Om Sakthi Indian Economic Perspective

Om Sakthi Overview Economics Factors of Production Enterprise Equity Market Foreign (In-) Direct Investment Market Structures Macroeconomic concepts Conclusion

Om Sakthi ECONOMICS

Om Sakthi Economics Economy refers to the conditions under which goods are produced in a country and the manner in which the people are gainfully employed Classification(s) – Rich/poor – Socialist/Capitalist/Mixed – Developed/underdeveloped/developing – Agricultural/industrial – Planned/unplanned

Om Sakthi Economics An economy in which people are very well employed and thus have high standards of living and high per-capita income, is known as rich economy People employed as per the government’s prescriptions is a socialist economy An economy where production and employment are controlled by private entrepreneurs is a capitalist economy

Om Sakthi Economics Per capita income means earnings of each Indian if the national income is evenly divided among the country's population at 117 crore (1.17 billion) India ranks a pitiable 127th in per capita income. And that, despite the fact that the per capita income of Indians grew by 14.5 per cent to Rs 46,492 in from Rs 40,605 in the year-ago period, as per the revised data released by the government on Monday, January 31 China is the world's second largest economy, with its GDP standing at slightly more than $7 trillion. China is ranked 93rd in terms of per capita income. China, the world's factory, has a highly developed manufacturing sector. The country also has a very well developed telecommunications market, apart from robust agricultural and industrial sectors.

Om Sakthi Essential Process of an Economy Production – Any economic directed towards the satisfaction of human wants is known as production – The production of goods and services is necessary for the existence of an economy – The level of production in any economy is the best measure of its performance Consumption – The act of satisfying one’s wants is called “consumption” – Goods and services are produced only because human wants need to be satisfied – The quality and quantity of consumption reflect the levels of income and employment in the economy Investment – Is the addition made to the total stock of capital – An economy cannot grow if it consumes all that it produces – If the desire is to increase its productivity, it must consume less than what it produces or produce more than what it consumes Fundamental Problems in Economy – What to produce, How to produce, For whom to produce

Om Sakthi FACTORS OF PRODUCTION

Om Sakthi Factors of Production Factors of production means inputs and finished goods means output. Input decides the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called as "Production Function". In economics, production means creation or an addition of utility. According to Prof. Benham, "Anything that contributes towards output is a factor of production."

Om Sakthi Factors of Production

Om Sakthi ENTERPRISE

Om Sakthi Enterprise Indian Partnership Act, 1932 – Firms can be created through a contract between collective individuals Company’s Act, 1956 – A registered company means a co incorporated under the Co’s Act, – What about co’s formed for promoting – art, charity, religion or any other useful purpose. – Def: A voluntary association of persons. A co, in the broad sense, may mean an association of individuals formed for some common purpose. – Separate legal entity: A co is separate from its members. It is an artificial person

Om Sakthi Enterprise Private Companies : – min capital of Rs. 1 lakh or higher. – Restricts the right to transfer shares – Limits the no. of its members to 50, not including employee members. – Prohibits public to subscribe for shares – Prohibits deposits from non-members Public Companies: – Minimum capital of 5 lakhs or more – May be listed or unlisted

Om Sakthi Enterprise FactorPublicPrivate No.of Persons-Minimun72 No.of Persons- Maximun No restriction50 Min Capital5 lakhs1 lakh Invitation to subscribe shares InvitesRestricts TransferabilityAllowedRestricted Managerial remuneration Not more than 11% of net profits No limits Special PrivilegesNoMany, eg: no statutory meetings, reports, etc

Om Sakthi EQUITY MARKET

Om Sakthi Equity Market Investment related – A bank deposit could earn 8% to 10% – An investment in the right company could earn upto 40% in short term, BUT includes high RISK – High RISK, HIGH RETURNS Moving from private firm to public firm – Revenues earned vs Capital borrowed IPO: Initial Public Offer (Oil India, Ashtavinayak Cine Vision, Nitesh Estates, Emaar MGF, Lodha Developers, Sahara Group) Face value vs market value

Om Sakthi Equity Market Equity Security – ownership – entitled to distributed earnings – entitled to share of assets Types of Trading – short selling – buying on the margin – institutional trading Bullish vs Bearish market

Om Sakthi Equity Market Stock Market indicators – measure average performance of a group of stocks Stock Index – weighting of stocks equal, price, value – average arithmetic geometric Organisation picks groups of stocks to measure – Nifty, FTSE 100, etc – Nifty: 50 large blue chip companies representing the cross section of industries and usually market leaders Sector corresponding to BSE/NSE quotes – Auto, Bank, Capital Goods, Consumer Durables, FMCG, Health Care, IT, Metal, Oil & Gas, PSU – Realty, Teck, Power

Om Sakthi Equity Market Ratios for ManagementRatios for CreditorsRatios for Shareholders Operating RatioCurrent RatioYield Ratio Debtors Turnover RatioSolvency RatioProprietary Ratio Stock Turnover RatioFixed Asset RatioDividend Rate Solvency RatioCreditors Turnover RatioCapital Gearing Return on CapitalReturn on Capital Fund Classification by Users

Om Sakthi Equity Market Balance Sheet Ratios (Financial Ratios) P/L Ratios (Operating Ratios) Inter Statement Ratios (Composite/Mixed Ratios) Liquid RatioGross Profit RatioReturn on Capital Employed Current RatioNet Profit RatioReturn on Shareholders Investment Stock RatioOperating RatioWorking capital turnover ratio Proprietary RatioOperating Profile Ratio Debtors turnover ratio Debt-Equity RatioExpenses Ratio Capital Gearing RatioInterest Coverage Ratio Ratio of Current Asset to Fixed Assets Capital Inventory to Working Capital Ratio

Om Sakthi FOREIGN (IN-) DIRECT INVESTMENT

Om Sakthi FDI/FII FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly

Om Sakthi FDI/FII Sector Specific Foreign Direct Investment in India – Hotel & Tourism (100% FDI is permissible in the sector on the automatic route) – Non-Banking Financial Companies (49% FDI is allowed from all sources on the automatic route subject to guidelines issues from RBI) – Insurance Sector (51% through automatic route) – Telecommunication (49% subject to licencing and security requirements and adherence by the companies to licence conditions) – Trading (51% provided it is primarily export activities) – Power (upto 100% in respect to projects relating to electricity generation, transmission and distribution) – Drugs & Pharmaceuticals (100% permitted on automatic route) – Roads, Highways, Ports and Harbours (100% under automatic route) – Pollution Control and Management (100% under automatic route) – Call centers in India (100% subject to certain conditions) – Business Process Outsourcing (100% subject to certain conditions)

Om Sakthi FDI/FII FDI is prohibited under the Government Route as well as the Automatic Route in the following – i) Retail Trading (except single brand product retailing) – ii) Atomic Energy – iii) Lottery Business – iv) Gambling and Betting – v) Business of Chit Fund – vi) Nidhi Company – vii) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (cf. Notification No. FEMA 94/2003-RB dated June 18, 2003). – viii) Housing and Real Estate business (except development of townships, construction of residen­tial/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005). – ix) Trading in Transferable Development Rights (TDRs). – x ) Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

Om Sakthi FDI/FII Countries Share – MAURITIUS (39%) – Singapore (10%) – Japan (8%) – U.S.A (6%) – U. K (6%) – Netherlands (4%) – Cyprus (4%) – Germany (3%) – France (2%) – U.A.E. (1%)

Om Sakthi FDI/FII Cumulative amount of FDI inflows from April 2000 to January 2012 US$ 160,096,000,000 Rs. 81,64,89,60,00,000/-

Om Sakthi FDI/FII

Om Sakthi FDI/FII Foreign Indirect Investment (FII) – Investment of foreign bodies in securities (equity market) – Monitored and regulated by SEBI (Securities and Exchange Board of India)

Om Sakthi MARKET STRUCTURES

Om Sakthi Market Structures Theory of the firm – The objective of the firm is to maximise net revenue in the face of given prices and a technologically determined production function – A price increase for a product raises its supply; a price increase for a factor reduces its demand – The theory of the firm deals with the role of business firms in the resource allocation process – The firm operates with perfect knowledge of all relevant variables involved in making a decision and it acts rationally while doing so – Originally, the theory assumed that the firm is operating within a perfectly competitive market

Om Sakthi Market Structures Market structures are studied to study the pricing constraints – Perfect Competition – Imperfect Competition Monopoly vsMonopsony Monopolistic competition and Oliogopoly and oligopsony

Om Sakthi Market Structures Pure and perfect competition – There are a large number of undifferentiated buyers and sellers – Each competitor offers or seeks exactly a similar thing as do the others – The market in which the commodity is bought and sold must be well organized, trading must be continuous and buyers and sellers must be so well informed – There are many competitors, each acting independently – The market price is flexible over a period of time, constantly rising and falling in response to the changing conditions of supply and demand – There should be no obstacle to the entry and to the withdrawal of the firms in the industry

Om Sakthi Market Structures Monopoly – There is only one seller of a particular good or services – Rivalry from the producers of substitutes is so remote as to the significant – Monopolist is in a position to set the price himself – Monopoly implies market power Causes of Monopoly – The government may grant a licence to any particular person for operating public services – A producer may possess certain scarce raw materials, patent rights, secret methods or production or specialised skill which might give him monopoly power – The necessity of having large resources, as in the case where the minimum efficient scale of operations is very large, may often create monopoly – Ignorance, laziness and prejudice of the buyers may create monopoly in favaour of a particular producer

Om Sakthi Market Structures Monopsony – There is only one buyer of the goods and services – Rivalry from buyers who offer substitutive outlets is so remote as to be insignificant – As a result, the buyer is in a position to determine the price he pays for the goods or services he buys

Om Sakthi Market Structures Oligopoly – Sellers are few in number – Any of them is of such a size that an increase and decrease in his output will appreciably affect the market price. In fact, the size of each seller’s output in relation to the total supply is the test. – Each seller knows his competitors individually in each market. Foundations of Oligopoly – Absolute cost advantages of established firms due to control of strategic material supplies or due to patented production techniques – Advantages of resulting from product differentiation and consumer loyalty to established brands/products – Economics of large scale that makes it difficult for a new firm to finance the size or built up a market that permits minimization of costs – Restrictions on the entry of new firms exercised by the existing firms

Om Sakthi Market Structures Oligopsony – Buyers in a particular market are few in number – Each one of them is of such a size that an increase or decrease in his demand will considerably affect the price – No single buyer can afford to ignore the reaction of his rivals to policies he might initiate

Om Sakthi Market Structures Kinds of Competition Number of Producers & Degree of Product Differentiation Part of Economy where prevalent Perfect Competition Many producers Identical products A few agricultural commodities Imperfect Competition Monopolistic Competition Many producers, Many real or imaginary differences to products Retail trade; tooth paste, soap, etc OligopolyFew producers, little or no difference in productSteel, Aluminium Few producers; some differentiation of productsAutos, Machinery MonopolySingle producer; single product without close substitues Public utilities MonopsonySingle buyer; single outlet with remote substitute outlets Indian wagon industry OligopsonyA few buyersMilk diaries Little or no difference in buyersAgricultural markets dominated by a few processors Differences in buyersMarkets for certain components (auto parts)

Om Sakthi MACROECONOMIC CONCEPTS

Om Sakthi Macroeconomic Concepts Gross Domestic Product (GDP) is the total market value of a nation’s output It is the market value of all final goods and services produced within a given period of time by factors of production located within a nation GDP as a measure of the total production of an economy, acts as an economic barometer of a nation GDP can be computed in two ways – One is to add up the amount spent on all final goods during a given period (expenditure approach) – Add up the income (i.e wages, rents, interest and profits) received by all factors of production in producing final goods (income approach)

Om Sakthi Macroeconomic Concepts The expenditure approach – Personal Consumption Expenditure (C) – Gross private domestic investment (I) – Government purchases (G) – Net exports (X) GDP = C + I + G + X

Om Sakthi Macroeconomic Concepts The income approach – Nation income (N) – Depreciation (D) – Indirect taxes minus subsidies (T) – Net factor payments to the rest of the world (F) GDP = N + D + T + F

Om Sakthi Macroeconomic Concepts Statistics GDP$1.846trillion (2011), 9 th position globally GDP Growth8.5% ( ) GDP per capita$1,527 (135 th rank, 2011) Inflation6.95% (Feb. 2012) Labour force487.6M (2011 est) Public Debt62.43% GDP Budget Deficit5.9% GDP Revenues$218.7 B Expenses$311.2 B Credit RatingBBB- (Domestic); BBB- (Foreign); BBB+ (T&C Assessment)

Om Sakthi Macroeconomic Concepts Pre 1991 era – The economy was then characterised by extensive regulation, protectionism, public ownership, pervasive corruption and hence slow growth Post 1991 era – Continuing economic liberalisation has moved the country towards a market based economy

Om Sakthi Macroeconomic Concepts Unemployment – Frictional, Structural, Cyclical, Cost of unemployment Business Cycle – Peak, Recession and Through Money and Money supply Fiscal and monetary policy Inflation and deflation Forex (Exchange rate) trading

Om Sakthi