Finance is Considered as the Life Blood

Executive Summary

The report aims to conduct a comprehensive analysis regarding how the finance or financial sector can play the role of life blood or engine for the growth of international trade and development. In this regard, the discussion critically focuses on evaluating how the financial markets work to allocate capital within a domestic economy and internationally for trade, investment and development purposes. Moreover, the report also provides a critical assessment of the current financial sector of a developing economy such as India and evaluates the key challenges that it faces due to industrialization and trade policies. The overall critical assessment of this report contains critical details about standards set by the GATT /World Trade Organization and certain regional trade agreements. For students who are grappling with economics dissertation help, understanding all these intricate dynamics is vital for crafting insightful analyses.

Additionally, the report also investigates the impacts of World Bank policies, investment treaties between states as well as the agreement between multinationals with adequate emphasis upon the current scenario of the Indian economy. Similarly, a clear assessment regarding the impacts of financial system regulations of the Indian government on the country trade and commerce practices. The report provides a range of relevant financial theories as well as concepts and implements them in the real business context of India by analysing the risk-return relationship and options.

Background of Financial Markets

The global trade activities in the modern business phenomenon have been attaining major boost and simultaneously augmenting the significance of the international finance market. The finance market tends to maintain its focus on lending and borrowing in foreign currencies to finance global trade transactions (Wurgler, 2000). About the recent scenario, the most influencing factors of the global finance market include deregulation, technological advancements, institutionalization, competitive business environment, and continuous flow of information (Beck et al., 2000). In this context, the role of international trade agreement regulatory councils or boards, as well as institutions, are also recognized to play a crucial role in strengthening the global finance market and escalate the growth rate of international trade and commerce. For instance, regulatory board or council such as General Agreement on Tariffs and Trade (GATT), World Trade Organisation (WTO), World Bank and different treaties between states are witnessed to increase performance of international finance market which further led to a tremendous growth in global trade and commerce activities (Yang, 2010).

The main purpose of GATT is to eliminate barriers to international trade. The fundamental regulatory principles of GATT are formed to minimize or eliminate quotas, subsidies, and tariffs that create major hurdles for multinationals to conduct international trade and commerce efficiently. The primary aim of GATT relating to international trade was to regulate the contracting parties for attaining the underlying purpose of the agreement which was to eliminate tariffs and different other barriers (Yang, 2010). Nevertheless, GATT was also introduced and practiced liberalizing international trade. Conserving potential benefits for the developing economies to a certain extent and leverage them to fuel the growth of international trade is also a major role that has been playing by GATT. In this context, raising living standards as well as enabling progressive development of the economies associated with the connecting parties can be considered as a major goal of GATT which has been enabling developing economies to attain growth and efficiently participate in the international trade domains (Robertson et al., 2002).

Accordingly, global trade organization such as WTO which facilitates by implementing administrations for smooth trade agreement operations among countries. The main role of WTO in international trade is to provide a fair platform to all the member countries to support a range of import and export transactions between the agreed parties or countries. WTO is also considered as the only international body to offer trade opportunities among member countries to perform trade operations efficiently without having barriers (Chaisse & Matsushita, 2015). On the other hand, countries apart from the member nations of WTO must negotiate trade agreements independently with their trading partner. With delivering resolution for a range of trade disputes among parties, WTO entails the potential to conserve world peace as well as bilateral relations between its member nations through monitoring negotiations and mediation (Krishnan & Nivetha, 2018). Therefore, the role of WTO is also prevalent in the development of international finance and seemingly increase trade opportunities among the member countries.

Capital Allocation within the Domestic Economy

The financial market of India can be regarded as one of the leading and prominent factors in the global trade environment. The financial market, such Security Exchange Board of India (SEBI) in India, was established during the 19th century due to its major trade liberalization as well as trade relations with other global partners. Currently, the financial market of India consists of 23 stock exchanges including the dominant entities such as BSE, NSE, and OTCEI among others (Bhole, 1993). The stock exchanges in the Indian financial market are regulated by structured Security Contracts or regulations Act and by SEBI itself. The key functions or roles of stock exchanges in India are categorized into six categories such as

Providing ready and uninterrupted financial market

Delivering adequate information about the sales and price

Ensuring the safety and security of transactions and investment

Offering support for the mobilisation of capital formation and savings

Maintaining and monitoring Barometer of trade and economic condition and

Providing better and improved allocation of funds

It has long been witnessed that financial markets and associated bodies or institutions seem to leverage the betterment of the capital allocation process. The process thus provides a major contribution to the growth and development of the economic and trade condition. The efficiency of capital allocation can be improved through a competitive pricing trend (McKinsey & Company, 2017). According to Durnev et al. (2003), creating a domestic or internal capital market can improve capital allocation across a range of investment projects. These business groups are commonly observed in developing and transition economies. However, the idea of creating an internal market is further argued that the business groups in the developing or emerging economies can also be to deliver adequate responses regarding imperfections in the capital market (Durnev et al., 2003).

About the modern phenomenon, the capita allocation has been critically playing a major role in the Indian financial market and gain major potential to empower trade relations with other foreign countries. The allocation of capital can be performed using five approaches, such as (1) Merger and Acquisition, (2) Repurchase of shares, (3) Invest in organic growth, (4) Paydown debt, and (5) Pay dividends. In India, the payment allocation, both intermediation as well as tunneling, plays a crucial role in Indian business groups (McKinsey & Company, 2017). However, in various situations, it has been recognized that intermediation is less capable of creating the value of the economy. Hence, it may not be a suitable process of capital allocation to increase growth in domestic trade operations for Indian business groups as the value of economy plays a critical role for countries to perform trade and commerce related activities with foreign partners.

Capital Allocation within International Markets

The allocation of capital in the global market includes investing in both developed and emerging or developing economies (Rajan & Zingales, 2003). The process is a way of allocating fund’s capital to determine costs along with associated risks and return. Investing in developing markets can be conducted through different procedures such as buying of financial assets straight from the domestic stock market or buying financial assets directly from global markets (Ross & Zervos, 1998).

If we talk about the capital allocation trend of India with internal markets, it can be said that the allocation of capital has been playing a vital role in the Indian economy and its trade relations with other parties globally. The leading financially dominating industries, such as the infrastructure development sector, can be duly considered as a major contributor to India’s strong financial growth and trade development (Krishnan & Nivetha, 2018). Since the economic liberation with the initiation of reformation during the period of 1992-93, the Indian financial system becomes strongly market oriented. Market efficiency was more likely to reflect on the dissemination of information as well as the reduction of various transactional costs and capital allocation (Mishra et al., 2011). Therefore, the allocation of capital has long been recognized to prioritized in the Indian financial system and is currently considered as one of the most contributing factors towards the growth and development of overall financial system and trade operations. Also, it is worth to mention that the domestic and international regulatory environment also increases the efficiency of the capital allocation processes. Regarding the developing economies, the financial system is strongly focused on complying with the underlying regulatory implications and principles.

Role of Regulatory Environment on Financial System and Capital Allocation

The primary objective of the financial regulatory system is to create and nurture self-regulating markets. Although self-regulating markets are more likely to face risks from the international financial regulatory system, they are capable of averting possible dangers and maintain the growth and prosperity of the markets. From a theoretical perspective, institutionalization and distinction between both risks and dangers are often considered as the key to achieving the optimal purpose of the financial regulatory systems of creating and maintaining markets (Kumar, 2014). Additionally, government regulations for the financial system is also a major part of financial systems in the emerging or developing markets. The main purpose of governmental regulations for competitive markets is to prevent possible failure of the market. About the proponents of regulations, it has been argued that an unregulated financial market is more likely to face significant loss due to less intensity of competition, efficiency, stability, and credibility.

Nevertheless, such markets often face challenges associated with the detachment of shareholders or investors (Teall, 2013). Therefore, the role of regulations in financial markets is prominent. Few major roles of the regulations towards international finance include:

Facilitates participation while establishing rules that are designed to build a self-regulating financial market which includes risks for all the participants

Helps in mediating the rules and regulations during the period when the financial markets involve any danger

Enables to conduct a review of incidents that become dangerous to identify whether or not the existing regulations require improved enforcement

Indian financial system is regulated by few major regulatory bodies namely, Reserve Bank of India (RBI), Security Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), Forward Market Commission of India (FMCI) and Pension Fund Regulatory and Development Authority (PFRDA). In this context, SEBI entails full autonomy as well as the authority to regulate and develop the Indian capital market (Jaiswal, 2016). The regulatory board (SEBI) is responsible for protecting interests and educating the investors with critically complying with the fundamental regulatory guidelines. The board also regulates and controls business regarding stock exchange as well as different types of other security markets. Also, audit and monitoring performance of the stock market, and eliminating fraud within the capital market is also a major responsibility of the regulatory principles of SEBI in India (Jaiswal, 2016).

In international trade and commerce activities, the underlying guidelines of SEBI tend to protect marketers or investors from various frauds and risks from the international financial market environment. In India, the capital market, as well as protection of investors’ interest, has become a major responsibility of SEBI. The key functions of SEBI are regulated and coordinated through a high-level committee on the financial and capital market of the country (Jaiswal, 2016). The coordinating committee of SEBI for India’s financial and capital market negotiates numbers of policy level concerns, and it requires inter-regulatory coordination between SEBI and other regulatory bodies such as RBI, IRDA, and PFRDA among others. The current regulatory structure of Indian financial and capital market has been illustrated below:

Fig.1: Financial Institutions and Market Structure Regulation of India

Concerning the above illustration, the fundamental functions of SEBI include:

Establishing regulations of business in the national stock exchange as well as other security markets

Regulating and registering collective investment scheme related works, such as mutual funds

Prohibiting fraudulent and unfair practices associated with security market trading

Promoting education for the investors and training of intermediaries

Barring insider trading within the securities through the imposition of penalties

Establishing regulations for substantial acquisition of takeovers and shares of institutions

Therefore, it can be said that the regulatory boards in the Indian financial and investment market have been playing a critical role in empowering the overall structure and performance of the financial and capital market system. Additionally, the continuous process of reforming norms by the competitive intensity in the global financial market also plays a major role in the Indian financial market to avert possible risks associated with the allocation of capital and resources in international markets.

Critical Evaluation of the Indian Economy

Current Market Size

Indian has become one of the leading and fastest economies in the globe. Supported by its strong democracy and partnership with leading international economies, India is expected to become one of the strongest markets with extensive potential of economic liberalization. According to the recent phenomenon, the nominal Gross Domestic Product (GDP) has been estimated 12% during the fiscal year 2019-20. The growth rate achieved an increase of 5% in the first quarter of the same fiscal year at a constant price of the year 2011-12. Moreover, the Indian economy has retained the third position globally in terms of the size of the start-up base. The total technology start-ups have been recorded over 4,750 with the new start-ups of 1,400 that have been founded in the year 2016 (Ministry of Commerce & Industry, Government of India, 2019).

Apart from its economic growth in GDP rates, the labour force of the country is also expected to increase major growth by reaching to 160 to 170 million by the year 2020. The increased growth in population caused major growth in labour participation. Moreover, increasing enrolment in higher educations is also considered a major factor leading to the growth of the Indian economy. If we talk about the development records, the increasing investment across differential trading and commercial sectors has substantially broadened the size of its economy. The Merger & Acquisition (M&A) practices are increased to 53.3% in India, which valued US$ 77.6 billion according to the financial year 2017.

Nevertheless, the value regarding Private Equity (PE) deals also reached a phenomenal height and is valued US$ 24.4 billion. Similarly, increasing growth in export transactions of US$ 92.33 billion (Y-O-Y) with a growth rate of 4.32% during April 2019 is also a major result that the Indian economy achieved through its continuous economic liberalization (Ministry of Commerce & Industry, Government of India, 2019). Between the period of April 2000 to June 2019, the equity inflow from Foreign Direct Investment reached US$436.47 billion, which is one of the landmark performances of India’s current economic condition. The leading industrial sectors that contributed to the FDI inflow growth include the service, software, and hardware, trading, construction, automobiles, and telecommunication industries (Ministry of Commerce & Industry, Government of India, 2019). Therefore, the growth in its domestic economic resources, as well as economic policies and regulatory systems, are the most critical factors that led India’s economic condition to become highly emerged economies in the world.

Critical Evaluation of Challenges that Country Faces due to Industrialisation and Trade Policies

Although industrialization is often considered as the most critical aspect of economic growth and trade development, in many cases, industrialization also turned into a curse for economies. The industrialization has major financial disadvantages as it is more likely to cause gaps between the poor and the rich because it tends to divide labour and capital. Demographics that own strong old on capital tend to obtain excessive benefits derived from a range of economic activities. Hence, industrialization causes a major disparity in terms of wealth and income level of the demographics within an economy (Gupta & Singh, 2019). About the current Indian economy, industrialization has been causing a major gap between the demographics. The economic activities associated with a range of domestic and international trading practices seemingly increasing profit for the people with a higher capacity of market capital. Hence, being a developing nation, the industrialization is somehow causing a major gap in income levels and wealth of its demographics.

Poor capital formation is another major disadvantage derived from industrialization in India. The sluggish rate in capital formation is also considered as the most affecting factor in the Indian economy to slower its industrial growth rate. This is because the country has a large size of poverty, where individuals are not able to save more in comparison to their negligible part of earnings (Siddiqui, 2018). Therefore, a low rate of savings significantly leads to a less or minimum rate of capital formation witnessed in the Indian economy.

Challenges from existing trade policies are also the reason for destabilizing continuous economic growth in India. The domestic market such as manufacturers and traders usually face major challenges due to the increasing protectionism in India’s trade policies. The foreign trade policy of India aims to increase its share price in the international markets from 2.1% to 3.5%. Moreover, the trade policy for the foreign trading environment is also aimed to double India’s export to a value of US$900 billion by the end of the fiscal year 2020 (Puri, 2017). However, the continuous focus on reviving its international trade policy has been inviting a major challenge for the Indian economy to attain the growth of its economic condition. Therefore, the risk of economic slowdown has become a major concern for the government that witnessed in the recent economic environment of India.

Conclusion

In the current scenario, the Indian economy is often considered as the most contending amongst all emerging markets globally, both in the context of the growth of finance trade liberalization. The current growth and development in the financial market and trade have been witnessed due to the economic liberalization as well as India’s increased focus on privatization. However, concerns associated with capital allocation, as well as poor capital formation, can be major factors for its uncalled future challenges. Also, India has been facing serious challenges in its trade policy segment. The increasing uncertainty of economic slowdown in global markets and protectionism can impose significant barriers for the Indian economy to achieve financial growth and trade development. To critically achieve the underlying objectives of its economic policies, the government and India’s leading manufacturing industries should prepare for a future opportunity of engaging in a growing multilateral trade domain. In this context, India should strongly focus on prioritizing its policy measures to meet and conform international standards through negotiating with the global financial regulatory boards and entities.

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