New RNI UP/ENG/2011/36701 ISSN: 2231-6353 HermeneuticS · 2020. 8. 12. · HermenuticS: A Biannual Refereed International Journal of Business and Social Studies Volume 02, No. 02,

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

Editor

Dr. Surya Prakash

Shri Ram College of Commerce, University of Delhi, Delhi

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SBS College, University of Delhi, Delhi

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Prof. S. K. Singh, F. M. S., Banaras Hindu University, Varanasi

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Prof Prafulla Y. Agnihotri, I. I. M., Kolkata

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Dr. M. P. Singh, SGR PG College, Dobhi, Jaunpur

Dr. Meera Singh, U.P. Autonomous College, Varansi

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Dr. Bimal Jaiswal, Lucknow University, Lucknow

Views Expressed in the Articles are those of the respective authors. Neither journal (HermeneuticS) nor the YERA can accept

Any responsibility for , neither do they necessarily agree with the view expressed in the articles.

Printed and published by Dr. F. B. Singh on behalf of Youth Empowerment and Research Association,

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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


Volume 02, Number 02, September 2012


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



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



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



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



RNI – UP/ENG/2011/36701 5 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 6 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 7 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 9 ISSN: 2231-6353

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



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



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



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


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


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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Dissertation (Delhi: University of Delhi)

Agarwal, M. and Bhattacharya, A. (2006) Mergers in India:

A Response to Regulatory Shocks, Emerging Markets

Finance and Trade, 42(3), pp. 46-65.

Akhavein, J.D., A.N. Berger and D.B. Humphrey (1997),

―The effects of megamergers on

Allen, L. and A. Rai (1996), ―Operational efficiency in

banking: An international

Altunbas, Y., P. Molyneux and J. Thornton (1997), ―Big-

bank mergers in Europe: An

analysis of the cost implications‖, Economica, No. 64(254),

pp. 317–329.

Basant, R. (2000) Corporate Response to Economic Reforms,

Economic and Political Weekly, 35(10), pp. 813-822.

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

Mergers in Contemporary India,

Chandrasekhar, C. P. (1999) Firms, Markets and the State:

An Analysis of Indian Oligopoly, in A. K. Bagchi (Eds),

Economy and Organization- Indian Institutions under Neo

Liberalized Regime, (New Delhi: Sage Publications).

comparison‖, Journal of Banking and Finance, No. 20(4), pp.

655–672.

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:

Patterns and Implications, Economic and Political Weekly,

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

Development, P.11.

Solomon, J., & Solomon, A. (2004). Corporate Governance

and Accountability. England: John Wiley and Sons, Ltd.



RNI – UP/ENG/2011/36701 15 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 16 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 17 ISSN: 2231-6353

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-



RNI – UP/ENG/2011/36701 18 ISSN: 2231-6353

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).



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

Indian Economy, ‗Pratiyogita Darpan, Special Issue‘ Ed.,

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.

Kalra Vinit, ‗Access to Agricultural credit case‘ published

2006

Tiwari Sanjay, ‗Service sector in India: Performance &

Reforms‘ International Journal of Multidisciplinary

Research, Vol.1, Issue 7, November 2005

www.indiabudget.nic.in/survey.asp

www.nabard.org



RNI – UP/ENG/2011/36701 20 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 21 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 22 ISSN: 2231-6353

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



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+



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



RNI – UP/ENG/2011/36701 23 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 24 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 25 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 26 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 27 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 28 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 29 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 30 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 31 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 32 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 33 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 34 ISSN: 2231-6353

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%



RNI – UP/ENG/2011/36701 35 ISSN: 2231-6353

(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



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



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:



RNI – UP/ENG/2011/36701 38 ISSN: 2231-6353

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.



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



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.



RNI – UP/ENG/2011/36701 41 ISSN: 2231-6353

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


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



RNI – UP/ENG/2011/36701 42 ISSN: 2231-6353

Exhibit 3: Volume of Future (2004)


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



RNI – UP/ENG/2011/36701 43 ISSN: 2231-6353

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

http://www.nseindia.com/








RNI – UP/ENG/2011/36701 44 ISSN: 2231-6353

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



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:



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)



RNI – UP/ENG/2011/36701 47 ISSN: 2231-6353

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.

References:

Yu, Fan 2006, How Profitable Is Capital Structure

Arbitrage? Financial Analysts Journal, Vol.

62, No. 5 (Sep. - Oct., 2006), pp. 47-62, CFA

Institute.

Scott, James H., Jr., Corporation A Theory of Optimal

Capital Structure, The Bell Journal of

Economics, Vol. 7, No. 1 (Spring, 1976), pp.

33-54,The RAND Corporation.

Pandey, I.M. 2001, Capital structure and the firm

characteristics: evidence from an emerging

market, Working paper 2001-10-04, Indian

Institute of Management, Ahmedabad,India.

BAUER, Patrik, Determinants of Capital Structure:

Empirical Evidence from the Czech Republic,

Finance a úvěr– Czech Journal of Economics

and Finance, 54, 2004, č. 1-2, pp. 02-21.

Abor, Joshua, The effect of capital structure on

profitability: an empirical analysis of listed

firms in Ghana, The Emerald, The Journal of

Risk Finance, vol. 6 No. 5, 2005, pp. 438-445.

Brigham, E. F. and Houston, Joel F., ‘Fundamentals of

Financial Management’ Harcourt Asia Pvt.

Ltd., Singapore, 2001.

Ghosh, P. K., and Gupta, S. S., ‘Fundamental of

Management Accounting’, National

Publication House, New Delhi, 1979.

Pandey, I. M. ‗Financial Management’, Vikas

Publication House, Pvt. Ltd., New Delhi,

2009.

Gupta, S. S. and Kapoor, V. K., ‘Fundamental of

Mathematical Statistics’ Sultan Chand &

Sons, New Delhi, 1997.



RNI – UP/ENG/2011/36701 48 ISSN: 2231-6353

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




RNI – UP/ENG/2011/36701 49 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 50 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 51 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 52 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 53 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 54 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 55 ISSN: 2231-6353

*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



RNI – UP/ENG/2011/36701 56 ISSN: 2231-6353

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*


*Significant at .01 level

Table 2c



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



RNI – UP/ENG/2011/36701 57 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 58 ISSN: 2231-6353

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.



RNI – UP/ENG/2011/36701 59 ISSN: 2231-6353

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 4c



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



RNI – UP/ENG/2011/36701 60 ISSN: 2231-6353

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


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



RNI – UP/ENG/2011/36701 61 ISSN: 2231-6353

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


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


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.

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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



RNI – UP/ENG/2011/36701 65 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 66 ISSN: 2231-6353

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:




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.



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.



RNI – UP/ENG/2011/36701 69 ISSN: 2231-6353

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



RNI – UP/ENG/2011/36701 70 ISSN: 2231-6353

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,



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.



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



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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

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(2010). FDI in multi brand retail trading. KPMG.

(2010). Global Economy China India confront wal mart.

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News

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Hermeneutics – A Bi-annual International Refereed Journal for

Business and Social Studies registered with Registrar of News

Paper of India (RNI no. UP/ENG/2011/36701) and having ISSN:

2231-6353 is a bi-annual publication of Youth Empowerment

and Research Association (YERA), registered under society act,

1860 u/s 21, No. V-38138/9798 – Varanasi.

The field of social studies is dynamic and changing with an

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The journal welcomes original empirical/ theoretical/ analytical

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