ms-03 mba assignment july dec 2010 Question2

2.      Analyze the Growth and Structure of the Private Sector in India with special reference to the informal sector. 

Solution:

Growth of Private Sector

The phenomenal growth of private sector of India can be attributed to political will, financial reforms, usage of more advanced technology, young and large English speaking working class. The 7-8 % of annual GDP growth rate India is the one of the highest growth rate in the world. The last 15 years witnessed a phenomenal rise of the growth of private sector in India. The opening up of Indian economy has led to free inflow of foreign direct investment (FDI) along with modern cutting edge technology, which propelled India's economic growth.

           Previously, the Indian market were ruled by the government enterprises but the scene in Indian market changed as soon as the markets were opened for investments. This saw the rise of the Indian private companies which prioritized customer's need and speedy service. This further fueled competition amongst same industry players and even in government organizations. Further, the government of India also divested some of its enterprises to ensure smooth operation of these companies which was otherwise were loss making. It also went further and forged joint venture private Indian companies, especially in sectors like, telecommunication, petroleum, housing and infrastructure. This inculcated healthy competition and benefited the end consumers, since the cost of service or products come down substantially.

           B grade private Indian companies are also offering lucrative and competitively priced products or service, whose quality is at par with A grade companies. Big players of Indian markets have been forced to lower their price bands to remain alive in the competition. Further, these big private Indian companies are offering mouth watering benefits in the form of gifts, rebates and even holding lucky draws to stay ahead in the race of 'market supremacy'. Gone are the days when 'brand loyalty, accounted for big customer base. Today, general Indian customers are trendy, flexible and are extremely flexible with their choice. Steady growth of private sector has sent a sense of urgency and insecurity amongst main market players. Defensive methods of protection of Brands against competitors are becoming popular. Legal instruments like patents, trademarks, industrial designs and copyrights filing has increased many fold and so is counter claim and litigation. Further, Mergers and Acquisitions, collaborations and licensing has become a popular amongst private Indian companies.

           The best thing that has happened to the overall Indian market with the growth of private sector is that it has helped to shed bureaucracy and lengthy official process and supplemented it by customer eccentric service, good work ethics, professionalism and transparency of accounts.

Some positive effect of the growth of private sector in India are as follows -

• Manufacturing registered 11.9% growth
• The passenger vehicles sector grew by 11.61% during April-May 2007
• Electricity, gas & water supply performed well and recorded an impressive growth rate of 8.3%
• Construction growth rate rose to 10.7%
• Trade, hotels, transport and communication registered a growth rate of 12%
• Financing, insurance, real estate and business services recorded an impressive growth rate of at 11% during the 1st quarter of this fiscal
• Exports grew by 18.11% during the 1st quarter of 2007-2008 and the imports shoot up by 34.30% during the same period
• The food sector is estimated to be of US$ 200 billion and it is expected to grow to $310 billion by 2015
• Merchandise Exports recorded strong growth

Organizational structure

The Private Sector Department (OPSM) operates through a Front Office and five Divisions namely:

• Financial Intermediation Division
• Industries & Services Division
• Infrastructure & PPP Division
• Microfinance & SME Development Division
• Portfolio Management Division

Financial Intermediation Division (OPSM 1)

The mandate of the Financial Intermediation Division is to promote the development of efficient financial sectors in the Bank’s Regional Member Countries (RMCs).  Toward this objective, the Division finances private financial institutions and regional Development Finance Institutions (DFIs).  The Division also finances public financial institutions that are able to borrow on the strength of their own Balance Sheet without recourse to sovereign guarantees.

The core activities of the Division are geared towards:

• increasing the financial sector’s responsiveness to demand for long-term capital,
• strengthening the capacity of financial institutions, especially in relation to the financing of Small and Medium Scale Enterprises (SMEs),
• supporting the development of Africa’s Development Finance Institutions (DFIs), and
• ensuring sound business and financial management practices within the assisted institutions.

The Division uses four primary instruments to support financial sector development, viz. Lines of Credit, Equity Participations, Guarantees and Technical Assistance.

Industries and Services Division (OPSM 2)

The main objective of this division is to ensure the Bank’s Group’s support to private sector development in RMCs through equity and direct lending to private sector enterprises mainly in the sector of petrochemicals, mining, oil and gas, manufacturing, agribusiness, hospitality, health and education.

The Division’s role in Africa includes:

• Support economic growth by helping RMCs diversify their economies, process their raw materials and add value to their natural resources.
• Increase local participation by involving provinces, local communities, local SMEs in the project life cycle (from preliminary to post project phase)
• Apply high standards on environmental and social impacts.
• Help implement high standards on good governance such as EITI and revenues management;
• Provide utilities (water, electricity, connectivity…), health and education to local communities

The Division’s role within the Bank includes:

• Provide solutions to ADB portfolio concentration and weak franchise concerns;
• Offer opportunities to ADF countries to access ADB resources as part of the Bank’s strategy for fragile and post conflict countries.
• Promote investments diversification in various sub sectors.

Frequently used instruments/products:

• Long-term loans in foreign currencies and occasionally in local currencies
• Guarantees in foreign and local currencies
• Participation (equity and quasi equity investments)
• Syndications

Infrastructure and PPP Division (OPSM 3)

            The primary role of the Infrastructure and PPP Division (OPSM 3) is implement the private sector strategy in the area of infrastructure development and public-private partnerships (PPPs) on the continent, on a regional basis, and within individual RMCs.   The Division provides support directly to corporate entities and projects, as well as through specialised intermediaries such as private equity and venture capital funds.

            The principal lending and investment activities of the Division entail the identification, preparation of and appraisal of programs and projects that provide debt, equity, credit enhancement (including guarantees) or a combination, in order to:

• Provide financial support to promote private sector infrastructure development and PPPs on a regional, national or sub-national basis in RMCs including health and education sectors;
• Support the development of indigenous entrepreneurship by promoting the participation of local entrepreneurs in infrastructure projects supported by the Bank;
• Promote the development of competitive private enterprises, through the development of efficient and affordable infrastructure services;
• Support private sector involvement in programs aiming at improving the quality of life of communities within RMCs by accelerating delivery and access to improved and affordable infrastructure services, including water and sanitation, power, telecommunications, transportation, health and education.

The Division’s non-lending activities as advisor and partner include:

• Technical assistance for the development and preparation of projects identified as a priority at regional, national and local level, though NEPAD and/or by individual RMCs;
• Technical assistance and capacity building support to promote international and local private sector participation in infrastructure projects;
• Collaborating with Country and Regional Departments to identify areas of policy dialogue and interventions to support Governments of RMCs to facilitate PPPs;
• Fostering and building strong development partnerships with multilateral, regional and national development banks, private sector financial institutions and other key players to support infrastructure development and PPPs on the continent.

Microfinance & SME Development Division (OPSM 4)

            In line with its poverty reduction mandate and Private Sector Strategy to support MSMEs development, the Bank has created a dedicated division for ‘Micro-Finance & SME Development’. The division is mandated to support micro-enterprises through microfinance, and SMEs with growth potential through specific support initiatives. This entails building the capacity of the market to avail appropriate instruments and mechanisms for MSMEs’ growth and enhanced access to finance.

General objectives to be achieved by the Division are the following:

• Enhancing the financial systems in order to better serve the MSME sector and improving the financial environment for MSMEs;
• Enhancing the growth and competitiveness of MSMEs in a globalized economy; and
• Promote partnerships with development partners and technical partners as well as towards enterprise development in Africa.

The Division will support the financial systems deepening through:

• Leveraging, strengthening and commercializing the MFIs industry;
• Building capacity of existing commercial banks and institutions to adequately serve the financial needs of the MSMEs.

            In selecting this approach, the Bank intends to play a catalytic and pioneering role in developing innovative structured finance and risk sharing mechanisms for the benefit of specific targeted smaller enterprises niches, in particular those with high growth potential and added economic value within the RMCs like export –oriented SMEs, as well as disadvantaged group like women, youth, black empowerment and rural populations. This includes incubation and implementation of SME financing mechanisms and facilitating their commercial uptake by public and private sector actors in RMCs.

            Another key role of the Division is to enhance the Bank’s additionality role and the impact of private sector transactions in infrastructure and extractive industry projects through Local Economic Linkages (LEL) approaches, including first and foremost through enhancing direct and indirect forward and backward SME linkages with the projects at hand, but also through capacity building of local workforce, community development at large, and through local services and infrastructure development around large projects.

            A further key component of the Division’s support role is the provision of targeted technical assistance and capacity building support build the market capacity to address the financing and non financing needs of MSMEs.

Role of Portfolio Management Division (OPSM 5)

            The portfolio Management Division is assigned primary responsibility for the management of the Bank’s non-sovereign portfolio (private sector portfolio, enclave project portfolio, non-sovereign public portfolio and public sector equity investments) from first disbursement of a project until the project is completed.
This division has evolved in recent years and now operates under four primary groups of activities:

• Transaction Administration
• Project Management
• Workouts
• Exposure Management.