Economic Environment And Capital Market-part-1

Linkages Between Macroeconomic Fundamentals and Capital Market Dr.Tarun Das, Eco.Adviser, MOF

Capital Market Dr. Tarun Das

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Contents of this presentation I. Linkages Between Macroeconomic Fundamentals and Capital Markets II. Macro Economic Environment 1. Sustained Economic Growth 2. External Sector under control 4. Fiscal and Financial sectors III. Strengths, challenges and Prospects 1. Strengths 2. Constraints 3. Economic Outlook

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I. Macroeconomic Fundamentals and Capital Markets

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1.1 Macroeconomic Fundamentals • Macroeconomic stability and efficient capital markets depend on each other. • Both promote savings, investment and effective allocation of resources. • Capital markets provide basic infra-structure to access savings and promote investment. • Both the real sector and financial sector are crucial to promote overall economic growth. • Sound macroeconomic policies are the first defense against any financial crisis.

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1.2 Economic Reforms in India

• Since July 1991 India has taken credible reforms in industry, trade, financial and fiscal sectors. • To improve efficiency, productivity and competitiveness of Indian industries and to impart dynamism to the overall growth process. • Emphasis is on so-called LPG (liberalisation, privatisation and globalisation of the Indian economy). Capital Market Dr. Tarun Das

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1.3 Basic Characteristics of Reforms  Gradual, Step by Step and Evolutionary Approach, not a Big Bang, Shock Therapy or Revolutionary Approach  General political consensus  Strong emphasis on “human face”  Sovereignty constraint  Agency constraint  Government ownership of reforms  Prioritisation and sequencing of reforms  No write-off / rescheduling of external debt  Practically no sacrifice made by people Capital Market Dr. Tarun Das

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1.4 Financial Sector Reforms  Capital markets • Strengthening SEBI as regulator • Liberalisation in primary/ secondary markets  Banking • Major Steps taken for tackling NPAs • Reduction of government equity in banks • Reduction in CRR, SLR & lending rates  Pension, Provident, Insurance Funds  Opened for private and foreign participation Establishment of IRDA as a regulatory entity Separate regulatory body for pensions Capital Market Dr. Tarun Das

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1.5 Financial Sector Reforms Est. of Clearing Corp.of India (Apr 2002) Screen based trading in G-securities Public Debt Act replaced by Govt Sec.Act Setting up of Asset Reconstruction Co. Legislation on securitisation Legislation facilitating foreclosure in banks Real time gross settlement system  Tax on long-term capital gains abolished. Instead, a tax on transactions in securities on stocks is levied at 8 variable rates.Capital Market Dr. Tarun Das

1.6 Progress of Financial Sector Reforms Status in June 1991 • CRR 25% • SLR 38.5% • Bank Rate 12% • Rev.Repo Rate- NA • PLR above 21% • Deposit and interest rates are controlled • Capital issues and prices determined by the CCI in MOF

Status in June 2005 • CRR 5% • SLR 25% • Bank rate 6% • Rev.repo rate 5% • PLR 10.5% to 12% • Deposit and interest rates are liberalised • The office of CCI abolished and SEBI established

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1.7 Progress of Financial Sector Reforms Status in June 1991 • Indian firms not allowed to raise funds from foreign stock exchanges • Portfolio investment by foreign investors in Indian companies not allowed • Foreigners not allowed to buy G-secs

Status in June 2005 • Indian firms allowed to raise foreign funds by GDR, ADR, FCCBs & offshore funds • FIIs, NRIs and OCBs allowed to buy stocks in Indian markets s.t. overall limit of 49% • FIIs/ NRIs/ OCBs allowed to buy G-secs

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1.8 Impact on Financial Sectors Item Mar-96 Mar-98 Mar-04 1.No.of foreign banks 33 42 33 2.New private banks 9 9 10 3.Gross NPA ratio 24.8 16.0 7.2 4.Net NPAs ratio 10.7 8.2 3.0 5.Op. profits ratio 1.6 1.8 2.7 6.Net profits ratio 0.2 0.8 1.1 7.CRAR (Capital adequacy ratio) No. of Banks -- Below 9% 31 6 2 -- 9 to 10% 10 16 1 -- Above 10% 43 71 87 8.Number of banks 84 93 90 . Capital Market Dr. Tarun Das

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500 400 300 200 100 0

B S E N -In d e x M S E -M .C a p GD P M3 11

9

7

5

3

GD I 1

Index with 199394=100

1.9 Capital Market and Macro-economic Variables

Ye a r s s in c e 1 9 9 3 -9 4

GD S

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1.10 Comparative development in India, China, Japan, USA in 2001 P P P A d ju s te d G N P ($9 7B8n1) M a rk e t C a p ($ B n ) 1 3 8 1 0 M a rk e t C a p (% o f G1D3 7P ) T u rn o v e r R a tio (% ) 2 1 0 N o .o f lis te d C o m p a n6ie3 s5 5 P C G N P ($ ) 34280 F E R ($ B n ) 130 A d u lt lite ra c y (% ) 1 0 0

5027 463 45 86 1235 890 220 91

3246 2252 54 81 2471 35610 402 100

2913 131 23 226 5650 460 49 61

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1.11 Factors influencing capital         

market

(a) Sound macroeconomic management, (b) Sustained economic and industrial growth, (c) Strict fiscal prudence & monetary discipline, (d) Control of inflation rates, (e) Liberalisation of Industry, Trade, Investment, (f) Liberal policy of FDI and portfolio investment, (h) Gradual convertibility on capital account, (g) Successful management of external sector, (g) Control on short-term external borrowing. Capital Market Dr. Tarun Das

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2.1 Sustained Economic Growth

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2.1 I ndia emerged as one of the fastest growing economies in 1990-2001 12.0

8.0

7.7

6.7

7.4

6.0

6.5 6.3

6.8 4.0

6.2

6.0

5.9

2.0

Ind ia

Do m. Re p

Li b er ia

Ch i le

Mo za mb i qu e Ma l ay s ia

Ug an da

My an ma r

Ire lan d

0.0 Ch ina

Average growth rate in 1990s (% )

10.0 10.0

Country

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9 8

2.2 India moved on a higher growth path (Real GDP growth rate in per cent) 8.5 7.8 7.3 7.3

7 6 5

6.9 6.5

5.9

5.6 5.1

4

5.8

6.1

4.8 4.4

4.0

3 2 1

1.3

19

90 19 -91 91 19 -92 92 19 -93 93 19 -94 94 19 -95 95 19 - 9 6 96 19 - 9 7 97 19 -9 8 98 19 -99 99 20 -00 00 20 - 0 1 0 2 0 1- 0 2 02 20 -0 3 03 20 -0 4 04 -0 5

0

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2.3 Recovery in Industry (Production growth rate in per cent)

14.0

13.0

12.0 10.0 8.5

9.1 8

%

8.0 6.0

6.1

4.0

6.7 4.1

5.7

5.0 2.7

2.3

2.0

19 9 6 96 19 9 7 97 19 9 8 98 19 9 9 99 20 0 0 00 20 -0 1 01 20 - 0 2 02 20 -0 3 03 20 -04 04 -0 5

5

95

-9 19

94

-9

19

19

93

-9

3

2

92

-9

19

91

4

0.6

0.0

19

6.7

7

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2.4 Sectoral growth rates in India (%) Sectors 1980-90 1992-2000 2002-05 Agriculture 3.1 3.3 1.2 Industry 7.2 6.5 7.0 Mining 7.7 4.0 6.9 Manufacturing 7.4 5.9 7.4 Utilities 8.9 5.7 4.4 Construction 4.6 8.2 6.7 Services 6.5 8.3 8.6 Trade,hotels 6.2 8.5 9.4 Trans & Telecom 5.8 7.4 13.6 Financial services 9.4 8.8 7.6 Social ,personal 6.0 7.4 5.2 All Sectors 5.5 6.4 6.5 Capital Market Dr. Tarun Das

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2.5 Sectoral shares in India (% in Sectors 1993-94 GDP) 2003-04 2004-05 Agriculture 32.9 24.0 21.1 Industry 23.9 23.8 27.2 Mining 2.1 2.3 2.8 Manufacturing 14.9 13.8 16.1 Utilities 1.3 1.1 2.1 Construction 5.6 6.6 6.2 Services 43.2 52.2 51 .7 Trade,hotels 13.8 16.3 16.3 Trans & Telecom 5.4 7.4 7.5 Financial services 11.5 13.6 13.7 Social 12.5 14.9 14.2 All Sectors 100.0 100.0 100.0 Capital Market Dr. Tarun Das

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2.6 Trend of GDS as % of GDP 30.0

Ratio to GDP (%)

25.0 20.0 15.0 10.0 5.0 0.0 -5.0 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 200391 92 93 94 95 96 97 98 99 00 01 02 03 04

Household

Pvt.Corp

Public

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Total

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2.7 Trend of GDI as % of GDP P vt.C o rp

2 0 .0

P u b lic 1 0 .0

To ta l

13

11

9

7

5

3

0 .0 1

As % of GDP

3 0 .0

Ye a rs s inc e 1 9 9 0 -9 1

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25 20 15 10 5

C PI WPI M3

15

13

11

9

7

5

3

0 1

Growth Rate (%)

2.8 Trends of Inflation (%) and GR of Broad Money (M3)

Ye a rs s inc e 1 9 9 0 -9 1

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2.9 Employment growth rate in India (%) Sectors 1983-1993 Agriculture 2.2 Mining 3.7 Manufacturing 2.3 Utilities 5.3 Construction 4.2 Trade 3.8 Trans & Telecom 3.4 Financial 4.6 Social 3.6 All Sector 2.7

1993-2000 0.0 -1.9 2.6 -3.6 5.2 5.7 5.5 5.4 -2.1 1.1

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2.10 Sectoral Employment as % of Total

Sectors 1983 1993-94 1999-2000 Agriculture 63.2 60.4 56.7 Industry 15.6 15.9 17.5 Mining 0.7 0.8 0.7 Manufac. 11.6 11.1 12.1 Utilities 0.3 0.5 0.3 Construction 3.0 3.5 4.4 Services 21.2 23.7 25.8 Trade,hotels 7.6 8.3 11.1 Trans/Telecom 2.9 3.2 4.1 Fin. services 0.9 1.1 1.4 Social /per 9.8 11.1 9.2 All Sectors 100.0 100.0 100.0

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2.11 Composition of sectoral GDI (%)

A. Agriculture & allied B. Industry C. Services --Trade, hotels --Transport, comm. --Finacial sectors -- Govt, social D. Total GDI

1990-91 8.4 53.0 38.5 3.9 11.7 14.4 8.5 100.0

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2002-03 8.9 46.9 44.2 0.6 10.8 13.6 19.2 100.0 26

2.12 Sectoral GDI as percentage of GDP

1990-91 1995-96 2002-03 A.Agriculture 2.4 1.7 2.1 B.Industry 12.1 16.1 10.9 C.Services 9.6 9 10.3 6. Trade, hotels 1 0.8 0.1 7. Transport & comm. 2.9 2.8 2.5 8. Finacial sectors 3.6 3.4 3.2 9. Govt., social 2.1 2 4.5 10. Total GCF 23.1 26.8 23.3

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2.13 Industrial Growth Rates by Broad Sectors Sectors 2002-03 2003-04 2004-05 (Weight) Mining (10.5) 5.8 5.2 4.3 Manuf (79.4) 6.0 7.4 8.8 Elect (10.2) 3.2 5.1 5.2 OVERALL (100) 5.7 7.0 8.0 Capital Market Dr. Tarun Das

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2.14 Industrial Growth Rates By Use-based Sectors 2002-03 2003-04 2004-05 Classification [Weight] Basic (35.6) 4.9 Capital (9.3) 10.5 Intermed. (26.5) 3.9 Consumer(28.7) 7.1 -Durables (5.4) -6.3 -Non-dur (23.3) 12.0

5.4 13.6 6.4 7.1 11.8 5.8

Capital Market Dr. Tarun Das

5.5 12.6 5.8 11.3 14.0 10.4 29

2.15 GR of Infrastructure sectors

Sectors 2002-03 2003-04 2004-05 Rail Traffic 5.3 Ports cargo 9.0 Cell phones 21.5 Air-Exp cargo 13.3 Air-Imp cargo 18.6 Air-Int.Pass 4.8 Air-Dom.Pass 9.6 Highways Up, ..

7.5 8.0 10.0 11.3 115.1 10.4 1.0 12.6 13.4 24.4 6.5 14.0 13.1 23.6 -16.6 161

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