Understanding the financial system, investment cycle and their impact from the perspective of economy and economical growth in the Indian and International Scenario:

The objective of this article is to get a basic & broad understanding of the financial system and related issues in the context of Indian financial system; the investment cycle and perspectives of a company, banking and financial institutions, government and as an Individual in the financial system.

Firstly we shall look into the common financial terms and secondly understand the general investment cycle and thirdly the general correlation of the investment cycle of different entities on the economy.

The common financial terms used in the financial system are:

Revenue / Income, Investments, Funds, Loans, Taxes

Tax – VAT, Service Tax, Excise Duty, Income Tax, Wealth Tax

Loans – Business Loans, Debtors, Loans through World Bank and IMF

Funds – Deposits, Shares (stocks), Mutual Funds, Insurance (general & personal) and other instruments

Investments – Retails Investors, Private Equity Investors, Financial Institutions, NBFCs, FDI and FII, Governments, World Bank and IMFs

Means of Transactions – Monetary, Financial Instruments and Commodities exchange

The financial system comprising of various organizations, institutions and the government involving different kinds of transactions would be:

Banks, Financial Institutions, Insurance, NBFCs

Government Companies (All industries & PSUs)

Imports Exports

Financial System Indian companies Controlled by Foreign Investments Investing in Foreign Ministry of Finance, Commerce & in India markets Regulatory authorities - RBI, SEBI, IRDA, CBDT

Individuals

Unorganized Business Sector

Agriculture

Schematic representation of the financial system

The below representation depicts the general investment cycle. Depending upon the context there may be additional factors influencing the cycle in case of organizations, institutions, agriculture or unorganized business sector.

Resources Human Investment Resource

Business (Services) Operations

Profits Investment Cycle Revenue

Taxes Less Operational Expenses Interest on Loans

Representation of General Investment Cycle

Having understood the general investment cycle, replicating the same to organizations, institutions and other entities, the investment cycle would go through a similar process with few other factors influencing the cycle. The performance of the financial system would basically depend upon the investment cycle of the entities forming as part of the financial system across the size, regions and industry segments. The degree of impact of each of these entities may vary with in the system. The complexity, scale of investments, timing and need will basically determine the correlation between the entities on the financial system.

Understanding the correlation between investment cycle of different entities in the financial system and the demand for the products and services offered by these in the domestic and international market; calculated, rationalized investment plans will yield improved overall economic growth in the current scenario.

The economic growth majorly depends upon the collective performance of the above entities; domestic & international demand for the products and services offered by companies including all the industries; domestic and international financial risks; agriculture, services and industrial outputs.

After the opening up of economy in 1992 and looking at the rebuild of economy after the recession period across the world, India will continue to be one of the prime focuses of investments; in addition to markets including Brazil, China, Russia, African nations by developed countries. Hence well planned investments addressing the basic issues of the economy will help ensure a steady and sustainable growth rate of the economy.

The major contribution to the Indian economy comes through agriculture, domestic growth of industrial goods and services, natural resources of the country and the international demand for the agricultural products, goods and services and natural resources. The growing rate of import of the goods because of the demand does concern the economic growth.

In the international context it is important to closely monitor and regulate the investments & flow of resources into the international markets and vice versa to ensure a gradual, sustainable growth so that the economy does not take a beating because of irrational investments.

Perspective of Funds, Expenses, Investments, Taxes from the view point as a company, government, banks and financial institutions and as a common man.

Perspective of organization / individual

Funds / Investments Expenses Taxes Other regulatory

Savings / Revenue/ Income

Banks & Financial Institutions

Deposits through salary / business income and term deposits

Loans to companies, Individuals, Housing,Gold, Tourism, Education

Salary to employees and other fixed and variable Expenses, Interest

Income Tax

RBI, IRDA & SEBI statute norms

Interest earned from Loans

Company (including public sector companies)

Loans, Shares, Debts

Into the company operations on Fixed and variable assets

Salary to employees and fixed and variable expenses depending upon the assets, Interest

Income Tax, Excise Duty, Service Tax

SEBI Operational revenues and Investment revenues

Government World Bank and IMFs, Taxes

Infrastructure Projects and other investments

Subsidies, fixed and variable assets, Interest on loans

None Natural resources

Unorganized Business Sector

Loans Deposits, Shares, MFs Insurance & back in business

Operational Expenses, Wages, Tax Salary , Interest

Income tax, VAT

IT / VAT Revenue through Business Operations

Agriculture / Farmer

Loans Bank Deposits & Insurance

Farming expenses and wages

None Revenue through sale of agricultural products

Common Man Term Deposits, Insurance, Shares, MFs

Personal and family expenses

Income tax

IT Dept Salary / Wages

Additional factors influencing the financial system in the International scenario are fluctuations in Currency exchange rates, Hedging, Futures and Options, Letter of Credits, Market Risks (non financial) and other policies and instruments. The above table signifies the cycle within each of the organizations in each financial year or each of financial transactions. The cycle between these bodies will broadly depend upon the regulations, economy; performance of different industries, international financial conditions, agriculture, government policies; international trade practices and projects.

Copyright, Ganesh Raj U, Smart Consulting, 2010. All rights reserved