Automobile Sales in India - FY 2019

Automobile Industry in FY 2019

Indian manufacturing sector  continue to report a slow growth in the Fiscal but Automobile industry in Fiscal FY 19 reported a growth of 6.3% in manufacturing of vehicles. For the first time more than 3 crore vehicles were manufactured in India and the production in FY 19 was at 3.09 crore vehicles. 

The performance of the Industry is based on overall Economic Growth , Industry growth, Infrastructure growth and availability of finance . Monsoons also a play a role in influencing the demand of the industry.  The new concept of sharing economy and ride hailing services created a demand for  vehicles. The fast growth of E commerce is also creating lot of opportunities in the Logistics sector and the Ecommerce Retailing companies are planning to place large orders for vehicles going forward.

The Indian auto industry reported a 6.5%  increase in overall vehicle sales in 2018-19, witnessing lower sales growth compared to a growth of  14.5% in FY18. The sales growth in the last few months was affected by the unexpected crisis in the NBFC sector,  liquidity crunch, uneven monsoon, increase insurance cost over the previous year , higher fuel cost and the move towards shared mobility in Cities and towns of India.

Indian has emerged as a hub for manufacturing of exports of vehicles. Exports constituted 15% of sale of vehicles in FY 19. More than 46.29 Lakh vehicles were exported in the year FY 2019 and the growth in exports over the previous year was at healthy 14.5%. The passenger vehicles witnessed a decline of 9.6% in exports but India has become the preferred destination for small car manufacturing in the world. More than 6.76 Lakh cars were exported from India last year. The export of commercial vehicles were closer to 1 lakh and the growth was at 3%. The one segment , which grew very fast in exports was three wheelers. It grew by more than 49% and more than 5.6 Lakh three wheelers were exported. India exported 32.8 Lakh two wheelers in FY 19 and the growth in exports of this segment was at 16.5%.

Domestic sales of vehicles rose by 5.15% YoY to 2.62 croroe units .

Segment	2017-18	2018-19	%change	%of Total
Passenger Vehicles	40,36,947	40,53,629	0.41	13.12
Medium and Heavy commercial Vehicles	3,84,874	4,39,414	14.17	1.42
Light Commercial Vehicles	5,68,907	6,67,836	17.39	2.16
Total  Commercial Vehicles	9,53,781	11,07,250	16.09	3.58
Total Three Wheelers	10,16,700	12,68,700	24.79	4.11
Total Two wheelers	2,30,15,120	2,44,62,231	6.29	79.17
Quadricycle	1,605	5,027	213.21	0.02
Total	2,90,24,153	3,08,96,837	6.45	100.00

Passenger Vehicles. Total production  in FY19 was won by 1.33%  and it was at  40.26  Lakh units. The domestic sale had a slow growth and it was 33.77 Lakh units in FY19 ,grew by 2.7%. within Passenger vehicles exports were not affected much like in the case of Passenger cars. The decline in export of Utility vehicle was only 4.8% compared to the decline in export of Passenger cars by 11.42%

Commercial Vehicles. Total production  in FY19 was up by 24.20%  and it was at  11.1 Lakh units. The domestic sale of CVs was up by 17.55% YoY to 10Lakh units in FY19. In Medium and Heavy Commercial Vehicle Category, Sales in FY 19  grew by 14.66% YoY to 3.9 Lakh units. Domestic sales of LCV segment rose by 19.46% YOY to 6.16 Lakh units .

Three Wheelers. Sales of three wheelers witnessed a healthy growth of  24.79% YoY to 12.68 Lakh units in FY19. Total production  in FY19 matched up with the sales requirements. The domestic sale had a high growth of 24% and and it was 12.68 Lakh units in FY19 . Exports were very healthy and India as a country has become very competitive for three wheelers in the world today. More countries were added to the export destinations in the year FY 19.

Two wheelers sales grew by 6.29 % YoY in FY19 to 2.45 crore vehicles. An average of more than 20 Lakh vehicles per month. But by the end of the year, the growth rate was less.  Total production  in FY19 was increased by 5.82%  and it was at  2.45 crore units marginally higher than the overall sales.   The domestic sale had a low growth of 4.86%  and it was at 2.11 crore units. The exports grew at a healthy growth rate.

Industry outlook for  FY 20. From FY 21 , BS – VI will be implemented. This will increase the cost of the vehicles. To avoid paying a higher price, customers will buy for the requirements in FY 21 in the year FY 20 only. Even after factoring this , according to SIAM , the leading Industry body for Automobiles in India,  passenger vehicle sales is projected to grow between 3 to 5 per cent and commercial vehicle will grow between 10 to 12 per cent. The two-wheeler segment is expected to grow between 5 to 7 percent and three wheeler segment is will grow between 7-9 percent. On large volumes, still the Sales increase will be significant and Automobile Industry will continue to contribute to manufacturing growth in a big way.

MSMEs in India – Growth Catalyst

My write up which appeared in the Cover Story of April 2019 issue of Monthly Economic Digest Published by Maharashtra Economic Development Council.

MSMEs in India – Growth Catalyst

India has the largest number of entrepreneurs in the world and it produces the largest number of entrepreneurs in a year. According to the latest survey by Dun and Bradstreet, there are 81 mn economic entities in the country (excluding entities involved in crop, public administration and defense). Many of them are single-person units operating from huts in villages, non-permanent structures. Excluding these entities, there are over 27 mn entities which could be termed as ‘commercially visible’. MSMEs account for around 99.9% of these 27 mn entities, they contribute to 35% of India’s GDP and employ 25% of India’s non-farm workforce.

MSMEs provide large employment opportunities at lower capital cost than large industries. At present, more than 15 crore are being employed in the MSME sector. The MSMEs in India are defined

 as follows :

Manufacturing Sector
Enterprises	Investment in plant & machinery
Micro Enterprises	Does not exceed twenty five lakh rupees
Small Enterprises	More than twenty five lakh rupees but does not exceed five crore rupees
Medium Enterprises	More than five crore rupees but does not exceed ten crore rupees
Service Sector
Enterprises	Investment in equipments
Micro Enterprises	Does not exceed ten lakh rupees:
Small Enterprises	More than ten lakh rupees but does not exceed two crore rupees
Medium Enterprises	More than two crore rupees but does not exceed five crore rupees

The enterprises go through an evolution, they evolve from micro to small to medium and then large entities. In developed markets, around 50% of the entities are micro and 40% are small/medium. In India, over 95% of total entities are micro and 4% are small/medium. Indian micro enterprises are finding it difficult to scale up and grow into small and medium sizes. The challenges they face in India are , access to finance, availability of adequate infrastructure, availability of skilled labour and inadequate power supply. Considering the contribution of MSMEs to the Economy, lot of new government initiatives were taken by the government to accelerate the growth of the MSMEs.  To support the MSMEs, RBI has constituted a committee in the month of March 2019 to enable higher level of funding to the MSMEs in India.

Realising the contribution, the MSMEs can make it to the Indian Economy , several initiatives were taken by the Government. The ministry of MSME plays a key role in accelerating the growth of the MSMEs.  A special cadre of officers has been created in the Ministry to focus only on MSME sector and those who join this cadre will mainly work in MSME department in their career.

One of the issues , relating to MSMEs is the access to the credit. As per the survey of Dun and Bradstreet, only 4% of micro enterprises have access to the format credit. This is one of the major challenges for the growth. To make this process simple, the government had introduced the Mudra Scheme. This scheme is operated under SIDBI and it refinances the loans given by Banks and NBFCs to the enterprises , which avail the loans under the Mudra scheme. In the year , 2017 – 2018, Mudra loans disbursed amounted to Rs.2,46,437 cr and in 2018 – 19 , so far, the loans disbursed amounted to Rs.2,02,668 cr. The total loans disbursed under this scheme stood at Rs.7.23 Lakh crore and more than 15.56 crore people benefited from this scheme. This scheme has benefited many in the new economy sector including those who are focussed on selling their products through e – commerce and those who wanted to run ride hailing services. Many enterprises were created in Food and service sector and small scale manufacturing and they are using the e commerce platforms.

Start up India Scheme. Startup India Scheme is an initiative of the Indian government, the primary objective of which is the promotion of startups, generation of employment, and wealth creation. It was launched on the 16th of January, 2016 . Under the scheme, New-entrants are granted a tax-holiday for three years. The government has provided a fund of Rs.2500 crore for startups, as well as a credit guarantee fund of Rs.500 crore rupees. The Eligibility For Startup Registration  is as follows and many have availed this scheme.    

• The company to be formed must be a private limited company or a limited liability partnership.
• It should be a new firm or not older than five years, and the total turnover of the company should be not exceed Rs. 25 crores.
• The firms should have obtained the approval from the Department of Industrial Policy and Promotion (DIPP).
• To get approval from DIPP, the firm should be funded by an Incubation fund, Angel Fund or Private Equity Fund.
• The firm should have obtained a patron guarantee from the Indian patent and Trademark Office.
• It must have a recommendation letter by an incubation centre.
• Capital gain is exempted from income tax under the startup India campaign.
• The firm must provide innovative schemes or products.
• Angel fund, Incubation fund, Accelerators, Private Equity Fund, Angel network must be registered with SEBI ( Securities and Exchange Board of India).

Skill India Scheme. One of the challenges, MSMEs  face today is availability of talent. To overcome this , skill development initiatives were taken at both Centre and state levels and there is an objective to train more than 50 cr people in the coming years. The model will be focussing on Vocational training similar to the vocational training system in Germany. Under this scheme , Pradhan Mantri Kaushal Vikas Yojana (PMKVY) was introduced and it  is the flagship scheme of the Ministry of Skill Development & Entrepreneurship (MSDE). The objective of this Skill Certification Scheme is to enable a large number of Indian youth to take up industry-relevant skill training that will help them in securing a better livelihood. Individuals with prior learning experience or skills will also be assessed and certified under Recognition of Prior Learning (RPL). Under this Scheme, Training and Assessment fees are completely paid by the Government.  In four years, this scheme is likely to benefit more than 10 million youth.

Cluster development Scheme. Industrial clusters play a major role in development of Industries in a country. Government of India  has adopted the Cluster Development approach as a key strategy for enhancing the productivity and competitiveness as well as capacity building of Micro and Small Enterprises (MSEs) and their contribution. A cluster is a group of enterprises located within an identifiable and as far as practicable, contiguous area and producing same / similar products / services. The essential characteristics of enterprises in a cluster are (a) Similarity or complementarity in the methods of production, quality control & testing, energy consumption, pollution control, etc., (b) Similar level of technology & marketing strategies / practices, (c) Similar channels for communication among the members of the cluster, and (d) Common challenges & opportunities. By part of being a cluster, MSMEs will find it easy to source raw material and buyers for the products. Further, the common costs are being shared among the enterprises operating in the cluster. There are various subsidy schemes operated by Centre and States and in many clusters, the participating companies have to incur only 10% of the total cost of cluster development.

PSU procurement. One of the challenges for MSMEs is to find buyers for their produce. To facilitate the demand creation for MSMEs, government has created a scheme , whereby , Now it is mandatory for all Central PSUs to take membership of the Government e-Marketplace (GeM) and they will put their purchase requirements in the market place,  which MSMEs can identify easily and participate in the process. Now, PSUs have to procure, at least a quarter of their requirement (25%) from MSMEs. With a view to encourage , more women to pursue entrepreneurship, out of the 25% procurement mandated from MSMEs from PSUs, 3% has been reserved for women entrepreneurs. A website has been created under the brand of MSME Sambandh and all the procurement notices of PSUs have to be placed on the website. In the previous financial year, more than Rs.25,000 cr was procured from MSMEs and this is likely to cross Rs.30,000 cr, this year.

Digitisation. To make the procedures simple, the government has embarked on several initiatives. The MyMSME is portal for web based application module to submit and track online application under the various schemes of the ministry.  Under the Udyog Aadhhaar Memorandum, mobile friendly application could be used for registration of MSMEs on self – certification basis. MSME Samadhaan scheme has been created to resolve the issues of delayed payments to MSMEs. Further, the digitisation and Introduction of GST has brought many MSMEs into the formal economy and this is helping MSMEs to build a credit profile and enable credit ratings by Credit rating agencies. This enables MSMEs to avail the formal channels of finance.

Some of the recent initiatives of the government include , approval of Rs.1 crore loan in 59 minutes, rebates in interest to be paid by them, Trade Receivables e- Discounting System (TReDS) , e market place for MSMEs, Cluster development subsidy for pharma companies, single annual return to be filed for   compliance matters , simplifying the factory inspection procedures and certain exemptions from punishment for minor violations.

In conclusion, a good , supportive and growth oriented , eco system has been created for the MSME development in India and various initiatives are being taken to create effective implementation policies and procedures. By creating an awareness among all the MSMEs about the various schemes and ensuring inter – departmental coordination in the government, the potential of MSMEs can be fully capitalised for a higher economic growth.

MSME Lending fuelled by Digitisation

The Article which appeared in Free Press Journal on 14th March 2019

MSME Lending fuelled by Digitisation

written by R Kannan March 14, 2019 9:01 am

MSMEs play a major role in Economic development of India. There are around 63.4 million units and they contribute to 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities and 33.4% of India’s manufacturing output. They have been able to provide employment to around 120 million persons and contribute around 45% of the overall exports from India. The sector grows at a rate faster than the large ones at more than 10% pa.

About 20% of the MSMEs are based out of rural areas.They provide employment to more than 130 million people and contribute to 45% of exports. MSMEs are also the largest employment generator every year. As of Sep18, the total credit in India was Rs 105.5 Lakh crores and MSMEs had borrowed Rs 24.7 Lakh cr. Large and Mid Caps borrowed Rs 44.4  Lakh cr. Year on Year the growth of overall commercial credit was at 13.5%.

Micro loans which are less than Rs1 cr grew 22.2% year on year and SME loans between Rs1 cr – Rs 2.5 cr grew at 18.3%.The growth was faster than the overall growth. Share of NBFCs in SME credit increased from 13% in Sep 15 to 17% in Sep 18. The number of NBFCs lending more than Rs 100 cr to MSMEs stood at 77 at the end of Sep 18.

The lending to MSMEs is an attractive business since, the interest rate charged are higher, the NIM margin is higher, the NPA ratio is lower and the risk of each loan is lower compared to Large and Medium Sector lending. The pace of lending to SMEs were accelerated by digitalisation of economy.

The factors including :concepts like Cash less economy, demonetisation, data mining, higher operating efficiency, adoption of new technologies, fintech revolution, Mudra Scheme, the telecom / internet / broad band penetration and the encouragement for new start ups have created new business models for delivering credit to MSMEs.

There are companies today delivering credit in 3 minutes of application for credit by using the latest technologies to disburse credit. In the year, 2017 – 2018, Mudra loans disbursed amounted to Rs 2,46,437 cr and in 2018 – 19, so far, the loans disbursed amounted to Rs 2,02,668 cr.

The total loans disbursed under this scheme stood at Rs 7.23 Lakh crore and more than 15.56 crore people benefited from this scheme. Apart from Mudra Loans, the concept of P2P, where person to person lending also took off and more than Rs 100 cr was disbursed through this system and the loans disbursed under P2P is likely to exceed more than Rs 25,000 cr in the next five years.

The acceleration of loans to MSMEs in the last four years was facilitated by a robust development of an eco system which was very conducive for disbursing more loans to the needy. The digitisation process has been adopted in Credit Assessment, Loan processing and Loan disbursement.

In the credit Analysis, the details of Aadhar card, Pan Card, their buying behaviour, data received from ecommerce web sites like Amazon, Flipkart, travel web sites are used to build a credit history. RBI has permitted a few Credit rating agencies to collect information from all the banks about all the borrowers and their credit history. The credit bureaus, calculate the credit scores based on the details given by banks. The credit history is available for Individuals as well as the corporates.

Today lenders are able to get this data online in a few seconds and this is one of the inputs to decide the credit worthiness of Individuals and corporates. Using their own models, they are able to decide the amount of credit which could be disbursed. All this is done, without much of human intervention and most of the processes are automated.

In the case of P2P lending, the lenders has evolved credit scoring models in their system. They connect both the lenders and borrowers and each put their own requirement. Lenders and borrowers are able to decide with whom the transaction to be executed based on the interest rate, duration and the amount of credit available.

In the last two years, India moved from a rank of 155 in data consumption in the world to No1 today. This was facilitated by fast growth of 4 G services and introduction of smart phones in the market. This has helped to deliver very small loans without much of processing and administration cost. Even credit card companies have started giving automatic credit limits to Individuals based on the credit history.

In the credit processing, the concepts like AI, Block Chain, Robotic Process Automation are being used which quickens the process of assessment and data is drawn from various sources and big data is being used, data mining techniques are being applied and the decision to give the credit is taken in minutes.

Jan Dhan, Aadhar and Mobile is making the process of digitisation in MSME lending easier. India has one of the most advanced digital infrastructure in the world today to deliver MSME credit and adoption of Digital technologies will increase the share of MSMEs in total credit, which will facilitate the GDP growth.

R Kannan is Head of Corporate Performance Monitoring and Research, Hinduja Group. Views are personal.

Growth Driven Budget

Growth Driven Budget

The budget has met the expectations of a most segments of the population.  Lots of sops for farmers,  Salaried and the workers in the unorgainsed sector. There is an increase in outlay for  Rural employment scheme to Rs.60,000 cr. Overall, the budget is likely to put more money in the hands of the common man. When more money is available, the people from Mid income and Low income tend to spend more and the growth of GDP from personal consumption will increase.

More than Rs.120,000 cr is likely to be put in the hands of the final customers on implementation of the budget proposals. The companies which are having a large presence in Rural areas and having business model based on consumption are likely to benefit in a big way.  Rs.20,000 cr for compensation to farmers has been budgeted in this fiscal and this money will be disbursed before March 19.

The budget is very good for stock markets and many companies will improve their financial  performance and  able to come up with good quarterly and annual results. The companies can focus on rural markets and increase their presence in rural markets.

Apart from giving a waiver of payment of income tax for those  who are earning Rs.5 Laks per annum, which will benefit more than 3 crore tax payers, there was no change in tax rates. The purchasing power of tax payers will rise and the exemption alone is going to put more than  Rs.25, 000 cr in the hands of tax payers, if additional benefits ,they will avail be taken into account.

The total receipts of the government is likely to rise to Rs.24.50 Lakh cr, a rise of 14.72% over the previous year. The projection for FY 20 is Rs.27.84 Lakh cr , a projected increase of 13.31% over the previous year. Tax revenue for the centre in FY 19 increased by 19.47% to Rs. 14.84 Lakh cr. In FY 20, it is projected rise to Rs.17.05 Lakh cr , a rise of 14.86%

Corporate tax will rise by 17.47% to Rs6.71 Lakh cr and in FY 20 , it is expected to rise by 13.26% to Rs.7.60 Lakh cr. Income tax collection will rise by 22.80% to Rs. 5.29 Lakh cr and the projection for FY 20 is Rs.6.20 Lakh cr,  growth of 17.2%. This is despite, 3 cr people who will stop paying taxes as per the tax waiver announced.

Since the trade growth was very tepid, the collections from customs is likely to rise by less than once per cent to Rs.1.30 Lakh cr in FY 19 but in FY 20, they are expecting a rise in revenue of  11.8% at Rs.1.45 Lakh cr. Excise duties are  likely to rise by only 0.07% to Rs. 2.59 Lakh cr in FY 19 and it is likely to remain at the same level as in FY 19.

There will be a shortfall in GST collection of Rs. 1 Lakh cr at Rs.6.43 Lakh crore in FY 19. It will rise to Rs.7.61 Lakh cr in Fy 20 , a rise of 18.22%.

In the year FY 18, dividends and taxes received by the Central government was at Rs.91,360 cr. In FY 19, they expect to collect Rs.1.19 Lakh cr, a sharp rise of 30.54% . In FY 20, the revenue from Dividends is projected to rise by 14% to Rs.1.36 Lakh cr. To achieve this target, there is a need to improve the performance of PSUs and there has to be a strategy to monetise the assets of PSUs in India.

Disinvestment receipts in FY 18 were at Rs.100,045 cr. In FY 19 , it is likely to be at Rs.80,000 cr and in FY 20, they are planning to divest Rs.80,000 cr.  They are showing an item of Strategic disinvestment of Rs.93,155 cr in FY 19 and the projection for FY 20 is Rs.102,507 cr.

Non tax revenue in FY 19 is likely to rise to Rs.2.45 Lakh cr, a rise of 27.2% over  FY 18. In FY 20, it is likely to rise to  Rs.2.72 L cr, a rise of 11.16%.  Capital receipts in FY 19 likely to be Rs.7.27 Lakh cr, a rise of only 2.94% over the previous year. But in FY 20, it is likely to rise to Rs.8.06 Lakh cr, a rise of Rs;10.85%. On capital receipts, the main source will be Borrowings. In FY 19 , borrowings are likely to be at Rs.6.24 Lakh cr, a rise of 7.33% over the previous year. In FY 20, it will rise to Rs.7.04 Lakh cr, a rise of Rs.10.97 %. The Fiscal deficit is projected at 3.4% for FY 19 and it is likely to remain at the same level  at 3.4%.  The budget deficit is likely to be mainly funded by borrowings. Government will be the largest borrower in the market in FY 20.

On the expenditure side,   Total revenue expenditure is likely to rise to Rs.21.40 Lakh cr, a rise of 13.93% and it is likely to rise by 14.36% to Rs.24.47 Lakh cr. Interest payments in FY 19 , on the total expenditure is likely to be at 23.9% and it is likely to be at 23.88% of the projected receipts.

Revenue deficit in Fy 19 is likely to be at Rs.4.10 Lakh cr. 2.2%. In budget , the  ratio is kept at the same level at 2.2% for Fy 20. Since  no new measures were announced for raising further taxes, most of the incremental expenses are likely to be met by other sources including Disinvestment, Strategic sale of assets and asset monetisation. It will be supported by borrowings by the government.

R.Kannan

Head – Corporate Performance Monitoring and Research

Hinduja Group

The Article  appeared in Free Press Journal on 2^nd Feb 2019

https://www.freepressjournal.in/business/budget-2019-exercise-in-driving-growth/1450212

My article which appeared in 31st Jan 2019 issue of Free Press Journal

Capital markets set to be growth catalyst for India

written by R Kannan January 31, 2019 9:19 am

By 2025, India will have one of the most sophisticated financial markets in the world, with the best practices and adoption of cutting edge technologies. Companies have to identify the right business model and funding model to capitalise on emerging opportunities, says R.Kannan

India has a very robust capital market and if the economic growth continues its momentum, by 2025 India could be among the top three capital markets in the world. India is growing at a rate of more than 7 per cent per annum now and going forward, for the next few years, Indian economy is likely to grow at a CAGR of 7 per cent. Many strategies and action plans are being discussed by various stakeholders on how to reach a Gross Domestic Product (GDP) of $5 trillion, as fast as possible. The robust growth in India is facilitated by various sources of funding. India is gradually moving from bank-based funding model to market-based funding model. In fact, in the last two years, markets have played a major role in meeting the funding requirements of corporates and the government. In the financial year 2018 (FY18), the funds raised from the capital market through equity and debt amounted to Rs 8.8 lakh crore, more than $100 billion.

India has one of the highest gross savings in the world. The savings of 30 per cent is mainly invested in physical assets in India and only a small portion of the savings is invested in capital markets. The level of financial intermediation in India is insignificant compared to other major markets in the world. The savings in the economy is about $750 billion a year and for infrastructure, India requires only $200 billion a year and including the capex in other sectors, the requirement of funds is lower than the overall savings. If a higher level of financial intermediation is achieved, this will result in meeting the funding requirements of Indian corporates and government through internal, domestic sources. Today, there was a reliance on foreign direct investment (FDI) and other investments by FIIs/FPIS from abroad to meet the funding requirements. A well-developed capital market will facilitate the channelising of funds smoothly to the required sectors.

Economies in the world can be classified into three categories in terms of how the funding needs in the economy are met. In the first category, many of the developed countries figure and the main sources of funding in the economy are capital markets. Even the charitable institutions and municipal bodies go to capital markets to meet their funding requirements. The second category of countries rely on both bank funding and capital markets to meet their fund requirements. In the third category, most of the funds required come from the banking system. India falls under the second category and the capital markets are in a take off stage and in future it is likely that the funds raised from capital markets will exceed the funds raised from banks. This trend is already visible in the Indian market. India is moving towards a higher level of financialisation.

The recent trends in digitalisation, demonetisation, financial inclusion, investor awareness, new financial products, introduction of GST and fintech revolution would accelerate the process of financial intermediation. The faster adoption of emerging technologies by customers including mobile transactions and digital transactions will help in introduction of many new financial products. The other trends which will accelerate the growth of capital market include: Opening of bond markets to retail segment, introduction of Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), securitisation, rising incomes, adoption of financial products in rural areas, cross sale of financial products, increasing popularity of wealth management and development of commodities trading market.

In any economy, where the per capita GDP is above $1500, the financial services sector grows at double the rate of the GDP growth. Assuming that, our economy will grow at a CAGR of 7 per cent in the coming years and reach a level of $4 trillion by 2025. The savings in a year will rise to $1.2 trillion. The capital markets will see a growth of 14 per cent CAGR. The resources raised from capital markets in a year will rise from $120 billion in 2018 to $300 billion in 2025. Mutual funds have become very popular in India and in the last few years and the industry size was at $331 billion at the end of March 18. At a growth of 15 per cent CAGR, the size of assets managed by mutual funds will rise to $880 billion by March 2025. The concept of systematic investment plans (SIPs) and the government outsourcing the management of corpus of the pension and other organisations also will a give a fillip to the mutual fund industry.

IPOs & secondary markets

India has the largest number of listed companies in the world and the average amount raised in Initial public offerings (IPOs) by a company has multiplied several times. Further, the stock exchanges also had opened windows for companies from SME sector to get listed and separate platform for trading of the stocks. There is a continuous introduction of new products and processes in the market, which will make the financial intermediation take off in a big way.

Life insurance

The penetration of insurance in India is very low and at the end of March 2017, the sector had a premium of $64.64 billion. The CAGR in the past was around 13 per cent. Assuming the same trend will continue, the size of this sector will rise to $170 billion annual premium. The share of private sector and new products in the overall pie will increase.

Non-life insurance

The size of the industry at the end of March was at $19.71 billion (premium). The industry is likely to grow at a CAGR of 14 per cent per annum. The premium by March 2025 is likely to rise to $56 billion a year. The insurance industry is likely to have assets under management of more than $1 trillion by 2025. Only insurance and pension industries have long term funds, which can be deployed in Iong-gestation infrastructure projects without any asset liability mismatch.

Pension funds

The funds under the management at the end of October 2018 was at Rs 2.63 lakh crore. This industry is likely to grow at more than 20 per cent per annum. The industry can provide long term funds for the Infrastructure sector. By 2025, the industry size is likely to be at Rs 10,00,000 crore.

Private equity & venture funds

In India, the concept of alternate assets has taken off. Various types of funds focussing on different aspects of the economy have emerged. Various new initiatives by the new government has given a big fillip to start up movement in India and at the end of 2017, the PE investments in India were valued at $26.45 billion and they grew at a CAGR of 28 per cent in the last five years and assuming that, they will grow at 20 per cent CAGR in the coming years, the industry will grow to $110 billion.

NBFCs

In the last few years, Non-banking financial companies (NBFCs) were growing at 18 per cent+ per annum and they had gained market share from bank funding. Especially, in realty funding, NBFCs increased their share substantially. But most of their funding was coming from banks and mutual funds. NBFCs mobilised short term funds and deployed in long term assets. This has resulted in a mismatch of asset liability. Their under writing losses also increased. Due to recent fiasco in the NBFC sector, these companies are in the process of realigning the business model and funding model. Despite the setback, this sector is likely to grow at a CAGR of 15 per cent in the coming years. Their share in total outstanding credit in India stands at 18 per cent and this is likely to rise to 25 per cent by 2025. The recent developments in the banking, financial services and insurance (BFSI) sector including the issues relating to NBFC sector and emerging vigilant regulation will force the marginal players to exit the business. There will be a consolidation from mergers and acquisitions. The companies with good underwriting skills, robust asset and liability management (ALM) and diligent risk management system will take over the weaker ones leading to consolidation of the industry.

To become the third-largest capital markets in the world, some of the action plans which could be taken by the authorities and stakeholders could include: Create enabling legislation for the faster growth of the markets. Stable policies. Assuring a certainty of implementation of policy/rule for at least five years. Improve the ease of doing business in these sectors. Allowing the introduction of new financial products available in other parts of the world. Introduce many new products where, the main target segment will be retail customers.Create an integrated and unified approach to regulation of all the business segments in capital market. Create incentives for investment in long dated instruments. Move towards a single KYC concept in the financial services sector. Create a centralised data base, where the data from all the regulators are aggregated, stored and used for formulating future policies. Develop a robust system for security of data and use of data for authorised purposes.

Use the electronic media to create an awareness among most of the population on the financial products. By 2025, India will have one of the most sophisticated financial markets in the world, with the best practices and adoption of the cutting edge technologies. Customers will have wider choice of financial products to choose from. The technology will bring challenges including cyber security and by 2025, the adoption cyber security solutions will have attained a maturity. India will become one of the most attractive markets for investment and our market capitalisation is likely to be in the top three in the world. Banks and financial services companies constitute a significant portion of the market indices in India today and in the total market capitalisation of the country. Considering the high growth of the capital markets, the preference for BFSI stocks will rise further and their share in overall market capitalisation will rise. The capital markets will play a major role in the years to come. In future, there will be a thrust on innovation in products, processes and distribution channels which will increase the share of capital markets in financial transactions in the economy. In conclusion, the future of capital markets in India is good and will grow at a healthy growth. The capital market offers opportunities for stakeholders including companies, banks, NPFCs, insurance companies, wealth managers, pension funds, private equity and venture capital and brokers. The higher level of financial intermediation and faster adoption of fintech technology will ensure a higher growth of capital markets. Companies have to identify the right business model and funding model to capitalise the emerging opportunities and participate in the growth of capital markets.

The author is Head Corporate Performance Monitoring and Research, Hinduja Group

https://www.freepressjournal.in/business/capital-markets-set-to-be-growth-catalyst-for-india/1448605