Economic and Business Awareness

Agenda:
Indian Financial System

The state of Indian Economy

Global Economic Meltdown in 2008 its effects on India Economic Terms Global Stock Exchanges Euro Zone Crisis

Indian Financial System:

1. Monetary system

2. Banking system
3. Tax system 4. Share Market Fundamentals

Monetary System
o Reserve Bank of India (RBI) Central Bank of India o RBI functions include Control and regulation of money and credit Control of foreign exchange operations Banker to the government Bankers bank

Lender of the last resort

Monetary System
o CRR (Cash Reserve Ratio)5.5%, no returns o SLR (Statutory Liquidity Ratio) 24% o Bank Rate Rate at which banks borrow Long Term loans from RBI (Currently-6%) o Open market operations Involves sale and purchase of government securities by the RBI (vis--vis banking system)

Monetary System
o REPO and Reverse REPO REPO transactions imply short term liquidity adjustment facility of the RBI whereby it injects and absorbs liquidity vis--vis the banking system to even out short term fluctuations in the money market. o Absorption of liquidity by the RBI is termed as reverse repo and injection as repo.

o Repo rate at present is 8.5% and the Reverse repo rate is

7.5%. Overnight Repo & Term Repo

Monetary System - FAQs

o When is monetary policy announced? Twice a year

A slack season policy (AprilSeptember) A busy season policy (October March) o Impact of CRR cut on interest rates? When CRR is reduced, more cash is available with the banks

As more money chases the same

number of borrowers, interest rates come down

Monetary System - FAQs

o Difference between monetary policy and fiscal policy. RBI is responsible for formulating and implementing

monetary policy
Fiscal policy is a broader tool with the government Monetary policy brings about a change in the economy by changing money supply and interest rate. Fiscal policy can be used to overcome recession and control inflation Fiscal policy decides the change in government revenue

and expenditure to influence the level of national output

and prices

Banking System
o Participants of the Indian financial systems

Commercial Banks
Co-operative Banks Financial Institutions (FI) State-level development banks Non-banking financial companies (NBFC) Market intermediaries stock

brokers and moneylenders

Commercial Banks
o Main functions Acceptance of deposits

Giving loans
Overdrafts Investment of funds o RBI categorisation of commercial banks Public sector banks Private sector banks

Foreign banks

Money market
o Market for borrowing and lending of short-term funds o Call money market inter-bank transactions on day-to-day

o Call money rate

High call money rate indicates scarcity of funds and tight money market Low call rate means easy availability of funds

GST
o Goods and Services Tax (GST) o GST will include CENVAT, VAT, Service tax, Turnover tax, Octroi.

o Aim is to bring uniformity in the indirect tax structure

o Kelkar Task Force has recommended a standard rate of 20% o Out of 20%, 12% will go to the Central government and 8% will go to the state government. o Proposed schedule for the implementation of GST is April 1, 2012

Share Market - Terms

o Stock Exchange o Equity / Share o Debt instrument

Bond Issued by central and state governments and

public sector organizations Debenture Issued by private corporate sector o Derivative Product whose value is derived from the value of one or more basic variables, called underlying, which can be equity, index, foreign exchange, commodity or any other asset. o Index Shows how a specified portfolio of share prices is moving in order to give an indication of market trends, Snesex, Dow-Jones

Securities - Terms
o Face Value Nominal or stated amount assigned to a security by the issuer o For shares, it is the original cost of the stock

o For bonds, it is the amount paid to the holder at maturity

o Also known as par value o When a security is sold above its face value, it is said to be issued at a premium o When it is sold at less than its face value, then it is said to be issued at a discount.

Issue of Shares
o Initial Public Offering (IPO) when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. o Rights Issue When a listed company proposes to issue fresh securities to its existing shareholders. o Market Capitalisation Market value of a quoted company; calculated by the product of the current share price and the number of shares in issue o ADR (American Depository Receipt) physical certificate of ownership of ADS (American Depository Share). ADS is a US dollar denominated form of equity ownership in a non-US company. o GDR (Global Depository Receipts) A global finance vehicle that allows an issuer to raise capital simultaneously in two or more markets through a global offering

Inflation
o In India, the year-on-year change in the wholesale price index (WPI) is used as the measure of inflation. o 435 Items used for calculation with base year 1993-94

CPI :Consumer Price Index Measures changes in the price level of consumer goods and services 157 out of 181 countries in the IMF statistics use consumer price index (CPI) for tracking inflation. Applicable in US and Europe

Balance of payments - Terms

o Current Account Deficit Occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world. o Capital Account - The capital account is calculated by netting the public and private investments within the country with those the government and domestic companies are making outside the country.

Indian Economy Vs Recession in 2008

o Despite signs of recovery from the global financial crisis, the GDP growth rate for the Indian economy is likely to be between 5.8 to 6.1 per cent in 2009-10, below the 6.7 per cent recorded in fiscal 2008-09. o While there has been an improvement in Indian industry, particularly the manufacturing sector, the adverse impact of the fall in kharif production due to a rainfall deficiency will act as a drag on the overall growth of the economy. o In the current financial year, the major policy challenges for the government will come from the rather sharp rise in inflation and deteriorating public finances. o The balance of payments situation may also require policy attention despite a narrowing of the current account deficit and a considerable capital account surplus because of the appreciation of the rupee.

Monetary measures
o In mid-September 2008, the central bank started to ease liquidity but no cuts were made yet in policy rates. o Inflation measured in terms of the wholesale price index (WPI) peaked at 12.9 per cent in early August 2008 and remained high for some time. o From mid-September till end-October 2008, the economy was in the grip of a serious liquidity crisis and credit crunch. o The Reserve Bank of India (RBI) acted aggressively from mid-October to ease the situation by a series of rate cutting and liquidity injecting measures that went on till April 2009.

Fiscal stimulus
o The central government announced three successive fiscal stimulus packages: one in early December 2008, the second one in early 2009 and the last one in early March 2009. o These included an across-the-board central excise duty reduction by 4 percentage points; additional plan spending of Rs.200 billion; additional borrowing by state governments of Rs.300 billion for plan expenditure; assistance to certain export industries in the form of interest subsidy on export finance, refund of excise duties/central sales tax, and other export incentives; and a 2 percentage-point reduction in central excise duties and service tax. o The total fiscal burden for these packages amounted to 1.8 per cent of GDP.

Impact on Economy
o The growth in GDP dropped to 5.8 per cent (year-on-year) during the second half of 2008-09 from 7.8 per cent in the first half.

o Growth improved slightly to 6.1 per cent in the first quarter

of 2009-10.

Indian Economy-GDP

Indian Economy - GDP

Fiscal Stability
o The situation changed drastically in 2008-09 o The fiscal deficit shot up to 8.9 per cent of GDP (10.7 per cent including off-budget bonds against 5 per cent in 200708) and the primary surplus turned into a deficit of 3.5 per cent of GDP. o The public debt, however, declined marginally to 74.7 per

cent of GDP. Budget estimates for 2009-10 indicate a

further worsening in the current year with the fiscal deficit rising to 10.2 per cent of GDP, primary deficit to 4.5 per cent and debt ratio deteriorating to 76.6 per cent. o This has raised afresh the issue of Indias fiscal stability and debt sustainability.

Fiscal Stability
o The policy implication is that
we should strive to reduce primary deficit or achieve a primary surplus, raise the growth rate and reduce the interest rate. o The growth is in nominal terms and there is surely an option of inflating our way out of debt. o However, this is not feasible given the political sensitivity

regarding inflation.

Global Economic Meltdown

o The first hint of the trouble
came from the collapse of Bear Stearns in early 2007. o Subsequently a number of other banks and financial institutions also began to show signs of distress. o Matters really came to the fore with the bankruptcy of Lehman Brothers, a big investment bank, in September 2008.

Reasons
o Boom in the Housing Market
o Speculation o High-risk Mortgage Loans and Lending Practices o Securitisation Practices o Poor Regulation

Impact on India
o Information Technology
o Exchange Rate o Foreign Exchange Outflow o Investment o Real Estate o Stock Market o Exports o Banks

o Increase in Unemployment

Economic Terms-Daily Use

Anti dumping suit: complaint by a domestic producer that imports are being dumped, could lead to anti dumping duty Balance of payments : (BOP) records all financial transactions between India and all other countries , difference between Exports and Imports Basel III : (revised) set of standards for Capital Adequacy Capital Adequacy :Intended to permit banks to absorb losses without becoming solvent ( basically to protect depositors) Budget Deficit : In a given year, total govt expenditure exceeds total tax collection

GDP/GNP

GDP
Farming Manufacturing Services
GNP = GDP + net factor income from abroad

Budget Related

Expenditure
Revenue expenditure Salaries Interest Maintenance Capital expenditure
Creation of infrastructure Loan repayment

Receipts
Revenue Receipts Taxes Income Dividend Interest Non debt receipts
Sales of shares Aid / Grant

Global Stock Exchanges

Index name (Asia) Country Hang Seng Hong kong Nikkei Average Japan Shangai Composite China BSE Sensex/ Nifty India Kospi South Korea FTSE 100 UK DAX ( Deutscher Aktien IndeX) Germany CAC 40 France Dow Jones Industrial Average USA Nasdaq USA (National Association of Securities Dealers Automated) S&P 500 USA

Credit Rating Agencies

Moodys S& P Fitch

Euro Zones debt crisis

Outline
Panic about the Greek govts ability to repay its creditors Its infecting influence to the other euro-area countries` sovereign debt
Portugal Spain Italy Ireland

Greece
Sovereign-debt crisis boiled over Debts too great Financial panic in Europe Around 213 billion-worth of Greek government bonds Foreign banks` lending 164 billion Public debt unclear ; 144%

Portugal

Budget deficit 9.3% of GDP Public debt 77% of GDP Common weaknesses with Greece:
Small economy Foreign debts run up

Debt 198 billion

Spain
Most at risk Dependence on foreign finance Public debt 53% of GDP

Italy and Ireland

Italy can hope to rely on domestic savers Ireland less prone to overseas finance

Details of Euro Zone Crisis

What is EuroZone? What is EuroZone Crisis? Countries affected and impact on them : PIIGS Effect on Greece Present condition Solution Conclusion

EuroZone Countries
Economic and Monetary Union ( EMU) of 17 European states have adopted Euro as currency in Jan 1998, for consumers on Jan 2002 17 countries which use Euro : Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovalia, Spain 10 countries do not use Euro : Bulgaria, Czech, Denmark, Hungary, Latvia, Poland, Lithuania, Romania, Sweden and UK

EuroZone Crisis
Due to global financial crisis of 2007-08, Eurozone entered its first official recession in 3rd Qtr of 2008 Started in Oct 2009 in Greece Sovereign debt crisis :PIIGS

Fairy tale of Greece

One of the fastest growing economy from 2000 to 2007 ( 4.2%) as foreign capital flooded the country The Greece govt. was therefore able to run large structural deficits Global financial crisis in 2008 had an effect on two major ind: Tourism and Shipping in 2009 Turning Point To keep within the monetary union guidelines, the government of Greece has been found to have consistently and deliberately misreported the country's official economic stats First Alarm on 27 April 2010: Debt rating decreased to first level of junk status by Standard and Poor's

What happened?
Sharp Budget Deficit Large government and External Debts in PIIGS Greece credit rating downgraded Interest rates surged on government bonds Need for external aid from EU and IMF The high debts and rising rate of interests was a matter of concern The crisis reduced confidence in other European economies
Ireland, with a government deficit of 14.3% of GDP U.K. with 12.6%, Spain with 11.2% Portugal at 9.4% are most at risk Financing needs for the Eurozone in 2010 come to a total of 1.6trillion

Impact of Crisis
Contagion Effect: Greek crisis has made investors nervous about lending money to Govts. Reduced Wealth :Take home pay is likely to fall as it is eroded by taxes Spain is experiencing the highest unemployment rate of 20 %

Saving the Ship

On 3rd May 2010 , the European Central Bank suspended its minimum threshold for Greek debt until further notice", meaning the bonds will remain eligible as collateral even with junk status Public sector limit of 1,000 introduced to bi-annual bonus, abolished entirely for those earning over3,000amonth. An 8% cut on public sector allowances and a 3% paycut for DEKO(public sector utilities) employees. Limit of 800 per month for pension installments; Return of as special tax on high pensions. Changes were planned to the laws governing lay offs and overtime pay Italy has taken austerity measures, 25 billion dollar euro cut, this year target of budget deficit to 2.7 %

Solution

Countries affected
must grind down wages Raise productivity Slash spending Raise taxes Transparent banking system Carry on such austerity drives for many years

Impact on India
India exports to Europe would witness a slump close to 10 %, specially textile and software sectors Finally impacting the overall target of our fiscal deficit

Thanks