25-07-2012, 12:07 PM
Indian Economic Perspective
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Economics
Economy refers to the conditions under which goods are produced in a country and the manner in which the people are gainfully employed
Classification(s)
Rich/poor
Socialist/Capitalist/Mixed
Developed/underdeveloped/developing
Agricultural/industrial
Planned/unplanned
An economy in which people are very well employed and thus have high standards of living and high per-capita income, is known as rich economy
People employed as per the government’s prescriptions is a socialist economy
An economy where production and employment are controlled by private entrepreneurs is a capitalist economy
Per capita income means earnings of each Indian if the national income is evenly divided among the country's population at 117 crore (1.17 billion)
India ranks a pitiable 127th in per capita income. And that, despite the fact that the per capita income of Indians grew by 14.5 per cent to Rs 46,492 in 2009-10 from Rs 40,605 in the year-ago period, as per the revised data released by the government on Monday, January 31
China is the world's second largest economy, with its GDP standing at slightly more than $7 trillion. China is ranked 93rd in terms of per capita income.
China, the world's factory, has a highly developed manufacturing sector. The country also has a very well developed telecommunications market, apart from robust agricultural and industrial sectors.
Essential Process of an Economy
Production
Any economic directed towards the satisfaction of human wants is known as production
The production of goods and services is necessary for the existence of an economy
The level of production in any economy is the best measure of its performance
Consumption
The act of satisfying one’s wants is called “consumption”
Goods and services are produced only because human wants need to be satisfied
The quality and quantity of consumption reflect the levels of income and employment in the economy
Investment
Is the addition made to the total stock of capital
An economy cannot grow if it consumes all that it produces
If the desire is to increase its productivity, it must consume less than what it produces or produce more than what it consumes
Fundamental Problems in Economy
What to produce, How to produce, For whom to produce
Factors of Production
Factors of production means inputs and finished goods means output.
Input decides the quantity of output i.e. output depends upon input.
Input is the starting point and output is the end point of production process and such input-output relationship is called as "Production Function".
In economics, production means creation or an addition of utility.
According to Prof. Benham, "Anything that contributes towards output is a factor of production."
Enterprise
Indian Partnership Act, 1932
Firms can be created through a contract between collective individuals
Company’s Act, 1956
A registered company means a co incorporated under the Co’s Act, 1956.
What about co’s formed for promoting – art, charity, religion or any other useful purpose.
Def: A voluntary association of persons. A co, in the broad sense, may mean an association of individuals formed for some common purpose.
Separate legal entity: A co is separate from its members. It is an artificial person
Enterprise
Private Companies :
min capital of Rs. 1 lakh or higher.
Restricts the right to transfer shares
Limits the no. of its members to 50, not including employee members.
Prohibits public to subscribe for shares
Prohibits deposits from non-members
Public Companies:
Minimum capital of 5 lakhs or more
May be listed or unlisted
Equity Market
Investment related
A bank deposit could earn 8% to 10%
An investment in the right company could earn upto 40% in short term, BUT includes high RISK
High RISK, HIGH RETURNS
Moving from private firm to public firm
Revenues earned vs Capital borrowed
IPO: Initial Public Offer (Oil India, Ashtavinayak Cine Vision, Nitesh Estates, Emaar MGF, Lodha Developers, Sahara Group)
Face value vs market value
Equity Market
Equity Security
ownership
entitled to distributed earnings
entitled to share of assets
Types of Trading
short selling
buying on the margin
institutional trading
Bullish vs Bearish market
Equity Market
Stock Market indicators
measure average performance of a group of stocks
Stock Index
weighting of stocks
equal, price, value
average
arithmetic
geometric
Organisation picks groups of stocks to measure
Nifty, FTSE 100, etc
Nifty: 50 large blue chip companies representing the cross section of industries and usually market leaders
Sector corresponding to BSE/NSE quotes
Auto, Bank, Capital Goods, Consumer Durables, FMCG, Health Care, IT, Metal, Oil & Gas, PSU
Realty, Teck, Power
FDI/FII
FDI stands for Foreign Direct Investment, a component of a country's national financial accounts.
Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations.
It does not include foreign investment into the stock markets.
Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly
Sector Specific Foreign Direct Investment in India
Hotel & Tourism (100% FDI is permissible in the sector on the automatic route)
Non-Banking Financial Companies (49% FDI is allowed from all sources on the automatic route subject to guidelines issues from RBI)
Insurance Sector (51% through automatic route)
Telecommunication (49% subject to licencing and security requirements and adherence by the companies to licence conditions)
Trading (51% provided it is primarily export activities)
Power (upto 100% in respect to projects relating to electricity generation, transmission and distribution)
Drugs & Pharmaceuticals (100% permitted on automatic route)
Roads, Highways, Ports and Harbours (100% under automatic route)
Pollution Control and Management (100% under automatic route)
Call centers in India (100% subject to certain conditions)
Business Process Outsourcing (100% subject to certain conditions)
FDI is prohibited under the Government Route as well as the Automatic Route in the following
i) Retail Trading (except single brand product retailing)
ii) Atomic Energy
iii) Lottery Business
iv) Gambling and Betting
v) Business of Chit Fund
vi) Nidhi Company
vii) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (cf. Notification No. FEMA 94/2003-RB dated June 18, 2003).
viii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).
ix) Trading in Transferable Development Rights (TDRs).
x ) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.
Countries Share
MAURITIUS (39%)
Singapore (10%)
Japan (8%)
U.S.A (6%)
U. K (6%)
Netherlands (4%)
Cyprus (4%)
Germany (3%)
France (2%)
U.A.E. (1%)
Cumulative amount of FDI inflows from April 2000 to January 2012
US$ 160,096,000,000
Rs. 81,64,89,60,00,000/-
Foreign Indirect Investment (FII)
Investment of foreign bodies in securities (equity market)
Monitored and regulated by SEBI (Securities and Exchange Board of India)
Market Structures
Theory of the firm
The objective of the firm is to maximise net revenue in the face of given prices and a technologically determined production function
A price increase for a product raises its supply; a price increase for a factor reduces its demand
The theory of the firm deals with the role of business firms in the resource allocation process
The firm operates with perfect knowledge of all relevant variables involved in making a decision and it acts rationally while doing so
Originally, the theory assumed that the firm is operating within a perfectly competitive market
Market structures are studied to study the pricing constraints
Perfect Competition
Imperfect Competition
Monopoly vsMonopsony
Monopolistic competition and
Oliogopoly and oligopsony
Pure and perfect competition
There are a large number of undifferentiated buyers and sellers
Each competitor offers or seeks exactly a similar thing as do the others
The market in which the commodity is bought and sold must be well organized, trading must be continuous and buyers and sellers must be so well informed
There are many competitors, each acting independently
The market price is flexible over a period of time, constantly rising and falling in response to the changing conditions of supply and demand
There should be no obstacle to the entry and to the withdrawal of the firms in the industry
Monopoly
There is only one seller of a particular good or services
Rivalry from the producers of substitutes is so remote as to the significant
Monopolist is in a position to set the price himself
Monopoly implies market power
Causes of Monopoly
The government may grant a licence to any particular person for operating public services
A producer may possess certain scarce raw materials, patent rights, secret methods or production or specialised skill which might give him monopoly power
The necessity of having large resources, as in the case where the minimum efficient scale of operations is very large, may often create monopoly
Ignorance, laziness and prejudice of the buyers may create monopoly in favaour of a particular producer
Monopsony
There is only one buyer of the goods and services
Rivalry from buyers who offer substitutive outlets is so remote as to be insignificant
As a result, the buyer is in a position to determine the price he pays for the goods or services he buys
Oligopoly
Sellers are few in number
Any of them is of such a size that an increase and decrease in his output will appreciably affect the market price. In fact, the size of each seller’s output in relation to the total supply is the test.
Each seller knows his competitors individually in each market.
Foundations of Oligopoly
Absolute cost advantages of established firms due to control of strategic material supplies or due to patented production techniques
Advantages of resulting from product differentiation and consumer loyalty to established brands/products
Economics of large scale that makes it difficult for a new firm to finance the size or built up a market that permits minimization of costs
Restrictions on the entry of new firms exercised by the existing firms
Oligopsony
Buyers in a particular market are few in number
Each one of them is of such a size that an increase or decrease in his demand will considerably affect the price
No single buyer can afford to ignore the reaction of his rivals to policies he might initiate