Motivation 1 |
Corporate Performance – Trends since mid 1990s |
End March |
Sales Growth |
PAT Growth Working Capital /Sales |
Debt / Sales |
1995 |
20.5 |
59.2 |
21.7 |
34.1 |
1996 |
23.7 |
23.9 |
18.3 |
31.7 |
1997 |
10.4 |
-26.6 |
15.7 |
33.7 |
1998 |
7.5 |
-13.7 |
12.0 |
36.6 |
1999 |
6.1 |
-20.9 |
13.8 |
39.8 |
2000 |
11.2 |
14.7 |
11.5 |
37.6 |
2001 |
9.9 |
8.3 |
11.3 |
35.0 |
2002 |
-1.3 |
-17.8 |
7.9 |
35.7 |
2003 |
8.5 |
76.2 |
5.5 |
31.4 |
2004 |
16.0 |
59.8 |
3.9 |
26.4 |
2005 |
24.1 |
51.2 |
5.2 |
22.5 |
2006 |
16.3 |
31.7 |
11.1 |
20.2 |
2007 |
26.2 |
45.2 |
.. |
.. |
Note : Working Capital is defined as Current Asset-Current Liabilities; * Based on abridged results of the corporates; Source: RBI |
Motivation 2 |
Corporate Performance - Recent Trends |
Growth Rates (Per cent) |
|
2005-06 |
2006-07 |
2007-08 |
|
Quarter |
Quarter |
Quarter |
Quarter |
Quarter |
Quarter |
Quarter |
Quarter |
Quarter |
Item |
1 |
2 |
3 |
4 |
1 |
2 |
3 |
4 |
1* |
|
|
|
|
|
|
|
|
|
|
No. of companies |
2,355 |
2,361 |
2,366 |
2,415 |
2,228 |
2,263 |
2,258 |
2,356 |
1,364 |
|
|
|
|
|
|
|
|
|
|
Sales |
18.5 |
16.4 |
13.2 |
19.5 |
25.6 |
29.2 |
30.3 |
22.5 |
19.0 |
|
|
|
|
|
|
|
|
|
|
Total Expenditure |
18.0 |
16.3 |
12.7 |
18.9 |
24.6 |
26.6 |
26.9 |
19.5 |
19.0 |
|
|
|
|
|
|
|
|
|
|
Gross Profits |
32.0 |
19.1 |
21.2 |
16.6 |
33.9 |
45.9 |
51.8 |
39.2 |
27.9 |
|
|
|
|
|
|
|
|
|
|
Interest Cost |
-13.5 |
-8.0 |
4.6 |
3.8 |
19.9 |
18.0 |
11.9 |
32.3 |
2.8 |
|
|
|
|
|
|
|
|
|
|
Profits after tax |
54.2 |
27.5 |
27.0 |
15.1 |
34.7 |
49.4 |
59.5 |
39.6 |
32.6 |
|
|
|
|
|
|
|
|
|
|
* Provisional; Source: Reserve Bank of India |
Profit Shares (% to GDP) ![](/documents/87730/28909807/79917_ch1.jpg) Note: Data are annual from 1960 to 2005. Source: Ellis and Smith (2007), BIS Working Paper. Facts and the Issues Facts
- Initial Growth in 1990s
- Deceleration during the latter part of 1990s
- Remarkable Recovery of Corporate Profitability since 2002
• Issues
–
Is this sustainable?
–
Is this Policy Induced?
Scheme of Presentation • Correspondence between
- Policy
- Corporate Performance
• Policies
1. Industrial Deregulation
2. Trade Liberalization
3. Tax Policy
4. Monetary Policy
5. Financial Sector Strengthening
6. Capital Market Deepening
• Concluding Remarks Some Conjectures On “Relating Corporate Performance to Economic Reforms” 1. Industrial Deregulation And Corporate Performance Industrial Deregulation • Elimination of Capacity Licencing • Dereservation of industries reserved for Public Sector • Removal of MRTP Act and Restrictions on Large Companies • Termination of Phased Manufacturing Programmes • Better Access to Foreign Technology • Revision of Patent Regime • Freeing of Foreign Direct Investment • Programme of SSI Dereservation Industrial Performance ![](/documents/87730/28909807/79917_ch2.jpg) Growth of Corporate Sector: Population
|
|
Estimated Paid-up Capital |
Year ended March |
No. of Companies |
Rs. Billions |
% of GDP |
1982 |
72402 |
189 |
11.1 |
1987 |
140670 |
440 |
14.0 |
1992 |
250361 |
846 |
12.9 |
1997 |
450950 |
1905 |
13.8 |
2002 |
589246 |
4058 |
17.8 |
2003 |
612155 |
4571 |
18.7 |
2004 |
641512 |
4988 |
18.1 |
2005 |
679649 |
6540 |
21.0 |
2006 |
732169 |
.. |
.. |
Sources: Department of Company Affairs, 50th Annual Report on the Working and Administration of the Companies Act, 1956. |
Industrial Investment: Number of Proposals ![](/documents/87730/28909807/79917_ch3.jpg) Marked improvements in investments in recent times Data are on calendar year basis Proposed Industrial Investment: Amount ![](/documents/87730/28909807/79917_ch4.jpg) Marked improvements in investments in recent times Data are on calendar year basis FDI and Portfolio Flows to India ![](/documents/87730/28909807/79917_ch5.jpg) India’s Direct Investment Abroad ![](/documents/87730/28909807/79917_ch6.jpg) Technology-related Payments Source: Balance of Payments Statistics, RBI 2 Trade Liberalization And Corporate Performance Import Liberalization Initiatives- 1 • Moving away from Import Substitution • Phasing out of Quantitative Restrictions on imports • Reduction in and simplification of tariff structure Import Liberalization Initiatives- 2 • Sharp Reduction in Customs Duty Rates • Simple Average of Basic Duty Rates
- 1991-92: 128 per cent
- 2004-05: 22 per cent
- 2007-08: Peak duty reduced to 10 per cent for non-agricultural goods
• Collection Rate (import revenue to value of imports ratio)
• Distribution of Duty Rates Has Changed Remarkably
- 1991-92: 4100 out of 5200 commodities Basic Rates above 100 per cent 2004-05:
- 4261 out of 5144 commodities Basic Rates Below (BRB) 25 per cent
- 2007-08: 8537 out of 10084 commodities BRB 25 per cent
Exchange Rate Management • Initial Ex Ante Real Devaluation • Switch to a market determined exchange rate regime since 1993 • Focus on management of volatility without fixed rate target. • Underlying demand and supply conditions determine the exchange rate movements in an orderly way Movement of Exchange Rate NEER Trade 6 country (1993-94=100) ![](/documents/87730/28909807/79917_ch8.jpg) Movement of Exchange Rate REER Trade 6 country (1993-94=100) ![](/documents/87730/28909807/79917_ch9.jpg) Ex Ante Real Devaluation in the mid 1990s Export Intensity and Import Intensity – All Companies
Export Intensity and Import Intensity of the Indian Corporates |
Amount in Rs. crore |
Year |
Number of |
Sales $ |
Earnings in |
Imports |
Forex |
Imports to |
|
companies |
|
Foreign |
|
Income to |
Sales |
|
|
|
Currencies |
|
Sales |
|
1991-92 |
1802 |
107026 |
8693 |
7692 |
8.1 |
7.2 |
1992-93 |
1802 |
120120 |
10902 |
10350 |
9.1 |
8.6 |
1993-94 |
1720 |
127823 |
13069 |
11185 |
10.2 |
8.8 |
1994-95 |
1720 |
154087 |
17110 |
17452 |
11.1 |
11.3 |
1995-96 |
1930 |
212241 |
22643 |
27792 |
10.7 |
13.1 |
1996-97 |
1930 |
234284 |
26881 |
30073 |
11.5 |
12.8 |
1997-98 |
1848 |
246610 |
33924 |
33006 |
13.8 |
13.4 |
1998-99 |
1848 |
261553 |
33664 |
33361 |
12.9 |
12.8 |
1999-00 |
1927 |
284761 |
40310 |
38039 |
14.2 |
13.4 |
2000-01 |
1927 |
312961 |
50719 |
41791 |
16.2 |
13.4 |
2001-02 |
2031 |
322151 |
61142 |
57471 |
19.0 |
17.8 |
2002-03 |
2031 |
349667 |
71245 |
64584 |
20.4 |
18.5 |
2003-04 |
2214 |
442743 |
90437 |
83500 |
20.4 |
18.9 |
2004-05 |
2214 |
549449 |
128721 |
118608 |
23.4 |
21.6 |
2005-06 |
1831 |
565444 |
137200 |
147270 |
24.3 |
26.0 |
$ Net of 'rebates and discounts' and 'excise duty and cess' |
Imports/Sales & Exports/Sales Ratio - All Companies ![](/documents/87730/28909807/79917_ch10.jpg) Imports/Sales & Exports/Sales Ratio -Manufacturing Companies ![](/documents/87730/28909807/79917_ch11.jpg) 3. Tax Policy And Corporate Performance Key Reforms Affecting Corporate Performance • Reduction of Corporate Tax • Tax on pidends • Rationalization of Excise Duties • Reduction in Customs Duties
Rates of Corporate Tax (Per cent) |
Year Tax Rate on Domestic Companies |
1991-92 |
40* and 50** |
1992-93 |
45* and 50** (15) |
1993-94 |
45* and 50** (15) |
1994-95 |
40 (15) |
1995-96 |
40 (15) |
1996-97 |
40 (7.5) |
1997-98 |
35 |
1998-99 |
35 |
1999-00 |
35 (10) |
2000-01 |
35 (10) |
2001-02 |
35 (2) |
2002-03 |
35 (5) |
2003-04 |
35 (5) |
2004-05 |
35 (2.5) |
2005-06 |
30 (10) |
2006-07 |
30 (10) |
2007-08 |
30 (10) |
* Widely held (in which public are substantially interested); ** Closely held (in which public are not 27 substantially interested) Note: Figures in parentheses represent surcharge. |
Tax on pidends 1998
- Tax on Shareholders pidends Abolished
- pidend Distribution Tax (DDT) Introduced
2002
- Tax on Shareholders pidends Re-introduced
2003
- Tax on shareholders pidends Abolished
- DDT Re-introduced (12.5 per cent)
2004
- DDT Increased to 20 per cent.
2007
- DDT raised from 12.5 per cent to 15 per cent.
1999 • 11 major ad valorem rates reduced to 3 rates 2000 • Uniform CENVAT of 16%; SED at 8%, 16% and 24% on specified goods. 2001 • SED at a single rate of 16 per cent. 2002 • SED abolished on all except 8 items. 2003 • SED on select items down from 16% to 8% 2004 • Convergence to a mean CENVAT of 16% 2005 • Of the 5 items attract 24%, duty reduced to 16% for three items 2006 • Duty reduced to 16% for the remaining two items 2007 • No change in the CENVAT rate (16 %). Customs Duty Rate – Peak Rate (%)
Year |
Peak Rate* |
1991-92 |
150 |
1992-93 |
110 |
1993-94 |
85 |
1994-95 |
65 |
1995-96 |
50 |
1996-97 |
50 |
1997-98 |
40 |
1998-99 |
45 |
1999-00 |
40 |
2000-01 |
38.5 |
2001-02 |
35 |
2002-03 |
30 |
2003-04 |
25@ |
2004-05 |
20 |
2005-06 |
15 |
2006-07 |
12.5 |
2007-08 |
10 |
* On Non-Agricultural Goods @ Reduced to 20 per cent in January 2004. |
Impact of Fiscal Policy on Corporate Performance
Year |
PAT/Net Worth |
Tax provision / |
Retained Profits / |
pidends / Net |
|
(Per cent) |
PBT (Per cent) |
PAT (Per cent) |
Worth (Per cent) |
1980-81 |
14.2 |
43.8 |
61.8 |
5.4 |
1990-91 |
13.5 |
32.4 |
62.8 |
5.0 |
1991-92 |
12.0 |
36.5 |
62.2 |
4.5 |
1992-93 |
8.7 |
33.3 |
53.9 |
4.0 |
1993-94 |
12.0 |
3.7 |
67.6 |
3.9 |
1994-95 |
14.0 |
20.2 |
72.2 |
3.9 |
1995-96 |
14.4 |
19.7 |
73.6 |
3.8 |
1996-97 |
9.5 |
27.8 |
64.0 |
3.4 |
1997-98 |
7.6 |
26.3 |
63.0 |
2.8 |
1998-99 |
5.6 |
31.4 |
52.3 |
2.7 |
1999-00 |
6.3 |
33.2 |
47.6 |
3.3 |
2000-01 |
6.5 |
32.3 |
48.8 |
3.3 |
2001-02 |
5.1 |
36.7 |
30.9 |
3.5 |
2002-03 |
8.7 |
31.3 |
56.3 |
3.8 |
2003-04 |
13.2 |
28.1 |
59.8 |
5.3 |
2004-05 |
16.8 |
25.7 |
71.7 |
4.8 |
2005-06 |
16.7 |
24.3 |
73.4 |
4.5 |
|
|
|
|
31 |
Tax Provision/Profits Before Tax
Any Pattern?
Why this Steady Fall? Note: Sales Include excise duty. Impact of Tax Policy
- No Obvious Correlation between Tax Policy and Corporate Profitability or Tax Payments
- Business Cycle Appears More Important
- High Profitability 1992-96
- Low Profitability 1997-2003
- Recovery Thereafter
- Puzzle : Steady Fall in Excise Duty Payments
4 Monetary Policy And Corporate Performance How were the 1980s?
Till the late 1980s: |
Resulted in: |
• |
Government Raised Funds Below Market Rate |
• |
Distorted interest rate mechanism |
|
|
• |
Automatic Monetisation |
• |
Automatic Fiscal Accommodation through Ad hoc T-bills |
• |
Adversely affected the viability and profitability of banks |
• |
CRR Used to Manage Liquidity |
• |
Transparency, accounting and prudential norms could not be strictly followed in banking operations |
• |
SLR Used to Ensure Subscription |
|
|
• |
No Depth in G-Securities Market |
• |
Lack of incentive to seek efficiency |
• |
Segmented and Under developed Financial Markets |
• |
Complex Interest Rate Structure |
• |
Paucity of Instruments |
• |
Gross inefficiencies at the micro level |
• |
Administered Interest Rate Regime |
|
|
• |
Regulation of Deposit Rates |
• |
Non-transparent accounting of intra-public sector financial transactions |
Interest Rate Deregulation –Deposit Rates April 1992
- Interest Rates Freed between 40 days and 3 years. But ceiling prescribed
October 1995
- Ceiling removed for Deposits over 2 years
July 2, 1996
- Ceiling removed for Deposits over 1 year
October 22, 1997
- Interest Rates on Term Deposits Completely Deregulated
October 2004
- Minimum Maturity for Term Deposits Reduced to 7 days
Interest Rate Deregulation –Lending Rate I April 1992 • Six Categories of Lending Rates • 5 slabs for below Rs.2 lakh • Minimum Lending rate Above Rs.2 lakh October 1994 • Lending Rate freed for Loans above Rs.2 lakh & Minimum Rate Abolished October 1996 • Banks to specify Maximum spread over PLR October 1997 • Separate PLRs permitted for cash credit/demand loans and term loans above 3 years. Floating Rate permitted. April 1998 • PLR made ceiling for loans upto Rs.2 lakh Interest Rate Deregulation -Lending Rate II April 2000 • Tenor Linked PLR Introduced April 2001 • PLR made benchmark rate; Sub PLR permitted for loans above Rs.2 lakh April 2002 • Bank-wise PLRs made transparent on RBI website April 2003 • Computation of Benchmark PLR rationalized; Tenor Linked PLRs abolished Statutory Liquidity Ratio (SLR) since 1990 (% of NDTL) ![](/documents/87730/28909807/79917_ch14.jpg) Prescribed Cash Reserve Ratio (CRR) –Per cent of NDTL ![](/documents/87730/28909807/79917_ch15.jpg) Note: With effect from October 29, 2004, nomenclature of Repo and Reverse Repo has been interchanged as per international usage. Repo and Reverse Repo Rates ![](/documents/87730/28909807/79917_ch16.jpg) Note: With effect from October 29, 2004, nomenclature of Repo and Reverse Repo has been interchanged as per international usage. Success on Inflation Front –WPI Inflation ![](/documents/87730/28909807/79917_ch17.jpg) Key Achievement of Monetary Policy Non-Food Credit ![](/documents/87730/28909807/79917_ch18.jpg) Recovery after 2003 Bank Credit (% to GDP) ![](/documents/87730/28909807/79917_ch19.jpg) Nominal & Real Interest Rates (%)
Item |
1990-91 to |
1996-97 to |
2002-03 to |
|
1995-96 |
2001-02 |
2005-06 |
A. Weighted Average Lending Rate of SCBs |
16.3 |
15.3 |
12.7 |
B. Weighted Average interest rates on Central |
12.3 |
11.6 |
6.6 |
Govt. Securities |
|
|
|
C. Average Cost of Aggregate Deposits of SCBs |
7.2 |
7.4 |
5.3 |
D. Average Cost of Time Deposits of SCBs |
8.9 |
8.9 |
7.0 |
Inflation Rate |
a. WPI |
10.5 |
4.8 |
5.0 |
|
b. WPI-Manufacturing |
9.9 |
2.9 |
4.4 |
|
c. CPI-IW |
10.4 |
6.8 |
4.0 |
Real Interest Rate |
Borrowers |
6.5 |
12.4 |
8.3 |
|
Central Govt. |
1.8 |
6.8 |
1.7 |
|
Depositors |
-1.5 |
2.1 |
2.9 |
Note: Real Interest Rate for Borrowers = A - b Central Govt. Sec = B - a Depositors = D - c |
Real Interest Rates ![](/documents/87730/28909807/79917_ch20.jpg) Low Interest Costs -1 Growth in Interest Expenses of the Corporates ![](/documents/87730/28909807/79917_ch21.jpg) Low Interest Costs -2 Interest Expenses / Sources of Fund Ratio ![](/documents/87730/28909807/79917_ch22.jpg) Changing Pattern of Sources of Fund ![](/documents/87730/28909807/79917_ch23.jpg) Increasing Reliance on Internal Financing But External Finance Increasing Again: ECB? Debt Equity Ratio ![](/documents/87730/28909807/79917_ch24.jpg) Major Change in Financial Structure of Firms Liquidity 1: Current Ratio ![](/documents/87730/28909807/79917_ch25.jpg) Danger Signs or more efficient financial management? Liquidity 2: Interest Coverage Ratio* ![](/documents/87730/28909807/79917_ch26.jpg) Recent increasing Trend: Recovering from strain to meet debt obligation * ICR is defined as the ratio of earnings before interest and taxes to interest expenses. Inventory Management ![](/documents/87730/28909807/79917_ch27.jpg) Capital Formation ![](/documents/87730/28909807/79917_ch28.jpg) Saving & Investment of Corporate sector ![](/documents/87730/28909807/79917_ch29.jpg) Source: National Accounts Statistics Monetary Policy and Corporate Performance • High correlation between real interest rates and corporate behaviour • Evidence of significant improvements in financial management in response to interest rates movements • Lower inflation rates and interest rates from 2002 have contributed to improved corporate performance 5 Financial Sector Strengthening And Corporate Performance Financial Sector Strengthening • Competition Enhancing Measures – Operational autonomy and disinvestment of public ownership in public sector banks – Transparent entry norms for private and foreign banks – Permission for FDI and portfolio investment in banking • Strengthening of Prudential Regulation – Phased implementation of international best practices (CRAR / Provisioning / NPL Norms / Exposure Limits) – Measures to strengthen risk management – Guidelines on Ownership and Governance – KYC and AML Guidelines Banking: Capital Structure 20 out of 27 public sector banks raised capital from market up to end-March 2006. Banking – Asset Quality ![](/documents/87730/28909807/79917_ch31.jpg) • Marked improvements in asset quality • Public sector banks showed more credible performance in NPL management than private sector banks 6 Capital Market Deepening And Corporate Performance Capital Market Deepening • Establishment of SEBI • Abolition of Controller of Capital Issues (CCI) • Removal of Pricing and Issue Control • Private Sector Mutual Funds • National Stock Exchange • Payment & Settlement Architecture • G-Sec and Bond Market Development Resource Mobilisation from Primary Market-Public Issues ![](/documents/87730/28909807/79917_ch32.jpg) Market Capitalization ![](/documents/87730/28909807/79917_ch33.jpg) Stock Market and Corporate Profitability: Has the Stock Market Movement been Rational?
Some Conjectures On “Relating Corporate Performance to Economic Reforms” Global Growth, Indian Growth & Corporate Sales ![](/documents/87730/28909807/79917_ch35.jpg) Global Growth rates are on Calendar Year basis, i.e 1995-96 =1995. Interpreting the Evidence 1 1992-97: Exuberant Response to Deregulation • Surge in Investment • New Projects • Surge in Lending • Increase in Corporate Profits • High Industrial Growth Interpreting the Evidence 2 1997-2002: Loss in Competitiveness • Significant Slowdown in Industrial Growth • Investment Slowdown • Loss in Confidence • Real exchange rate depreciation catches up • High Real Interest Rates • Period of widespread restructuring Interpreting the Evidence 3 2002-now: Resumption of Growth and Competitiveness 1 • Industrial growth resurfaces • Boom in Corporate Profitability • Return of domestic confidence • Emergence of International Confidence • Increase in Mergers and Acquisition Interpreting the Evidence 4 2002-now: Resumption of Growth and Competitiveness 2 • Consequence of restructuring • Low inflationary expectations • International business cycles • Investment buoyant Thank You
Special Talk by Dr. Rakesh Mohan, Deputy Governor, Reserve Bank of India at FICCI-IBA Conference on “Global Banking:Paradigm Shift”September 14, 2007. |