Health Codes: BArDaISSSSfa)

• 1988-89, Assets were allotted HEALTH CODES1. Bad & Doubtful of Debt Recovery2. Advanced Recalled3. Decreed Accounts4. Irregular5. Satisfactory6. Sick-viable7. Sick-non-viable8. Suit-Filed Accounts

2. Provisioning (SSDsuL)• Assets were further Classified into

1. Standard No Provision2. Sub-Standard 10% Provision3. Doubtful

1. Secured 20 to 50% Provision2. Unsecured 100% Provision

4. Loss 100% Provision

3.Recovery (DSLR)• Settlement Advisory Committees (SAC) 1999• Debt Recovery Tribunals (DRT)• Recovery of Debt due to Banks and Financial

Institutions Act (RDBFA) amended in 2000• Lok Adalats

Basle Norms1. Earlier: Capital Adequacy Norms did not receive adequate

emphasis• because of false assumption that Govt. owned

Banks/Financial Institutions cannot fail/run into problems2. Now: Capital Adequacy Norms• based upon recommendations of the committee on• Banking Regulations and Supervisory Practices (1988) of

Basle – Based Bank of International Settlement3. Inter Alia, All Banks would have to achieve 8% Capital

Adequacy Ratio4. PSBs had to increase Capital Base– By 5840 crores by 31 March 1991– By 20000 crores by 1996

Up gradation of Technology1. Computerization of Operations2. Leverage IT for:

1. Competitive Advantage2. Better House-Keeping3. CRM / Service Quality4. ALM etc

Conclusion• Measures of Reforms initiated and those under way

are expected to create in the financial system:1. Conducive environment for Competition2. Better Operational Efficiency3. Better Customer Service / Product Development4. Higher Productivity / Profitability5. Strengthen Organizational and Managerial abilities6. Financial Viability of the System7. Withstand problems which may arise in the normal course

of Business

Conclusion• Nationalization of Major Banks– 1969 14– 1980 6

• Banking Network – 76,000 branches• Banks have acted as not only a catalyst but as engine

of/for economic development• Challenges

1. To NOT be considered “Rich Country of Poor People”rather “Rich Country of Rich People”

2. New Product Development3. Better Customer Orientation (CRM)4. One Stop Financial Services Super-Shoppe5. Mobile/Internet Banking

• Challenges6. Transparency / Disclosure Practices7. SURVIVAL OF THE FITTEST8. Being able to adopt and adapt to Dynamic and Constantly

Changing Local and Global Business Environment9. Before 1991, The Economist, a British Weekly, brought a

special issue on Indian Economy:• Due to excessive Government Controls and Regulations, Indian

economy was not able to deliver• Indian economy is like “TIGER IN CAGE”

10. During 1993-94, The Economist:• With Policy of LPG and abolition of Controls and Regulations the

GOI has done it’s bit• “Although the Cage is wide open, the Tiger refuses to come out”

Commercial Banking

Vinit Khandelwal

Commercial Banking1. “Engine for Economic Development”2. Lending, Investments and Related Services facilitate

Production, Distribution and Consumption3. What is a Bank– A Bank is an Organization that– Accepts Monies (Deposits)– Repayable on demand, either by Cash, Cheque or DD– Monies so mobilized are Utilized for– Lending (Advances/Credits) &– Investments (CLR/SLR)

Commercial Banking1. Operates in 2 Ways

1. Branch Banking2. Unit Banking

2. Courtesy the British Rule, banks have been operating in Branch Banking Mode

3. As Banks were started on British Pattern in the Beginning of 19th Century, all banks were set up as Joint Stock Company and were governed by Companies Law

Evolution• 1949• 1955

• 1959

• 1961

• 1968• 1969

• Regulations – Banking Companies Act, 1949• Nationalization Phase I – Imperial Bank into

SBI• Nationalization Phase II – Princely State

Banks into SBI subsidiaries

• Insurance Cover to Depositors – Deposit

Insurance Corporation• National Credit Council• Nationalization Phase III – 14 Major Banks

with DTL of over Rs. 50 Crores Nationalized

Evolution• 1971

• 1975

• 1985• 1996• 1998

• Credit Guarantee – Credit Guarantee Corporation

• New Regional Rural Banks• Nationalization Phase IV - 6 Commercial

Banks with DTL of over Rs. 200 Crores Nationalized

• Re-Organization of Banking• New Private Banks• Review – Re-Examination

Commercial Banking• Commercial Banks 2 Broad Categories

1. Scheduled1. Public Sector

1. SBI2. Associate Banks of SBI3. Nationalized Banks4. IDBI Bank Ltd.5. Regional Rural Banks

2. Private Sector1. Old2. New Post 1996

3. Foreign4. Co-Operatives

1. Urban2. State3. District Central4. Land Development Banks

2. Unscheduled

Functions1. Mobilizing Deposits

1. Current2. Savings3. Recurring4. Fixed• Cumulative• Non-Cumulative

2. Investments (CLR/SLR)3. Providing Financial Services

Functions4. Providing Credit

1. Working Capital1. Cash Credit Facility2. Over-Draft Facility

2. Term Loan1. Demand Loan2. Installment Credit3. Medium Term4. Long Term

1. Equity2. Plant & Machinery3. Housing4. Industrial Estate

Why Nationalization?1. Widening Branch Network of Banks in Rural and

Semi-Urban areas2. Greater Mobilization of Savings through Deposits3. Re-Orientation of Credit Flow to benefit the

Neglected Sectors (Agriculture, SSI, Small Business)4. Extensive Expansion in Rural and Semi Rural areas

– 4:15. Significant expansion of Credit to the

Weaker/Neglected Sector – 40% of Advances6. Maintaining Credit/Deposit Ratio – 60% in

Rural/Semi-Urban areas to prevent siphoning of funds from these areas to urban areas

Why Nationalization?7. Higher Interest Rates for Bigger Borrowers

Lower Interest Rates for Lower Borrowers8. RRBs set up in 1970s to meet credit needs of weaker

sections in rural areas9. Lead Bank Scheme launched10. Formulation of District Credit Plans/Annual Action Plans

as part of Area Planning to ensure Dove-tailing of Banks’ credit plans with Developmental Plans

11. Credit Authorization Scheme/Tandon Committee Norms implemented to prevent large borrowers from pre-emptying credit from banking system

12. Formalities regarding application, processing, guarantee streamlined and simplified

Why Nationalization?7. Discretionary powers reviewed/enhanced to

facilitate speedy disposal8. Move from Security/Guarantee to Activity/Purpose9. Move from 3rd Party Collaterals to creating security

from Assets financed by the Banks10. Emphasis on need based finance and end-use

credit

Insurance

Vinit Khandelwal

Definition1. Functional Def– Co-operative Device to spread loss caused by a particular risk

over a number of people who are exposed to it and agree to insure themselves too by bearing nominal expenditure.

2. Contractual Def– Sum of Money as a premium is paid in consideration of

insurer’s incurring the risk of paying large sum upon a given contingency.

• Examples1. Life2. Marine3. Fire4. Vehicle5. Miscellaneous

Functions1. Primary

1. Security2. Protection3. Risk Sharing

2. Secondary1. Prevents Loss2. Provision of Capital3. Improves Efficiency of person by reducing worries4. Economic Progress

Nature1. Risk Sharing2. Co-operative Device3. Payment at contingency4. Large number of insured people5. Not Gambling6. Not Charity

Principles of Insurance7. Principles of Co-operation8. Principles of Probability

TypesBusiness Point of View

1. Life2. General3. Social

Risk Point of View4. Personal

1. Life2. Accident3. Health

5. Property1. Marine2. Fire3. Automobile4. Cattle5. Crop6. Machinery

7. Theft

6. Liability1. Third Party2. Employee3. Motor4. Re-Insurance

7. Fidelity1. Fiduciary2. Credit3. Privilege

Types of Insurance Organizations• Self Insurance #• Individual Insurers #• Partnership #• Joint Stock Companies• Mutual Companies• Co-operative Insurance Organizations• Lloyd’s Association

# Now Disappeared

Insurance: Economic Developmen• Capital formation is critical for economic

development• Insurance Sector contributes to Capital formation

through the 3 stages1. Real Savings2. Mobilization of Savings3. Investments

• Functions as Financial Intermediary• Tool for mobilizing savings

Insurance: Regulation & Control• Indian General Insurance Industry governed by

1. Insurance Act, 19382. Insurance Regulatory and Development Authority Act,

1999 (IRDA)3. General Insurance Business (Nationalization) Act,

1972• Life Insurance Industry is governed by

1. Insurance Act, 19382. Insurance Regulatory and Development Authority Act,

1999 (IRDA)3. Life Insurance Corporation Act, 1956

IRDA, 1999: Duties, Powers, Functions1. Watchdog and Regulator for Insurance Sector in India2. IRDA has been vested with Statutory Status3. Issue applicants, Certificate of Registration4. Renew, Modify, Withdraw, Suspend, Cancel

registrations5. Protection of Interests of Policy Holders6. Specifying Qualifications, Code-of-Conduct, Training

for intermediaries/Insurance intermediaries/Agents7. Promoting and Regulating Professional Organizations

connected with Insurance and Re-insurance Business

IRDA, 1999: Duties, Powers, Functions8. .

1. Call for Information2. Inspecting3. Enquiring4. Investigations5. Auditsof Insurers, Intermediaries, Insurance Intermediaries and other organizations

connected to Insurance Business.

9. Control and Regulation of 1. Rates2. Advantages3. Terms and ConditionsOffered by insurers

10. Specifying form and manner in which1. Books of Accounts will be maintained2. Statement of Accounts will be rendered

IRDA, 1999: Duties, Powers, Functions11. Regulating Investment of Funds by Insurance

Companies12. Regulating Maintenance of Margin of Solvency13. Adjudication of disputes between insurers and

intermediaries/insurance intermediaries14. Supervising functioning of Tariff Advisory

Committee15. Specifying percentage of the premium income of

the insurer to finance schemes16. Specifying percentage of Life Insurance & General

Insurance business to be undertaken by the insurer in the Rural/Social Sector

Reforms in the Indian Insurance Sector1. Malhotra Committee April 19932. Headed by Sri R. N. Malhotra

Former Secretary, Finance, GoIFormer Governer, RBI

3. Examine structure of Insurance Industry and4. Recommend changes to make it more efficient

and competitive1. Opening up of Insurance Sector for Private Sector2. Allow Foreign Equity in Indian Insurance Companies3. Setting up Strong and Effective Insurance Regulatory

Authority in India

New Norms1. Capital Requirement for

1. Starting General/Life Insurance Company 100 cr2. Starting Re-Insurance Company 200 cr

2. Required Solvency Margin Highest1. 50 cr 100 cr for Re-Insurance2. Sum equivalent to 25% of premium income3. Sum equivalent to 30% of net incurred claim

Advantages of Foreign Participation1. Investment in Customer Service & Value2. Transfer of Technological Know-How3. Transfer of Managerial Know-How4. Additional Financial Resources/Capital

Disadvantages of Foreign Participation5. Foreign Insurers dominate Domestic Market6. Foreign Insurers will service the market

selectively (class rather than mass Insurance products and Services)

Retail Sector in India

Vinit Khandelwal

Retail Sector in India1. Retail Sector contributes 14 – 15% of GDP2. Retails Sector provides employment to

approximately 8% of the total Employed Population

3. Retail Industry is expected to grow at 9% annually between 2012-16

4. India is one of the 5 Biggest Retail Market with a population of more than 1.2 Billion

Organized Retail in India1. Modern Retail in India is worth $455 Billion2. Organized Retail Industry Expected to grow at

24% annually3. Food Retail in India dominates Shopping Basket4. Mobile phone Retail - $16.7 Billion Business– Growing at 20% annually

5. Government policies becoming more favourable– Allowing FDI upto 51% in multi-brand retail, although

with a few constraints– 100% FDI in single brand retail

Un-Organized Retail in India1. India having the most unorganized retail2. Traditionally shop in front and house at the back3. 99% of unorganized retailers in < 500 square feet area4. Traditional Retail to grow at 8% annually5. Itinerant Salesmen, Haats, Mandis, Melas

Finding Success1. Reliance Fresh2. Aditya Birla Retail3. Future Retail India Ltd. has sold majority stakes in

Pantaloons to Aditya Birla Group4. Close to 30 Crore consumers shop from Future

Group's Retail Store annually

Failures5. Subhiksha Trading Services Ltd.6. Vishal Trading Services Ltd.

Global Overview

USA32%

Europe31%

Asia Pacific26%

Rest of the World11%

Retail Market Space

Global Overview1. Largest Corporation in the World : A Retailer– Wal-Mart– Since 2002

2. Fortune 500 List 2005– 34 Retailers

Retail in India1. Formats

1. Traditional2. Established3. Emerging

2. Has become a mix of1. Life-style Expression2. Experience3. Entertainment

Drivers of Retail in India1. GDP Contribution: Large and Increasing2. Employment Provider: Major3. Retailers Diversifying their activities– Future Group entered Insurance

4. Organizations Growing at International Scale5. Income: Increasing6. Working Women/2 Income Families7. Disposable Income: Increased8. Lifestyle changes / High Aspirations9. Rural and Urban: Diminishing Differences

Drivers of Retail in India10. Manufacturing Sector Easing Product Supply11. Technological Advancement12. Import duties reduced13. Customer Service Emphasis (CRM)14. Vast Middle Class Population15. Large working population with a median age 2416. Increasing Nuclear Families in Urban Areas17. Government policies becoming more favorable

FDI in Retail1. FDI in Single Brand Retail: 100%– Source 30% from MSMEs: ‘Mandatory’ to ‘Preferably’

2. FDI in Multi Brand Retail: 51%– Minimum: $ 100 Million– 50% of FDI in Infrastructure (Storage, Logistics)– City Population: 10 Lakh+ Only– Individual State’s Permission• 54 Cities can Open: Only States of 18 Cities permitted

– TESCO is entering India, in times when it’s slow on Global Expansion due to sluggish sales in the west

Challenges1. Unorganized Sector Competition2. Sawadeshi Sentiments3. Lack of Trained/Qualified/Professional HR4. Space: Non-availability at affordable prices5. Infrastructure: Poor (Roads, Logistics, Storage)6. Labor Laws7. Cater ‘Lifestyle’ and ‘Value for Money’ together8. Government Corruption issues9. Controlling Costs and Prices10. Legal and Policy Issues

Application of IT in Retail1. Inventory Management2. Billing Quickly3. Track Slow/Fast Moving Stock4. Easy Financials5. Analyze Customers6. Tracking Stock7. Customer Service: Enhanced8. Reduce Errors/Leaks9. Database Management10. Increase Competitiveness

Application of IT in Retail11. RFID – Radio Frequency Identification– Chitale Bandhu Mithaiwale (Revenue 200 crore) with

11 stores in Pune are early adoptors of technology– Use of RFID to reduce billing time and manage

inventory

12. Online Retail

I.T. Sector in India

Vinit Khandelwal

Impact of IT1. Reduce Geographical distance2. Routinize un-structured processes3. Reduce Human Labor4. Complex Analysis5. Inventory Management6. Reduce Errors/Leakages7. Enhance Processes: Time and Energy8. Communication: Effective

ITeS• Services offered using IT• India: Ahead of All1. Customer Care2. Medical Transcriptions3. GIS4. Animation5. BPO/KPO6. Back Office Operations7. Collection Service8. Educational Services

Why Outsource to India1. High Quality Technical Skills/Knowledge Talent2. Cost Effective English Speaking Employees3. Supporting Govt. Policies4. Technical/Management Education Infrastructure5. Improving Basic Infrastructure (Roads, Ban-width)

Healthcare Sector in India

Vinit Khandelwal

Evolution of Healthcare• Phase I (1947-83):

Healthcare policy based on 2 principles1. None should be denied care for want of ability to pay2. State’s responsibility to provide healthcare for people

• Phase II (1983-2000)1. First National Health Policy announced in 1983

1. Private Initiative in Healthcare Service Delivery encouraged2. Expand Access to Publicly Funded Primary Health Care

• Phase III (Post 2000)1. State Role: Only Provider to Financier as well2. Liberalization of Insurance sector

Healthcare Reforms: Focus1. Financing

1. Risk Sharing Schemes (Health Insurance)2. Competitive Approach

2. Provision1. Equal distribution of care for under-privileged2. Horizontal Approach than Vertical3. Rural area to be covered

3. Resource – Human, Technology, Money1. Doctors and Technical Staff generation2. Private and International Monetary funding

4. Governance1. Decentralization

5. R&D6. PPP