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UNIVERSITY OF MUMBAI
MASTER OF COMMERCE
(Accountancy)
SEMESTER II
2015-16
SUBMITTED BY
Name: VIRAJ V. BALSARA
Roll No.: 32
PROJECT GUIDE
PROF. MRUNALINI RAVALEKAR
K.P.B HINDUJA COLLEGE OF COMMERCE
315, NEW CHARNI ROAD, MUMBAI-400 004
M.Com (Accountancy)
2nd SEMESTER
SUBMITTED BY
VIRAJ BALSARA
Roll No.: 32
008
NAAC Re-Accredited A
THE BEST COLLEGE OF UNIVERSITY OF MUMBAI FOR THE ACADEMIC YEAR 2010-2
Prin. Dr. Minu Madlani (M. Com., Ph. D.)
CERTIFICATE
This is to certify that Ms. VIRAJ V. BALSARA
of
M.Com (Accountancy)
________________
Project Guide
________________
Co-coordinator
________________
________________
Internal Examiner
External Examiner
________________
Principal
________________
College Seal
DECLARATION
I Mr. VIRAJ V. BALSARA student of M.Com-Accountancy, 2nd semester
(2015-2016), hereby declare that I have completed the project on TRENDS
K FLOW TO INDIA.
The information submitted is true and original copy to the best of our
knowledge.
(Signature)
Student
INDEX
SR. No
TOPIC
PAGES
there is convertibility of the rupee for FIIs both on current and capital account.
Over the years, Indian capital market has experienced a significant structural
transformation.
Financial markets are significantly different from other markets; market failures
are likely to be more pervasive in these markets and there exists Government
intervention. Government interventions in the financial markets that promoted
savings and the efficient allocation of capital are the central factor to the
efficiency of financial markets.
This project represents the Economic Reforms, Capital Flows and Economic
Growth in India, trends and composition of Capital Flow, types and Magnitude
of Capital Flows and Changes of Financial Markets in India after Liberalization,
1991.
&
For instance, the peak levels are above 20 per cent for Malaysia, 13 per cent for
Thailand, 10 per cent for the Philippines and almost 10 per cent for Singapore
between 1990-93.
Second, the swing in the capital account observed in the case of other emerging
economies is not visible for India so far. In 1995 estimate a change in the capital
account from 2.4 per cent (GDP) on an average between 1984-89 to 1.6 per
cent (1990-93) for ten Latin American countries and from 1.6 (1984-88) to 3.2
(1989-93) per cent (GDP) for eight Asian ones. Comparative figures for India
are 2.3 (1985-89) and 2.4 (1993-985) per cent of GDP, indicating only a
marginal increase. This is probably explained by Indias relatively late start in
liberalizing its trade and investment regimes, by which time the competition for
international capital had already stiffened.
Though the magnitude of capital inflows into India is at variance vis--vis Latin
America and other parts of Asia, there is a common pattern in the composition.
World capital flows in the nineties have displayed a steep decline in official
capital flows and a rise in private investment, particularly portfolio capital. This
trend is clearly reflected in that profiles the composition of Indias capital
account over the eighties and nineties. The substantial contribution of aid
towards the capital account in the eighties dwindles steadily by the nineties
(excluding the IMF loan in 1991 and 1992). Official flows are replaced by
private flows; a sharp increase in foreign investment, direct and portfolio can be
observed after 1992. Commercial borrowings abroad drop during the crisis
decline of the short-term to total debt ratio from 10.2 in 1991 to 3.9 in 1994; as
a ratio to reserves, short-term debt fell from 382.1 (1991) to 24.1 (1994) and
further to 13.5 in 1998.10 Significant institutional, regulatory and policy
changes impacting the external environment during this period were the switch
to a flexible exchange rate regime, consolidation of external debt, full
convertibility of current account transactions, trade reforms, liberalization of
investment policies relating to FDI and financial sector reforms. While the
overall thrust of the reforms served to improve international investors
confidence, there is no doubt that specific measures to attract FDI and portfolio
capital into India catalyzed these inflows. These focused upon elimination of
entry barriers and market integration. Foreign investment, which was permitted
only in cases of technology transfer, was liberalised and the ceiling of 40 per
cent on foreign equity participation was relaxed, procedures were greatly
simplified. Elements of financial liberalisation that have a direct bearing upon
portfolio investments were allowing foreign institutional investors to operate in
the Indian capital market; these investments, initially restricted to equity, were
subsequently relaxed to include debt, including government bonds.
Simultaneously, raising external resources abroad by domestic corporate was
selectively liberalised. These developments are partly reflected in the growing
demand of institutional and private investors abroad, which has facilitated
depository issues in the US and Europe and equity purchases by foreign
institutional investors on the domestic stock exchanges. Equity investment has
been an important channel for portfolio inflows in other emerging markets too.
the volume of bond issues has increased after 1991. These changes are
consistent with evidence available for other emerging markets in Asia, where
bond issues nearly quadrupled between 1989 and 1992 and continued to
increase beyond this period. The composition of foreign capital is by now well
understood to make a difference in impact. Thus short-term or portfolio capital,
which is subject to sudden reversal and is, therefore, more volatile, renders the
recipient country extremely vulnerable. Tentative evidence for India supports
this hypothesis as portfolio flows are more volatile than FDI, as measured by
the standard deviation of the two series. The standard deviation of portfolio
investment between 1990-99 is 5163.2 which is substantially larger than 4592.3
for FDI. The difference in volatility increases when measured at higher
frequency, quarterly (1900.5 and 1226.9 respectively) as well as monthly (205.3
and 94 respectively).
Portfolio flows also render the stock markets more volatile through increased
linkages between the local and foreign financial markets. Preliminary evidence
for India shows some support for this hypothesis as the co-movement between
the share prices index and other stock prices indicators during the capital surge
of 1992-95. The rise in the share prices index presumably contributed to the
rise in market capitalization and the price-earnings ratios during this period.
Simple correlation measures between portfolio capital flows and the BSE share
price index is positively strong, 0.58. The price-earnings ratio is observed to be
doubling between 1990-91 and 1992-93 and dipping sharply after 1995, when
the flows subsided. A similar trend is observed for the period of inflows boom
in South-east Asia; this ratio doubled between 1990-93 for Hong Kong and
Thailand. The negative consequences were that it fuelled stock market booms
and contributed to market volatility in the case of Mexico and the East Asian
economies.
commercial debt capital in the 1980s and in favour of non-debt flows in the
1990s. The approach to liberalization of restrictions on specific capital account
transactions, however, has all along been against any "big-bang". India
considers liberalization of capital account as a process and not as a single event.
While relaxing capital controls, India makes a clear distinction between inflows
and outflows with asymmetrical treatment between inflows (less restricted),
outflows associated with inflows (free) and other outflows (more restricted).
Differential restrictions are also applied to residents vis--vis non-residents and
to individuals vis--vis corporate and financial institutions. The control regime
also aims at ensuring a well-diversified capital account including portfolio
investments and at changing the composition of capital flows in favour of nondebt liabilities and a higher share of long-term debt in total debt liabilities. Thus,
quantitative annual ceilings on external commercial borrowings (ECB) along
with maturity and end use restrictions broadly shape the ECB policy. Foreign
direct investment (FDI) is encouraged through a progressively expanding
automatic route and a shrinking case-by case route. Portfolio investments are
restricted to select players, particularly approved institutional investors and the
NRIs. Short-term capital gains are taxed at a higher rate than longer-term capital
gains. Indian companies are also permitted to access international markets
through GDRs/ADRs, subject to specified guidelines. Capital outflows (FDI) in
the form of Indian joint ventures abroad are also permitted through both
automatic and case-by-case routes.
assistance chiefly for infrastructure projects. As the need for capital assistance
increases, the need for technical assistance shifts from general to more specific
skills.
The gradual increase in domestic savings and a growing capacity to attract
private and other conventional foreign capital on non-concession ally term will
progressively reduce the need for foreign aid. The assumption that need for
foreign capital is temporary and limited is underlined several recipients in Latin
America elsewhere and expected attain rapid development in ten to fifteen years
but it is recognized that in Asia and Africa, the need for capital flows ill remain
for a much longer time. Theoretical and empirical research on the role of
foreign capital in the growth process has generally yielded conflicting results.
Conventionally, the two-gap approach justifies the role of foreign capital for
relaxing the two major constraints to growth. In the neo-classical framework,
however, capital neither explains differences in the levels and rates of growth
across countries nor can large capital flows make any significant difference to
the growth rate that a country could achieve. In the subsequent resurrection of
the two-gap approach, the emphasis has generally laid on the preconditions that
could make foreign capital more productive in developing countries. The
important preconditions comprised presence of surplus labour and excess
productive demand for foreign exchange.
With the growing influence of the new growth theories in the second half of the
1980s that recognized the effects of positive externalities associated with capital
accumulation on growth, the role of foreign capital in the growth process
1 shows the areas where FDI caps exist. While inbound FDI investors have the
ability to repatriate capital, so far, in the Indian experience, this reverse flow of
capital has been tiny. As an example, in 2006{07, it was 0.01% of GDP. Hence,
for all practical purposes, inbound FDI has been a one-way process of capital
coming into the country. The easing of capital controls, coupled with strong
investment opportunities in India, gave a strong rise in FDI flows into India:
from 0.14% of GDP in 1992-93 to 0.53% in 1999-2000 and then to 2.34% of
GDP in 2006-07.
From April 2000 to August 2007, $44 billion came into India through FDI. In
terms of the country composition, the bulk of FDI into India came from
Mauritius; the reason for this is that India has a preferential tax treaty with
Mauritius. Services, financial and non-financial, attracted the highest amount of
FDI. Between April 2000 and August 2007, US$8 billion, or 20.6of all FDI
flows, came into the services sector.
financial
listing.
One element of the policy framework of the early 1990s was encouragement for
equity flows but barriers against debt inflows. Technically, the government of
India has no sovereign debt program. Aid flows are miniscule. There is a cap on
the stock of ownership of government bonds by FIIs which is set at a miniscule
number of $1.5 billion. Hence, as a practical matter, FII investment into rupee
-denominated government bonds is zero. However, from time to time, banks
have borrowed abroad depending on the government's assessment of the stock
of foreign exchange reserves and their adequacy. One form this has taken is
borrowing in the form of bank deposits of Non-Resident Indians (NRIs).
The interest rates on these deposits are set by the RBI and fluctuate according to
whether the government wishes to encourage or discourage inflows. Three quarters of Indian bank deposits are with government-owned banks, which are
explicitly guaranteed by the government. Even with private banks, there is an
implicit liability of the State, for no significant private bank has ever been
followed to fail. The borrowing of an Indian bank is, then, visibly backed by the
government. The authorities claim that a massive reduction in offshore debt,
particularly offshore sovereign debt, took place in the 1990s.
By the official classification, the external debt of GOI stagnated at between $45
billion and $50 billion over 1998-2007. However, a more accurate rendition of
the situation requires addressing a phenomenon that we term \quasi-sovereign"
debt. Quasi-sovereign borrowing, based on a reclassification of the detailed
statistics for debt stock. While sovereign debt measured in dollars has stagnated,
implying a rapid decline in sovereign debt expressed as percent to GDP (from
20% in 1992 to 6% in 2007), this decline is exaggerated by keeping quasisovereign debt out of this reckoning. Until 2000, the private sector had roughly
one-fourth of total debt. Between 2000 and 2007, the share of the private sector
rose to roughly 40%, reflecting the liberalization of ECB. However, the
Outward capital flows primarily take two forms. The first and massive
mechanism is the purchase of US treasury bills and other foreign assets by RBI
when it builds reserves. The other form of capital outflows that has become
important in recent years is outbound FDI by Indian companies. Outbound FDI
flows from India have risen sharply since 2004.
India's overseas investment policy was liberalized in 1992. The rationale for
opening up Indian investment overseas was to provide Indian industry access to
new markets and technologies with a view to increasing their competitiveness.
The policy was further liberalized in 1995. Since 2004 Indian companies have
been allowed to invest in entities abroad up to 200% of their net worth in a year.
In response, thousands of Indian firms have embarked on turning themselves
into multinational corporations.
Overseas investment approvals have been steadily increasing since 1996.
Approvals for investment abroad were at 1395 ($2,855 million) in 2005-06 as
compared to 290 approvals ($557 million) in 1996-97. But the sharpest growth
took place in 2006-07. In 2006-07, between April and October, 870 approvals
were granted to Indian companies for overseas investments worth $6,034.87
million as compared with 822 approvals worth $1,191 million in the
corresponding period of last year, a sharp jump of more than 5 times.
Inbound and outbound (net) FDI flows, both expressed as percent to GDP.
Outbound flows have risen sharply, to a level of over 1% of GDP a year. In
2006 the flow of outbound FDI as a percentage of gross fixed capital formation
in India rose to gross outbound FDI rose to 1.5. Software firms were among the
first Indian firms that used overseas acquisitions as a way to better access the
US market. Pharmaceutical firms were next, and they employed acquisitions to
reach out to regulated overseas markets like Europe and the US. The share of
undertake the tasks of regulations and supervision (Khanna, 1999). The most
important fall out of the reform was the free pricing and setting up of new
guidelines regarding new issues.
Initially, only fixed price mechanism of floating new capital issues were
followed. An alternative mechanism of book building 1 was introduced in 1995
giving the issuer the choice to raise resources either through this or through the
fixed price mechanism. Although the book building guidelines were prescribed
in 1995, no issue was floated due to certain restrictive guidelines, which were
modified in 1999. The book building mechanism of floating new capital issues
has been devised in such a way that those small investors will also be able to
subscribe to securities at a price arrived at, through transparent process. Issuers
of capital are required to meet the guidelines of SEBI on disclosure and
investors protection (Reddy, 1997).
In September 1992, Foreign Institutional Investors (FIIs) were allowed
unrestricted entry in terms of volume of investment in both primary and
secondary markets. In the secondary market, major reforms were the laying
down of capital adequacy ratio for brokers; the banning of inside trading and the
introduction of computer based trading system (Pal, 1998 and chitre, 1996).
Till recently, trading on the Indian stock exchanges took the place
through open outery system baring NSE and OCTEI, which adopted screen
based trading system from the beginning (i.e. 1994 and 1992, respectively). At
present all other stock exchanges have adopted on-line-screen-based electronic
trading. It has replaced the open outery system of the two large stock
exchanges; the BSE, which provides a combination of order and quote driven
trading system, and NSE, which has only an order driven system. All stock
exchanges operating in India have over 8000 terminals spread wide across the
country. In 1999-00, the SEBI issued guidelines for opening and maintaining
the trading terminals abroad, while no trading terminal could be opened abroad
due to high cost of connectivity. For ensuring greater market transparency, the
SEBI has recently banned, negotiated and crossed deals (where both the buyer
and the seller operate through the same broker) in Sept. 1999. All private off
market deals in both shares, as well as listed corporate debts were banned. All
such deals were now rotated only through the trading screens. There were three
main advantages of electronic trading over floor-based trading as observed in
India, viz. transparency, more efficiency price discovery and reduction in
transaction costs. It also reduces the segmentation of markets (Bhole, 1999).
Thus, emphasis has been on disclosure of information, safeguarding of
investors interest and opening up to foreign investors. The result of this has
been a dramatic increase in the number of new issues and amount of capital
raised after 1991-92. While traditionally; mainly two instruments viz., debt and
equity were traded, a large number of new and hybrid instruments were
introduced in the first half of nineties through an increase in the new issues
(Chakrabrati, 2001 and Samal, 1997).
Markets have widened with an increase in the number of players such as mutual
funds and Foreign Institutional Investors (FIIs) 2. A major implication of this
resulted in giving the firms a position to substitute one source of funds for
another, depending on relative costs. When the foreign markets were modest
this enabled the firms to diversify their source of funds (Mishra, 1997).
CHAPTER 6: CONCLUSION:
This study, therefore, made a modest attempt to analyze the dynamics of some
major macroeconomic variables during the post-reform period in India. The
main focus of this study lies in analyzing the behavior of some selected macroeconomic indicators in relation to the surge in inflows of private foreign capital
in India since 1995, the year in which several major reform programs were
initiated. A review of the analytical literature shows that macroeconomic
consequences of financial liberalization are the results of the combined effect of
monetary, fiscal as well as trade and exchange rate policies followed by the
government of a country. So, there is no straightforward way of predicting the
resulting macro- economic effects of financial liberalization in any country.
The trends of total international capital flows into India are positive, where
portfolio investment flows are negative in the year of 1998-99. The Foreign
Direct Investment (FDI) does not reveal stable trend so far in India. The
composition of capital inflows in India makes a significant size both in terms of
impact and smooth management. The impact of total capital flows on economic
growth is positive in India. The Foreign Direct Investment (FDI) that has huge
contribution to influence the economic behavior is also positively affecting the
economic growth. The Foreign Portfolio Investment (FPI) is indirectly affecting
the economic growth, which has less impact on economy. The Foreign
Institutional Investment (FII) has negative impact on growth, but it is very
negligible.
Portfolio capital flows are invariably short term and speculative and are often
not related to economic fundamentals but rather to whims and fads prevalent in
international financial markets. There are three-policy implications, which
emerge from this analysis. First India should move to influence both the size
and composition of capital flows. Second India should focus on strengthening
theyre banking system rather than promoting financial markets. Banks can
provide the surest vehicle for promoting long-term growth and industrialization.
Thirdly since financial markets in India are here to stay, Government should try
to shield the real economy from their vagaries. Economic growth in India is
financed either by its domestic savings or foreign saving that flow into the
country. We had to largely depend on domestic savings to give impetus to our
growth, prior to financial sector reform in the country. Though, the foreign
capital flows into the country in the form of aid, External Commercial
Borrowing (ECB) and NRI deposits, it did not and was not expected to
contribute much towards are capital formation or economic growth. After 1993,
when capital account was partially liberalized, it was hoped that capital inflows
would contribute towards our economic growth. It concludes that capital
inflows have not contributed towards industrial production or economic growth.
There are two reasons for this, one the amount of capital inflows to the country
has not been enough. Two, the amount of capital that does flow in, is not
utilized to its full potential (Mazumdar, 2005).
CHAPTER 7: BIBLOGRAPHY
1. A published volume from the National Bureau of Economic Research Publication Date: May 2007 Title: Indias Experience with Capital
Flows: The Exclusive Quest for a Sustainable Current Account Deficit
2. Economic Reforms, Capital Flows And Macro Economic Impact On
India by Narayan Sethi
https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=10&cad=rja&uact=8&ved=0
CFgQFjAJ&url=http%3A%2F%2Fwww.igidr.ac.in%2Fmoney
%2Fmfc_10%2FNarayan
%2520Sethi_submission_51.pdf&ei=ezDoVJyzPMG1uQTLpYCYBA&u
sg=AFQjCNEfMMRqfHvc-c783UAEDx4FGaW9bg&sig2=0w-9_91r9a4goZ9YNYvtA
3. Managing capital flows: The case of India by Ajay Shah, Ila Patnaik
May 2008
NIPFP-DEA Research Program on Capital Flows and their Consequences
National Institute of Public Finance and Policy
New Delhi
http://www.nipfp.org.in/nipfp-dea-program/index.html
4. Capital Flows And Their
Macroeconomic Effects In India
Renu Kohli
March, 2001
http://icrier.org/pdf/renu64.pdf