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HermeneuticS
Volume 02, Number 02
Poverty and Inequality in Uttar Pradesh
Dinesh Sharma, Mohd Arif
Corporate Governance, Merger, and Acquisition in Nepalese Financial Sector
Tara Prasad Upadhyaya, Prashant Kumar
NABARD’s Functioning in Persuit of Agricultural Development
Sameer Shekhar, S. N. Jha
A Study of Irregular Trend of Child Death in Madhya Pradesh
B. P. Singh, Sonam Maheshwari, Gunjan Singh
NewDTC& its Impact on Inclusive Growth: Pragmatic Study from Indian Perspective Meera Singh
Corporate Social Responsibility – Issues and Challenges in India
Manju Khosla
Inventory Management in Indian Steel Industry: A Comparative Study
Mukesh Babu Gupta
Derivatives Trading and Stock Market Volatility
Vaibhav
Impact of Capital Structure on Profitability of HINDALCO Industries Ltd
Anup Kumar Roy
Mobile Banking: Problems and Future prospects
Anurag Singh
Trends of Economic Growth and Regional Disparity in India
Sunil Kumar
Convergence from Indian GAAP to IFRS
Mohd. Salim
FDI in Multi Brand Retailing –A New Concept
Dharmendra Kumar
A Publication of
A Biannual Refereed International Journal of Business and Social Studies
September 2012
Youth Empowerment and Research Association
RNI – UP/ENG/2011/36701 ISSN: 2231-6353
RNI – UP/ENG/2011/36701 ISSN: 2231-6353
Patron
Prof. Y. P. Singh Formerly Head & Dean, Department of Commerce and Business,
Delhi School of Economics, University of Delhi, Delhi
Chief Advisor Prof. H. K. Singh
Faculty of Commerce, Banaras Hindu University, Varanasi
Editorial Board Chief Editor
Prof. F. B. Singh
Faculty of Commerce, Banaras Hindu University, Varanasi
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Shri Ram College of Commerce, University of Delhi, Delhi
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SBS College, University of Delhi, Delhi
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HermeneuticS A Biannual International Refereed Journal of Business and Social Studies
Volume 02, Number02, September 2012 Copy Right © YERA, Varanasi.
Associate Editors 1. Dr. B. P. Singh, Faculty of Commerce, BHU,Varanasi 2. Dr. Anita Kumari, R.G.S.C., B.H.U., Barkachha 3. Dr. Ajai Pratap Yadav, S.B.S. College, D.U., Delhi 4. Dr. Anand Singh, R.G.S.C., B.H.U., Barkachha 5. Dr. Maju Khosla, Gargi College, Delhi Univeristy
Assistent Editors 1. Pushpraj Singh 2. Jamaluddeen (MANF) 3. J. E. Bara (RGNF) 4. Brajesh Kumar (JRF) 5. Arun Kumar(JRF)
Editorial
Qualitative as well as quantitative improvements are the buzzwords of the business
education and empirical research fields. Quantitative growth has resulted in a perceived loss of
professional quality, autonomy and satisfaction. Can the teachers or researchers, who are seriously
bothering of Academic Performance Index (API) in their CV, deliver to the best on qualitative
front? It is essential to understand that provision of API has clear intention of quality also therefore
the academicians cum practitioners of business world must put emphasis on empirical and case
study approach in writing the articles and research papers for reputed journals. Quality of Research
Work (QRW) is a multidimensional construct and infrastructural support of UGC, AICTE and other
Governmental Agencies should be such that academic standards may be enhanced by the scholars,
in effective way. In Central Universities the mandatory funding of every Ph.D. scholar is a positive
step to bring qualitative and comprehensive growth and this should be accepted by state universities
of our country.
HermeneuticS, a biannual refereed international journal published by Youth Empowerment
and Research Association (YERA), is solely devoted to provide a pragmatic forum of interaction
among researchers, executives and academicians of business and social studies. I congratulate the
entire team of HermeneuticS for this serious academic work. We are privileged to present before
you the September 2012 issue of HermeneuticS, which contains a rich blend of research and case
papers. In this issue the contributors have thrown light on emerging issues of Corporate
Governance, Rural Growth, CSR, Derivatives, Poverty Eradication, Mobile Banking, Accounting
Convergence etc. related to business and managerial world. The articles on new DTC, FDI and
IFRS regulation are of interesting character and in future other attractive areas will be touched by
scholars by contributing in this reputed journal. With the growth of professionalism, the journals
have become popular device in these days. IT revolution has resulted into the availability of large
number of alternative journals but this journal is a major departure from the conventional literature
which attempts to provide a fresh and systematic approach in comprehensive way to cover the
various facets of the business and management. Overall the journal presents emerging dimensions
and horizons of business studies especially in Indian context. I congratulate the entire team of
HermeneuticS for this academic work. We shall be grateful if the student community, readers and
the teachers come out openly with constructive and positive criticism so that improvement can be
made in the coming editions.
Our special thanks to Patron who has been an encouraging source and strength.
Wish you very happy Dashahara and Diwali.
H. K. Singh F. B. Singh Chief Advisor Chief Editor
HermeneuticS Volume 02, Number02, September 2012
Copy Right © YERA, Varanasi.
RNI – UP/ENG/2011/36701 ISSN: 2231-6353
HermeneuticS
Contents
Title of Paper Author (s) Page
No.
Poverty and Inequality in Uttar Pradesh Dinesh Sharma,
Mohd Arif
1
Corporate Governance, Merger, and
Acquisition in Nepalese Financial Sector
Tara Prasad Upadhyaya,
Prashant Kumar
6
NABARD’s Functioning in Persuit of
Agricultural Development
Sameer Shekhar,
S. N. Jha
15
A Study of Irregular Trend of Child Death in
Madhya Pradesh
B. P. Singh, Sonam Maheshwari,
Gunjan Singh
20
Corporate Social Responsibility – Issues and
Challenges In India
Manju Khosla 24
New DTC and its Impact on Inclusive Growth:
Pragmatic Study from Indian Perspective
Meera Singh 29
Inventory Management in Indian Steel
Industry: A Comparative Study
Mukesh Babu Gupta 36
Derivatives Trading and Stock Market
Volatility
Vaibhav 39
Impact of Capital Structure on Profitability of
HINDALCO Industries Ltd
Anup Kumar Roy 44
Mobile Banking: Problems and Future
prospects
Anurag Singh 48
Trends Of Economic Growth and Regional
Disparity In India
Sunil Kumar 52
Convergence from Indian GAAP to IFRS Mohd. Salim 66
FDI in Multi Brand Retailing –A New Concept Dharmendra Kumar 70
A Biannual Refereed International Journal of Business and Social Studies
Volume 02, Number 02, September 2012
Youth Empowerment and Research Association
A Publication of
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 1 ISSN: 2231-6353
A Poverty and Inequality in Uttar Pradesh
Prof. (Dr) Dinesh Sharma *
Mr. Mohd Arif **
Abstract
Uttar Pradesh is one of the regions having huge potential in India. Lately, it sank into the sea of backwardness. From
the National Sample Survey (NSS) round surveys it was found that poverty has decreased but inequality has
increased in Uttar Pradesh (UP) over the year. The Head Count Ratio for UP fell from 40.9% to 29.20% during 1993-
94 to 2002-03 and it become 19.25% in 2007-08. The validity of the proposition can be examined by tracing the
trends in MPCE, State Domestic Product (SDP), per capita income growth and Gini coefficients.
Uttar Pradesh (UP) has one of the largest and most backward states with an assorted composition. It suffered from
regional disparities, imbalance and inequality. In post independence era, some of the regions of this state became very
backward or underdeveloped and the state inhabits largest number of poor population. The challenges rose by intra-
regional and inter-regional disparities & imbalances and their rigorous implications on poverty & living conditions
and governance are gigantic. This paper deals with the scenario of poverty, living conditions and inequality of Uttar
Pradesh.
Keywords: Poverty, Incidence of Poverty, Poverty Lines, Inequality, Measure of Inequality, Regional Disparities,
Economic Growth, Uttar Pradesh.
Introduction
Through out British Rule, Indian Economy remained
almost stagnant. People were caught in abject poverty.
Grand old man of India, Dadabhai Naoroji, gave the
theory of Drain of wealth to explain how Indians were
being exploited by the Raj and how the conditions
were being created to perpetuate poverty. As our
freedom struggle proceeded to maturity, economic
matters and economic conditions of people came to be
deliberated upon by the Indian national congress.
Socialist ideas entered congress thinking in 30s.
Karachi Congress Session (1931) specially mentioned
the economic objectives.
After Independence, we adopted our own constitution.
In the constitution, people of India resolved to give
themselves social, economic and political justices.
Economic justices involves end of deprivation of
people on lower strata of society. It means creating
condition in which an individual has fullest
opportunities to develop and realize his potential
capabilities. Deeply impressed by achievement of
Soviet Model of Planned Economic Development, our
policy makers also choose similar pattern to be
formulated and implemented through Five Year Plans.
It was assumed that high growth of Gross Domestic
Product (GDP) will address the problem of poverty via
trickle down. But Hindu growth rate belied all
expectations. Measures such as abolition of zamidari
and half hearted land reform did not prove fruit full.
Indian economy‘s growth performance began to
change in 80s. After economic reforms, growth
accelerated further and India become one of the fastest
growing economy of the world second only to china in
first decade of 21st century. But the benefits of growth
are not evenly distributed among all sections and
regions of the country. In fact vast majority of people
has been left behind the growth process that is why 11th
five year plan document gave special emphasis to
inclusive growth i.e. a growth which include all
section, regions and sectors of the economy.
Uttar Pradesh (UP) has always been a curious case as
well as challenge to researchers. Drèze and Gazdar
(1996) opine, ―Uttar Pradesh can also be seen as a case
study of development in a region of India that currently
lags behind much of the rest of country in terms of a
number of important aspects of well-being and social
progress‖. Uttar Pradesh (UP) inhabits about 16.2% of
total population of India but it contributes only 8% of
India‘s GDP. Population of UP is more than the
population of many countries of the world. But at the
same time it is one of the most backward states and is a
member of so called BIMARU states. The
economically stronger UP with its huge market could
be the engine of growth for the rest of the country.
After the post-reform period, the economic
performance of the state has fallen over the year and
lagged behind the rest of the country.
Objective of the Study
The research has the following objectives:
1) To Study the Poverty Scenario in Uttar Pradesh.
To Study the Inequality Scenario in Uttar Pradesh
Research Methodology
2) This research is an attempt to study the poverty
and inequality scenario prevailing in Uttar
Pradesh. For this purpose exploratory and
descriptive research design is used. The research is
based on secondary data which are collected from
*Professor, Department of Commerce, University of Lucknow **Research Scholar, Department of Commerce, University of Lucknow
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 2 ISSN: 2231-6353
Directorate of Economics and Statistics (DES),
Planning Commission & Department and National
Sample Survey Organization (NSSO), PSMS,
publication and website etc. To estimate the incidence
of poverty Head Count Ratio (HCR), Poverty Gap
Index, Squared Poverty Gap Index, Sen Index is used.
To measure the inequality Gini Coefficient and
Coefficient of Variation is used. This Paper is divided
into four sections. Section I deals with the Theoretical
Background, Section II deals with the Incidence of
Poverty, Section III deals with the inter-regional and
intra-regional Inequalities and Section IV relates to the
Conclusion.
Section I: Theoretical Background
Poverty is a social phenomenon. According to the
World Bank (2000), ―Poverty is pronounced
deprivation in wellbeing‖. Here the important question
is what is meant by well-being and of what is the
reference point against which to measure the
deprivation. There are many approaches to think of
well-being, one of them is as the command over
commodities in general, so people are better off if they
have a greater command over resources. The main
focus is on whether households or individuals have
enough resources to satisfy their needs. Typically,
poverty is then measured by comparing individual‘s
income or consumption with some defined threshold
below which they are considered to be poor. It is a
traditional method to define the poverty and also
known as income poverty.
Economist Nurkse viewed poverty as a consequence of
‗vicious circle‘. To him, poverty can be eradicated by
breaking the vicious circle which operates both on
demand and supply side of an underdeveloped
economy. Classical economists believed in natural
hand and suggested liaises faire policy for addressing
the issue of the development. Thus there was no active
role for state intervention in economic matter. Great
depressions provided opportunity for Keynes, to
underline the role of state in economic sphere.
Keynesian principle of effective demand proved
important for guiding policy action for the government
all over the world. Keynes showed how fiscal policy
can be effective not only for taking an economy out of
depression but also for attaining distributive objectives
of helping poor. Myrdal gave the theory of circular
causation which explains how pull and push factors
operate to widen the difference between backward and
developed regions.
According to neo-classical growth theory, regional
inequalities will eventually vanish because factor price
will be equalized under the force of competition and
inter-regional migration. However, new growth theorist
like Lucas, Romer etc., does not agree that regional
disparities will vanish. This is because differences in
human capital, research and development prevails.
Study reveals that there is little evidence of any
convergence taking place among the states in India.
Measures of Poverty
For measuring the poverty, one has the following
indicators:
Head Count Ratio (HCR): Head Count Ratio
(poverty rate or incidence of poverty) is one of the
most widely used measures for the poverty. It describes
the percentage of the population whose per capita
incomes or expenditures are below the poverty line.
Formally, the HCR is calculated as:
where P0 is proportion of the population that is counted
as poor, Np is the number of poor and N is the total
population (or sample).
Poverty Gap Index: Another popular measure of
poverty is the poverty gap index, which adds up the
extent to which individuals on average fall below the
poverty line, and expresses it as a percentage of the
poverty line. More specifically define the poverty gap
(Gi) as the poverty line (z) less actual income (yi) for
poor individuals. The gap is considered to be zero for
everyone else. Formally poverty gap index is written
as:
Squared Poverty Gap (Poverty Severity) Index: It is
another measure of poverty that takes into account the
inequality among the poor. This is simply a weighted
sum of poverty gaps (as a proportion of the poverty
line), where the weights are the proportionate poverty
gaps themselves. Squared Poverty Gap puts more
weight on observations that fall well below the poverty
line. Squared Poverty Gap =
Measures of Inequality
For measuring the various types of inequalities,
economist uses following indicators:
Gini Coefficient of Inequality: Economists have
popularized a measure known as Gini Coefficient
named after Corrado Gini, an Italian statistician and
demographer to measure the inequality. It is based on
the Lorenz curve, a cumulative frequency curve that
compares the distribution of a specific variable with
the uniform distribution that represents equality. To
construct the Gini coefficient, graph the cumulative
percentage of population on the horizontal axis and the
cumulative percentage of income on the vertical axis.
The sample Lorenz curve is shown below. The
diagonal line represents perfect equality. The Gini
coefficient is defined as A/(A + B), where A and B are
the areas shown in the figure. If A = 0, the Gini
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 3 ISSN: 2231-6353
coefficient becomes 0, which means perfect
equality, whereas if B = 0, the Gini coefficient
becomes 1, which means complete inequality.
Formally, let xi be a point on the x-axis, and yi a
point on the y-axis. Then Gini Coefficient is,
Coefficient of Variation: The standard deviation is an
absolute measure of variation. It is expressed in terms
of units in which the original figures are collected and
stated. The standard deviation of heights of students
cannot be compared with the standard deviation of
weights of students, as both are expressed in different
units, i.e., heights in meters and weights in kilograms.
Therefore, the standard deviation must be converted
into a relative measure of variation for the purpose of
comparison. The relative measure is known as the
coefficient of variation.
X
DeviationdardtansoftCoefficien
The coefficient of standard deviation is multiplied by
100 gives the coefficient of variation. Symbolically:
100X
.)V.C(variationoftCoefficien
Section II: Incidence of Poverty
The poverty line may be thought of as the minimum
expenditure required by an individual to fulfill his or
her basic needs. The poverty line defines the level of
consumption (or income) needed for a household to
escape poverty. Poverty line could be relative as well
as absolute. Planning Commission of India accepted
calorie intake as an indicator for determining poverty
line. Accordingly, 2400 cal. and 2100 cal. were fixed
poverty line respectively for rural and urban areas.
Table 1, present the incidence of poverty in
Uttar Pradesh and India from 1973-1974 to
2004-05.
It is noticed that except for 1977-78, poverty in UP has
always been greater than poverty in India. In 1977-78,
49.05% were poor in UP while 51.32% were poor in
India. Pattern of poverty in rural UP is almost same as
it is for India as whole up to 1987-88. From 1993-94 to
2004-05, there is a noticeable difference in rural
poverty of UP and India. Incidentally, this is a period
during which economic reforms were initiated and
accelerated.
Comparing, urban poverty in UP and India, we find
wider difference. From 1973-74 to 1983-84, difference
between urban poverty of UP and India was about 10-
11%. However, this narrowed down to about 5-6%
from 1987-88 to 2004-05. This may suggest that urban
poor of UP benefited more from the economic reforms
than rural poor. Percentage of poor in urban and rural
area of UP does not show large variation. For entire
period of under consideration, percentage of poor in
urban area is greater than in rural area. In 1977-78, the
difference was about 10% whereas for India percentage
of poor in urban area is less than it is in rural area.
We have calculated the rate of decline in poverty in UP
and India by compound growth formula. The highest
rate of decline is found in the period of 1993-94 to
1999-00. For UP the rate of decline was 5.27% per
annum while it was 6.21% for India. Between 1977-78
and 1983-84, poverty declined at the rate of 0.82%
while for India it was 2.82%, this difference seems
large. Similarly, the rate of decline was 0.29% and
1.53% respectively for UP and India during 1987-88 to
1993-94. The table 1 reveals that rate of decline in
poverty was more between 1993-05 than between
1973-74 to 1993-94.
Head Count Ratio treats poor as homogeneous group.
It is not sufficient to know how many poor there are
but also how much poor they are. Table 2, present the
data on Head Count Ratio and Poverty Gap over
different time period. In 1993-94, poverty gap was 10.4
and 9 for rural and urban area, meaning mean income
of people below poverty line was not much less from
poverty lines. The poverty gap steady fell during 2002-
03 and 2007-08. In 2007-08 the gap reached 0.033 and
0.042 in rural and urban area respectively. The figure
suggests, poor are concentrated just below the poverty
lines.
Table 1 Percentage of Population Below Poverty Line in UP and India
Years Uttar Pradesh India
Rural Urban
Combined Rate of
Annual
Decline
Rural Urban Combined Rate of
Annual
Decline
1973-
74 56.53 60.09 57.07 56.44 49.01 54.88
1977-
78 47.6 56.23 49.05 2.98 53.07 45.24 51.32 1.33
1983-
84 46.45 49.82 47.07 0.82 45.65 40.79 44.48 2.82
1987-
88 41.1 42.96 41.46 2.50 39.09 38.21 38.86 2.66
1993-
94 42.28 35.39 40.85 0.29 37.27 32.36 35.97 1.53
1999-
00 31.22 30.89 31.15 5.27 27.10 23.60 26.10 6.21
2004-
05 25.30 26.30 25.51 3.92 21.80 21.7 21.80 3.53
Source: Planning Commission, Government of India & NSSO Data, 61st Round
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 4 ISSN: 2231-6353
Growth performances of the states including UP are
given in Table 3, 4 and 5. State Domestic Product
(SDP) growth rate of UP was 4.95% in 1980-81 to
1990-91 and declined to 3.58% in 1991-92 to 1998-99
and increased to 4.53% in 1999-00 to 2006-07. Growth
rate of UP has been less than the national average in
both the period. Growth rate of per capita income of
UP was 2.60% in 1980-81 to 1990-91, declined to
1.28% in 1991-92 to 1998-99. Overall performance of
UP has been worse than the national performance.
Table 4
Annual Rates of Growth of Per Capita GrossState Domestic Product (% Year)
S.No. State 1980-81 to 1990-91 1991-92 to 1998-99
1 Bihar 2.45 1.27
2 Rajasthan 3.96 3.48
3 Uttar Pradesh 2.60 1.28
4 Orissa 2.38 2.08
5 Madhya Pradesh 2.08 3.67
6 Andhra Pradesh 3.34 3.67
7 Tamil Nadu 3.87 4.78
8 Kerala 2.19 4.35
9 Karnataka 3.28 4.08
10 West Bengal 2.39 5.14
11 Gujarat 3.08 6.73
12 Haryana 3.86 2.85
13 Maharashtra 3.58 6.19
14 Punjab 3.33 2.93
Combined GSDP of
14 States 3.03 4.02
Source: Montek S. Ahluwalia, ―State Level Performance Under Economic Reforms in
India‖ May 2000, Stanford University.
Table 6, present the per capita income and poverty
ratio for different states and some UT‘s of India. We
have estimated the coefficient of correlation (r)
between the two figures and it came out to be -0.518.
This shows that correlation between per capita income
and incidence of poverty is not strong one. This
suggests us to think over the strategy as increase in per
capita income may not be successful in reducing the
poverty. States with high per capita income such as
Maharashtra, Haryana have high percentage of poor
while states such as Kerala, J&K do not have very high
per capita income but they have low incidence of
poverty
S.No. State\UT’s Per Capita Income (in Rs.) (2004-05) Poverty Ratio (%) (2004-05)
1 Andhra Pradesh 23729 29.9
2 Arunachal 22542 31.1
3 Assam 16825 34.4
4 Bihar 7467 54.4
5 Chhatisgarh 18068 49.4
6 Delhi 55215 13.1
7 Goa 66135 25.0
8 Gujarat 29468 31.8
9 Haryana 35044 24.1
10 Himachal Pradesh 31140 22.9
11 Jammu & Kashmir 18630 13.2
12 Jharkhand 17493 45.3
13 Karnataka 24199 33.4
14 Kerala 27864 19.7
15 Madhya Pradesh 14534 48.6
16 Maharashtra 32979 38.1
17 Manipur 18386 38.0
18 Meghalaya 21915 16.1
19 Mizoram 22417 15.3
20 Nagaland 20996 9.0
21 Orissa 16306 57.2
22 Pondicherry 44908 14.1
23 Punjab 32945 20.9
Section III Inequality
Inequality is a broader concept than poverty as it takes
into account income distribution over entire population
rather than focusing only on the poor. Poverty is
related to, but distinct from, inequality. Inequality
focuses on the dispersion of a distribution of attributes,
such as income or consumption, across the whole
Table 2
Poverty Estimates for UP: 1993/94, 2002/03 and 2007/08
Poverty
Measure
Poverty Estimates
1993/94(50TH ROUND) 2002/03 (PSMS-II) 2007/2008 (PSMS-III)
Rural Urban Overall Rural Urban Overall Rural Urban Overall
Poverty
Line(in
Rs)
213.01 258.65 - 346.37 460.21 - 461.84 599.07
Headcount
Ratio (%) 42.3 35.1 40 .9 28.5 32.3 29.2 19.79 16.83 19.25
Poverty
Gap 10.4 9 10.1 4.7 6.5 5.1 0.033 0.042
Squared
Poverty
Gap
3.5 3.5 3.3 1.2 1.9 1.3 0.009 0.013
Source: NSS 50th and 61st round Central sample & PSMS-II & III.
Table 3
Rate of Growth of Gross State Domestic Product (Per cent Per Year)
S.No. Particulars 1980-81 to 1990-91 1991-92 to 1998-99
1 Bihar 4.66 2.88
2 Rajasthan 6.60 5.85
3 Uttar Pradesh 4.95 3.58
4 Orissa 4.29 3.56
5 Madhya Pradesh 4.56 5.89
6 Andhra Pradesh 5.65 5.20
7 Tamil Nadu 5.38 6.02
8 Kerala 3.57 5.61
9 Karnataka 5.29 5.87
10 West Bengal 4.71 6.97
11 Gujarat 5.08 8.15
12 Haryana 6.43 5.13
13 Maharashtra 6.02 8.01
14 Punjab 5.32 4.77
15 Combined GSDP of 14 States 5.24 5.9
GDP (National Accounts) 5.47 6.5
Source: Montek S. Ahluwalia, ―State Level Performance Under Economic Reforms in India‖ May 2000, Stanford
University.
Table 5
GSDP and Growth of UP
Year GSDP at Constant Price
1999-00 175159
2000-01 178997
2001-02 182885
2002-03 189682
2003-04 199682
2004-05 210462
2005-06 222242
2006-07 239070
Annual Growth Rate 4.543%
Source: Based on author calculation & DES Planning Department, UP.
Table 7
Trend in Gini Coefficient and CV in Different regions of UP
Year Gini Coefficient Coefficient of Variation
1999-00 0.085750 72.63185
2000-01 0.081455 72.10778
2001-02 0.075949 71.03878
2002-03 0.066960 69.75621
2003-04 0.070260 70.07721
2004-05 0.070843 70.31832
2005-06 0.074928 71.01876
2006-07 0.075840 71.12591
Source: Based on author calculation & DES Planning Department,
Government of UP
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population. In the context of poverty analysis,
inequality requires examination if one believes that the
welfare of individuals depends on their economic
position relative to others in society. Different
indicators can be used to study and analyze the level of
inequality particularly important indicators are income,
consumption, land ownership structure and distribution
of operational holdings.
Trends in coefficient for measuring inter-state
inequality are given in Table 7. This was found to be
stable up to 1988-89 and very low. There after it began
to rise and reached 0.233 in 1998-99. This increase is
substantial. Significantly positive slope is found by
fitting a time trend to the series. Increase in income
inequality can be attributed to uneven distribution of
benefits of economic reform. Economic reforms
increased industrialization and gave a boost to service
sector but UP remained laggard in these respects.
Table 8, attempts to analyze the intra-regional
inequality in income in four regions of UP, namely
Western, Eastern, Central and Bundelkhand during
1999-00 to 2006-07. Coefficient of Variation (CV)
between different regions is very high suggesting that
there is a high variation among regions in term of
aggregate production. Variation was 72.63% in 1999-
00 and fell to 69.75% in 2002-03 thereafter it began to
rise steadily. But the same cannot said about Gini
Coefficient. The Gini Coefficient fell from 0.085 in
1999-00 to 0.066 in 2002-03. Thereafter it began to
rise and reached 0.075 in 2006-07, incidentally these
are the years when Indian economy registered high
growth rate and growth rate of UP also picked up.
Section IV Conclusion
Above analysis shows that poverty in UP is still very
high and it has always been above national average in
both urban and rural area. Growth rate of UP has not
been keeping pace with national average. UP could not
be the beneficiary of economic reforms and
globalization. Economy of the state remains primarily
agriculture based. Share of UP in total FDI inflow in
the country is almost nil. Industrialist of the country
are not taking interest in making investment in UP. As
result per capita income remains low. Inequality
condition in land holding and operation holding is
discouraging whereas income inequality at regional
level does not seem to be high. To overcome these
issues strong effort is called for on the part of
government and policy makers. It should also be kept
in view that rising per capita income is not a guarantee
for eradication of poverty and reduction of inequality.
Target sections should be identified and programs
initiated focusing the target groups. Issue of
governance is also important. States which have good
governance show remarkable performance on
economic front also whereas poorly governed states
reflect poor performance on the front of over all
development including Human Development. There is
no objective measure of quality of governance but
impressionistic assessment suggest that situation
changes across states and poorer performing state have
more problems in the area of governance. Unless,
these deficiencies are addressed, plan schemes will not
achieve their stated objectives. Quality of governance
can help stimulate growth by making the policy
environment more business friendly.
References: Ahluwalia Montek S., ―State Level Performance Under
Economic Reforms in India‖, May 2000, Stanford
University.
Haughton Jonathan & Khandker Shahidur R (2009),
―Handbook on Poverty and Inequality‖, The World Bank,
Washington, DC.
Himanshu (2007), ―Recent Trends in Poverty and Inequality:
Some Preliminary Results‖ Economic and Political Weekly,
February 10, 2007.
Directorate of Economics and Statistics (DES), Planning
Department, Government of Uttar Pradesh, Download URL:
http://updes.up.nic.in/
DES, Planning Department, Government of Uttar Pradesh,
Monitoring Poverty in Uttar Pradesh: A Report on the
Second & Third Poverty and Social Monitoring Survey
(PSMS-II & III). Lucknow.
Basu. D. D, ―Introduction to the Constitution of India
(2009)‖, Wadhwa and Company Law Publishers, New Delhi
Pathak D. C, ―Poverty and Inequality in Uttar Pradesh during
1993-94 to 2004-05: A Decomposition Analysis‖, Indira
Gandhi Institute of Development Research, Mumbai, August
2010.
Diwakar, D.M. (2009), ―Intra-Regional Disparities,
Inequality and Poverty in Uttar Pradesh‖,
Economic and Political Weekly, Vol. XLIV, Nos. 26 and 27.
Planning Department, Government of UP. Download url:
http://planning.up.nic.in/
Planning Commission, Government of India,Download url:
http://planningcommission.nic.in/
NSS 61st Round, December. National Statistical
Commission, 2001, Report, Vol. II
Table 8
Trend in Inter-State Inequality
S.No. Year Gini Coefficient
1 1980-81 0.152
2 1981-82 0.152
3 1982-83 0.152
4 1983-84 0.151
5 1984-85 0.154
6 1985-86 0.159
7 1986-87 0.157
8 1987-88 0.161
9 1988-89 0.158
10 1989-90 0.175
11 1990-91 0.171
12 1991-92 0.175
13 1992-93 0.199
14 1993-94 0.207
15 1994-95 0.206
16 1995-96 0.230
17 1996-97 0.222
18 1997-98 0.235
19 1998-99 0.233
Source: Montek S. Ahluwalia, ―State Level Performance Under Economic
Reforms in India‖ May 2000, Stanford University.
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Corporate Governance, Merger, and Acquisition in
Nepalese Financial Sector
Tara Prasad Upadhyaya*
Dr. Prashant Kumar**
Abstract Corporate Governance, Merger and Acquisition is a new phenomenon in Nepal and it is now practicing in the
banking and financial sectors for the betterment of the Nation. In common parlance, fusion of more than one entities
leads to range of transactions in domain of mergers and acquisitions. Merger commonly take two forms. One, in case
of amalgamation i.e. two entities combined together and form a new entity extinguishing both the existing entities.
Second, in case of absorption, one entity get absorbs into another. The latter does not lose its entity. It is concluded
that merger and acquisition is the vital way to manage banking and financial institutions in Nepal. It is believed that
M&A would enhance quality, competitiveness, morale of investors and employees, and credibility of the financial
institutions as well. NRB is well aware about bad governance practices in banking and financial institutions, though
slightly lately but it would bring and reap the economies of scale in the banking and financial sectors in the days to
come by reducing unnecessary numbers whether by voluntarily or by forcefully and bringing a base of well
governance.
Key words: Merger and acquisition, Corporate Governance, Nepal Rastra Bank
The term "corporate governance" is fairly new in the
vocabulary of management science in Nepal, but it is
quickly increasing in importance. Nepal‘s major
banking units are experiencing a substantial downturn
in operation and even reach to knock the liquidation
process. One cause of such declines can be found in
the inability of the existing framework of corporate
management the structure of corporate governance to
cope with recent changes in the business environment.
World Bank defines Corporate Governance from
corporation angle and the emphasis is placed on the
relations between owners, management, and
stakeholders and from the public policy perspective
Corporate Governance refers to providing for the
survival, growth, and development of the company,
and the same time, its accountability in the exercise of
power and control over companies. Contributing on the
same literature the (OECD, 2004) has broadly defines
corporate governance as ―..a set of relationships
between a company‘s board, its shareholders and other
stakeholders. It also provides the structure through
which the objectives of the company are set, and the
means of attaining those objectives, and monitoring
performance, are determine‖ or on the similar way
(Solomon & Solomon, 2004) stated ―…the system of
checks and balances, both internal and external to
companies, which ensures that companies discharge
their accountability to all their stakeholders and act in a
socially responsible way in all areas of their business
activities‖.
Corporate governance is a broad descriptive term
rather than a normative term as (Macey, 2008) stated
that corporate governance describes all of the devices,
institutions, and mechanisms by which corporations
are governed. Anything and everything that influences
the way that a corporation is actually run falls within
this definition of corporate governance. Every device,
institution, or mechanism that exercises power over
decision-making within a corporation is part of the
system of corporate governance for that firm.
In common parlance, fusion of more than one entities
leads to range of transactions in domain of mergers and
acquisitions. Merger commonly take two forms. One,
in case of amalgamation i.e. two entities combined
together and form a new entity extinguishing both the
existing entities. Second, in case of absorption, one
entity get absorbs into another. The latter does not lose
its entity. Thus, in any type of merger, at least one
entity loses its entity. While acquisitions is more
general term enveloping in itself range of acquisition
transactions. It could be acquisition of control leading
to takeover of company. It could be acquisition of
tangible assets, intangible assets, rights and other kind
of obligations. They could be independent transactions
and may not lead to any kind of takeovers or mergers.
Mergers and acquisitions in banking sector have
become familiar in the majority of all the countries in
the world. A large number of international and
domestic banks all over the world are engaged in
merger and acquisition activities. One of the principal
objectives behind the mergers and acquisitions in the
banking sector is to reap the benefits of economies of
scale. Horizontal mergers & acquisitions involve two
corporates operating and/or competing in same kind of
* Faculty member in Lumbini Banijya Campus, Tribhuvan University, Nepal
** Professor, Faculty of Commerce, Banaras Hindu University, Varanasi, India.
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product or market come together. It is generally
initiated to gain economies of scale, increase
competitiveness, and reduce competition. Vertical
mergers & acquisitions involve two corporates which
are vertically linked to each other, either forward or
backward, come together. It is initiated generally for
achieving operating efficiencies through reliability of
inputs, better material control, gaining competitive
power through controlling input prices and to create
entry barrier in terms of scale, market, and technology.
Conglomerate mergers & acquisitions involve two
firms operating in unrelated market or product come
together. It could be product extension, market
extension or pure conglomerate merger or takeover
transaction.1
Mergers and acquisitions also referred to as M&A,
involve the buying, selling, and combining of
companies. The acquiring and target companies feel
that by joining they can somehow aid, finance, or help
each other within their industry, or sometimes between
industries, without having to spend the time and capital
to create another unit. Sometimes a company may
acquire another company against their will through
what is known as a hostile takeover, where they will
purchase the majority of outstanding shares of a target
company. Firms, after merging, may take the name of
the acquiring company, the target company, or just
create a new name. Some companies will merge at the
corporate level, but for all other purposes allow the two
individuals to continue business as if they were still
separate entities. This decision is based on what the
managers‘ feel will allow them to be the most
successful in branding themselves in their respective
industry.
During the last two decades, due to high competition,
emerging of new financing opportunities and
decreasing of entry barriers throughout the globe,
mergers and acquisitions M&A, internationally and
domestically have developed into an admired strategic
option for organizations to enhance products range,
accessing new markets and attaining new technologies
(Hansen and Nohria, 2004). The 1990s saw the
greatest U.S. merger wave ever. Every year from 1995
to 2000 generated a new record for U.S. merger
volume, starting from $800 billion in 1995 – the record
at that time - to $1.8 trillion in 2000.2 Several
industries experienced dramatic merger waves,
including commercial banking, telecommunications,
1 On the basis of note is prepared by Dr. Jinesh
Panchali, Indian Institute of Capital Markets, Navi
Mumbai. 2 See ―The Year of the Mega Merger…‖, Fortune
Magazine, January 11, 1999, ―Tales of the Tape: ‘99
M&A Vol Hits Record…‖, Dow Jones News Service,
December 29, 1999, and ―Year-End Review of Mar-
kets & Finance 2000..‖, The Wall Street Journal,
January 2, 2001.
investment banking, hotels and casinos, and oil and
gas. Due to the importance of mergers, there is a vast
academic literature on the topic. However, existing
merger theories have difficulties reconciling the
stylized facts about mergers.
In the past decade the U.S banking industry has
experienced major structural changes, including a
significant reduction in the number of independent
banking organizations. This change is partly the result
of the increased pace of bank mergers and acquisitions.
During the twenty –year period from 1960-1979,
mergers averaged 170 per year, with an average of
$4.9 billion in total bank assets being acquired each
year. In contrast, from 1980 to 1989 there was a yearly
average of 498 mergers and $64.4 billion in total bank
assets acquired (Holder,1993). M&As in not the only
the consolidation strategy offered to banking
institutions, alliances, cross shareholdings etc, could
offer an alternative strategic response to expand
geographically and across sectors. These alternative
strategic responses could however lead to question
about the optimal level of cooperation that allows
banking institutions to benefit from their advantages
(Hansen, M.T. and Nohria, N., 2004; Akhavein,
J.D., A.N. Berger and D.B. Humphrey, 1997; Allen,
L. and A. Rai ,1996; and Altunbas, Y., P. Molyneux
and J. Thornton ,1997).
Introduction of deregulatory policy measures in
general and competition policies in particular since
1991 have resulted in a significant increase in the
number of mergers and acquisitions (MA)3 in Indian
corporate sector (Khanna, 1997; Venkiteswaran,
1997; Chandrasekhar, 1999; Roy, 1999; Basant,
2000; Beena, 2000, 2004 & 2008, Das, 2000; Kumar,
2000; Agarwal, 2002; Dasgupta, 2004; Mishra,
2005; Agarwal and Bhattacharya, 2006;
Mantravadi and Reddy, 2008). The profitability of a
firm depends directly on its size, selling efforts, and
exports and imports intensities but inversely on their
market share and demand for the products. However,
MA does not have any significant impact on
profitability of the firms in the long run possibly due to
the resultant X-inefficiency and entry of new firms into
the market. In addition, in-house R&D and foreign
technology purchase also do not have any significant
impact on profitability of the firms (Mishra &
Chandra, 2010).
M&A in Nepal
Under section 177, Company Act 2006:
3 Although mergers and acquisitions are different in
their definitions and the statutory procedures, their
effects from an economic perspective are the same as
in both the cases the control of one company
passes on to another. So, in the present paper, no
distinction is made between the mergers and the
acquisitions
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Merger of a company: (1) A public company may, by
adopting a special resolutions in its general meeting to
that effect, be merged with another company subject to
Sub-section (3). Provided, however, that, in the case of
a private company it shall be as provided in its
memorandum of association, articles of association or
consensus agreement.
(2) A public company, upon merging into a private
company or a private company, upon merging into a
public company shall stand as a public company.
(3) If a resolution for merger is adopted pursuant to
Subsection(1),such company shall, within thirty days ,
make an application, setting out the following matters
to the Office for approval:
(a) In the case of a public company, a copy of the
decision of the general meeting as referred to in
subsection (1) ,and in the case of private company ,
copies of the related provisions contained in the
memorandum of the associations, articles of the
associations, or consensus agreement authorizing the
merger;
(b) Last balance sheet and auditors report of the
merging company;
(c) A copy of the letter of consent in writing, of the
creditors of the merging company and of the merged
company;
(d) Valuation of the movable and immovable
properties of , and actual details of the assets and
liabilities of, the merging company;
(e) If the merging company and merged company have
made a decision as to the creditors and employees and
workers of the merging company, a copy of such
decision;
(f) The scheme of arrangement concluded between the
companies for merger with each other.
(4) Where the information as referred to in Sub-section
(3) is given to the Office, it shall study the matter given
information and give its decision within three months .
(5) On receipt of an approval from the Officer for
merger pursuant to Sub-section (4) , all the assets and
liabilities of the merging company shall be deemed to
have been transferred to the merged company.
NRB and Merger
The Nepal Rastra Banka has issued bylaws concern to
merger of banks and financial institutions 2012; where
the act of merging stated that, when two or more than
two licensed institution agreed for merger, on that case,
the merging organization loses its legal entity by
surrendering itself to another organization where it
intended to merge as well as merger also means the
state of amalgamation of banks and financial
institutions. The salient objectives of the merger by
laws are as follows:
To enhance the trustworthiness of the citizens
towards the whole banking system by
protecting and promoting the same.
By protecting and safeguarding the interest of
the depositors for making whole banking and
financial system as permanent and leading the
system towards well- governed , safe ,
healthy, effective and capable one in the
Nation. To increase the competitive capabilities of the
licensed organization the capital base of
financial system should be strengthen.
To make licensed organization capable of
discharging the modern banking services to
the common citizens- the banking, financial,
human resource, technical and other capacity
of the licensed organization shall be
enhanced.
To protect the interest of the investors (Nepal
Rastra Bank, 2012).
If we critically examine the objectives of the merger
bylaws of NRB it is easily traceable that:
The banking system in Nepal is in downward
trends by losing the trustworthiness in the
common people.
The interest of the depositors is not completed
protected, and the whole banking system is
vulnerable to ill governance.
There is a lacking in the capabilities of the
licensed organization on the basis of capital
base.
Not all but some of the licensed organizations
are not able to provide modern banking
services to the citizens of the nations though
they are in operation.
The interest of the investors is in doubt.
There are 32 commercial Banks with Rs. 71,524
million in core capital, 3.53% on Non- Performing
Loan to Total Loan as on 2068 chaitra End. Likewise
88 Development Banks of Category ‗B‘ with Rs.
19,61,06,03,000/ in core capital as well as Rs.
5,32,93,61,000/ on Non-Performing Loan. 70 class ―C‖
finance companies; Class ―D‖ micro finance
development banks accounted to 24; saving and credit
cooperatives for limited banking ranges to 16 and
category of non- government organizations(NGOs)
listed to 36, are running in Nepal as mid-July 2012
(Nepal rastra Bank).
The merging activities in financial sectors is a new
phenomenon in Nepal, so, the pros and cons of his
activities are to be awaited at least five years to know
the actual and factual result.
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Table 1
the banks and financial Institutions which are merged till August 8, 2012
Source: www.nrb.org.np
Since this paper is based on the perception of the
respondents towards the good governance, effect of pre
and post point of merger, whether there is a need of
forceful merger and are the numbers of licensed
organizations available more than needed in the nation.
To evaluate the above queries 21 questions of five
degree likert scale is developed and served to different
respondents of Kathmandau valley and Rupandehi
district of Nepal. Haphazard sampling method has been
used to administer the questionnaire. All together 21
questions were served among the following and the
answer was based on SA=Strongly Agree=5,
MA=Moderately Agree=4, MB=May Be=3, MD=
Moderately Disagree=2 and SD=Strongly Disagree=1.
Table II showing the details of questionnaires administration
Source: Questionnaire Survey, February 9, 2012 – 31st August, 2012
The whole questionnaire is structured with 21
questions divided into four groups corresponding from
proposition 1 to proposition 4 consisting 6, 8, 3, and 4
queries for the different proposition respectively and
served to all the respondents as shown in Table II
above.
Proposition 1: Merger and acquisition is the vital way
to manage the financial institutions properly in Nepal
– based on the following queries
1. Banking and financial institutions are
available more than that needed in Nepal.
2. M&A is a new phenomenon in Nepal
therefore forceful merger is essential. 3. Voluntary merger and acquisition practices
are to be appreciated.
4. M&A become the vital element in Banking
and Financial Institutions of Nepal.
5. NRB‘s policy of merger is a device for
reducing the number of financial institutions.
6. The machinery of NRB is well enough
equipped for M&A.
Proposition 2: Merger and Acquisition enhance value
added customer services, morale of Investors and
Institutional credibility through inbuilt duly activated
interactive Good Governance practices - covers the
following queries.
7. There is strong Corporate Governance status in
Banking and Financial institutions 8. M&A is the way to eliminate unethical financial
practices
S.N Merging Partners New Bank
1 2 3
1 National Finance Ltd. Narayani Finance Ltd Narayani National Finance Ltd.
1 Global Bank Ltd. IME Financial Institution Ltd. Lord Buddha Finance Ltd. Global Ime Bank Ltd.
2 Himchuli Bikash Bank Ltd Birgunj Finance ltd. H&B Development Bank Ltd.
3 Kasthamandap Development Bank Ltd. Shikhar Finance ltd Kasthamandap Development Bank Ltd.
4 Infrastructure Development Bank ltd Swostik Finance ltd Infrastructure Development Bank ltd
5 Business Development Bank Ltd. Universal Finance Ltd Business Universal Development Bank ltd.
6 Annapurna Development Bank Ltd. Surya Darsan Finance Ltd. Suprem Bikash Bank Ltd.
7 Pasupati Development Bank Ltd. Uddham Bikash Bank Ltd Axis Development Bank Ltd.
8 Machapuchre Bank Ltd. Standared Finance Ltd. Machapuchre Bank Ltd.
Respondents Distributed collected incomplete Complete remarks
Bankers 179 113 27 86
Common Investors 187 96 31 65
Academia/professional 117 83 16 67
Employees 112 78 21 57
Total 595 370 95 275 46.218%
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9. M&A enhance the Good Governance Status.
10. M&A enhance the value added customer services.
11. M&A boost up the morale of Investors/
Shareholders.
12. M&A creates more credibility of the institution.
13. M&A increases the value of the firm.
14. Horizontal merger is better than Vertical merger.
Proposition 3: The challenges of settlement and re-
settlement of employees is vital one due to non-
availability of proper laws, by laws and procedure for
M&A in Nepal - covers
15. M&A doesn‘t affect employees status of
employment. 16. M&A Acts, rules and provisions are more than
enough in Nepal.
17. Resettlement of employees in post-merger period is
the biggest challenges.
Proposition 4: The main obstacles of M&A in
Nepal are the lack of awareness of concerned persons
and poor professional experience of related authority
- covers
18. BODs of different financial institutions are well
known to M&A. 19. Agencies for M&A services, like Chartered
Accountant Firms are less experienced in Nepal. 20. Appointment of new CEO in M&A has a great
impact on M&A process. 21. Formation of new BOD is the main issue having
the greatest impact on success or failure of M&A
process.
Table 3
the P1 mean scores of different correspondents on different scales
Proposition SA MA MB SD MD
P1: BANKERS 219.67 66.83 31.67 23.33 16.00
P1: COMMONIN 188.33 31.33 40.50 1.88 12.00
P1: ACADEMIPR 129.17 51.33 33.50 9.83 14.67
P1: EMPLOYEES 88.33 27.00 27.00 9.50 12.00
Table 4
the P2 mean scores of different correspondents on different scales
Proposition SA MA MB SD MD
P2: BNKS 92.50 77.00 67.50 13.00 25.00
P2: COIN 96.25 57.50 54.00 8.13 12.25
P2: ACPR 83.75 73.50 43.13 12.13 11.25
P2: EMPL 77.50 62.50 41.63 7.25 9.50
Table 5
the P3 mean scores of different correspondents on different scales
Proposition SA MA MB SD MD
P3: BNKS 58.33 69.33 40.00 28.00 31.33
P3: COIN 58.33 58.67 40.50 14.67 17.33
P3: ACPR 93.33 36.00 42.00 22.33 13.00
P3: EMPL 75.00 28.00 34.00 14.67 18.00
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Table 6
the P4 mean scores of different correspondents on different scales
Proposition SA MA MB SD MD
P4: BNKS 115.00 59.00 64.50 14.00 25.50
P4: COIN 67.50 55.00 36.75 12.00 27.00
P4: ACPR 73.75 70.00 51.00 11.25 13.00
P4: EMPL 108.75 38.00 33.00 7.00 15.50
Source: Table III-VI Sample Survey
Fig:I
Fig: II
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Fig:III
Fig:IV
Fig:V
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Table 7
Post Hoch Multiple Comparisons: LSD
Based on observed means; the error term is mean square (Error)
*. The mean difference is significant at the 0.05 level
The Proposition P1 to P4 based on different elements
is to be tested on the basis of significant mean
differences of different scales and groups and it is
generalized that there is no significant differences
prevail in the perceptions of the different respondents
in Nepal. But the result shown by Table VI depicted
above completely rejected our general hypothesis that
the perception is equal among the various groups for
different propositions on the basis of five degree likert
scale data. It means that there is different perception of
the respondents towards the proposed proposition.
Proposition 1: Merger and acquisition is the vital way
to manage the financial institutions properly in Nepal
– Table III and Fig.I- Fig.V clearly shows that the
bankers are very strong in favor of our first proposition
with mean score of 219.67 by strongly agreeing with
and followed by common investors having mean score
of 188.3 as well as third respondent who favors the P1
with 129.17 related to academician and professional.
Looking at the strongly disagree scores concerned to
P1 we find that common investors SD mean score is
the lowest i.e. 1.88 followed by 9.50, 9.83, 23.33 is
related to employees, Academician and professional
and bankers respectively. This result concludes that
merger and acquisition is the vital way to manage the
financial institutions properly in Nepal for the time
being.
Proposition 2: Merger and Acquisition enhance value
added customer services, morale of Investors and
Institutional credibility through inbuilt duly activated
interactive Good Governance practices
Looking at Table IV and Fig.I- Fig.V we find that
common investors are strongly agree with P2 showing
mean score of 96.25 and followed by Bankers 92.50,
Academician and professional 83.75 and employees
with 77.50. If we look at the moderately agree score it
shows that bankers mean score is the highest i.e. 77.00
among the group. Looking at the strongly rejected
score of P2 bankers scores 13.00 and 12.13, 8.13, and
7.25 for academician and professional, common
investors, and employees respectively. With the help of
this mean perceptional attitude of various respondents
we can conclude that merger and acquisition enhance
value added customer services, morale of investors and
institutional credibility through inbuilt duly activated
good governance practices in Nepal.
Proposition 3: The challenges of settlement and re-
settlement of employees is vital one due to non-
availability of proper laws, by laws and procedure for
M&A in Nepal
Table V and Fig.I- Fig.V show the perceptional
attitude of different correspondents for P3 and it is
noticed that instead of employees‘ academician and
professional are favoring it highly with mean score of
93.33. Employees, common investors and bankers also
supported p1 with the mean scores of 75.00, 58.33, and
58.33 respectively. The moderately agree score is
highest for bankers with 69.33. The strongly disagree
mean score is 28.00, 22.33, 14.67 and 14.67
respectively for bankers, academician and professional,
Dependent
Variables
Proposition
(i)
Proposition (j) Mean Difference
(I-J)
Std.Errors Sig.
SA P1 P2 68.87* 10.964 .000
SA P1 P3 85.12* 14.35 .000
SA P1 P4 65.12* 13.10 .000
SA P2 P1 -68.87* 10.96 .000
SA P3 P1 -85.12* 14.35 .000
SA P4 P1 -65.12* 13.10 .000
MA P1 P2 -15.42* 6.67 .024
MA P2 P1 15.42* 6.67 .024
MA P2 P3 19.63* 8.36 .022
MA P3 P2 -19.63* 8.36 .022
MB P1 P2 -18.40* 6.80 .009
MB P2 P1 18.40* 6.80 .009
SD P1 P3 -8.79* 3.81 .024
SD P2 P3 -9.79* 3.65 .009
SD P3 P1 8.79* 3.81 .024
SD P3 P2 9.79* 3.65 .009
SD P4 P3 -8.85* 4.11 .035
MD P1 P4 -7.50* 3.18 .021
MD P4 P1 7.50* 3.18 .021
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employees and common investors. Looking at the
attitudinal mean scores we have accepted the p3 for the
time being in Nepal.
Proposition 4: The main obstacles of M&A in
Nepal are the lack of awareness of concerned persons
and poor professional experience of related authority
Table VI and Fig.I- Fig.V is revealing the facts about
the P4. In favor of the proposition with SA scale,
bankers show mean score of 115.00, employees
108.75, academician and professional 73.75 and
common investors 67.50. The moderately agree score
is highest to academician and professional and the
lowest goes to employees. Looking at the strongly
disagree score against P4 it is noticed that bankers with
14.00, common investors 12.00, academician and
professional 11.25 and employees mean score is 7.00.
So, we can assume that the main obstacles of M&A in
Nepal are the lack of awareness of concerned persons
and poor professional experience of related authority.
Conclusions
The findings shown in this paper are hundred percent
perceptions of the different correspondents used for the
survey. Since haphazard sampling is used, so there is a
chance of different biasness as commonly expected
even without the desire of the researcher‘s. The
location selected is limited to Rupandehi and
Kathmandau, if it could have been extended, there
might have some different perception on the study as
proposed, and the sample size as well as selection of
respondents could have been added more for getting a
detail perception of various groups for the merger and
acquisitions in Nepal.
It is concluded that merger and acquisition is the vital
way to manage banking and financial institutions in
Nepal. It is believed that M&A would enhance quality,
competitiveness, morale of investors and employees,
and credibility of the financial institutions as well. The
findings clearly stated that the banking and financial
institutions are more than that needed for Nepal and
due to ill governance practices they are losing their
goodwill and credibility in the society where the need
to operate for sustainable growth. It is also concluded
that the NRB is well aware about the fact, though
slightly and lately but it would bring and reap the
economies of scale in the banking and financial sectors
in the days to come by reducing unnecessary numbers
whether by voluntarily or by forcefully.
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Akhavein, J.D., A.N. Berger and D.B. Humphrey (1997),
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Allen, L. and A. Rai (1996), ―Operational efficiency in
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Altunbas, Y., P. Molyneux and J. Thornton (1997), ―Big-
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Basant, R. (2000) Corporate Response to Economic Reforms,
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Beena, P. L. (2000) An Analysis of Mergers in the Private
Corporate Sector, Working Paper
Beena, P. L. (2004) Towards Understanding the Merger
Wave in the Indian Corporate Sector – A Comparative
Perspective, Working Paper 355, CDS, Trivandrum.
Beena, P. L. (2008) Trends and Perspectives on Corporate
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Chandrasekhar, C. P. (1999) Firms, Markets and the State:
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Das, N. (2000) A Study of the Corporate Restructuring of
Indian Industries in the Post-New
Dasgupta, P. (2004) Establishing an Effective Competition
Policy System: the Challenges Facing India in Implementing
its New Competition Law, presentation made at the
WTO/UNESCO/ASCI Regional Seminar for Asia and
Pacific Economies on Competition Policy, Development and
the Multilateral Trading System, Hyderabad, India, 6-8
October.
Economic and Political Weekly, 43(39), pp. 48-56.
Efficiency and prices: Evidence from a bank profit function‖,
Review of Industrial
Hansen, M.T. and Nohria, N. 2004, ―How to build
collaborative advantage,‖ Sloan
Holder, C. L. (January/February 1993). Competitive
Considerations in Banks Mergers and Acquisitions:
Economic Theory, Legal Foundations and the Fed. Federal
Reserve Bank ofAtlant Economic review. India's First
Merger Wave, Mimeo, (Calcutta: Indian Institute of
Management) Industrial Policy Regime – The Issue of
Amalgamations/Mergers, unpublished Ph.D. thesis,
Khanna, S. (1997) Industrial Deregulation and Corporate
Restructuring: Understanding
Kumar, N. (2000) Mergers and Acquisitions by MNEs:
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35(32), pp. 2851-2858. Management Review, Vol. 46. No. 1,
pp. 22-30
Mantravadi, P. and Reddy, A. V. (2008) Post-Merger
Performance of Acquiring Firms fromDifferent Industries in
India, International Research Journal of Finance and
Economics, 22,pp. 193-204.
Macey, J. R. (2008). Promises Kept, Promises Broken. New
Jersey, U S A: Princeton University Press,
Mishra, P. (2005) Mergers, and Acquisitions in the Indian
Corporate Sector in the Post-Liberalization Era: An Analysis,
Ph.D Dissertation, (West Bengal: Vidyasagar University)
Mishra, P., & Chandra, T. (2010). Mergers, Acquisitions and
Firms‘ Performance:Experience of Indian Pharmaceutical
Industry. Eurasian Journal of Business and Economics , 3(
5), 111-126. Nepal rastra Bank. (n.d.). Retrieved August 9,
2012, from www.nrb.org.np:
http://bfr.nrb.org.np/bfrdirectives.php?vw=15
Nepal rastra Bank. (2012, August 7). Retrieved from
www.nrb.org.np.
OECD. (2004). Organisation for Economic Cooperation and
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Solomon, J., & Solomon, A. (2004). Corporate Governance
and Accountability. England: John Wiley and Sons, Ltd.
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NABARD’s Functioning in Pursuit of Agricultural Development Sameer Shekhar*
Dr. S. N. Jha**
Abstract This paper reveals study of Indian Economy in contrast to the rural development wheeled by banking system.
Banking can be viewed as one of the most traditional and sophisticated sector in the economy and rural India today.
Regional Rural Banks occupies prominent position in the whole economic attainment because it is the rural area
which provides means of subsistence to more than half of population. Based on secondary sources the study
emphasizes mainly on contribution by banking and financial institution(NABARD) in rural sector that explain what
major role the SCBs, PSBs, RRBs, SCARDBs etc. plays. They are not in fact trader in money but are in fact trader in
development. Banking thus has been regarded to be the core area of agricultural and rural development.
Objective:
The present study is based on analysis of NABARD‘s
contribution in Rural India and more specifically
Indian agriculture. It includes how the base of Indian
economy kept on weathering and constituent ratio of
GDP has tremendously changed over the decades after
independence. The study focuses on need of banking
and financial institution in rural sector. In this pursuit
mainly function, facilities and schemes executed and
introduced by NABARD are taken into consideration.
Efforts have also been made to evaluate the
governmental initiatives in this regard. In particular the
study aims at-
Examining the diminishing trend in contribution of
agriculture in Indian GDP.
Evaluating importance and role of banking
industry in rural areas.
Analyzing contribution and role played by
NABARD in India.
Examining refinance disbursement by various
financing agencies in shadow of NABARD
Suggesting, what is necessarily to be considered
for gaining rural strength.
Methodology:
The study is completely based on secondary data and
sources. For this several books, magazines, websites
and articles have been referred. Data have thus, been
collected from different issues of economic survey and
NABARD‘s official websites.
Introduction:
In the last few years, the Indian economy has emerged
as one of the fastest growing economies on the world
map. However the condition of Indian agricultural
performance in compare to other macroeconomic
indicators is well known, as is moving towards further
vulnerability. The region behind is that, India is
becoming more prone to the manufacturing and service
industries rather than primary sector which mainly
originates and run around village based resources. No
doubt, the focus on merchandise and service sector is
need of globalization but it should not be at the cost of
agriculture and allied activities. The government has
been trying lot to maintain the dignity of rural
production but is not adding required amount of sugar
to make it sweet as it should gain. Many economists
and policy makers anticipate that the future growth of
Indian economy will depend on the robust performance
of the rural and agricultural sector to a large extent
because only those sectors other than primary in nature
cannot sustain economic growth and development.
Contribution of agriculture which acts as stock and
supply to the human resources and manufacturing
industries in Gross Domestic Product (GDP) of India
was remarkably very high in 1950-51 that accounted
for approximately 56 percent. More importantly about
70 percent of the total populations were dependent on
primary sector during the period for their livelihood.
As per stated in the table 1 share of the agriculture kept
on declining. In 1970-71 its share in GDP declined to
45 percent and during 1990-91 it came down to 29.1
percent. In 2000-01 the share in GDP shrank down to
26.5 percent and further in 2006-07 the contribution
declined to 18.5 percent. Share of agriculture and allied
sectors to GDP declined further to 13.9 per cent in
2011-12 from 14.5 per cent in 2010-11, according to
the Economic Survey 2011-12.
Table:1 Changes in Sectoral distribution of Gross
Domestic Product
Economic
Sectos
1950-
51
1970-
71
1990-
91
2000-
01
2006-
07
2010-
11
Agriculture 55.6
%
43.2
%
29.1
%
26.5
%
18.5
%
14.5
%
Manufacturin
g
11.7
%
15.9
%
21.9
%
23.1
%
26.4
%
28.4
%
Service 32.7
%
40.9
%
49.0
%
50.4
%
55.1
%
57.1
%
(Source: Collected from different issues of Economic
Survey)
The importance of agriculture justifies the need and
concentration of banking and insurance industry‘s
expansion in rural area. It in fact supplies various
services and support to the different sectors of Indian
economy. It makes important contribution to the
employment generation, national income, support to
manufacturing industries (textile, sugar, tea, paper and
other cottage industries), share in foreign trade,
*Research Scholar, Faculty of Commerce, BHU, **Associate Professor, Faculty of Commerce, BHU
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supplies food and fodder, saving capital, contribution
to the government‘s revenue, solve problem of urban
congestion etc. The contribution of banking, finance and insurance
sector to the current Indian economic growth is
essentially significant. Banking and insurance sector
reforms and establishments are on rising verge to
catalyze production potential in almost all the sectors,
but access of banking services to the rural, agricultural
and common man in general is not promising. Banking
Sector plays an important role in rural areas, there is no
doubt in it, indeed anywhere banking sector leads its
own role. That is the basic need of any human being
for any kind of financial transaction in current
generation, it is mandatory that starts from farmer for
his cultivation, seeking loans and repaying them, an
employee to withdraw his salary, for students for their
scholarships etc, when it comes to comparison between
past and present, can differentiate in terms of its usage
such as number of users, frequency, kind of operations
and services it renders to its customers. All such
services are needed in rural sectors also under saga of
infrastructural and cultural advancement.
Importance and need of banking in rural sector
The people living in rural sector suffer from great deal
of indebtedness and are subject to exploitation in the
credit market due to mount interest rates and lack of
convenient access to credit facilities. Rural households
need credit for expenditure in their common business
of life and investment in agricultural projects. They
also needs for smoothing out seasonal fluctuations in
earning. Since cash flows and saving in rural areas for
the majority of households typically tend to rely on
credit for other consumption need like education, food,
housing, health facilities, household fluctuation etc.
they need access to the financial institutions that can
provide them with credit at lower cost and at
reasonable terms than the money-lenders who use to
lend at traditional condition. This will help them to
avoid debt-traps that are common in rural grounds.
Rural indebtedness has taken deep root in Indian rural
society. In order to rescue the rural households from
this cancer, our government begun to adopt some
serious steps soon after independence as it was means
of foundation to the Indian economy. Banks in such
areas were established and introduced acted as
―messiha‖ for the people and gave them a new sense of
dignity. Banks are not only giving loans for purchase
of gadgets, tractors, seeds or for digging wells but also
becoming active participants in bringing new
technology to the farmers and in educating them along
with others there. Today we see that almost all the
nationalized banks are trying to reach the rural areas to
enable people think as a part of developing India.
Punjab National Bank, State Bank of India, Gramin
Banks, Allahabad Banks and other nationalized are
expanding their units at very fast pace. People there in
the village sector are eased to keep their deposits and
withdraw the amount required at subsidized price. Here
discuss over those banks and financial institutions
which are closely associated with the lending facilities
to the farmers and business carriers will be more
contextual.
Development of Banking and Insurance industries in
rural sector is benefitting in following manner. The day
is not far away when India will change beyond
recognition. In that respect the major share of the credit
would certainly go to the banking industry in rural
areas. Since the early 1980‘s, innovations in the
delivery of financial services have enabled millions of
people formerly excluded from the financial sector to
gain access to these services on ongoing basis while
there are over lapping in financial sectors among
micro, rural and agricultural finance. But the modern
concept of banking and development has made it easy
for the common people to understand the differences
among all three and the services they are providing.
The expansion of banking industry is playing vital role
in integrated rural development.
1. Of course the expansion of banking would
develop saving habits of the people there in.
2. Loans required by the farmers or other producers
can be easily obtained.
3. Loans can be sanctioned at reasonable interest
rates.
4. Inter loaning for non productive purpose can also
be obtained by the rural people.
5. If saving capacity would increase, of course this
will push the village people to make investment in
insurance companies and productive firms.
6. The banking has made it possible for rural
survivors to transfer the funds.
7. Banking in rural area is also producing interest
among new comer to opt commerce as a branch
of study.
NABARD and its Role in assisting Rural
Development
Banking in rural sector mainly aims at rural financing,
micro-finance, agricultural finance, rural micro-finance
for its all-round development. In this regard apex
banking institution providing finance for agriculture
and rural development NABARD was established on
July 12th
1982 with the paid up capital of Rs.100 crore
having 50:50 contribution of Indian government and
RBI. NABARD Amendment Bill 2000 has raised the
authorized capital to Rs. 2000 crore. It provides credit
for promotion of agriculture, small scale industries,
cottage and village industries, handicraft and other
allied economic activities in rural areas with a view to
promote integrated rural development and securing
prosperity in rural areas.
As an apex institution in rural credit structure,
NABARD provides refinance facilities to various such
financial institutions which provide loan to promote
productive activity in rural areas. As against the target
of Rs. 2,80,000 crore of credit flow to agriculture for
2008-09, the banking system disbursed Rs. 2,87,149
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crore achieving 102 percent of the target. Commercial
bank, co-operative bank and RRB disbursed
Rs.2,23,663 crore, Rs.36,762 crore and Rs. 26,724
crore achieving around 115, 67 and 89 percent of the
target respectively. NABARD is implementing
participatory watershed development programme
under the special plan for Bihar component of
Rashtriya Sam Vikas Yojna (RSVY) to develop
80,000 hectare of wasteland in eight districts of South
Bihar with an allocation of Rs.60 crore. NABARD has
launched Pilot Project for Integrated Development
(PPID), Village Development Programme (VDP),
Capacity Building for Adoption of Technology
(CAT), Tribal Development Fund (TDF), Farm
Innovation and Promotion Fund (FIPF), Farmer
Technology Transfer Fund (FTTF), Farmer‘s Club,
Rural Innovation Fund (RIF), District Rural Industries
Project (DRIP), Rural Entrepreneurship Development
Programme (REDP), Skill Development
Programme(SDP) etc. these have created an
encouraging sense to the efforts being made for
overall rural development. NABARD provides
various credit facilities in different form to galvanize
and catalyze rural development. NABARD's credit
functions cover planning, dispensation and monitoring
of credit. This activity involves:
• Framing policy and guidelines for rural financial
institutions
• Providing credit facilities to issuing organizations
• Preparation of potential-linked credit plans annually
for all districts for identification of
credit potential
• Monitoring the flow of ground level rural credit
Developmental and Promotional function of
NABARD
NABARD is performing extraordinarily relating to
policy, planning and operational aspects in the flow of
credit for promotion of agriculture, small-scale
industries and cottage industries, handicraft and other
rural crafts and other allied activities in rural sector.
Credit is a critical factor in development of agriculture
and rural sector as it enables investment in capital
formation and technological up gradation. Hence
strengthening of rural financial institutions, which
deliver credit to the sector, has been identified by
NABARD as a thrust area. Various initiatives have
been taken to strengthen the cooperative credit
structure and the regional rural banks, so that adequate
and timely credit is made available to the needy.
In order to reinforce the credit functions and to
make credit more productive, NABARD has been
undertaking a number of developmental and
promotional activities such as:-
• Help cooperative banks and Regional Rural Banks
to prepare development action plans for
themselves
• Enter into MoU with state governments and
cooperative banks specifying their respective
obligations to improve the affairs of the banks in a
stipulated timeframe
• Help Regional Rural Banks and the sponsor banks
to enter into MoUs specifying their respective
obligations to improve the affairs of the Regional
Rural Banks in a stipulated timeframe.
• Monitor implementation of development action
plans of banks and fulfillment of obligations under
MoUs
• Provide financial assistance to cooperatives and
Regional Rural Banks for establishment of
technical, monitoring and evaluations cells
• Provide organization development intervention
(ODI) through reputed training institutes like
Bankers Institute of Rural Development (BIRD),
National Bank Staff College, Lucknow and
College of Agriculture Banking, Pune, etc.
• Provide financial support for the training institutes
of cooperative banks.
• Provide training for senior and middle level
executives of commercial banks, Regional Rural
Banks and cooperative banks
• Create awareness among the borrowers on ethics
of repayment through Vikas Volunteer Vahini and
Farmer‘s clubs.
• Provide financial assistance to cooperative banks
for building improved management information
system, computerization of operations and
development of human resources.
Refinance Disbursement for strengthening loan
facilities by NABARD
NABARD as an apex National Bank for Agricultural
and Rural Development has facilitated long term
financing by means of refinance disbursement. The
total refinance disbursement during 2008-09 amounted
t0 Rs.10,535.29 crore as compared to the disbursement
of Rs. 9,046.27 crore during previous year. During
2006-07 this refinance disbursement was Rs. 8,795.02
crore which included refinance disbursement by State
Cooperative for Agricultural and Rural Development
Banks (SCARDB), State Co-operative Banks (SCBs),
Agricultural Development Finance Corporation
(ADFC), PUCBs, Regional Rural Banks (RRBs) and
other Commercial Banks. This disbursement has been
depicted through Table-2.for instance.
Agency Credit Facilities
Commercial Banks -Long-term credit for
investment purposes
-Financing the
working capital
requirements of
Weavers' Co-
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operative Societies
(WCS) & State
Handloom
Development
Corporations
Short-term Co-
operative Structure (State Co-
operative Banks, District
Central Co-operative Banks,
Primary Agricultural Credit
Societies)
-Short-term (crop and
other loans)
-Medium-term
(conversion) loans
-Term loans for
investment purposes
-Financing WCS for
production and
marketing purposes
-Financing State
Handloom
Development
Corporations for
working capital by
State.
Co-operative Banks
Long-term Co-operative
Structure (State
Cooperative Agriculture
Rural Development Banks,
Primary Co-
operative Agriculture and
Rural Development Banks)
-Term loans for
investment purposes
-Pilot scheme for
financing short term
loans in three states
Regional Rural Banks (RRBs) -Short-term (crop and
other loans)
Term loans for
investment purposes
State Governments -Long-term loans for
equity participation
in
co-operatives
-Rural Infrastructure
Development Fund
(RIDF) loans for
infrastructure projects
Non-Governmental
Organizations (NGOs) -
Informal Credit Delivery
System
-Revolving Fund
Assistance for various
micro-credit delivery
-Innovations and
promotional projects
under 'Credit and
Financial Services
Fund' (CFSF) and
'Rural Promotion
Corpus Fund' (RPCF)
respectively
Table-2 Agency-wise refinance disbursement AGENCY 2006-07 2007-08 2008-09
SCARDBs 1,742.72 1,950.58 1,986.54
SCBs 1,130.67 826.55 801.51
Commercial
Banks
4,568.82 3,951.73 5,867.19
RRBs 1,352.81 2,313.99 1,879.04
ADFC/PUCB - 3.42 1.01
TOTAL 8,795.02 9,046.27* 10,535.29*
(Source: Annual report of NABARD 2008-09)
SCARDBs and Primary Cooperative Agriculture and
Rural Development Banks (PCARDBs) are two tier
operated banks counted under Land Mortgage Banks/
Land development Banks which provides long term
credit to the agricultural and rural sector. SCARDBs
constitute the upper tier of long term credit structure in
India are mostly dependent on borrowing for on-
lending, whereas PCARDBs are the lowest layer of the
long term credit cooperatives.
National Banking Policy initiated by Government
In order to attain the objective of rural prosperity on all
grounds and encourage sustainable and unbiased
agricultural and rural opulence through effective credit
support, allied services, development of institution and
other innovation; Agricultural Development Banks
undertake a number of inter-related activities falling
under three broad categories:
Credit Dispensation Role
Under the role it prepares a potential link credit
programme for each district, finalizes the annual
action plan at block, district and state level. It
monitors implementation of credit plan at higher
level, provides guidance in involving the credit
discipline to be followed by the credit institution
in availing finance to production, marketing and
investment activities of rural farm and nonfarm
sectors.
Developmental and Promotional Role
NABARD has launched countless schemes since
its establishment for the continuous enhancement
in the productive capacity of rural producers
whether they belong to agriculture or small
industries or cottage industries. Its developmental
activities can be high-lighted as Nurturing and
Strengthening of RFIs like SCBs, SCARDBs,
CCBs, and RRBs etc. by various incentives and
initiatives. Fostering the growth of SHG Bank
linkage programmed. It extends essential support
to SHPIs/NGOs/Development Agencies and Client
Banks. It also extends additional assistance for
Research and Development and thus acts as
catalyst to the agricultural and rural development,
encouragement in prudential financial standards of
RFIs, capital formation, promotion of micro
finance, export oriented projects etc.
Supervisory activity as the Apex Development
Bank
As NABARD is creation of 50:50 share by
Government and RBI, like RBI this establishment also
act as supervisory agency for all other Regional Rural
Banks and Financial Institutions. It specially supervises
for removal of sectoral and regional imbalances,
poverty eradication and employment generation, micro
enterprises development, strengthening and working of
Rural Financial Institutions (RFIs).
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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RNI – UP/ENG/2011/36701 19 ISSN: 2231-6353
Conclusion & Suggestion
Expansion of banking system in the rural areas has
brought revolutionary changes in the life style and
living pattern of the people there in. Earlier farmers
and small producers were obligated to lend frommoney
lenders on traditional pattern at high rate of interest
which some time made them to lose all what they had,
but with the introduction of banking easy and fair
credit lending became possible. However agricultural
share in Indian GDP has been declining because the
expansion is inadequate. There are so many entire
regions where number of banks is limited. On the basis
of the study, following suggestion would be
remarkable:
More number of cooperative banks and financing
institutions should be set up in rural sectors.
Promising Self Help Groups should be constructed
to carry borrowing and lending at fair condition.
Refinance Disbursement level should be increased
in order to access easy loan borrowing.
Private Banks should also show their interest in
rural areas to expand their units.
Government should pay equal interest in
agricultural and primary sector development along
with manufacturing and Service sector.
Availability and efficiency of banking system in rural
areas will provide life blood to boost Indian Economy,
because still around 54 percent of the total life is
residing in rural area which means large human
resources are there who can accelerate our economy
further.
Abbreviation:
ADFC- Agricultural Development Finance
Corporation
BIRD- Banker‘s Institute for Rural Development
CFSF- Credit and Financial Service Fund
NABARD- National Bank for Agricultural and Rural
Development
RFIs- Rural Financial Institutions
RIDF Rural Infrastructural Development Fund
RPCF- Rural Promotion Corpus Fund
RRBs- Regional Rural Banks
SCARDBs-State Cooperative for Agricultural and
Rural Development Banks
SCBs- State Co-operative Banks
WCSs- Weaver Cooperative Societies
References: M.L. Jhingan ‗Money, Banking, International Trade and
Public Finance‘, Vrinda Publications (P) Ltd., Delhi,
Ed.2011‘8th
Mishra S.K. & Puri V.K., ‗Indian Economy‘ Himalaya
Publication.,New Delhi, 20th ed., 2008, pp-313 & 394.
Awasthi G.D. ‗Money, Banking and International Trade‘ 1st
Ed., 2003
D. Ruddar & Sundaram K.P.M., ‗Indian Economy‘, S.Chand
& Company Ltd.,New Delhi, 54th Ed., 2006, Pp-574-577
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2011, vol.1, pp.173-175.
B.Gaurav & C. Suraj, ‗Role of banking in rural development
in India‘ XLRI Jamshedpur, Journal of Chartered
Accountant, 2006
Sengupta Abhijeet, report, ICRIER, 2006
Singh Ramesh, ‗Indian Economy‘ Tata McGrawhills Series,
1st Ed., 2008
Sharma J.K., ‗Bank‘s Credit and Economic Development in
India‘, Classical Publishing Co.,New Delhi.
Ramkishan Y., ‗New Perspective in Rural and Agricultural
Marketing‘ 2nd Ed., 2004.
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Research, Vol.1, Issue 7, November 2005
www.indiabudget.nic.in/survey.asp
www.nabard.org
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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A Study of Irregular Trend of Child Death in Madhya Pradesh
Dr. Brijesh P. Singh*
Sonam Maheshwari**
Gunjan Singh***
Abstract: Level and trend of child death of any place reflect its level of socioeconomic development and quality of life and are
used for monitoring and evaluating population and health programmes and policies. The child death should be in
declining order with respect to time because of enhancement of health facilities. In this paper, a comparison is made
to perceive the level and trend of child death in Madhya Pradesh. The analysis is based on those mothers who
completed their fertility, thus mothers who do not deliver any birth during last five years prior to the survey date. For
comparison, the data of NFHS-I, NFHS-II and NFHS-III are used. For comparing the level and trend, the
distribution of number of child death according to different parity, age, religion, education and their place of
residence of mothers are obtained. But the result shows the average number of child deaths to a mother is found more
in NFHS-II than in NFHS-I and is less in NFHS-III. Hence the result contradicts the fact that child death should be in
decreasing order with the time. Thus it is an interesting issue to the researchers for searching possible reason behind
this.
Introduction:
Death is the last phase of life and is the permanent
disappearance of all evidence of life has taken place at
any time after birth. It may occur at an early stage of
life (as in the case of death of newly born baby) or may
be delayed by number of years (as in the case those
who are centenarians). Apart from severe emotional
trauma associated with the event, there are several
profound socio-economic and demographic
implications of death which makes its study important.
Population scientists classify mortality as two types:
endogenous and exogenous. Endogenous mortality is
presumed to arise from genetic causes such as
degenerative disease (cancer, diabetes, etc) and from
causes related to early infancy such as birth injuries,
congenital disorders, premature births and postnatal
asphyxia. Exogenous mortality, on the other hand is
presumed to arise from environmental or external
cause such as infection, accidents. The former type of
mortality has biological character and dominates the
death in elderly population and in early infancy, the
latter class of mortality is viewed as relatively treatable
and preventable.
The infant and child mortality rates have long been of
interest to social scientist and person concerned with
public health problems. The infant mortality rate is
defined as the probability of dying before the first
birthday and the child mortality is defined as the
probability of dying between first and fifth birthday,
whereas, the under five mortality (child death) is
defined as the probability of dying before the fifth
birthday. This mortality depends on some socio-
demographic characteristics of individual or society.
Adlakha & Suchindran (1985) considers some
characteristics as mother‘s age at the birth of child,
birth order, previous child loss, mother‘s residence,
father‘s occupation and mother‘s work experience
since marriage. Also maternal education has been
observed strong predictor of child mortality in
developing countries (Bhattacharya, 1999 and
Caldwell, 1979). The education of the mother is
emerged as one of the strongest predictors of child
mortality though other factors like women‘s autonomy,
income, working status of parents, standard of living
index, household size, place of residence, better
conditions of water supply and sanitation have
influence upon it (Hobcraft et. al., 1984).
In this paper, we are consider the level and trend of
child death of Madhya Pradesh and child death is none
other than under five mortality i.e., the probability of
dying before the fifth birthday. Level and trend of child
deaths are relevant to a demographic assessment of the
population and are an important measure of a country‘s
level of socioeconomic development and health
condition of life. They can also be used for monitoring
and evaluating population and health programmes.
Data:
The data of Madhya Pradesh from NFHS-I, NFHS-II
and data of Madhya Pradesh and Chattishgarh from
NFHS-III are used in this study so that homogeneity
can be maintained. NFHS-I, II and III asked all ever
married women aged 15-49 to provide a complete
history of their births including for each live birth, the
sex, month and year of birth, survival status, and age at
time of the survey or age at death. Age at death was
recorded in days for children dying in the first month
of life, in months for other children at later ages. The
analysis is based on those mothers who completed their
fertility, thus it is assumed that mothers who do not
deliver any birth in last five years prior to the survey
date are considered. For comparing the level and trend,
the distribution of number of child death and observed
risk of death (D/B) according to different parity, age-
group, religion, education and
*Asstt. Professor (Statistics), Faculty of Commerce, Banaras Hindu University,
**JRF, Department of Statistics, Banaras Hindu University, Varanasi.
***JRF, Department of Statistics, Banaras Hindu University, Varanasi.
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their place of residence of mothers are obtained.
Results and discussion:
Table 1 shows that the under five mortality taken from
different NFHS reports directly. These estimates
calculated on the basis of data five year prior to the
survey date. This shows that the under five mortality
per 1000 live births. Also this indicate that the
diversity in trend of the under five mortality. Table 1
also shows the average infant death and child death to
a female, total number of live births, total number of
died children under age five and observed risk of child
death per live births in Madhya Pradesh. According to
the different reports of NFHS in Madhya Pradesh, it is
reveals that the child death in NFHS-II is more than its
value in NFHS-I and again its value decreases in
NFHS-III. This raise a question in our mind that why is
it so, thus in this paper an attempt has been made to
investigate the possible factors which made this
irregularity.
Table 2 shows the mean number of child death, total
number of births, total number of died children and
observed risk of child death according to different
parity of mothers for NFHS-I, NFHS-II and NFHS-III.
From the table, it is observed that for parity 3, the
mean number of child death is 0.209 in NFHS-1, 0.217
in NFHS-II and 0.131 in NFHS-III, for parity 4 it is
0.365, 0.507 and 0.304 i.e., the mean number of child
is higher in NFHS-II than NFHS-I and again it is lower
in NFHS-III, which also shows that the trend is not in
decreasing order with respect to time. But for parity 5,
the mean number of child deaths is 0.754, 0.676 and
0.622 in NFHS-I, NFHS-II and NFHS-III respectively
which shows the declining trend and similar trend is
seen for parity 6 and 7. Again in parity 8, the mean
number of child deaths are respectively 1.67, 2.121 and
1.092 for NFHS-I, NFHS-II and NFHS-III, which
shows that the trend of mean number of child death is
in fluctuating nature. Similar fluctuating trend is
observed for parity 9 and 10. Thus the trend of mean
number of child death is not uniform in Madhya
Pradesh between NFHS-I, NFHS-II and NFHS-III.
From the tables it should be noted that Infant death,
child death, under five mortality rate and observed risk
of child death per live births is higher in NFHS-II than
in NFHS-I and is lower in NFHS-III in each category,
which is a contradiction because these estimates should
be either in increasing order or in decreasing order. It is
expected that the trends of child death to females
should be either in increasing order or in decreasing
order with respect to time; it should not be like in
fluctuating nature because it is important indicator of
socioeconomic condition and availability of health
facilities of any country, state or any place.
Table 1
Average Infant Death & Child Death in Madhya Pradesh (all females)
Characteristics NFHS
I II III
Infant death with 95% confidence interval
Male 0.1829
(0.1703-0.1955)
0.2021
(0.1894-0.2147)
0.1190
(0.1112-0.1268)
Female 0.1637
(0.1516-0.1758)
0.1723
(0.1615-0.1831)
0.1006
(0.0936-0.1076)
Total 0.3467
(0.1500-0.3663)
0.3744
(0.3561-0.3927)
0.2196
(0.2080-0.2312)
Child death with 95% confidence interval
Male 0.2526
(0.2375-0.2676)
0.2789
(0.2638-0.2940)
0.1288
(0.1207-0.1369)
Female 0.2474 (0.2322-0.2626)
0.2717 (0.2574-0.2860)
0.1114 (0.1038-0.1188)
Total 0.5000
(0.2552-0.5245)
0.5506
(0.5273-0.5795)
0.2402
(0.2277-0.2526)
Total no. of deaths 3127 3822 2459
Total no. of births 19962 23260 24137
D/B 0.1566 0.1643 0.1019
Under five mortality (Child death)* 130.30 137.60 94.20
* Taken from NFHS reports
Table 2
Distribution of different parity of mothers according to the number of child deaths
in Madhya Pradesh for NFHS-I, II & III
No.
of
Child
death
Parity of mother
3 4 5 6 7 8 9 10
NFHS NFHS NFHS NFHS NFHS NFHS NFHS NFHS
I II III I II III I II III I II III I II III I II III I II III I II III
Mean 0.209 0.217 0.131 0.365 0.507 0.304 0.754 0.676 0.622 1.146 1.127 0.985 1.613 1.51 1.362 1.67 2.121 1.092 2.479 2.822 2.125 2.75 3.257 3.058
S.E. 0.022 0.019 0.011 0.028 0.029 .0019 0.051 0.038 0.034 0.073 0.059 0.064 0.112 0.877 0.095 0.145 0.1465 0.188 0.254 0.232 0.223 0.512 0.341 0.473
D/B 0.070 0.072 0.044 0.091 0.127 0.076 0.151 0.136 0.124 0.191 0.188 0.164 0.230 0.217 0.195 0.209 0.265 0.237 0.276 0.314 0.236 0.275 0.326 0.303
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Table 3
Distribution of different age of mothers according to the number of child deaths
in Madhya Pradesh for NFHS-I, II & III
No. of
Child
death
Age of mother
15-20 20-25 25-30 30-35 35-40 40-45 45-50 Total
NFHS NFHS NFHS NFHS NFHS NFHS NFHS NFHS
I II III I II III I II III I II III I II III I II III I II III I II III
Mean 0.002 0.000 0.000 0.073 0.022 0.005 0.233 0.283 0.126 0.464 0.444 0.232 0.623 0.670 0.312 0.809 0.803 0.409 0.952 1.021 0.531 0.486 0.536 0.214
S.E. 0.002 0.000 0.011 0.018 0.009 0.027 0.028 0.031 0.019 0.036 0.034 0.020 0.044 0.038 0.020 0.057 0.044 0.027 0.066 0.063 0.032 0.018 0.017 0.007
D/B 0.333 - - 0.175 0.077 0.085 0.111 0.122 0.080 0.135 0.135 0.084 0.148 0.163 0.092 0.170 0.169 0.105 0.177 0.189 0.125 0.155 0.162 0.102
Table 4
Distribution of different background characteristics of mothers according to the number of
child deaths in Madhya Pradesh for NFHS-I, II & III
No. of
Child
death
Different background characteristics of mother
Urban Rural Hindu Muslim Illiterate Primary Middle High School+
NFHS NFHS NFHS NFHS NFHS NFHS NFHS NFHS
I II III I II III I II III I II III I II III I II III I II III I II III
Mean 0.300 0.359 0.124 0.545 0.610 0.301 0.494 0.550 0.227 0.368 0.451 0.148 0.582 0.694 0.418 0.315 0.392 0.174 0.196 0.196 0.056 0.104 0.119 0.014
S.E. 0.026 0.025 0.007 0.022 0.021 0.013 0.019 0.018 0.008 0.058 0.063 0.022 0.022 0.024 0.016 0.037 0.030 0.016 0.037 0.031 0.006 0.045 0.026 0.004
D/B 0.095 0.113 0.068 0.176 0.181 0.126 0.160 0.167 0.106 0.101 0.122 0.072 0.174 0.185 0.123 0.110 0.132 0.088 0.083 0.090 0.055 0.048 0.055 0.016
D/B (observed risk of child death) provides a very
useful approach of understanding the level of child
death. For parity 3, the observed risk of child death
(D/B) is respectively 0.070, 0.072 and 0.044 in NFHS-
I, NFHS-II and NFHS-III. The value 0.070 indicates
that 7 child deaths occur in 100 child births. The trend
of D/B is same as the trend of mean number of child
death.
Table 3 presents the distribution of different age of
mothers according to the number of child deaths in
Madhya Pradesh for NFHS-I, NFHS-II and NFHS-III.
It shows the mean number of child death, total number
of births, total number of died children and observed
risk of child death according to different age group of
mothers for NFHS-I, NFHS-II and NFHS-III. This
table shows that the mean number of child death is
0.002 in the age-group 15-20 according to NFHS-I
report while it is zero for both NFHS-II and NFHS-III.
In the age-group 20-25, the mean number of child
death are 0.073, 0.022 and 0.005 for NFHS-I, NFHS-II
and NFHS-III respectively. But in the age-group 25-30,
the mean number of child death are 0.233, 0.283 and
0.126 for NFHS-I, NFHS-II and NFHS-III
respectively. Thus in age-group 20-25, the mean
number of child death shows declining trend and in
age-group 25-30, it is in fluctuating nature. In the age-
group 30-35 and 40-45, the mean number of child
death shows declining order while it is in fluctuating
nature in age-group 35-40 and 45-50. It is observed
that the trend of observed risk of child death (D/B) is
same as the trend of mean number of child death.
Table 4 presents the distribution of different
background characteristics of mothers according to the
number of child death in Madhya Pradesh for NFHS-I,
II and III. It shows the mean number of child death,
total number of births, total number of died children
and observed risk of child death according to place of
residence, religion and education for NFHS-I, NFHS-II
and NFHS-III. In urban area, the mean number of child
death is 0.300, 0.359 and 0.124 for NFHS-I, II and III
respectively while in case of rural area it is respectively
0.545, 0.610, and 0.301 i.e., the trend of mean number
child death is not predictable for both urban area and
rural area. Again it is observed that mean number of
child death is higher in rural areas as compare to urban
areas. Similarly the observed risk of child death is
higher in rural areas. According to religion of mothers,
it is observed that the mean number of child death is
0.494, 0.550, and 0.227 for Hindu while it is 0.368,
0.451 and 0.148 for Muslim respectively for NFHS-I,
II and III report. The trend of child death is
unpredictable and the risk of child death is in Hindu
women. According to education background of
mothers, the trend of child death is not in deceasing
order for each category (Illiterate, Primary, Middle and
High School+). But the risk of child death is mostly
seen in case of illiterate mothers, i.e., the risk of child
death is negatively associated with education of
mothers. Thus the trend of mean number of child death
and observed risk of child death are in fluctuating
nature according to place of residence, religion and
education. It shows the same outcome as it is observed
in table1, 2 & 3 i.e., mean number of child death, total
number of births, total number of died children and
observed risk of child death (D/B) is higher in NFHS-II
than in NFHS-I and again it is lower in NFHS-III.
From the above findings it is observed that all table
shows the mean number of child death and observed
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risk of child death is higher in NFHS-II than in NFHS-
I and again lower in NFHS-III, which supports our
doubt mentioned earlier that this is a conflicting result
because these estimates either should be in increasing
order or in decreasing order with respect to time. These
should not be like in fluctuating nature. Analysis reveal
that certainly there is some drawback in one of the
three NFHS data either it is in NFHS-II or in NFHS-
III. Every social scientist, demographers, statisticians
and researchers uses these three data for their research
works and helps to policy makers for making their
policies for proper implication. But it is very difficult
to provide productive information when a researcher is
going to use these three data simultaneously. Thus in
order to rectify these discrepancies in the data
government should take proper course of action during
the sampling and collection of data.
References:
Adlakha, A.L. and Suchindran, C.M. (1985) Factors
affecting infant and child mortality, J. Biosoc.
Sci., 17(40), pp. 481-496.
Bhattacharya, P.C. (1999) Socio-economic
determinants of early childhood mortality: a study
of three Indian states, Demography India, 28, pp.
47-63.
Caldwell, J. C. (1979) Education as a factor in
mortality decline: an examination of Nigerian
data, Popul. Stud, 33(3), pp. 395-413.
Hobcraft, J.N., Mc Donald, J.W., and Rustein, S.O.
(1984) Socio-economic factors in child mortality,
a cross-national comparison, Popul. Stud., 38, pp.
193-223.
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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Corporate Social Responsibility – Issues and Challenges In India Dr .Manju Khosla*
Abstract Corporate social responsibility is the buzzing words in every sphere of the corporate sector. Corporate social
responsibility has its ethos in the business self regulation, which is considered as integrated and inseparable part of
the business models. The Bhopal gas tragedy case has left the unending issue of the compensation to the victims,
which is still an unanswerable question before the judiciary and the corporate sector regarding the social
responsibility. In India companies like TATA and Birla are practicing the Corporate Social Responsibility (CSR) for
decades, long before CSR become a popular basis. In spite of having such good glorious examples; In India CSR is in
a very much budding stage. A lack of understanding, inadequately trained personnel, coverage, policy etc. further
adds to the reach and effectiveness of CSR programs. Large no. of companies are undertaking these activities
superficially and promoting/ highlighting the activities in Media. The basic aim or object of the corporate social
responsibility is to give the responsibility on the companies to give positive impact on environment, consumers,
employees, communities, etc through their business. Corporate social responsibility gives the responsibility to the
corporate world to focus on the public interest by not harm the community through its product and increase or help
in the development of community or the society. This research paper focuses on the finding & reviewing of the issues
and challenges faced by CSR activities in India.
Keywords- CSR, Corporate Social Responsibility
Introduction
Nearly all leading corporate in India are involved in
corporate social responsibility (CSR) programs in areas
like education, health, livelihood creation, skill
development, and empowerment of weaker sections of
the society. Notable efforts have come from the Tata
Group, Infosys, Bharti Enterprises, ITC Welcome
group, Indian Oil Corporation among others. The
2010 list of Forbes Asia‘s ‗48 Heroes of Philanthropy‘
contains four Indians. The 2009 list also featured four
Indians. India has been named among the top ten Asian
countries paying increasing importance towards
corporate social responsibility (CSR) disclosure norms.
India was ranked fourth in the list, according to social
enterprise CSR Asia's Asian Sustainability Ranking
(ASR), released in October 2009. Although corporate
India is involved in CSR activities, the central
government is working on a framework for quantifying
the CSR initiatives of companies to promote them
further. According to Minister for Corporate Affairs,
Mr Salman Khurshid, government is developing a
system of CSR credits, similar to the system of carbon
credits which are given to companies for green
initiatives. Moreover, in 2009, the government made
it mandatory for all public sector oil companies to
spend 2 per cent of their net profits on corporate social
responsibility. Besides the private sector, the
government is also ensuring that the public sector
companies participate actively in CSR initiatives. The
Department of Public Enterprises (DPE) has prepared
guidelines for central public sector enterprises to take
up important corporate social responsibility projects to
be funded by 2-5 per cent of the company's net profits.
Today, CSR in India has gone beyond merely charity
and donations, and is approached in a more organized
fashion. It has become an integral part of the corporate
strategy. Companies have CSR teams that devise
specific policies, strategies and goals for their CSR
programs and set aside budgets to support them. These
programs, in many cases, are based on a clearly
defined social philosophy or are closely aligned with
the companies‘ business expertise.
A handful corporate houses are dedicated and
practicing the CSR as they are dictated by the very
basis of their existence. It is observed that many
companies are promoting their CSR activities and uses
it as a tool for Marketing. This denotes that the
companies are far from perfect as the emphasis is not
on social good but rather as a promotion policy.
Definition
Corporate Social Responsibility has been defined as
‗companies integrating social and environmental
concerns in their daily business operations and in their
interaction with their stakeholders on a voluntary
basis‘. Taken literally, the term CSR is more ‗biased‘
in its sole reference to corporate ‗responsibility‘.
Corporate Citizenship has been defined as
‗understanding and managing a ompany‘s wider
influences on society for the benefit of the company
and society as a whole‘ or ‗business taking greater
account of its social and environmental – as well as
financial – footprints‘. The term ‗corporate citizenship
is based on the view that companies, as independent
legal entities, are members of the society and as such
can be regarded as citizens with legal rights and duties.
companies have a number of legal rights and are
expected to carry out not only their legal duties.
*Deptt. Of Commerce, Gargi College, Delhi University.
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Objectives
The Present paper is basically concerned with the
objective to study the Issues and Challenges for CSR in
India.
Research Methodology
Looking into requirements of the objectives of the
study the research design employed for the study is of
descriptive type. Keeping in view of the set objectives,
this research design was adopted to have greater
accuracy and in depth analysis of the research study.
Available secondary data was extensively used for the
study. The investigator procures the required data
through secondary survey method. Different news
articles, Books and Web were used which were
enumerated and recorded.
The key drivers for CSR are:
• Enlightened self-interest - creating a synergy of
ethics, a cohesive society and a sustainable global
economy where markets, labour and communities are
able to function well together.
• Social investment - contributing to physical
infrastructure and social capital is increasingly seen as
a necessary part of doing business.
• Transparency and trust - business has low ratings
of trust in public perception. There is increasing
expectation that companies will be more open, more
accountable and be prepared to report publicly on their
performance in social and environmental arenas.
• Increased public expectations of business -
globally companies are expected to do more than
merely provide jobs and contribute to the economy
through taxes and employment.‖
CSR: Current Issues
Corporate social responsibility (CSR) promotes a
vision of business accountability to a wide range of
stakeholders, besides shareholders and investors. The
key areas of concern in CSR are environmental
Drivers of CSR
Source: Corporate Social Responsibility Survey 2002 – India
(United Nations Development Programme, British Council, CII, PriceWaterHouseCoopers
protection and the well-being of employees, the
community and civil society in general, both now and
in the future. The concept of CSR is underpinned by
the idea that corporations can no longer act as isolated
economic entities operating in detachment from
broader society. Traditional views about
competitiveness, survival and profitability are being
swept away.
Some of the drivers pushing business towards CSR
include:
The shrinking role of government In the past, governments have relied on
legislation and regulation to deliver social and
environmental objectives in the business sector.
Shrinking government resources, coupled with a
distrust of regulations, has led to the exploration
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of voluntary and non-regulatory initiatives
instead.
Demands for greater disclosure
There is a growing demand for corporate
disclosure from stakeholders, including
customers, suppliers, employees, communities,
investors, and activist organizations.
Increased customer interest
There is evidence that the ethical conduct of
companies exerts a growing influence on the
purchasing decisions of customers. In a recent
survey by Environics International, more than one
in five consumers reported having either
rewarded or punished companies based on their
perceived social performance.
Growing investor pressure
Investors are changing the way they assess
companies' performance, and are making
decisions based on criteria that include ethical
concerns. The Social Investment Forum reports
that in the US in 1999, there was more than $2
trillion worth of assets invested in portfolios that
used screens linked to the environment and social
responsibility. A separate survey by Environics
International revealed that more than a quarter of
share-owning Americans took into account ethical
considerations when buying and selling stocks.
(More on socially responsible investment can be
found in the 'Banking and investment' section of
the site.)
Competitive labour markets
Employees are increasingly looking beyond
paychecks and benefits, and seeking out
employers whose philosophies and operating
practices match their own principles. In order to
hire and retain skilled employees, companies are
being forced to improve working conditions.
Supplier relations
As stakeholders are becoming increasingly
interested in business affairs, many companies are
taking steps to ensure that their partners conduct
themselves in a socially responsible manner.
Some are introducing codes of conduct for their
suppliers, to ensure that other companies' policies
or practices do not tarnish their reputation.
Some of the positive outcomes that can arise when
businesses adopt a policy of social responsibility
include:
1. Company benefits:
• Improved financial performance;
• Lower operating costs;
• Enhanced brand image and reputation;
• Increased sales and customer loyalty;
• Greater productivity and quality;
• More ability to attract and retain employees;
• Reduced regulatory oversight;
• Access to capital;
• Workforce diversity;
• Product safety and decreased liability.
2. Benefits to the community and the general public:
• Charitable contributions;
• Employee volunteer programmes;
•Corporate involvement in community education,
employment and homelessness programmes;
• Product safety and quality.
3. Environmental benefits:
• Greater material recyclability;
• Better product durability and functionality;
• Greater use of renewable resources;
• Integration of environmental management tools into
business plans, including life-cycle assessment and
costing, environmental management standards, and
eco-labeling. Nevertheless, many companies continue
to overlook CSR in the supply chain - for example by
importing and retailing timber that has been illegally
harvested. While governments can impose embargos
and penalties on offending companies, the
organizations themselves can make a commitment to
sustainability by being more discerning in their choice
of suppliers.
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The concept of corporate social responsibility is now
firmly rooted on the global business agenda. But in
order to move from theory to concrete action, many
obstacles need to be overcome. A key challenge facing
business is the need for more reliable indicators of
progress in the field of CSR, along with the
dissemination of CSR strategies. Transparency and
dialogue can help to make a business appear more
trustworthy, and push up the standards of other
organizations at the same time. The Global Reporting
Initiative is an international, multi-stakeholder effort to
create a common framework for voluntary reporting of
the economic, environmental, and social impact of
organizationlevel activity. Its mission is to improve the
comparability and credibility of sustainability reporting
worldwide. There is increasing recognition of the
importance of public-private partnerships in CSR.
Challenges to CSR:
In a World Bank study, it was found that the three key
challenges to the implementation of CSR were:
1. Generation of inefficiency and confusion in the
buyer CSR codes.
2. Traditional implementation of CSR Strategies not
achieving the desired results
3. Insufficient information about the business benefits
of CSR implementation
The World Bank then proposed some solutions to go
forward. Effective implementation of CSR involves
active engagement of the public sector, capacity
building, empowerment of the workers, development
of the standards, and harmonizing them with the firm‘s
objectives and goal, ongoing research, removal of
economic barriers to CSR etc. Public Sector
engagement involves host government actions as well
as home country government. They must build a
sustainable relationship so as to promote CSR. In order
to harmonize standards, care must be taken to address
implementation guidelines, training and education,
sharing information, and monitoring of procedures.
Global Scenario
The role of Multinational Corporations (MNCs) in
developing countries, within the context of
globalization and free trade, continues to expand.
Although globalization is boosting the economies of
developing countries, these benefits come with their
downside too. MNCs are being held accountable for
the impact of their operations on social and
environmental parameters. Apart from this, it is
perceived that the wealth created by MNCs is not
distributed equitably among all stakeholders. This has
led to the increase in the number of MNCs subscribing
to codes of conduct. Within the field of CSR, most
standards are of a voluntary nature. Companies are
adopting a more integrated approach to CSR, in the
sense that policies and practices are extended beyond
the company itself. Responsible policies and practices
are applied throughout the organization and extended
to customers and clients. In some cases, demands on
responsible policy and practices involve the entire
supply chain (i.e. environmental responsibility in a life
cycle perspective – ‗from cradle to grave‘). This
involves being responsible for the performance of their
suppliers, sub-contractors, joint venture partners,
distribution outlets and ultimately the responsible
disposal of their products.
Poor environmental or social performance at any stage
of the supply chain process will damage a company‘s
most important asset, its reputation.
Global Issues and Challenges
Global issues are issues that:
• Have significant impacts for large numbers of people
• are trans-national
• are persistent, or long-acting
• are interconnected
Political, social, environmental, economic, health, and
security concerns are all impacted by global issues and
are in themselves, global issues. Some of the major
issues covered here are;
A) Energy:
After food and water, energy to cook or heat or move
from place to place is the most basic human need.
Hydrocarbon fuels (oil, natural gas, and coal) still
provide nearly 80 percent of the world‘s energy even
though their carbon content leads directly to the
development of greenhouse gases and global warming,
which in turn causes skin cancer & respiratory
problems More than two billion people in the
developing world continue to use traditional biomass
fuels like wood whose overuse has led to land
degradation, deforestation, desertification, and air
pollution. The United States and Canada, with only 6
percent of the world‘s population consume nearly 30
percent of the world‘s energy while all of Africa
consumes only 5 percent. It is estimated that almost
two billion people still lack electricity in their homes.
B) Population:
If population were stable, many global issues would be
far more manageable. World population is currently
increasing by 80 to 85 million people each year. Far
more people are born each year than die. Decisions
about family size are often based on economic factors,
and in poorer societies, having numerous children may
be an important asset. They provide support and
security in parents‘ old age, help raise food, haul
water, care for younger siblings, and gather fuel wood.
Children may also work for wages outside the home,
be indentured, or even sold to help support the family.
Birth rates are also closely linked to education. In the
areas of the world where education levels are highest –
Europe, Japan, China, North America – fertility is
correspondingly lowest. Increasing population and
consumption cause damage to the planet, and increase
deforestation, soil erosion, extinction of species, and
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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pollution of air and water. As world population and
consumption grow, environmental impacts multiply,
and resource scarcity worsens. As environmental
destruction and scarcity spread, and as more people
compete for limited resources, social, ethnic, and
political tensions increase. This combination drives
political instability, declining social health, and greater
migration.
C) Environment:
40 percent of the Earth‘s surface has been converted to
cropland or pasture and half of the tropical forests have
been destroyed or degraded. In the atmosphere
surrounding us, the protective ozone layer has been
damaged. Power plant and automotive emissions create
widespread air pollution. Fresh water is declining in
quality and quantity. As a result of over fishing, many
species of fish exist only in small, isolated pockets in
the oceans of the world. Groundwater close to the
surface is especially vulnerable to environmental
pollution from industrial waste, excessive irrigation
and overuse of fertilizers. An unexpected result of an
environment out of balance is the increase in natural
disasters. Overcrowding in cities has also meant that
urban dwellers are more vulnerable to earthquakes and
mudslides.
D) Health:
Good health is absolutely essential for social and
economic development. Population growth,
globalization, and inappropriate development have had
a tremendous impact on the developing world directly.
In the richer nations, over consumption has caused
serious environmental health impacts. Food and water
security are key links in the chain that leads to good
health at all levels of a society and in the family of
nations. Due to global warming there has been
increased rainfall in many parts of the world, which
has led to a higher incidence of cholera, dysentery,
typhoid, and other water-borne disease. Everyone is
familiar with increased skin cancer due to our depleted
ozone layer, the harmful impacts of herbicides and
pesticides on both agricultural workers and consumers,
and the impact of air pollution on young and old alike.
In the industrialized world, workplace-related mental
illnesses often associated with stress are becoming
commonplace. The HIV-AIDS pandemic has had this
effect on Africa where, in some countries like Uganda,
Botswana, and Malawi, nearly an entire generation of
farmers has died, crippling the ability of those
countries to support themselves.
Conclusion:
The study was conducted to find out the company's
reasons towards corporate social responsibility on
cause related and its impact on the company's brand
image and sales. The important factors that influence
the company to contribute are: Customer oriented,
Ethical oriented, Community oriented, Humane
oriented. Financial benefits in terms of tax benefits also
are important, though the responses to this issue seem
to be guarded. Companies must generate awareness to
the various stakeholders regarding its contribution to
corporate social responsibility through its affiliation
with social cause through event management (Mumbai
marathon events) & company websites as it is directly
related to increase in sales and brand loyalty. India
being a developing country with over 250 million
strong middle class families has a large potential for
any marketer & at the same time it can support quiet a
good number of causes which benefits the society at
large. e.g. due to operation of CRY' a NGO 89244
children lives were permanently transformed 1013
communities experienced 100% school enrollment,
159 primary health centers began functioning and long
term rehabilitation program were initiated in almost
100 tsunami affected villages in Tamil Nadu, Andhra
Pradesh and Kerala and earth quake relief &
rehabilitation programs were initiated in 11villages in
Jammu & Kashmir. So we can conclude that corporate
social responsibility and cause related marketing is
beneficial both for company and the society.
References: www.k4d.org/Health/sustainable-development-challenges-
and-csr-activities-in-india.
http://www.iisd.org/business/issues.
Indian Brand Equity Foundation, www.ibef.org.
Dr. Suri Sehgal, Chairman & Founder Institute of Rural
Research & Development (IRRAD) Gurgaon.
―Desirable Corporate Governance: A Code‖, established in
April 1998.
Business Line, Business Daily from THE HINDU group of
publications, Wednesday, Jun 23, 2010.
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New DTC and its Impact on Inclusive Growth: Pragmatic
Study from Indian Perspective Dr. Meera Singh*
Abstract
In the world of free trade, deregulation and changing technology there is urgent need of simplification in Income tax
Act. Accordingly, Government of India proposed the New Direct Tax Code (DTC) to make revolutionary changes and
rapid economic growth. The global meltdown has harmed every sector of Indian economy so in this paper a modest
attempt has been made to provide a sectoral analysis of new DTC and its impact on inclusive growth.
Key Words: DTC, EEE, EET, Modification, Exemptions
Tax structure is not only a revenue generation exercise
but also the most important pillar of financial
infrastructure of any nation. A tax structure which
meets the criteria of certainty, ability to pay,
convenience to pay and lesser collection cost is a sine
qua non to sustain a growth oriented structure of any
economy. It is really heartening to see that the
proposed bill meets all these criteria and something
more. The New Direct Tax Code (DTC) is said to
replace the existing Income Tax Act of 1961 in India -
and would be presented in the winter session of the
Parliament. It is expected to be passed in the monsoon
session of 2010 and is expected to be enforced from
2011. During the budget 2010 presentation, the finance
minister Mr. Pranab Mukherjee reiterated his
commitment to bringing into fore the new direct tax
code (DTC) into force from 1st of April, 2011.The new
code will completely overhaul the existing tax
proposals for not only individual tax payers, but also
corporate houses and foreign residents. It has been
drawn from the prevailing tax legislation in UK, USA,
and Canada.
Salient Features of DTC:
(a) Single Code for direct taxes:
All the direct taxes have been brought under a single
Code and compliance procedures unified. This will
eventually pave the way for a single unified taxpayer
reporting system.
(b) Use of simple language:
With the expansion of the economy, the number of
taxpayers can be expected to increase significantly.
The bulk of these taxpayers will be small paying
moderate amounts of tax. Therefore, it is necessary to
keep the cost of compliance low by facilitating
voluntary compliance by them. This is sought to be
achieved, inter alia, by using simple language in
drafting so as to convey, with clarity, the intent, scope
and amplitude of the provision of law. Each sub-
section is a short sentence intended to convey only one
point. All directions and mandates, to the extent
possible, have been conveyed in active voice.
Similarly, the provisos and explanations have been
eliminated since they are incomprehensible to non-
experts. The various conditions embedded in a
provision have also been nested. More importantly,
keeping in view the fact that a tax law is essentially a
commercial law, extensive use of formulae and tables
has been made.
(c) Reducing the scope for litigation:
Wherever possible, an attempt has been made to avoid
ambiguity in the provisions that invariably give rise to
rival interpretations. The objective is that the tax
administrator and the tax payer are ad idem on the
provisions of the law and the assessment results in a
finality to the tax liability of the tax payer. To further
this objective, power has also been delegated to the
Central Government/Board to avoid protracted
litigation on procedural issues.
(d) Flexibility:
The structure of the statute has been developed in a
manner which is capable of accommodating the
changes in the structure of a growing economy without
resorting to frequent amendments. Therefore, to the
extent possible, the essential and general principles
have been reflected in the statute and the matters of
detail are contained in the rules/Schedules.
(e) To ensure that the law can be reflected in a
Form:
For most taxpayers, particularly the small and marginal
category, the tax law is what is reflected in the Form.
Therefore, the structure of the tax law has been
designed so that it is capable of being logically
reproduced in a Form.
(f) Consolidation of provisions: In order to enable a
better understanding of tax legislation, provisions
relating to definitions, incentives, procedure and rates
of taxes have been consolidated. Further, the various
provisions have also been rearranged to make it
consistent with the general scheme of the Act.
*Assistant Professor of Commerce, U.P. Autonomous PG College, Varanasi, Uttar Pradesh.
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g) Elimination of regulatory functions:
Traditionally, the taxing statute has also been used as a
regulatory tool. However, with regulatory authorities
being established in various sectors of the economy,
the regulatory function of the taxing statute has been
withdrawn. This has significantly contributed to the
simplification exercise.
(h) Providing stability:
At present, the rates of taxes are stipulated in the
Finance Act of the relevant year. Therefore, there is a
certain degree of uncertainty and instability in the
prevailing rates of taxes. Under the Code, all rates of
taxes are proposed to be prescribed in the First to the
Fourth Schedule to the Code itself thereby obviating
the need for an annual Finance Bill. The changes in the
rates, if any, will be done through appropriate
amendments to the Schedule brought before Parliament
in the form of an Amendment Bill.
Sectoral impact of New Direct Tax code:
SECTORS IMPACT CHANGES IMPACT ANALYSIS
Agriculture Neutral Reduction in the corporate tax
rate from33% to 25%
Decrease in the Depreciation rate
for plant and Machinery
The industry is currently under a full tax regime; hence
a reduction in the tax would definitely increase profits
of company. Negative for cash rich company that have
invested surplus cash in mutual funds and other
financial instruments. Reduction in the tax shield,
negative for all companies, however the lower income
tax might compensate for the same.
Automobile Positive Significant changes in personal
tax slabs
Cut the corporate rate
MAT will be 2% of the value of
goods assets, 15% of the book
value at present.
Change in tax slabs for personal income will boost
consumption, owing to rising disposable income in the
hand of consumers. Positive for most of the Auto
majors. Specifically, this would boost the demand for
consumer discretionary items like Two Wheelers and
Passenger Vehicles. Positive for Maruti, M&M, Hero
Honda, Bajaj Auto, TVS Motors and Tata Motors. A
cut in the corporate tax rate to 25 will benefit high tax-
paying companies like Hero Honda, Maruti and Bajaj
Auto.
Banking Positive Reduction in Corporate Tax rate
to 25%.
MAT at 0.25% of Gross Assets.
Increase in Tax incentive limit on
savings from Rs1 to 3lakhs;
Withdrawal of a key incentive for
Home Loans, viz. tax exemption
on the Interest paid up to
Rs1.5lakh.
Provision for NPAs allowable up
to 1% of aggregate average
Advances as against 7.5% of
Total Income and 10% of Rural
Advances at present
Positive, as majority of the companies in the Sector are
paying taxes close to the maximum rate of 34%.Very
few companies (mainly Mid-cap banks like DCB,
UCO Bank, etc.) could be hit by the proposed MAT at
0.25% of gross assets. Increase in the limit is a positive
for banks having large financial subsidiaries in life
insurance and asset management such as ICICI Bank,
SBI, etc. However, the prospect of eventual taxation at
the time of withdrawal could weigh on investment
decisions and reduce attractiveness of tax-saving
instruments such as ULIPs, ELSS, etc.
Capital
Goods
Positive The Corporate tax rate is
proposed to be reduced to 25%
from 33% earlier.
Significant changes in Personal
Income Tax slabs.
Since all the Capital Goods companies under our
coverage universe fall in the full tax bracket, any
reduction in their bottom line corporate tax rate would
positively boost bottom-line. Positive for ABB, Areva
T&D, BHEL and Crompton Greaves.
Cement Positive Corporate tax rate reduced to
25% from 33% earlier.
As companies under our coverage come under the full
tax bracket, the reduction in corporate tax rate will
bring down the overall tax liability of these companies
and will provide a push-up to the bottom line. Positive
for ACC, Grasim Industries, Ultratech Cement, Abuja
Cements, India Cements, Madras Cements, etc.
FMCG Positive Significant changes in Personal Changes in the Personal Income Tax slabs are likely to
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Income Tax slabs
Basis for computing Minimum
Alternate Tax (MAT) changed
from "Book Profits" to "Gross
Assets"
MAT to be charged at 2% of
Gross Assets
drive higher consumption owing to rising disposable
income levels. This is a key positive for FMCG
companies. A cut in Corporate Tax rate to 25% will
benefit most FMCG companies which generally pay
full tax rate. Key beneficiaries include GSK Consumer,
ITC and Nestle.
Hotel Positive Tax rate of companies (both
domestic and foreign) to be
reduced to 25% from 33% earlier.
Significant changes in Personal
Income Tax slabs
Since the industry falls in the full tax bracket (33%
tax), the proposal of reducing the tax rate would be
positive, consequently providing a boost to the bottom-
line bottom line. The tax slabs for individuals are
proposed to be revised significantly, thereby leading to
increased disposable income in hands of individuals.
Infrastructu
re
Neutral Basis for computing MAT
changed from "Book Profits" to
"Gross Assets".
Negative for companies having presence in BOT space
and claiming MAT credit such as Nagarjuna
Construction credit, Construction, Madhucon Projects,
etc, since they will not be able to claim further credit.
Media
Positive Significant changes in Personal
Income Tax slabs
Corporate Tax rate proposed to be
reduced to 25%.
Changes in Person Income Tax slabs are likely to drive
higher consumption. Key positive for Media
companies as it is likely to drive higher Advertising. A
cut in Corporate Tax rate to 25% will benefit most
Media companies, which generally pay full tax rate.
Power Neural Basis for computing MAT
changed from "Book Profits" to
"Gross Assets.
Corporate Tax rate be reduced.
Discontinuance of the provision to carry forward MAT
is a negative for companies availing MAT such as
CESC and GIPCL.
Retail Positive Tax rate of companies to be
reduced to 25% from 33% earlier.
Significant scale-up in the tax
slabs for individuals.
Since the industry falls in the full tax bracket (33%
tax), the proposal of reducing the tax rate would be
positive, consequently pro idling a boost to the bottom
line consequently providing bottom-line.
- The tax slabs for individuals are proposed to be
revised significantly, thereby leading to increased
disposable income in hands of individuals, and
triggering additional spending.
Software Neutral Basis for computing MAT
changed from "book profits" to
"gross assets"
Corporate tax rate proposed to be
reduced to 25%.
Negative for companies with a low tax rate and
claiming MAT credit, There is a lack of clarity as
regards the exemptions available to SEZs (currently
under Section 10AA), which is where IT companies
are shifting most of their incremental business owing
to the sunset clause for the STPI scheme (Section
10A/B).
- If the exemptions under the SEZ scheme are
withdrawn, there is no rationale for shifting to an SEZ,
and this is likely to lead to IT companies coming under
the purview of a full tax regime, which is a Negative
for companies like Cranes Software, 3i InfoTech and
Tech Mahindra.
Telecom Negative Basis for computing MAT
changed
Corporate tax rate
proposed to be reduced to
25%.
Negative for companies with a low tax rate and
claiming MAT Reliance credit, such as Bharti Airtel,
Communications, Idea Cellular and Tulip Telecom.
The proposed reduction in the Corporate Tax rate is a
Positive for the sector.
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Impact of New Direct Tax Code on some other
areas:
(a) Corporate Taxation:
The Tax Deprecation regime stipulates:
o Depreciation to lessee in case of a financial
lease and payment for lease rents to be treated
as payments towards principal and interest.
o Many new blocks of Assets/categories
introduced such as Rails, Scientific Research
Assets, Family planning Assets, Differed
Revenue Expenditure for example Non-
compete, Voluntary Retirement Scheme and
other items such as preliminary expenses etc.
o Allowances of depreciation even where all the
assets in the block of asset are demolished,
destroyed, discarded of transferred.
Any expenditure on which withholding tax is
paid after two years after the end of the
financial year in which the tax was deductible at
source, is not to be allowed as a deduction.
Specific provisions continue for change in
shareholding of unlisted public
companies/private companies impacting carry
forward and set-off losses.
Tax Rates:
Category Existing Rate As per DTC
Income –
Tax
30% 25%
Minimum
Alternative
Tax
Levied at 15% of
the adjusted book
profits in the case
of those
companies where
income-tax
payable on the
taxable income
according to the
normal provisions
of the Act is
lesser than the
same.
Tax on gross
assets
introduced as
under: 0.25
percent of gross
assets for
Banking
companies, 2
percent of gross
assets for other
companies.
Dividend
Distribution
Tax
15% 15%
A company is considered to be a resident
in India if it is an Indian Company or if
its places of control and management at
any time during the year are situated
wholly or partly in India.
In case of a company , its liability to pay
income tax is to be the higher of the two:
o The amount of income tax liability on its
Total Income is calculated at the
specified rates or
o The amount of income tax liability
calculated at the prescribed rated on gross
assets.
Income of distinct and separate business
i.e. where there is no interlacing, inter-
dependence and unity of business as
stipulated, is to be computed separately.
The ambit of business income has been
widened to cover:
o Profit on sales of business capital assets,
undertaking under a slump sale and
consideration with respect to a transfer of
any self-generated business assets.
o The reduction, remission or cessation of
any liability by way of loan, deposit,
advance or trade credit.
o Amount accrued or received either as
advance or security deposit or
otherwise from the lease of assets for
not less than 12 years, or agreement
which proved for extensions of the
lease terms for not less than 12 years.
Personal Taxation:
Proposed Tax slabs for
personal Income Tax
Tax Rate (%)
Up to Rs 1,60,000* Nil
Rs 1,60,000 – Rs
10,00,000
10
Rs 10,00,000 – Rs
25,00,0000
20
Above Rs 25,00,000 30
*Rs1, 90,000 for women and RS 2, 40,000 for senior citizen,
Source: Direct Taxes Code Bill, 2009
Moderation of Tax Rates and increase in tax
slabs:
New beneficial tax slabs are proposed to be introduced
which will reduce the tax burden for individuals. Peak
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rate of 30 percent applicable on income exceeding INR
25 lakhs.
Definition of Residency and scope of income:
Definition of residence proposed to be changed. A
separate category of ―Non Ordinarily Resident‖ and
additional condition of 729 days to ascertain residency,
are proposed to be abolished. Only two categories of
taxpayers proposed viz. ‗Resident‘ and ‗Non-resident‘.
Residents are proposed to be taxed only on India-
sourced income for initial two years, if they qualify as
a non resident in the preceding nine financial years.
Income from employment:
Employment income proposed to be computed as the
gross salary less the aggregate of the specified
deductions. Popular exemptions such as house rent
allowance, leave travel concession, leave encashment,
tax on non monetary perquisites are to borne by the
employer , medical reimbursements etc. are proposed
to be deleted. Payment in relation to voluntary
retirement scheme, gratuity, commuted pension
deductible from employment income if invested with
permitted savings intermediaries.
Withholding tax on employment income:
Withholding tax on salaries is now proposed to be a
part of the overall consolidated withholding tax
provisions on all payments. Tax to be withheld on
payment/credit.
Income from house property:
Gross rent proposed to be calculated as higher of
contractual rent of a presumptive rate of six percent of
rate able value, construction, acquisition cost.
Deduction towards interest on housing loans on self
occupied property is not available. Deduction for
repairs and maintenance reduce to 20% of the gross
rent. Service tax is deductible on payment basis.
Exempt-Exempt Tax (EET) regime for savings
scheme:
All long term retrial savings schemes are proposed to
be moved to the EET regime. Contributions (both by
employee and employer) of up to INR 3 lakhs to any
account with permitted savings intermediaries are
proposed to be deductible. Accretion of income till
withdrawal is exempt. Any withdrawal made under any
circumstances is taxable. Withdrawals pertaining to
approved employee provident fund accumulated
balance as on 31 March 2011 and accretions thereon
not taxable. Savings from one eligible savings scheme
to another is not to be treated as a withdrawal.
Permitted savings intermediaries to include approved
and superannuation funds, life insurer and new pension
system trust.
Other deductions:
Aggregate deductions for above referred long term
eligible savings along with tuition fees paid proposed
to be increased from INR 1 lakh to INR 3 lakh. No
further investment eligible.
(b) Capital Gains :
Definition of capital assets have been modified and
replaced with the term investment asset. Investment
asset does not include business assets like self
generated assets, right to manufacture and other capital
asset concocted with the business. All gain from sale of
investment asset would be considered as capital gains
without any distinction as to short term and long term
and is to be taxable, further the indexation facility
would be available to all investment assets held for
more than one year .The indexation base date is
proposed to be changed from 1 April, 1981 to 1 April,
2000. In respect of exemption on transfer of investment
assets from holding company to wholly Owned
subsidiary (WOS) and vice versa, the present lock in
period of 8 years has been proposed to be replaced by
providing that the 100 percent holding-subsidiary
relationship should not cease at any point of time and
the transferee should not convert the capital asset into
stock in trade. If the cost of acquisition/cost of
improvement of an asset is not determinable by the tax
payer, for example in the case of self-generated asset is
not determinable by the tax payer, for example in the
case of self –generated assets , then such cost shall be
taken as nil and capital gains to be computed.
(c) Wealth Tax:
Individual, HUF and private discretionary trust are
liable to wealth tax. Wealth will be taxable at 0.25% of
net wealth. Basic exemption limit has been enhanced to
INR 500 million. New concept of wealth includes all
assets. Key exclusions from net wealth are-assets
located outside India of foreign citizen/non-residents
individuals/HUF, and any one house or part a house or
a plot of land belonging to an individual or a HUF
which is acquired or constructed before 1 april, 2,000.
(d) International Tax:
A foreign company is considered to be a resident in
India if its place of control and management at any
time during the year is situated wholly or partly in
India. Income from the transfer, directly of a capital
asset situated in India shall be deemed to accrue in
India. Income would be deemed to accrue in India.
Income would be deemed to accrue in India even if the
payment is made outside India or service is rendered
outside India and in other stipulated cases.
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Tax Rates
Category Existing
Rates
As per DTC
Foreign
company
40% -25%
-For branches of foreign
company in India, an
additional branch profit tax of
15%(on after tax total income)
is also payable resulting in
effect tax rate of 36.25%
(e) Merger & Acquisitions:
The considerations for demerger to be in the form of
‗equity‘ shares issued by the resulting company to
shareholders of demerged company. Profit on sale of
an undertaking under ‗slump sale‘ will not be treated as
capital gains. Such profits shall form part of income
from business income. Deduction is to be given to the
extent of net worth of the undertaking sold. DTC
defines ‗business reorganization‘; ‗amalgamation‘;
‗demerger‘; ‗successor‘; ‗predecessor‘. Successor can
claim benefits of business losses of the predecessor
irrespective of the nature of business carried out by
successor/ predecessor. Even successors in case of a
business re-organization would be eligible for
deduction of the losses of the immediately preceding
fiscal year. The present provision of providing
exemption in respect of transfer of shares through the
process of amalgamation/demerger of a foreign
company with another foreign company is proposed to
be extended to all assets (i.e. investment assets).
(f) Taxes Deduction at Sources:
Provision relating to tax withholding from various
payments as well as rates of tax withholding from
payments to residents and non-residents have been
included in separate schedules instead of independent
sections. Disallowance of expenditure for non
withholding of tax or nonpayment of tax has been
extended to all payments if the tax has been deducted
from any payments during the last quarter of the
financial year and such tax is paid before the due date
of the filing of return of income, such payment shall be
allowable for computing business income. No
deduction would be granted in respect of the
expenditure where the tax thereon has not been paid
within the two years immediately succeeding the
financial year. The scope of withholding tax at source
for resident dedicatee has been widened by covering all
categories of income in case of residents unless
specifically exempted, and uniformity has been
achieved by covering all persons as the dedicator
unless specifically exempted. The benefit of self-
declaration by a person for non withholding of tax at
source from certain payment viz. interest income,
income on units of mutual funds, income from NSS
deposit, etc. is not available.
Residentia
l status of
deductive
Particulars
of
expenditure
Existing
rates
Rates
propose
d by
DTC
Resident Payment for
non-compete
fee
10% 10%
Amount
received as
remuneration
or prize for
rendering any
service
Nil
(Existing
rates for
professiona
l and
technicians
is 1%)
10%
Rent for use
plant or
machinery or
equipment
2% 1%
Payment to a
individual/HU
F contractor
for works
contract
2% 1%
Any other
income
Nil 10%
Non
Resident
Royalty and
fee for
technical
service
10% 20%
Capital gains -40% in
case of
short term
capital
gains
-20% in
case of
long term
capital
gains
30%
Any other
income (i.e.
other than
income on
which
specified rate
is prescribed )
40% 35%
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(g) Return of Income and Assessment:
The due date for filing the return of income for non-
corporate taxpayers is to be 30th
June of the year
following the financial year and for other assesses is to
be 31 August. Belated /revised return can be filed
within 21 months from the end of the financial year as
stipulated. An electronic acknowledgement is issued on
receipt of each return of tax bases and initial
processing to be completed within 12 months form the
month in which the return is filed. Assessment
generally completed within 21 months from the end of
the financial year in which the return is furnished.
Assessment of taxes after search and seizure operations
to be treated as tax base escaped assessment and would
be subject to re-opening.
(h) Penalty & Prosecution:
Maximum amount of penalty that can be levied is
reduced to 2 times from the exiting 3 times to the tax
sought to be evaded. In case of individuals and
cooperative societies, penalty will be calculated at the
maximum marginal rate of tax.
Conclusions & Suggestions:
1. To some extent it is said that DTC is more beneficial
to higher income group as compare to lower income
group but I am not sure how they arrived upon the
conclusion that new tax code is more taxing for people
with incomes between 1.6-5lakhs!!! Let‘s take example
of a person having income of 4 lakhs. As per existing
tax he would be paying Rs 34,000(14,000 20,000). As
per the new proposed tax code he would be paying Rs
24,000 only. So when we move to new tax code this
bracket of people have more money in their hands.
2. As per the new tax code, people income between
1.6 to 5 lakh will end up paying more tax compared to
the others above 5 lakh, simply because of the inflation
and rocketing of the food prices and other day today
expenses, this segment of people will be left with very
;;;less money for saving as they would have consumed
because of price rise of even essential
3. Direct tax code is common man-friendly. The
system of direct tax code is made simpler so that the
common man can follow it, said retired Indian
Revenue Service officer K R Vasudevan. Delivering a
lecture on `Direct tax code' at Karnataka Chamber of
Commerce and Industry (KCCI, Hubli) recently, he
said the proposed limits of income tax for individuals
are quite encouraging and the government can earn
more direct tax.
4. Karnataka against Direct Tax Code for SEZ,
Karnataka Chief Minister B S Yeddyurappa appealed
to Prime Minister Manmohan Singh to intervene and
put on hold the proposal to change the SEZ Scheme
through Direct Tax Code as it would send a wrong
signal to international and domestic investors. In a
letter, copy of which was released to the media here, he
said "SEZ Act intended to provide a long term stable
policy regime which was absolutely essential for such
projects‖. By proposing to change the SEZ Scheme
through the Direct Tax Code, we are sending a very
wrong signal to international and domestic investors.
In case this change is brought about, we would have no
alternative but to withdraw Karnataka State SEZ
Policy. I earnestly request that SEZ Scheme must not
be altered through the proposed Direct Tax Code. Draft
DTC has already created uncertainty and many
investors have put their
5. In overall conclusion it can be said that Direct Tax
Code is proved as ―A bag full of fruits” for individuals
, employees, corporate and ,more other different
sectors but we know that every coins has two sides
same way the Pain side of DTC for some sectors like
SEZs can‘t be ignored. Gain side of DTC is much more
to pain side so overall it is beneficial step taken by
References:
Singhania Dr. V.K., ―Student guide to Income-
Tax‖.Taxmann Publication Pvt. Ltd, N.Delhi.
Ahuja Grish and Gupta Ravi, ―Systematic Approach to
Income Tax and sales tax‖, Bharat law House,
New Delhi.
Mehrotra Dr,H.C. and Goyal Dr. S.P. ―Direct
Taxes(With Tax Planning),Sahitya Bhawan
publication, Agra
Bhatnagar S. P. ―Customs Laws & Procedure‖ Centax
Publication, New Delhi.
http://timesofindia.indiatimes.com/city/hubli/Direct-
tax-code-is-common-man-
friendly/articleshow/6211632.cms
www.google.co.in
Website of ministry of finance, government of India
The Economic Times. June 20,2010, ―New Direct Tax
Code: Much simpler and full of Exemption‖
The Times of India.Aug, 12, 2009, ―New Tax Code
:Pay10% tax for salary up to Rs 10 Lakh.
Direct Taxes Code Bill,2009
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 36 ISSN: 2231-6353
Inventory Management in Indian Steel Industry: A Comparative Study
Mukesh Babu Gupta*
Abstract Inventory is one of the most important and complicated part of the working capital management. It normally holds
bigger portion of current assets. Production and sales very much depends on the inventory. There is a trade-off
between the cost of investing in inventory and the cost of insufficient inventory. There is a cost to too much inventory
and there is a cost of too little inventory. Inventory management deals with setting of inventory levels so as to
maximize the benefits while minimising the cost associated with holding inventory. There are many factors which
affects decision of level of inventory. The present paper elaborates the various aspects of the inventory management
of selected companies of Indian Steel Industry.
Key Words: Steel Industry, Inventory Management. Trend of Inventory, Structure of Inventory,
Introduction:
Inventories constitute the most significant part of
current assets of a large majority of companies in India
(Pandey, 2009). Inventory balances can help firms
meet variation in demand, as well as variation in the
supply of raw materials (Preve & Allende, 2010).
Holding inventory of such raw materials creates
flexibility not only in the purchase system of the
concern but in the manufacturing operations. In the
absence of such an inventory the concern has to depend
upon the system of ‗daily purchase and consumption‘
(Gupta, 2006). The proper management and control of
inventory not only solves the acute problem of
liquidity, but also increases the annual profits and
causes substantial reduction in the working capital of
the firm (Howard, 1971).
Overview of Indian Steel Industry:
Steel industry is one of the core industries. The growth
of the Indian steel industry can be traced to the early
20th
century, when the first plant set up by the
Jamshediji Tata (Rohini, 2004). From the fledgling one
million tonne capacity status at the time of
independence, India has now risen to be the 4th
largest
crude steel producer in the world and the largest
producer of sponge iron (Ministry of Steel, 2011-12).
Crude steel production grew at 8% annually
(Compounded Annual Growth Rate) from 46.46
million tonnes in 2005-06 to 69.57 million tonnes in
2010-11. Contribution of steel industry in the GDP is
about 2%. It provides employment to more than 5 lakh
people. Many ancillary industries depend upon it.
Annual report of the Ministry of Steel says that
consumption of steel in India is about 14%, in
comparison to 6% in rest of world, which shows that
steel is more consumed in India.
Review of Literature:
Lieberman (1980) in his study ‗Inventory Demands
and Cost of Capital Effects‘ examined the size and
significance of the theoretically important cost of
capital effect on inventory investment by utilizing firm
specific cost of capital measures in a pooled cross
section econometrics analysis of inventory behaviour.
This study is done on the sample of two firms. He
founded that level of inventory was the function of
sales.
Mishra (1988) analyse and evaluate the inventory
position in the various industrial groups.. This study is
based on the period of ten years and done on the
central public enterprises in India. He founded that
period of time and various industry have their impact
on the inventory.
Lingaraj, B. P. and et. al. (1983) studies the
Inventory Management and Material System for
Aircraft Production and founded that information
system at operational was not efficient. Lack of
sufficient inventories was also a big problem in the
establishment.
Singh (1994) studied on the inventory management.
He conducted his study on four public sector
undertaking of Indian Steel Industry and founded that
they are still using orthodox techniques in managing
inventory.
Kapuscinski, R. and et. al. (2004) during his study
found that inventory level in dell is quit high. They
also suggested that Dell can become more efficient by
reducing the delivery period. According to him, Dell is
in position where, level of inventory can be reduced by
38%.
Objective of the Study: The main objective of the
study is to make a comparative study of inventory
management in Indian Steel Industry. For fulfilment of
this objective Tata Steel Limited (TSL) and Steel
Authority of India Limited (SAIL) is selected and
entire study based on these two companies.
*Research Scholar, Faculty of Commerce, B.H.U., Varanasi
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 37 ISSN: 2231-6353
Statement of the problem:
Inventory management is the most complicated part of
the working capital. Normally inventory holds the
bigger portion of current assets. The present work
attempts to examine inventory management in steel
industry. This study analyse the size, composition and
trend of inventory in Indian steel industry. This study
is trying to explain the following questions:
1. What is the structure of the inventories in
selected companies?
2. What is the level and trend of inventories in
the selected companies?
Data Collection: In this study, secondary data have
been used. All the required data for this study have
been collected form the annual reports of the sample
companies. The data cover a twelve year period
starting from 2000-01 to 2011-12.
Table 1
Structure of Inventory in TSL & SAIL (Values in
%)
Year Raw Materials
Finished &
Semi-finished
Goods
Stores &
Spares
TSL SAIL TSL SAIL TSL SAIL
2011-12 46 28 35 56 19 16
2010-11 45 27 37 54 18 19
2009-10 37 29 42 52 20 19
2008-09 41 26 41 57 18 17
2007-08 35 21 44 58 21 22
2006-07 31 27 47 53 22 20
2005-06 33 29 47 52 20 20
2004-05 32 32 49 46 19 21
2003-04 23 19 51 52 26 29
2002-03 23 21 50 56 28 24
2001-02 21 16 46 62 34 22
2000-01 19 14 55 65 26 21
Average 32 24 45 55 23 21
Source: Computed from the Annual Reports of TSL &
SAIL from 2000-01 to 2011-12
Table 1 give a snapshot of the structure of inventory in
TSL & SAIL. Table shows that there is an increasing
trend in portion of raw materials in TSL with average
of 32. In SAIL portion of raw shows fluctuating tend.
It ranged between 14% in 2000-01 to 32% 2004-05.
Portion of finished & semi-finished fluctuate
throughout the study period. It ranges 35% to 55% in
TSL and 65% to 46% in SAIL. For the TSL, it is
lowest in last financial year. Stores & Spares of both
sample companies also fallowing same trend. Portion
of sores & spares is ranged between 18% to 34% with
average of 23 in TSL and 16% to 29% with average of
21 in SAIL.
Trend of Inventory:
Trend of Inventory in TSL & SAIL: (Values in
Crore)
Year
Original Value of
Inventory
Trend Value of
Inventory
TSL SAIL TSL SAIL
2000-01 921.77 4518.97 532.45 2203.52
2001-02 1021.59 4041.83 870.51 3068.34
2002-03 1152.95 3744.37 1208.57 3933.16
2003-04 1249.08 3081.44 1546.63 4797.98
2004-05 1872.4 4220.69 1884.69 5662.8
2005-06 2174.75 6210.06 2222.75 6527.62
2006-07 2332.98 6651.47 2560.81 7392.44
2007-08 2604.98 6857.23 2898.87 8257.26
2008-09 3480.47 10121.5 3236.93 9122.08
2009-10 3077.75 9027.46 3574.99 9986.9
2010-11 3953.76 11302.8 3913.05 10851.7
2011-12 4858.99 13742.4 4251.11 11716.5
Source: Computed from Annual Report of TSL &
SAIL from 2000-01 to 2011-12
Trend of inventory provides a base to judge the
practice and prevailing policy of the management with
regard to inventory. It is evident from the table that
absolute value of inventories in both companies
increasing during the study period. In TSL value of
inventory is increased by Rs. 3937.22 Crore during the
2000-01 to 2011-12 whereas, SAIL shows increase of
Rs. 9223.43. Value of inventory in TSL is increased by
5 times during the study which is higher than SAIL
with 3 times.
I. Inventory Management Performance of TSL &
SAIL: For the purpose of examine the inventory
management performance of the TSL & SAIL
following ratios are used:
A. Inventory to Current Assets Ratio:
B. Inventory to Current Liabilities Ratio:
C. Inventory to Total Assets Ratio:
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
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Size of Inventory:
Year
Inventory to
Current Asset
Inventory to
Current
Liabilities
Inventory to
Total Asset
TSL SAIL TSL SAIL TSL SAIL
2011-12 0.38 0.48 0.29 0.62 0.05 0.18
2010-11 0.16 0.30 0.36 0.65 0.05 0.19
2009-10 0.46 0.23 0.46 0.53 0.05 0.18
2008-09 0.34 0.29 0.39 0.59 0.06 0.27
2007-08 0.07 0.26 0.38 0.52 0.06 0.25
2006-07 0.17 0.33 0.43 0.61 0.09 0.29
2005-06 0.51 0.36 0.57 0.50 0.15 0.34
2004-05 0.46 0.29 0.51 0.42 0.15 0.24
2003-04 0.31 0.38 0.31 0.34 0.12 0.22
2002-03 0.32 0.51 0.43 0.51 0.12 0.21
2001-02 0.33 0.57 0.51 0.60 0.10 0.21
2000-01 0.29 0.54 0.44 0.67 0.09 0.23
Average 0.32 0.38 0.42 0.55 0.09 0.23
S.D. 0.13 0.11 0.08 0.09 0.04 0.05
C.V. 39.41% 29.52% 18.93% 16.87% 40.18% 19.89%
Sources: Computed form the Annual Reports of TSL &
SAIL from 2000-01 to 2011-12
Inventory to Current Assets Ratio: The inventory to
Current Assets Ratios of TSL shows a fluctuating trend
during the study period. It fluctuates between 0.07 in
2007-08 to 0.51 in 2005-06 with an average of 0.32
and C.V. at 39.41%. It also shows standard deviation
of 0.13. The inventory to Current Assets Ratios of
SAIL also shows a fluctuating trend during the study
period. It fluctuates between 0.23 in 2009-10 to 0.57 in
2001-02 with an average of 0.38 and C.V. at 29.52%. It
also shows standard deviation of 0.11.
Inventory to Current Liabilities Ratios:
The inventory to Current Liabilities Ratios of TSL
reveals a fluctuating trend during the study period. It
fluctuates between 0.29 in 2011-12 to 0.57 in 2005-06
with an average of 0.42 and C.V. at 18.93%. It also
shows standard deviation of 0.13. The inventory to
Current Liabilities of SAIL shows a less fluctuating
trend during the study period in comparison to TSL. It
ranged between 0.34 in 2003-04 to 0.67 in 2000-01
with an average of 0.55 and C.V. is found 16.87.
Inventory to Total Assets Ratio:
Inventory to Total Assets ratio in TSL is increased
during 2000-01 to 2004-05 then it stable for next year,
thereafter it decline to 0.05. It ranged between 0.05 in
2009-10, 2010-11 and 2011-12 to 0.15 in 2004-05 and
2005-06 with an average of 0.09 and C.V. at 40.18%.
Inventory to Total Assets ratio in SAIL shows a
fluctuating trend during the entire study period. It
ranged between 0.18 in 2009-10 & 2011-12 to 0.34 in
2005-06 with an average of 0.23 and C.V. is found
19.89
Conclusion:
Inventory to current assets ratio, inventory to current
liabilities and inventory to total assets ratio exhibited
that on average inventory management in TSL is better
to SAIL and liquidity position of TSL is better than
SAIL. Structure of inventory shows that on average
finished & semi-finished goods constitute more than
half of total inventory and rest part is shared by the raw
materials and stores & spares in both companies. But it
is not true for the TSL, if we talk about the resent
years. In recent years raw materials constitute major
portion. Trend analysis shows that TSL is following
steady trend in comparison to SAIL. TSL is managing
Inventory level more efficiently.
Bibliography
Gupta, S. P. (2006). Financial Management. Agra.
Sahitya Bhawan Publications.
Howard, L. R. (1971). Working Capital-Its
Management and Control. Mac Donald &
Evans Ltd.
Indicus Analytics. (2009). ―Public Enterprises,
Government Policy and Impact on
Competition”. Competition Commission of
India. New Delhi: Indicus Analytics.
Ministry of Steel, (2011-12), Annual Report. India:
Government of India.
Pandey, I. M., (2009), Financial Management. New
Delhi: VIkas Publishing House Pvt. Ltd.
Preve, L. A., & Allende, V. S., (2010), Working
Capital Management. Oxford University
Press Inc..
Rohini, S., (2004), ―Steel Industry: A Performance
Analysis”. Economic & Political Weekly,
1613-1620..
Jaber, M. Y., (2009), Inventory Management: Non-
Classical Views, CRC Press, Taylor & Francis
Group, LLC.
Kallberg, Jarl G. and Palison, Kenneth I., (2000),
Current Asses Management: Cash Credit and
Inventory, John Wiley and Sons, New York,.
Muller, M., (2003), Essentials of Inventory
Management, American Management
Association.
Solomon, E. and Pringle, J. J., ( 1977), Introduction to
Financial Management, Good Year
Publication Co., Sant Morica, Calif,
Weston, J. F. and E. F. Brigham, (1974), Essential of
Managerial Finance, Holt Rinehart and
Winston, New York,
James, C. Van Horne, (2008), Financial Management
and Policy, Prentice-Hall of India Pvt. Ltd,
New Delhi,
Hampton, John J. and Wgmer, Cecilia L., ( 1979),
Working Capital Management: Planning,
Forecasting and Control, Prentice-Hall,
Englewood Cliffs, Inc.,
Bagchi, J., (2005), Development of Steel Industry in
India, I. K. International Pvt. Ltd., New Delhi.
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 39 ISSN: 2231-6353
Derivatives Trading and Stock Market Volatility
Vaibhav*
Abstract
Derivatives market in India has grown significantly, since inception, in terms of both number of contracts and
turnover. Therefore, impact of derivatives trading on stock market volatility cannot be overlooked. This paper is an
attempt to explore the impact of derivatives trading on stock market volatility using monthly data for the period
November 2001 – December 2006. The study shows that turnover in index futures positively and turnover in stock
futures and index options negatively affects stock market volatility whereas turnover in stock options does not affect
stock market volatility that may be due to the lesser trading. The study also shows that volatility in the stock market
before introduction of derivatives was higher in comparison to that of the after introduction of derivatives.
Currently stock market volatility (SMV) is a burning
issue of debate to ascertain the factors which determine
its magnitude. In fact, it is determined/ affected by a
large number of factors and most of them have been
covered in different studies earlier. No doubt,
introduction of derivatives trading has led to high
volume of trading in the stock market. Therefore, the
role of derivatives trading in the SMV can not be
overlooked. High volatility means high risk for the
investors. All types of markets face various types of
risks and these risks induce market participants to
search for ways to manage it. Derivative is one of the
risk management tools. It is used as a hedging device
against risks over which a business has no or little
control. Where there are risks, there are derivatives to
strip the risks and transfer it. The term ―derivative‖
indicates that it has no independent value, i.e. its value
is entirely ―derived‖ from the value of the ―underlying
assets‖. The underlying assets can be securities,
commodities, bullion, currency, line stock or anything
else. In other words, derivative means a forward,
future, option or any other hybrid contract of
predetermined fixed duration, linked for the purpose of
contract fulfillment to the value of a specified real or
financial asset or to an index of securities.
Derivatives trading in the Indian stock market, after
inception, have witnessed tremendous growth led by
stock futures. No doubt, derivatives trading have not
only improved overall market depth but also brought
high liquidity in the market. Growth intensity in the
derivatives market may be imagined from the fact that
the number of contracts in the derivatives was 41,
96,873 during 2001-02 which switched to 15,63,00,630
contracts during 2005-06. This indicates more than
3724% growth within this short span of time. So far as
turnover is concerned, it has also incorporated more
than 4733% growth which was Rs. 1, 01,927 crore in
2001-02 and switched to Rs. 48, 24,250 crore in 2005-
06. Keeping these facts in mind, it has been assumed
that there might be a close relationship between trading
in derivatives products and SMV. Through this study,
therefore, an attempt has been made to examine the
impact of trading in each derivatives product on SMV
separately.
In the next section, we will briefly consider the
existing studies on the topic. In section III, we have
explained hypotheses and methodology adopted in the
study. Section IV briefly assesses the growth of
derivatives market in India. Comparative analysis of
volatility has been done in section V and discussion of
estimated results of the study and appropriate
conclusions have been drawn in the last section.
Review of Literature
The literature, however, is not unanimous whether
derivatives trading lead to stabilize or destabilize the
SMV or there is no relationship between both. Cox
(1976), Figlewski (1981) and Stein (1987) concluded
in their studies that the introduction of futures trading
increases the spot market volatility and thereby,
destabilizes the market. While Powers (1970), Schwarz
and Laatsch (1991) and thereby, stabilizes the market.
Antoniou and Holmes (1995) have concluded that
increased volatility is argued that the introduction of
futures actually reduces the spot market volatility
undesirable. This is, however, misleading as it fails to
recognize the link between the information and the
volatility. On the other hand, Kumar, Sarin and Shastri
(1995), Antoniou, Holmes and Priestley (1998) have
argued that trading in these products improve the
overall market depth, enhance market efficiency,
increase market liquidity, reduce informational
asymmetries and compress cash market volatility.
Bologna and Cavallo (2002) investigated the stock
market volatility in the post derivative period for the
Italian stock exchange using Generalized
Autoregressive Conditional Heteroscedasticity
(GARCH) class of models. To eliminate the effect of
factors other than stock index futures (i.e., the
macroeconomic factors) determining the changes in volatility in the post derivative period, the GARCH
model was estimated after adjusting the stock return
equation for market factors, proxied by the returns on
an index (namely Dax index) on which derivative
*Assistant Professor, Faculty of Commerce, Rajiv Gandhi South Campus, Banaras Hindu University, Varanasi
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 40 ISSN: 2231-6353
products are not introduced.This study shows that
unlike the findings by Antoniou and Holmes (1995) for
the London Stock Exchange (LSE), the introduction of
index future, per se, has actually reduced the stock
price volatility.
A few studies have been undertaken to analyze the
impact of derivative trading on the stock market
volatility in India. Most of the studies have
concentrated on the NSE as the derivative trading at
BSE is at negligible level. According to the RBI study
(Bandibadekar and Ghosh, 2003), volatility in both
BSE sensex and S&P CNX Nifty has declined during
the period. After introduction the derivatives products
did not have any significant impact on market volatility
in India. Although conclusive evidence is yet to
emerge, India has made a mark on the derivative
market within a very short period. P. Shenbagaraman
(2003) has also concluded that futures and options
trading have not to a change in the volatility of the
underlying stock index, but the nature of volatility
seems to have changed post-futures. He has also found
that there is no evidence of any link between trading
activity variables in the futures market and spot market
volatility.
A. N. Sah and G. Omkarnath (2006) found in their
study that introduction of futures and options have
negligible or no effect on the volatility as evident from
GARCH (1, 1) model. When surrogate index taken into
consideration S&P Nifty showed decline in volatility
while BSE Sensex exhibited rise in volatility.
EGARCH model indicates fall in volatility in case of
all indices.
T. M. Sony and M. Thenmozhi (2004) have concluded
that investors speculate in the futures market, in
particular when faced with volatility in the cash
market. The fluctuations as a result of speculative
activity are decreasing over a period of time, possibly
due to the hedging activities taking place in the market.
The dynamic interactions between speculative activity
and spot volatility show that index futures are having a
stabilizing effect on underlying spot market.
Hypothesis
To ascertain the impact of derivatives products trading
on the SMV separately, the following null hypotheses
have been framed and tested -
Trading in stock futures have no impact on SMV
Trading in index options have no impact on SMV
Trading in stock options have no impact on SMV
Methodology
Presently, NSE dominates the derivatives market in
India with its share of over 99% in the turnover as well
as the number of contracts. The trading volume in the
derivatives segment in BSE has been declining over
the years and has recorded almost nil volumes since
May 2005 (SEBI Bulletin, April 2006). Since
derivatives trading are mainly concentrated on NSE,
the study is based on the derivatives segment of NSE.
The present study is an attempt to separately explore
the impact of derivatives product trading on SMV
using monthly data on SMV and turnover in each
derivatives product for the period November 2001 to
December 2006. Although trading in index futures was
started in NSE in June 2000 but trading in all
derivatives products was initiated from November
2001. The volatility of S&P CNX Nifty index as it
represents top 50 most trading companies has been
taken as SMV for the said period. A comparative
analysis has also been done to ascertain whether there
is significant difference in the SMV of pre-introduction
and post-introduction period of derivatives. Lastly,
regression analysis has been done using monthly data
on SMV and turnover in each derivatives product. Data
for the analysis has been taken from the various
monthly bulletins of SEBI.
Derivatives Market in India
The L. C. Gupta committee was formed to study the
feasibility of derivatives trading in India. On the basis
of recommendations of the committee, SEBI allowed
both BSE and NSE to start trading of index futures.
Accordingly, on June 9, 2000 BSE commenced trading
of index futures based on BSE sensex and NSE started
trading of index futures based on S&P CNX Nifty on
June 12, 2000. In the second phase index options were
introduced on NSE based on S&P CNX Nifty index on
June 4, 2001. On July 2, 2001, stock options were also
introduced on NSE on 31 securities. Later, stock
futures on NSE were also introduced on November 9,
2001 for 31 securities and interest rates futures was
introduced on June 24, 2003.
With Securities Law (Second Amendment) Act, 1999,
derivative has been included in the definition of
securities. The term derivative has been defined in
Securities Contracts (Regulations) Act, as -
a derivative includes
1. A security derived from a debt instrument, share,
loan, whether secured or unsecured, risk instrument or
contract for differences or any other form of security.
2. A contract which derives its value from the price or
index of prices of underlying securities.
The derivatives market has grown substantially, since
inception, in terms of both turnover and number of
contracts. On the average, both have been grown by
more than 205% and 168% respectively each year
since 2001-02. During 2002-03 and 2003-04, annual
growth rate in the turnover was more than 300% which
came down even bellow 100% in the consecutive two
years while in case of number of contracts, this figure
was more than 200% in the former period and 100% or
less in the latter years. The total turnover of derivatives
at NSE rose by 89.4% to Rs. 48,24,251 crore in 2005-
06 from Rs. 25,47,053 crore in 2004-05. The total
number of contracts has also increased more than
105% in 2005-06 over the year 2004-05. During 2005-
06 the turnover in the derivatives segment was more
than 300% of the cash market turnover.
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The exhibit 1 shows the speedy growth of derivatives
market in India. During 2000-01, number of contracts
was 90,580 which stood at 15,63,00,630 during 2005-
06 while turnover has grown from Rs. 2,365 crore
during 2000-01 to Rs. 48,24,251 crore during 2005-06.
Exhibit: 1 Trend in Derivatives Market
Year Number of contracts Turnover
(Rs. crore)
June 2000 to
March 2001 90,580 2,365
2001-02 41,96,873 1,01,925
2002-03 1,67,67,852 4,39,865
2003-04 5,68,86,776 21,30,649
2004-05 7,70,17,185 25,47,053
2005-06 15,63,00,630 48,24,251
Source: SEBI Bulletin, April 2006
However, the growth of index and stock futures was at
higher speed as compared to the other instruments of
derivative. Turnover in the future market has grown so
significantly that outpaced the turnover in the cash
segment since early 2004.
The exhibit 2 shows the year wise turnover of
derivatives instruments separately. The exhibit clearly
depicts that the stock futures dominate the derivatives
market in India with 58% of the total turnover in 2005-
06 followed by index futures.
Exhibit 2: Turnover in Derivatives Instruments (Rs. crore)
Year Index Futures Stock Futures Index Options Stock Options
June 2000 to
March 2001 2,365
2001-02 21,482 51,516 3,766 25,163
2002-03 43,951 2,86,532 9,248 1,00,134
2003-04 5,54,462 13,05,949 52,823 2,17,212
2004-05 7,72,174 14,84,067 1,21,954 1,68,858
2005-06 15,13,791 27,91,721 3,38,469 1,80,270
Source: SEBI Bulletin, April 2006
The figure 1 shows the monthly turnover in index
futures, stock futures, index options and stock options
for the period November 2001 to December 2006. It is
obvious from the figure that trading frequency in the
stock futures has always been much more in
comparison to others. It should be noted that stock
future is the derivatives product which was launched in
the market after launching of rest three derivatives
products and it has now become most preferred
derivative for the traders. It can also be seen from the
figure that the movement in the line of index future is
not exactly similar but close to that of the stock futures
and trading in rest two derivatives products is lesser
than that of the above two.
In the global market, NSE ranks first in terms of
number of contracts traded in the single stock futures
and second in the Asia in terms of number of contracts
traded in equity derivatives instrument.
The exhibit 3 gives the country wise break up of
number of contracts in single stock future trading
which shows that NSE is at top with 4,40,20,670
contracts followed by RTS Stock Exchange with
3,90,61,704 contracts during 2004.
Figure: 1
0
100000
200000
300000
400000
500000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61
Months
Turn
over
(Rs.
cr.)
Turnover in index futures Turnover in stock futures
Turnover in index options Turnover in stock options
Source: Data collected from various monthly bulletins of SEBI
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Exhibit 3: Volume of Future (2004)
Source: SEBI Bulletin, April 2006
In 2003, NSE held the second position in terms of
number of contracts. Many of the developed markets
like Hong Kong and Australia had lesser number of
contracts compared to India. In fact, the share of NSE
in the total number of contracts by all derivatives
exchanges was 37%.
Comparative Analysis of Volatility
Since we are endeavoring to find out impact of
derivatives trading on SMV, it will be much beneficial
to us to know first what type of changes in volatility
occurred after introduction of derivatives in the Indian
market, whether it has been increased or decreased.
Although trading of derivatives started in June 2000 by
allowing trading in index futures in the NSE, yet we
have taken monthly data on volatility for the period
November 2001 to December 2006 to make
comparison unbiased as it is the month which is
witnessed of starting trading in all derivative products.
Data on volatility during pre-introduction period have
been taken from April 1995 to December 2006. We
frame a null hypothesis that there was no change
between SMV of pre and post introduction period of
derivatives. If we plot collected data on graph, it
clearly depicts that SMV during pre-introduction
period was more than that of post-introduction period.
Figure: 2
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61
Months
Vola
tility
(%)
Volatility after introduction of derivatives
Volatility before introduction of derivatives
The statistical analysis of the same data shows the
same results as indicated above. The results are as
follows-
Descriptive Statistics
N Minimum Maximum Mean
Std.
Deviat
ion
VAID* 62 0.61 4.21 1.2356 .61135
VBID+ 62 0.65 3.51 1.6323 .63095
* Volatility after introduction of derivatives
+ Volatility before introduction of derivatives
Our results show that mean and std. deviation of SMV
during pre-introduction period of derivatives was
higher in comparison to SMV during post-introduction
period of derivatives. Thus, our results have rejected
the null hypothesis.
Results, Discussion and Conclusion
To know the impact of derivatives trading on SMV,
linear regression analysis has been done using monthly
data on SMV as dependent variable and turnover in
each derivatives product as independent variable.
Exchange Number of Contracts
National Stock Exchange 4,40,20,670
RTS Stock Exchange 3,90,61,704
Euronext 1,34,91,781
Spanish Exchange (BME) 1,20,54,799
Stockholm 45,33,805
Borsa Italiana 17,34,256
Athens Derivatives Exchange 9,19,679
JSE South Africa 8,83,587
Budapest 7,06,386
Australia 4,59,801
Warsaw 87,888
Mumbai 38,383
SFE Corporation 29,986
Hong Kong 17,274
Copenhagen 1,685
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Analysis has been done on 5% level of significance. It
has been assumed that data of each variable are
normally distributed.
Regression Results
Independent
Variable Coefficient t-value Significance
TIF
TSF
TIO
TSO
2.400
-0.964
-1.217
-0.050
5.634
-2.706
-3.415
-0.310
0.000
0.009
0.001
0.758
Dependent Variable = Stock Market Volatility
Number of Observations = 62
R² = 0.383
Thus, regression results show that turnover in index
futures, stock futures and index options have
significant impact on the SMV while turnover in stock
options has insignificant impact on SMV which may
be attributed to the lesser trading. One unit change in
turnover in the index futures results 2.4 times change
in SMV in the same direction while 0.964 and 1.217
times reverse change in SMV in case of one unit
change in turnover in stock futures and index options
respectively. Our results, thus, have rejected the first
three hypotheses and have accepted the last one. It has
also been found that SMV during the period before
introduction of derivatives was more than that of after
introduction of derivatives. Thus, it can be said that
derivatives have reduced SMV not stabilized the SMV.
The study shows that derivatives market in India has
risen significantly over the years and sock futures are
more popular than other derivatives‘ instruments and
dominated the derivatives market with 58% of the total
turnover in 2005-06.
Abbreviations
TIF : Turnover in index futures
TSF : Turnover in stock futures
TIO : Turnover in index options
TSO : Turnover in stock options
References
Khan, M.Y.; ‖Financial Management‖, 4th
Edition-
2004, Tata Mc Graw-Hill; p. 23.1-23.15;
V. K. Bhalla, Financial Derivatives (Risk
Management) 2001, S Chand & Company Ltd.
Publication
Edward, Franklin R.; ―Futures and Options‖, Fourth
Edition-1992, Mc Graw-Hill, Inc. International
Sahoo, M.S. (1999). "Forward trading in securities in
India." Chartered Secretary. June 1999. Vol.
XXIX, No.6, Pp. 624−629.
SEBI Monthly Bulletin, Jan 2006 – Sep 2006
SEBI Annual Report, 2005-06
Gupta O P, Kumar M : Impact of Introduction of Index
Futures on Stock Market Volatility: The Indian
Experience, 2002,
(http://www.pbfea2002.ntu.edu.sg/papers/2070.pdf).
Shenbagaraman P: Do Futures and Options trading
increase stock market volatility?, NSE Working
Papers, 2003,
http://www.nseindia.com/content/research/Pape
r60.pdf
Thenmozhi M : Futures Trading, Information and Spot
Price Volatility of NSE-50 Index Futures
Contract, NSE Working Paper, 2002,
http://www.nseindia.com/content/research/Paper59.pdf
RBI website www.rbi.org.in
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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Impact of Capital Structure on Profitability of HINDALCO
Industries Ltd
Anup Kumar Roy*
Abstract The determination of a company’s capital structure is a difficult task, which involves several incompatible factors,
such as risk and profitability. When the economic environment in which a company operates its business presents a
highly instability, the decision regarding capital structure becomes much more difficult. So, the choice among the
ideal proportion of debt and equity can affect the value of company, as much as the rate of returns can. In the present
study, I tried to investigate the relationship between capital structure and profitability of HINDALCO Industries Ltd.
during the period of last ten year. This paper is basically based on the regression mode.
Key words: capital structure; profitability; financial decision.
Introduction: When deciding the firm‘s capital structure some
important questions that are significantly affecting the
capital structure decisions should be kept into mind.
Like, what is the relationship between capital structure
and profitability? Does the risk related to the increase
of the debt capital should be taken by the firm? Should
the financing decisions of the firm follow a single
pattern? The capital structure decision is a very crucial
decision for every firm. It is more important because
every firm have need to maximise returns also because
of the impact of such decision is directly linked with
firm‘s ability to deal with its competitive environment.
The term capital structure refers to the financing-mix,
mainly comprising the long-term indebtedness of the
corporation; it is long term debt preferred stock and net
worth. A capital structure concerns the composition of
the liability of the company, or more specifically,
which is the relative participation of the several
financing sources in the composition of the total
obligations (Brealey and Myers, 1992; Gitman, 1997
and Weston & Brigham, 2000). In general a firm can
choose one among many alternative capital structures.
However it attempts to find the particular combination
of debt and equity that maximises its overall market
value.
A number of theories have been propounded
in explaining the capital structure of firms. In spite of
the theoretical appeal of capital structure, researchers
in financial management have not found the optimal
capital structure. This paper examines the relationship
between the capital structure and profitability of the
HINDALCO Industries Ltd. during the period 2002-03
to 2011-12.
HINDALCO- An Overview:
HINDALCO Industries Limited is the flagship
company of Aditya Birla Group, which is one of the
India‘s leading business houses. The group has been in
operations over 5 decades with global experience
spanning nearly 30 years.HINDALCO Industries
Limited is a non-ferrous metals powerhouse, in the
country. Its operations are organised into two Strategic
Business Units Aluminium and Copper. HINDALCO
industries Limited was incorporated in December 1958
as Hindustan Aluminium Corporation Limited under
the provision of the act. The company changed its
name from Hindustan Aluminium Corporation Limited
to HINDALCO Industries Limited on October 9, 1989.
HINDALCO commenced production of Aluminium in
1962 at Renukoot –Uttar Pradesh with an initial
capacity of 20,000 TPA of aluminium metal; it has
grown continuously and at present has a primary
aluminium smelting capacity of 345000 TPA.
Manufacturing at HINDALCO is vertically integrated
from the raw material stage to the finished products.
The power requirements are also met by its captive
power generation plants.
Accounting for 40% of India's primary aluminium
production, HINDALCO enjoys a dominant position in
India for aluminium and downstream products. In
2000, HINDALCO acquired a majority stake in Indian
Aluminium Company Ltd. (INDAL) and the operations
of these two companies subsequently merged.
Synergies of operations with its wholly owned
subsidiary INDAL have enhanced the company's share
in value-added segments, where the HINDLACO-
INDAL combination accounts for over 50% of the
market share. Later acquisitions and mergers with Birla
Copper and the Nifty and Mt. Gordon copper mines in
Australia, strengthened its position in value-added
alumina, aluminium and copper products. The
acquisition of Novelis Inc. in 2007, positioned
HINDALCO among the top five aluminium majors
worldwide and the largest vertically integrated
aluminium company in India. Today it is a metals
powerhouse with high-end rolling capabilities and a
global footprint in 13 countries. Its consolidated
turnover of USD 15.85 billion places it in the Fortune
500 league.HINDALCO's semi-fabrication facilities
comprise Rolled Products, Redraw Rods, Extrusions,
Foils and Wheels.
*Research Scholar,Faculty of Commerce, B.H.U.Varanasi-221005
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Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 45 ISSN: 2231-6353
Wheels and Foils manufacturing unit is located at
Silvassa. HINDALCO‘s product range includes
primary aluminium ingots, billets, rolling slabs, redraw
rods, alloy wire rods, sheet products, extruded profiles,
foils and wheels.
Literature on Capital Structure:
Capital structure is one of the continuously explored
subjects of finance. After the works of M-M in 1958
there are many studies have been taken place across the
world. Many scholars examined capital structure with
different perspective. Some important empirical studies
which are relevant with this paper have been reviewed
here.
Modigliani and Miller (1958) affirm that the capital
structure does not affect the firm‘s market value, which
will be settled by the composition of its assets.
However their theory was based on very restrictive
assumptions that do not hold in the real world. These
assumptions include perfect capital markets,
homogenous expectations, no taxes, no transaction
costs, company‘s debt of are free of risk.
That initial position was later reviewed by Modigliani
& Miller (1963), and started to incorporate the taxes
benefits of the debt. After this review, it is considered
that the cost of debt would be smaller than the equity,
because the government would be indirectly
subsidizing the expenses with interests. In other words,
as the fiscal legislation allows the company to deduct
the amount of interest payment on debt from the
operational profit, the value of the tax levy on revenues
would be reduced in the same proportion of the aliquot
of the income tax. Therefore, the profit of the company
would be smaller, in comparison with a company
without debt.
Uddin (1993) stated that there is no relationship
between capital structure and return on investment
(ROI). Price-earnings ratio and earnings per share i.e.,
capital structure is independent of these issues. He, of
course, said that a ‗real world‘ it is absolutely
surprising.
Rao and Sadanandam(1995) in their study analysed
the impact of capital structure decision on operating
performance of state enterprises in Andhra Pradesh.
They draw inferences that the size of investment
showed positive but low and negligible relation with
D/E ratio, fixed assets to total assets showed a
negligible and moderate association with D/E ratio, the
liquidity showed negative and very low degree of
correlation with D/E ratio, the profitability showed a
diverse relationship with D/E ratio earning capacity
showed negative and very poor relation with D/E ratio
etc. finally they concludes that the finance executives
of state enterprises are not paying adequate attention to
the capital structure decision.
Rahman (1995) identified the several aspects of
problem of the sugar mills in Bangladesh and
particularly of Kushtia Sugar Mills Ltd.
McNulty (2002) indicate the importance of accurately
considering the cost of the capital. The author reminds
that the cost of capital is used to evaluate the viability
of the company‘s investments. If an inaccurate rate
were used to discount the cash flows, the company
would not accept attractive projects or make
investments that will lead to damages.
Mesquita and Lara (2003) found in their study that
the relationship between rates of return and debt shows
a negative relationship for long-term financing.
However, they found a positive relationship for short-
term financing and equity.
Joshua Abor (2005) identified in his study that that
profitable firms use more short-term debt to
finance their operation. However, he found the
negative relationship between total long-term debts
to total assets (LDA) and return on equity (ROE).
He found that profitable firms depend more on
debt as their main financing option.
Research Methodology:
Objectives:
The main objective of the study is to find out the
impact of capital structure on the profitability of the
HINDALCO Industries Ltd. and specific objectives
are:
To determine the relationship between capital
structure and profitability of sample company
To evaluate the impact of capital structure on
profitability of sample company over ten years
from 2002-03 to 2011-12.
Hypotheses:
The following hypotheses are formulated for the study:
Capital structure and profitability are significantly
correlated.
Capital structure has impact on profitability of
HINDALCO Industries Ltd.
Data Sources:
In order to meet the objectives of the study, data were
collected from secondary sources mainly from annual
report of the HINDALCO Industries Ltd.
Analyses:
The following profitability ratios and capital structure
ratios are used in this study:
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RNI – UP/ENG/2011/36701 46 ISSN: 2231-6353
Table no 1
Calculations of Capital Structure and
Profitability Ratios
Capital Structure Ratio
Debt Equity Ratio Long Terms Debt/Net Worth
Debt Assets Ratio Total Debt/ Total Assets
Interest Coverage Ratio Net Profit Before Interest and Taxes / Fixed
Interest Charges
Profitability Ratio
Gross Profit Ratio Gross Profit/ Net Sales × 100
Net Profit Ratio Net Profit/Net Sales × 100
Operating Profit Ratio Profit from Operating Activities/Net Sales ×100
Return on Capital
Employed
Profit after Interest and Taxes/ Capital Employed
×100
The relationship between capital structure and
profitability is established with the help of following
four regression models. Here the Profitability is
dependent variable and Debt/Equity Ratio (D\E);
Debt/Assets Ratio (D/A); and Interest Coverage Ratio
(IC) are independent variables. Where Profitability = f
(GPR; OPR: NPR: and ROCE)
GPR =α+β 1(D/E) + β2 (D/A) + β3 (IC) +µ
(1)
OPR=α+β1 (D/E) + β2 (D/A) + β3 (IC) + µ
(2)
NPR=α+ β1 (D/E) + β2 (D/A) + β3 (IC) + µ
(3)
ROCE=α+ β1 (D/E) + β2 (D/A) + β3 (IC) + µ
(4)
Where, ‗µ‘ represents the disturbance term.
Results and Discussion: Several studies on capital structure highlighted that,
there is a positive impact of capital structure on the
profitability of the firms. Banu (1990) in her study
proposed that the concerned financial executives
should put emphasis on several aspects of capital
structure. Otherwise the capital structure of the
enterprise will be unsound making adverse impact on
its profitability. Hence, capital structure indicators such
as D/E; D/A, and IC should have a relationship with
profitability indicators such as GPR; OPR; NPR and
ROCE. The correlation analysis was carried out to
examine the relationship and the results are
summarized in Table No 2.
Table No 2
Correlation Matrix for Capital Structure and
Profitability
variables GPR NPR OPR ROCE D/E D/A IC
GPR 1
NPR 0.665691 1
OPR 0.991804 0.691707 1
ROCE 0.87337 0.821566 0.851956 1
D/E 0.470922 0.653726* 0.40459 0.707897* 1
D/A 0.491602 0.666817* 0.427643 0.708451* 0.997756 1
IC 0.386572 0.626932 0.334644 0.703345* 0.891916 0.878001 1
*Correlation is significant at the 0.05 level
From the Table No. 2 we may state that there is
positive relationship between capital structure and
profitability of the company. We can observe that D/E
and D/A ratios are strongly and significantly associated
to NPR and ROCE. Similarly IC ratio is also positively
correlated to NPR and significantly correlated to
ROCE.
As we mentioned in mode of analysis, four models
were formulated and the results are summarized in
Table No 3.
Table No 3
Predictor of Profitability – Model Summary
Details GPR OPR NPR ROCE
D/E
-0.847
(0.429)
-0.970
(0.370)
-0.874
(0.415)
-0.285
(0.785)
D/A
0.963
(0.373)
1.067
(0.327)
0.977
(0.366)
0.371
(0.724)
IC
0.175
(0.867)
0.264
(0.801)
0.698
(0.511)
0.672
(0.526)
Constant
-36.956
(t=-0.805;
P=0.451)
-25.613
(t=-0.716;
P=0.501)
-7.143
(t=-0.486;
P=0.644)
-7.027
(t=-0.263;
P=0.801)
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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R 0.575 0.548 0.717 0.733
R2 0.331 0.300 0.514 0.537
Adjusted R2 -0.004 -0.0501 0.271 0.306
Standard
Error
6.227 4.854 1.994 3.622
F Value 0.988 0.857 2.116 2.319
NOTE: figure in the brackets indicate P value
Fcrit (0.05) = 4.7571
The specification of the three variables such as D/E;
D/A, and IC in the above model shown the ability to
expect profitability (R2 = 0.331; 0.300; 0.514 and
0.537 respectively). In this model R2 value of above
four profitability ratios represent that 33.1%; 30.0%;
51.4% and 53.7% to the observed variability in
profitability can be explained by the differences in
three independent variability namely debt to equity
ratio; debt to assets ratio, and interest coverage ratio.
The remaining 66.9%; 70.0%; 48.6% and 46.3% are
not explained, because the remaining part of the
variance in profitability is related to other variables
which are not depicted in the model.
An examination of the model summary in conjunction
with ANOVA (F–value) indicates that the model
explains the most possible combination of predictor
variables that could contribute to the relationship with
the dependent variables. F value for all the models
indicates that F value is insignificant in respect to their
critical values. However, it should be noted here that
there are some other variables which can have a
significant impact on financial performance, which
need to be studied.
Conclusion:
This paper examined capital structure and its impact on
profitability. The analysis shows that profitability and
capital structure are positively correlated and D/E and
D/A ratios are significantly associated to NPR and
ROCE. Further, IC ratio is significantly correlates to
ROCE. But result of regression models shows that
there are some other important variables which affect
the profitability of the HINDALCO Industries Ltd
other than capital structure of the company. The impact
of capital structure on profitability of the company is
very low or not significant.
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Gupta, S. S. and Kapoor, V. K., ‘Fundamental of
Mathematical Statistics’ Sultan Chand &
Sons, New Delhi, 1997.
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Mobile Banking: Problems and Future prospects
Anurag Singh*
Abstract Over the last few years, the mobile and wireless market has been one of the fastest growing markets in the
world and it is still growing rapidly. Mobile phones have become a crucial communication tool more or less for every
individual. Initiation of m-Commerce has managed to take mobile VAS to next level, adding great value to
telecommunication industry. Mobile banking is also known as M-Banking. It generates new, convenient
communication and fast financial transactional channel for mobile users which is accessible from anywhere,
anytime.
As mobile networks are upgraded with WAP, GPRS and UMTS to deliver next-generation multimedia
services, the banks are getting ready to unleash services on mobile phones. Customers may avail services such as
account statement, transfer funds between accounts, easily payment of large amounts and may have direct and full
control over their finances. Next-generation mobile banking services will bring significant improvements with user-
friendly icon driven instructions, instant access, security and immediate transaction processing all at a lower cost.
Banks might conquer higher levels of customer satisfaction and increased loyalty by providing anywhere, anytime
banking. They can be benefited further from lower administrative costs, lesser number of branches, reduced
headcount, streamlined call centers and lower handling charges. The study aims to highlights the concept, challenges
and future prospects of mobile banking in India.
Introduction:
Mobile banking is a new generation platform
accessible to customers for conducting balance
inquiries, account transactions, utility payments, and
other banking activities using a mobile handset. Mobile
banking is synonym to the word convenience banking.
Application based banking has emerged as a new
concept with the introduction of smart phones and ever
growing usage of internet on mobile handsets. Banks
are now offering banking services on mobile handsets
through WAP-based internet websites and application
based mobile banking services other than SMS
banking. Although in spite of efforts made by Indian
banks to increase the scope and usage of mobile
channels, there are very few consumers who are
actively using the same. Some of the reasons
contributing to this include the lack of adoption of
mobile as a channel for banking, limitations of services
on mobile banking, non-availability of mobile banking
services in varied languages in India, etc. Now, banks
have started offering mobile banking services through
another innovative means called USSD. This platform
works on menu-based banking model on mobile
handsets where users can perform mobile banking
services by recalling the menu and simply dialing a
number. Greater acceptability and usage of users are
yet to reach a critical mass. With the RBI relaxing the
limit on the value of mobile-based transactions from
50, 000 per day to any limit and allowing non- banks to
offer banking services as business correspondents
appointed by banks, the focus is to drive banking
services in rural areas where a large population is still
unfamiliar with banking facilities. This will also allow
banks and non-banks to offer payment solutions using
a mobile phone with the development of near field
communication, barcode and sound wave technologies.
This will help us reach the purpose of financial
inclusion in India. With these technologies banking on
mobile handsets should lead to more transactions on
the move as increased reach and last mile connectivity
is better achieved via mobiles in comparison to
traditional banking channels like branches and ATMs.
Innovations like IMPS are evolving by the day and
once the medium gains higher acceptability, the
number of transactions will grow exponentially. In an
environment which has flood of advanced technology
and mobile handset capabilities , one size fits all kind
of a solution does not work. Therefore, banks need to
make investments to offer mobile banking services to
cater to various mobile / tablet platforms like IOS,
Android, Windows, and BlackBerry which are
available on high-end phones / tablet platforms with
good processing capabilities while at the same time
offer services to the low-end segment having java
based phones with limited data processing capabilities.
Mobile-based payments and the commerce eco-system
are still at a emerging stage and hence, acceptance
among merchants and customers is currently low but is
bound to increase over a period of time.
Objectives of the Study:
1. To examine the mobile banking trends in
India.
2. To present the services offered by mobile
banking in India.
3. To analyze the challenges faced by the mobile
banking services in India.
4. To evaluate the future prospects of mobile
banking in India.
Methodology:
The present study is based on secondary sources of
data via journals, magazines, books, newspapers and
websites. The study is confined to the mobile banking
*Research Scholar, Faculty of Commerce, B.H.U., Varanasi
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services in India. The period i.e. from August 2011 to
May 2012 has been taken for the purpose of the study.
The data have been presented through table and graphs
and descriptive analyses have been done.
Mobile Banking in India- An Overview:
Mobile banking services in India started with SMS
banking in 2002. In India, with an increasing mobile
subscriber base, mobile banking has been growing
rapidly in recent years. Today more than half the
population in India has a mobile phone. The Mobile
telecommunications system in India is the second
largest in the world with a subscriber base of more than
929 million and it was thrown open to private players
in the 1990s. GSM with 80% of the mobile subscriber
market was comfortably maintaining its position as the
dominant mobile technology, but for the time being
CDMA seemed to have stabilized its market share at
20%. By May 2012 the country had 929 million mobile
subscribers, up from 350 million just 40 months
earlier. The mobile market was continuing to expand at
an annual rate in excess of 40% coming into 2010.
[Source: RBI website]
Taking into consideration the period from August 2011
to May 2012 the number of transactions using mobile
banking in India has grown up by 68.86% while the
amount has increased by 102.65%. The average
amount per transaction placed at Rs 731.83, however it
is consider that the transaction information shared by
the RBI includes both payment and non-payment
related transactions. The total number of mobile
banking transactions stood at 33,46,743 as on May
2012, while the amount transacted was at Rs 28654.54
lakhs.
It can be observed from the above table that growth
rate over previous year for amount transacted was
7.32% and for volume transacted was 3.68% during
August to September 2011. The amount grew from
7.32% to 9.71% and volume transacted also grew from
3.68% to 9.25% during September to October 2011.
During October to November 2011 there was a little
slow down in both in amount transacted and volume
transacted from 9.71% to 8.22% and from 9.25% to
3.19% respectively. During November to December
the growth rate of both amount transacted and volume
transacted was jumped up from 8.22% to 13.83% and
3.19% to 13.15% respectively. The amount transacted
saw a minor fall in both the amount transacted and
volume transacted from 13.83% to -3.57% and 13.15%
to 6.13% respectively during December 2011 to
January 2012, while the amount transacted grew by
2.62% rom-3.57%, the volume transacted faced a slow
down from 6.13% to 1.59% during January to February
2012. Both the amount transacted and volume
transacted raised from 2.69% to 15.69% and 1.59% to
10.35% during February to March 2012. There was a
slow down in both amount transacted and volume
transacted from 15.69% to 0.87% and 10.35% to
1.73% during March to April 2012. The amount
transacted faced the highest growth from 0.87% to
18.13% and the growth rate of volume transacted was
1.73% to 5.02% during April to May 2012. August
2011 saw Rs 13646.43 lakhs being transacted was the
lowest amount transacted during this period, while
May 2012 saw Rs 28654.54 lakhs being transacted was
the maximum amount being transacted during this
period.
[Source: http://www.medianama.com/2012/07/223-chart-
transactions-vs-amount-using-mobile-banking-in-india-during-aug-2011-may-2012/]
Most Popular Mobile Banking Services:
[Source:http://vitalanalytics.wordpress.com/2009/05/1
4/mobile-banking-in-urban-india-most-popular-
services/]
The above figure shows that checking account balance
service is leading with 15.9% from all the services.
Viewing last three transaction service stands for
second position with 11.8%. Checking the status of
cheques/demand drafts stands with the third position
with 8.7%. Service of payment reminders stands for
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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fourth position with 7.3% and lastly request for cheque
book stands for fifth position with 7.5%.
Mobile Banking Services offered by banks in India
are as Follows:
1. Account Information
-statements and checking of account history
thresholds
nt
and deleting of payments)
of PIN and reminder over the
Internet
2. Payments, Deposits, Withdrawals, and
Transfers
-payment handling
processing
3. Investments
-time stock quotes
prices
4. Support
credit, including mortgage
approval, and insurance coverage
complaint submission and tracking
5. Content Services
ates, news
-related offers
-based services
Problems in Mobile Banking in India: Challenges in mobile banking are as follows:
1. Security:
Financial theft creates the challenges for mobile
banking adoption. The Security of financial
transactions being executed from remote locations and
transmission of financial information over the air are
the most complicated challenges that nee d to be
addressed jointly, by the mobile application
developers, wireless network service providers, and the
bank‘s IT department.
2. Technical expertise:
Mobile banking application uses JAVA and .NET
framework that run on peak of range of operating
system viz. iPhone OS, Symbian, Android and
Windows Mobile. Since financial institutions not have
efficient technical expertise to build, support and
manage an online banking framework on their own,
they rely on the capabilities of a faithful mobile
technology partner.
3. Compatibility
There is a need of smart phones to get the most out of
mobile banking. Mobile banking is not available on all
device. Some banks do not provide mobile banking at
all. Others banks require to use a custom mobile
banking application only available on the most trendy
smart phones, such as the Apple iPhone and RIM
Blackberry. Third-party mobile banking software is not
always supported. If we do not own a smart phone, the
types of mobile banking we can do will be usually
limited. Checking bank account balances via text
message is not a problem, but more advanced features
such as account transfers are usually not available to
users of "dumb phones."
4. Cost:
Network service charges rapidly included. The cost of
mobile banking might not appear important if we
already have a compatible device, but we still need to
pay fees for data and text messaging. Some financial
institutions charge an extra fee for mobile banking
service, and we have to pay fees for software. If we
access mobile banking often than these extra charges
speedily add up.
5. Regulation:
Although, mobile banking will change the future but
still there is largely ungoverned mobile banking
market. RBI has to issue some strict norms for the
defaulters of the mobile banking crime and regulate the
system strictly.
6. Handset Operability:
There are a huge variety of mobile phones in the
market. It is very difficult and a big challenge for
banks to provide mobile banking facility on each and
every mobile phone. Some of these devices support
JAVA ME and others support SIM Application
Toolkit, a WAP browser or only SMS.
7. Availability and Reliability: Customers expects from the bank that they provide the
mobile banking services in 24/7 basis and 365 days.
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Future prospects of Mobile Banking in India: In the coming future, there is a huge scope for growth
in mobile banking industry. In future, the concept of
carrying cash or carrying wallet may become obsolete.
By using their mobile phones people will be able to
carry out all kind of financial transactions from buying
a small pencil worth Rs. 1 to buying a car worth, say,
Rs. 10 lakh There will be no need to carry any credit
cards. Mobile phones will be able to serve as a debit
and a credit card. The banking software vendors will
have an important role to play in this. Wedding of
mobile phones to bank accounts has definitely
generated a lot of interest in government as well as
customers. By now RBI has relaxed mobile banking
policies and increased the mobile payment limit to Rs.
50,000 per day. There is a huge potential for these
services to pick up in the country when the regulatory
environment becomes more cooperative. According to
a Tower Group Research, large banks and telecom
service providers who are fighting to have a share in
this booming market, will grow from 10 mn to over 53
mn active users in India by 2013. 40% of the
population in India is un-banked. Of those who are
banked, a major portion of the population is still under-
banked, creating an opportunity in both the financial
and telecom sectors. For India-mobile banking is such
an innovation because mobile telephony has evolved as
a platform for future innovations that can have long
ranging socio-economic benefits. for India which has
over 60% of the population living in rural and
backward areas it is certainly a boon to use the existing
network and base to offer financial services in that
areas. ―In India, where the population has crossed 1 bn
mark-the need for mobile money, as a financial
solution, is ripe and bound to grow. We believe India is
the perfect market for mobile payments where we can
marry banking and rapid proliferation of mobile
phones, and hence also be able to capitalize on the
Indian government's dream of 'One Bank Account per
Indian', established the fact that mobile banking is the
need of the hour in India today,‖ says Deepak
Chandnani, president, Obopay.
Conclusion:
It is predictable from the above study that mobile
banking has enormous potential of performing
financial
transactions thus leading the financial growth with lot
of convenience and much at very cheap cost. For
complete growth, it is necessary for the benefits of
mobile banking to reach to the common man at the
remotest locations in the country. For this all
stakeholders like Regulators, Government, telecom
service providers and mobile device manufactures need
to make efforts so that saturation of mobile banking
achieves the users from high-end to low-end and from
metros to the middle towns and rural areas. There is
also need to create awareness about the mobile banking
so that more and more people use it for their benefit.
References:
Sharma Archana,(2011), Mobile Banking as
Technology Adoption and Challenges, International
Journal of Multidisciplinary Research, Vol.1 Issue 6,
October 2011, ISSN 2231 5780, 147-157
Sharma Bamoriya Prerna, Singh Preeti, (2011), Issues
& Challenges in Mobile Banking In India: A
Customers‘ Perspective, Research Journal of Finance
and Accounting, Vol. 2, No 2
Srivastava Vivek, Gupta Ragini and Dubey
Priyanka,(2012) Mobile Banking – The Future
Prospects, VSRD-IJBMR, Vol. 2 (2), 31-37
Websites: http://www.rbi.org.in/
http://en.wikipedia.org/wiki/Communications_in_India
http://articles.economictimes.indiatimes.com/2007-06-
23/news/27675623_1_banking-software-
mobile-banking-global-banks
http://www.medianama.com/2012/07/223-chart-
transactions-vs-amount-using-mobile-banking-
in-india-during-aug-2011-may-2012/
www.vitalanalytics.in
http://www.icicibank.com/
http://www.moneycontrol.com/news/business/mobile-
banking-gets-leg-up-sbi-icici-
jvstelcos_512753.html
http://www.ehow.com/list_6683378_disadvantages-
mobile-banking.html
http://voicendata.ciol.com/content/top_stories/1101012
02.asp
http://mbanking.blogspot.in/2008/11/future-of-mobile-
banking.html
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Trends of Economic Growth and Regional Disparity in India Suneel Kumar*
Abstract A significantly a large period of twenty years has been passed after economic reforms in India which initiated in
1991. It seems imperative to assess its impact on the socio-economic disparity among states of India. Present study
stretches its scope from pre-liberalization (1981) to the recent years (2007-08) and tests the convergence or
divergence through a regression model. We have compared data from fifteen major states of India. The study is based
on economic indicators like: Net State Domestic Product, Human Development Index (HDI), Per Capita
Consumption Expenditure and Population below Poverty Line. It further goes to establish relationship between per
capita expenditure in five year plans and four indicators mentioned here. Findings are sensitive to various indicators
of economic growth. In the post economic reform period we find significant divergence among states on the basis of
all economic indicators except HDI. States with high per capita expenditure in Five Year Plans have performed
better.
Key Words:
Economic growth, Disparity, Liberalization, Convergence, Divergence
Indian economy has been growing at a striking rate of
more than seven percent annually during last few
years; it has doubled its per capita income (at 1999-
2000 base) in the last decade. But this is only half of
the tale, next half indicates a rise in suicide by farmers,
low literacy rate, high level of unemployment and still
one third of the population below poverty line1 (BPL)
in many states. Prevalent disparity in the level of socio
– economic development among different states of
India has always been a major concern of the economic
planning. From the very beginning of the planning
phase there has been a central effort to eliminate
disparities. But in the later phase we observe a change
in the ideology from government initiatives to market
mechanisms. Faith has been shifted from centralized
planning with a strong hold of public sector to a great
faith in the efficacy of the market mechanism. The
assumption is that market forces will adjust
automatically to deliver goods. This ideological shift
resulted in a drastic change in economic policy from
closed economic set-up to a highly liberalized
economy. Since a relatively long period of two decades
has been passed after economic reforms (1991) it
seems imperative to assess its impact on the socio-
economic disparity among states of India.
There are numerous studies on economic growth and
disparity in different regions of India conducted by
many analysts (Nair 1982, Nair 1993a, Malhotra 1998,
Cassen 2002, Planning
1People who are not able to intake 2100 calories per
day in urban area and 2400 calories per day in the rural
area are treated as below poverty line (Gaurav Datt as
quoted by Datt Sundaram – 2009)
Commission 2002). Datt and Ravilion (2002) have
attempted to establish the relationship between poverty
and economic growth at the regional level. In a
remarkable exploratory study confined to only one
state – Orissa, Nair (1993b) attempted to link the
regional development with regional policy. Kurian
(2000) has done a detail study on the major states of
India. But a comparative inter-state study on the data
taken before and after liberalization to the recent years
is uncommon. Present study stretches its scope form
pre-liberalization (1981) to the recent years (2007-08).
Availability of data is a major problem (Dholakia
2005) and this is the biggest barrier in the way of
significant research dealing with the problems of
regional development. Even if data is available with
various sources, they are collected by different
methods and hence are incomparable in true sense.
Planning Commission of India has come up with data
on Per Capita Net State Domestic Product (Databook
for DCH, 2010), Human Development Index and Per
Capita Consumption Expenditure (National Human
Development Report -2001). Economic Survey of
Delhi 2007 – 08 has brought out data on Percentage of
Population below Poverty Line. This study is based on
data taken from these sources.
The present study attempts to analyze the convergence
or divergence in the economic development in fifteen
major states of India. The study is based on economic
indicators like: Net State Domestic Product (NSDP),
Human Development Index (HDI), Per Capita
Consumption Expenditure (PCCE) and Population
below Poverty Line (BPL). It further goes to establish
relationship between per capita plan expenditure in
five year plans and four indicators mentioned here.
Literature Review
In the post reform era there are evidences of increase in
regional disparity in India, southern and western states
are performing much better than northern and eastern
states of the country (Deaton & Dreze, 2002). They
have rejected the claims that the nineties have been a
period of ‗unprecedented improvement‘. After 1991
states like Gujarat, Maharashtra, Kerala, Tamil Nadu
and West Bengal are major contributors to the
*Associate Professor, Invertis University, Bareilly
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economic growth in India (Dholakia, 2009). There is a
rising trend in regional disparities in both infrastructure
and income (Ghosh & Prabir 2005). As the poor are
regionally concentrated he questions on the success of
poverty removal programs under globalization. The
policy of globalization is widening the regional
disparities; Bihar and Orissa are still standing far
behind (Economist 2004). Research findings show a
mix of opinion on economic divergence or
convergence after 1991. Initially poorer states grew at
slower rates than wealthier ones but there is also
evidence of increasing dispersion of income levels
across the states (Baddeley et al. 2006). They have
further commented that economic policy reforms
introduced in 1991 have significantly intensified the
inter-state growth differentials. Chakravorty (2003)
found solid evidence of inter – regional divergence in
his study on the industrial location in post-reform
India. There are not enough evidences to show the
income convergence in poorer states (Jayanthakumaran
2010).
In spite of massive public investment in the backward
regions, disparity has widened (Tiwari, 2008). Rural
India is still deprived from the benefits of country‘s
recent economic growth (Solomon, Bellman 2004).
Country‘s economic achievements have not produced
better results in reducing poverty (Roy, 2005). But
there are also some contradictory findings. Das et al.
(2010) found a convergence of inequality and poverty
indicators at both rural and urban levels. They have
observed a convergence in the per capita consumption
expenditure at urban level but the same is not true at
rural level. In his study on regional disparities in
economic and human development Dholakia (2003)
has noticed a decline in disparity. Cashin and Sahay
(1996) have also noted a decline in economic disparity
among states of India.
Conclusions on economic disparity are sensitive to
what indicators of economic growth are taken into
consideration. In a study Nirvikar et al. (2003) found
that study of human development indices does not
support the increase in regional disparity. They further
establish that studies based on consumption and credit
indicators also do not help to conclude the rise in
disparity as State Domestic Product does; results show
that economic power of western and southern states is
increasing.
Research Objective
In the present study our effort is to describe the trends
in economic growth of India during pre and post
economic reform periods. This research aims to test the
convergence or divergence in the economic growth of
fifteen major states.
Finally we intended to establish relationship between
per capita expenditure in five year plans and four
indicators of economic growth considered in this study.
Research Methodology And Hypothesis
Studies examining the trends in economic disparity
among states of India before and after liberalization of
Indian economy generally focus on comparing the
estimates of some parameters of economic
development at two deferent points of time and
describe the observed state of positive or negative
change without any statistical test of significance. The
most popular tool for measuring the disparity among
states is coefficient of variation either unweighted or
weighted by the population of the state; meanwhile a
few studies have used some other measures like Gini
coefficient of inequality or Lorenzo ratio (Dholakia
2005). We have taken this limitation as serious
drawback of existing studies.
Our approach is to analyze the trends of economic
growth by using a regression model and the widely
used method of comparing percentage change in the
state relatives calculated in respect of indicators e.g.
Net State Domestic Product (NSDP) at current prices,
population Below Poverty Line (BPL), Human
Development Index (HDI) and Per Capita
Consumption Expenditure. This study is based on
comparison of fifteen major states of India; these are
Andhra Pradesh, Assam, Bihar, Gujarat, Haryana,
Karnataka, Kerala, Madhya Pradesh, Maharashtra,
Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh
and West Bengal.
Let us consider an economic indicator X, at a particular
time period t, Xi denotes its value for the i
th state for
that period, and the value of national average of the
same indicator is denoted by XI at the point of time t.
We have calculated the ‗state relatives‘ for all the
indicators taken in this study at any point of time by
(Xi / XI)*100 for i=1 to 15. We can make two different
series of ‗state relatives‘ for two different points of
time – initial point t and the terminal point T. We have
calculated percentage change in the state relatives for
points of time t and T, and then a pattern of change is
described in detail. To test the relationship between
state relatives for initial year t and the percentage
change during the initial year t and the terminal year T
Correlation coefficient is calculated. Significance of
correlation coefficient is tested through‗t‘ test. To
study the disparity among states we can consider cross
section regression between ‗state relatives‘ (Dholakia
2005), let us consider Yi as the value of same indicator
for ith
state at the terminal point T:
Yi = a + b Xi + ui
If we observe no change in ‗state relatives‘ for a
particular indicator X or the regional disparity
remained same over two points of time t and T, as per
above equation we should expect a=0 and b=1.
In the case of change in ‗state relatives‘ for a particular
indicator X in favour of advanced states or if backward
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states lose further over two points of time t and T, as
per above equation we should expect a<0 and b>1.
This is the condition of increase in economic disparity.
In case of decrease in regional disparity for a particular
indicator X over two points of time t and T, as per
above equation we should expect a>0 and b<1.
To test the cross section regression between XiT and Xi
t
we require testing following hypotheses:
H0: a=0 and b = 1 for unchanged disparity
H1: a>0 and b<1 for decreased disparity
a<0 and b>1 for increased disparity
a>0 and b>1 for increased disparity
Data Analysis
Analysis of state relatives of per capita NSDP
(SRPC – NSDP):
State relatives of per capita NSDP at current prices is
given in table 1a. Selected fifteen states for study are
arranged in ascending order for their state relatives at
year 1980-81. We find that out of fifteen there are
initially ten states having per capita NSDP lower than
the per capita NNP of India. A superficial observation
reveals that in the year 2007-08 six out of these ten
states remain with low ‗state relatives‘. Since
economic reforms began in 1991, we have taken it as a
base of comparison for further analysis. There are ten
states in the year 1991 having SRPC-NSDP less than
100 (for the national average), these states are Bihar,
Rajasthan, Uttar Pradesh, Assam, Orissa, Madhya
Pradesh, Andhra Pradesh, Kerala, Karnataka, and West
Bengal. For the ease of identification we will call them
‗Group One‘ states. In the ‗Group Two‘, we have other
five states, Tamil Nadu, Gujarat, Haryana, Maharashtra
and Punjab. Group Two states have SRPC-NSDP
higher than 100 (for the national average).
Observing the percentage change in ‗state relatives‘
from the initial year 1980-81 to the terminal year 1990-
91 we find that three states (Tamil Nadu, Haryana and
Punjab) of group two have shown a positive change
whereas Maharashtra and Gujarat have a negligible
negative shift in their SRPC-NSDP. On the other side
seven states of group one has shown negative
percentage change in their respective SRPC-NSDP.
Only Rajasthan, Assam, and Andhra Pradesh have
positive percentage change in SRPC-NSDP. This
enables us to conclude that high performing states have
further improved their performance than low
performing states. A divergence is visible in states. We
have tested our conclusion with the help of regression
equation. Table 1c (intercept ‗a‘= -3.834, coefficient
‗b‘=1.03) indicates an increase in the disparity among
states during the 1980-81 to 1990-91. The trend during
the first decade of economic liberalisation (1990 – 91
to 2000 – 01) is slightly different. In group one five
states like Andhra Pradesh, Orissa, Kerala, Karnataka
and West Bengal have positive shift in the percentage
change of SRPC-NSDP but other five states (Bihar,
Rajasthan, Uttar Pradesh, Assam and Madhya Pradesh)
in the same group have negative percentage change.
Some states have improved their performance
significantly whereas some have lost their positions in
the hands of good performers. Regression analysis
(intercept ‗a‘ = 0.633, coefficient ‗b‘ = 1.008)
evidences increase in disparity among states. In the
subsequent years (2000-2001 to 2007-08) the
divergence increased significantly and Madhya
Pradesh was the biggest loser and Orissa was the
highest gainer in the same period. We are in position to
conclude a high degree of divergence among states.
Regression analysis (intercept ‗a‘=-5.23, coefficient
‗b‘= 1.054) also supports this view.
To assess the overall impact of economic reforms on
balanced economic growth of India we have further
compared the state relatives of per capita NSDP on two
points of time, 1990-91 as initial year and 2007-08 as
the terminal year. States like Bihar, Rajasthan, Uttar
Pradesh, Assam and Madhya Pradesh, are still behind
in the row with negative percentage change in their
SRPC-NSDP. On the other side Tamil Nadu, Haryana,
and Gujarat have further strengthened their position. It
shows an obvious divergence among states of India.
The same conclusion is drawn by regression analysis
(intercept ‗a‘ = -2.037, coefficient ‗b‘ = 1.037).
Economic reforms have benefited those states which
were already leading the growth and poor performers
have further lost in the hands of high performing states.
Table 1a
State Relatives* of Per Capita Net State Domestic Product (SRPC-NSDP) at Current Prices
Sl. No.
State
1980-
81
1990-
91
2000-
01
2007-
08
%
Change
in ( C) &
(D)
%
Change
in ( D) &
(E)
%
Change
in ( E)
& (F)
%
Change
in ( D) &
(F)
(A) (B) ( C) (D) (E) (F) (G) (H) (I) (J)
1 Bihar 56.25 53.48 38.44 33.27 -4.92 -28.12 -13.44 -37.78
2 Rajasthan 74.96 82.54 78.02 72.06 10.11 -5.47 -7.63 -12.69
3 Uttar Pradesh 78.4 72.04 58.89 48.25 -8.11 -18.25 -18.06 -33.02
4 Assam 78.77 85.91 76.71 66.07 9.06 -10.70 -13.87 -23.09
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*Calculated on the basis of data given at the sources mentioned here.
Source: Data for the year 1980-81 and 1990-91 are taken from - Net Domestic Product, CSO; available at
http://dspace.vidyanidhi.org.in.8080/dspace/bitstream/2009/4353/3UOH-1998-320-2.pdf. Accessed on Feb 10, 2011.
Data for the year 2000-01 and 2007-08 are taken from - Databook for DCH; 16 November 2010, Page 75 of 150;
available at: http://planningcommission.nic.in/data/database/1611/tab_75.pdf Accessed on Feb 08, 2011.
Table 1b
Relationship between Percentage Change in SRPC - NSDP during the Initial Year
and the Terminal Year and SRPC-NSDP in the Initial Year
Relationship
between
Column
G & C
Relationship
between
Column
H & D
Relationship
between
Column
I & E
Relationship between
Column
J & D
Value of ‗r‘ 0.08868255 0.11902 0.24864 0.1291
Calculated value of ‗t‘ 0.321 0.432 0.924 0.469
Table Value of ‗t‘ at .01 level 3.0123
Table 1c
Regression Intercept and Regression Coefficient
Initial Year Terminal Year Regression Intercept 'a' Regression Coefficient 'b'
1980-81 1990-91 -3.834 1.03
1990-91 2000-01 0.633 1.008
2000-01 2007-08 -5.23 1.054
1990-91 2007-08 -2.037 1.037
Analysis of state relatives of HDI (SR – HDI):
Column (G) of the table 2a shows a percentage change
in the state relatives of HDI from the initial year 1981
to the terminal year 1991. We observe that states of
group two have a negative percentage change in SR –
HDI, on the other side there is positive percentage
change in SR-HDI in all the states of group one except
Uttar Pradesh, which has recorded a negative shift of -
2.39 percent . It shows a notable convergence among
states of India. The correlation coefficient calculated
among percentage change and the state relatives in the
year 1981 is -0.673; and it is significant at .01 levels.
The convergence of states is further tested through the
regression analysis (intercept ‗a‘ = 18.55, coefficient
‗b‘ = 0.819) which validates our conclusion with an
indication of decrease in the disparity.
During the period of 1991 to 2001 we observe that all
the states of India have recorded a negative shift in
their state relatives of HDI. A significant negative
relationship (correlation coefficient ‗r‘= -0.69,
significant at .01 level) is found among the percentage
change and the value of HDI for the year 1991. The
value of intercept in the regression equation is 15.091
and the value of regression coefficient is 0.785, which
indicates decrease in disparity among states of India
for their HDI. During the period 2001 – 2007 we
observe decrease in disparity but there is not a
significant change in the state relative HDI, an
insignificant (at .01 level) low value (0.193) of
correlation coefficient and values of intercept (0.054)
and regression coefficient (0.999) in the regression
equation also supports this notion.
We have also compared the state relatives of HDI
taking 1991 as the initial year and 2007 as the terminal
year. A high value (r= -0.678) of correlation coefficient
shows a significant (at .01 level) negative relationship
among the state relative HDI for 1991 and the
percentage change in the HDI from the initial year
5 Orissa 80.61 61.74 62.63 80.08 -23.41 1.44 27.86 29.70
6 Madhya Pradesh 83.92 81.33 71.08 54.23 -3.08 -12.60 -23.70 -33.32
7 Andhra Pradesh 84.66 94.84 103.03 106.96 12.02 8.63 3.81 12.77
8 Tamil Nadu 91.9 101.76 125.67 122.45 10.72 23.49 -2.56 20.33
9 Kerala 92.51 84.28 120.4 129.5 -8.89 42.85 7.55 53.65
10 Karnataka 93.25 92.41 109.92 108.96 -0.91 18.94 -0.87 17.90
11 West Bengal 108.77 94.52 99.37 96.34 -13.10 5.13 -3.04 1.92
12 Gujarat 119.01 118.74 110.21 137.52 -0.22 -7.18 24.77 15.81
13 Haryana 145.39 150.53 153.3 177.29 3.53 1.84 15.64 17.77
14 Maharashtra 149.38 148.02 136.48 141.36 -0.91 -7.79 3.57 -4.49
15 Punjab 164.04 167.38 167.07 140.26 2.03 -0.18 -16.04 -16.20
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1991 to the terminal year 2007. The value of intercept
in the regression equation is 15.144 and the value of
regression coefficient is 0.785, and as per our
hypothesis this evidences a decrease in disparity during
the period.
Table 2a
State Relatives of Human Development Index (SR – HDI)
*Calculated from National Human Development Report, 2001, Planning Commission of India; Available at
http://socialjustice.nic.in/pdf/tab16.pdf Accessed on Feb 09, 2011
**Calculated from Publius Quinctilius Varus, Available at http://pqvarus.wordpress.com/2010/03/15/indian-statistics-
by-hdi
Table 2b
Relationship between Percentage Change in SR - HDI during the Initial Year and
the Terminal Year and SR - HDI in the Initial Year
Relationship
between
Column
G & C
Relationship
between
Column
H & D
Relationship
between
Column
I & E
Relationship
between
Column
J & D
Value of ‗r‘ -0.673277973 -0.69 -0.193 -0.678
Calculated value of ‗t‘ 3.278* 3.432* 0.708 3.321*
Table Value of ‗t‘ at .01 level 3.0123
*Significant at .01 level
Table 2c
Regression Intercept and Regression Coefficient
Initial Year Terminal Year Regression Intercept 'a' Regression Coefficient 'b'
1981 1991 18.55 0.819
1991 2001 15.091 0.785
S.N. States 1981* 1991* 2001* 2007**
%
Change
in ( C) &
(D)
%
Change
in ( D) &
(E)
%
Change
in ( E) &
(F)
%
Change
in ( D) &
(F)
(A) (B) ( C) (D) (E) (F) (G) (H) (I) (J)
1 Bihar 78.47 80.83 77.75 77.77 3.01 -3.81 0.02 -0.89
2
Madhya
Pradesh 81.12 86.08 83.47 83.49 6.11 -3.03 0.02 2.92
3 Uttar Pradesh 84.43 82.41 82.2 82.18 -2.39 -0.25 -0.02 -2.66
4 Rajasthan 84.76 91.07 89.83 89.86 7.44 -1.36 0.03 6.01
5 Orissa 88.41 90.55 85.59 85.62 2.42 -5.47 0.03 -3.15
6 Assam 90.06 91.33 81.77 81.69 1.41 -10.46 -0.09 -9.29
7
Andhra
Pradesh 98.67 98.95 88.13 88.07 0.28 -10.93 -0.06 -10.74
8 West Bengal 100.99 106.03 100 100 4.99 -5.68 0 -0.98
9 Tamilnadu 113.57 122.3 112.5 112.41 7.68 -8.01 -0.08 -1.02
10 Karnataka 114.56 108.13 101.27 101.14 -5.61 -6.34 -0.12 -11.71
11 Gujarat 119.2 113.12 101.48 101.47 -5.10 -10.29 -0.01 -14.87
12 Haryana 119.2 116.27 107.83 107.84 -2.45 -7.25 0.01 -9.53
13 Maharashtra 120.19 118.63 110.8 110.78 -1.29 -6.60 -0.01 -7.82
14 Punjab 136.09 124.67 113.77 113.72 -8.39 -8.74 -0.04 -16.43
15 Kerala 165.56 155.11 135.16 135.13 -6.31 -12.86 -0.02 -18.38
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2001 2007 0.054 0.999
1991 2007 15.144 0.785
Analysis of state relatives of per capita consumption
expenditure (srpc – ce):
We observe an increase in disparity among states for
the rural per capita consumption expenditure during
the period of 1983 to 1993-94. Six states (Bihar,
Orissa, Madhya Pradesh, Assam, Andhra Pradesh and
Karnataka) of group one show a negative percentage
change in state relatives whereas four states (Tamil
Nadu, Gujarat, Haryana and Punjab) of group two
show a positive shift in the state relatives of per capita
consumption expenditure (See Table 3a). The value of
regression coefficient is 1.137 and the value of
intercept is -14.599 and it enables us to conclude an
increase in the disparity among states of India for the
per capita consumption expenditure in the rural area.
Table 3a depicts that during the initial years of
economic liberalisation (1993-94 to 1999-2000) four
states of group two (Maharashtra, Tamil Nadu, Gujarat
and Haryana) have recorded positive shift, on the other
side seven states (Orissa, Madhya Pradesh, Uttar
Pradesh, West Bengal, Assam, Andhra Pradesh and
Rajasthan) of group one have recorded negative
percentage change in SR-PCCE in rural area.
Regression analysis (Coefficient ‗b‘=1.143, intercept
‗a‘= -13.964) indicates increase in the disparity among
states of India during 1993-94 to 1999-2000. The trend
of disparity continues in the later years (1999-2000 to
2007-08). In the regression equation the value of
intercept is -6.933 and the value of coefficient is 1.089.
However Assam, Kerala and Andhra Pradesh have
significantly improved their positions. Three states of
group two show a positive percentage change in their
state relatives, Gujarat has a nominal negative
percentage change of -0.07%.
While comparing the state wise percentage change in
the state relatives of per capita consumption
expenditure for the initial period 1993-94 and the
terminal period 2007-08 we find that states which were
leading in the initial years are still leading and the poor
performers remain poor. On the basis of SR – PCCE in
rural area regression analysis (intercept ‗a‘ = -22.079,
coefficient ‗b‘ = 1.244) proves a divergence among
states.
Table 3a also contains state relatives of per capita
consumption expenditure and percentage change in it
for the urban area from the initial year 1983 to the
terminal year 2007-08. In the pre reform decade there
is a sign of increase in disparity among states of India
on the basis of their state relatives of per capita
consumption expenditure in the urban area. An
observation of percentage change in the state relatives
during the initial year 1983 to 1993-94 reveals that six
states (Bihar, Orissa, Madhya Pradesh, Andhra
Pradesh, Karnataka and Rajasthan) of the group one
have recorded negative shift rest four have a minimal
positive change in the percentage of state relatives. On
the other side three states (Maharashtra, Gujarat and
Punjab) of group two have shown a positive change in
the percentage of state relatives and two (Tamil Nadu
and Haryana) have recorded minor negative shift.
From this preliminary observation an increase in the
disparity among states of India is evident. This
conclusion is further supported by the regression
analysis. The value of intercept in the regression
equation is -6.694 and the value of regression
coefficient is 1.046.
During the initial year 1993-94 and the terminal year
1999-2000 six states of group one (Bihar, Orissa,
Madhya Pradesh, Uttar Pradesh, West Bengal and
Assam) have noted negative percentage change rest
four have recorded positive percentage change in the
state relatives. On the other side three states (Tamil
Nadu, Gujarat and Haryana) of group two have shown
a positive shift, Maharashtra and Punjab have recorded
a minor negative change in the percentage of state
relatives. This shift indicates an increase in the
disparity among states on the basis of their per capita
consumption expenditure. Regression analysis
(intercept ‗a‘ = -11.236, coefficient ‗b‘ = 1.112) also
provides ground for the similar conclusion. In
subsequent years (1999-2000 to 2007-08) the trend
seems to be changing. A normal convergence among
the states is evident. The value of intercept in the
regression equation is 21.072 and the value of
regression coefficient is 0.817.
Finally we have observed the percentage change in the
state relatives of per capita consumption expenditure in
the urban area between the initial year 1993-94 and the
terminal year 2007-08. It is visible from the table 3a
that six states (Bihar, Madhya Pradesh, Uttar Pradesh,
West Bengal, Assam and Rajasthan) of group one have
recorded a negative percentage change during the
period; and except Punjab all the states of group two
have noted positive shift. We have a ground to
conclude an increase in the disparity among states of
India on the basis of their per capita consumption
expenditure during the initial year 1993-94 and the
terminal year 2007-08. Regression analysis (intercept
‗a‘= -12.606, coefficient ‗b‘ = 1.162) supports this
conclusion.
Disparity has increased in both rural and urban areas
but the intensity is high in the rural area than the urban
area
Analysis of state relatives of percentage of
population bpl (sr – bpl):
At national level percentage of population below
poverty line has decreased significantly from 44.48%
in 1983-84 to 27.5 in 2004-05 (Economic Survey of
Delhi, 2007-08). From the initial year 1983-84 to the
terminal year 1993-94 we observe a convergence.
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among states of India. Maharashtra which is kept in
group two has lost its position from the low (97.66) SR
– BPL state to a high (102.47) SR – BPL state during
the pre reform period. In the year 1983-84 Tamil Nadu,
is another state of group two which had a high (116.14)
state relative of percentage of population BPL (more
than that for the national average) but in subsequent
years it has improved its position significantly. Table
4a depicts that five states (Orissa, West Bengal,
Kerala, Rajasthan and Andhra Pradesh) of group one
show a negative percentage change in the state
relatives of percentage of population BPL and two
states (Maharashtra and Haryana) of group two also
have noted a positive shift. Kerala and West Bengal
have recorded -22.21% and -19.61% change in their
state relatives, this indicates an improvement over the
period. This primary observation reveals a decrease in
disparity. Regression analysis (intercept ‗a‘ = 9.751,
coefficient ‗b‘ = 0.891) supports our conclusion.
The trend of convergence in the pre reform era did not
continue in the first decade (1993-94 to 1999-2000) of
post reform period. A significant (at .01 level) positive
relationship (correlation coefficient ‗r‘ = 0.74) is found
between the percentage change and the value of state
relatives in the initial year (1993 – 94). Regression
analysis (intercept ‗a‘ = -44.777, coefficient ‗b‘ =
1.463) also indicates an increase in the disparity. But
situation improved in the later phase. Situation is not
so worse in the later phase. Percentage change of SR –
BPL between the initial year 1999-2000 and the
terminal year 2004-05 shows a decrease in the
disparity among states of India. The correlation
coefficient (r= -0.69079) calculated between the
percentage change and the value of state relatives in
the initial year 1999-2000 is significant at .01 level.
The value of intercept in the regression equation
(21.839) and the value of regression coefficient (0.747)
enable us to conclude a decrease in disparity among
states of India.
We have also calculated percentage change in the state
relatives of percentage of population below poverty
line for the initial year 1993-94 and the terminal year
2004-05. Regression analysis (intercept = -18.123,
coefficient = 1.162) provides us ground to conclude an
increase in the disparity among states of India.
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Table 4a
State Relatives of Percentage of Population below Poverty Line (SR – BPL)
S.N. States
1983 -
84
1993 -
94
1999 –
2000
2004 –
05
%
Change
in ( C)
& (D)
%
Change
in ( D)
& (E)
%
Change
in ( E) &
(F)
% Change
in ( D) &
(F)
(A) (B) ( C) (D) (E) (F) (G) (H) (I) (J)
1 Orissa 146.76 135 180.65 168.72 -8.01 33.81 -6.60 24.97
2 Bihar 139.88 152.79 163.21 150.54 9.22 6.81 -7.76 -1.47
3 West Bengal 123.31 99.13 103.52 89.81 -19.61 4.42 -13.24 -9.40
4 Tamilnadu 116.14 97.38 80.91 81.81 -16.15 -16.91 1.11 -15.98
5 Madhya Pradesh 111.91 118.2 143.41 139.27 5.62 21.32 -2.88 17.82
6 Uttar Pradesh 105.82 113.56 119.34 119.27 7.31 5.08 -0.05 5.02
7 Maharashtra 97.66 102.47 95.86 111.63 4.92 -6.45 16.45 8.93
8 Assam 91.65 113.59 138.27 71.63 23.93 21.72 -48.19 -36.93
9 Kerala 90.87 70.69 48.73 54.54 -22.21 -31.06 11.92 -22.84
10 Karnataka 85.97 92.18 76.78 90.9 7.22 -16.70 18.39 -1.38
11 Rajasthan 77.47 76.2 58.54 80.36 -1.63 -23.17 37.27 5.45
12 Gujarat 73.71 67.3 53.9 61.09 -8.69 -19.91 13.33 -9.22
13 Andhra Pradesh 64.99 61.69 60.42 57.45 -5.07 -2.05 -4.91 -6.87
14 Haryana 48.04 69.64 33.48 50.9 44.96 -51.92 52.03 -26.91
15 Punjab 36.37 32.72 23.6 30.54 -10.03 -27.87 29.41 -6.66
Source: Calculated from Economic Survey of Delhi, 2007 - 08, page 343
Table 4b
Relationship between Percentage Change in SR – BPL during the Initial Year and
the Terminal Year and SR – BPL in the Initial Year
Relationship
between
Column
G & C
Relationship
between
Column
H & D
Relationship
between
Column
I & E
Relationship
between
Column
J & D
Value of ‗r‘ -0.250010902 0.739297 -0.69079 0.36750139
Calculated value of ‗t‘ 0.960 3.952* 3.439* 1.422
Table Value of ‗t‘ at .01 level 3.0123
*Significant at .01 level
Table 4c
Regression Intercept and Regression Coefficient
Initial Year Terminal Year Regression Intercept 'a' Regression Coefficient 'b'
1983-84 1993-94 9.751 0.891
1993-94 1999-2000 -44.777 1.463
1999-2000 2004-05 21.839 0.747
1993-94 2004-05 -18.123 1.162
Relationship between per capita expenditure in five
year plans and the level of economic development in
states:
There can be many reasons of economic disparity
among states e.g. infrastructure development, rate of
employment or unemployment and the level of
industrialization. As a matter of fact, both State and
Central governments are responsible for developing
infrastructure and basic facilities for industrialization.
We have taken per capita expenditure in Five Year
Plans (Table V in Appendix) as a key factor of
developing infrastructure and basic facilities. It shows
the commitment on the part of central government for
infrastructure development.
Per capita plan expenditure has a significant (at .05
level) positive relationship with per capita NSDP in
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entire period of study. It infers that PC-NSDP is high
in those states which were allocated high amount in
five year plans. Bihar being the state where per capita
plan expenditure is consistently the lowest or the
second lowest has the lowest PC-NSDP as well. Five
states of group two (Tamil Nadu, Gujarat, Haryana,
Maharashtra and Punjab) and Karnataka are states on
the top in the list of per capita plan expenditure, these
are the states which also have high PC-NSDP.
A significant (at .05 level) positive relationship is
found in per capita plan expenditure and HDI, PCCE in
rural and urban area. It means that states which show
high value in HDI or per capita consumption
expenditure in rural or urban area were allocated per
capita higher amount in Five Year Plans than those
which show a low value.
Percentage of population BPL has significant (at .05
level) negative relationship with per capita plan
expenditure, hence we conclude that high BPL states
were expending low per capita amount in Five Year
Plans.
Table 5a
Correlation Matrix for the Per Capita Plan Expenditure in Seventh
Five Year Plan (1985 – 90) and other Economic Indicators
Per Capita Plan
Expenditure
(1985 – 90)
PC-NSDP
(1990-91)
HDI
(1991)
BPL
(1993-94)
Per Capita
Consumption
Expenditure in
Rural Area (1994)
Per Capita
Consumption
Expenditure in
Urban Area (1993-
94)
Per Capita
Plan
Expenditure
(1985 – 90)
1.000
PC-NSDP
(1990-91) 0.873* 1.000
HDI
(1991) 0.298 0.542* 1.000
BPL
(1993-94) -0.482 -0.707* -0.619* 1.000
Per Capita
Consumption
Expenditure
in Rural Area
(1994)
0.507 0.684* 0.719* -0.866* 1.000
Per Capita
Consumption
Expenditure
in Urban
Area (1993-
94)
0.575* 0.795* 0.755* -0.596* 0.641* 1.000
*Significant at .05 level
Table 5b
Correlation Matrix for the Per Capita Plan Expenditure in Ninth Five
Year Plan (1997 – 02) and other Economic Indicators
Per Capita Plan
Expenditure
(1997 – 02)
PC-NSDP
(2000-01)
HDI
(2001)
BPL
(1999-00)
Per Capita
Consumption
Expenditure in Rural Area (1999 - 2000)
Per Capita
Consumption
Expenditure in Urban Area (1999 -
2000)
Per Capita
Plan Expenditure
(1997 – 02)
1.000
PC-NSDP (2000-01)
0.675* 1.000
HDI
(2001) 0.654* 0.801* 1.000
BPL (1999-00)
-0.608* -0.813* -0.688* 1.000
Per Capita 0.469 0.775* 0.816* -0.846* 1.000
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Consumption
Expenditure in
Rural Area
(1999 - 2000)
Per Capita Consumption
Expenditure in
Urban Area (1999 - 2000)
0.728* 0.856* 0.821* -0.742* 0.640* 1.000
*Significant at .05 level
Table 5c
Correlation Matrix for the Per Capita Plan Expenditure in Tenth Five
Year Plan (2002 – 07) and other Economic Indicators
Per Capita
Plan
Expenditure
(2002 – 07)
PC-
NSDP
(2007-
08)
HDI
(2007)
BPL
(2004-
05)
Per Capita
Consumption
Expenditure in
Rural Area (2007
- 2008)
Per Capita
Consumption
Expenditure in
Urban Area (2007 -
2008)
Per Capita Plan
Expenditure
(2002 – 07)
1.000
PC-NSDP (2007-08) 0.702* 1.000
HDI(2007) 0.707* 0.790* 1.000
BPL(2004-05) -0.488 -0.675* -0.588* 1.000
Per Capita
Consumption
Expenditure in Rural
Area (2007 - 2008)
0.609* 0.695* 0.850* -0.793* 1.000
Per Capita
Consumption
Expenditure in
Urban Area (2007 -
2008)
0.724* 0.790* 0.826* -0.586* 0.770* 1.000
*Significant at .05 level
Conclusion:
Against our objective to measure the convergence or
divergence in the economic and human development
across major states of the country our findings are
different for various indicators of economic
development. These can be pointed as below:
Comparison of state relatives of per capita
NSDP indicates increase in disparity during the
period taken in this study.
Comparison of state relatives of HDI reveals
decrease in disparity among states of India.
A divergence among states is visible on the
basis of Per Capita Consumption Expenditure in
rural area during the entire period of study. In
the urban area the study indicates the similar
trend of increase in disparity except during the
initial year 1999-2000 and terminal year 2007 –
08 when we find a convergence among states of
India.
Analysis of population Below Poverty Line
indicates convergence among states in the pre
reform period of 1983-84 to 1993-94 but in the
first decade (1993-94 to 1999-2000) of
economic reforms the disparity among states of
India increased significantly. In the later phase
(1999 – 2000 to 2004 – 05) there is
improvement in the situation and states again
show a convergence. However the overall
picture after economic reforms (from 1993 – 94
to 2004 – 05) shows an increase in disparity.
While exploring the reason of disparity among states of
India, we analyzed the relationship among per capita
expenditure in five year plans and PC-NSDP, HDI,
PCCE and population BPL. We conclude that high
performing states are those where per capita
expenditure is high in Five Year Plans. Unequal
allocation of funds resulting in economic disparity is
major flaw of central planning in India.
Increasing disparity in economic development can
cause many social and political problems. The
government of India should take it into serious
consideration otherwise situations may get worse in
coming future.
Reference:
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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RNI – UP/ENG/2011/36701 62 ISSN: 2231-6353
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Appendix
Table 1
State wise Per Capita Net State Domestic Product (PC-NSDP) at Current Prices
Table 2
State wise Human Development Index (HDI)
S.N. States 1981* 1991* 2001* 2007*
(1) (2) (3) (4) (5) (6)
1 Andhra Pradesh 0.298 0.377 0.416 0.539
2 Assam 0.272 0.348 0.386 0.500
3 Bihar 0.237 0.308 0.367 0.476
4 Gujarat 0.360 0.431 0.479 0.621
5 Haryana 0.360 0.443 0.509 0.660
6 Karnataka 0.346 0.412 0.478 0.619
7 Kerala 0.500 0.591 0.638 0.827
8 Madhya Pradesh 0.245 0.328 0.394 0.511
9 Maharashtra 0.363 0.452 0.523 0.678
10 Orissa 0.267 0.345 0.404 0.524
11 Punjab 0.411 0.475 0.537 0.696
12 Rajasthan 0.256 0.347 0.424 0.550
13 Tamilnadu 0.343 0.466 0.531 0.688
14 Uttar Pradesh 0.255 0.314 0.388 0.503
15 West Bengal 0.305 0.404 0.472 0.612
India 0.302 0.381 0.472 0.612
*Source: National Human Development Report, 2001, Planning Commission of India, as printed in Handbook on Social
Welfare Statistics 2007,Taken from http://socialjustice.nic.in/pdf/tab16.pdf Accessed on Feb 09, 2011
**Source: Publius Quinctilius Varus, available at http://pqvarus.wordpress.com/2010/03/15/indian-states-by-hdi
(Rupee)
Sl. No. State 1980-81 1990-91 2000-01 2007-08
(1) (2) (3) (4) (5) (6)
1 Andhra Pradesh 1380 4726 17195 35600
2 Assam 1284 4281 12803 21991
3 Bihar 917 2665 6415 11074
4 Gujarat 1940 5917 18392 45773
5 Haryana 2370 7501 25583 59008
6 Karnataka 1520 4605 18344 36266
7 Kerala 1508 4200 20094 43104
8 Madhya Pradesh 1368 4053 11862 18051
9 Maharashtra 2435 7376 22777 47051
10 Orissa 1314 3077 10453 26654
11 Punjab 2674 8341 27881 46686
12 Rajasthan 1222 4113 13020 23986
13 Tamil Nadu 1498 5071 20972 40757
14 Uttar Pradesh 1278 3590 9828 16060
15 West Bengal 1773 4710 16583 32065
All-India Per Capita NNP 1630 4983 16688 33283
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Table 3
State wise Per Capita Consumption Expenditure
(Figures in Rupees per month)
S.N. State 1983* 1993-94* 1999-2000* 2007-08**
Rural Urban Rural Urban Rural Urban Rural Urban
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
1 Bihar 93.76 139.5 218.3 353 384.72 601.89 598 1080
2 Orissa 97.48 151.35 219.8 402.5 373.17 618.48 559 1438
3
Madhya
Pradesh 101.8 148.39 252 408.1 401.5 693.56 634 1190
4 Uttar Pradesh 104.3 137.84 273.8 389 466.68 690.68 680 1121
5 West Bengal 104.6 169.94 278.8 474.2 454.49 866.6 702 1452
6 Maharashtra 111 187.56 272.7 529.8 496.77 973.33 868 1709
7 Tamil Nadu 112.2 164.15 293.6 438.3 513.97 971.61 834 1410
8 Assam 113 160.48 258.11 458.6 426.12 814.12 799 1452
9
Andhra
Pradesh 115.6 159.55 288.7 408.6 453.61 773.52 816 1550
10 Karnataka 118.1 168.11 269.4 423.1 499.78 910.99 819 1668
11 Gujarat 119.3 164.06 303.3 454.2 551.33 891.68 875 1471
12 Rajasthan 127.5 159.96 322.4 424.7 548.88 795.81 801 1265
13 Kerala 145.2 178.31 390.4 493.8 765.7 932.61 1383 1948
14 Haryana 149.1 183.97 385 473.9 714.37 912.07 1034 1628
15 Punjab 170.3 184.38 433 510.7 742.43 898.82 1273 1633
All-India Per Capita NNP 112.3 165.8 281.4 458 486.08 854.96 772 1472
*Source: National Human Development Report 2001, Indicators of Economic Attainment, Page 147.
**NSS Report No.530: Household Consumer Expenditure in India, 2007-08, Page No. 13. Available at:
http://mospi.nic.in/rept%20_%pubn/ftest.asp?rept_id=505&type=NSSO. Accessed on Feb 10, 2011
Table 4
State wise Percentage of Population below Poverty Line (BPL)
S.N. States 1983 – 84 1993 - 94 1999 - 2000 2004 - 05
1 Andhra Pradesh 28.91 22.19 15.77 15.8
2 Assam 40.77 40.86 36.09 19.7
3 Bihar 62.22 54.96 42.6 41.4
4 Gujarat 32.79 24.21 14.07 16.8
5 Haryana 21.37 25.05 8.74 14
6 Karnataka 38.24 33.16 20.04 25
7 Kerala 40.42 25.43 12.72 15
8 Madhya Pradesh 49.78 42.52 37.43 38.3
9 Maharashtra 43.44 36.86 25.02 30.7
10 Orissa 65.28 48.56 47.15 46.4
11 Punjab 16.18 11.77 6.16 8.4
12 Rajasthan 34.46 27.41 15.28 22.1
13 Tamilnadu 51.66 35.03 21.12 22.5
14 Uttar Pradesh 47.07 40.85 31.15 32.8
15 West Bengal 54.85 35.66 27.02 24.7
India 44.48 35.97 26.1 27.5
Source: Economic Survey of Delhi, 2007 - 08, page 343
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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Table 5
Per Capita Plan Expenditure/Outlay in Five Year Plans
(Rupees.)
S. N. State
Five Year Plan
Fourth Fifth Sixth Seventh Eighth Ninth Tenth Eleventh
(1969-
74)
(1974-
79)
(1981-
85)
(1985-
90)
(1992-
97)
(1997-
02
(2002-
07) (2007-12)
1 Andhra Pradesh 98 333 601 1129 1977 3756 6158 19341
2 ASSAM 136 297 643 1380 2152 2666 3126 8986
3 Bihar 85 210 422 863 624 1197 2533 7305
4 Gujarat 204 515 1138 1596 2855 4873 7907 21100
5 Haryana 358 671 1216 1965 2987 3785 4874 15783
6 Karnataka 128 355 718 1060 2697 5906 8265 19236
7 Kerala 156 310 645 903 2336 4566 7547 13172
8 Madhya Pradesh 114 333 740 1260 1783 2983 4336 11654
9 Maharashtra 199 518 1038 1724 3152 4613 6883 13164
10 Orissa 114 292 592 1199 2204 3301 5177 8756
11 Punjab 316 691 1126 2113 3342 4040 7678 11873
12 Rajasthan 120 338 622 907 2703 3457 4844 12694
13 Tamilnadu 134 277 740 1288 2492 4032 6441 13676
14 Uttar Pradesh 132 329 588 1077 1559 1704 3430 10896
15 West Bengal 82 278 446 818 1197 2550 3571 7955
All States 142 361 718 1270 2205 3421 6544 14468
Source: http://planning.up.nic.in/Annual_plann_2009-10/Vol-I%20Part-I/CONTENTS.htm
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Convergence from Indian GAAP to IFRS
Mohd. Salim*
Abstract:
The convergence of accounting standards towards IFRS is gaining momentum across the globe and
accounting bodies such as the International Accounting Standards Board(IASB) and US Financial
Accounting Standards Board(FASB) have already initiated the groundwork on converging international
Financial Accounting Standards (IFRS) and Generally Accepted Accounting Standards (GAAP).The
boards for standards the world over have set their own timetable for adapting IFRS and more and more
countries have agreed to adopt the new standards as their national accounting standards in the future.
The Institute of Chartered Accountants of India (ICAI) has announced a plan to transition to IFRS in
India from April 1, 2011. The present paper throws light on the drivers, opportunities and challenges of
convergence of Indian GAAP with IFRS.
Introduction With globalisation of Capital Markets across the world,
investors desire that companies across the globe use
the same accounting principles and methods therefore,
sincere and serious efforts are being made to achieve
convergence of accounting practices across the world
more than 100 countries (including the European
union) have adopted International Financial Reporting
Standards (IFRS) which are issued by International
Accounting Standards Board (IASB). India has decided
to adopt IFRS from 1st April 2011.
The International Accounting Board (IASB) has
recognised the need for guidance. In 2003 it published
IFRS 1 first –time adoption of International Financial
Reporting Standards (IFRS 1). IFRS 1 covers the
application of IFRS in a company‘s first IFRS financial
statements. It starts with the basic premise that an
entity applies IFRS for the first time on a fully
retrospective basis. However, acknowledging the cast
and complexity of that approach, it then establishes
various exemptions in areas where retrospective
application would be too burdensome or impractical.
Methodology:
The study is basically based on the secondary data
collected from various sources like ICAI concept
paper, report on IFRS by Thompson and grant, report
on IFRS by RSM astute etc. mainly through website
research papers and books. The phase table given in the
paper was mainly a mixture from the report on IFRS
given by KPMG and Thompson and Grant.
This research paper is basically descriptive in nature
and purpose of it is to investigate the challenges,
benefits, risk involved in the convergence and to
provide suggestions on the subject matter.
Structure of IFRS: IFRS are as principles based set of standards
that establish broad rules and also dictate specific
treatments. International Financial Reporting Standards
comprises of International Financial Reporting Standards
(IFRS) - standards issued after 2001
International Accounting Standards (IAS) -
standards issued before 2001
Interpretations originated from the
International Financial Reporting
Interpretations Committee (IFRIC) - issued
after 2001
Standing Interpretations Committee (SIC) -
issued before 2001
IFRS Convergence in India
India is one of the largest jurisdictions that is currently
going through the process of convergence with IFRS.
Considering the diversity and complexity amongst
Indian companies that will transition to IFRS reporting,
the Ministry of Corporate Affairs (MCA) has
announced a roadmap which requires Indian companies
to adopt the converged standards in a phased manner
from 2011 onwards, the roadmap is summarised in the
table:
*Research Scholar, Faculty of Commerce, B.H.U., Varanasi
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 67 ISSN: 2231-6353
Road Map for companies (other than banking, insurance and non-banking financial companies)
Phase
Companies covered
Opening
balance
sheet
First
financial
statement
Phase 1
Companies that are part of NSE Nifty 50 index
Companies that are part of BSE Sensex 30 index
Companies that have shares or other securities listed in overseas
stock exchanges ,and
Listed and unlisted companies with net worth in excess of rs1000
crores
1st April
2011
31st March
2012
Phase 2
Listed and unlisted companies with net worth in excess of rs500
crores but not exceeding rs1000 crores
1st April
20113
31st March
2014
Phase 3
listed companies with net worth of rs500 crores or less
1st April
2014
31st March
2015
Road Map for Banking, Insurance and Non-Banking Financial Companies
Class of
Companies
Criteria for phased implementation
Opening
balance
sheet
First
financial
statement
Insurance
companies
All insurance companies
1st April
2012
31st March
2013
Banking
companies
All scheduled commercial banks
Urban co-operative banks with net worth in excess of
rs300crores
Urban co-operative banks with net worth in excess of rs200
crores but not exceeding rs300 crores
1st April
2014
1st April
2013
1st April
2014
31st March
2014
31st March
2014
31st March
2015
Non-banking
financial
companies
(NBFCs)
NBFCs that are part of NSE-Nifty 50 index
NBFCs that are part of BSE Sensex 30 index
Listed and Unlisted NBFCs with network in excess of
rs1000crores
1st April
2013
31st March
2014
All Listed NBFCs that do not fall into the above categories 1st April
2014
31st March
2015
Unlisted NBFCs that do not fall into the above categories and
which have a net worth in excess of rs500 crores
1st April
2014
31st March
2015
Urban co-operative banks with net worth less than
rs200crores, Regional rural banks and unlisted NBFCs
with net worth less than rs500crores are exempt from
following the converged Indian Accounting Standards,
though they may voluntarily opt to do so.
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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RNI – UP/ENG/2011/36701 68 ISSN: 2231-6353
Benefits of adopting IFRS I
t will increase the growth of International
business and benefit the economy
I
t will mobilise the international saving into
the investment and will lead to more foreign
capital inflows into the country
I
FRS will provide information to the investor ,
which is more relevant, reliable, timely and
comparable across the jurisdictions.
I
FRS would enhance the comparability
between financial statements of various
companies across the globe
B
etter understanding of financial statements
would benefit investors who wish to invest
outside their own country
T
he industry would be able to raise capital from
foreign markets at lower cost if it can create
confidence in the minds of foreign investors
that their financial statements comply will
globally accounting standards
I
t would reduce different accounting
requirements prevailing in various countries
there by enabling enterprises to reduce cost of
compliances
I
t would provide professional opportunities to
serve international clients
I
t would increase their mobility to work in
different parts of the world either in industry
or practices.
IFRS Challenges i
ncrease in cast initially due to dual reporting
requirement which entity might have to meet
till full convergence is achieved
u
nlike several other countries, the accounting
framework in India is deeply affected by laws
and regulations changes may be required to
various regulatory requirements under the
companies act 1956, income tax act 1961,
SEBI , RBI, etc. so that IFRS financial
statements are generally accepted
I
f IFRS has to be informally understood and
consistently applied, all stakeholders,
employees, auditors, regulators, tax
authorities, etc. would need to be trained.
Entity would need to incur additional cost for
modifying their IT systems and procedures to
enable it to collate data necessary for meeting
the new disclosures and reporting
requirements.
D
ifferences between Indian GAAP and IFRS
may impact business decision/financial
performance of an entity
L
imited pools of trained resource and persons
having export knowledge on IFRS.
Need for IFRS: Level of confidence: the key benefit will be a common
accounting system that is perceived as stable,
transparent and fair to investors across the world,
whether local foreign.
Risk evaluation: IFRS will eliminate barriers to cross-
border listing and will be beneficial for investors who
generally ascribe a risk premium if the underlying
financial information is not prepared in accordance
with international standards.
Merger stake over activity: cross border mergers and
acquisitions will get a boost by making it easier for the
parties involved in as for as redrawing the financial
statements is concerned.
Risks involved in Introducing IFRS in India:
The researchers feel that the biggest risk in
converging Indian GAAP with IFRS is the fact
that the accounting entities underestimate the
complexity involved in the process. Instead it
should be recognized well in advance that teething
problems would definitely creep in. Converting to
IFRS will increase the complexity with the
introduction of concepts such as present value and
fair value. Similarly there are some recognition
and measurement issues that would create quite a
lot of controversy
Implementing IFRS has increased financial
reporting risk due to technical complexities,
manual workarounds and management time taken
up with implementation.
Another risk involved is that the IFRS do not
recognize the adjustments that are prescribed
through court schemes and consequently all such
items will be recorded through income statement
In IFRS framework, treatment of expenses like
premium payable on redemption of debentures,
discount allowed on issue of debentures,
underwriting commission paid on issue of
debentures etc is different than the present method
used. This would bring about a change in income
statement leading to enormous confusion and
complexities.
IFRS will introduce changes in the very concepts
and definitions of in a few areas like change in the
definition of 'equity'. This would result in tax
benefits of hybrid instruments where 'interest' is
treated as receiving a dividend.
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
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At the ground level, it will be difficult for the
small firms and the accounting companies to keep
pace with the process of convergence with IFRS
and it will be more challenging for them. Basically
the idea is that it should be made mandatory for
the companies to prepare consolidated financial
statements which would require them to provide
information about their unlisted companies as well
under IFRS. This may however result in increased
challenges to the small and medium firms in the
country.
IFRS financial statements are significantly more
complex than financial statements based on Indian
GAAP. This complexity threatens to undermine
the usefulness of IFRS financial statements in
making decisions. The risk is that the preparation
of financial reports will become just a technical
compliance exercise rather than a mechanism for
communicating performance and the financial
position of companies.
Laws and pronouncements are always country
specific and no country can abandon its own laws
altogether. It will always be checked to see if the
IFRS pronouncements fit for application in a
particular country and its environment.
In fact it is not yet very clear whether IFRS would be
directly adopted or will they converge into Indian
GAAP. This also shows our unpreparedness towards
the convergence process.
Suggestions for increased convergence: The researchers put forward certain suggestions to
enable harmonization in published company annual
reports at the international level--
1. Political pressure on International Accounting
Standards Board (IASB) should be avoided from
various interest groups like private sector and
government agencies.
2. IASB should publicise standards developed by it and
get support from the accounting profession, member
countries and corporate management all over the
world.
3. IASB should encourage member bodies to adopt
IFRS and formulate and reformulate their rules that
they are in line with IFRS
4. Legislation should be passed to the effect that in
case of any changes or amendments in IASB, the local
standards, if any, should be brought in line with these.
5. Local stock exchange can be used for cooperating in
taking action against companies that fail to comply
with the IFRS.
Conclusion: Though the timeline for the convergence of India‘s
GAAP with IFRS is April 1 2011, companies started
adopting the standards from FY10 itself so that
comparative figures would be available for disclosure
in the annual report. A successful transition requires a
well thought of plan and hopefully well in advance.
Many large listed companies have already moved on to
the new standards and those that are in transition must
be actively incorporating the changes especially in the
beginning of the new financial year. Looking at the
present scenario of the world economy and the position
of India convergence with IFRS can be strongly
recommended. But at the same time it can also be said
that this transition to IFRS will not be a swift and
painless process.. Implementing IFRS would rather
require change in formats of accounts, change in
different accounting policies and more extensive
disclosure requirements. Therefore all parties
concerned with financial reporting also need to share
the responsibility of international harmonization and
convergence. Keeping in mind the fact that IFRS is
more a principle based approach with limited
implementation and application guidance and moves
away from prescribing specific accounting treatment
all accountants whether practicing or non-practicing
have to participate and contribute effectively to the
convergence process. This would lead to subsequent
revisions from time to time arising from its global
implementation and would help in formulation of
future international accounting standards. A continuous
research is in fact needed to harmonize and converge
with the international standards and this in fact can be
achieved only through mutual international
understanding both of corporate objectives and
rankings attached to it. References: Grant and Thompson(2010), report on road to IFRS In India
RSM astute consulting group (2011) , report on IFRS In
India
Ball, Ray (2005). International Financial Reporting Standards
(IFRS): Pros and Cons for Investors. Accounting and
Business Research, Forthcoming.
www.icai.org
KPMG report on insurance accounting IFRS BASED 2004
www.ifrs.org
Callao, Susana, Ferrer, Cristina, Jarne, Jose I. and Lainez,
Jose A. (2009). The impact of IFRS on the European Union:
Is it related to the accounting tradition of the countries?.
Journal of Applied Accounting Research, 10(1), 33 – 55.
www.ifrs.co.in
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FDI in Multi Brand Retailing –A New Concept Dharmendra Kumar*
Abstract India needs trillions of dollars to build infrastructure, hospitals, housing and schools for its growing population.
Indian economy is small, with limited surplus capital. Indian government is already operating on budget deficits. It is
simply not possible for Indian investors or Indian government to fund this expansion, job creation and growth at the
rate India needs. Retailing industry in India is facing various challenges on account of infrastructure, technology,
supply chain management, human resource and foreign direct investment. Global investment capital through FDI is
necessary. Beyond capital Indian retail industry needs knowledge and global integration. Global integration can
potentially open export markets for Indian farmers and producers. The government of India announced 24 November,
2011 foreign direct investment in ‘multi brand retailers’ multi brand retailers must have a minimum investment of US
$100 million with at least half of the amount invested in back end infrastructure including cold chains. (commerce,
2011) A wall street journal article claim that fresh investments in Indian organized retail will generate 10
million new jobs between 2012-2014 and about five to six million of them in logistics alone even though the retail is
being opened to just 53 cities out of about 8000 town and cities. (megha, 25 nov, 2011)
On other hand, nearly 3 core people depend on retail trade and If we count the dependents in the form of children
and others at least 120 million will be impacted by the retail revolution created by FDI. The growth of corporate
retail will take place by destroying the self-organized small retail in India.
Objective of the study
To examine the opportunities of FDI in retail
sector
To analyze the problem faced by the
implementing FDI in multi brand retailing
Methodology The study is conducted to assess and analyze the
benefits and problems in implementing .FDI in retail
markets. Descriptive study is conducted and the
literature base data is used for the study.
Significance of the study
India has emerged as fifth most attractive retail market
Outpacing U.A.E, Russia, Indonesia and Saudi Arabia.
But Indian retail sector is not well established yet the
share of unorganized retail market is more than the
organized sector. The main purpose of this study is to
know that FDI is functioning in a desired way or not
and what are the various opportunities in retail sector
for the growth of Indian economy.
Introduction
India has had years of debate and discussion on the
risks and prudence of allowing innovation and
competition within its retail industry. Numerous
economists repeatedly recommended to government of
India that legal restrictions on organized retail must be
removed and the retail industry in India must be
opened to competition.
A 2007 Indian retail report noted that an increasing
number of people in India are turning to the services
sector for employment due to the relative low
compensation offered by the traditional agriculture and
non manufacturing sector. The organized retail market
is growing at 35 % annually while growth of
unorganized retail sector is pegged at 6 %. (Indian
retail: The supermarket last frontier, dec,2011)
Before 2011 India had prevented innovation and
organized competition in its consumer retail industry.
Several studies claim that the lack of infrastructure and
competitive retail industry is a key cause of India‘s
persistently high inflation. Further more because of
unorganized retail in a nation where malnutrition
remains. a serious problem food waste is rife. Well
over 30% of food staples and perishable goods
produced in India spoil because poor infrastructure and
small retail outlets prevent hygienic storage and
movement of the goods from the farmer to the
consumers (FDI in multi brand retail trading, 2010)
Indian laws already allow FDI in cold chain
infrastructure to the extent of 100% . There has been
no interest in FDI in cold storage infrastructure build
out. The risk of cold storing perishable food without an
assured way to move and sell it puts the economic
viability of expensive cod storage in doubt in the
absence of organized retail competition and with a ban
of FDI in multi brand retailers. FDI are unlike to begin
in cold storage and farm logistic infrastructure.
In 1991, the Indian government introduced the
economic policy to attract FDI and since then it has
amended the policy from time to time in various
sectors to allow higher levels of foreign participation.
The government policy in retail sector allow 100% FDI
in wholesale cash-and-carry and single brand retailing
but prohibits investments in retail trading in1997 the
government imposed restrictions on FDI in retail sector
but in 2006 these were lifted and opened in single-
brand retailing and in cash and carry formats.
Overviews on Indian retail markets
The Indian retail market is divided into organized and
unorganized sectors. Origin retailing refers to trading
activities undertaken by licensed retailers that are those
who are registered for sales tax, income tax etc. These
include the corporate
* Research Scholar Faculty of Commerce B.H.U. Varanasi,
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 71 ISSN: 2231-6353
backed hypermarkets and retail chains and also the
privately owned large retail business unorganized
retailing on the other hand, refers to the traditional
formats of low cost retailing. For example the local
kirana shops, owner manned general stores paan/beedi
shops convenience stores hand carts and pavement
vendors etc.
The Indian retail sector is highly fragmented with 97%
of its business being run by the unorganized retailers.
The organized retail however is at a very nascent stage
though attempts are being made to increase its
proportion to 9-10% by the year 2010 bringing in a
huge opportunity for prospective new players
(Research, 2011)
The retail sector is the largest source of employment
after agriculture and has deep penetration in to rural
India generating more than 10%of India‘s GDP. Over
the past few years the retail sales in India are hovering
around 33-35% of GDP as compared to around 20% in
the US. The table gives the picture of India‘s retail
trade as compared to the China. (Global Economy
China India confront wal mart, 2010)
Structure of retail market
Indian organized retail sector is smaller than Chinese
organized retail sector. Indian retail industry is facing
many challenges including FDI. China has allowed
100% FDI in retail sector but India did not allow FDI
in retail sector from all the ways.
Source: Indian retail market report 2012 Market segments
Retail sector in India is primarily categorized by the
type of products retailed as opposed to the different
retails format in operation,. The food and grocery
vertical is the largest segment and accounts for close to
74% of total value addition. The Indian consumer
behavior of preferring proximity to retail formats is
highly pronounced in this sector with food grocery and
allied product largely source from the local stores or
push cart vendor.
Source: Indian retail market report 2012 Growth in retail sector
India has topped the A.T. Kearney‘s annual global
retail development index for the third consecutive year
maintain its position as the most attractive market for
retail. Business of retail market is increasing year by
year.
The retail business in India is currently at the point of
inflection as of 2008. Rapid change with investments
to the tune of US. $25 billions. Were being planned by
several Indian and MNC; s in next 5 year. (sanjay, nov
2011)
Currently organized retail is in nascent stage of growth
in India as it just has 5.9% share in the total India
organized. Retailing has been growing at a robust rate
due to rise in the number of shopping malls as well as
the number of organized retail formats.
In the coming years it can be said that the hypermarket
route will emerge as the most preferred format for
international retailers stepping FDI into the country. At
present there are 50 hypermarket operated by four to
five large retailer spread across 67 cities catering to
population of half a million or more. Estimates indicate
that this sector will have the potential to absorb many
more hypermarkets in next four to five years.
Source: Indian retail market report 2012
FDI in the retail sector
India has kept the retail sector largely closed to
outsiders to safe guard the livelihood of nearly 15
million small storeowners and only allows 51% FDI in
single brand retail with prior government permission.
FDI is also allowed in the wholesale business. The
policy makers continue to explore areas where FDI can
be invited without hurting the interest of local retail
Community. Government is considering opening up of
the retail trading for select sectors as electronic goods,
stationary sports goods and building equipment.
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 72 ISSN: 2231-6353
At present entry into India‘s retail sector can be done
through there different routes. The chart below shows
the current formats permitted by government of India
for the international players.
The Indian government removed the 51% capital on
FDI into single brand retail outlets in December 2011,
and opened the market fully to foreign investors by
permitting 100% foreign investment in this area.
(Chatterjee, june 2011)
It has also made some, albeit limited progress in
allowing multi- brand retailing which has so far been
prohibited in India. At present this is restricted to 49%
foreign equity participation. The specter of large
supermarket brand displacing traditional Indian mom-
and-pop stores is a hot political issue in India and
progress and development of newly liberalized single
brand retail industry will be watched with some keen
eyes as concerns further possible liberalization in the
multi brand sector.
FDI opportunities in the multi brand retail sector
A.T. Kearney‘s study on global retailing trends found
that India is the least competitive as well as least
saturated of all major global markets. This implies that
there are significantly low entry barriers for players
trying to set up base in India in term of the competitive
landscape. The report further stated global retailers
would take advantage of the more favorable FDI rules
that are likely in India and enter the country through
partnership with local retailers. (A.T.Kearney, 2011)
o A good talent pool unlimited opportunities huge
markets and availability of raw material at
cheaper costs is expected to make India
overtake the world‘s best retail economies.
o According to experts the retail industry in India
will be a major employment generator in the
future.
o The sector is expected to see an investment of
over $30 billion within the next 4-5 year
catapulting modern retail in the country to
$175-200 billion by 2016 according to
technopak estimates.
o On total organized retail market of Rs.550
billions the business of fashion accounts for Rs.
300.80 billions which translates in to nearly
55% if the organized retail segment in the
country.
o According to wall street journal after fresh
investment in retail market only an organized
retail sector will generate 10 million jobs
between 2012-2014
o Allowing FDI in multi brand retail can benefit
both the foreign retailer and Indian partner as
foreign players get knowledge of the local
market while Indian companies can access
global best management practices. Design,
technological knowhow.
o By partially opening this sector the government
will be able to reduce the pressure from its
trading partners in bilateral/ multilateral
negotiations and could demonstrate India‘s
intentions in liberalizing this sector in a phased
manner.
o Permitting foreign investment will also ensure
adequate flow of capital in to the country and its
productive use.
o FDI would also help bring about improvement
in farmer‘s income and agriculture growth and
assist in lowering consumer price inflation
o India will significantly flourish in terms of
quality standards and consumer expectation
since the inflow of FDI bound to pull up the
quality standards and cost competitiveness in all
segments.
Thus it can be safely concluded that allowing FDI in
multi brand retail would not only augment the
country‘s GDP growth and overall economic
development but would also help in integrating the
Indian retail market with that of the global retail
market.
Impact of FDI in retailing in India Retailing as an industry in India has still a long way to
go. To become a truly flourishing industry retailing
needs to cross the following hurdles- (Dixit, Aug 2011)
o Retail marketing efforts have to improve in the
country advertising promotions and campaigns
to attract customers building loyalty by
identifying regular shoppers and offering
benefits to them, efficiently managing high
value customers and monitoring customers
needs constantly are some of the aspects which
Indian retailers need to focus upon on a more
pro active basis.
o FDI will generate a lot of job in retail sector but
this does not compare the number of people
destroying the self organized small retail.
o Consumer will have to pay for the high input of
corporate retail such as real estate; A.C.
educated sales man wasteful consumption of
electricity and many more.
o Foreign retailers will only take profits outside of
country and not reinvest in local economies and
neighbor hoods as the local shopkeeper does.
o Organized retail will displace millions of street
vendors hawkers workers and shopkeeper they
have destructed local economy where it has
gone and is doing the same in India;
Conclusion:
If we allow foreign direct investment in full it will
increase unemployment. It has shown that
unemployment leads to a series of social problem like
rise in poverty, alcoholism, domestic violence, indebt,
suicides, and crime have major implications by even
making the political situation unstable.
If we follow western trend which increases the
tendency of divide between rich and the poor. These
divide between rich and poor these divide have always
led to social unrest and political turmoil of a nation. On
HermenuticS: A Biannual Refereed International Journal of Business and Social Studies
Volume 02, No. 02, Septermber 2012
RNI – UP/ENG/2011/36701 73 ISSN: 2231-6353
the other hand, we have the golden opportunities for
developing our economy now this time
It is booming time for Indian retail sector. After
discussing opportunities and challenges we can say
that FDI in retail sector must be allowed but not in
giant.
Bibliography A.T.Kearney. (2011). Retail global Expansion-A Portfolio of
opportunities.
Chatterjee, M. a. (june 2011). Growth and Poverty- the great
debate. ICRIER Academic Foundation .
commerce, m. o. (2011). FDI Policy. New Delhi: The Hindu.
Dharmendra. (2011). A case study. India retail watch.
Dixit, A. (Aug 2011). The uneasy compromise- Indian retail.
The Wall Street Journal .
(2010). FDI in multi brand retail trading. KPMG.
(2010). Global Economy China India confront wal mart.
AsiaTimes.
Indian retail: The supermarket last frontier. (dec,2011). The
Economist .
megha. (25 nov, 2011). "India unlooks door for global
retailer". The wall steet .
Research, C. (2011). Indian Retail Industry Report.
sanjay. (nov 2011). Changing the way Indian shop. BBC
News
HermeneuticS
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