MATHURRAHULSHARMAJIMIPE JoIE (Vol 7, Iss 2, Jul-Dec 16) 28 Jan 2017 PDF

Journal of
INTERNATIONAL
ECONOMICS
Volume 7, No 2, July-December 2016
ISSN 0976-0792
Research Articles
The Impact of External Funds Flows on Forex Reserves of India
- A Kotishwar
Characteristics of Domestic Service Sector and Financial Enterprises

of India in the Context of Export Performance
- Prem Kumar
Cross Border Mergers and Acquisitions and The Exchange Rate:

A Literature Review
- Meghna Sharma
Financial Crisis and the Performance of Commercial Banks:

Indian Experience
- G Ramakrishna, M Ramulu and B Praveen Kumar
Forecasting portfolio value-at-risk via DCC-MGARCH Model: Impact of

Brexit on Valuation of UK Pound and Indian Rupee
- Rahul Sharma and Somesh K Mathur
Export Competitiveness of Selected Agriculture Products in

India in the Global Market: CMS Analysis
- Ahamed Kabeer M
Spatial Composition of Indian Small and Medium Enterprises Export

- Tareef Husain
Indexed in:
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Journal of International Economics
Aims and Scope
Journal of International Economics is devoted to the publication of professional and academic
research in all the areas of international economics. It is published in the months of January and July.
The journal broadly covers areas such as cross country growth models, population and migration
patterns, international trade, trade policy and relations, trade organizations and bodies, foreign
investment flows, balance of payments and exchange rate mechanism, multinational corporations
and cross border manufacturing, etc.
Chief Editor Editor
Prof RK Mishra Dr G Rajesh
Director Assistant Professor
Institute of Public Enterprise Institute of Public Enterprise
Hyderabad Hyderabad
Editorial Associate: Mr AV Bala Krishna, Institute of Public Enterprise

Editorial Advisory Board
Prof TCA Anant Prof R Nanda Gopal

Chief Statistician of India and Secretary Director
National Statistical Commission PSG Institute of Management
New Delhi Coimbatore
Prof Rehman Sobhan Prof Sam N Basu

Chairman Dean, Cotsakos College of Business
Center for Policy Dialogue William Patterson University
Bangladesh New Jersey, USA
Prof NJ Kurian Prof Bhanoji Rao

Visiting Professor Visiting Professor, LKY School of Public Policy
Council for Social Development National University of Singapore
New Delhi Singapore
Prof S Indrakanth Prof BN Swami

RBI Chair Professor Faculty of Business
Council for Social Development University of Botswana
Southern Regional Centre Gaborone, Botswana
Hyderabad
Copyright 2016 Institute of Public Enterprise. All Rights Reserved.

No part of this publication may be reproduced or copied in any form by any means without prior written permission.
The views expressed in this publication are purely personal judgments of the authors and do not reflect the views
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Institute of Public Enterprise is not responsible for any errors caused due to oversight or otherwise.
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Place of Publication: Institute of Public Enterprise, OU Campus, Hyderabad - 500007
We thank Indian Council of Social Science Research (ICSSR) for financial assistance for publication
of the Journal
Contents
From the Editors Desk 2

The Impact of External Funds Flows on Forex Reserves
of India 4
- A Kotishwar
Characteristics of Domestic Service Sector and Financial

Enterprises of India in the Context of Export Performance 13
- Prem Kumar
Cross Border Mergers and Acquisitions and

The Exchange Rate: A Literature Review 23
- Meghna Sharma
Financial Crisis and the Performance of

Commercial Banks: Indian Experience 35
- G Ramakrishna, M Ramulu and B Praveen Kumar
Forecasting portfolio value-at-risk via

DCC-MGARCH Model: Impact of Brexit on Valuation
of UK Pound and Indian Rupee 56
- Rahul Sharma and Somesh K Mathur
Export Competitiveness of Selected Agriculture Products in

India in the Global Market: CMS Analysis 64
- Ahamed Kabeer M
Spatial Composition of Indian Small and

Medium Enterprises Export 70
- Tareef Husain
From the
Editors Desk...
Two major developments that took place in the last two to three months time had
become very crucial for international economics. The first one is the election of
Donald Trump as the president of USA, that has triggered a debate on the future of
globalization. Economists, policy makers, intelligentsia and all concerned are debating
whether, the policies of protectionism, which Donald Trump has been talking about, if
and when implemented would spell the doom of globalization? Even post Brexit, it is
being hotly debated whether globalization has promoted inequality? Has Globalization
lead to more inequalities not only among the nations but also within the nations?
One of the prime reasons for Brexit was considered to be the job losses, for the
locals, as a result of free movement of people, which in turn was the by product of
globalization. Donald Trump has been highly critical of job losses to Americans as a
result of free movement of people.
He has been vehemently criticizing free movement of people and free trade. He stated
in no ambiguous terms his disdain for WTO. His inclination to impose high tariffs on
Chinese goods, is well known. His strong desire to stop US companies from taking
advantage of availability of cheap labor in Mexico, may endanger the very survival of
North American Free Trade Agreement (NAFTA).
The experts of international economics are quite apprehensive whether we are in for
protectionism wars in future? The appointment of Peter Navarro, as the head of white
house trade council, who is a strong critic of Chinese policy, shows how tenacious
Donald Trump is, to pursue his anti China policy. As things start unfolding everyone
would be watching with bated breath as to whether Trump would really turn his election
rhetoric into reality.
There was another equally significant development that took place in the domain
of international economics. The Federal Reserve increased the interest rates and
signaled the tapering of quantitative easing, the unconventional monetary policy,
which was introduced during the world economic crisis of 2008.
2
This is of immense importance for emerging economies such as India, which saw a
spurt in FII as a consequence of quantitative easing. Now the tapering of quantitative
easing may mean capital flight. In such a scenario emerging economies have to think
as to how to meet the challenge of capital flight.
This journal has always made earnest efforts, to publish articles which dwell at length
on various issues, having international ramifications. The present issue of the journal
has seven articles touching upon issues such as, the impact of external fund flows, on
forex reserves of India, cross border mergers and acquisitions, export competitiveness.
Dr G Rajesh
Volume 7, No 2, JUly-December 2016
3
ISSN 0976-0792 Volume 7, No.2, July-December 2016, pp.4-12
The Impact of External Funds Flows

on Forex Reserves of India
A Kotishwar
FDI and FII play a key role in any country foreign exchange reserves and are essential
for the developing economies like India. We cannot deny that the exchange rates
are of vital importance and are usually looked upon before making any investment
decision abroad by foreign investors. This paper has focused on the external fund
ows and its allied economic factors for the 2001 to 2015. Bi-variate Correlation is
applied on the FDI, FII and Rs vs. Dollar rate and observed that Variables have strong
positive correlation among them. Regression analysis is implemented on Rs Vs Dollar,
FDI and FII it was observed that exchange rate uctuation has impact on FII and FDI.
Granger causality test was applied on FII, FDI and fx reserve and it was found that
FII and FDI are having the impact on fx reserves. This study is useful to the Indian
investors fraternity such as HNIs, QIB, Indian Mutual Funds and retail investors.
Keywords: FII, FDI, Dollar, Exchange Rate
Introduction
NSE was established in 1992 even though after 18 years of completion foreign
investments are more than the Indian investments. Indian investors prefer other asset
class to equity investment hence regarding the stock market investment still they
are in the nascent stage. Stock market is dominated by foreign investors and they
are benefiting from by being a part of wealth distribution and wealth creation. Indian
investors because of their low risk appetite, sentiments and perceptions are not able
to be a part of this asset class. Before investing in the security they just consider few
factors which is not enough to get decent returns. To understand this problem of the
Indian investor I started collecting the data for the period of 2001-15 for the variables
such as exchange rate, FDI, FII and foreign reserves
4
The graph shows the movements of the variables across 15 years. FDI and FII inflows,
Forex Reserve shows an increase in the initial years i.e.., from 2001 to 2009 even
Rupee is shown depreciating. A major fall is shown in 2011 in all the variables. In the
last two years there is a recovery higher than previous levels. In the year 2013 to 15
even though the rupee value is depreciating DEFTY, FDI, FII and forex have amplified.
In 2014 the total external capital inflow was 35959.99 crores and return on the market
were 6.54% whereas in 2015 till july the total external inflows were 34142.01 crores
and market gave a return of 34.68%. In the year 2014-14 Rupee value depreciated by
2.3498 Rupees but FII amplified from 5190.66 crores to 21351 crores. Forex reserves
have also increased. Even there is increased in Defty index also. In 2015 in 6 months
Rupee value depreciated by 1.9096 Rupees there is increase in the forex reserves,
FDI and Defty.
Dr. Jasbir Singh, Dr. Anupama Sharmas study aimed at knowing the requirement of
amount of foreign investment by India for its economic development. It also analyzes
the trend and role of FDI/FPI in improving the quality and availability of goods in India.
Syed Tabassum Sultana & Prof S Paradha Saradhis paper focuses on impact of FDI
and FII on Indian stock market. The present studies on focus the impact of exchange
rate fluctuation on FDI and FII and in turn their impact on forex reserves. Majority of
Indian investors only focus on Technical and Fundamental analysis before making any
investment decision. My study has proven the foreign investments have influence on
the Returns on Indian Equity markets and foreign investments are influenced by the
fluctuation in exchange rates. The Indian investors have to concentrate on the external
inflow i.e., FDI, FII and exchange rate movements too beside fundamental analysis
and technical analysis.
Review of Literature
Dr. JasbirSingh, Ms. Sumita Chadha, Dr. Anupama Sharma (2012): The study
aimed at knowing the requirement of amount of foreign investment by India for its
economic development. It also analyzes the trend and role of FDI/FPI in improving
the quality and availability of goods in India. Sources of information includes reports/
publication of Govt. and RBI relating to foreign investment. It was found that foreign
investment flows are supplementing the scarce domestic investment in developing
countries particularly in India. The research is single dimensional FII can make or
break the stock market and the study has on the whole avoided this fact. And exchange
rate plays a very important role when FII & FDI are concerned. It is not the requirement
of Indian Economy but the interest of foreign economy on which the FDI/FII depends
upon.
Khandelwal, Vartika (2014): This paper has investigated the casual relationship
between FII and Stock market return and exchange rates. Granger Causality test is
used. In the study it was found that there was FII coming to India w ere return chasers.
And FII inflows are effect of exchange rate movements. They dont cause movement
in exchange rates. My study includes FDI, foreign reserves apart from Exchange rates
and FII.
5
K Raviteja (2013): The paper had examined the flow of global and Indian FDI/FPI
before and after the recession of 2009 particularly the impact on India. The variables
used are FDI, FPI, and recession. In this research it was found that rupee depreciation
has influenced the FDI and FPI flows. The research focuses only on the impact of 2009
recession on FDI /FPI. But my study emphasizes on impact of currency fluctuation for
the period of 2001-15 on FDI and FII along with foreign reserve, Composite bond
index and the 2001-15 wrap all the phases of economic cycle.
Miss Chonnikarn Aranayara (2014): The paper aims to study if the exchange rates
have impact on FDI at industry level and FPI at firm specific level. It is empirical study
and conduct time series model apply regression on the overall FDI and FPI at industry
and sector level. Based on the monthly data 2005-09 the exchange rate risk and
the foreign portfolio investment has negative relationship in Thailand. In the period
2001-09 FDI respond to Exchange rate risk varies across the different industries. The
research is limited to FDI and FPI. My paper is for the period of 2001-15 it also covers
forex reserve and exchange rate fluctuation beside FDI and FPI.
Nithyashree (2005): This paper talks about the era of 1990 marked with the advent
of liberalization policy and the push it gave to Indian equity market. Analysis shows
that the Indian equity market became lucrative destination fetching higher returns for
the investment because of FII flow to India. The current paper talks only about the
liberalization policy and the boost in Indian equity market and economy. Because of
FII along with domestic savings the equity markets in India is moving ahead. But
the current paper talks about the another dimension of FII and FDI as they are the
booster for our stock market but they can even play havoc as they also bring exchange
rate risk and also get affected from exchange rate risk. The above study ignores the
Exchange rate risk aspect of FDI and FII. The current paper deals with not only the
FDI, FII, DEFTY and Forex Reserve.
Dr Hojtallah Goudarzi Dr CS Ramanarayanan (2010): The study emphasises on
investigation on the co-integration causality between the Indian stock market and FII in
India during world financial turmoil of 2008. It was found that BSE 500 stock index and
FII series are co-integrated and causality between them is bilateral. The paper focuses
only on the impact of FDI and FII on Indian stock market but completely avoided Debt
market and uses only three variable FII, FDI and Sensex. My research investigates the
impact of exchange rate on FDI, Fii along with other variable such as foreign reserves.
Aditya Gaiha, Puja Padhi Ramanathan (2014): The study explores the relationship
between capital flows and the real exchange rates for the period of 2005 July to
November 2012. The study has taken three major component of capital flows in to
India namely FDI, FPI and ECB. It was found that FDI flows have no significant impact
on the change in the real exchange rates in India. FPI and ECB have a significant
impact on the change in the real exchange rates in India. The research is limited to
the FDI, FPI ECB and exchange rates where as the current research has fx reserve
along with FDI/FPI.
6
Ravi Bhandari (2014): This study analyzed the cause and impact of rupee depreciation
against Dollar on Indian Economy. The variable considered are FDI / GDP / Inflations /
money supply as % of GDP. Correlation method is used to analyze the relationship
between the above said factors and exchange rate. It completely ignores the stock
and debt market which is the barometer of Indian economy. My study emphasizes on
impact of exchange rate on FDI and FII and in turn their impact on Forex reserve.
Research Gap
Equity markets are the barometer of the economy and include domestic and external
flows. The researchers have proven that our equity market gets affected by external
flows and external inflows. The external inflows in turn are influenced by the exchange
rate fluctuation. During 2001 to 2015 no research has been found in this area, hence
there is a need to do research on impact of exchange rate fluctuation by considering
Rs vs. Dollar rate, FDI, FII.
Objectives of the Study

1. To know the relationship between Rs vs. Dollar rate, FII and FDI
2. To measure the currency fluctuation impact on FDI.
3. To measure the currency fluctuation impact on FII.
4. To measure the impact of FII and FDI on FX reserves.
Scope of the Study

The current study takes the 15 years data into consideration. To study the impact of
exchange rate fluctuation on the FDI and FII the forex market and the BSE and NSE
was the natural choice.
Empirical study: The following variables were considered.
FDI: Foreign Direct Investment
FII: Foreign Institutional Investors
Rs Vs Dollar exchange Rate.
Research Methodology
In the study descriptive analysis tools are applied on the secondary data. The following
formulas were used in the analysis.
1. Correlation: Correlation is used to determine the degree to which the movement of
two variables is related. There is a possibility of positive and negative correlation

between the movements of two variables

in order to analyze the collected data different statistical tools such as Bi variate
correlation, linear regression model, granger casuality test and regression model
are used
7
2. Linear regressions is used to know the impact of Rs Vs Dollar fluctuation movement
on fdi and Fii. So Rs Vs. Dollar is considered as independent variable for both the
models and fdi is the dependent variable in Model 1 and FII is dependent variable
in Model 2.

3. Arch test: An ARCH (q) model can be estimated usingordinary least squares. The
methodology to test for the lag length of ARCH.

4. Garch test:when testing forheteroskedasticityin econometric models, the best test
is theWhite test. However, when dealing withtimeseriesdata, this means to test for
ARCH and GARCH.

5. EGarch: The formulation for allows the sign and the magnitude of to
have separate effects on the volatility. This is particularly useful in an asset pricing
context

6. TARCH: if , and if .
7. PARCH
8. The Granger causality test is a statistical hypothesis test for determining whether
one series is useful in forecasting another.
Data Analysis
1. Correlation between FDI, FII, Rs Vs. Dollar exchange rate.
Table-1: Correlation between FDI, FII, Rs Vs. Dollar exchange rate
Rs Vs Dollar FDI FII
Pearson Correlation 1 .627* .604*
Rs Vs Dollar Sig. (2-tailed) 0.012 0.017
N 15 15 15
Pearson Correlation .627* 1 .534*
foreign direct investment Sig. (2-tailed) 0.012 0.04
N 15 15 15
Pearson Correlation .604* .534* 1
foreign institutional investor Sig. (2-tailed) 0.017 0.04
N 15 15 15
Source: Complied data
Interpretation: Correlation is applied to study the relationship between FDI, FII,

and Rs Vs. Dollar exchange rate. The following Table-1 presents the output when
correlation is run over 15 years data. Based on the result it can be concluded that Rs
Vs. Dollar and FDI and FII has strong positive correlation.
8
2. Impact of exchange rate on Foreign Direct Investment

Table-2: Model Summary Strength of the Relationship
between the Model and the Dependent Variable
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .6272 0.393 0.346 5332.37537
a. Predictors: (Constant), Rs vs Dollar
b. Dependent variable Foreign direct investment
The Table-2 Model Summary shows the strength of the relationship between the model
and the dependent variable. R value represents the correlation between independent
variable i.e., Rs Vs. Dollar and the dependent variable foreign direct investment. R
square predicts the 39.3% variation of FDI can be explained by the Rs Vs. Dollar.
Table-3: ANOVA Tests the Acceptability of the Model from Statistical Perspective
Model Sum of Squares df Mean Square F Sig.
1Regression 239287137.8 1 239287138 8.415 .012b
Residual 369644951.9 13 28434227.1
Total 608932089.7 14
a. Dependent Variable: foreign direct investment
The Anova Table-3 tests the acceptability of the model from statistical perspective. Sig
column represents the statistical significance of the regression model. P value is less
than .05 indicates that overall regression model is statistically significant to predict the
outcome.
Table-4: Coefficient
Unstandardized Coefficients Standardized Coefficients
Model t Sig.
B Std. Error Beta
1 (Constant) -2329234 10748.125 -2.167 0.049
Rs Vs Dollar 626421 215.937 0.627 2.901 0.012
a. Dependent Variable foreign direct investment
In the above Table-4 it is shown that for every unit of change in Rs Vs. Dollar rate there
would be increase in FDI by 626.421 units with standard error of 215.937. P value is
less than 0.05 that shows Rs Vs. Dollar fluctuation has impact on FDI.
3. Impact of exchange rate fluctuation on FII

Table-5: Correlation between the Variable
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .604a 0.364 0.315 5462.69375
a. Predictors: (Constant), Rs Vs. Dollar
9
As per the Table-5 the correlation between the variable is very strong i.e., 0.604. The
variation of FII that can be explained by Rs Vs. Dollar is just is 36.4%.
Table-6: ANOVA (tests the acceptability of the model from statistical perspective)
Model Sum of Squares df Mean Square F Sig.
1Regression 222233508.6 1 222233509 7.447 0.17b
Residual 387933298.8 13 29841023
Total 610166807.4 14
a. Dependent Variable: foreign institutional investor
b. Predictors: (Constant), Rs Vs Dollar
The Anova Table-6 tests the acceptability of the model from statistical perspective Sig
column represents the statistical significance of the regression model. P value is less
than 0.05 i.e., 0.017 indicates that overall regression model is statistically significant
to predict the outcome.
Table-7: Coefficient
Unstandardized Coefficients Standardized Coefficients
Model t Sig.
B Std. Error Beta
1 (Constant) -23464 11010.799 -2.131 0.053
Rs Vs Dollar 603.686 221.214 0.604 2.729 0.017
a. Dependent Variable: foreign institutional investor
The above table shows that for every unit of increase in Rs Vs. Dollar rare FII would
increase by 603.686 units with standard error of 222.214. Beta standard co efficient
is .604 for Rs Vs. Dollar shows that change in Rs Vs. Dollar by one unit of standard
deviation would change FII by 0,604 units. P value of less than .05 implies that null
hypothesis is rejected and the Dollar fluctuation has impact on FII.
Objective 4: Impact of FDI and FII on Foreign exchange reserves
Table-8: Impact of FDI and FII on Foreign exchange reserves

Data Trend: None None Linear Linear Quadratic
Rank or No. of CEs No Intercept Intercept Intercept Intercept Intercept AIC SIC
LIR Values FDI No Trend No Trend No Trend Trend Trend
0 -252.4467 -252.4467 -252.34 -252.3395 -251.977 42.7411 42.90275
1 -242.6605 -234.0878 -234.069 -233.0394 -233.0325 41.7768 42.10003

2 -241.9192 -232.675 -232.675 -230.2592 -230.2592 42.3199 42.80478
LIR Values FII
0 -240.5923 -240.5923 -240.546 -240.5458 -240.0549 44.4713 44.616
1 -235.0502 -235.0006 -234.996 -230.483 -230.0927 44.1909 44.4803
2 -234.682 -233.0688 -233.069 -228.4415 -228.4415 44.8513 45.2853
10
As all the values in the table either row wise or column wise in the descending order
hence the FDI has co integration with FX reserve. Even FII has co integration with FX
reserve too.
Table-9: Granger Test
Null Hypothesis Obs F-Statistic Prob.
DFII does not Granger Cause DFXRESERVE 11 0.72119 0.524
DDFDI does not Granger Cause DFXRESERVE 12 2.2601 0.1749
Hypothesis
Ho - Reject the null hypothesis - FDI do not have the impact on the FX reserve.
H1 - Alternative hypothesis - FDI has impact on the FX reserve.

As the value is less than 0.5 the null hypothesis is accepted. FDI is having the impact
on the FX reserve.
Ho - Reject the null hypothesis - FII do not have impact on the FX reserve
H1 - Alternative hypothesis - Fii have impact on the FX reserve

Hence the significant value is greater than 0.5, so null hypothesis is rejected. FII has
impact on FX reserve.
Limitation of the Study

1. The study is limited to 2015 July only.
2. FDI figures for 2001 to 2004 were not available
3. The study moves around only 4 variables it only focuses on Impact of exchange
rate fluctuation on FDI and FII but not Vice versa.
Findings of the Study

1. Rs Vs. Dollar exchange rate, FDI and FII has strong positive correlation
2. Exchange rate fluctuation has impact on FDI
3. Exchange rate fluctuation has impact on FII
4. FDI and FII are having the impact on Foreign reserve
Conclusion
I conclude the analysis of the impact of exchange rate on FDI and FII for the period of
2001 to 2015. In this study the Rs Vs Dollar exchange rate, FDI, FII, Forex Reserve
are considered for the said period. In the equity market investment comes from internal
flow and external flows. Foreign investments are influencing the Indian investments.
Foreign investments are the integral part of the equity investments and present study
found that their decisions get influenced by the exchange rate movements. The Indian
11
investor should not only consider the fundamental values of the company or the
technical analysis but they should also concentrate on FDI, FII and Exchange rate
movements. Hence there is further scope to do research in this field by considering
various macro level factors which influences the FDI and FII flows such as the
commodity price movements, political stability, and interest rate fluctuation.
References
Jasbir Singh., Sumita Chadha & Anupama Sharma (2012). Role of Foreign Direct
Investment in India - Research Inventy, [Available at: www.researchinventy.com/
papers]
Khandelwal, Vartika (2014). Investigating Causal Relationships between Foreign
Institutional Investment with respect to Stock Market Returns and Exchange Rate
in India, [Available at:www.connection.ebscohost.com/.../investigating-causal-
relationships]
K Raviteja (2013). Cash reserve ratio impact on stock market (india) in long
run,[Available at: www.indianresearchjournals.com/pdf/IJMFSMR/2013/August/9.
pdf]
Hojtallah Goudarzi & C.S. Ramanarayanan (2010). DRDO Newsletter, 35(4), April
2015, [Available at:www.drdo.gov.in/drdo/pub/newsletter/2015/apr_15.pdf]
Aditya Gaiha & PujaPadhi Ramanathan (2014), Number 3, March, [Available at:
www.ijsse.org/articles/ijsse_v1_i10_59_69.pdf]
S Kumar(2013). Foreign Direct Investment (FDI) and Foreign Institutional, [Available
at: https://ideas.repec.org/a/mgn/journl/v6y2013i7a9.htm]l
ST Sultana (n.d.). Impact of Flow of FDI & FII on Indian Stock Market,[Available at:
researchpub.org/journal/fr/number/vol1-no3/vol1-no3-1.pdf]
S Menani(2013). FDI and FII as Drivers of Growth for Indian Economy,[Available at:
www.ijird.com/index.php/ijird/article/view/44248]
A Banerjee (2013). Impact of FDI and FII on the Indian Stock Market during Recent
Recession Period, [Available at:ssrn.com/abstract=2575248]
About the Authors

A Kotishwar is Associate Professor & HOD, Department of Master of Business

Administration, CMR College of Engineering & Technology, Hyderabad and can be reached
at: mail2kotish@yahoo.co.in
12
Characteristics of Domestic Service Sector and

Financial Enterprises of India in the Context of
Export Performance
Prem Kumar
Condition and characteristics of domestic firms inuence the export performance

of firms output. Performance of service sector export has been satisfactory. India
has witnessed positive service trade balance over the period of 2000-01 to 2012-
13. However, performance of financial service export is not satisfactory. Further, the
percentage share of financial services to total service export is uctuating within
the low range of 3 to 5 per cent. However, a substantial proportion of service sector
workers are engaged in financial service sector. It has potentiality of expansion. In
this context, the condition and characteristics of domestic service sector with specific
focus on financial services need to be analysed.
Keywords: Service Sector, Financial Service, Export Performance
Introduction
Indias service sector provides the bulk of employment and income. Its contribution
to Indian economy is beyond debate. Moreover, performance of Indian service sector
export can be said satisfactory. India has witnessed positive service trade balance
over the period of 2000-01 to 2012-13. In terms of service export, India performed
better than Brazil, Hong Kong, Indonesia, Malaysia, Russian Federation, Singapore
and South Africa. India contributes around 1.61 per cent to worlds merchandise export.
But, this figure comes to around 3.32 per cent in terms of commercial service export.
Financial enterprises occupy crucial place in Indian service sector. 7.78 per cent of
service sector enterprises are financial enterprises. A substantial proportion of service
sector workers are engaged in financial sector (15.91 per cent). These figures indicate
the possibility of its expansion and its importance in service sector export.
Methodology
Main data sources are WTO, RBI, Ministry of Corporate Affairs, Government of India
and National Sample Surveys 63rd Round on Service Sector in India (2006-07):
Operational Characteristics of Enterprises. Export performance of service sector,
particularly financial service, has been analysed by data provided by WTO, RBI and
13
Ministry of Corporate Affairs, Government of India. NSSs 63rd round data on service
sector has been used to analyse characteristics of domestic service sector and
financial sector. A correlation matrix has been generated among variables; export
volume of financial service, insurance and other business services, and number and
paid-up capital of public and private companies; for the period of 2001 to 2012.
Comparative Overview
Indias balance of service trade has remained positive over the period of 2000-01 to
2012-13 (Table-1). Further, it has been increasing during all years, except 2009-10,
2010-11 and 2012-13. This may be attributed to good performance of service export.
Table-1: Indias Services Trade
Year / Item Export Imports Balance of Trade
2000-01 32267 22473 9794
2001-02 36737 21763 14974
2002-03 41925 24890 17035
2003-04 53508 25707 27801
2004-05 69533 38301 31232
2005-06 89687 47685 42002
2006-07 114558 62341 52217
2007-08 148875 73145 75730
2008-09 167818 76215 91603
2009-10 163431 83408 80023
2010-11 190488 111218 79270
2011-12 219229 107625 111604
2012-13 224044 116551 107493
Source: RBI
In terms of service export, India performed better than Brazil, Hong Kong, Indonesia,
Malaysia, Russian Federation, Singapore and South Africa (Table-2). During the years of
2012 and 2013, Indias service export exceeded that of Japan. Chinas service export was
the highest among these countries. However, it can be argued that India has occupied a
significant position in Service Export among emerging economies.
Table-2: Service Export in Million US Dollars
Country 2010 2011 2012 2013
Brazil 31,598.90 38,209.12 39,863.63 39,118.46
China 162,165.07 176,422.45 191,430.42 208,221.22

Hong Kong, China 104,047.74 118,912.77 126,207.57 135,104.58
India 116,939.53 138,754.05 146,143.67 153,076.22
Indonesia 16,765.80 20,690.34 23,113.21 22,557.65
Japan 141,283.61 145,506.66 145,589.70 146,470.91
Malaysia 31,800.53 35,851.02 37,617.68 39,281.21
Russian Federation 45,080.35 55,226.54 59,104.33 66,720.11
Singapore 94,345.24 108,656.44 112,243.15 116,871.28
South Africa 14,003.50 14,823.50 15,148.34 14,041.24
Source: WTO
14
Characteristics of Domestic Service Sector and Financial Enterprises of India in the Context of Export performance
The total export volume of service in South Asian Preferential Trading Arrangement
is low and has potentiality to expand (Table-3). Total export volume in South Asian
Preferential Trading Arrangement (SAPTA) was $169,570 million in 2013. The
corresponding figures for Asia, Asia-Pacific Economic Cooperation (APEC) and North
American Free Trade Agreement (NAFTA) were $1,225,190 million, $1,859,930 million
and $783,470 million respectively.
Table-3: Service Export in Million US Dollars
Country Group 2010 2011 2012 2013
Asia 959,810.00 1,081,750.00 1,159,730.00 1,225,190.00
Asia-Pacific Economic
Cooperation (APEC) 1,496,960.00 1,666,080.00 1,764,590.00 1,859,930.00
Association of Southeast Asian
Nations (ASEAN) 202,390.00 237,770.00 255,630.00 275,520.00
North American Free Trade
Agreement (NAFTA) 646,440.00 714,540.00 746,820.00 783,470.00
South Asian Preferential
Trading Arrangement (SAPTA) 130,970.00 152,250.00 162,180.00 169,570.00
Source: WTO
The contribution of financial service to total service export has varied from 1.65 per
cent in 2000 to 3.56 per cent in 2013 (Table-4). Pattern and trend of financial service
trade indicates the condition of financial institutions and organisations in a country.
Table-4: Contribution of Financial Services to Total Service Export
Year Percentage Share
2000 1.65
2001 1.77
2002 3.07
2003 1.53
2004 0.89
2005 2.18
2006 3.38
2007 3.89
2008 4.01
2009 3.91
2010 4.99
2011 4.50
2012 3.51
2013 3.56
Source: WTO
Interestingly, balance of trade of financial services was negative during the period of
2000 to 2004 and 2009 to 2011 (Table-5).
15
Table-5: Indias Financial Services Trade
Year Export (Million USD) Import (Million USD) Balance of Trade
2000 276.01 1,277.19 -1001.182
2001 306.10 1,780.06 -1473.956
2002 598.24 1,434.26 -836.025
2003 366.60 487.81 -121.216
2004 341.18 790.57 -449.387
2005 1,143.02 869.03 273.994
2006 2,356.97 1,949.90 407.070
2007 3,378.72 3,236.46 142.260
2008 4,290.83 3,545.15 745.680
2009 3,617.04 3,759.05 -142.010
2010 5,834.01 6,787.41 -953.400
2011 6,249.04 8,296.32 -2047.280
2012 5,135.04 4,840.56 294.481
2013 5,445.73 5,108.03 337.698
Source: WTO
Countries like Brazil, Hong Kong, Japan, Singapore, United Kingdom and United
States of America experienced positive balance of financial service trade over the
period of 2010 to 2013 (Table-6).
Table-6: Financial Services Trade (Million USD)
Balance Balance
Countries Years Export Imports Countries Years Export Imports
of trade of trade
Brazil 2010 2072.6 1678.9 393.75 Malaysia 2010 106.22 331.88 -225.7
Brazil 2011 2661.9 1803.5 858.36 Malaysia 2011 285.62 358.73 -73.11
Brazil 2012 2683.7 1974.8 708.92 Malaysia 2012 143.83 369.3 -225.5
Brazil 2013 2907.6 1792.7 1114.9 Malaysia 2013 212.18 402.95 -190.8
Russian
China 2010 1331.1 1387.3 -56.18 2010 1053.5 1720.3 -666.8
Federation
Russian
China 2011 849.36 746.83 102.53 2011 1102.5 1743.8 -641.3
Federation
Russian
China 2012 1886 1925.7 -39.77 2012 1317.3 1899.2 -582
Federation
Russian
China 2013 2867.7 3385.5 -517.8 2013 1507.9 2878.7 -1371
Federation
Hong Kong,
2010 13140 3543 9597.4 Singapore 2010 11900 2568.8 9331.1
China
Hong Kong,
2011 14570 3881.6 10689 Singapore 2011 14827 3036.4 11791
China
Hong Kong,
2012 15768 3935.8 11832 Singapore 2012 14837 3018.5 11818
China
16
Balance Balance
Countries Years Export Imports Countries Years Export Imports
of trade of trade
Hong Kong,
2013 17623 4233.5 13389 Singapore 2013 16871 3677.9 13193
China
United
India 2010 5834 6787.4 -953.4 2010 53971 9725.3 44246
Kingdom
United
India 2011 6249 8296.3 -2047 2011 62371 12263 50107
Kingdom
United
India 2012 5135 4840.6 294.48 2012 59032 10604 48428
Kingdom
United
India 2013 5445.7 5108 337.7 2013 60154 10838 49316
Kingdom
Indonesia 2010 332.2 449.93 -117.7 United States 2010 72348 15502 56846
Japan 2010 3606.4 3149.4 457.07
Japan 2011 4110.7 3346 764.75
Japan 2012 4644.3 3224.2 1420.1
Japan 2013 4547.1 3616.7 930.41
Source: WTO
Overview of Indian Domestic Service Sector

There is lack of proper data on Indian service sector. Impressive growth of this sector
and spread in the geographical domain are main reasons. Data on private non-financial
services are not available regularly1. Also, major data gaps exist with regard to private
non-banking financial sectors (NBFCs), Self-Help Groups (SHGs), Co-operative credit
societies, Micro-finance institutions etc.
A survey of service sector enterprises was conducted during July 2001 - June
2002, as part of NSS 57th round. The 63rd round covered broadly service sector
enterprises engaged in the activities of hotels and restaurants; transport, storage
and communication; financial intermediation; real estate, renting and business
activities; education; health and social work and other community, social and personal
service activities. A striking feature of the current survey was inclusion of financial
intermediation not covered in earlier surveys on unorganised services sector. About
1.65 crore service sector enterprises were estimated to be working in India during
2006-072. OAEs constituted 85% of all enterprises and the remaining 15% were
establishments. Uttar Pradesh had the highest share in total number of enterprises
(14%) followed by West Bengal (13%), Andhra Pradesh (10%), Maharashtra (9%) and
Tamil Nadu (7%). These five states accounted for 53% of enterprises at all-India level.
About 3.35 crore persons were estimated to be working in service sector enterprises
during 2006-07. The number of workers per enterprise was about 2.03. About 90% of
1 National Sample Surveys 63rd Round, Service Sector in India (2006-07): Operational Characteristics of Enterprises
2 National Sample Surveys 63rd Round, Service Sector in India (2006-07): Operational Characteristics of Enterprises
17
enterprises were proprietary enterprises and 7% were cooperative societies and self-
help groups. About 59% of enterprises were not registered with any agency. About
74% of enterprises were having fixed premises of operation of business, out of which
32% were located in the household premises and 41% were located outside household
premises. The remaining 26% of enterprises had no fixed premises of operation. While
about 99% of all enterprises were perennial in nature, 91% of enterprises operated
more than 9 months during the reference year. About 81% of working owners or
managing partners of proprietary and partnership enterprises were literate with some
formal education.
About 86% of enterprises did not receive any assistance from any government or
non-government agencies. About 2% of enterprises had undertaken at least some
work on contract basis. Nearly 32 % of enterprises had also undertaken some other
economic activity. About 5% of enterprises were pursuing mixed activity. About 10% of
enterprises were maintaining accounts. The entire range of units in the service sector
consist of very big corporate entities accounting for bulk of output as well as large
number of very small and tiny enterprises with substantial share in employment.
Proprietary enterprises (i.e. enterprises owned by a single household) had the highest
share (90%) of service sector enterprises, out of which only 8 per cent of the owner
proprietors were females and the rest males. Female-owned proprietary enterprises
numbered more in urban areas than in rural areas. The share of female-owned
proprietary enterprises was 10 % in urban areas against 6% in rural areas. Only a
little more than one per cent of enterprises were operated on a partnership basis. Co-
operative society/SHG constituted about 7% of the total enterprises.
It is seen that about 43% of all enterprises had worked more than 8 hours in a normal
day. More enterprises in urban areas worked more than 8 hours in a day than in rural
areas and about 9% of enterprises worked less than four hours in a day in urban
areas as compared with 20% in rural areas. Percentage of enterprises working 7
hours or less was 64% in rural areas against 45% in urban areas. Interestingly, more
establishments in rural areas (10%) worked for less than 4 hours in a normal day
than in urban areas (4%). Among OAEs, percentage of enterprises having worked
for more than 8 hours was more in urban areas (53%) as compared to corresponding
percentage in rural areas (35%).
About 41% of all enterprises were registered under any Act or with any registration
authority. The types of registration or authorities of registration included Companies
Act, 1956, Municipal Corporation, Panchayat, Local Body, Shops and Establishments
Act, Sales Tax Act, Motor Vehicles Act, Indian Vessels Act/ Merchant Shipping Act,
RBI / NABARD / IRDA / SEBI, Bar Council, Chartered Accountants Act, NASSCOM,
Directorate of Education / AICTE / NCTE, Medical Practitioners Act, Co-operative
Societies Act, Societies Act, Indian Charitable Act, Cinematograph Act, Factories Act,
1948 and others. The percentage of OAEs registered with at least one authority or
under at least one Act was 37% whereas it was 66% in the case of establishments.
The overall proportion of registered enterprises was higher in urban areas (47%) as
compared to rural areas (37%).
18
Condition of Domestic Financial Service in India

Transport, storage & communication had the highest percentage (38%) of enterprises;
community, social & personal services had next highest share (19%) of enterprises
followed by hotel & restaurants (12%); and financial intermediation (9%) (Table-7).
Table-7: Percentage Distribution of Enterprises by Type of Activity
Percentage of
Type of Enterprises
Distribution
Hotels 0.42
Restaurants 12.05
Hotels & restaurants 12.47
Storage and warehousing 0.02
Mechanized road transport 11.38
Non-mechanised motor transport, water transport and other related activities 15.13
Communication 11.47
Transport, storage & communication 37.99
Non-banking financial intermediation except insurance and pension funding 7.78
Insurance and pension funding and auxiliary activities 1.39
Financial intermediation 9.17
Real estate, renting and business activities 8.48
Education 6.31
Health and social work 6.63
Other community, social and personal service activities 18.94
Source: National Sample Surveys 63rd Round, Service Sector in India (2006-07): Operational
Characteristics of Enterprises
It can be seen that the percentage of workers engaged in financial intermediation is

substantially high at 15.91% (Table-8).
Table-8: Percentage Distribution of Workers by Type of Activities Separately
for Each Sector and Enterprise Type
Percentage
Types of Activities Distribution
of Workers
Communication 7.95
19
NSS data revealed that the sub-sector Mechanised road transport (89%) had the highest
percentage of registered enterprises followed by Non-banking financial intermediation
excluding insurance and pension funding (82%), Hotels (76%), Insurance and pension
funding and auxiliary activities (74%) and Health and social work (58%). However,
among the broad activities financial intermediation had the highest percentage (81%)
of registered enterprises (Table-9).
Table-9: Percentage of Enterprises Registered under/with Any Act/Authority by Type of
Activity and Enterprise Type for Each Sector
Percentage of
Type of Enterprises
Enterprises
Communication 54.2
Ownership pattern of financial enterprises is entirely different from that of other types
of service sector enterprises. Around 90.8 per cent of financial enterprises are owned
by Cooperative society/SHG (Table-10). Ownership pattern of other service sector
enterprises is characterised by dominance of proprietary enterprises.
Table-10: Percentage of Enterprises by Type of Ownership
Partnership with
Proprietary
Members of Cooperative
Type of Enterprises Same Different society /
Male Female house house SHG
hold holds
Mechanized road transport 98.1 .6 .6 .6 0
Non-mechanised motor transport, water 98.4 .8 .2 .2 0
transport and other related activities
communication 89.9 9.1 .4 .5 0
Non-banking financial intermediation 5.5 1.4 .2 1.2 90.8

except Insurance and pension funding
Insurance and pension funding and 84.8 10.4 .9 1.6 .1
auxiliary activities
Real estate, renting and business 91.1 4.3 1.2 2.0 .2
activities
20
In terms of ownership pattern, quality of labour and registration, financial enterprises

are better than that of other service sector enterprises (Table-11). However, its
contribution to total service sector export is low.
Table-11: Characteristics of Service Sector Enterprises
Personal,
Communica- Construc- Finan- Insu- Transpor-
Characteristics cultural and
tions tion cial rance tation
recreational
Share to total export* 3.13 0.89 3.38 1.6 0.44 10.84
Share to total
enterprises in India 11.47 8.48 7.78 1.39 18.94 26.51
Percentage distribution
of workers 7.95 9.24 15.91 1.31 15.18 16.96
Percentage of
enterprises owned by
cooperative/SHG 0 0.2 90.8 0.1 0.1 0
Percentage enterprises
Owned by limited
company 0.1 0.5 0.5 1.9 0 0.1
Percentage of
proprietary enterprises 99 95.4 6.9 95.2 97.9 98.95
Percentage of
enterprises having
graduate owner/
managing partner 11.3 23.2 21 47.4 3.6 2.7
Characteristics of Enterprises and WTO
Note: * Figure is of year 2006. This has been done to make data compatible.
The above analysis manifests that Indias financial service sector has potentiality to
expand. Financial service accounts for 20.49 per cent of total service export in United
Kingdom3. The corresponding figures for USA, Brazil and Germany are 12.01 per cent,
7.43 per cent and 5.15 per cent respectively.
Over the period of 2001 to 2012, the total export of financial service, insurance and
other business services continued to increase each year except 2003 and 20094. A
correlation matrix has been generated among variables; export volume of financial
service, insurance and other business services, and number and paid-up capital of
public and private companies; for the period of 2001 to 2012. A positive significant
correlation has been observed between export of financial service, insurance and other
business services; and number and paid-up capital of private companies (Table-12).
This indicates that export; number and paid-up capital of domestic private companies
of financial service, insurance and other business services have increased over the
period of 2001 to 2012. Interestingly, a negative significant correlation has been
3 Source: WTO, 2013.
4 Data on other business services export has not been used for years 2001, 2002 and 2003.
21
observed between export and number of public companies, which is quite general and
obvious observation in present era of liberalisation.
Table-12: Correlations Among Important Indicators
No. of Paid-up Capital No. of Paid-up Capital
Indicators Export Public of Public Private of Private
Companies Companies Companies Companies
Export 1 -.711** .812** .901** .922**
No. of public companies -.711** 1 -.857** -.603* -.826**
Paid-up capital of public
companies .812** -.857** 1 .849** .948**
No. of private companies .901** -.603* .849** 1 .933**
Paid-up capital of public
companies .922** -.826** .948** .933** 1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
Conclusion
Indian domestic service sector is characterised by the existence of very big corporate
entities accounting for bulk of output as well as large number of very small and tiny
enterprises with substantial share in employment. The relative condition of financial
enterprises is better than that of other service sector enterprises in term of ownership
pattern and registration etc. However, a substantial proportion of service sector labour
is engaged in financial enterprises. But, its share in total service sector export is low
and fluctuating. Moreover, trade balance of financial service has remained negative
during the period of 2000 to 2004 and 2009 to 2011. Export; number and paid-up
capital of domestic private companies of financial service, insurance and other
business services have increased over the period of 2001 to 2012. The characteristics
of domestic financial enterprises indicate that it has potentiality to strengthen the
service sector export of India.
References
National Sample Surveys 63rd Round, Service Sector in India (2006-07): Operational
Reserve Bank of India. (2013). Database on Indian Economy. Reserve Bank of India
(RBI), Mumbai.
WTO
About the Authors
Prem Kumar is Assistant Professor, Department of Economics, Shaheed Bhagat
Singh (Eve.) College University of Delhi, New Delhi and can be reached at: premkrec@
gmail.com
22
Cross Border Mergers and Acquisitions and

The Exchange Rate: A Literature Review
Meghna Sharma
The concept of mergers and acquisitions has been an interesting area of study in
the literature of finance. The whole process of a financial entity merging, and thereby
aligning its operation and management, with another financial entity, indeed provides
vast aspects to be studied. With globalization at large and trade liberalization in
particular, mergers and acquisitions between companies situated in different countries
have become wide spread. The obvious questions that narrate the reasons behind such
activities relate to the determinants of cross-border mergers and acquisitions. While
that question answers the basic foundation of mergers and acquisitions, a question
that arouses practical concern is who gains more from mergers and acquisitions
when judged in terms of domestic and cross border; acquirers of domestic targets or
acquirers of foreign targets. This paper is a review of the literature available on the
reasons and gains from mergers and acquisitions and what motivates cross border
mergers. It also leads the way for further studies on how the exchange rate can be a
determining factor in understanding gains from mergers.
Keywords: Mergers and Acquisitions, FDI, Exchange Rate, Currency, Cross Border
Mergers, International Finance
Mergers and Acquisitions Introduction

The concept of mergers and acquisitions has been an interesting area of study in
the literature of finance. The whole process of a financial entity merging, and thereby
aligning its operation and management, with another financial entity, indeed provides
vast aspects to be studied. With globalization at large and trade liberalization in
particular, mergers and acquisitions between companies situated in different countries

have become wide spread. The obvious questions that narrate the reasons behind such
activities relate to the determinants of cross-border mergers and acquisitions. While
that question answers the basic foundation of mergers and acquisitions, a question
that arouses practical concern is who gains more from mergers and acquisitions
when judged in terms of domestic and cross border; acquirers of domestic targets or
acquirers of foreign targets. While investigating on such gains, a question that requires
attention is whether the strength of the domestic currency affects gains from these
23
acquisitions and whether it can be considered as a deciding factor in determining if
acquisition by a firm should be domestic or foreign. This paper has tried review the
evidence of such a relationship established through different studies across the globe.
Mergers and Acquisitions: Reasons and Gains

Mergers and acquisitions can turn out to be major events that impart information into
the market. Hence, this might result in an increase in trading activity for the firms
involved in the merger. According to the research work conducted by Kyle (1985),
Easley and OHara (1987) and Admati and Pfleiderer (1988), mergers might bring about
an increasing course of trading activity, thereby providing positive support to this fact.
A study that dates back to as early as 1983 by Jensen and Ruback has indicated
that takeover activities yield positive gains; while the shareholders of the target firms
benefit, shareholders of bidding firms do not lose. That target firms are affected
positively is a widely proven fact in the literature of finance. This is not confined to a
particular country. In fact, this applies to countries that are geographically separated.
Research work conducted by Draper and Paudyal (1999) for the UK, Conrad and
Niden (1992) for the USA, Goergen and Ronneboog (2004) for the European countries
and Cheung and Schum (1993) for Hong Kong have provided evidence of target firms
facing positive gains through mergers and acquisitions. Empirical study by Draper and
Paudyal (2008) has confirmed that undervalued firms can announce takeover bids to
gain attention of investors as it reveals new information into the market. This finding,
according to them, rests on the assumption of information asymmetry which means
that managers have more information about the company which is not available to
outside investors. Thus managers of undervalued firms can take up the announcement
of takeover activity as a means to circulate new information and thus reassure the
market about its position and positive growth opportunities and hence increase their
share prices through revaluation. Such a finding had also been brought up previously
by the research conducted by Officer et al (2006) who studied the role of information
asymmetry resulting in increase in acquirers gains. Their argument lies in the fact that
the assessment of information contained in certain variables is difficult to measure
which leads to higher gains to bidders.
Previous empirical work has divided the analysis of gains from mergers and
acquisitions depending upon the mode of acquisition. It has been shown by empirical
and theoretical analysis that the method of payment that bidders offer in mergers and
acquisitions mirrors what managers of the bidding company think about the value of
their own company. The consideration offered by the bidding firm maybe in the form
of cash deal, share deal or earn outs or a combination of each. A study by Loughran
and Vijh (1997) point out that acquirer stock returns are greater when a tender offer is
made and when cash is used as the mode of payment. On the other hand, they point
out that acquirer stock returns are smaller when merger offer is made and when stock
is used as a mode of payment. The difference, as they found, was quite significant,
ranging from -25% for stock mergers and +61.7 % for cash deals. According to Draper
and Paudyal (1999), bidding companies face a decline in their share prices when
24
Cross Border Mergers and Acquisitions and The Exchange Rate: A Literature Review
share exchanges are offered as a means of payment. On the other hand, an offer
of cash payment yields positive returns to the shareholders of the bidding firm. Their
research also brings out the fact that trading activity around the event period for both
the target and bidding companies increase depending upon the method of payment.
Another question that decides the gains accruing to bidding firms is whether the target
companies are listed in any stock exchange or are unlisted. Various studies that have
studied the gains accruing to firms involved in mergers and acquisitions have mostly
concentrated on targets that are listed. According to Draper and Paudyal (2006),
acquirers of unlisted targets gain more than acquirers of listed targets. According to
them, acquirers of listed targets do not face any sizeable change in share price during
the period around the announcement of takeover bids. On the other hand, acquirers
who target private or unlisted firms experience a substantial gain in the period
surrounding the announcement of the takeover bids. They also prove the fact that deals
settled by means of shares lead to higher gains from acquisitions if the target company
is unlisted but such share deals lead to a loss if the target companies are listed.
FDI and Cross Border Mergers and Acquisitions

The parent action that embodies cross border mergers and acquisitions into its wrap is
foreign direct investment. Foreign direct investment is an essential form of investment
and a productive flow of capital. As pointed out by Moosa (1998), it can be in the form
of greenfield investment, cross border mergers and acquisitions and joint ventures. It is
important at this point to highlight the fact that majority of FDI is in the form of cross border
mergers and acquisitions. Some facts about cross border mergers and acquisitions
are well explained by Moosa (1998). Cross border mergers and acquisitions have
become rampant since the advent of 1990s due to increased deregulation adopted by
many countries and reduction of trade barriers. Greenfield investment takes the form
of investing firms establishing new production lines, distribution and other amenities in
the host country. The other form, namely cross mergers and acquisitions has certain
advantages over it. These include the fact that it is cheaper, especially if the bidding or
the acquiring firm can take over loss making entities at a cheaper cost. Also, it enables
the acquiring firms to gain quick access to other foreign markets where the target firms
are domiciled. The importance of cross border mergers and acquisitions is intensified
by the fact that such activities are politically sensitive and hence can have a significant
influence on the political interests, of the host countries in particular.
Stated in economic terms, cross border acquisitions can be advantageous if the
motivation for the acquirer is to harness the advantages of market imperfections, to
overcome trade barriers, or to establish a globally well connected system of better

economic performance. The comparison of returns of the firms who acquire domestic
targets with the returns of firms who acquire targets overseas can lead to interesting
conclusions.
What Motivates Cross Border Mergers and Acquisitions?

The literature available on mergers and acquisitions that spread out beyond national
25
boundaries to qualify as cross border mergers and acquisitions is vast. The basic
study about cross border mergers and acquisitions, which attracts obvious attention, is
what motivates firms to merge or acquire companies that are located outside their own
geographical boundary. The general literature on mergers and acquisition available,
still hold for it when extended to cover cross border activities. However, a number of
additional factors that are associated once it gains a cross border flag add to the body
of empirical work.
Empirical work by Kang and Johansson (2000) examined the patterns or the trends and
the drivers or the factors that propel cross border mergers and acquisitions. According
to them, cross border mergers and acquisitions are impelled by a host of factors.
These include excess capacity and increased competition in traditional industries, as
well as new market opportunities in technologically advanced sectors. However, the
main drivers as presented by them, is the need to acquire complementary intangible
assets like technology, human resources, brand names etc. Furthermore, they state
that the dividends that arise out of cross border mergers and acquisitions are revealed
in terms of company performance and profits of the participating firms. A study
published by Olivier, Jean-Louis, and Habib (2004) shed light on the location pattern
or the choices that determine the location of cross border mergers and acquisitions
between firms in OECD member countries. By using appropriate econometric models,
they reveal that the supply of target firms that is captured by market capitalization and
privatization activity restricts the location of mergers and acquisitions. However, they
divulge that other determinants like size of the markets, cost of labour, accessibility
to markets and financial openness play a positive and crucial role in deciding the
location of cross border mergers and acquisitions. On the other hand, they also cite
that, adverse corporate tax, cultural and geographic distances and differences in
legal rules may exert a negative influence in determining the cross border merger
and acquisition activities. As cited by Giovanni (2005), a number of financial variables
and institutional factors play a significant role as determinants of the flow of cross
border mergers and acquisitions. He mentions, in particular, that the size of financial
markets as considered by the ratio of stock market capitalization to GDP, as well as the
credit provided by financial institutions to the private sector to the GDP in the domestic
country, have substantial positive impact in generating incentives for domestic firms
to get involved in cross border mergers and acquisitions. Empirical work by Gonzalez,
Vasconcellos and Kish (1998) has looked closely into the financial characteristics of
firms involved in cross border mergers and acquisitions. Their study imposes on the
validity of the theory that is named as the Undervaluation Hypothesis. They begin with
the observation that the number of foreign firms acquiring US firms is larger than the
number of firms that US firms have taken over. Their results, which explain a plausible
motivation to undergo cross border mergers and acquisitions is that, in order to curtail
the costs of penetrating into foreign markets, domestic firms will seek out firms beyond
their domestic boundaries to find undervalued firms, and hence acquire them suitably.
26
Are Cross Border Mergers and Acquisitions Beneficial?

Besides focusing on the factors that motivate firms towards cross border mergers and
acquisitions, it is important to take into account the literature that examines whether
cross border mergers and acquisitions yield positive returns. It would be inappropriate
and inadequate to derive a conclusion without looking into the various research works
conducted in this regard. Mergers and acquisitions have various motives and they are
cited in various literatures available in finance. However, the gains from them, when
compared in terms of acquisition of domestic targets relative to acquisition of foreign
targets, have shown different results making it a controversial topic. It is important
at this point to revive the literature on the gains from cross border mergers and
acquisitions. According to a study conducted by Moellerr and Schlingemann (2005)
on US firms that have acquired foreign targets as compared with domestic targets
have experienced lower announcement stock returns and lower level of operating
performance. According to them, stock returns have a negative association with
increase in global and industrial diversification. Evidence from the works of Conn and
Connel (1990) and Black et al. (2001) indicate similar results indicating a negative return
for those who acquire foreign targets. Measures of pre and post acquisition abnormal
accounting performance suggest a superior performance by domestic bidders (Eckbo
and Thorburn, 2000) In contrast to these findings, a study by Conn, Cosh, Guest and
Hughes (2001) on the performance of UK firms involved in cross border M&A, have
not found any evidence of negative returns emerging from post-acquisition. Also, they
found that domestic UK acquisitions influence share performance negatively. Overall,
cross border acquisitions result in lower announcements and long run returns than
domestic acquisitions (Conn, Cosh, Guest and Hughes, 2001). Doukas and Travlos
(1988) based on their study of US bidding firms involved in international acquisitions
show that shareholders of bidding firms experience positive returns when companies
expand to new markets and industries.
A study by Bris, Brisley and Cabolis (2008) bring out the fact that cross border mergers
allow firms to alter the level of protection that is provided to their investors as target
firms often imbibe the structure of corporate governance from the acquiring company
under legal procedures. Thus they use this as a basis to analyse the effects on firm
value that is brought about by changes in corporate governance. They conclude that
firms that are better equipped to adopt better practices do so and the market assigns
more value to protection. When the bidders and targets are from different countries,
then the differences in the corporate governance structure in the different countries
involved play an important role in determining gains from cross border merger activities.
According to Martynova and Renneboog (2008), when the bidder is from a country
with strong shareholder orientation then a portion of the total value of the takeover
may be because of the fact that a stronger focus on the shareholders of the acquirer
will generate additional returns because of better management of the target assets.
On the contrary, if the bidder has its origin in a country that provides less protection
27
to its shareholders compared to the target country, then the anticipated gains by the
bidder and the target will be less as a less efficient corporate governance structure will
be imposed on the target assets. A specific study conducted by Kiymaz (2004) on the
US bidders and targets involved in cross border mergers and acquisitions of financial
institutions had shown that various macroeconomic variables that include the economic
conditions of foreign and US, the level of economic development of the target country,
volatility of exchange rate, the strength of the government of the target country, relative
size of the participants (the bidders and targets) and control of targets can essentially
explain the wealth gains to bidders and targets. Research work conducted by Cakici,
Hessel and Tandon (1996) examined the wealth gains of the shareholders of foreign
firms that had acquired US firms. After analyzing the abnormal returns of the foreign
bidding firms, they found that Japanese, British, Dutch and Australian acquirers gain
significantly by purchasing US firms. Against general anticipation, their study found
that, in cross border acquisitions, there is no relation between the abnormal returns
of the bidding firms to the relative size ratio of the target to bidder, or to the degree of
their overseas exposure, or to the intensity of the target towards R&D. They provide
support to the hypothesis that competition among bidding firms to acquire the same
target leads to a decrease in the returns accruing to acquirers.
Empirical analysis conducted by Francis, Hasan and Sun (2008) find the existence
of a positive effect for US acquirers that are involved in cross border mergers and
acquisitions. They specifically draw attention on the fact that, when firms merge with
or acquire target firms from segmented financial markets, then the abnormal returns
realized by the acquirers are positively higher. On the other hand, they find that
firms which acquire targets from integrated financial markets realize a comparatively
lesser level of abnormal returns. Also, they bring out the fact following this, which
is, acquirers in segmented financial markets experience an improvement in their
operating performance. Mork and Yeung (1992) examine the outcome of cross border
acquisitions on the US firms by observing their stock prices. They testify that the
market value of a firm is positively associated to its multinational operations due to the
information based intangible assets of the firm.
Cross Border Mergers and Acquisitions With FDI

To state empirically, majority of foreign direct investment flow is created by means
of cross-border mergers and acquisitions (Kang and Johansson, 2000; Letto-
Gilles, Meschi and Simonetti, 2001; Chen and Findlay, 2002). Clearly cross-border
acquisitions now account for over 80% of all foreign direct investment by industrialized
countries (UNCTAD, 2000).While FDI is a broad category, cross-border mergers and

acquisition is somewhat narrow when compared to it, yet an extremely dominant form
of it. The difference between these two can be stated as, in a cross-border mergers
and acquisition, control of assets and operations is transferred from a local to a
foreign company, the former becoming an affiliate of the latter (UNCTAD, 2000, p.
99). Understanding of cross-over takeover requires a marriage of the theoretical and
empirical work on FDI and corporate acquisitions (Harris and Ravenscraft, 1991).
28
With increasing economic integration, the extent of cross border mergers and
acquisitions has increased. Bjorvatn (2004) brings out the fact increase in economic
integration should actually reduce the number of cross border mergers and
acquisitions due to the business stealing effect. But, he proves that this concept
does not necessarily have to be true. He states that economic integration can trigger
cross border mergers and acquisitions by reducing the business stealing effect and,
in his words, by reducing the reservation price of target firms. There exists a field of
research where cross border mergers and acquisitions have been weighed against
foreign direct investment. Young-Han Kim (2009) mentions that there are two ways
of promoting regional economic integration, one is via Greenfield investment and
the other by means of cross border mergers and acquisitions. According to him, in a
market structure which is based on a model of oligopoly, preferential trade agreements
increase the intentions of a multinational firm to shift its mode of entry from greenfield
investment to cross border mergers and acquisitions. Thus, just the way in which the
strength of the domestic currency may influence flow of FDI; it will have a similar impact
on cross-border mergers and acquisitions, as acquisition of a foreign company by a
domestic company necessarily implies an outflow of capital. Some of the cross-border
mergers and acquisition deals are so large that it can have a significant influence on a
countrys position as a net acquirer or target (Brakman, Garretsen, Marrewijk, 2006). A
basic analysis would be to know why a domestic company wants to acquire a foreign
company. It entails the question whether cross-border mergers and acquisition can
achieve greater gains as compared to domestic mergers and acquisition. The gains
from M&A depend on a host of factors like mode of acquisition, method of payment,
time of announcement etc. When foreign acquisition is taken into consideration, then
factors like size and strength of the foreign economy, its tax and legal system etc
come into play. A study by Harris and Ravenscraft (1991) points that the cross- border
effect on wealth gains is not well explained by industry and tax variables, it is positively
related to the weakness of the US Dollar indicating a significant role of exchange rate
movement on FDI. However, it does not direct clearly towards an indication which
domestic acquirers should take from the strength of the domestic currency.
The Exchange Rate and Mergers

The activity of cross border mergers and acquisitions has found its place in the arena
of financial literature with respect to various additional factors that are attached to it
owing to the encroachment into foreign countries. The exchange rate, noted from the
side of both the bidding and the targets firms, can impose an influence on the outcome
of cross border mergers and acquisitions, thereby providing incentives to potential

acquirers either positively or negatively. Most of the literature that bring together the
body of cross border mergers and acquisitions with that of the exchange rate as an
influencing factor, do so by bringing out the phenomenon of foreign direct investment.
This, however, is not without valid justification.
The valuation of the domestic currency of the country where the acquiring country is
domiciled might be influencing the gains from cross border mergers and acquisitions.
29
According to Blonigen (1997), movement in the exchange rate may affect the flow of
acquisition FDI because acquisition involves firm-specific assets, which can produce
returns in currencies other than the currency that had been used for purchase.
Based on data comprising of Japanese acquisitions in the US, he provides support
to the hypothesis that a depreciation in the real value of the Dollar makes Japanese
acquisitions more favourable in US industries, particularly for those industries that
contain firm specific assets.
Goldberg (1993) cites that the pattern of exchange rate may set off firms to expand or
contract their existing production operations, enter or exit foreign markets, modify the
location of their facilities of production or consolidate their market power by means of
mergers and acquisitions. Thus, it can be said that the exchange rate is an important
factor in stirring firms towards the decision of exploring the possibility of undergoing
cross border mergers and acquisitions. The level of exchange rate could affect
decisions about where and how much to produce or sell, as well as internal transfers
of intermediate goods (Itagaki, 1981; Cushman, 1985).
Thus, there is a considerable background to the concept that links the strength of
the domestic currency with gains from cross-border mergers and acquisitions.
Understanding of crossover takeover requires a marriage of the theoretical and
empirical work on FDI and corporate acquisitions (Harris and Ravenscraft, 1991).
Under perfect mobility of capital, exchange rate should not affect the cost of capital of
domestic and foreign investors (Moeller and Schlingemann, 2005). A research work
by Froot and Stein (1991) examines the connection between exchange rates and
foreign direct investment. They find that the FDI ratio in USA is significantly negatively
correlated with the value of the Dollar. According to them, a depreciation of the domestic
currency can motivate acquisition of domestic assets by foreign companies. They
argue that a strong dollar increases the relative wealth of US investors and therefore
it reduces the need for costly external funding when acquiring foreign targets. Thus,
a depreciation of the domestic currency results in an increase in prices of domestic
goods. Following these discussions, a general conclusion that can be arrived at is that
if foreigners can buy domestic goods at cheaper rates with an appreciating currency,
then domestic consumers should have the option of borrowing the foreign currency
in a free global capital market and make use of that currency. However this is argued
against as the view that exchange rates are irrelevant to FDI is at odds with more
than just casual empiricism (Froot and Stein, 1991). A number of empirical studies by
Caves (1989), Harris and Ravenscraft (1991) and Swenson (1993) have supported
the fact that a depreciation of the US Dollar is positively related to a higher flows of
FDI into the United States as well as a higher foreign takeover premia. Baker (2004)
reveals that temporary overvaluation of source country capital promotes FDI while
temporary undervaluation of host country assets has no significant impact on FDI
flows. The extent of overvaluation or undervaluation of a currency may be captured by
the deviations of that currency from Purchasing Power Parity (Moosa, 1998).
A study conducted as early as in 1988 by Caves states that the exchange rate affects
30
FDI through two channels. Firstly, changes in the exchange rate lead to changes in
the costs to be incurred and the revenues earned by the investors. Secondly, the
expected short term exchange rate movements can affect FDI. If the depreciation of
a currency is expected to be reversed, then this leads to an increase in FDI inflows
to obtain capital gains from an appreciating domestic currency. However, there are
empirical studies that failed to establish a connection between the exchange rate and
the level of FDI. Bajo-Rubio and Sosvilla-Rivero (1994), based on their analysis of FDI
in Spain could not successfully link the exchange and the exchange rate as dependent
of each other. Again, Wang and Swain(1995) used the exchange rate as a variable
in their analysis, but failed to establish a connection between the exchange rate and
FDI. Yang et al. (2000) could not find a significant relationship between the effective
exchange rate of the Australian Dollar and inflows of FDI. Thus, the fact whether the
exchange rate affects FDI and cross border mergers and acquisitions for that matter
may be debatable.
Conclusion
The gains from mergers and acquisitions, whether domestic or cross border, is
influenced by many factors. These factors, when considered along with the strength of
the domestic currency can give a broader picture that can influence the decisions of
acquirers. The factors can be the domestic currency, method of payment, technique of
acquisition (merger deals, tender offers, divestiture and stock swaps), status of target
firms (whether listed or unlisted) and the industry of operation of the acquiring and
target firms. The effective exchange rate of a currency takes into account the status
of balance of trade of the country concerned. This value also determines the cost of
import for other countries purchasing goods from the country under consideration. A
high value of the effective exchange rate, on the other hand, implies that the country
concerned has a favourable balance of trade situation. Also, the benefits from imports
are higher as foreign countries that purchase its domestic goods are willing to pay a
high value. But to capture the changes effectively, the time period should be adequately
long so that it can take into account the effects of a fluctuating domestic currency.
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About the Authors

Meghna Sharma is an Independent researcher in Economics and Finance and
works as a development sector professional and can be reached at:meghna.sharma210@
gmail.com
34
Financial Crisis and the Performance of

Commercial Banks: Indian Experience
G Ramakrishna, M Ramulu and B Praveen Kumar
The present study is an attempt to evaluate the performance of commercial banks of

India during 2002--2013, its post liberalization period, involving the period before and
after financial crisis of 2008. The study used different indicators such as deposits,
advances, expenditure, income, profitability, capital adequacy, NPA etc. for this purpose.
An attempt is made to study the efficiency of group wise commercial banks before
and after the financial crisis using panel data. Assuming variable returns to scale, the
DEA - non parametric Malmquist indices of total factor productivity (TFP) have been
computed; and the total factor productivity is decomposed into technical efficiency
and technological change and technical efficiency change is further decomposed
into pure efficiency change and scale efficiency change. Based on various indicators
we find mixed evidence on the performance of banks after the financial crisis. The
DEA analysis suggests that Indian banks are impacted in terms of declining efficiency
during financial crisis but got recovered during the post crisis. Technical efficiency
scores increased after the crisis and the pattern of efficiency scores predicted by
DEA is U-shaped for the study period. The scale efficiency of public sector banks and
technical efficiency of private commercial banks have increased after the financial
crisis.
Keywords: Commercial Banks of India, Financial Crisis, Performance, Panel Data,

VRS, Malmquist Index
Introduction
The objective of this paper is to evaluate the performance of the banks in India during
2002--2013, using different performance indicators such as deposits, advances,

expenditure, profitability, and capital adequacy, NPA etc. before and after the financial
crisis of 2008. An attempt is also made to assess the efficiency of the commercial
banks during this period using nonparametric Malmquist DEA approach. The
reason for choosing 2002-2013 as study period is that, during this period banking
sector witnessed both robust growth and also got impacted by economic slowdown
due to global financial crisis of 2008. A lot of literature and debate has gone
35
into the subject of efficiency and productivity of Indian banking sector (see Jayaraman
and Srinivasan, 2014).
A sound financial system is crucial for an indispensable and vibrant economy. Thus,
the performance of any economy to a large extent is dependent on the performance
of the banking sector as it being the predominant component of the financial service
industry. The Indian banking sector went through structural changes since its
independence keeping in view its financial linkages with the rest of the economy and
to meet the social and economic objectives of development (Kumbhakar and Sarkar,
2005). Consequently, the sector was initially following strict controls on interest rates,
as well as stringent regulations relating to branch licensing, directed credit programs,
and mergers. However, the closed and strict regulated environment started showing
adverse affect on the sector, resulting in under-performance of the banks over the
years. As a result, Indian banking sector underwent a sea of changes through its
liberalization policy in early 1990s with implementation of a series of reforms with an
objective to make the banking sector more productive and efficient by limiting the state
intervention and enhancing the role of market forces.
Like most developing countries, the banking sector in India is characterized by the
co-existence of different ownership groups, viz, public and private, and within private,
domestic and foreign. The Indian public sector banks (PSBs) came into existence in
several phases. In 1955, the Government of India took over the ownership of the Imperial
Bank of India and reconstituted it as State Bank of India (SBI) under the State Bank
of India Act of 1955. Later, the State Bank of India (subsidiary banks) Act was passed
in 1959 allowing SBI to take over seven banks of large states as its associate banks.
However, in spite the progress made of SBI and its subsidiaries in terms of geographic
coverage and credit expansion, it was felt that bank credits were flowing mainly to the
large and well established business firms and primary sectors such as agriculture and
small scale industries were almost neglected. This resulted in an announcement of
policy of social control over banks in 1969 and consequently fourteen largest private
banks were nationalized under the Nationalization Act 1969. In the second phase of
nationalization, another six private banks were nationalized in 1980. The private and
foreign banks were operating side-by-side, but on a relatively small scale and their
activities were restricted through entry regulation and strict branch licensing policies.
During the period of 1969-1991, the number of banks increased slightly, but savings
were successfully mobilized in part because the number of branches held by public
sector banks was encouraged to expand rapidly. Further, relatively low inflation kept
negative real deposit interest rates at a mild level, which in turn helped the banks
to increase deposits. However, many banks remained unprofitable, inefficient, and
unsound owing to their poor lending strategy and lack of internal risk management
under government ownership. The prolonged presence of excessively large PSBs
resulted in inefficient resource allocation and concentration of power in a few banks.
Facing major economic crisis, the Reserve bank of India (RBI) launched major banking
sector reforms in 1991 aimed at creating a more profitable, efficient and sound
36
Financial Crisis and the Performance of Commercial Banks: Indian Experience
banking system, based on the recommendations of the first Narasimham committee

on financial sector reforms. The reforms sought to improve the bank efficiency through
entry regulation, branch de-licensing, deregulation of interest rate, and diversifying
ownership of PSBs by enabling the state-owned banks to rise up to 49 per cent of
their capital from the market. The reforms also targeted at improving bank profitability
through the gradual reduction of the Cash Reserve Ratio (CRR) and the Statutory
Liquidity Ratio (SLR), and to strengthen the banking system by introducing the micro
prudential measures (see Bhide et al., 2001; Reddy, 2006; Prasad and Ghosh, 2007;
and Kumar and Charles, 2011 for extensive review of the recent banking sector
reform). These reforms are expected to have an impact on the operations of banks.
With reduced statutory requirements banks will have more funds at their disposal for
commercial lending and the interest rate liberalization is expected to bring flexibility and
competition into the banking system. The competition is further infused by opening up
banking sector for the private and foreign banks. Along with these flexibilities, certain
regulatory reforms are also introduced, which are meant to equip the banks to face
fluctuations in the economy.
However, the turmoil in the international financial markets of advanced economies that
started around mid-2007 has exacerbated substantially since August 2008. The first
hint of the trouble came from the collapse of two Bear Stearns hedge funds in early
2007 (Prasad and Reddy, 2009). Subsequently a number of other banks and financial
institutions also began to show signs of distress. Matters really came to the force with
the bankruptcy of Lehman Brothers, a big investment bank, in September 2008. In
spite of the fact that Indian banking system is not directly exposed to the sub-prime
mortgage assets, the shock has been felt in Indian financial market as well, since India
is far more exposed to international markets after macro-economic reforms of 1991.
The financial sector, especially banks, is subject to prudential regulations, both in
regard to capital and liquidity. As the current global financial crisis has shown, liquidity
risks can increase manifold during a crisis and can pose serious downside risks to
macroeconomic and financial stability (Mohan, 2008). The RBIs policy response aimed
at containing the contagion from the outside in order to keep the domestic money and
credit markets functioning normally and see that the liquidity stress does not trigger
solvency cascades (Subbarao, 2009). In particular, three objectives were targeted:
first, to maintain a comfortable rupee liquidity position; second, to augment foreign
exchange liquidity; and third, to maintain a policy framework that would keep credit
delivery on track so as to arrest the moderation in growth. Available empirical studies
on the impact of financial crisis on the performance of banks in India provide mixed and
sometimes conflicting evidence due to the use of different methodologies, time periods
and variables. There is a need to provide a comprehensive and methodologically
superior procedure in evaluating the performance of Scheduled Commercial Banks
in India. This paper is an attempt in this direction and organized into five sections:
The next section deals with literature review relevant for the present work. The third
section is on materials and methods used in the study. Section four is on empirical
findings and the discussion of the results. The final section comes out with summary
and conclusion.
37
Review of Literature
A strong banking sector effectively channels funds from savers to investors by
efficiently performing the function of financial intermediation. Moreover, it also
leads to what is commonly known as credit creation through the process of money
multiplier. Therefore, the sound performance of banking sector is of utmost importance
to economic development. Traditionally, the performance and efficacy of banking
institutions is measured by nancial ratios, but this approach has a major demerit in
terms of its subjectivity and reliance on benchmarking ratios (Yeh, 1996). Sherman and
Gold (1985) initiated the frontier analysis approach to bank performance assessment.
They argued for the application of frontier analysis techniques in bank performance
evaluation instead of nancial ratios and other traditional nancial measures.
Over the past several years, substantial research efforts have gone into measuring the
efficiency of commercial banks using frontier efficiency measurement techniques like
Stochastic Frontier Analysis, Data Envelopment Analysis, Thick Frontier Analysis, etc.
However, earlier studies of the banking efficiency literature were mainly confined to the
banking system of US and other well developed European countries (1993a; Berger
and Humphrey, 1997; Berger and Mester, 1997). Berger and Humphrey (1997) in
their extensive international literature survey documented 130 studies on efficiency of
financial institutions covering 21 countries. However, only about 5% studies examined
the efficiency of banks in the developing countries. Thus, a lop-sided distribution of
the studies in favor of industrially advanced countries was confirmed by the existing
surveys on the subject matter.
To get rid of financial repression which existed until 1980s, emerging market
economies embarked upon the process of financial deregulation and liberalization of
the banking sector. The deregulation policies aimed at eliminating government control
and intervention, enhancing competition, improving resource allocation and acquiring
more efficient financial institutions, by making them less state-directed and by exposing
them to increased market competition (Barajas et al, 2000). Consequently, there has
been a proliferation of research studies on examining the impact of deregulation and
liberalization on the efficiency and productivity of the banking system. Notable studies
which reported a positive impact of deregulation on the efficiency and productivity of
banks are Berg et al. (1992) for Norway; Zaim (1995), Isik and Hassan (2002), Isik
(2007) for Turkey; Maghyereh (2004) for Jordan; Barajas et al. (2000) for Colombia;
Leightner and Lovell (1998), Xiapong et al. (2005), Burki and Naizi (2010) for Pakistan.
In contrast to aforementioned studies, there are some studies which reported a negative
or insignificant effect of deregulatory measures on the efficiency and productivity

of banks. Some prominent studies in this context are Humphrey (1991), Humphrey
(1993), Humphrey and Pulley (1997), Grabowski et al. (1994), Elyasiani and Mehdian
(1995), Wheelock and Wilson (1999), Lozano-Vivas (1998) for Spain; Kumbhakar and
Wang (2007), Ariff and Can (2008) and Fu and Heffernan (2009) for China;
Overall, there is no consensus about the impact of deregulation on the efficiency of
banks across different economies. In some countries, the banking sector is benefited
38
from deregulation and liberalization policies, whereas in others, the efficiency

performance of banks seemed not to be affected or deteriorated. However, majority
studies (about 67%) conclude that deregulation and liberalization have had a positive
effect on the banks performance. That is, banks tend to respond positively to more
liberal environment, and banks efficiency and productivity improved significantly during
and post-deregulation period. Other studies (about 33%) conclude that deregulation
has deteriorated the efficiency performance of banks. Thus, the consequences
of deregulation and liberalization differ across countries due to differences in their
economic environment.
The literature concerning bank efficiency in India shows that good number of studies
has assessed the impact of transition from regulation to competition on the efficiency
and productivity of banks. The most of the literature on the effect of deregulation and
liberalization on Indian banking industry portraits a positive impact of deregulatory
policies on the efficiency of Indian banks. The studies of Bhattacharyya et al. (1997),
Shirai (2001), Shanmugam and Das (2004),Reddy (2006),Bhide (2008), Ray and Das
(2010), Ramathilagam and Preethi (2010) broadly concluded that the deregulatory
policy regime has had a positive and favorable impact in terms of efficiency
improvement.
In Indian context too, though the majority of studies portrayed a positive impact of
deregulation and liberalization policies on the efficiency and productivity of Indian banks
yet a few studies also reported an adverse or insignificant effect of these policies on
the performance of banks. The studies that reported either an adverse or insignificant
effect of deregulation on the performance of Indian banks include Kumbhakar and
Sarkar (2005), Galagedera and Edirisuriya (2005), Das and Ghosh (2006), Sanjeev
(2006), Sensarma (2005 and 2008), Kalluru and Bhat (2009), Ramathilagam and
Chanchu (2009). Thus, the review of the studies pertaining to Indian banking industry
also yield the mixed results. In all 33 studies that have been reviewed, of which 25
studies concluded that deregulation has improved the efficiency of Indian banks.
However, only 8 studies have provided an evidence of insignificant or adverse effect
of deregulation on the efficiency of the banks.
A number of studies have been conducted to study the background causes and impact
of the 2007 financial crisis. Whalen (2008), Myers an Sendanyoye (2009) reviewed the
background and causes of the financial crisis and effect of the financial crisis. Fratianni
and Marchionne (2009) illustrates the role of banks in the subprime crisis, what actions
they have taken in reducing leverage, and how security markets have penalized bank
equity. The weakness that are unique to the financial crisis of 2007 were the transfer
of assets from the balance sheets of banks to the markets, the creation of complex
and opaque assets, the failure of ratings agencies to properly assess the risk of such
assets, and the application of fair value accounting. Vidyakala and Madhuvanthi
(2009) explain that the prudential norms adopted by the Indian banking system and
the better regulatory framework in the country have helped the banking system remain
stronger even during the global meltdown. The banking industry is indirectly affected
39
due to the decrease in exports and drying up of overseas financing. The Indian banks
do not have big exposures to subprime market and thus the impact recession on the
Indian Banking sector was very small. Thus, empirical evidence largely concludes
that liberalization had a positive impact on productivity of Indian banks while a study
of Indian banks pre and post global crisis reveals that Indian banks have not been
materially impacted due to the crisis. An effort is made in this study to provide evidence
on the impact of financial crisis of 2008 on the performance of group wise commercial
banks in India using simple indicators and the recently developed Malmquist index of
efficiency.
Materials and Methods

The basic source for the data collection is the Reserve Bank of India. The study period
considered for the empirical analysis is 2002 to 2013. The study period is subdivided
in to two sub periods, viz., 2002-2007 and 2008-2013. The data on variables such
as deposits, advances, etc. for individual banks have been collected for this period.
There are several ways of measuring performance of financial institutions but there
is no generally accepted best method (Frimpong, 2010). Researchers use financial
ratios such as return on equity (ROE) and return on assets (ROA) and also advanced
methods such as parametric and nonparametric approaches (Erasmus and Makina,
2014). As to what approach best suits is still an unresolved question though the
DEA approach pioneered by Farrell (1957) is increasingly being preferred by several
authors. We use the combination of these methods in evaluating the performance
of commercial banks in India. A simple descriptive analysis has been used to study
the performance of the scheduled commercial banks before and after financial crisis.
In addition, using the panel data for the study period, the non parametric Malmquist
indices of efficiency are computed within the DEA framework. The details of DEA are
as follows:
Measuring Efficiency
Efficiency measurements can either be input or output oriented. Input oriented
measures focus on the extent inputs can be reduced for a bank to be there on the
efficient frontier. Output oriented efficient measures focus on output expansion using
the available inputs for the bank to be efficient. The present study is based on output
oriented efficiency of the banks. Three variables have been used as outputs: loans and
advances, interest income and total investment and two variables i.e. Deposits and the
number of Employees have been used as inputs. Efficiency has been decomposed
into technical and allocative efficiency and their product implies productive efficiency
(Farell, 1957). The firms which are technically efficient can produce on the production
frontier and the inefficient ones produce below the frontier (Coelli, 1995). The allocative
efficiency measures deviation from optimal production levels given the prices of inputs
and outputs.
40
Data Envelopment Analysis (DEA)

Following Coelli (1995) we have started with the constant returns to scale input
oriented DEA. The specification is based on data for inputs and outputs of
decision making units (DMU).These are represented by vectors, and respectively
for each bank.
The empirical question is that of finding the values of and such that the efficiency
measure of each bank is maximized subject to the constraint that all efficiency
measures must be less than or equal to one (Macochekanwa and Apani,2016).
The CRS DEA model has been extended to incorporate variable returns to scale (VRS
under the assumption that perfect competition does not exist in banking industry). The
VRS DEA (using linear programming duality) is represented as follows:
Where is a vector of unit values. The specification provides scores which are
less than or equal to those obtained using the CRS model.
In the panel data framework, DEA-like linear programs and a Malmquist total factor
productivity (TFP) index are used to measure productivity change. The productivity
change will be decomposed into technical change and technical efficiency change.
According to Grifell-Tatje and Lovell (1996), the Malmquist indexes have three main
advantages relative to the Fisher and Tornqvist indices. Firstly, it does not require the
profit maximization, or cost minimization assumption. Secondly, it does not require
information on the input and output prices. Finally, if researcher has panel data, it allows
the decomposition of productivity changes into two components (technical efficiency
change, and technical change or changes in the best practice).Its main disadvantage
is the necessity to compute the distance functions. However, the Data Envelopment
Analysis can be used to solve this problem. Following Fare et al. (1994) the Malmquist
(output oriented) TFP change index The Malmquist TFP index calculates the change
in productivity between two points by estimating the ration of the distances of each
point relative to a common technology. Fare et al (1994) specified the following output
based Malmquist productivity index that is employed in this study.
41
Equation 3 expresses the productivity of the production point relative to the
production point . The predicted values greater than 1 indicate positive growth
in productivity between the period and period +1. The above index is a geometric
mean of two output-based Malmquist TFP indices. One of the two indices uses the
period technology while the other uses the period +1 technology (Macochekanwa
and Apani, 2016).
Findings and Discussion of the Results

Commercial banks in India constitute the largest segment of the Indian financial
system and were predominantly government owned till the early 1990s. The number
of banks considered for this study is 48 that include the scheduled commercial banks
(SCBs) which are grouped into: public sector banks comprising State Bank of India
and its associates (6), nationalized banks (20), and private sector banks (22). The
banking system in India had undergone a metamorphic change with the introduction of
the first phase of reform in 1991. The objective of early phase of reform was to create
an efficient, productive and profitable financial service industry operating within the
environment of operating flexibility and functional autonomy. The focus of the second
phase of financial sector reforms in 1998 was strengthening of the financial system and
introduction of structural improvements with an aim to align Indian banking standards
with the internationally recognized best practices. These reforms promoted diversified,
efficient and competitive banking system in India. The operational flexibility resulted
in a strong balance sheet growth of the banks during this period. One of the major
objectives of banking sector reforms is to enhance efficiency and productivity through
enhanced competition. The reform process established a competitive banking system
in India driven by market forces and it is evident from considerable reduction in interest
spread during the reform period as well as change in business strategy like non fund
based business, treasury and foreign exchange business. Also, greater emphasis on
income and expenditure management during the reform period resulted in a general
reduction in operating expenditure as a proportion of total assets in spite of large
expenditure incurred on technology upgradation and voluntary retirement of staff. A
key achievement of banking sector reform has been the sharp improvement in the
financial health of banks which reflect in significant improvement in capital adequacy
and improved asset quality (Mohan, 2005). Prior to the global financial crisis i.e. during
2005-2008, the business and financial performance of banks in India was underpinned
by strong macroeconomic environment and supporting monetary and financial policies.
SCBs exhibited robust growth in terms of aggregate deposits and gross bank credit
with improved asset quality and profitability. The effect of global financial crisis was
quite visible in Indian banking industry during 2009-2010. Though, the banking industry
withstood this test by adopting counter-cyclical prudential regulations framework during
credit boom and slowdown period, it was not completely insulated from the effects of
the financial crisis. This is evident from decelerated growth of aggregate deposits,
loans & advances, net profits and a sharp increase in provisions and contingencies
during this period. In 2011, banks in India experienced another test due to challenging
operational environment like high interest rates, tight liquidity conditions and high
42
inflation. Consequently, the major concern in 2012 is deterioration of asset quality and
growing NPAs. Below follows the discussion on a few key performance indicators of
SCBs before and after the emergence of financial crisis:
Deposits and Advances

Deposits and advances constitute the liability as well as asset side of the banking
sector. While deposits are the source of funds or the resources for the banking sector,
advances indicate the use of funds or the deployment of funds. Thus, it is amply
evident that both asset and liabilities side of the balance sheet is intimately interlinked
as evolution of one depends on the other.
Table-1: Bank Group Wise deposits & Advances
Advances Deposits
Bank group Total Total Total Total
CAGR CAGR CAGR CAGR
2002-07 2008-13 2002-07 2008-13
(2002-07) 2008-13 (2002-07) 2008-13
(US $bn) (US $bn) (US $bn) (US $bn)
1 Nationalized Banks 731 25.91 2758 22.03 1193 18.13 3741 15.77
2 SBI& Associates 352 25.98 1225 20.86 516 13.40 1533 11.90
3 Private sector banks 274 33.04 994 19.40 347 32.36 1242 15.19
Total 1357 27.08 4978 21.18 2056 19.02 6517 14.71
Note: CAGR= Compound annual growth rate, Source: RBI
For the sake of uniformity, we have considered the six year period 2002-07 before the
crisis and 2008-13 coinciding with and post the crisis. It is evident from the above table
that both the asset and the liability side of the balance sheet shows a declining trend
post the global financial crisis. For instance, on the liability side, there is a declining
trend across bank groups. The decline in deposit growth calculated on a compounded
basis during the six year period was the sharpest for the private sector banks. The
6 year CAGR in deposit growth declined from 32.36% during the pre-crisis period to
15.19% post the crisis, a decline by more than half. We can explain this phenomenon
by the fact that after the global financial crisis, the confidence in public sector banks
increased since they came to be regarded as safer compared to their private sector
counterparts. Coming to advances, or the deployment of funds, we observe a similar
result. For all banks put together, advances declined on a compounded basis from
27% before the crisis to 21% post the 2008 crisis. The decline has been a common
phenomenon across bank groups but it was steepest for private sector banks from
33% before the crisis to 19% post crisis period. It is also pertinent to note that the
rate of decline is on similar lines to that of deposit growth decline. Hence, it may
be concluded that the decline in credit growth across bank groups post the global
financial crisis was due to the decline in deposit growth. Again, the decline in advances
growth was the sharpest for private sector banks since deposit growth was lowest
among these groups.
Credit Deposit Ratio

This is a useful tool in understanding the relationship between deposits and credit.
Usually, after meeting Statutory Liquidity Ratio (the portion of deposits banks are
43
mandated to invest in Government Securities) of, say, 24% and Cash Reserve Ratio
(the portion of deposits banks are mandated to invest with RBI) of 4% only 72% is
available for lending and ideally; the Credit Deposit ratio (CD ratio) must be 72%.
Here, we try to map the movement in CD ratio of bank groups.
Table-2: Credit Deposit Ratio across bank groups
Incremental Incremental
CD ratio CD ratio CD ratio CD ratio
Bank group CD ratio 2007 CD ratio 2013
range 2002 range 2007 range 2008 range 2013
over 2002 over 2008
1 Nationalized Banks 34.79-64.29 59.61-144.09 59.30-112.62 67.67-86.43 86.62 77.22
2 SBI& Associates 44.65-62.24 67.73-77.46 71.54-79.59 78.87-86.94 114.33 92.15
3 Private sector banks 42.32-110.61 55.30-89.70 53.20-94.69 61.04-99.19 75.48 87.15
Total 37.94-146.59 52.74-144.09 53.20-112.62 61.04-99.19 88.99 82.27
Source: RBI
The absolute ratio or the credit deposit ratio leads us to infer an overall increase
over the post crisis period. This might lead us to an erroneous conclusion that credit
demand has gone up and banks were engaged in higher leverage since a higher
CD ratio implies over leverage and, perhaps, higher borrowings to fund credit growth
(since CD ratio of more than 72%, after SLR and CRR implies borrowings to fund credit
growth). However, a more meaningful measure, the incremental credit deposit ratio,
provides a realistic to picture. This ratio shows a decline across bank groups except
for private sector banks (this group shows an increase from 75.48% to 87.15%). The
decline in incremental CD ratio buttresses the fact that post crisis, there is a general
deceleration. It needs to be further clarified that credit growth is showing a sharp
decline since 2013 due to sluggish domestic growth. The rise in incremental CD ratio
in the case of private sector banks merits an explanation. In this case, we can attribute
some leverage effect. Historically, private sector banks have been borrowers in the
money market through call, CBLO (collateralized Borrowijg and Lending Obligation)
and notice money markets while public sector banks are lenders. Thus, we can safely
assume that higher incremental CD ratio for private sector players is a result of higher
borrowings.
Total income & Total expenses
Table-3: Income & expenditure

Income Expenditure

CAGR CAGR CAGR CAGR
2002-07 2008-13 2002-07 2008-13
(2002-07) 2008-13 (2002-07) 2008-13
1 Nationalized Banks 121 12.47 369 22.47 109 11.40 264 20.14
2 SBI& Associates 66 8.03 167 19.91 60 7.33 130 16.92
3 Private sector banks 44 30.78 165 19.75 37 26.36 110 13.14
Total 232 14.20 701 21.18 206 12.61 504 17.85
44
The table above provides useful insights about income and expenditure. It may be is
observed that total income has registered growth across nationalized banks and state
bank group during the post crisis period (2008-13 relative to 2002-07) while there was
a decline in income growth for the private sector banks. The low income growth for
private sector banks is due to a sharp decline in credit growth for this bank group from
33% during pre crisis period to 19% during the post crisis period as shown in Table-1.
Though nationalized banks and state bank group also showed a decline in credit
growth, it was not very sharp and the rise in income should lead us to believe that
public sector banks showed higher income growth due to higher yield on advances by
virtue of more exposure to SME and retail portfolio.
Ovn the expenditure side, however, public sector banks have shown higher growth
rate over the period 2008-13 compared to 2002-07 while the private sector banks
have shown a sharp decline. This is also attributed to the fact that deposit growth was
sluggish for private sector banks post the 2008 crisis since the inherent safety of PSBs
were given a premium while parking their funds by the general public and corporates.
Lower deposit growth implies lower expenditure and hence slowdown in expenditure
growth for private sector banks.
Profitability
Table-4: Operating Profit & net profit
Operating profit Net profit
CAGR CAGR CAGR CAGR
2002-07 2008-13 2002-07 2008-13
(2002-07) 2008-13 (2002-07) 2008-13
1 Nationalized Banks(20) 46 18.00 77 21.69 13 23.79 36 14.90
2 SBI& Associates(6) 69 12.01 35 20.09 22 22.22 73 15.44
3 Private sector banks(22) 6 44.47 30 25.15 5 32.82 22 26.94
Total (48) 121 18.83 142 22.03 39 23.85 131 17.32
Operating and net profit of the banks also present a similar picture. Operating profit
growth in compounded terms increased for public sector banks while it declined for
private sector banks. The decline in operating profit growth for private sector banks
was obvious since advances growth was also on the decline for these banks post
crisis period. For All Banks as a whole, however, operating profit showed an increase
in compounded terms. However, there is a reversal of the trend seen in operating profit
in the case of net profit. Net profit of public sector banks witnessed a sharp decline
post crisis phase while the decline was less steep for private banks. Growth in net
profit was also higher for private sector banks. This is explained by higher incidence
of asset quality issues post crisis period. This happened through the growth channel.
Countries affected adversely post the 2008 meltdown never recovered fully, leading to
muted growth in these economies. It had a spillover effect on India through the export
and trade channels. Hence, the crisis contributed to slowdown in Indian economy
(though domestic factors like high inflation were also responsible for lower growth).
Lower growth directly affects corporates resulting in bank loans turning bad, potentially
45
resulting in asset quality issues. This led to rising Non-performing Assets in banks and
necessitated more provisioning. Higher provisioning has resulted in lower net profit
(net profit = operating profit provisions).
Asset Quality
Table-5: Gross NPA & Net NPA
GNPA Net NPA
GNPA GNPA
Bank group Total Total
total CAGR Total CAGR CAGR CAGR
2002-07 2008-13
2002-07 (2002-07) 2008-13 2008-13 (2002-07) 2008-18
(US $bn) (US $bn)
(US $bn) (US $bn)
1 Nationalized Banks(20) 42 40.58 66 66.28 17 33.19 35 78.20
2 SBI& Associates(6) 20 37.64 43 68.56 9 37.01 21 63.96
3 Private sector banks(22) 10 33.14 23 53.44 5 53.69 7 45.70
Total (48) 72 38.60 132 64.49 30 36.50 62 67.21
Predictably, the Gross Non Performing Assets of the banking industry have increased
post crisis period from 38.60% on a compounded basis to 64.49%. Net NPA also
showed a similar increase from 36.5% to 67.2%. As stated earlier, since Indian economy
was adversely affected through the export channel, lower growth meant lower capacity
utilization by corporates, adversely impacting their repayment capacity of bank loans.
Higher gross NPAs necessitated more provisioning and hence net NPAs also widened
further. The increase was more pronounced for public sector banks and asset quality
issues continue even now. As per estimates, total gross NPAs in the Indian banking
system at the end of March 2014 amounted to INR 2.43 lakh crores, leading to a Gross
NPA ratio of 4.5%.
Key Ratios
Table-6: Gross NPA% & Return on Assets
Gross NPA % Gross NPA% Return on Assets Return on Assets
Bank group
range 2007 range 2013 range 2007 range 2013
1 Nationalized Banks(20) 2.70 3.24 0.96 0.71
2 SBI& Associates(6) 2.10 3.78 0.93 0.81
3 Private sector banks(22) 3.32 2.00 0.94 1.29
Total (48) 2.73 3.00 0.94 0.94
Source: RBI
The table shows that while gross NPA ratio has increased across the banking industry,
return on Assets has remained same on an average. However, it is pertinent that
while the asset quality of PSBs declined during the post crisis period, it has improved
for private sector banks. Naturally, asset quality is a function of economy as well as
quantum of advances. Since PSBs have a higher volume of advances, they bore the
brunt of the post crisis period which was also a recessionary phase with a deep crisis
engulfing the Euro Zone while the U.S continued to suffer from the trauma inflicted
during the crisis period.
46
Return on Assets is the ratio of net profit to average assets. This metric worsened for
PSBs due to asset quality issues since it led to lower net profits. Higher delinquency
implies more provisioning and lower net profits. However, for private sector banks,
asset quality was better since their volume of advances was lower. As a corollary, they
had to incur comparatively lower provisioning leading to better return on Assets.
Key Ratio Capital Efficiency & Margins
Table-6: Capital Adequacy Ratio and Net Interest Margin

Bank group CRAR Avg 2007 CRAR avg 2013 NIM Avg 2007 NIM Avg 2013
1 Nationalized Banks(20) 12.29 12.19 2.60 2.40
2 SBI& Associates(6) 12.45 12.23 2.57 2.51
3 Private sector banks(22) 13.55 14.61 2.70 3.03
Total (48) 12.76 13.01 2.62 2.65
Note: CAGR= Compound annual growth rate, Source::RBI
Capital Adequacy Ratio (CAR) measures the efficient use of capital by banks. This is
the ratio of capital to risk weighted assets. On this count, we observe that for Public
Sector Banks and SBI & Associates, CAR has declined during the post crisis phase
over the previous period. This is due to higher asset quality issues and lower net profit,
which reduced the amount of profit that is ploughed back to capital. Since private
sector banks had lower asset quality issues, they had higher net profits and in turn
better capital adequacy ratios. For PSBs, however, there is an urgent need to shore up
their capital base since they have to meet Basel-III capital adequacy norms which kick
in from April 2019. Various instruments such as Basel-III bonds have come into forces
which are being deployed by PSBs to raise capital. GOI has also decided to reduce
their stake in PSBs to 52% which will provide further headroom to raise capital. On the
margin front, predictably, private banks showed better margins relative to public sector
banks. A major reason for better margins for private sector banks post crisis is their
lower asset quality and improvement in their share of low cost deposits since private
banks have bulk of corporate salary accounts. Saddled with higher NPAs, public sector
banks faced lower margins.
Efficiency scores from DEA

Technical efficiency scores have been estimated under the assumption of variable
returns to scale. The results are presented in Table 7. SBI and associates were given
the score of 1 implying that it lied on the frontier and other banks performance was
rated relative to its performance. Relative to the frontier bank, other banks mean
efficiency scores ranged between 0.521 and 0.0.543. The mean efficient score for all
the three groups was 0.469. This implies that on average banks can increase their
performance by 53% without increasing inputs. Except for private banks all other
banks have shown an increase in the efficiency.
47
Table-7: Efficiency Scores
Bank 2002 2008 2013 Bank Mean
SBI and Associates 1.00 1.000 1.000 1.000
Nationalized Banks 0.550 0.538 0.562 0.552
Private Banks 0.620 0.611 0.630 0.621
All banks 0.662 0.652 0.701 0.678
Mean 0.720 0.716 0.730
Source: Computed using DEAP software
The annual efficiency mean scores of all banks have increased over time, though there
was some decline during financial crisis period. The other banks efficiency ranged
from 0.552 to 0.621. For all banks, technical efficiency scores remained stable at
0.662 in 2002 to 0.678 in 2013. However, there was some decline during 2008. Thus,
the pattern of efficiency scores predicted by DEA appears to be U-shaped overtime.
Decomposition of efficiency scores

The use of panel data enabled us the calculation of Malmquist Indices and the
decomposition of productivity change into technical efficiency and technological
change. The technical efficiency was further decomposed into pure technical efficiency
and scale efficiency.
Table-8: Malmquist Index Summary of Means
Efficiency Technological Pure efficiency Scale efficiency Total factor
Bank
change change change change productivity change
SBI and Associates 1.020 0.980 0.980 1.053 1.020
Nationalized Banks 1.015 0.984 0.976 1.050 1.018
Private Banks 1.020 1.020 0.980 0.950 1.020
Mean 1.017 0.994 0.978 1.017 1.019
Table-9: Malmquist Index Summary of Annual Means

Efficiency Technological Pure efficiency Scale efficiency Total factor
Year
change change change change productivity change
2002 1.030 0.981 1.030 1.102 1.126
2008 1.126 0.882 1.020 1.145 1.100
2013 0.946 1.021 0.940 1.007 1.104
Mean 1.034 0.961 0.996 1.084 1.018
Table-8 indicates that there was minimal growth in total factor productivity for the
banks averaging 2%. The mean growth in total productivity is 2%. This was mainly
accumulated through improvement in efficiency as technological progress across
banks was on regress of an average 0.6%. Decomposition of technical efficiency
shows that pure efficiency was on regress across banks and scale efficiency was the
driver of technical change.
48
The summary of annual means indicated that total factor productivity improved by
12.6% between 2002 and 2013 before marginally increasing by 4.6% between 2008
and 2013. Between 2002 and 2007, total factor productivity regressed by an average
of 4%. Overall, total factor productivity change improved by a mean of 2% largely
driven by changes in technical efficiency. However, scale efficiency was the driver of
the growth in total factor productivity over the years compared to pure efficiency.
Overall, the major finding of the research is that inefficiency exists among banks in
India Average mean efficiency score is 0.73. Thus, on average output can be increased
by 27% without increasing inputs. The results further pointed out that banks have not
gained much through growth in total factor productivity. Minimal growth in total factor
productivity of 2% in reported mainly driven by efficiency gains than technological
gains. Efficiency gains were driven by scale efficiency as compared to pure technical
efficiency growth.
Summary and Conclusion

The objective of this paper is to evaluate the performance of the banks in India during
2002--2013, using different indicators such as deposits, advances, expenditure,
revenue, profitability, and capital adequacy, NPA etc. before and after the financial
crisis of 2008. An attempt is also made to assess the efficiency of the commercial
banks during this period using DEA analysis. The reason for choosing 2002-2013 as
study period is that during this period, banking sector witnessed both robust growth
and also got impacted due to the economic slowdown due to global financial crisis
of 2008. Indian banking sector underwent a sea of changes through its liberalization
policy in early 1990s with implementation of a series of reforms with an objective to
make the banking sector more productive and efficient by limiting the state intervention
and enhancing the role of market forces. Like most developing countries, the banking
sector in India is characterized by the co-existence of different ownership groups, viz,
public and private, and within private, domestic and foreign. The empirical evidence
supports that Indian banks are impacted in terms of their performance and efficiency
during financial crisis but got recovered during the post crisis. However, based on
various performance indicators we find mixed evidence on the performance of banks
after the financial crisis. The details are presented below:
Both the asset and the liability side of the balance sheet of commercial banks
indicate a declining trend during the post global financial crisis period. The decline
in deposit growth is the sharpest for the private sector banks compared to public
sector banks indicating an improvement in the confidence in public sector banks

compared to the private banks.
There is a decline in credit growth across bank groups post global financial crisis
due to the decline in deposit growth. The decline in advances growth has been
sharpest for private sector banks.
49
The incremental credit deposit ratio has declined across bank groups except for
private sector banks. However, there has been rise in incremental CD ratio in the
case of private sector banks due to higher borrowings.
Nationalized banks and state bank group have shown a decline in credit growth.
However, there was an increasing trend in growth in total expenditure during 2008-
13 compared to 2002-07 while the private sector banks had a sharp decline.
Operating profit growth in compounded terms has increased for public sector banks
while it declined for private sector banks.
The Gross Non Performing Assets of the banking industry have increased post
crisis period. Net NPA also has shown a similar increase. However, the asset
quality of PSBs has declined during the post crisis period, but improved for private
sector banks.
Capital Adequacy Ratio of public sector banks has declined during the post crisis
period over the previous period and the private sector banks had lower asset quality
issues, they had higher net profits and in turn better capital adequacy ratios.
Relative to the frontier bank group, other banks mean efficiency scores ranged
between 0.538 and 0.0.701. The mean efficient score for all the three groups was
0.730. This implies that on average banks can increase their performance by 273%
without increasing inputs. Except for private banks all other banks have shown an
increase in the efficiency.
The summary of annual means indicated that total factor productivity improved
by 12.6% between 2002 and 2013 before marginally increasing by 4.6% between
2008 and 2013. Between 2002 and 2007, total factor productivity regressed by an
average of 4%. Overall, total factor productivity change improved by a mean of 2%
largely driven by changes in technical efficiency. However, scale efficiency was
the driver of the growth in total factor productivity over the years compared to pure
efficiency.
The important finding of the research is that inefficiency exists among banks in
India as average mean efficiency score is 0.763. Thus, on average output can be
increased by between 27% without increasing inputs.
The results further pointed out that banks have not gained much through growth
in total factor productivity. The minimal growth in total factor productivity that is
reported mainly driven by efficiency gains than technological gains. Efficiency gains
were driven by scale efficiency as compared to pure technical efficiency growth.

Acknowledgement: The authors wish to acknowledge the data support provided by
Madhavan Kutty, Bank of India, Mumbai, India.
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About the Authors

G Ramakrishna is Professor, Dept. of Public Financial Management, SGS, Ethiopian Civil
Service University, Addis Ababa, Ethiopia, E. Mail: profgrk@gmail.com
M Ramulu is Assistant Professor, Dept. of Economics, Osmania University, Hyderabad,

India
B Praveen Kumar is PhD Scholar, Dept. of Economics, Osmania University, Hyderabad,

India.
55
Forecasting portfolio value-at-risk via

DCC-MGARCH Model: Impact of Brexit on
Valuation of UK Pound and Indian Rupee
Rahul Sharma and Somesh K Mathur
In this paper, we will implement the DCC (Dynamic Conditional Correlational) MGARCH
model to forecast the VaR (Value at Risk) for a given portfolio. We have taken data on
the exchange rate of Indian rupee with US Dollars, Euro and British Pound. We will
try to predict the volatility from the DCC MGARCH model and see how Brexit have
affected the rates of return in terms of the Indian rupee. For our calculations, we have
assumed an equal weighted portfolio. At the end of paper, we will evaluate our model
performance by analyzing the forecast error using predictions failure and average
deviations between VAR and realized returns.
Keywords: DCC Model, Portfolio, VaR, Brexit, Forecast Error
Introduction
To evaluate the performance of a portfolio it is necessary to quantify the risk involved
with it. As a result, there is a need for risk management. One of the important technique
for solving this problem is to calculate the VaR (Value at risk). However, for evaluating
VaR, we are required to know the volatility in the rate of returns from a given collection
of assets. The information on volatility for a given collection of assets lies in the
variance-covariance matrix. This variance-covariance matrix can be forecasted using
MGARCH techniques. There are various MGARCH techniques like BEKK Model,
Vech Model, CCC Model, DCC models, among others to account for the variance-
covariance matrix. For this paper, our main focus will be to understand and implement
the DCC MGARCH model. The portfolio of interest in this paper will be the foreign
exchange rate of US dollars, British pound and Euro in terms of the Indian rupee. We
will see how Brexit have affected the risk involved with the above portfolio. Finally, we
will comment on the performance of the model by calculating the forecast error. The
idea of this paper mainly follows from the paper titled Estimating portfolio value-at-risk
via dynamic conditional correlation MGARCH model -an empirical study on foreign
exchange rates by Yuan-Hung Hsu Kua, and Jai Jen Wangb(2008).
56
Forecasting portfolio value-at-risk via DCC-MGARCH Model: Impact of Brexit on Valuation of UK Pound and Indian Rupee
Methodology
For the dataset, at first, we have to implement the ADF (Augmented Dickey-Fuller test)
to check whether there is the unit root problem. After this, we will evaluate the kurtosis
of the data-series involved to check whether the data distribution is leptokurtic. For
evaluating VaR we will implement the covariance based approach as used by JP
Morgan RiskMetrics (1996). The mathematical formula is as follows:
Here, we have assumed, C and C1- are the critical values of standard normal
distribution at percentile. w is the weight vector, here wi is the percentage invested
in the ith asset of the portfolio. Ht is the variance-covariance matrix. For the derivation
of above formula please refer to the Appendix below. We will estimate the variance-
covariance matrix with the help of DCC MGARCH model. In this way, we can estimate
the VaR associated with a portfolio. The performance of the model will be judged by
the number of prediction failure(NF) and the average deviation between VaR and
realized return (AD). The special feature of DCC model is that instead of modeling
conditional covariance directly, we will model conditional standard variance and
conditional correlations separately. The complete MGARCH model is as follows:
rt = t + at
at =Ht0.5 Zt
rt : log returns from assets at time t
at : random error vector
t : Expected value of rate of return of rt
Ht : Conditional variance of atat time t
zt : iid errors which are standardized

For our analysis, we will assume t is assumed to be constant. The conditional
covariance matrix is decomposed into conditional standard deviation and conditional
correlation matrix as follows:
Ht = DtRtDt
Here Dt is the matrix considering of standard deviation along the diagonal. These
conditional standard deviations are modeled separately from the correlation matrix. In
this paper, we will use the GARCH(1,1) to model the diagonal elements of the matrix
Dt. As we can see that Dt will always be positive definite hence we are not required
to imposed any specific restrictions on Dt. The standard deviations are modeled as
follows:
57
In the above equation, we have to impose the restriction that all coefficients should be
positive. We will focus our attention on the conditional correlation matrix Rt. For Ht to
be positive definite we have to impose restrictions on Rt to be positive definite. Define
t=Dt1at. We can easily show that Qt~ N(0,Rt). For Rt to be positive definite we will
again decompose it into three matrices as follows:
Rt = Qt*-1QtQt*-1

Here Qt= (1 a b) Q+at1tT1+bQt-1, where Q can be estimated by .
We will model Qt* using Garch(1,1) model in which we have to learn the coefficients
a and b. Note that here Qt is defined by the following matrix:
is the element of correlation matrix where . From

direct observation we can say that is a positive definite matrix. At last we are left
with the matrix . For making positive definite we will implement the following
conditions:
Further, we are required to set Q0 (Qt at t=0) as a positive definite matrix. The above
model is called as DCC(1,1) model. For this paper, we have taken n=3. In this way, by
setting the above constraints we have ensured that the conditional covariance matrix
is positive definite.
Empiric Strategy and Database

The exit of Britain from the European Union happened on 23rd June 2016. We have
taken data from Investing.com on the foreign exchange rate of Euro, Pound Sterling
and US dollars with respect to Indian rupee from June 2015 to November 2016. We
will forecast the value of VaR of our portfolio for the month of October. Finally, we will
compare the estimated VaR with real values so as to measure the effectiveness of the
model.
To evaluate the performance of the DCC MGARCH model, we will evaluate two values
here:
Prediction Failure: If |rt|> |Vart| then it is considered as a failure of the model at time t.
Average Deviation: For calculating the average deviation we will take all the cases
such that |rt|< |Vart| and will take the average of |rt -Vart|. The formula is as follows:
58
Expected Results
After the exit of Britain from the European Union, British Pound has become a risky
asset. Hence we expect that VaR (coupled with DCC MGARCH model) will show a
high-risk value for a portfolio in which percentage investment in the pound is more. For
this paper, we have taken 40 days period for our forecast analysis.
Results
We have calculated the mean, Variance, Kurtosis, Skewness, ADF test and Jarque
Bera Stat. The summary stats for the data are as follows:
Table 1: Basic Statistics of three Exchange Rates
US Dollars Euro British Pound
Mean 0.0001097148 5.51305310-05 -0.0004456023
Variance 1.038810-05 4.513 10-05 5.24 10-05
Kurtosis 3.46 6.23 33.08
Skewness 0.187 0.514 -2.881
ADF Test -6.54 -7.24 -7.06
Jarque Bera Stat 5.665 182.92 14938
Based on above summary statistics, we can say that there is no unit root problem
(ADF test), Also the Jarque Bera Stat is significant for all the three series implying
that data is nonnormal and there is a presence of outliers in the data(see kurtosis).
We also learn that the coefficients of DCC Garch model for the time period (June
2015 to September 2016). For implementing DCC Model we have used the rmgarch
package of R. The coefficients learned are tabulated in Table 2.
We have plotted the rate of returns observed from our portfolio from June 2015 to Nov
2016. As we can see that there is a sharp decrement in returns from Euro and British
pound due to Brexit. The graphs can be seen in the Appendix.
We have predicted volatility for 40 days (1st Oct-10th Nov,2016). For evaluating the
performance of our model we have used two criteria(Prediction Failure and Average
Deviation). Max Predicted VaR is the maximum VaR for the forecasting period (40
days). We have tried different combinations of portfolios to predict the VaR associated
with them. The portfolio is [Dollars, Euro, Pound]. The results are tabulated in Table 3.
Table 2: Estimated Coefficients for DCC MGARCH Model
Estimate Std. Error t value Pr(>|t|)

[USDollar].mu 0.000121 0.000163 0.745858 0.455753
[USDollar].omega 0.000001 0.000000 1.309403 0.190398
[USDollar].alpha1 0.076348 0.026945 2.833478 0.004604
[US Dollar].beta1 0.868163 0.021932 39.584513 0.000000
[Euro].mu 0.000160 0.000329 0.484139 0.628288
[Euro].omega 0.000000 0.000001 0.007531 0.993991
[Euro].alpha1 0.033171 0.022378 1.482335 0.138251
59
Estimate Std. Error t value Pr(>|t|)
[Euro].beta1 0.964028 0.021568 44.697637 0.000000
[Pound].mu -0.000139 0.000314 -0.442391 0.658206
[Pound].omega 0.000003 0.000005 0.549419 0.582718
[Pound].alpha1 0.281635 0.137780 2.044092 0.040944
[Pound].beta1 0.712063 0.052788 13.489004 0.000000
a 0.034196 0.011447 2.987369 0.002814
b 0.934594 0.026267 35.58065 0.000000
In Table 2 the expected value for all the exchange rates ([USDollar].mu, [Euro].mu,
[Pound].mu) are insignificant having very high p values. The DCC coefficients (A & B)
are both significant indicating that DCC MGARCH model fits the data well. Using these
estimated coefficients learned on the basis of trained data (June 2015 to September
2016) we will forecast the volatility for 40 days (Oct 2016 to 10 Nov 2016).
In Table 3 we have predicted the Value at Risk for various portfolios for 40 days (
Oct 2016 to 10 Nov 2016). We have predicted the maximum value at risk over a
period of 40 days (Column 2 of Table 3). Prediction Failure(Column 1 of Table 3)
indicates the number of times original volatility exceeds the forecast VaR, All such
cases are considered as a failure of the model. From Table 3 we can conclude that as
we are increasing the investment proportion in British Pound the VaR of the portfolio
is increasing. These results match with the expected results. Since British Pound is
currently a risky asset, it is natural to expect that higher investment in the pound will
lead to a higher risk. VaR coupled with DCC MGARCH model is indicating the same
results as shown in Table 3.
Table 3: Predicted VaR For Various Portfolios
Portfolio Proportion Max Predicted VaR Prediction Failure Average Deviation
(0.25,0.25,0.5) 0.01020668 6 0.003601258
(0.4,0.2,0.4) 0.008399726 6 0.003090642
(0.4,0.4,0.2) 0.006075661 4 0.002781750
(0.2,0.4,0.4) 0.008918193 5 0.003395290
(0.5,0,0.5) 0.009654619 6 0.003349701
(0.5,0.5,0) 0.005341867 6 0.002646160
(0,0.5,0.5) 0.010957425 3 0.004050478
Policy Implications & Investments in Current Scenario

As we can see from Table 3 that as we are increasing the percentage investment
in the pound, the Maximum value of VaR (Predicted) is increasing. This is quite
intuitive because British pound has become quite unstable due to Brexit. The good
thing about our model is that it is able to identify Pound as a risky asset. This shows
the effectiveness of VaR (coupled with DCC MGARCH) in identifying the appropriate
portfolio for the future investment.
60
Based on above results, The exit of Britain from the European Union was not a
favorable decision for its exchange rate (in terms of Indian Rupee). Right after 23rd
June 2016, British Pound has been dropping tremendously. It has also affected Euro
significantly which is also reducing in terms of Indian Rupee. In between all these US
Dollars seems to be completely unaffected, indicating that it is quite stable now. It
is expected that Brexit would have affected other currencies of European union like
Bulgarian Lev, Poland Zloty, Croatia Kuna etc.
Conclusion
From above results, we can say that British Pound has become very unstable due
to exit from European union. Since Britain was an important part of European Union,
its exit has also made Euro unstable along with pound. The dollar is currently quite
stable currency, hence holding dollar is not very risky. On the other hand, British
pound dropped from being Rs 100/pound on 23rd July 2016 to Rs 82/pound on 10th
November 2016. A drop of Rs18 in just three months. Similarly, Euro dropped from
Rs76/Euro on 23rd July 2016 to Rs 72/Euro on 10th November in just three months.
Hence, we should invest less amount of money in Euro and Pound currently. VaR
via DCC MGARCH gives us a good insight into how to invest money in the current
scenario.
Appendix
VaR Derivation
In this section, we will derive the VaR for a given portfolio P for which there are three
assets. Let us assume we have invested I amount of money into three assets A1,A2
and A3 with proportion w1,w2,and w3. Let the rate of returns achieved from assets be
r1,r2,and r3. So the total return we get from our portfolio P is:
TR= I(w1r1 + w2r2 + w3r3)
Now we will calculate the variance associated with the total returns achieved. For this,
we will subtract the expected total returns from above expression and square it so as
to evaluate the variance.
variance(TR)=I2 E{w1r1 + w2r2 + w3r3 - (w11 + w2 2 + w3 3)}2
variance(TR)= I2 E{w1 (r1- 1) + w2 (r2 - 2) + w3 (r3- 3) }2
variance(TR)= I2 E{w1 (a1) + w2 (a2) + w3 (a3) }2

Since variance([a1, a2, a3])= Ht , we can write above expression as a matrix product as
follows:
61
Now assume that the confidence interval to be 1-. Hence the critical value observed
for the Total Returns is as follows:
We can say that for (1-) confidence interval the value of TR will always be bounded
by . This is called as the VaR(Value at risk) associated
with our portfolio. Assume that the critical value at (1-)th percentile to be C1-. Then TR
will always be bounded by
This upper bound of TR is known as VaR(Value at risk) i.e the risk associated with a
given portfolio. The variance-covariance matrix is estimated through DCC MGARCH
model in this paper. For wt we will try different proportions so as to identify the best
portfolio.
Rate of Return Plots

The observed rate of returns is from June 2015 to Nov 2016. We have plotted the
graph for US Dollar, Euro, and British Pound. The Red graph shows the rate of return
from US Dollars. The Blue graph shows the rate of return for Euro. The green graph
shows the rate of return from British Pound.
62
References
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dynamic conditional correlation MGARCH model an empirical study on foreign
exchange rates Yuan-Hung Hsu Kua, and Jai Jen Wangb
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About the Authors

Rahul Sharma is Senior UG Student, Indian Institute of Technology, Kanpur and can be
reached at: shrahul@iitk.ac.in
Somesh K Mathur is Professor of Economics, Indian Institute of Technology, Kanpur and

can be reached at: skmathur@iitk.ac.in
63
Export Competitiveness of Selected Agriculture

Products in India in the Global Market:
CMS Analysis
Ahamed Kabeer M
Cashew industry has the potential to generate employment and foreign exchange for
developing countries. The present paper aims to explore competitiveness of cashew
export in India in the global market in the context of new economic scenario. The Time
series data from 1991 to 2013 were used to measure Constant Market Share Model.
It takes into account three effects other than the competitiveness effect namely world
the trade effect, commodity composition effect, and market distribution effect. For the
purpose of analysis entire study period divided into three parts, first period (1991-2001),
second period (2002-2013) and final period represent the whole period from 1991-
2013. It has been found that As a result of competition from rival India has eroded their
competitive edge and the effects such as world trade effect, market distribution effect,
and the competitiveness effect has shown favorable results with regard to spices and
cashew, whereas commodity composition have registered negative inuence on total
effect. It has been suggested that India has to make effective policy to promote export
and competitiveness forthcoming years to capture the world market.
Keywords: Reforms, Export, Competitiveness. Spices, Cashew
Introduction
Agricultural trade has a dominant role in the economic development of the nation.
The agricultural sector has received special attention in all countries at every stage
of development. For a developing country like India, agricultural sector is an engine
of economic growth due to lively hood food security and its interdependence with
industrial sector. The Development of a nation and welfare of people especially of a
country like India to great extent depends on the agricultural sector. (Rathna, Sharma,
Kallumal, and Biswas 2010). The export opportunity allows agricultural sector to expand
productive capacity to the fullest extent. In the four decades since the beginning of
planned development in 1951, India followed a strong inward oriented policy. With the
adoption of the import substitution strategy in the first three five-year plans, the inward
orientation becomes very powerful. Several measures were taken since the early
1970s for export promotion, but they were not adequate enough to provide needed
incentives for exporters. A major development soon after third five-year plan was the
64
Export Competitiveness of Selected Agriculture Products in India in the Global Market: CMS Analysis
devaluation of the Indian rupee in 1966 (Francis 2001). A Poor trade performance and
foreign exchange crisis compelled India to devaluate rupee in 1966. Subsequent to
the devaluation, further modification adjustments and extensions in export promotion
scheme were made. An Export policy resolution was announced by the government
of India in 1970s, with the following objectives to strengthen the domestic production,
to strengthen and develop export marketing infrastructures, and to provide incentive
to the export sector. A number of measures were taken in the eighties to promote
export. These include development of export processing zones, promotion of hundred
percent export oriented units, rationalization and simplification of scheme of export
assistance and incentives. During the seventh plan (1985-90) efforts were made to
identify sectors, industries and product which have a good export potential and to
provide a suitable policy framework. As a result of these measures the export growth
accelerated in the late 1980s. But even in the 1980s the Indian policy was strongly
inward oriented (Francis 2001). In 1991 Indian economy had witnessed dramatic
policy changes. Trade policy reforms have been an integral part of the economic
policy reform ushered in India since July 1991. There were two parts of new economic
policy, structural and stabilization. Stabilization measures for short term purpose
while structural measures were of long term nature. Stabilization measures contain
devaluation of the Indian rupee, drastic fiscal compression and credit squeeze. The
Medium term adjustment Programme includes a package of trade reforms, exchange
rate reforms and reforms in financial policy. The export promotion measures adopted
by the government of India consist of monetary and non-monetary incentives, fiscal
relief, credit facilities, establishment of institution for the help of exporters and strict
quality control.
Statement of the Research Problem

Export promotion is a prime objective of India economic policy, the fulfillment of this
objective depends on the international competitive with that of rival country in the
global market. Various issues were debated during 1990s about Indian agriculture,
especially the impact of economic reforms and trade liberalization
India started liberalization in 1991 and it is one of the founding members of world trade
organization (WTO). The main objective of WTO is to make international trade more
liberal and free by removing all tariffs and non-tariff trade barriers. While it provides
us with new opportunities, it also poses some threats to the economy. The research
problem is to express as how or to what extent reforms influenced agricultural export
in India. Indian spices and cashew nut are contributing to a great extent to the
socioeconomic progress of the country and earning a substantial amount of foreign

exchange. India has a centuries old trade relation with foreign countries. The lure of
spices and cashew attracted the Greek, Turks, Romans, Arabs, and Europeans in
India. Enhancing competitiveness is a strategy of developing the country, Successful
exporting countries of the world improved their competitiveness with the development
process. The linkage of agriculture sector to the rest of the economy is so strong
therefore overall economic performance of the nation is determined by agricultural
growth. India has initiated a new trade policy with an objective to make an Indian
65
export sector competitive and efficient by exposing it to greater competition and to
integrate it with the global economy.
Objectives
1. To measure export competitiveness of spices in India in the world market since 1991
2. To measure export competitiveness of cashew in India after the reforms
Data Source and Methodology

The present study is entirely based on time series data. Time series data for the period
of 1991 to 2013 is used to analyze major objectives of the study. The Constant market
share model was used to measure export competitiveness of selected agricultural
products in India. Secondary data were collected from Food and agriculture
organization of the united nation (FAOSTAT), spices board of India Cochin, Indian
Institute of Spices Research, Calicut, Directorate General of Commercial Intelligence
and Statistics, Kolkata.
Constant Market Share Model

The Constant market share model is one of the important measures to use export
competitiveness. It is used to decompose the export growth of country between two
periods, it take in to account four effects (Veeramani (2009), Leamer and Stern (2006),
namely the world trade effect, commodity composition effect, market distribution effect
and finally the competitiveness effect.
Symbolically
i rXi + i ri xi - i rxi + i j rij Xij - i ri xi + X i j rij Xij
Where
r percentage change in total world export
Xi Indias export of commodity to the rest of the world
ri percentage change in world export of i commodity
rij percentage change in world export of I commodity to region J
Xij the value of Indias export commodity I to region j in terminal year
World trade effect ( i rXI))

Where Xi is the export of i th the commodity of India to world at the base period. r is
the percentage change in total world export between two points of time if it is positive
value then it has taken advantage of world demand of a particular product.
Commodity composition effect ( i riXi rXi)

Where ri is percentage increase in world export between two periods, the positive
value of it indicated that export country had concentrated on export commodities
66
whose market growing relatively fast. (Kaur and Nanda 2011). The negate value
indicated concentration of export commodities for which world demand is growing
relatively slowly.
Market distribution effect ( i j rij Xij - i ri xi)

The positive sign indicates that the country exports were directed to faster growing
market, and negative sign reflects that exports are concentrated in the relatively
stagnant market.
Competitiveness effect (X i j rij Xij)

It is residual, which reflects competitiveness. A positive sign indicated that country
achieved its growth due to competitiveness improvement; similarly negative
sign indicates that country fails to maintain market power because of a lack of
competitiveness.
Result and Discussion

It takes into account three effects other than the competitiveness effect namely world
trade effect, commodity composition effect, and the market distribution effect1. For
the purpose of analysis entire study period divided into three parts, first period (1991-
2001), second period (2002-2013) and final period represent the whole period from
1991-2013. This analysis provides a clear picture about various effects on cashew nut
and spices export.
The CMS analysis result of spices in India is represented in the Table-1.1. It has been
noticed that world trade effect, market distribution effect and competitiveness effect
were favorable to India during all the three periods. In the case of a world trade effect
the first period (1991-2001) has contributed 45.50 percent to total change, which
means India has utilized growing demand of this product in the world market, thereafter
it went down to 11.07 percent in the second period (2001-2013) and 6.53 percent in
the whole period (1991-2013).
Table-1.1: CMS Analysis of Spices from India
Categories 1991-2001 2002-2013 1991-2013
108806 1438481 1527324.014
Total change (100) (100) (100)
49508.693 159261.3791 99726.18503
world trade effect (45.50) (11.07) (6.53)
-873.9008429 -11799.68665 -10925.7858
Commodity composition effect (-0.80) (-0.82) (-0.72)

7728.815841 689063.3076 787112.6151
Market distribution effect (7.10) (47.90) (51.54)
52442.392 601956 651411
Competitiveness effect (48.20) (41.85) (42.65)
Source: Estimated using data from FAOSTAT
Note: Figures in parentheses are percentage shares
1 Methods to measure CMS explained in the methodology session
67
India has failed to increase its growth as compared with world growth, which can
be mainly attributed to unfavorable production and growing demand in the domestic
market. It is very interesting that commodity composition have registered negative
figure in all the periods. It may be due to concentration of products in less growth in
the world or in lack of proper storage facilities in the country. In the case of market
distribution effect it was 7.10 percent in the first period, thereafter it goes up to 47.90 in
the second period and 51.54 in the final period. It shows that India is able to concentrate
its export relatively growing market in the international market in the second and third
period. The competitiveness remains positive in all the periods, while it is not a major
factor behind the trade growth of spices from India. It reflects that India has been
facing competition from others both in terms of price and non price factor.
Table-1.2: CMS Analysis of Cashew Nut from India
Categories 1991-2001 2002-2013 1991-2013
410830.9652 1438481 1535781
Total change (100) (100) (100)
49508.693 159261.3791 99726.18503
World trade effect (12.05) (11.07) (6.49)
-14013.94629 -806431.9279 -289368.4458
Commodity composition effect (-3.41) (-56.06) (-18.84)
224323.7359 1651295.707 1651297.222
Market distribution effect (54.60) (114.79) (107.52)
151012.4826 434355.8414 74126.03911
Competitiveness effect (36.76) (30.20) (4.83)
Source: Estimated from FAOSTAT data
Note : Figures in parentheses are percentage shares
The results show that all the indicators or effects are positively related to cashew
export from India, except the commodity composition effect. The World trade effect
was favorable to cashew export while it declined from 12.05 in the first phase to 11.07
in the second phase and to 6.49 in the final phase. It is evident that India is not able
to utilize growing demand in world market; it may be due to domestic factors such as
low production and high consumption. The Commodity composition effect registered
unfavorable to export growth, which can be due to policy level failure to boost exports
by providing support and infrastructural facilities, the commodities those have in
comparative advantage in the world market. It is the fact that market distribution effect
has a larger influence on India cashew export than other effects, which reflects India
has able to captured growing market in the cashew export. Major exporting partners
are USA, Netherland, UAE, Japan, and UK. Competitiveness effect has less influence
in the second period and over all period, which reflects that India has faced challenges
from other players both in price and non price factors.
68
Conclusion
Indian is an agrarian economy, and has a strong export experience in the commodities
like spices and cashew. The CMS analysis shows that both products have competitive
in the world market while eroding competitiveness over the years. Moreover the CMS
analysis indicates that effects such as the world trade effect, market distribution effect,
and competitiveness effect has shown favorable results with regard to spices and
cashew, whereas commodity composition have registered negative influence on total
effect. It has been suggested that India needs to make policies and programme to
increase production, productivity and to improve production, productivity, quality and
infrastructural facilities.
References
Ratna, R., Sharma, S., Kallumal, M. & Biswas, A. (2010). Agriculture Under WTO
Regim: Cross Country Analysis of Selected Issues. [Available at: wtocentre.iift.
ac.in/discussion_papers/05.pdf] [Accessed November 1, 2013]
Veeramani, C. (2007). Sorces of Indias Export Growth in Pre and Post Reform Periods,
Economic and Political Weekly, 4(8), pp:2419-2427. [Accessed January 2, 2016]
Leamer & Stern. (2006). Quantitative Intrenational Economics, pp:171-183.London.
Cherunilam, F. (2001). Indian trade strategy. In International trade (4th ed., Vol. 2, pp.
40-65). New Delhi, Delhi: Mcgraw hill companies.
Acknowledgment
I express sincere thanks to DR P Abdul Kareem, Research Supervisor and dean
school of Economics, Central University of Kerala for his valuable suggestion and
support throughout the work.
About the Authors

Ahamed Kabeer M is Research Scholar, Department of Economics, Central University of
Kerala and can be reached at:kabeer.m313@gmail.com
69
Spatial Composition of Indian Small and

Medium Enterprises Export
Tareef Husain
In this era of globalisation, the small scale sector faces an ever increasing competition
from the multinationals, and it is generally been argued that, to survive in the growing
competition from large scale industries, Indian small scale sector requires to raise their
export activities. Simultaneously, India as an economy consists of various sub-national
entities, where export activities of Indian small scale sector are sourced by few Indian
states, having healthy export conducive infrastructure. This study is an attempt in the
same context i.e. exploring the export of Indian small scale sector located in various
Indian states, in the light of various export promotion policies of the respective state
governments. Mainly, the present study concentrates on the registered sector of
Indian small scale sector, using unit-level data of third and fourth all India micro, small
and medium enterprises censuses. The exploratory results reveal that export from
the Indian small scale sector has grown significantly, but only few Indian states have
participated in this growing export. Moreover, this study finds that the SMEs export
is lower in the states where overall export is higher and vice versa. In this regard,
this study has some important policy implications for sub-national as well as national
polices makers by revealing the status of export from Indian small scale sector located
in various Indian states.
Keywords: Export, Spatial Composition, SMEs, Regional Policies
Introduction
Small scale sector and export, both are of immense significance for their extensive
contributions in an economy. Worlds 65 per cent of employment roots in the small
scale sector (IFC, 2006)1. Likewise, Indian SMEs (small and medium enterprises)
sector also plays an important role in the employment and income generation in India,
by employing upto 29.5 million employees (Ministry of Finance, 2008) and holding 37.5
per cent stake in Indias gross domestic product (Ministry of Finance, 2015). As far as
the export from the registered sector of Indian SMEs is concern, it is also noteworthy,
carrying 1.97 per cent share in Indian GDP (gross domestic product); similarly, the
merchandise export from Indian SMEs2 accounts for 11.7 per cent of overall Indian
merchandise export, during 2006-07 (Table-1).
70
In this era of globalisation, SMEs sector faces an ever increasing competition from the
multinational enterprises. It is generally been argued that, to survive in this growing
competition, Indian small scale sector requires to raise their export activities to
compete with the large enterprises. Moreover, the growing internationalisation strained
the small scale sector to reorganise its structure in terms of product composition and
technology frontiers so as to endure the competition (Bhavani, 2011; Subrahmanya,
2011). This means, SMEs are now required to develop their competitive, innovative
and networking capabilities, to participate actively in the international market.
By and large, the extant literature on international activities of firms has been confined
to the country level analysis (McCann and Mudambi, 2005). Recently, there are few
studies which emerged dealing with the sub-national analysis of international activities
of firms (Beugelsdijk and Mudambi, 2013). These studies established that export
activities of firms are regionally concentrated in case of the emerging economies like,
India (Pradhan and Das, 2012; 2016), South Africa (Matthee and Naude, 2008) and
China (Perkins, 1997; Wu, 2007). However, the sub-national SMEs export is yet to be
explored in the literature; there are very few studies dealing with the regional aspects
of export from Indian SMEs (e.g. Pradhan and Das 2015; 2016).
With the growing significance of sub-national entities in an economy as already
acknowledged the importance of SMEs export, it becomes indispensable to explore
the SMEs export at sub-national level. The aggregate picture based on exporting
activities at country level does not depicts the export status of Indian states, which
are ultimately the sources of export. The present study is an attempt in the same
context, revealing the spatial dimensions of export from SMEs, which is likely to be
characterised by the mark disparities at the sub-national level similar to other economic
activities like, manufacturing export (Pradhan and Das, 2016) and Infrastructure (Mitra
and Varoudakis, 1998).
This study proceeds with the next section containing, the share of SMEs export in
states GSDPs (gross state domestic products) and merchandise export. The third
section discusses about the states policies and schemes regarding export promotion in
the respective states. Fourth section discusses the data issues. Fifth section explores
SMEs export from various Indian states and the final section concludes the study.
Spatial Contribution of SMEs Export in Merchandise Export and GSDPs

Spatial aspects of Indian SMEs export, appears to be fascinating, while taking into
account their partaking into the other spatial economic attributes. Table-1, exposes the
participation of SMEs export from Indian states in the GSDPs and overall merchandise
export of the respective Indian states. The state of Jammu & Kashmir has reported
that during 2006-07, 6.77 per cent of its GSDP contributed by the SMEs export, which
is the highest contribution in any of the Indian state. While in terms of the participation
of merchandise SMEs export in the overall merchandise export of the state, Uttar
Pradesh accounts for the highest participation i.e. around 87 per cent during 2006-07,
these figures witnesses the significance of SMEs export in a state.
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SMEs export participation in the respective states domestic product turned out to be
more than four per cent for the states of Jammu and Kashmir, Uttar Pradesh, Punjab
and Haryana, while the states of Rajasthan, Tamil Nadu, Goa and Pondicherry vary
between three to four per cent, during 2006-07. The other states like, Karnataka (2.7
per cent), Gujarat (1.96 per cent), Kerala (1.61 per cent) also represent a significant
participation of SMEs export in their GSDPs. There are five states, where the SMEs
export contributes by less than 1 per cent to their GSDPs, including the states of West
Bengal, Madhya Pradesh, Andhra Pradesh, Orissa and Delhi.
While exploring the contribution of merchandise3 SMEs export in the overall merchandise
export among various Indian states, Uttar Pradesh (with the participation of as much
as around 87 per cent) has been followed by Punjab where almost half (48.28 per
cent) of the total merchandise exports source by the SMEs, during 2006-07. The
lowest contribution of SMEs in terms of merchandise export, found in, none other than
the two major exporting Indian states, namely Maharashtra and Gujarat. Merchandise
export of Maharashtra and Gujarat happens to be 16245 and 10963 billion Indian
rupees; at the same time the merchandise export of SMEs in these two states stand
to 545 and 470 billion Indian rupees, which makes their shares 3.36 and 4.29 per cent
respectively. Similarly, the other major exporting states namely, Karnataka, Andhra
Pradesh and Delhi reveal less than 10 per cent share of merchandise SMEs export
in the overall merchandise export. On the other side, comparatively, lower exporting
states namely, Haryana, Uttar Pradesh, Rajasthan, Kerala and Punjab reveal higher
share of merchandise SMEs exports in overall merchandise export viz. round about
28, 87, 33, 22 and 48 per cent, respectively.
Table-1: Export of SMEs and Its Share in Total Merchandise Export and GSDP
for Major Indian States (2006-07)
Merchandise Merchandise
Share in Share in
States SMEs Export Export
Merch Exp GSDP
in billion INR in Billion INR
Uttar Pradesh 1431 1645 87.01 4.78
Punjab 470 973 48.28 4.16
Rajasthan 497 1520 32.70 3.27
Haryana 483 1717 28.15 4.15
Kerala 228 1038 21.93 1.61
Tamil Nadu 1003 5931 16.92 3.49
West Bengal 209 1816 11.54 0.90

Madhya Pradesh 86 903 9.55 0.66
Karnataka 544 5740 9.48 2.70
Goa 47 645 7.31 3.14
Delhi 123 2210 5.56 0.99
Andhra Pradesh 124 2481 4.98 0.45
Orissa 44 893 4.93 0.48
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Merchandise Merchandise
Share in Share in
States SMEs Export Export
Merch Exp GSDP
in billion INR in Billion INR
Gujarat 470 10963 4.29 1.96
Maharashtra 545 16245 3.36 1.03
Jammu & Kashmir 207 - - 6.77
Uttaranchal 45 - - 1.39
Himachal Pradesh 31 - - 1.10
Pondicherry 24 - - 3.20
India 6700 57222 11.70 1.97
Source: Merchandise Export data is taken from Economic Census 2006-07, based on DGCI&S, Government
of India; GSDP data taken from Statement on State Domestic Product, CSO, Government of India.
These results of lower share of SMEs export in the states where overall export
activities are substantially high seems appealing because they contradict with the
view point that export activities of SMEs tend to be higher in a region where large
firms export extensively. SMEs, in a region with substantially higher export from large
firms may get the cost effective and other benefits like, imitating technology from large
firms, accessing skilled manpower, obtaining better information on export market etc.
(Saxenian, 1994; Venables, 1996). Conversely, the statistics of Indian states depicts
that SMEs are not able to exploit the externalities provided by the other enterprises
(mostly large enterprises) or the other enterprises crowding out the export probabilities
of SMEs located in the Indian states. However, this phenomenon requires a detailed
time series study before arriving to a definite conclusion. And, the concept of region
used in this study is Indian state and perhaps a further disaggregated level study is
needed to provide a clear picture of above phenomenon.
Regional Policies
In the early 1990s, Government of India launched a set of policy reforms, wherein
promotion of internationlisation of Indian firms was one of the main constituents of
those reforms. The various regressive policies related to import substitution and
protectionism were eliminated by the government. However, it always ponders the
economists that whether these reforms assisted equally the given diversity of India
based in various Indian states. These predicaments virtually made every Indian state
to formulate their own strategies to facilitate and promote export level, within their
respective frontiers (Pradhan and Das, 2016).
The state of Uttar Pradesh has established a fully fledged export promotion bureau
in the year 1999, after recognising the importance of export, specifically from SMEs.
The primary objective of the bureau is to enhance the level of export in the state by
adopting the effective and supportive measures with the help of various exporters,
export promotion councils, export associations etc. The export promotion bureau
provides various facilitative measures, concessions, subsidies and incentives, so that
the enterprises from the state could compete internationally. These measures include,
73
providing incentives for public advertising, helping enterprises to obtain quality
certificates etc., Likewise, the state of Uttar Pradesh assists through building the export
capacity of various local firms by the means of training for export marketing, export
information study, surveys and brand promotion etc. The state of Uttar Pradesh has
been bringing in new strategies for export promotion under various industrial policies.
The latest industrial policy of Uttar Pradesh (Government of Uttar Pradesh, 2012)
expresses the concern over the regular data collection on export and setting up different
committees to look into the sector specific opportunities available to the local firms.
The state of Gujarat was the first Indian state to adopt the reform process started in
India during early 1990s (Government of Gujarat, 2003). Under the industrial policy
2003, the Gujarat government came up with the objectives like, developing global
brand in the state, to help the local firms complying with WTO regime, promoting
export competitiveness, establishment of trade centres in the district of Ahmadabad
and Surat, especially for textile and diamond industries. The major export promotion
scheme was the market development scheme (MDS) which involve the participation
of local firms in trade fairs, exhibitions and also sending the sample abroad at the
subsidised rates. The new industrial policy of Gujarat (Government of Gujarat, 2015)
introduces the concept of Zero Defect, Zero Effect, implying the promotion of quality
products by the local firms which have negligible impact on environment and are
internationally competitive.
In the year 2003, the state of Karnataka has introduced an export promotion policy
and became the first Indian state of formulating such policy, with the objective of
enhancing the level of export and doubling its share from 7 per cent to 15 per cent
by 2007 (Pradhan, et al., 2013). The various strategies adopted under this policy
are, supportive measures for specific sectors, linkaging various export supporting
institutions, providing e-governance support and developing the database regarding
various export products (Government of Karnataka, 2003).
The state of Andhra Pradesh has recently provided the importance to export in its
industrial policy 2010-15 (Government of Andhra Pradesh, 2010). Andhra Pradesh
has particularly mentioned the significance of export from MSMEs through marketing
assistance programme, participation in trade fairs, road shows and participation in
foreign exhibitions and delegations.
Maximisation of indigenous products and minerals particularly for export oriented
units has been one of the priorities of Keralas industrial policy 2001 (Government
of Kerala, 2001). Kerala has focused on removal of inefficiency in the system and
professionalising marketing and export support. It has focused on promotion of
innovative activities in the garment sector to promote the level of export originating
from the state. Likewise to promote the export of health care facilities, healthcare
export parks were to be established in the state.
The state of Maharashtra has also been giving emphasis on the export promotion in
the state by introducing various supportive measures in its industrial policies since
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2001. These policy supports include, developing special economic zones (SEZs),
developing necessary infrastructure in the state etc. (Government of Maharashtra,
2001). Similarly, Government of Tamil Nadu has also introduced various export
supportive measures its new industrial policy (Government of Tamil Nadu, 2003),
including development of various parks like, special parks, apparel parks, agri export
zones and formulation of SEZs etc.
Data Issues
This study is based on the unit-level data of 3rd (2001-02) and 4th (2006-07) all
India MSMEs censuses, conducted under the Ministry of Micro, Small & Medium
Enterprises, Government of India. The present study deals with the registered sector
of MSMEs. The 4th MSMEs census (2006-07) is the latest available census providing
detailed information over various characteristics of Indian MSMEs and especially the
information over SMEs export. Hence the time period covered in the present study is
subject to the availability of data. The two aforementioned censuses have adopted
different methodologies to define small scale sector in India. Third census has defined
the small scale sector as the units, having investment value of 10 million in plant &
Machinery. On the other side, the fourth census split the sector among micro, small
and medium enterprises, covering all the units having investment value upto 50 million
in plant & machinery. Moreover, the fourth census covers the units, registered with
district industrial centres (DICs) and sector 2m (i) & 2m (ii) of the factories act as
well as the KVIC/KVIB & Coir units; whereas third census covered only those units
registered with DICs only. So in order to provide a time series analysis of SMEs export
and calculate the growth rates, only those units are selected having 10 million value of
investment in plant & machinery and registered with DICs only.
Spatial Composition of SMEs Export

Export from Indian SMEs underwent a significant rise during 2001-02 to 2006-07.
It has grown with 21.5 per cent compound annual growth rate (CAGR); likewise the
export intensity (export as a percentage of output) of Indian SMEs climbed from 6.1
during 2001-02 to 9.1 per cent during 2006-07 (Table-2). The rising performance of
export from Indian SMEs is linked to the various export promotion policies of India
during 1990s and the growing size of world economy during early 2000s or until the
financial crisis broke out in the year 2008. This could be evident from the fact that
Indias merchandise export has grown at a substantial rate of 24 per cent during 2003-
07 (Francis, 2015).
India is a nation of 36 sub-national entities (states and union territories), having huge
diversity in almost all the important economic and social attributes, apparently it also
makes sense to explore the SMEs export status over the space. Similarly, India can
also be categorised into six different regions, namely, central India, east India, north
India, north-east India, south India and west India.
The regional SMEs export has remain concentrated in few Indian regions, wherein
75
north India, south India and west India together represent 95 per cent of overall
Indian export from SMEs, during 2006-07 and the matter of concern is, it has actually
increased from 91 per cent during 2001-02. These three regions have exhibited the
rising SMEs export intensities by 3-4 percentage points, during the study period.
Conversely, central India, east India and north-east India have contributed marginally
to the Indian SMEs export and reported declining export intensities during 2001-02 &
2006-07. However, the export volume for these low contributing regions (in absolute
terms), has increased considerably by around 15 to 28 per cent of CAGR, except for
east India (6.43 per cent) during the study period.
The Indian SMEs export has been led by few Indian states during the study period.
During 2001-02, top five Indian states were contributing with more than 10 per cent
share each and holding together around 60 per cent of total SMEs export. Another five
Indian states were having share between 4-9 per cent and rest of the states holding
less than 4 per cent share. During 2001-02, Tamil Nadu alone was contributing with
15.2 per cent share. The high SMEs export from the state of Tamil Nadu associated with
the handy industrial policies of the state government complemented by the locational
advantageous like, availability of skilled labour, access to healthy infrastructural
facilities particularly the port facilities etc. The state of Tamil Nadu is followed by
Haryana (12 per cent), Uttar Pradesh (11.9 per cent), Maharashtra (10.8 per cent) and
Delhi (10.5 per cent) share.
During 2006-07, Karnataka and Rajasthan have entered into the top five exporting
states group while Haryana and Delhi have lost their places. During this year, Uttar
Pradesh has accounted for 21.4 per cent of total SMEs export; the substantially high
export share in the state might be linked to the abundant cheap labour force which
makes the products internationally cost-effective; a hub of artisans engaged in various
crafts, having higher demand in the international market; and the larger consumer
market of the state. The state of Uttar Pradesh was followed by Tamil Nadu (12.2 per
cent), Karnataka (11.7 per cent), Rajasthan (9.8 per cent) and Maharasthra (7.1 per
cent).
Compared to the previous years 2001-02 and 2005-06, Jammu & Kashmir (J&K)
exhibited the continuous rise in its SMEs export share from almost negligible (during
2001-02) to 4.2 per cent (during 2005-06) and 6.5 per cent (during 2006-07). During
2001-02 to 2006-07, J&K have reported more than 300 per cent growth rate and 23
percentage points rise in export intensities.
The state of Gujarat has also reported the rising share from 0.2 to 4.2 per cent during
2001-02 and 2005-06, but declined to 3.6 per cent during 2006-07. Between the
periods of 2001-02 and 2006-07, SMEs export from Gujarat has grown at more than
100 per cent growth rate, at the same time export intensity of SMEs has increased
from just 0.2 to 7.9 per cent. The state of Gujarat is well-known for its investment
friendly policies, entrepreneurial culture, and good infrastructural facilities like, road,
76
electricity, port etc. these characteristics might have played a crucial role in rising
SMEs capabilities of export in the state.
Table-2: Export Volume, Intensity and CAGR by Indian States
Export Volume (Billion Rs.) CAGR Export Intensity
States 2001- 2005- 2006-
2001-02 2005-06 2006-07 %
02 06 07
J&K 0 (0.0) 94 (4.2) 207 (6.5) 346.9 0.1 7.6 23.1
Chhattisgarh 0 (0.0) 5 (0.2) 8 (0.2) 125.5 0.1 1.2 2.4
Gujarat 2 (0.2) 107 (4.7) 112 (3.6) 124.8 0.2 7.9 7.9
Tripura 0(0.0) 0 (0.0) 0 (0.0) 94.3 0.0 0.8 0.6
Goa 2 (0.1) 21 (0.9) 34 (1.1) 84.2 0.9 8.4 10.4
Uttarakhand 2 (0.1) 18 (0.8) 26 (0.8) 76.6 1.1 5.3 6.2
Karnataka 51 (4.3) 58 (2.6) 370 (11.7) 48.5 6.2 4.8 25.2
Chandigarh 1 (0.1) 2 (0.1) 10 (0.3) 47.3 1.7 1.4 7.7
Himachal 1 (0.1) 10 (0.4) 8 (0.3) 44.0 0.6 2.3 1.4
Rajasthan 57 (4.8) 426 (18.8) 310 (9.8) 40.1 5.1 23.7 15.3
Uttar Pr 142 (11.9) 550 (24.3) 677 (21.4) 36.7 8.7 10.8 19.8
Sikkim 0 (0.0) 0 (0.0) 0 (0.0) 32.5 1.0 3.3 2.8
Daman 9 (0.8) 19 (0.9) 37 (1.2) 31.7 1.9 4.8 7.4
Pondicherry 6 (0.5) 21 (0.9) 20 (0.6) 27.9 2.7 11.6 8.6
Nagaland 0 (0.0) 0 (0.0) 0 (0.0) 24.3 1.1 0.4 0.7
Jharkhand 2 (0.2) 5 (0.2) 6 (0.2) 22.9 2.9 0.9 2.8
Bihar 0 (0.0) 1 (0.0) 0 (0.0) 18.1 0.2 0.1 0.2
Tamil Nadu 181 (15.2) 210 (9.3) 386 (12.2) 16.3 12.5 9.6 13.8
Punjab 110 (9.2) 179 (7.9) 210 (6.7) 13.9 5.9 5.6 6.4
West Bengal 56 (4.7) 107 (4.7) 101 (3.2) 12.3 7.8 8.2 7.3
Maharashtra 129 (10.8) 138 (6.1) 223 (7.1) 11.5 3.8 1.8 3.9
Assam 1 (0.0) 1 (0.0) 1 (0.0) 11.3 0.4 0.2 0.2
Madhya Pr 19 (1.6) 72 (3.2) 32 (1.0) 10.8 3.0 5.2 2.3

Haryana 143 (12.0) 116 (5.1) 201 (6.4) 7.1 9.6 5.7 9.5
Kerala 74 (6.2) 49 (2.2) 93 (2.9) 4.8 11.4 4.6 6.7
Manipur 0 (0.0) 0 (0.0) 0 (0.0) 3.6 0.1 0.1 0.1
Lakshadweep 0 (0.0) 0 (0.0) 0 (0.0) 0.0 0.0 0.0 0.1
77
Export Volume (Billion Rs.) CAGR Export Intensity
States 2001- 2005- 2006-
2001-02 2005-06 2006-07 %
02 06 07
Andaman 0 (0.0) 0 (0.0) 0 (0.0) 0.0 0 0.0 0.0
Arunachal Pr 0 (0.0) 0 (0.0) 0 (0.0) 0.0 0.0 0.0 0.0
Meghalaya 0 (0.0) 0 (0.0) 0 (0.0) 0.0 0.0 0.0 0.0
Andhra Pr 46 (3.9) 32 (1.4) 27 (0.8) -10.5 3.9 2.2 1.6
Odhisa 29 (2.4) 10 (0.4) 13 (0.4) -15.3 8.9 1.2 1.2
Delhi 125 (10.5) 13 (0.6) 47 (1.5) -17.8 18.4 1.9 4.6
Dadar 3 (0.3) 0 (0.0) 0 (0.0) -37.8 0.8 0.2 0.3
Mizoram 0 (0.0) 0 (0.0) 0 (0.0) -69.1 0.1 0.0 0.0
Regions
Central India 19 (1.6) 77 (3.4) 40 (1.3) 15.43 2.35 4.28 2.34
East India 87 (7.3) 123 (5.4) 120 (3.8) 6.52 7.14 3.51 4.16
North India 524 (43.9) 982 (43.4) 1388 (43.9) 21.50 8.31 7.45 11.70
North East
1 (0.1) 1 (0.1) 1 (0.0) 17.36 0.39 0.24 0.23
India
South India 358 (30.0) 370 (16.3) 895 (28.3) 20.12 8.24 6.07 11.86
West India 203 (17.0) 712 (31.4) 717 (22.7) 28.74 3.04 6.11 7.12
India 1193 2265 3162 21.5 6.1 6.2 9.1
Source: Authors estimation from the unit level data of 3rd (2001-02) and 4th (2006-07) all India censuses of
MSMEs; Note: From the 4th census, only those SMEs export is considered which are having Rs. Less than
or equal to one crores Original Value of P&M /Equipment physically installed, to make uniformity with the
3rd census; Export intensity is calculated as, states SMEs export as a percentage of states SMEs output;
CAGR is calculated for the periods of 2001-02 and 2006-07 using the formula CAGR = (CV/PV)1/t-1;
where CV is current value; PV is previous value; t is number of years or time period; Percentage shares in
parentheses.
The state of Karnataka seems to be an appealing state because firstly, it has reported
a declining share during the early two periods and suddenly its share has increased to
more than 10 per cent during 2006-07. In the state of Karnataka, the export intensities
has also been reported rising, between 2001-02 to 2006-07 by 19 percentage points
and the growth rate was as high as 48.5 per cent. This could be due to the introduction
of its own export promotion policy (first ever in India) in the year 2003; the main
objective of the policy was to accelerate the states share in export from 7 to 15 per
cent by the year 2007 (Pradhan et al., 2013).
The states/UTs of Andhra Pradesh, Odhisa and Delhi have shown the miserable trends
during the study period. During 2001-02 to 2005-06 and 2006-07, these states have
demonstrated declining SMEs export. Among these states/UTs, Delhi turned out to be
78
the most interesting case, because during 2001-02, it has participated in Indias SMEs
export with around 10 per cent share, which has declined to 0.6 in 2005-06 and 1.5 in
2006-07. The export intensity has also declined from 18.4 to 4.6 per cent during 2001-
02 to 2006-07. The downfall of Delhi in terms of SMEs export might be associated
to the rising environmental concern and declining manufacturing activities in Delhi.
Delhi had the problem of functioning of various industrial units in the non-confirming
areas, which led to the relocation of many manufacturing units in those areas of the
UT4. The declining manufacturing activities can be traced by the declining share of
manufacturing sector from around 80 per cent during pre 2000 period to 20 per cent in
the post 2000 period (Government of Delhi, 2010).
During 2001-02 to 2006-07, the states of West Bengal, Haryana and Kerala found to
be grown positively, with 12 to 5 per cent growth rates. However, these states faced the
declining shares and export intensities. The trends of positive growth rates but declining
share and export intensities of SMEs export implies that among these states, export
performance of SMEs was vigorous in absolute terms, but dismal in relative terms.
The states/UTs namely, Chhattisgarh, Uttarakhand, Chandigarh, Himachal Pradesh,
Pondicherry, Jharkhand, Bihar, Dadar, Andaman & Nicobar and all the north-eastern
states participated marginally to the SMEs export i.e. with less than 1 per cent.
Similarly, Madhya Pradesh, Goa and Daman have shown around 1 per cent share
in Indian SMEs export. Given the negligible participation of these Indian states in
terms of SMEs export, it requires specific policy attentions from central as well state
governments to identify and promote the internationally competitive SMEs from low
participating Indian states. SMEs export from India may arrest a significant share in
the worldwide export, if SMEs from these low participating Indian states manage to
intensify their export activities.
Conclusion
The ever growing globalisation aura tends to make Indian SMEs considering
internationlisation either as corridor to progress or survival. Simultaneously, central as
well as various regional governments considered SMEs export as one of the ways to
capture a significant part of international market by improving Indian export share in
the worlds export. Periodically, Government of India came out with a variety of export
promotional policies and schemes, specifically for Indian SMEs export. However,
the vigorous export promotion activities by various state governments are the recent
phenomenon, which requires more policy attention towards the improving export
activities in the respective states.

Indian SMEs export has grown extensively (with 21.5 per cent CAGR) during 2001-
02 & 2006-07. The participation of various Indian regions exposes that north India,
south India and west India have been the foremost regions, in terms of SMEs export.
The state-wise SMEs export representation is distressing; in the sense that, very few
Indian states have exported a chunk of SMEs export. Out of 36 Indian states/UTs,
Haryana, J&K, Karnataka, Maharashtra, Punjab, Rajasthan and Tamil Nadu were
79
exporting more than 80 per cent of SMEs export, during 2006-07. In relative terms
(i.e. SMEs export intensities of Indian states), only six Indian states have shown, more
than 10 per cent of their output was being exported, while nine such states were there
exporting 5-10 per cent of their output during 2006-07. Moreover, this study also finds
that the SMEs export is lower in the states where overall export is higher and vice versa.
Hence, this study enclosed some critical policy implications for the regional as well as
central government. Central government may identify the backward Indian states, in
terms of SMEs export as well as the SMEs having potential to export and come up with
the supportive and promoting measures, specifically meant to the backward states.
Likewise, the state governments may introduce more focused policy supports (like
Karnataka) to boost the export potential of SMEs.
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(Endnotes)
1 In case of 130 countries.
2 Present study deals with the registered sector of Indian MSMEs, hence when
author uses Indian SMEs in the text, it means registered sector of Indian MSMEs.
3 Merchandise export is obtained after excluding the service sector export.
4 In 1996 Supreme Court has ordered the closing down of various industrial units
creating environmental problem and relocate the manufacturing units in residential
areas which are not confirming to master plan of Delhi (MPD-2021). Further, MPD-
2021 has notified 20 non-confirming clusters with industrial concentration of 70 per
cent.
About the Authors

Tareef Husain is Ph.D.Scholar (Economics) in Central University of Gujarat and can be
reached at tareefhussain.amu@gmail.com
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Journal of

Characteristics of Domestic Service Sector and Financial Enterprises

Cross Border Mergers and Acquisitions and The Exchange Rate:

Financial Crisis and the Performance of Commercial Banks:

Forecasting portfolio value-at-risk via DCC-MGARCH Model: Impact of

Export Competitiveness of Selected Agriculture Products in

Spatial Composition of Indian Small and Medium Enterprises Export

Editorial Associate: Mr AV Bala Krishna, Institute of Public Enterprise

Prof TCA Anant Prof R Nanda Gopal

Prof Rehman Sobhan Prof Sam N Basu

Prof NJ Kurian Prof Bhanoji Rao

Prof S Indrakanth Prof BN Swami

Copyright 2016 Institute of Public Enterprise. All Rights Reserved.

Characteristics of Domestic Service Sector and Financial

Cross Border Mergers and Acquisitions and

Financial Crisis and the Performance of

Forecasting portfolio value-at-risk via

Export Competitiveness of Selected Agriculture Products in

Spatial Composition of Indian Small and

Volume 7, No 2, JUly-December 2016

The Impact of External Funds Flows

Keywords: FII, FDI, Dollar, Exchange Rate

such as exchange rate, FDI, FII and foreign reserves

Objectives of the Study

Scope of the Study

two variables is related. There is a possibility of positive and negative correlation

Interpretation: Correlation is applied to study the relationship between FDI, FII,

2. Impact of exchange rate on Foreign Direct Investment

3. Impact of exchange rate fluctuation on FII

Table-8: Impact of FDI and FII on Foreign exchange reserves

1 -242.6605 -234.0878 -234.069 -233.0394 -233.0325 41.7768 42.10003

H1 - Alternative hypothesis - FDI has impact on the FX reserve.

H1 - Alternative hypothesis - Fii have impact on the FX reserve

Limitation of the Study

Findings of the Study

About the Authors

A Kotishwar is Associate Professor & HOD, Department of Master of Business

Characteristics of Domestic Service Sector and

Condition and characteristics of domestic firms inuence the export performance

Keywords: Service Sector, Financial Service, Export Performance

China 162,165.07 176,422.45 191,430.42 208,221.22

Overview of Indian Domestic Service Sector

Condition of Domestic Financial Service in India

It can be seen that the percentage of workers engaged in financial intermediation is

Non-banking financial intermediation 5.5 1.4 .2 1.2 90.8

In terms of ownership pattern, quality of labour and registration, financial enterprises

Cross Border Mergers and Acquisitions and

Mergers and Acquisitions Introduction

particular, mergers and acquisitions between companies situated in different countries

Mergers and Acquisitions: Reasons and Gains

FDI and Cross Border Mergers and Acquisitions

overcome trade barriers, or to establish a globally well connected system of better

What Motivates Cross Border Mergers and Acquisitions?

Are Cross Border Mergers and Acquisitions Beneficial?

Cross Border Mergers and Acquisitions With FDI

countries (UNCTAD, 2000).While FDI is a broad category, cross-border mergers and

The Exchange Rate and Mergers

of cross border mergers and acquisitions, thereby providing incentives to potential

Finance, 43(5), pp: 1161-1175.

About the Authors

Financial Crisis and the Performance of

G Ramakrishna, M Ramulu and B Praveen Kumar

The present study is an attempt to evaluate the performance of commercial banks of