presentation impact of economic liberalisation on indian
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PresentationImpact of Economic Liberalisation
on Indian Corporate Sector Financing?by Sankar De
Centre for Analytical Finance, ISB
Conference onIndian Economic Reforms: Current Status
December 19, 2005ISB campus
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OutlineOutline
Performance of public and private sector companies in post – liberalisation period
Capital market objectives of Indian libralisation drive
Financing pattern of non-fianncial Indian corporations in pre─ and post─liberalisation eras
Performance of Indian stock markets in post-liberalisation period
Special situation of SME sector
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Performance of private & public Performance of private & public sectors post-liberalisationsectors post-liberalisation
Growth of private sector companies has far exceeded public sector companies in important dimensions in the post-liberalisation period:
Private Public
─ Number of units: CAGR 1993-02 7.9% 0.6%
─ Paid-up capital: CAGR 1993-02 23.8% 6.2%
─ Share of paid-up capital 1993 35.2% 64.8%
─ Share of paid-up capital 2002 71.6% 28.4%
─ Share of GDP 2002 75.9% 24.1%
─ Share of GDI 2002 73.9% 26.1%
A lot of this is due to privatisation drive post-liberalization.
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-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
1993-94 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03
Year
Yea
r to
yea
r g
row
th
Government Companies
Non-GovernmentCompanies
Fig. 1.A : Annual growth in number of companies
Source: Central Statistical Organization, National Accounts Statistics
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0
50000
100000
150000
200000
250000
300000
1993 1994 1995 1996 1997 1998 1999 2000* 2001* 2002*
Year
Rup
ees
cror
es
Government Companies
Non-Government Companies
Fig. 1.B : Paid-up Capital
Source: Central Statistical Organization, National Accounts Statistics
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0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
1993 1994 1995 1996 1997 1998 1999 2000* 2001* 2002*
Year
Rup
ees
cror
es
Government Companies
Non-GovernmentCompanies
Fig. 1.C : Contribution to GDP
Source: Central Statistical Organization, National Accounts Statistics
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0
50000
100000
150000
200000
250000
300000
350000
400000
1993 1994 1995 1996 1997 1998 1999 2000* 2001* 2002*
Year
Rup
ees
cror
es
Government Companies
Non-Government Companies
Fig. 1.D : Gross Domestic Investments
Source: Central Statistical Organization, National Accounts Statistics
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Performance of private & public Performance of private & public sectors post-liberalisationsectors post-liberalisation
However, the performance of private sector companies post – liberalisation has not been an unmixed success.
The growth rate of private sector companies decelerated during 1996-97 through 2002-3. It has picked up again only recently.
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19.0%
15.4%
20.5%
10.4%
6.1%
-1.3%
22.2%
3.7%
22.5%
31.0%
-3.2%
9.0%
5.8%
3.0%
12.1%
7.5%
11.2%
8.5%9.9%
23.7%
7.8%
-2.8%-1.9%
31.7%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
Year
Gro
wth
Rat
e
Sales Gross Profits
Fig. 2: Growth rates in sales and profits of private sector companies
Source: RBI Bulletin, November 2005
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Performance of private & public Performance of private & public sectors post-liberalisationsectors post-liberalisation
Besides, the bigger companies in the private sector have grown much faster than smaller companies in all important respects, including sales, profits, and assets.
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0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Sales Gross Profits Bank Borrowings Gross FixedAssets
Inventories Total Net Assets
Indicators
Av
g A
nn
ua
l Gro
wth
Ra
te (
%)
Below Rs. 1 crore
Rs. 1 crore - Rs. 5 crore
Rs. 5 crore - Rs. 25 crore
Rs. 25 crore and above
Fig. 3: Average annual growth rates in size groups
Source: RBI Bulletin, November 2005
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SEBI’s capital market objectives : “promote, develop, and regulate the securities
market by such measures as it thinks fit” (SEBI Act 92/00, chapter IV)
Pre-budget Economic Survey (93), Ministry of Finance “The corporate sector will have to be encouraged to
raise resources increasingly from the market”
Capital market objectives Capital market objectives of liberalisationof liberalisation
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Financing pattern of non-financial Financing pattern of non-financial companies in private sectorcompanies in private sector
Type of funding 89-92 92-04 Internal sources 32.2.% 33.3% External sources
Capital markets 17.8% 21.9% Banks and other financial 22.1% 18.2%
institutions Other sources (including 27.8% 25.9%
trade credit and provisions)
Note: the numbers for both periods are averages across the years
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Financing pattern of non-financial Financing pattern of non-financial companies in private sectorcompanies in private sector
Financing pattern of private sector companies appears to have changed little over the first ten years of liberalisation.
Proportion of funds raised from the market increased only marginally.
Almost to the same extent, the proportion of funds raised from banks/FIs declined.
Actually, the financial institutions themselves absorbed capital market financing.
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0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
Internal Sources Capital markets Banks / FinancialInstitutions
Group Companies /Promoters / Directors
Others (includingcurrent liabilities &
provisions)
Source
Con
trib
utio
n
1989-90 to 1991-92
1992-93 to 2003-04
Fig. 4 : Sources of funds for non-government companies in India
Source: Centre for Monitoring Indian Economy (CMIE)
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Stock market performance Stock market performance since liberalisationsince liberalisation
Interestingly, though Indian capital markets have not become more important as a primary source of funds for the private sector, over the same period the stock markets have experienced much more volume of trading.
At the end of 2004, BSE and NSE combined was the 14th largest stock market in the world (in terms of total market capitalisation), significantly ahead of China (15th).
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Table 1: Largest stock markets Table 1: Largest stock markets in the worldin the world
Rank Stock Market Total Market Cap (US$ billion)
Concentration (%)
Turnover Velocity (%)
1 NYSE 12,707,578.3 55.8 89.8
2 Tokyo SE 3,557,674.4 56.9 97.1
3 Nasdaq 3,532,912.0 59.3 249.5*
4 London SE 2,865,243.2 82.2 116.6
5 Euronext 2,441,261.4 68.8 115.0
6 Osaka SE 2,287,047.8 56.7 5.9
7 Deutsche Börse 1,194,516.8 73.2 67.9
8 TSX Group 1,177,517.6 63.1 66.2
9 BME Spanish Exchanges 940,672.9 NA 57.7
10 Hong Kong Exchanges 861,462.9 78.6 39.7
11 Swiss Exchange 826,040.8 76.0 100.5
12 Borsa Italiana 789,562.6 61.9 134.9
13 Australian SE 776,402.8 79.8 81.1
14 India (BSE+NSE) 749,597.1 78.4 70.9
15 China (Shanghai+Shenzen) 447,720.3 40.5 97.0
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Stock market performance Stock market performance since liberalisationsince liberalisation
A dollar invested in the BSE index during 1992-05 would have earned a higher (buy and hold) return than the S&P 500 and the indices in UK, China, and Japan.
At the end of March 2005, market cap of BSE index was 55% of GDP (3.5% in early 80’s).
India boasts the largest number of listed companies in the world: well over 10,000.
All of this has captured popular press as well as public forums, somewhat to the neglect of corporate financing.
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Return on Stock Indexes around the World
0
1
2
3
4
Val
ue
of $
1 in
vest
men
t, ($
)
SBE-India
SSE-China
S&P 500
FTSE-London
Nikkei -Japan
Fig. 5: Return on Stock Indexes around the World
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Banks and financial institutions Banks and financial institutions as a financing sourceas a financing source
The banking sector in India has grown steadily in size (total deposits) at a fairly uniform annual rate of 18% since the 1980’s.
With deposits of over $385 billion dollars in 2003, the sector accounted for 75% of the country’s financial assets.
The NPL problem is not serious: could be partly due to under-lending.
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Banks and financial institutions Banks and financial institutions as a financing sourceas a financing source
On the other hand, the proportion of funds provided by banks and financial institutions actually declined for private sector companies over 1993 – 2002.
There is evidence of “under-lending” by banks (Banerjee and Duflo; 2002).
While they shied away from corporate loans, financial institutions invested heavily in government and other kinds of securities.
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Reasons for under - lendingReasons for under - lending
Among may reasons cited,
Inadequate lender protection before SARFEISI Act, 2002. Not enforced until the other day.
Lack of right incentives for public sector bankers to make risky corporate loans (Banerjee, Cole and Duflo; 2004)
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““Other” sources of financingOther” sources of financing
Mostly short-term trade credit
Close to a third of all sources
The second most important source (after internal sources) before as well as since liberalisation
Importance increases dramatically for the small and medium sector (SME) sector
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The SME sectorThe SME sector
A very important sector of the economy: accounts for
40% of value added in manufacturing
USD 188 billion annual output (6.75% of GDP)
20 million employment
95% of total industrial units
Managed faster growth rate than industrial production as a whole in the 90’s
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Growth of the SME sector in India
0
5
10
15
20
25
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03
Years
Un
its a
nd
Em
plo
ym
en
t (m
illio
ns)
0
20
40
60
80
100
120
140
160
180
200
Ou
tpu
t (b
illio
ns o
f U
SD
)
Units
Employment
Production
Source: CII website
Fig. 6: Growth of the SME sector in India
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Growth Rates of the SME sector and Industrial Production
0
2
4
6
8
10
12
14
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03
Years
An
nu
al G
row
th R
ate
s (
%)
SSI Sector
Industrial Sector
Source: CII website
Figure 7 : Growth rates of the SME Figure 7 : Growth rates of the SME sector and Industrial Productionsector and Industrial Production
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The SME sectorThe SME sector
No official definition of SME exists
Two subsets of SME are Small Scale Industry (SSI): less than Rs. 1 crore in
plant and machinery Small Scale Service and Business Enterprises
(SSSBE): less than Rs. 10 lakh in plant and machinery
SME sector is important in other high-growth economies as well: importance hardly unique to India
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Financing sources for SME sectorFinancing sources for SME sector
Severely credit-constrained:
In an NSSO survey: faced an acute shortage of capital mean loan outstanding was less than 3% of GFA 93% had no bank/FI loan outstanding About 50% of the loans were from SIDBI/SFCs
Depends heavily on “other” sources (close to 50%)
Similar, though less extreme, situation for SMEs in other countries
Anecdotal evidence indicates high bankruptcy
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Survey findings of SSI units Survey findings of SSI units in Hyderabadin Hyderabad
The findings of a survey of SSI units in Hyderabad( in Allen, Chakrabarti, De, and Qian; 2005) indicate that During the start-up phase, friends and family comprise the
‘most important’ (over 50%) source of financing for an overwhelming majority of respondents (70%)
During the growth phase too, friends and family remain the best source of financing for 70% of respondents.
Bank financing is the second preferred source.
Bank financing seems to be extremely relationship-driven. 20% respondents had no bank credit. 63% had credit from only one institution.
Dependence on “friends and family” financing avoids independent scrutiny on the one hand and limits growth on the other.
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Fig. 7.A : Importance of various sources of funds at start - up
Importance of various sources of funds at start-up
0%
10%
20%
30%
40%
50%
60%
70%
80%
Fam
ily
Clo
se
Frie
nd
s
Sta
te-o
wn
ed
ban
ks
Private
cre
dit
age
ncie
s a
nd
indiv
idua
ls
Sta
te B
udg
et
/ Lo
ca
l
Gove
rnm
en
t
Tra
de
Cre
dits
Ven
ture
Cap
ita
l
NR
I In
vestm
en
t
Fore
ign
Dire
ct
Inve
stm
en
t
Sources of funds
Perc
en
tag
e o
f re
sp
on
den
ts
Extremely important (above 50%)
Very Important (25-50%)
Somewhat important (10-25%)
Of Little Importance (<10%)
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Fig. 7.B : Ease of obtaining funds during growth stage
Ease of obtaining funds during growth stage
0%
10%
20%
30%
40%
50%
60%
70%
80%
Family andclose friends
Short-termbank loans
Long-termbank loans
Loans fromspecial
institutionssuch as
SIDBI andSFCs
Trade credits Privateequity/debt
frominvestors
within India
NRIInvestments
Foreign directinvestment(non-NRI)
Issue publicstock and
bonds in thestock markets
Years
Perc
en
tag
e o
f re
sp
on
den
ts
Very easy and low cost
Relatively easy and moderate costs
Difficult and costly
Extremely difficult and costly
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Concluding observationsConcluding observations
Capital markets financing has become only marginally more important.
Financing from the banking sector actually declined over 1993 – 2002.
Heavy dependence on “other” sources
External financing for the SME sector is scarce.
Overall, the picture is sobering.
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Q&A
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Thank You