Presentation Impact of Economic Liberalisation on Indian ...

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

Sankar De Indian Economic Sector Reforms Conference

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


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.


-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


0

50000

100000

150000

200000

250000

300000

1993 1994 1995 1996 1997 1998 1999 2000* 2001* 2002*

Year

Rup

ees

cror

es


Non-Government Companies

Fig. 1.B : Paid-up Capital



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


Non-GovernmentCompanies

Fig. 1.C : Contribution to GDP



0

50000

100000

150000

200000

250000

300000

350000

400000

1993 1994 1995 1996 1997 1998 1999 2000* 2001* 2002*

Year

Rup

ees

cror

es


Non-Government Companies

Fig. 1.D : Gross Domestic Investments




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.


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



Besides, the bigger companies in the private sector have grown much faster than smaller companies in all important respects, including sales, profits, and assets.


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


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


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


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.


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)


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).


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


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.


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


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.


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.


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)


““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


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


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


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


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


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


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.


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%)


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


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.


Q&A


Thank You

Presentation Impact of Economic Liberalisation on Indian ...

Economy & Finance

Transcript of Presentation Impact of Economic Liberalisation on Indian ...