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Impact of the Fluctuations in Indian Economy on the Profitability of an Industry w. r. t. Manufacturing Sector and Service Sector (for the Period ) Thesis Submitted to the D. Y. Patil University,
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Impact of the Fluctuations in Indian Economy on the Profitability of an Industry w. r. t. Manufacturing Sector and Service Sector (for the Period ) Thesis Submitted to the D. Y. Patil University, Department of Business Management in partial fulfillment of the requirements for the award of the Degree of DOCTOR OF PHILOSOPHY In BUSINESS MANAGEMENT Submitted by DEEPALI M. GARGE (Enrollment No. DYP-PhD ) Research Guide Prof. Dr. R. Gopal Director, Dean and Head of the Department D.Y. PATIL UNIVERSITY, DEPARTMENT OF BUSINESS MANAGEMENT, Sector 4, Plot No. 10, CBD Belapur, Navi Mumbai December 2014 IMPACT OF THE FLUCTUATIONS IN INDIAN ECONOMY ON THE PROFITABILITY OF AN INDUSTRY W. R. T. MANUFACTURING SECTOR AND SERVICE SECTOR (FOR THE PERIOD ) i DECLARATION I hereby declare that the thesis entitled Impact of the Fluctuations in Indian Economy on the Profitability of an Industry w. r. t. Manufacturing Sector and Service Sector (for the Period ) submitted for the award of Doctor of Philosophy (PhD) in Business Management at the D.Y. Patil University, Department of Business Management is my original work and the thesis has not formed the basis for the award of any degree, associate ship, fellowship or any other similar titles. The material borrowed from other sources and incorporated in the thesis has been duly acknowledged. I understand that I myself could be held responsible and accountable for plagiarism, if any, detected later on. The research papers published based on the research conducted during the course of the study are also based on the study and not borrowed from any other sources. Place : Navi Mumbai Signature of the Student Date : Enrollment No. DYP-PhD ii CERTIFICATE This is to certify that the thesis entitled Impact of the Fluctuations in Indian Economy on the Profitability of an Industry w. r. t. Manufacturing Sector and Service Sector (for the Period ) submitted by Deepali M Garge is a bonafide research work in partial fulfilment of the requirements for the award of the Doctor of Philosophy in Business Management at the D.Y.Patil University, Department of Business Management, and that the thesis has not formed the basis for the award previously of any degree, diploma, associateship, fellowship or any other similar title of any University or Institution. Also it is certified that, the thesis represents an independent work on the part of the candidate. Place: Navi Mumbai, Date: Dr. R. Gopal Signature of the Head of the Department Dr. R. Gopal Signature of Guide iii ACKNOWLEDGEMENT First and foremost, I owe thanks to the Almighty God for giving me strength to pursue this study. I am greatly indebted to the D.Y. Patil University, Department of Business Management which has accepted me for the Doctoral Program and provided me with an excellent opportunity to carry out the present research work. I am grateful to my guide, mentor, philosopher Prof. Dr. R. Gopal who encouraged me during the entire study. His esteemed guidance at every step made my research more directional and focused. I am grateful to him, for guiding me throughout the research period and for providing his constructive criticism which made me to bring my best. I would also like to thank sir for being there at any point of time without considering his own precious personal time. I would like to thank my senior most colleague Ranjeev Manrao and all the Industry experts who spent their valuable time for me and helped me to complete research work. Very special thanks to my dear husband, my sweet little child and my parents for their support throughout the course of this study. I am grateful to my in-laws for their immense support in completing the thesis. Lastly, I also wish to thank all my near and dear ones who have been directly and indirectly instrumental in the completion of my dissertation. iv Contents Chapter No Subsection Title List of Tables List of Figures List of Abbreviations EXECUTIVE SUMMARY Introduction: Indian Economy and Fluctuations Page No. Viii ix-xi Xii xiii xxii Global Economic Fluctuations Phases of economic fluctuation a b c & after 1.3 A comparative study of 2008 economic meltdown with reference to impact on India 21 and USA economy 1.4 Manufacturing Industries in India Service Industries in India 49 Literature Review and Research Gap Studies on Economic Fluctuations Studies on service sector Studies on manufacturing sector Research Gap 60 Statement of the Problem Objectives of the Study Hypotheses Defining variables for the Study Operational Definition of the variables GDP Inflation GDP deflator PBDIT 72 Research Methodology Conceptual Framework Research Design Sources of Data Econometric Modelling for the Hypothesis Details of statistical tools Used for the study Limitations of the study 85 Case Study on Manufacturing and Service 87 Sector Industry Impact of fluctuations on Profitability of Hindustan Unilever Ltd Impact of fluctuations on Profitability v Imperial Tobacco Company (ITC) Ltd 100 Impact of fluctuations on Profitability of Glenmark Pharmaceuticals Impact of fluctuations on Profitability of Dr Reddy s Laboratories Ltd Impact of fluctuations on Profitability of TATA Consultancy Services Ltd Impact of fluctuations on Profitability of Infosys Ltd Impact of fluctuations on Profitability of Reliance Capital Ltd Summary of Impact of fluctuations on Profitability of sample companies of Manufacturing and Services Sector Impact of Inflation Impact of Inflation on Profitability of Manufacturing Industries Impact of Inflation on Profitability of Service Industries Recommendations to industries 164 Data Analysis, Interpretations and Model Estimations Model 1: (GDP and profitability of manufacturing sector) Karl Pearson s correlation coefficient Descriptive Analysis of Two variables Model 2: : (GDP and profitability of service sector) Karl Pearson s correlation coefficient 7.4 Model 3 (GDP and Inflation) Granger s Causality Test Inferential Statistics Tests of Granger s Causality Validation of Data through Industry Experts Results and Discussion Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Summary of Hypothesis, Statistical Tools Used and Results Conclusion 218 vi 12. Recommendations & Future scope of the Study Suggestions 226 References 228 Annexure 234 vii List of Table Table No. Title of Table Page No. 1. Sectoral growth rate in the year Growth Rate of GDP Vs Inflation in India, viii List of Figures Figure Title of Figure Page No. No. 1. Sectoral Composition of GDP of India 2 2. Growth Rate of GDP in percentage YoY 5 3. Ten Years Study of GDP fc at constant prices 7 4. Growth rate of IIP since Nasdaq fall in Varieties of crises-world Aggregate-1932 to GDP trend of India since year 1960 to Calculated trend of GDP of India Author s Prediction of GDP growth rate of India for the year in GDP trend of USA since year 1960 to Author s Prediction of GDP growth rate of USA for the year in Comparative study of India and USA Business Cycle since year to Factory forward process GDP fc quarterly growth rate since Q. 2, Use-based classification of India s manufacturing sector Classification of FMCG Industry GDP growth rate yearly, at factor cost & market price Earnings Per Share of TCS since 2005 to EBITDA of TCS since 2005 to Fit for better future for industries Recommendations to Industries in turbulence time Growth Rate of GDP at Factor Cost (Bar Diagram) GDP at Factor cost with Actual values Inflation yearwise trend GDP Growth rate at various inflation values Growth rate of Manufacturing Sector Growth Rate of Services Sector PBDIT of Manufacturing Sector 240 ix 29. PBDIT of Service Sector Regression scatter plot for PBDIT of Manufacturing w.r.t. EBIT of 242 HUL. 31. Regression scatter plot for PBDIT of Manufacturing w.r.t. EBIT of 243 ITC. 32. Regression scatter plot for PBDIT of Manufacturing w.r.t. EBIT of 244 Glenmark 33. Regression scatter plot for PBDIT of Manufacturing w.r.t. EBIT of 245 Dr Reddy s Laboratories 34. Regression scatter plot for PBDIT of Services w.r.t. EBIT of TCS Regression scatter plot for PBDIT of Services w.r.t. EBIT of 247 Infosys 36. Regression scatter plot for PBDIT of Services w.r.t. EBIT of 248 Reliance Capital 37. ACF plot for GDP growth PACF plot for GDP growth ACF of Growth Rate of Manufacturing Sector PACF of Growth Rate of Manufacturing Sector ACF for Growth Rate of Services Sector PACF for Growth Rate of Services Sector ACF for Inflation PACF for Inflation ACF for PBDIT of Manufacturing Sector PACF for PBDIT of Manufacturing Sector ACF for PBDIT of Service Sector PACF for PBDIT of Service Sector ACF for EBIT of HUL PACF for EBIT of HUL ACF for EBIT of ITC PACF for EBIT of ITC ACF for EBIT of TCS PACF for EBIT of TCS ACF for EBIT of Reliance Capital PACF for EBIT of Reliance Capital Regression scatter plot for GDP Growth Rate w.r.t. PBDIT of 269 Manufacturing sector 58. Regression scatter plot for GDP Growth Rate w.r.t. PBDIT of 270 x Service sector 59. Regression scatter plot for change in PBDIT of Manufacturing sector w.r.t. change in Inflation 60 Regression scatter plot for change in PBDIT of Service sector w.r.t. change in Inflation xi List of Abbreviations ACF CAGR CMIE CPI CRR CSO EBIT EBITDA FDI FICCI FMCG GDP (fc) GNDM ICRA ICRIER IMF IIP MOSPI NASSCOM NAASDAQ NDP NNP PACF PBDIT RBI SLR UNESCO WPI Auto Correlation Function Compound Annual Growth Rate Centre for Monitoring Indian Economy Consumer Price Index Cash Reserve Ratio Central Statistics Organisation Earnings Before Interest & Taxes Earnings Before Interest, Taxes, Depreciation and Amortisation Foreign Direct Investment Federation of Indian Chamber of Commerce & Industry Fast Moving Consumer Goods Gross Domestic Product at factor cost Global Network Delivery Model Investment Information and Credit Rating Agency Indian Council for Research on International Economic Relations International Monetary Fund Index of Industrial Production Ministry of Statistics & Programme Implementation The National Association of Software and Services Companies National Association of Securities Dealers Automated Quotations Net Domestic Product Net National Product Partial Auto Correlation Function Profit Before Depreciation, Interest & Taxes Reserve Bank of India Statutory Liquidity Ratio United Nations Economic and Social Cooperation Wholesale Price Index xii EXECUTIVE SUMMARY GDP had been the prime calculator of economic growth and also vital to sustenance in economic fluctuations. Future economic growth crucially depends upon positive performance of GDP. Stability and continuity in performance of GDP, controlled creeping Inflation and favourable economic conditions are responsible for progress towards growth in performance of all sectors of economy. Primary sector of economy is Agriculture, secondary is Manufacturing and tertiary sector is Services sector. In India out of total population, highest share is engaged with Agriculture. In present scenario, agriculture is the only sector engaged in highest percentage of population in Indian economy. After primary sector, the tertiary sector and then industry sector provides highest employment. During economic fluctuations, the less affected sector is agriculture sector since there is less impact of global economic activity on the performance of agriculture. Whereas, manufacturing sector and services sector are the most affected sectors during global economic fluctuations. Severe ups and downs in macro economic variables like GDP, Export-Import, Rupee currency devaluation, Inflation, Employment have direct impact on performance and profitability of manufacturing sector and service sector. Precisely, the effects of the global crisis have directly impacted on some important macroeconomic variables. Three general indicators stand out in terms of their quite sudden deterioration during any downfall of an Economy. The decline in the foreign exchange reserves held by the Reserve Bank of India, the fall in the external value of the rupee especially in exchange of the US dollar and the decrease in stock market indices are these three indicators. Similar observations were noted down in these three indicators during downfall of year GDP is considered as the broadest indicator of economic growth and output. Real GDP considers inflation into account, which allows for comparisons against some other historical time xiii periods. There was severe decline in GDP percentage growth rate in (which was 6.77% only). In its previous year ( ), GDP growth rate was 9.32%. Further, because of inflation and rupee devaluation vis-a-vis in exchange of US dollar, performance of Economy deteriorated and reflected in terms of GDP. So, in GDP growth rate was just 4.99%. Economic fluctuations or frictions are always present in economy but get worsened in crisis period. Profitability of manufacturing sector and service sector had serious impact in economic downfall. Several steps were also taken by Reserve Bank of India (RBI) through monetary policy. Changes in repo rate, reverse repo rate, rise and fall in CRR, and SLR were done by RBI. To control money supply in economy, these steps were effective during financial frictions. Fluctuations in economy are not always harmful but, improve the working of the economy. In the present study, introduction of Global economic fluctuations and phases of Global and Indian economic fluctuations was studied in Chapter 1. In these fluctuations, impact on macroeconomic variables like GDP fc, Inflation, and IIP have been described. Manufacturing process comprises of converting raw materials, components or parts into finished or semi finished goods that meet a customer's specifications or expectations has been considered. Manufacturing generally employs a manmachine setup with division of labor in a large scale production. In its earliest form, manufacturing was usually carried out by a single skilled artisan with assistants. According to economists, manufacturing had been a wealth-producing sector of an economy. In chapter 1, impact of fluctuation on manufacturing sector had also been covered by the researcher. The three phases of economic frictions were considered in this research study. The three focused phases were marked as follows: First: From 2002 to 2005, Second: From 2005 to 10 and xiv Third: From 2010 and thereafter. In 2002, the dotcom bubble busted and declined the value of dollar steadily. Sharp drop in stock prices in Nasdaq was observed, which continued till In the year 2008, sub-prime crisis which was also known as financial crisis arose and it had impact global economies till After Great Recession of , problem of Unemployment was faced by major developed economies. Recovery was very difficult for them in post recession period. Almost all countries were adjusting their economies with monetary policy measures. Germany was the country where recovery after recession was prompt and strong. Germany used its previous experience of WWII to stabilise the economy. In this chapter, an analytical study which was carried out in 2011 by the researcher has also been presented with predictions of GDP for the year 2013 for India and USA. In the year 2014, the predictions based on the study were also cross checked by least squares method by the researcher. Further, the two major sectors of economy manufacturing and service sector and their contribution in GDP had been described in this study. Impacts of economic fluctuation on these two sectors were also studied in this section. In chapter 2, detailed study of available research related to this topic has been done by the researcher. To give gist of all available research papers and thesis, its literature review has been classified in three different categories. The first has been about Research on economic fluctuations. Here, all global and Indian economic fluctuations and their impact on macroeconomic variables were studied. Second sub point of Literature review chapter was focused for service sector i.e. economic fluctuations and impact on Indian service sector has been studied in detail. Here, the focus was mainly on IT sector, which has been considered to be the highest affected sector in global economic fluctuation of 2008 and also taken as a case study in this research further. Moving ahead, the last point of Literature review has been xv about manufacturing sector i.e. impact of economic fluctuations on Indian manufacturing sector. Here, the focus was based on FMCG sector since according to the researcher, this sector has been least affected sector in 2008 global economic crisis. In chapter 3, the statement of problem, objectives, Hypotheses and Variables studied by the researcher have been discussed. Objectives of the Study were finalised as follows: 1. To study the impact of change in GDP growth rate due to change in profit ratio of manufacturing sector. 2. To study the impact of change in GDP growth rate due to change in profit ratio of Service sector. 3. To examine and understand the growth rate of manufacturing sector in comparison with growth rate of the GDP. 4. To examine and understand the growth rate of service sector in comparison with growth rate of the GDP. 5. To analyse consequences of Inflation on Profit ratio of manufacturing sector. 6. To analyse consequences of Inflation on Profit ratio of service sector. 7. To study the impact of Inflation on GDP. Development of Hypotheses for the study: In order to evaluate and quantify the objectives, null and alternate Hypothesis for each of the objective were developed. Null Hypothesis and Alternate Hypothesis were denoted by first suffix, either zero or one respectively. The developed hypotheses have been listed as follows: Hypothesis: 1 H 01 : Change in profit ratio of Manufacturing sector has insignificant impact on GDP growth rate. xvi H 11 : Change in profit ratio of Manufacturing sector has significant impact on GDP growth rate. Hypothesis: 2 H 02 : Change in profit ratio of Service sector has insignificant impact on GDP growth rate. H 12 : Change in profit ratio of Service sector has significant impact on GDP growth rate. Hypothesis: 3 H 03 : Manufacturing sector has insignificant contribution in the growth of GDP. H 13 : Manufacturing sector has significant contribution in the growth of GDP. Hypothesis: 4 H 04 : Service sector has insignificant contribution in the growth of GDP. H 14 : Service sector has significant contribution in the growth of GDP. Hypothesis: 5 H 05 : Inflation rate has no effect on Profit ratio of manufacturing sector. H 15 : Inflation rate has effect on Profit ratio of manufacturing sector. Hypothesis: 6 H 06 : Inflation rate has no effect on Profit ratio of service sector. H 16 : Inflation rate has effect on Profit ratio of service sector. Hypothesis: 7 H 07 : Inflation has no significant effect on GDP. H 17 : Inflation has significant effect on GDP. Finalization of the variables to be used for the study: In this study, variation in GDP growth rate has been studied and compared with variation in PBDIT of manufacturing and services sector. Change in inflation has impact on xvii various factors such as commodity price, demand, market fluctuations and so on. Change in GDP growth rate with respect to Inflation has also been considered. Based on the objectives and the Hypotheses formulated, finalization of the variables to be used for the study has been carried out. Dependent and Independent variables were listed as follows: Independent Variables: i. Inflation, ii. PBDIT or EBIT of Manufacturing Industries and Service Industries. Dependent Variable: GDP growth rate. Research Methodology Adopted for the present study has been elaborated in Chapter 4. Primary and secondary data were considered in this study. The information of GDP, Inflation, IIP, PBDIT or EBIT of Manufacturing industries and Service industries was obtained from secondary data. Annual reports of RBI, statistical data base of RBI, reports of CSO and planning commission were r
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