MANAGERIAL ECONOMICS

BUSINESS AND GOVERNMENT

ROLE OF GOVT IN BUSINESS

• Individual freedom for production, process and consumption

• Co-existence of public and private sector• Planning• Social welfare like development of backward

regions, increasing employment and infrastructure development

WAYS IN WHICH GOVT MAY INFLUENCE BUSINESS OPERATIONS

• Public Enterprises• Price fixation (MRP)• Subsidies• Direct and indirect intervention through

taxation and quota system

PUBLIC PRIVATE PARTICIPATION (PPP)

• PPP is co-operative institutional arrangements between public and private enterprises.

• PPPs are co-operation of some sort of durable activity between public and private sectors in which they jointly develop products and services and share risks, costs and resources which are connected with these products

• Contd…

PUBLIC PRIVATE PARTICIPATION (PPP)Contd…

• Has gained wide interest around the world

• New way to handle infrastructure projects

• Can benefit both public and private sectors

• Reduces pressure on government budgets

CHARACTERISTIC FEATURES OF PPPs

• Co-operative and contractual relationship• Shared responsibilities• A method of procurement of capital, assets or

infrastructure• Risk transfer• Flexible ownership

PPP APPRAISAL COMMITTEE

Consists of Secretary of• Planning Commission• Department of expenditure• Dept. of legal affairs and • Dept sponsoring the project• Chairmanship of Secretary of department of

economic affairs

ACTIVITIES UNDERTAKEN

• MINISTRY OF FINANCE – NODAL CENTRE• Examines, scrutinizes and makes concession agreements• PLANNING COMMISSION• Sets up a PPP appraisal unit to prepare a report for improving

the concessional terms• DEPT OF LEGAL AFFAIRS• Scrutinizes the legal perspective• PLANNING COMMISSION AND FINANCE MINISTRY• Engages experts to undertake due diligence• COMPETENT AUTHORITY• Accords final approval

BENEFITS OF PPP

• To the Public Sector: Helps govt in raising capital, expertise and infrastructure to render better service in an effective manner to the general public

• To the Private Sector: Gets long term business opportunities

DISADVANTAGES OF PPP

• Public Sector may lose its control and efficiency

• May become time consuming and expensive instead of being cost effective

• Some times, private sector may not be flexible in agreements

MAJOR REASONS FOR FAILURE OF SOME PPP PROJECTS

• Insufficient resources• Poor drafting• Lack of experience• Inadequate monitoring

INDIAN EXPERIENCE

• Over 70% of the projects were on strengthening roadways and railways and building ports

• 11 PPP projects dealt with urban infrastructure (8 solid waste management, 2 water and sanitation and 1 bus terminal project)

• Total cost awarded $ 339 billion (55% for ports, 36% for roadways and (5% on airport development)

• CII has organized many training programs at Central and State level

INDUSTRIAL FINANCE AND FOREIGN DIRECT INVESTMENTS

INDUSTRIAL FINANCE• Life blood of business• Modern business requires huge capital• Long term and short terms funds requirement• Needed for purchase of fixed assets like land,

building, machinery, etc.• Capital required to purchase fixed assets is

called as fixed capital

PURPOSE OF INDUSTRIAL FINANCE

• To finance fixed assets

• To finance permanent part of working capital

• To finance growth and expansion of business

DETERMINANTS OF INDUSTRIAL FINANCE

• Nature of business

• Nature of goods produced

• Technology adopted

MAJOR SOURCES OF INDUSTRIAL FINANCE

• Shares• Debentures• Public Deposits• Retained earnings• Terms loans from banks• Loans from financial institutions• FDI

FOREIGN DIRECT INVESTMENT

• FDI refers to the net inflows of investments to acquire a lasting management interest (10% or more of voting stock) in an enterprise operating in an economy

• FDI can be classified as inward FDI and outward FDI.

• FDI Can be a loan, collaboration or borrowing.• The Major investors in FDI are individuals,

grou7ps, private and public entity

NEED FOR FDI IN INDIA

• Sustaining high level of investment• Technological gap• Exploitation of natural resources• Facing the initial risk • Development of basic infrastructure • Improvement in balance of payments position• Facing completion

DETERMINANTS OF FDI

• Stable policies• Economic factors: Interest on loans, tax

breaks, grants, subsidies and removal of restrictions

• Cheap and skilled labour• Basic infrastructure• Unexplored market• Availability of natural resources

ADVANTAGES OF FDI TO HOST COUNTRY

• Availability of scare factors of production• Improves balance of payments• Building economic and social infrastructure• Fostering economic linkage• Strengthening govt budget

DISADVANTAGE TO HOST COUNTRY

• Employment of expatriates

• Unhealthy competition

• Cultural and political issues

ADVANTAGES OF FDI TO HOME COUNTRY

• Improves availability of raw material• Improves balance of payments of the country• Creates more employment• Creates more revenue• Builds political relations• Gets better investment opportunity

DISADVNTGES TO HOME COUNTRY

• Too much exploitation of factors of production

• Conflict with govt of host country

TOP 5 COUNTRIES DIRECTING THEIR FDI TO INDIA

Country

• Mauritius• Singapore• USA• UK• Netherlands

% of total inflows

• 42• 9• 7• 5• 4

SECTOR-WISE FDI

Sectors %

Services sector 21Computer software and hardware

8

Telecommunication 8Housing and real estate 7Construction 7Auto 5Power 5

FLOW OF FDI AND FII IN US $ IN MILLIONS

Year Total FDI flow FIIs

2000 4029 18472001 6130 15052002 5035 3772003 4322 109182004 6051 86862005 8961 99262006 22826 32252007 34835 203282008 37838 (15017)2009 37763 290482010 27024 29422

Thank you!!!