1.   There are some misconceptions about accounting. Like the fact that a Profit & Loss Statement shows the true profit or loss earned in a year, or that a balance sheet perfectly depicts the financial position of a firm. Whereas the truth is that accounting is not a perfect science or art orRead more

     

    There are some misconceptions about accounting. Like the fact that a Profit & Loss Statement shows the true profit or loss earned in a year, or that a balance sheet perfectly depicts the financial position of a firm.

    Whereas the truth is that accounting is not a perfect science or art or language yet. It has been evolving for so many years and continues to evolve. The limitations of accounting must be studied to understand it better.

    Measurability

    One of the biggest limitations of accounting is that it cannot measure things/events that do not have a monetary value. If a certain factor, no matter how important, cannot be expressed in money it finds no place in accounting. Some very important qualities like management, loyalty, reputation, etc find no place on the balance sheet or the income statement.

    No Future Assesment

    The financial statements show the financial position of the firm on the date of preparation. The users of the statement are more interested in the future of the company in the short term and long term. However, accounting does not make any such estimates.

    And due to the dynamic nature of the business environment, a lot can change between such dates. Auditors sometimes do disclose the important events occurring after the balance sheet date to rectify these limitations of accounting.

    Historical Costs

    Accounting often uses historical costs to measure the values. This fails to take into consideration factors such as inflation, price changes, etc. This skews the relevance of such accounting records and information. This is one of the major limitations of accounting.

    Accounting Policies

    There is no global standard in accounting policies. In India, we follow the Accounting Standards. Americans follow the GAAP and then there are the international standards, namely the IFRS. And if a global company operates in more than one country, there may be confusion.

    Not all accounting policies follow the same line of thinking, and conflicts may arise due to this. It has long been said that the whole world must agree on uniform accounting policies but this has not happened yet.

    Estimates

    Sometimes in accounting estimation may be required as it is not possible to establish exact amounts. But these estimates will depend on the personal judgment of the accountant. And estimates are extremely subjective in nature. They are basically a person’s guess of future events. In accounting, there are many cases where such estimates need to be made like provision of doubtful debt, methods of depreciation, etc.

    Verifiability 

    An audit of the financial statements does not guarantee the correctness of such statements. The auditor can only assure that the statements are free from error to the best of his judgment.

    Errors and Frauds

    Accounting is done by humans, so there will always be the scope of human errors. There is also the fear of possible manipulation of accounts to cover up a fraud. Since fraud is deliberate, it is that much harder to spot. This is one of the most dreaded limitations of accounting.

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  2. An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices. Accounting standards improve the transparency of financial reporting in all countries. In the United States, the Generally Accepted Accounting PrinciplRead more

    An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices. Accounting standards improve the transparency of financial reporting in all countries. In the United States, the Generally Accepted Accounting Principles form the set of accounting standards widely accepted for preparing financial statements. International companies follow the International Financial Reporting Standards, which are set by the International Accounting Standards Board and serve as the guideline for non-U.S. GAAP companies reporting financial statements

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  3. Commerce is the conduct of trade among economic agents. Generally, commerce refers to the exchange of goods, services or something of value, between businesses or entities. From a broad perspective, nations are concerned with managing commerce in a way that enhances the well-being of citizens, by prRead more

    Commerce is the conduct of trade among economic agents. Generally, commerce refers to the exchange of goods, services or something of value, between businesses or entities. From a broad perspective, nations are concerned with managing commerce in a way that enhances the well-being of citizens, by providing jobs and producing beneficial goods and services.

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  4. Labelling is the display of label in a product. A label contains information about a product on its container, packaging, or the product itself. It also has warnings in it. ... It helps the product stand out in the market, and identifies it as a part of a particular brand.

    Labelling is the display of label in a product. A label contains information about a product on its container, packaging, or the product itself. It also has warnings in it. … It helps the product stand out in the market, and identifies it as a part of a particular brand.

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  5. A business organization is an entity aimed at carrying on commercial enterprise by providing goods or services, to meet needs of the customers. ... The different forms of business organizations are Sole Proprietorship, General Partnership, Limited Partnership, Corporation, "S" Corporation, and LimitRead more

    A business organization is an entity aimed at carrying on commercial enterprise by providing goods or services, to meet needs of the customers. … The different forms of business organizations are Sole Proprietorship, General Partnership, Limited Partnership, Corporation, “S” Corporation, and Limited Liability Company.

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  6. Meaning : It’s that time again where we like to look ahead at the incoming year and pinpoint the biggest trends to keep an eye on in the global trade environment. 2019 was another year full of challenges, surprises, and continued volatility. This year looks to be less explosive, with fewer conflictsRead more

    Meaning :

    It’s that time again where we like to look ahead at the incoming year and pinpoint the biggest trends to keep an eye on in the global trade environment. 2019 was another year full of challenges, surprises, and continued volatility. This year looks to be less explosive, with fewer conflicts but a general slowdown in trade growth. However, more small businesses are jumping into international markets than ever before, and new trade deals and tech continue to bring ample opportunities for those willing to make the leap.

    Here’s what we’ll be watching in 2020.

    1. Slowing economic growth

    After a difficult 2019, most global outlooks were projecting subdued 2020 global trade growth late this year. This was largely due to a sharp downturn in manufacturing activity and global trade volatility with Brexit and China-US relations.

    In Canada, specifically, global growth forecasts were downshifted in EDC’s fall update to the 2020 outlook.

    “With the slowing global economy and lingering trade tensions weighing more heavily on Canada’s exports than previously expected. EDC now forecasts export growth to moderate further to 2.6% in 2020, revised down from the 3.4% growth forecast in spring 2019.” – EDC Global Export Forecast 2019

    However, with the very recent and significant progress made on the Canada-US-Mexico Trade Agreement and the “phase one” US-China trade deal, growth forecasts into 2020 may soon be revised again, to the positive this time.

    2. Service export opportunities growing in new regions

    Canadian trade in services continued to grow for the 9th year in a row, with industries such as travel, finance, resource development, technology, transportation, and agriculture presenting the best opportunities. While the U.S. is still the biggest importer of Canadian services, the fastest growing relationship in commercial service exports was with African nations (13%).

    In the U.S. service exports are increasing as well, reaching $71.1 billion for the year as of October.

    Service exports also seem to have been immune to the downturn weakening goods exports.

    “Goods exports have been more negatively impacted by softening global conditions and are expected to grow at a modest 3.3% in 2019, slowing further to 2.3% in 2020. ”

    “Alternatively, services – exports have been resilient, and continue to be steady with forecasted growth of 5.1% this year and 3.9% next year.” –EDC Global Export Forecast 2019

    3. China – “Decoupling,” or in “phase one” of renewing trade relations?

    After almost three years of escalating tensions and retaliatory tariffs between the US-China and Canada-China, talk began to emerge of a “decoupling” strategy. This would see China drastically reduce trade with North America, replacing it with domestic inter-regional trade.

    Already, China’s foreign direct investments in the U.S. dropped 88% from 2016-2018. The potential for a drastic drop in China-U.S. trade is raising alarms about possible tech wars, and remapping supply chains to leave out the west all together.

    However, this fall saw the U.S. and China put much of the contention behind them and most recently, sign off on “phase one” of a China-U.S. trade deal. Details have yet to be released, but during a press conference it was announced that,

    “Trump agreed to scale back some tariffs (which was China’s top demand and was cheered on Wall Street). In exchange, China said it will buy more U.S. farm products (which Beijing had wanted to do anyway), enhance its intellectual property protections and allow U.S. banks and credit card companies full access to China.” – according to the Washington Post

    Canada is watching the developments between China and the U.S. closely, as increased trade between the two nations could have either a positive or negative effect on Canada’s energy and agricultural exports.

    The shifting dynamics between China and North America will send shockwaves through the global market so we will certainly be watching for any developments.

    4. Tariff workarounds

    Because of the continued uncertainty between China – North America trade, companies have started looking for workarounds to avoid getting caught by tariffs. Other nearby regions, such as Vietnam, South Korea and Taiwan, as well as Mexico have been seeing increased importsas North American companies have tweaked their supply chains to reroute around China.

    A little less on the up-and-up, some North American-based companies have been exploiting loopholes in trade policy to circumvent paying increased tariffs on Chinese-manufactured goods. Specifically, section 321 of the Tariff Act of 1920’s de minimis rule. Some are stretching the legitimate rules, which U.S. Customs is aware of and claims to be cracking down on. Others are using the rule to apply correctly to their goods.

    Either way, some of those that can’t avoid China-North American trade uncertainty are finding ways around paying the tariffs, for now. We’re keeping an eye on new manufacturing hot spots as they pop up and trade policy continues to shift. It’s a good time to be a trade lawyer.

    5. More new supply chain tech

    The adoption of buzzworthy technology, such as artificial intelligence, blockchain, drones and robotics have been revolutionizing supply chains for the past few years. This is reaching a new level of maturity as companies big and small take agility and automation to the next level into 2020.

    Some predictions we’re seeing illustrate the level of adoption of this technology,

    “By the end of 2021, half of all manufacturing supply chains will have invested in supply chain resiliency and artificial intelligence (AI), resulting in productivity improvements of 15%. And,

    By the end of 2020, half of all large manufacturers will have automated supplier and spend data analysis, resulting in a 15% procurement productivity gain.” – MH&L Magazine

    Shippers are recognizing this and have gotten on board in a big way. Two of the world’s leaders in moving containers, Maersk and DAMCO, are doubling down on streamlining logistics processes with higher integration of inland services. This will help shippers to route their transportation at reduced cost, as the two companies connect sea and land, beyond the port of call. Digitization plays a huge role in this integration, giving them access to real-time data and creating more agile and efficient processes and operations.

    See more 2020 supply chain trends to watch here.

    6. Beyond greenwashing – Demand for truly sustainable products/services increasing

    Research is showing that people are voting for sustainability with their wallets. According to a 2019 study by NYU Stern’s Center for Sustainable Business, 50% of the growth in consumer packaged goods from 2012-2018 came from sustainable products, accounting for 16.6% of the total market. That’s a 29% jump in that five year time period.

    A recent report from the International Trade Centre found that consumers in the EU are increasingly seeking sustainable and ethical products and have increased savviness on what makes a product or company truly “sustainable.”

    The numbers are compelling –

    85% of retailers report increased sales of sustainable products over the past five years and 92% of retailers expect sales in sustainable products to increase in the next five years.

    The message from the report is clearly summed up by Arancha González, Executive Director, ITC in the introduction:

    “This report carries an important message for small businesses seeking to export to major industrial nations in the European Union: Retailers consider sustainability key, when buying from suppliers.”

    We’ll be watching to see how impactful the growth of sustainable business practices and purchasing behavior is in 2020, and how businesses respond.

    7. Localization in supply chains and communications

    The last three trends – tariff work arounds, new supply chain tech, and increased demand for green/sustainable goods – together usher in a new era of localization. Businesses are looking for ways to bring manufacturing closer to their consumers, allowing them to sidestep tariff uncertainty. They are engaging new tech in wringing every last drop of inefficiency and waste out of their supply chains, a move that will please their climate conscious consumers.

    As consumers are getting increased access to a wider range brands and products and the concern for climate issues accelerates, many are also turning to products and services that speak more directly to them and come from closer by. Here’s where the other type of localization – adapting your product or service to a local market – will be increasingly important into 2020.

    The need for proper translation and transcreation is growing, alongside machine translation and video creation.

    8. SMEs going global from the outset

    Today, more companies are born with a global mindset than ever before. Companies are often factoring in global market entry from the outset, and a majority are planning on going into at least one international market within the first five years. This is a major change from the recent past where international business was seen as a large corporation’s game.

    According to Rochester PR Group’s UK Market Entry Index,

    64% of Canadian respondents stated that the vision for their companies had always been global rather than local. The peak age of a Canadian business first starting to trade overseas was 2–5 years at 39%, compared to 23% for under a year.”

    In an article for Hockeystick Deanna Horton, a Fellow at the University of Toronto’s Munk School of Global Affairs and Public Policy explains further,

    “One always thinks that companies, especially small companies, need to be a certain size before they expand to other markets. But the digital economy is different. Canadian tech companies in particular are going global from a very early stage. For them, going global means opening a small office with a few people in another country. So, it’s not always as complex as it can be for manufacturers.”

    But many SMEs still feel too intimidated or unprepared to make the international leap. Here’s where training in the right areas can make a big difference in a company’s global market entry success. Doing the right research to be prepared to face the local competition, draft your business plan, build the right team, and adapt your products/services are the main keys to success. Fortunately, there are a multitude of training, resources and support for businesses preparing to make the journey.

    9. Consumer-driven data privacy

    Privacy issues have been in the spotlight over 2019 with several large organizations being scrutinized for data leaks and questionable practices. With the implementation of the European Union’s General Data Protection Regulation (GDPR) in May, 2018 companies were more or less forced to sit up and take data protection seriously.

    Into 2020 companies will continue to feel the implications of GDPR around the world, and other regulations are making their way through approval processes as well, such as the California Consumer Privacy Act (CCPA) which will come into effect on January 1, 2020. South Korea and Brazil are also working on similar protection policies.

    E-Privacy and the transferring of personal data will also be under the microscope this year, along with the application of artificial intelligence technology. Companies who have put little priority into complying with privacy regulations should re-evaluate their stance, as more companies are being outed for breaches in privacy and data leaks, which comes with fines, fees, and often significant losses.

    We’ll be watching to see how oversight and consumer behaviour changes alongside the developments in online technology in 2020.

    10. Global trade volatility easing

    After a few years of increasing uncertainty and upheaval, most outlooks are finally showing a trend for an easing of global trade volatility into 2020.

    Towards the end of 2019 massive uncertainty around the state of North American trade relations started to dissipate with some of the last hurdles being cleared in the ratification of the United States Mexico Canada Agreement. Canada and the U.S. agreed to revised terms in December and it is expected to be signed in early 2020.

    Tensions between China and U.S. that have seen the U.S. impose tariffs on more than $350 million worth of Chinese goods have been eased by “phase one” trade agreement reached last week. Already additionally scheduled tariffs have been cancelled and  some of the existing ones have been cleared as well. Exporters dealing in the regions can breathe a tentative sigh of relief for the year ahead.

    In the UK, Brexit uncertainty seems to be clearing as well after a decisive election has paved the way for the conservative party to move forward on their plans to leave the European Union. It remains to be seen what Canada’s trade relationship with the UK may look like after the UK-EU split.

    Another massive piece of trade policy is on track to be signed in 2020. The world’s largest ever trade agreement, the Regional Comprehensive Economic Partnership or RCEP, is made up of 15 mostly Asian nations and includes all 10 ASEAN members as well as China, Australia, New Zealand, Japan and South Korea.

    If the last few years have taught us anything, it’s that in the global trade environment, nothing is certain and staying on top of the latest developments is the best way to plan for the years ahead.

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  7. Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. In simple terms objective of Financial ManagemRead more

    Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

    In simple terms objective of Financial Management is to maximize the value of firm, however it is much more complex than that. The management of the firm involves many stakeholders, including owners, creditors, and various participants in the financial market.

    Effective procurement and efficient use of finance lead to proper utilization of the finance by the business concern. It is the essential part of the financial manager. Hence, the financial manager must determine the basic objectives of the financial management

    The objectives of financial management are given below:

    1. Profit maximization

    Main aim of any kind of economic activity is earning profit. A business concern is also functioning mainly for the purpose of earning profit. Profit is the measuring techniques to understand the business efficiency of the concern.

    The finance manager tries to earn maximum profits for the company in the short-term and the long-term. He cannot guarantee profits in the long term because of business uncertainties. However, a company can earn maximum profits even in the long-term, if:

    • The Finance manager takes proper financial decisions
    • He uses the finance of the company properly

    2. Wealth maximization

    Wealth maximization (shareholders’ value maximization) is also a main objective of financial management. Wealth maximization means to earn maximum wealth for the shareholders. So, the finance manager tries to give a maximum dividend to the shareholders. He also tries to increase the market value of the shares. The market value of the shares is directly related to the performance of the company. Better the performance, higher is the market value of shares and vice-versa. So, the finance manager must try to maximize shareholder’s value

    3. Proper estimation of total financial requirements

    Proper estimation of total financial requirements is a very important objective of financial management. The finance manager must estimate the total financial requirements of the company. He must find out how much finance is required to start and run the company. He must find out the fixed capital and working capital requirements of the company. His estimation must be correct. If not, there will be shortage or surplus of finance. Estimating the financial requirements is a very difficult job. The finance manager must consider many factors, such as the type of technology used by company, number of employees employed, scale of operations, legal requirements, etc.

    4. Proper mobilization

    Mobilization (collection) of finance is an important objective of financial management. After estimating the financial requirements, the finance manager must decide about the sources of finance. He can collect finance from many sources such as shares, debentures, bank loans, etc. There must be a proper balance between owned finance and borrowed finance. The company must borrow money at a low rate of interest.

    5. Proper utilization of finance

    Proper utilization of finance is an important objective of financial management. The finance manager must make optimum utilization of finance. He must use the finance profitable. He must not waste the finance of the company. He must not invest the company’s finance in unprofitable projects. He must not block the company’s finance in inventories. He must have a short credit period.

    6. Maintaining proper cash flow

    Maintaining proper cash flow is a short-term objective of financial management. The company must have a proper cash flow to pay the day-to-day expenses such as purchase of raw materials, payment of wages and salaries, rent, electricity bills, etc. If the company has a good cash flow, it can take advantage of many opportunities such as getting cash discounts on purchases, large-scale purchasing, giving credit to customers, etc. A healthy cash flow improves the chances of survival and success of the company.

    7. Survival of company

    Survival is the most important objective of financial management. The company must survive in this competitive business world. The finance manager must be very careful while making financial decisions. One wrong decision can make the company sick, and it will close down.

    8. Creating reserves

    One of the objectives of financial management is to create reserves. The company must not distribute the full profit as a dividend to the shareholders. It must keep a part of it profit as reserves. Reserves can be used for future growth and expansion. It can also be used to face contingencies in the future.

    9. Proper coordination

    Financial management must try to have proper coordination between the finance department and other departments of the company.

    10. Create goodwill

    Financial management must try to create goodwill for the company. It must improve the image and reputation of the company. Goodwill helps the company to survive in the short-term and succeed in the long-term. It also helps the company during bad times.

    11. Increase efficiency

    Financial management also tries to increase the efficiency of all the departments of the company. Proper distribution of finance to all the departments will increase the efficiency of the entire company.

    12. Financial discipline

    Financial management also tries to create a financial discipline. Financial discipline means:

    • To invest finance only in productive areas. This will bring high returns (profits) to the company.
    • To avoid wastage and misuse of finance.

    13. Reduce cost of capital

    Financial management tries to reduce the cost of capital. That is, it tries to borrow money at a low rate of interest. The finance manager must plan the capital structure in such a way that the cost of capital it minimized.

    14. Reduce operating risks

    Financial management also tries to reduce the operating risks. There are many risks and uncertainties in a business. The finance manager must take steps to reduce these risks. He must avoid high-risk projects. He must also take proper insurance.

    15. Prepare capital structure

    Financial management also prepares the capital structure. It decides the ratio between owned finance and borrowed finance. It brings a proper balance between the different sources of capital. This balance is necessary for liquidity, economy, flexibility and stability.

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  8. The following points highlight the three main approaches to financial management. The approaches are: 1. Traditional View 2. Modern View 3. Liquidity and Profitability. Approach # 1. Traditional View: Financial management is primarily concerned with acquisition, financing and management of assets ofRead more

    The following points highlight the three main approaches to financial management. The approaches are: 1. Traditional View 2. Modern View 3. Liquidity and Profitability.

    Approach # 1. Traditional View:

    Financial management is primarily concerned with acquisition, financing and management of assets of business concern in order to maximize the wealth of the firm for its owners. The basic responsibility of the Finance manager is to acquire funds needed by the firm and investing those funds in profitable ventures that will maximize firm’s wealth, as well as, yielding returns to the business concern.

    The success or failure of any firm is mainly linked with the quality of financial decisions. The focus of Financial management is on efficient and judicious use of resources to attain the desired objective of the firm.

    The basic objectives of Financial management centres around (a) the procurement funds from various sources like equity share capital, preference share capital, debentures, term loans, working capital finance, and (b) effective utilization of funds to maximize the profitability of the firm and the wealth of its owners.

    The responsibilities of the Finance managers are linked to the goals of ensuring liquidity, profitability or both and are also related to the management of assets and funds of any business enterprise.

    The traditional view of financial management looks into the following functions, that a Finance manager of a business firm will perform:

    (a) Arrangement of short term and long-term funds from financial institutions.

    (b) Mobilization of funds through financial instruments like equity shares, preference shares, debentures, bonds etc.

    (c) Orientation of finance function with the accounting function and compliance of legal provisions relating to funds procurement, use and distribution.

    With the increase in complexity of modern business situation, the role of a Finance manager is not just confined to procurement of funds, but his area of functioning is extended to judicious and efficient use of funds available to the firm, keeping in view the objectives of the firm and expectations of the providers of funds.

    Approach # 2. Modern View:

    The globalization and liberalization of world economy has caused to bring a tremendous reforms in financial sector which aims at promoting diversified, efficient and competitive financial system in the country. The financial reforms coupled with diffusion of information technology has caused to increase competition, mergers, takeovers, cost management, quality improvement, financial discipline etc.

    Globalization has caused to integrate the national economy with the world economy and it has created a new financial environment which brings new opportunities and challenges to the individual business concern. This has led to total reformation of the finance function and its responsibilities in the organization.

    Financial management in India has changed substantially in scope and complexity in view of recent Government policy. Today’s Finance managers are seized with problems of financial distress and are trying to overcome it by innovative means. In the current economic scenario, financial management has assumed much greater significance.

    It is now a question of survival of entities in the total spectrum of economic activity, with pragmatic readjustment of financial management. The information age has given a fresh perspective on the role of financial management and Finance managers. With the shift in paradigm it is imperative that the role of Chief Finance Officer (CFO) changes from Controller to a Facilitator.

    In view of modern approach, the Finance manager is expected to analyse the firm and to determine the following:

    (i) The total funds requirement of the firm,

    (ii) The assets to be acquired, and

    (iii) The pattern of financing the assets.

    The Finance manager of a modern business firm will generally involve in the following three types of decisions:

    (1) Investment decisions,

    (2) Finance decisions, and

    (3) Dividend decisions.

    (1) Investment Decisions:

    Investment decisions are those which determine how scarce resources in terms of funds available are committed to projects. The project may be as small as purchase of equipment or as big as acquisition of an entity.

    Investment in fixed assets requires supporting investment in working capital in the form of inventory, receivables, cash etc. Investment which enhance internal growth is termed as ‘internal investment’ and acquisition of entities represents ‘external investment’.

    The investment decisions should aim at investment in assets only when they are expected to earn a return greater than a minimum acceptable return, which is also called as ‘hurdle rate’. The minimum return should reflect whether the money raised from debt or equity meets the returns on investments made elsewhere on similar investments.

    The hurdle rate has to be set at higher for riskier projects and has to reflect the financing mix used i.e., the proportion of debt and equity. The Finance function involves not only in investment decisions, but also in disinvestment decisions, for example withdrawing from unsuccessful projects or restructuring with a strategic motive.

    Investment decisions relate to the careful selection of viable and profitable investment proposals, allocation of funds to the investment proposals with a view to obtain net present value of the future earnings of the company and to maximize its value.

    It is the function of a Finance manager to carefully analyze the different alternatives of investment, determination of investment levels in different assets i.e., fixed assets and current assets.

    The investment decisions of a Finance manager cover the following areas:

    (a) Ascertainment of total volume of funds, a firm can commit.

    (b) Appraisal and selection of capital investment proposals.

    (c) Measurement of risk and uncertainty in the investment proposals.

    (d) Prioritizing of investment decisions.

    (e) Funds allocation and its rationing.

    (f) Determination of fixed assets to be acquired.

    (g) Determination of levels of investments in current assets viz., inventory, receivables, cash, marketable securities etc., and its management.

    (h) Buy or lease decisions.

    (i) Asset replacement decisions.

    (j) Restructuring, reorganization, mergers and acquisitions.

    (k) Securities analysis and portfolio management etc.

    (2) Finance Decisions:

    The financing objective asserts that the mix of debt and equity chosen to finance investments should maximize the value of investments made. The debt equity mix should minimize the hurdle rate allows the firm to take more new investments and increase the value of existing investments.

    Financing decisions relate to acquiring the optimum finance to meet financial objectives and seeing that working capital is effectively managed. Financing decisions call for good knowledge of costs of raising finance, procedures in hedging risk, different financial instruments and obligations attached to them etc. Important principle to consider in financing is that long-term assets should be financed with long-term debt and short-term assets should be financed with short-term debt.

    Firms that violate this basic rule do so at their own risk. It is one of the important functions of a Finance manager is procurement of funds for the firm’s investment proposals and its working capital requirements.

    In fund raising decisions, he should keep in view the cost of funds from various sources, determination of debt-equity mix, the advantages and disadvantages of debt component in the capital mix, impact of taxation and depreciation in maximization of earnings per share to the equity holders, consideration of control and financial strain on the firm in determining level of gearing, impact of interest and inflation rates on the firm etc.

    The Finance manager involved in the following finance decisions:

    (a) Determination of degree or level of gearing.

    (b) Determination of financing pattern of long-term funds requirement.

    (c) Determination of financing pattern of medium and short-term funds requirement.

    (d) Raising of funds through issue of financial instruments viz., equity shares, preference shares, debentures, bonds etc.

    (e) Arrangement of funds from banks and financial institutions for long-term, medium-term and short-term needs.

    (f) Arrangement of finance for working capital requirement.

    (g) Consideration of interest burden on the firm.

    (h) Consideration of debt level changes and its impact on firm’s bankruptcy.

    (i) Taking advantage of interest and depreciation in reducing the tax liability of the firm.

    (j) Consideration of various modes of improving the earnings per share and the market value of the share.

    (k) Consideration of cost of capital of individual components and weighted average cost of capital to the firm.

    (l) Analysis of impact of different levels of gearing on the firm and individual shareholder.

    (m) Optimization of financing mix to improve return to the equity shareholders and maximiza­tion of wealth of the firm and value of the shareholders’ wealth.

    (n) Portfolio management.

    (o) Consideration of impact of over capitalization and under capitalization on the firm’s profitability.

    (p) Consideration of foreign exchange risk exposure of the firm and decisions to hedge the risk.

    (q) Study of impact of stock market and economic conditions of the country on modes of financing.

    (r) Maintenance of balance between owners’ capital to outside capital.

    (s) Maintenance of balance between long-term funds and short-term funds.

    (t) Evaluation of alternative use of funds.

    (u) Setting of budgets and review of performance for control action.

    (v) Preparation of cash-flow and funds flow statements and analysis of performance through ratios to identify the problem areas and its correction, etc.

    For financing decisions, the capital structure is broadly divided into:

    (a) Equity, and

    (b) Debt.

    Equity:

    The raising funds through issue of shares attract flotation costs. The shareholder expects the return in the form of dividends and capital appreciation of their investment reflected in the increase in stock market price.

    The dividend payments are made only if the distributable profits are available with the company, after payment of interest charges and tax payments. Any further issue of shares by the existing companies may dilute the controlling interest.

    The equity is considered as low risk but most expensive way of funding the company’s projects. The equity funds are not returnable except in the case of liquidation. However, the buy-back of shares is allowed under the provisions of the Companies Act, 1956.

    The equity holders will participate in the policy decisions of the company. In company form of business, only legal personality exists, hence all decisions are carried through the agents who work for remuneration. Therefore, agency problems arise with the managers.

    Debt:

    The debt funds are raised in the form of debentures, bonds, term loans etc. The expectation of the providers of debt is obtain return in the form of interest payments which should commensurate with the risk attached to their investment. The debt is repaid as per the agreement. The interest should be paid irrespective of the profitability of the firm.

    The portion of debt component in capital structure will facilitate the trading on equity Le. the interest on debt is payable at a fixed rate and if the firm’s return on capital employed is more than the interest payable, the excess return over fixed interest will be added to the profits available to equity providers.

    But the high proportion of gearing i.e., excess reliance on debt funds will increase the financial risk of the firm. The cost of debt is always lower than cost of equity, since any interest payable will reduce the tax liability of the firm. The non-repayment of interest and principal amounts in time may sometimes call for liquidation of the company.

    (3) Dividend Decisions:

    Dividend decisions concerned with the determination of quantum of profits to be distributed to the owners and the frequency of such payments. The dividend decisions will effect in two ways (a) the amount to be paid out and its influence on share price, and (b) the amount of profit to be retained for internal investment which maximizes the value of firm and ultimately improves the share value of the firm.

    The level and regular growth of dividends represent a significant factor in determining a profit-making company’s market value and the value of its shares in the stock market. The dividend decisions of a Finance manager is mainly concerned with the decisions relating to the distribution of earnings of the firm among its equity holders and the amounts to be retained by the firm.

    The Finance manager will involve in taking the following dividend decisions:

    (a) Determination of dividend and retention policies of the firm.

    (b) Consideration of impact of levels of dividend and retention of earnings on the market value of the share and the future earnings of the company.

    (c) Consideration of possible requirement of funds by the firm for expansion and diversification proposals for financing existing business requirements.

    (d) Reconsideration of distribution and retentions policies in boom and recession periods.

    (e) Considering the impact of legal and cash-flow constraints on dividend decisions.

    The investment, finance and dividend decisions are interrelated to each other and, therefore, the Finance manager while taking any decision, should consider the impact from all the three angles simultaneously.

    In the words of Ezra Solomon “the function of Financial management is to review and control decision to commit and recommit funds to new and on going uses. Thus in addition to raising funds, Financial management is directly concerned with production, marketing and other, functions within an enterprise whatever decisions are made about the acquisition or distribution of assets”.

    This statement will reflect the modern view of financial management. From the point of view of modern corporate firm, financial management is related not only to fund raising but encompasses the wider perspective of managing the finances for the company efficiently. Hence, Financial management is nothing but managerial decision making on asset mix, capital mix and profit allocation.

    The corporate finance theory centres around three important objectives of a finance function:

    (a) Allocation of funds i.e. investment decisions,

    (b) Generation of funds i.e. financing decisions, and

    (c) Distribution of funds i.e., dividend decisions.

    The guiding factors for the above said finance decisions are as follows:

    (i) The wealth maximization objective of firm, and

    (ii) The existence of efficient capital markets.

    The whole subject of financial management is based on following tenets:

    (a) The owners will have primary interest in the firm’s success and growth.

    (b) The shareholder’s wealth is the determinant of current share price.

    (c) The firm will go on spending on capital investment proposals so long as it generates positive net present values.

    (d) The firm’s capital structure and dividend decisions are irrelevant, since they are guided by the management control over firm and also depends on the efficiency of capital market.

    Interrelationship of Investment, Financing and Dividend Decisions:

    The corporate finance theory has broadly categorized the financial decisions into investment, financing and dividend decisions. All these financial decisions aims at the maximization of shareholders’ wealth through maximization of firm’s wealth.

    i. Investment Decisions:

    The firm should select only those capital investment proposals whose net present value is positive and the rate of return on the projects should exceed the marginal cost of capital. In situations of capital rationing, the investment proposals are selected based on maximization of net present value. The profitability of each individual project will contribute to the overall profitability of the firm and leads to creation of wealth.

    ii. Financing Decisions:

    The financing of capital investment proposals are done in two forms of finances in general i.e., equity and debt. The finance decisions should consider the cost of finance available in different forms and the risks attached to it. The reduction in cost of capital of each component would lead to reduction in overall weighted average cost of capital.

    The principle of trading on equity should be kept in view while selecting the debt-equity mix or capital structure decisions. The relative advantages and risk attached to debt financing and equity financing should also be considered. The lower cost of capital and minimization of risks in financing will lead to the profitability of the organization and create wealth to the owners.

    iii. Dividend Decisions:

    The dividend distribution policies and retention of profits will have ultimate effect on the firms wealth. The company should retain its profits in the form of reserves for financing its future growth and expansion schemes. The conservative dividend payments will adversely affect the firms’ share prices in the market. Therefore, an optimal dividend distribution policy will lead to the maximization of shareholders’ wealth.

    In conclusion, it is viewed that the basic aim of the investment, financing and dividend decisions is maximize the firm’s wealth. If the firm enjoys the stability and growth, its share prices in the market will improve and will lead to capital appreciation of shareholders’ investment; and ultimately maximizes the shareholders wealth.

    Approach # 3. Liquidity and Profitability:

    Ezra Solomon states that “liquidity measures a company’s ability to meet expected as well as unexpected requirements of cash to expand its assets, reduce its liabilities and cover up any operating losses.”

    The balancing of liquidity and profitability is one of the prime objectives of a Finance manager. One of the important problems faced by Finance manager is the dilemma of liquidity vs. profitability. Liquidity ensures the ability of the firm to honour its short-term commitments.

    The liquidity means the firm’s ability to pay trade creditors as and when due, ability to honour its bills payable on due-dates, ability to pay salaries and wages on time when it is due, ability to meet unexpected expenses etc. It also reflects the firm’s ability to convert its assets into cash, cash equivalents and other most liquid assets.

    The liquidity of the firm indicates the ability of the organization to realize value in money, and its ability to pay in cash the obligations that are due for payment. To maintain concern’s liquidity, the Finance manager is expected to manage all its current assets and liquid assets in such a way as to ensure its affectivity with a view to minimize its costs. Under profitability objective, the Finance manager has to utilize the funds in such a manner as to ensure the highest return.

    Profitability concept signifies the operational efficiency of an organization by value addition through the utilization of resources i.e., men, materials, money and machines. It refers to a situation in terms of efficiency in utilization of resources to achieve profit maximization for the owners.

    There is an inverse relationship between profitability and liquidity. The higher the liquidity the lower will be the profitability and vice versa. Liquidity and profitability are competing goals for the Finance manager. Under liquidity management, the Finance manager is expected to manage all its current assets including near cash assets in such a way as to ensure its affectivity with a view to minimize costs.

    Sometimes, even if the profit from operations is higher, the firm may face liquidity problems due to the fact that the amount representing the profit may be in the form of either in fixed assets like plant, buildings etc. or in the form of current assets like inventory, debtors – other than in the form of cash and bank balances. In situations where the firm faces the liquidity problems, will hamper the working of the company which result in lower profitability of the firm.

    If, more assets of the firm are held in the form of highly liquid assets it will reduce the profitability of the firm. Lack of liquidity may lead to lower rate of return, loss of business opportunities etc.

    Therefore, a firm should maintain a trade-off situation where the firm maintains its optimum liquidity for greater profitability and the Finance manager has to strike a balance between these two conflicting objectives. If, more assets of the firm are held in the form of highly liquid assets, it will reduce the profitability of the firm.

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  9. Meaning of Working Capital: Working capital means current assets or circulating capital. Experts define working capital in both, narrow as well as broad sense. In the narrow sense, it is defined as “the difference between current assets and current liabilities”. In a broader sense, working capital hRead more

    Meaning of Working Capital:

    Working capital means current assets or circulating capital. Experts define working capital in both, narrow as well as broad sense. In the narrow sense, it is defined as “the difference between current assets and current liabilities”.

    In a broader sense, working capital has been defined as follows:

    As per Mead, Baker and Mallot, “working capital means current assets”.

    As per J. S. Mill, “the sum of current assets is working capital of a business”.

    It takes into account all current resources of the company. It refers to ‘gross working capital’.

    Factors affecting Working Capital Requirement: 

    The factors affecting working capital requirement are as follows:

    i. Business Cycle:

    When there is boom in the economy, sales will increase, which will lead to an increase in investment in stock.
    Hence, additional working capital would be required. During recession period, sales would decline and the need of working capital would also decrease.

    ii. Requirement of Cash:

    The requirement of working capital depends upon the cash required by the organization for various purposes. If the requirement of cash is more, then company requires more working capital and viceversa.

    iii. Growth and Expansion Activities:

    The working capital requirement increases with the growth of firm. It needs funds continuously to support large scale operation.

    iv. Seasonal Fluctuations:

    The requirement of working capital depends upon the seasonal fluctuations. It states that, if the demand for the product is seasonal, the working capital required in that
    season will be more.

    For e.g. The demand for sweaters is more in winter. Sweater manufacturing companies need more working capital before winters to make the goods available in the market before the season starts.

    v. Production Cycle:

    The process of converting raw material into finished goods is called ‘production cycle’. A firm requires more working capital when the production cycle is longer and vice versa.

    vi. External Factors:

    If the financial institutions and banks provide funds to the firm as and when required, the need of working capital will be reduced.

    vii. Credit Control:

    Volume and terms of credit sales, collection policy etc. are the important factors of credit control. Sound credit policy improves cash flow and hence the firms making cash sales require less working capital. Liberal credit policy increases the risk of bad debts and hence the firms selling on easy credit terms may require more working capital.

    viii. Terms of Purchase and Sales:

    If the credit terms of purchases are favourable and terms of sales are less liberal then the requirement of working capital will reduce as the requirement of cash will be less. On the other hand, if the firm does not get proper credit for purchase and adopts liberal credit policy for sales, it will require more working capital.

    ix. Size of Business:

    The size of business has a great impact on the requirement of working capital. Large scale firms require large amount of working capital.

    x. Volume of Sale:

    The volume of sale is directly proportional to the size of working capital. If the volume of sale increases, there is an increase in amount of working capital and vice versa.

    xi. Management Ability:

    The requirement of working capital will reduce if there is proper co‐ordination between production and distribution of goods. Lack of co‐ordination between different departments may result in heavy stocking of finished and semi‐finished goods, which ultimately leads to an increase in the requirement of working capital.

    xii. Nature of Business:

    The nature of business highly influences the requirement of working capital. Industrial and manufacturing enterprises, trading firms, big retail stores etc. need a large amount of working capital as they have to satisfy varied and continuous demands of consumers.

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  10. The following points highlight the top thirteen characteristics of the Indian economy. Some of the characteristics are: 1. Low per capita income 2. Excessive dependence of agriculture and primary producing 3. High rate of population growth 4. Existence of chronic unemployment and under-employment 5.Read more

    The following points highlight the top thirteen characteristics of the Indian economy. Some of the characteristics are: 1. Low per capita income 2. Excessive dependence of agriculture and primary producing 3. High rate of population growth 4. Existence of chronic unemployment and under-employment 5. Poor rate of capital formation and Others. 

    Indian Economy:Characteristic # 1.

    Low per capita income:

    In India, the national income and per capita income is very low and it is considered as one of the basic features of underdevelopment. As per World Bank estimates, the per capita income of India stood at only $ 720 in 2005. Keeping aside a very few countries, this per capita income figure of India is the lowest in the world and it is even lower than China and Pakistan.

    In 2005, the per capita income figure in Switzerland was nearly 76 times, in U.S.A. about 61 times, in Germany about 48 times and in Japan about 54 times the per capita income figure in India. Thus the standard of living of Indian people remained all along very low in comparison to that of developed countries of the world.

    This disparity in the per capita income of India and other developed countries has registered a manifold increase during the last four decades (1960-2005).

    Although the per capita income at official exchange rates exaggerated this disparity but after making necessary correction through purchasing power parity figures, the per capita GNP of U.S.A. was 12.0 times that of India in 2005 as against 68.0 times that of India at official exchange rates.

    Even after making necessary adjustment, the per capita income differences, although narrowed down, yet remain quite significant and huge. Table 1.3 will clarify the position.

    Per Capita GNP at Market Prices

    In order to convert national currency figures to the US dollars, the utilisation of official exchange rates does not allow to measure the relative domestic purchasing power of currencies. In this connection, work of LB. Kravis and others titled “International Comparison of Real Product and Purchasing Power”(1978) has provided some relief.

    Following the aforesaid work, the United Nations International Comparison Programme (ICP) has introduced measures of real GDP on an internationally comparable scale using the system of purchasing power parities (PPPs) instead of exchange rates as factors for conversion.

    Indian Economy:Characteristic # 2.

    Excessive dependence of agriculture and primary producing:

    Indian economy is characterised by too much dependence on agriculture and thus it is primary producing. Out of the total working population of our country, a very high proportion of it is engaged in agriculture and allied activities, which contributed a large share in the national income of our country.

    In 2004, nearly 58 per cent of the total working population of our country was engaged in agriculture and allied activities and was contributing about 21.0 per cent of the total national income.

    In most of the countries of Asia, Middle East and Africa, from two-thirds to four- fifths of their total population are solely dependent on agriculture. In most of the developed countries like U.K., U.S.A. and Japan, the percentage of active population engaged in agriculture ranges between 1 to 5 per cent. Table 1.4 will clarify this position.

    Percentage of Active Population Engaged

    Table 1.4 reveals that in India 58 per cent of its active population is engaged in agriculture but agriculture contributes only about 21 per cent of the national income of our country. Moreover, low agricultural productivity, lack of modernisation and lack of diversification in its output are some of the basic problems from which our agricultural sector is suffering.

    Thus our agricultural sector is overburdened as the majority of our active population is depending on agriculture.

    Indian Economy:Characteristic # 3.

    High rate of population growth:

    India is maintaining a very high rate of growth of population since 1950. Thus the pressure of population in our country is very heavy. This has resulted from a very high level of birth rates coupled with a falling level of death rates prevailing in our country.

    In India, the rate of growth of population has been gradually increasing from 1.31 per cent annually during 1941-50 to 2.5 per cent annually during 1971-81 to 2.11 per cent annually during 1981-91 and then finally to 1.77 per cent during 2001-2011.

    The prime cause behind this rapid growth of population is the steep fall in its death rate from 49 per thousand during 1911-20 to 7.1 per thousand in 2011. On the other hand, compared to its death rate, the birth rate of our population has gradually declined from 49 per thousand during 1911-20 to 21.8 per thousand in 2011.

    Thus whatever development that has been achieved in the country, it is being swallowed up by the increased population. Moreover, this high rate of growth of population necessitates a higher rate of economic growth just for maintaining the same standard of living.

    This imposes a greater economic burden on the economy of our country as to maintain such a rapidly growing population we require food, clothing, housing, schooling, health facilities etc. in greater magnitude. Besides, this fast rate of growth of population is also responsible for rapid increase in the labour force in our country.

    Indian Economy:Characteristic # 4.

    Existence of chronic unemployment and under-employment:

    Rapid growth of population coupled with inadequate growth of secondary and tertiary occupations are responsible for the occurrence of chronic unemployment and under-employment problem in our country. In India, unemployment is structural one, unlike in developed countries, which is of cyclical type.

    Here unemployment in India is the result of deficiency of capital. Indian industries are not getting adequate amount of capital for its necessary expansion so as to absorb the entire surplus labour force into it.

    Moreover, larger number of labour force is engaged in the agricultural sector of the Indian economy than what is really needed. This has reduced the marginal product of agricultural labourer either to a negligible amount or to zero or even to a negative amount.

    There exists disguised unemployment in Indian agricultural sector which has resulted from too much dependence of population on land and absence of alternative occupations in the rural areas.

    Moreover, in the urban areas of our country, the problem of educated unemployment has also taken a serious turn. Thus both the rural and urban area of our country has been suffering from the serious problem of unemployment and under-employment to a large extent.

    Thus the Third Five Year Plan mentioned, “Urban and Rural unemployment in fact constitute an indivisible problem.” On the basis of NSS data, the planning commission has estimated that the total backlog of unemployed at the end of Seventh Plan, i.e., in 1990 would be around 28 million.

    During the 5 year period of 1990-95, new entrants to the labour force are estimated to be around 37 million. To put it in another way we can guess that total burden of unemployment during this Eighth Plan would be around 65 million which is a matter of serious concern for the economy of our country.

    The incidence of unemployment on CDS basis increased from 7.31 per cent of labour force in 1999-2000 to 8.28 per cent of labour force in 2004-05.

    Indian Economy:Characteristic # 5.

    Poor rate of capital formation:

    Capital deficiency is one of the characteristic features of the Indian economy. Both the amount of capital available per head and the present rate of capital formation in India is very low. Consumption of crude steel and energy are the two important indicators of low capital per head in the under-developed countries like India.

    In 1987, the per capita consumption of steel in India was only 20 kg as against 582 kg for Japan, 417 kg for U.S.A., 259 kg for U.K. and 64 kg for China. Similarly, the per capita consumption of electricity in 2003 was only 594 for India as against 14,057 for U.S.A., 5,943 for U.K., 8,212 for Japan and 1,440 for China.

    Moreover, this low level of capital formation in India is also due to weakness of the inducement of invest and also due to low propensity and capacity to save. As per Colin Clark’s estimate, in order to maintain the same standard of living, India requires at least 14 per cent level of gross capital formation.

    To achieve a higher rate of economic growth and to improve the standard of living, a still higher rate of capital formation is very much required in India. In India the rate of saving as per cent of GDP has gradually increased from 14.2 per cent in 1965-66 to 30.6 per cent in 2013-14 which is moderately high in comparison to that of 30 per cent in Japan, 23 per cent in Germany, 15 per cent in U.K. and 17 per cent in USA.

    But considering the heavy population pressure and the need for self sustained growth, the present rate of saving is inadequate and thus the enhancement of the rate of capital formation is badly needed.

    Indian Economy:Characteristic # 6.

    Inequality in the distribution of wealth:

    Another important characteristic of the Indian economy is the mal-distribution of wealth: The report of the Reserve Bank of India reveals that nearly 20 per cent of the households owing less than Rs 1000 worth of assets possess only 0.7 per cent of the total assets.

    Moreover, 51 per cent of the households owing less than Rs 5000 worth of assets possessed barely 8 per cent of the total assets. Lastly, the top four per cent households possessing assets worth more than Rs 50,000 held more than 31 per cent of the total assets.

    Maldistribution in income is the result of inequality in the distribution of assets in the rural areas. On the other hand, in respect of industrial front there occurs a high degree of concentration of assets in the hands of very few big business houses. This shows high degree of assets concentration in the hands of very few powerful business houses of our country.

    Indian Economy:Characteristic # 7.

    Low level of technology:

    Prevalence of low level of technology is one of the important characteristics of an underdeveloped economy like India. The economy of our country is thus suffering from technological backwardness. Obsolete techniques of production are largely being applied in both the agricultural and industrial sectors of our country.

    Sophisticated modern technology is being applied in productive units at a very limited scale as it is very much expensive. Moreover, it is very much difficult to adopt modern technology in Indian productive system with its untrained, illiterate and unskilled labour.

    Thus due to the application of poor technology and lower skills, the productivity- in both the agricultural and industrial sectors of our country is very low. This has resulted in inefficient and insufficient production leading towards general poverty in our economy.

    Indian Economy:Characteristic # 8.

    Under-utilisation of natural resources:

    In respect of natural endowments India is considered as a very rich country. Various types of natural resources, viz., land, water, minerals, forest and power resources are available in sufficient quantity in the various parts of the country.

    But due to its various inherent problems like inaccessible region, primitive techniques, shortage of capital and small extent of the market such huge resources remained largely under-utilised. A huge quantity of mineral and forest resources of India still remains largely unexplored. Until recently, India was not in position to develop even 5 per cent of total hydropower potential of the country.

    Indian Economy:Characteristic # 9.

    Lack of infrastructure:

    Lack of infrastructural facilities is one of the serious problems from which the Indian economy has been suffering till today. These infrastructural facilities include transportation and communication facilities, electricity generation and distribution, banking and credit facilities, economic organisation, health and educational institutes etc.

    The two most vital sectors, i.e. agriculture and industry could not make much headway in the absence of proper infrastructural facilities in the country. Moreover, due to the absence of proper infrastructural facilities, development potential of different regions of the country largely remains under-utilised.

    Indian Economy:Characteristic # 10.

    Low level of living:

    The standard of living of Indian people in general is considered as very low. Nearly 25 to 40 per cent of the population in India suffers from malnutrition. The average protein content in the Indian diet is about 49 grams only per day in comparison to that of more than double the level in the developed countries of the world.

    Moreover, the low calorie intake in Indian diet is another characteristic of low level of living. In 1996 the daily average calorie intake of food in India was only 2,415 in comparison to that of 3,400 calories per day in various developed countries of the world. The present calorie level in India is just above the minimum caloric level required for sustaining life which is estimated at 2100 calories.

    Moreover, a small percentage of Indian populations have access to safe drinking water and proper housing facilities. As per the estimate of National Building Organisation (NBO), in total there was a shortage of 31 million housing units at the end of March, 1991 and by the turn of the century, total backlog of housing shortage in the country is around 41 million units.

    Indian Economy:Characteristic # 11.

    Poor quality of human capital:

    Indian economy is suffering from its poor quality of human capital. Mass illiteracy is the root of this problem and illiteracy at the same time is retarding the process of economic growth of our country. As per 2001 census, 65.3 per cent of the total population of India is literate and the rest 34.7 per cent still remains illiterate.

    In most of the developed countries like U.S.A., U.K., Canada, Australia etc. the level of illiteracy is even below 3 per cent. Moreover, the problem of illiteracy in India makes way for conservatism and this is going against the economy of the country.

    Besides, low level of living is also responsible for poor health condition of the general masses. All these have resulted the problem of poor quality of human capital in the country.

    Indian Economy:Characteristic # 12.

    Demographic characteristics:

    The demographic characteristics of India are not at all satisfactory rather these are associated with high density of population, a smaller proportion of the population in working age group of 15-60 years and a comparatively larger proportion of population in the minor age group of 0-15 years, As per 2011 census, the density of population in India was 382 per sq km. as compared with world density of population of 41 per sq km.

    Even in China, the density is nearly 123 per sq km. Again, as per 2001 census, 35.6 per cent of the total population is in the age group of 0-14 years, 58.2 per cent is in the working age group of 15-60 years and about 6.3 per cent in the age group of 60 and above. All these shows that the dependency burden of our population is very high.

    Moreover, lower income level, low level of living including absence of balanced diet and proper housing and medical facilities are responsible for low life expectancy of 63.9 years in India in comparison to that of 75 years in most of the developed countries of the world and high rate of infant mortality in India, i.e., about 53 per 1000 children as against only 5 to 7 per 1000 in developed countries,

    Indian Economy:Characteristic # 13.

    Inadequate development of economic organisation:

    Poor economic organisation is another important characteristic of the Indian economy. For attaining economic development at a satisfactory rate certain institutions are very much essential. As for example, for mobilisation of savings and to meet other financial needs, more particularly in the rural (areas, development of certain financial institutions are very much essential.

    In India the development of financial institutions is .still inadequate in the rural areas. There is the urgent need to develop certain credit agencies for advancing loan to small farmers on easy terms as well as to provide long term and medium term loan to industries.

    For protecting poor tenants from the clutches of landlords, proper enforcement of tenancy legislation is very much necessary. All these require maintenance of honest and efficient administrative machinery which India is lacking very much.

    Thus from the foregoing analysis it has been revealed that the Indian economy largely remains underdeveloped as the economy still exhibits the basic features of an underdeveloped economy. But considering its developmental strategy followed during last six decades of its planning and the progress attained in certain areas thereupon, Indian economy can be safely considered as a developing economy.

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