Current Global Economy Deterioration Presents Challenges And Essay

Current Global Economy Deterioration Presents Challenges And Opportunities For the Strategic Human Resource Management - Essay Example This report declares that while on the one hand the organizations are restricting the HR budgets and placing curbs on the scope and utility of the human resource managers, on the other hand they expect the employees to perform at their maximum and generate unprecedented productivity. This is an added challenge for the HR managers as they have to perform their function under severely restricted budgets and have to get the employee feel motivated enough to perform at their best. In this situation, some of the things that the HR managers can do is to realign the employees attitudes towards the changed organizational goals. This essay makes a conclusion that strategic human resource management is facing in the event of the global financial crisis reveal that this is a time for the HRM function to reassert itself. It is needed that the HRM be given a more central and decision making position in the organizations vis-Ã  -vis employee’s affairs, and that they be treated as strategic business partners and not merely as business support. Most of the challenges – like the need to work with immensely limited resources and budgets - are expected to be short term, though HRM can learn several useful lessons for emulating in the future. Further, the crisis offers several opportunities to increase the scope and importance of the HR function and the HR managers should make an active effort towards this.

The Pyramid of Corporate Social Responsibility - Toward the Moral Article - 2

The Pyramid of Corporate Social Responsibility - Toward the Moral Management of Organizational Stakeholders - Article Example The article by Archie B. Carroll deals with the concept of CRS in relation to businesses and organizations, for all of which the main task is to be profitable. Carroll distinguishes three types of business management – immoral, amoral and moral, each of which entails a different organization’s treatment of its stakeholders and the society in general. The author claims that each company’s management should act in a moral way in order to fulfill its corporate social responsibilities. Background Information Though the article was published in 1991, its ideas are valid today too, since it provides certain definitions of such terms as corporate social responsibility, stakeholders, immoral management, amoral management and moral management, among others. Such definitions are based on the works of earlier authors. Nevertheless, they can be said to be valid since they determine the general concept related to the CSR theory used by businesses nowadays. Therefore, the arti cle should be judged on the basis of applicability of the concepts and ideas presented in it. Furthermore, it seems necessary to determine how in particular the presented ideas can be applied in an organization if it is possible at all. Summary One of the major ideas presented by A. Carroll is that businesses and organizations can become more socially responsible if managers of such organizations become more moral instead of being immoral or amoral. Being immoral, in the author’s understanding, means acting in the financial and economic interests of the company and the manager. Similarly, being amoral means manager’s acting without considering any moral or ethical principles of the society or even the company itself – the major focus in this case is on the manager’s interests only. A moral manager, on the contrary, is an individual who acts in the best interests of both the company and the society. Such a person, therefore, is to manage the companyâ€℠¢s economic, legal, ethical and philanthropic responsibilities of the company in relation to all of the stakeholders – owners, customers, employees, community, competitors, suppliers, social activist groups, public at large, and others. Evaluation The author’s goal was to explore the nature of CSR having defined its major components. A. Carroll intended to describe the different types of CSR strategies a manager might use in order to make his or her organization more effective and efficient in terms of corporate social responsibility. Finally, the author’s desire was to determine what it means to treat the stakeholders, who were to be determined in the article as well, in an ethical and moral manner. All these tasks have been accomplished by the writer. Carroll suggests that a moral manager should consider the interests of such stakeholders as customers, employees, community or social activist groups in order to run a business in an ethical and moral manner. Sti ll, it might be noted that the author does not provide any practical advice on how such a state of the business can be achieved. While the theoretical background looks quite sufficient – the author bases the argument on earlier works of the scientists.

Outsourcing in the Automotive Industry

Outsourcing in the Automotive Industry The global automotive industry continues to grow worldwide at about 2.5% annually, driven by increasing car ownership in the developing economies. In the mature economies, including the UK, growth is much lower or even absent (NGAIT, 2008). Because of market proximity and local content restrictions imposed by the Governments of many developing nations who wish to encourage the establishment of local automotive sectors, the vast majority of new manufacturing capacity in the last 6 years to support this growth has been in the BRIC countries and within the EU, in Eastern Europe. Lower labour costs in these developing automotive economies have also stimulated a shift of production eastwards, but this has to date mainly affected the automotive supply base and less so vehicle assembly sites. The UK automotive industry has transformed itself in the last decade from a sector with turbulent labour relations and a poor reputation for quality and productivity to one that is fully competitive. Independent external reliability surveys put UK built cars at the top of the rankings, and productivity and labour relations are among the best in the world. Until the impact of the global financial crisis, the industry was profitable and self-sustaining in Europe and in the UK. Technology and modern management practices have transformed the shop floor environment, and product technology embraces lightweight materials, cutting edge design analysis and visualisation tools and the extensive use of integrated electronic systems to extend digital control to most functions of the car. The climate change agenda is accelerating technological change at an unprecedented rate, and the industry in Europe and the UK has embraced the CO2 challenge and is investing heavily in people and technology to provide innovative solutions while continuing to offer exciting, safe and satisfying products that people want to buy. In 2008, 1.65 million vehicles and 3 million engines were built in the UK, by a diverse range of manufacturers in car, commercial vehicle, off-road and premium vehicle sectors. The vehicle production levels (until the present recession beg an) were relatively stable for some years, but employment has been declining as productivity improved and there has been severe hollowing out of the supply chain. This is important because about 75% of the value of material in a new vehicle is added by the supply chain (NGAIT, 2008). Literature review: Manufacturing outsourcing continuum: There is much debate in the management literature on defining outsourcing (Gilley and Rasheed, 2000; Harland et al., 2005). The definitions of outsourcing relevant to supply chain management emerge from these elements: Outsourcing implies a business relationship between two parties: the outsourcing subject (also called the principal or the client) who makes the decision of whether to outsource or not; and an external outsourcing firm (Arnold, 2000). The objects of outsourcing are general business processes or processes results which might be outsourced (Arnold, 2000; Kimura, 2002). This can include core (e.g. manufacturing, marketing, RD) as well as support (e.g. maintenance, accounting, IT, logistics) processes (Gilley et al., 2004). Outsourcing is not simply a purchasing decision. While all firms purchase elements of their operations, outsourcing is less common and represents the fundamental decision to reject the internalization of an activity (Gilley and Rasheed, 2000). Thus, outsourcing occurs in two situations. First, is when the client outsources objects that were originally sourced internally, resulting from a vertical disintegration decision (Gilley and Rasheed, 2000). Second, when the client sources objects that, although they have not been completed in-house in the past, are within the clients capabilities and hence could have been sourced internally notwithstanding the decision to go outside (Gilley and Rasheed, 2000; Van Mieghem, 1999). The outsourced objects are specific to the client. That is, the outsourced activities are performed according to a plan, specification, form, or design, of varying detail, provided by the client (Kimura, 2002; Van Mieghem, 1999; Webster et al., 1997). Hence, a firm buying an off-the-shelf, standardized component or a suppliers proprietary part is not considered outsourcing, because no customization is performed for the buyer. The client may outsource all or part of a process or process result (Gilley et al., 2004). For example, the outsourcing of manufacturing processes may take the form of a part, component, or a finished product (Harland et al., 2005). Manufacturing outsourcing: Throughout the 1990s a remarkable increase of outsourcing activities by firms has been observed. It has been hypothesized that this increase results from the decline in transaction costs in connection with the intensified use of information technology (Abraham and Taylor, 1996). Today, activities that used to be performed in-house (e.g. auditing, maintenance, repair, transportation, janitorial and legal services) are usually outsourced to firms in the business service sector. Consequently, outsourcing has contributed significantly to the growth of business-related services during the last decade (Fixler and Siegel, 1999). Moreover, manufacturing firms are outsourcing not only services but also internal production. One prominent example is the automotive industry, where some large car manufacturers only perform the final assemblage of major parts whose production is outsourced to external suppliers. Since this type of outsourcing quite often occurs at an international level, it is als o closely entwined with the globalization process (Feenstra and Hanson, 1996). Various aspects of the trend to outsource have been discussed in the academic literature. A large literature starting with the seminal paper by Coase (1937) and papers by Grossman and Hart (1986), Bolton and Whinston (1993) and Grossman and Helpman (2002) examines theoretically a firms decision of whether to produce in-house or to outsource. At the heart of this literature are issues concerned with transaction costs and, in particular, incomplete contracts leading to either vertical integration or specialisation. Lyons (1995) provides an empirical application to evaluate the importance of transaction costs theory for firms outsourcing decisions. The trade related aspects of outsourcing have also attracted increasing attention in the literature. Trade theoretic models such as Deardorff (2001), Jones and Kierzkowski (2001) and Kohler (2001) examine the effects of trade in fragmented products on countries patterns of specialisation and resulting implications for factor prices. On the empirical side recent papers by Feenstra and Hanson (1996, 1999) and Gorg et al. (2001) have analysed the effect of international outsourcing (or fragmentation) on relative wages and labour demand using industry level data for the US and UK respectively. In line with traditional HOS trade theory these papers find that international outsourcing (moving low skill intensive production to low skill abundant countries) leads to increased demand and increases in the wage premium for high skilled workers in the US and UK. Egger and Egger (2001) investigate the effect of outsourcing on the productivity of low skilled labour in the EU using industry level d ata. They find that increases in outsourcing have a negative effect on low skilled labour productivity in the short run, but a positive effect in the long run. Drivers of manufacturing outsourcing: There have been several studies that have examined the motivations for and benefits of outsourcing. Abraham and Taylor (1996) identified three reasons for outsourcing: Savings on wage and benefit payments, Transfer of demand uncertainty to the outside contractor Access to specialized skills and inputs that the organization cannot itself possess. Kakabadse and Kakabadse (2000) report that the main reasons for outsourcing are: Economic: greater specialization in the provision of services, as outsourcing allows economies of scale and the longevity of demand for the activity; Quality: access to skills, the competency and focus of potential suppliers and geographical coverage is increased; and Innovation: improvements in quality through innovation, and the development of new service products, can lead to new demands. Bendor-Samuel (1998) also asserts that outsourcing provides certain power that is not available within an organizations internal departments. This power can have many dimensions: economies of scale, process expertise, access to capital, access to expensive technology, etc. The combination of these dimensions creates the cost savings inherent in outsourcing, because the outsourcing supplier (the organization specializing in a particular business function) has the economy of scale, the expertise and the capital investments in leading technology to perform the same tasks more efficiently and effectively than the internal departments of the outsourcing buyer . Another possible benefit is that outsourcing provides companies with greater capacity for flexibility, especially in the purchase of rapidly developing new technologies, fashion goods, or the myriad components of complex systems (Carlson, 1989; Harrison, 1994). Companies can buy technology from a supplier that would be too expensive to replicate internally. A network of suppliers could provide an organization with the ability to adjust the scale and scope of their production capability upward or downward, at a lower cost, in response to changing demand conditions and at a rapid rate. As such, outsourcing claims to provide greater flexibility than the vertically integrated organization (Carlson, 1989; Harrison, 1994; Domberger, 1998). Furthermore, outsourcing can decrease the product/process design cycle time, if the client uses multiple best-in-class suppliers, who work simultaneously on individual components of the process (Quinn and Hilmer, 1994). Issues in manufacturing outsourcing: The case against outsourcing is based on arguments such as loss of management control, reduction in flexibility and increased costs. For instance, competitive outsourcing requires a high standard of supplier management to avoid the pitfalls of transferring critical functionality, or becoming too dependent on a supplier for day-today performance of vital business functions. In addition, outsourcing can generate new risks, such as the loss of critical skills, developing the wrong skills, the loss of cross-functional skills, and the loss of control over suppliers (Domberger, 1998; Quinn and Hilmer, 1994). The possible loss of flexibility is connected to the typical long-term contractual relationship that is formed as part of an outsourcing agreement, and that during the contract term, the customers business, the available technology, and the competitive and regulatory environment may change dramatically. Thus, this inflexibility is mostly linked to an unyielding and inappropriate contra ct. Although outsourcing is undertaken by many organizations to control or reduce costs, there is some evidence that it does not decrease costs as expected, and in some cases, costs increase. For instance, when an item is outsourced, the assumption is that the suppliers costs and required contribution is less and will continue to be less than the cost of internal provision. A survey based on 1000 managers worldwide by the PA Consulting Group (PACG) revealed that only 5% of organizations gained high levels of economic benefit from outsourcing (PA ConsultingGroup (PACG), 1996) and that 39% of organizations admitted mediocre economic benefit. Also, as outsourcing leads to a re-definition of organizational boundaries and, by implication, structural adjustments involving human resources, these changes incur social as well as financial costs. Although the social costs are transitory and can be mitigated by facilitating the adjustments through the re-training and redeployment of staff with in the organization, their transfer to the supplier organization and ensuing redundancy payouts can still be considerable (Domberger, 1998; Hall and Domberger, 1995). Also, outsourcing can lead to industrial disputes between employers and employees, which in turn can damage morale, trust and productivity. Experts maintain that global supply chains are more difficult to manage than domestic supply chains (Dornier et al., 1998; Wood et al., 2002; MacCarthy and Atthirawong, 2003). Substantial geographical distances in these global situations not only increase transportation costs, but complicate decisions because of inventory cost tradeoffs due to increased lead-time in the supply chain. Different local cultures, languages, and practices diminish the effectiveness of business processes such as demand forecasting and material planning. Similarly, infrastructural deficiencies in developing countries in transportation and telecommunications, as well as inadequate worker skills, supplier availability, supplier quality, equipment and technology provide challenges normally not experienced in developed countries. These difficulties inhibit the degree to which a global supply chain provides a competitive advantage. Cost benefits of manufacturing outsourcing: In the absence of transaction costs, a firm will decide to outsource when the market price for an outsourced activity is lower than internal marginal cost for that activity (Fixler and Siegel, 1999). It is an unresolved empirical issue whether outsourcing actually has a positive influence on a firms performance as is expected a priori. Some case studies have reported that firms tend to underestimate the transaction costs associated with outsourcing. For instance, it has been documented that some firm have again in-sourced activities that were previously performed by external firms, because they were dissatisfied with the quality or because they have underestimated the amount of asset specific investments (Benson, 1999; Gornig and Ring, 2000; Young and Macneil, 2000). A few studies have analysed the impact of outsourcing on firm efficiency (Heshmati, 2002). Although efficiency is certainly an important aspect of firm performance, it neglects the product market performance of firms. Fo r instance, even if efficiency of firms remains unchanged after outsourcing of internal production, higher quality of intermediate inputs might result in higher quality of final products and hence higher sales and higher margins. The lack of empirical studies on the link between outsourcing and firm performance might be also due to a limited availability of suitable micro data for analysing this subject. Theoretical considerations for manufacturing outsourcing: In theory, efficient firms will allocate their resources within the value chain to those activities that give them a comparative advantage (Shank and Govindarajan, 1992). Other activities that do not offer such advantages will be outsourced to external suppliers. When firms engage in outsourcing, they assess the productivity of their in-house service functions and decide to outsource if others can provide comparable services cheaper. Basically, when firms outsource activities and functions related to producing their products and services, they move towards a business strategy based on core competencies, a set of skills and knowledge that helps maintain their competitive advantage in serving customers (Porter, 1985; Sharpe, 1997). Thus outsourcing is expected to imply cost savings relative to internal production or internal service functions. This will be the case if outside suppliers benefit from specialized knowledge and/or economies of scale (Heshmati, 2002). However, recent work by Grossman and Helpman (2002) shows that the choice between continued internal production or an outsourcing decision means taking into consideration more than just production cost differences. According to transaction cost economics, outsourcing is desirable only when transaction costs incurring from asset specificity, incomplete contracting and search efforts are lower than the production cost advantage (Williamson, 1971). In addition, the attractiveness of outsourcing to a certain producer may well depend on how many firms can potentially provide the inputs it needs. As mentioned above, some case studies have also reported that benefits from outsourcing are quite often not derived immediately and that managers tend to overestimate the resulting benefits and underestimate the involved transaction costs (Benson, 1999; Gornig and Ring, 2000; Young and Macneil, 2000). Earlier works: Wasner (1999) presents a state-of-the-art view on the outsourcing process by combining a thorough literature review with two independent case studies of the Swedish aircraft industry (Saab AB) and the electronics industry (Ericsson Radio Systems AB and one key supplier Swedform Metall AB). The first case concentrates on outsourcing of aircraft sub-systems and subsequent in-sourcing of related software activities, whereas the second case deals with outsourcing of radio base station production. However, he argues that the process of carrying out the transfer of an activity from being internally controlled to becoming externally managed is equally difficult because of interdependencies at the operational level. The effects of outsourcing are far reaching in terms of physical, temporal and organisational reach. Physically, because there is an inherent complication of losing control as an activity is turned over to an external supplier. Temporally, because it is difficult to estimate how conditions will change over time. Organisationally, because outsourcing involves converting decisions at the strategic level into actions at the operational level and transferring functions from one organisation to another.

Oedipus and Hamlet as Father Figures :: William Shakespeare Sophocles

Oedipus and Hamlet as Father Figures Oedipus and Hamlet are two very well known characters in literature. They both stand out in a reader's mind through their actions, conflicts, strengths, and weaknesses. A reader becomes involved more in the action through these two characters. They allow us, the reader, to gain a greater sense of the stories plot. In many ways these characters hold similar traits to one another but the one that stands out most in my mind is their relationships with their fathers. Their father's prior conflicts and decisions influenced these characters to the point of their own demise. In Hamlet Prince of Denmark young Hamlet is left facing the outcomes of the conflict his father had with his brother. Old Hamlet is dead, killed by his own brother for the thrown of Denmark. Young Hamlet is in deep morning over the loss of his father and now he has to handle the remarriage of his mother to his own uncle, the man who in cold blood killed his father. Hamlet, with the death of his father, is acting strangely but his whole outlook changes for the worst when his father's ghost visits him. He finds out the true causes of his death and he is influenced by his father to seek revenge. Hamlet's father tells his son to kill his uncle, Claudius because he is the cause of his death. Hamlet loved his father deeply and would do anything for him. He becomes enraged with anger and hate for Claudius and begins to plot his revenge, Claudius' own death. Throughout the play his father's ghost visits Hamlet. Even after his death he has a great control over his son and his action s. These visits are a constant reminder to Hamlet of the truth. Knowing the truth of his father's death has driven Hamlet to the brink of insanity. The only thing he can think of is revenge. His father's death and prior conflict with his brother has left Hamlet in a position of honoring his father and doing right by him, and the only thing he sees fit to do is rid himself of the man that brought about the anger Hamlet is feeling. In the end Hamlet finally gets the revenge he sought with the death of Claudius.

Report on Inflation

EVOLUTION OF EXCHANGE RATE REGIME: IMPACT ON MACRO ECONOMY OF BANGLADESH by Liza Fahmida A project submitted in partial fulfillment of the requirements for the degree of Professional Master in Banking and Finance Examination Committee: Dr. Sundar Venkatesh (Chairperson) Dr. Juthathip Jongwanich Dr. Yuosre Badir Nationality: Bangladeshi Previous Degree: Master in Finance and Banking University of Dhaka Bangladesh Scholarship Donor: Bangladesh Bank Asian Institute of Technology School of Management Thailand May 2012 ACKNOWLEDGEMENT The dissertation paper entitled â€Å"Evolution Of Exchange Rate Regime: Impact On Macro Economy Of Bangladesh† has been prepared for the partial fulfillment of Professional master in Banking and Finance (PMBF) program conducted by School of Management, AIT, Thailand. I would like to offer my wholehearted gratitude and respect to a good number of people who offered encouragement, data and information, inspiration and assistance during the course of co nstructing this dissertation paper.It would be difficult to prepare the paper and to present it in a lucid manner within stipulated time without the help of my guide teacher Dr. Sundar Venkatesh, Adjunct Faculty, School of Management, Asian Institute of Technology, Thailand. His utmost care, constant support and meticulous supervision guided me through the process. I am indebted to Begum Sultana Razia, General Manager, Monetary Policy Department, Bangladesh Bank, whose sincere co-operation and valuable advice help me to prepare this paper.I would like to thank all of my colleagues and other employees of Foreign Exchange Policy Department and Monetary Policy Department, Bangladesh Bank for their assistance in this regard. I would like to thank all of fellow course mates who contributed through their comments and suggestions to prepare the report in a comprehensive manner. ii ABSTRACT Bangladesh had two different exchange rate regimes- a fixed exchange rate system from January 1972-Ma y 2003 and a floating exchange rate regime since June 2003. After adopting the floating exchange rate regime Bangladesh experienced positive impacts on macro economic development.The variables of the macroeconomic factors have been considered as foreign reserve, workers’ remittances and export proceeds to evaluate the impact of exchange rate over them in this paper. But the ongoing challenges for the country are the depreciating trend in local currency in a highly inflationary economy. The objective of the paper is to evaluate the macroeconomic performance over the regimes and to analyze present currency situation of Bangladesh. iii Table of Content NO. 01 Title page Acknowledgement Abstract Table of contents List of Figures List of Abbreviations Chapter-01 02 1. 1 Rationale 1. Scope 1. 3 Objectives of the study 1. 4 Methodology 1. 5 Limitations 1. 6 Organization 02 Chapter-02 Literature Review 03 Introduction 3. 1 Factors Affecting Exchange Rate 3. 2 Performance of previous and current FX-Regime in Bangladesh rate of GDP 3. 2. 1 Growth Unde 3. 2. 2 Current Account Balance 3. 2. 3 Inflation Situation 3. 3 Justification of Floating Exchange Rate 3. 4 The Transition from Fixed to Float 04 Chapter-04 Performance of Floating Exchange Rate System On Macro Economy of Bangladesh 4. 1 The Export On Macro Economy of Bangladesh Situation 4. 2 Enhancement of Workers Remittance 4. Reserve Position 4. 4 The Growth Rate of GDP 13 14 14 15 7 8 8 8 9 10 10 Chapter-03 Exchange Rate Evolution in Bangladesh 7 Introduction 1 1 1 2 2 2 3 3 SECTION Page I ii iii iv V vi iv 4. 5 Relationship among variables 05 Chapter 5 Preset Exchange Rate Situation Preset Exchange Rate Situation 5. 1 Exchange Rate Movement 5. 2 Reasons for Currency Depreciation 5. 2. 1 High Inflation 5. 2. 2 Low Foreign Direct Investment 5. 2. 3 Trade Deficit Chapter 6 06 Recommendation and Conclusion 6. 1. Control Inflation 6. 2. Reduce Trade Deficit 6. 3 Enhancing Foreign Direct Investment 6. 3 Effective Capital Market 6. Short Term Foreign Borrowings 6. 5 Effective Capital Market 6. 6 Derivatives Market 6. 7 Formation of Domestic FX Market 6. 8 Autonomy of the Central Bank 07 08 References Appendix Trade Deficit of Bangladesh Yearly Reserve Position Yearly data of Workers Remittance Yearly data of Inflation Yearly data of Export, Remittance, Reserve and Exchanger Rate Monthly data of Remittance and Exchange Rat Regression Analysis FDI In Bangladesh 16 17 17 17 18 18 19 21 21 21 21 21 21 21 22 22 22 23 24 25 26 27 28 29 30 31 v LIST OF FIGURES TITLE 3. 4 3. 5 4. 1 4. 2 4. 3 4. 4 5. 1 5. 2 5. 3 5. Exchange Rate Movement immediately after inception of Floating Comparison of month end Real Effective Exchange Rate The Export Volume in US$ The Workers Remittance The Foreign Reserve Position (REER) and Nominal Exchange Bangladesh GDP Growth Rate Rate between 2003-2004. Exchange Rate Movement Figure: Inflation Growth Rate of Foreign Direct Investment Trade Deficit of Bangladesh PAGE 11 11 13 14 15 16 17 18 19 20 vi LIST OF ABBREVIATIONS AD ADB BB FDI FPI FX FY GDP IMF LC Authorized Dealers Asian Development Bank Bangladesh Bank Foreign Direct Investment Foreign Portfolio Investment Foreign Exchange Financial YearGross Domestic Product International Monetary Fund Letter of Credit NEER OANDA REER USD Net Effective Exchange Rate Website of exchange rates information. Real Effective Exchange Rate Us Dollar vii Chapter 1 INTRODUCTION At the preamble of the Bangladesh Bank order, 1972, it is stated that â€Å"Whereas it is necessary to establish a central bank in Bangladesh to manage the monetary and credit system of Bangladesh with a view to stabilizing domestic monetary value and maintaining a competitive external par value of the Bangladesh Taka toward fostering growth and development of country’s productive resources in the national interest. To maintain a competitive external par value of the Bangladesh Taka, as per Foreign Exchange Regulation Act, 1947, Bangl adesh Bank as a central bank of the country, regulates the foreign exchange on behalf of the government 1. 1 Rationale: Exchange rate indicates the global position of economy of the country. The country’s economic development is closely related with it’s foreign exchange system. Foreign exchange rate is a vital component for the country’s economic activities too. Bangladesh has been experienced the floating exchange rate regime since May 2003 and passed a number of Pons and cons in the overall economy.Due to the utmost importance of the exchange rate in the economy, the study has been conducted in this area. 1. 2 Scope: This paper covers the comparison of the fixed and floating exchange regime of Bangladesh. The key factor of this paper is the evaluation of the impact of exchange rate on the fundamental macroeconomic indicators of the economy. Three main fundamental factors have been identified to measure their impact with exchange rate. Those are export, worker s remittance and foreign exchange reserve. The empirical data of 2000 to 2012 has been used to ustify the whole thing. To get an idea about the Bangladesh’s position, some neighboring country’s experience also been compared here. 1. 2 Objectives of the study 1. To evaluate the exchange rate regimes in Bangladesh economy: Fixed and Floating 2 To evaluate the floating arrangement's performance in three macro economic variables: Export, Workers Remittance and Foreign Reserve. 3 To understand the reason for currency depreciation 1 1. 4 Methodology To obtain the objectives of the study, secondary data have collected.The sources of data are Bangladesh Bank, Board of Investment, Export Promotion Bureau, Websites of IMF, ADB, OANDA and other related links. Statistical analysis correlation has been calculated to understand the exchange rate’s significance on the economic variables of Export, Workers Remittance and Foreign Reserve . 1. 5. Limitations There were some limit ations to conduct the study. Being, sensitive, new one, problems were faced to relate with various components and linking with them. And for its very nature, primary data was not available.Since the exchange rate regime is a vast area, it was also challenging to prepare this report within a limited time. 1. 6. Organization There are six chapters in this report. Chapter I is the introduction that divided into six sub sections. Literature Review is in Chapter 2. Exchange Rate Evaluation in Bangladesh has been covered in Chapter 3. Chapter 4 covers Performance of Floating Exchange Rate System On Macro Economy of Bangladesh. Present exchange rate situation is describing in Chapter 5. The last chapter covers recommendation and conclusion. 2Chapter 2 LITERATURE REVIEW The basic policy variables of country is foreign exchange rate that ensured trade, business, long term funding, foreign direct investment, inflation, foreign exchange reserve, inward remittance etc. Various economists opined that the policy of the exchange rate system had a crucial impact on 1990’s economic catastrophe. Nevertheless, it is yet to be proved either theoretically or empirically regarding the role of exchange rate on the indicators of macroeconomic variables. Whatever the case may be, different countries adopt different exchange rate policies.Bangladesh, the focus of this paper, had a fixed exchange rate system in place since January, 3 1972. After more than 31 years, the Central Bank of Bangladesh (Bangladesh Bank) changed it into a floating exchange rate system in June 2003. Bangladesh has been pursuing a floating exchange rate system since then. Dr. Mirza Azizul Islam, the former advisor, Ministry of Finance of the Caretaker Government of Bangladesh, presented a paper in January 2003, right before the shift from fixed to floating regime, explaining the overall performance of the fixed regime and the probable implications of the floating regime on Bangladesh economy.He suggested t hat the experiences of other countries in the region show that floating regime generates greater volatility in exchange rates and this sort of uncertainty is likely to affect adversely the overall trade and investment climate which is already afflicted by many unfavorable elements in Bangladesh (See Islam, 2003). Bangladesh pursued a ‘fixed exchange rate’ regime upto 1979. After that, from 1979 to mid-2003, it followed a managed floating exchange rate system.Repeated depression of the home money, for maintaining a steady real exchange rate as well as keeping away from overvaluation of the local taka, were the prime factors for taking new system of the foreign exchange system. From May, 2003, Bangladesh took almost a new policy known as ‘clean floating’ exchange rate policy by creating fully convertible current account. But capital account convertibility is not yet done. The main reasons for all the policies that Bangladesh took were due to improve export si tuation, decrease import liability with the aim of improving balance of trade.The evidences in favor of the above mentioned opinion have been placed below. Islam( 2003) told that the regulators of the monetary policy decides the exchange rate policy of the country in order to obtain two basic goals. The first one is â€Å"domestic target† that covers preventing inflation rate of inflation, the growth of credit both in Government and Private levels, and also the growth in liquidity and M2. The second reason is â€Å"external target† which considers foreign exchange reserve hike, declining current account balance, prevent exchange rate volatility in the country’s nterbank foreign exchange market as well as balance the exchange rate flow with neighboring countries like India, Bhutan, Sri Lanka, Pakistan etc. Hossain (2005) referreing Rahman and Bayes that Bangladesh took floating exchange rate system due to: (i) global competitiveness; (ii) improve export dimension s ;(iii) eliminate subsidy from export; (iv) reduce import pressure; (v) increase the substitutes products for export. Aziz (2003) showed that according to the statements of the finance ministers for 3 ast decades, the prime causes of devaluation of taka in our country (i) rise in export;(ii) reduce import;(iii) improve local newborn industries; (iv) promote the inward remittances trough pursue wage earners, and (v) increase foreign exchange reserve. As per the â€Å"Financial Sector Review(2006)’ of the central bank of the country, the major reasons of exchange rate policy covers: (i) export promotion; (ii) encourage inward remittances;(iii) keeping the price level stable, and (iv) preserve a variable account situation externally.As a result, all the publications and write-ups have illustrated both directly or indirectly the export-growth and import reduction as the key reasons of the exchange rate policy of the country. Prior to adopting floating exchange rate regime, Isla m (2003) argued that the economic and institutional prerequisites of a floating exchange rate regime are not met in Bangladesh. Some recent studies have tried to explain the behavior of nominal exchange rates of Bangladesh after its transition to the floating rate regime.By doing a correlation analysis, Rahman and Barua (2006) explore the possible explanation of the exchange rate movement. They found that there is a strong correlation (-0. 40) between depreciation and export-import gap as a share of reserves; L/C openings for imports also have a positive correlation (0. 45) with volatility of the exchange rate, which implies that the higher the L/C openings the more volatile is the exchange rate.They conclude that high seasonal demand for foreign currency because of increased import bills, systematic withdrawal of excess liquidity by Bangladesh Bank, relatively faster expansion of credit and higher interest rates on various national savings instruments are the reasons behind the int erest rate hike in the money market and depreciation of the nominal exchange rate. William Miles, 2006 discussed about the effect of exchange rate system (both fixed and floating) on the long term growth in the economy.The effect of fixed rate, pegged rate and floating rate has been discussed here briefly on the basis of several literature reviews and the finding is that fixed and intermediate regimes have a clear, significantly negative impact on growth (holds only for emerging markets not for industrial nations. ) In this paper, the author has given an approach to determine if exchange rate regime itself truly extracts an independent effect on growth.Results here indicate that the effect of fixed exchange rates on growth in emerging markets is not direct, but rather contingent on the existence of macroeconomic imbalances and other distortions in place in the domestic economy. These results seem to conform more closely with exchange rate theory, which posits mostly positive, and fe w negative channels for pegged currencies to impact growth over the long run. Asad Karim Khan, June 2009 examines whether the floating exchange rate regime has any impact on the value of Bangladesh taka i,e does it make any lose on the value of the currency.He shows that regime change has no statistically significant impact on the value of Bangladesh currency once foreign exchange reserve is incorporated in the regression model. Younus and Chowdhury (2006) made an attempt to analyse Bangladesh's transition to floating regime and its impact on macroeconomic variables. They find that output growth in Bangladesh performed well in the intermediate and floating exchange rate regimes. Inflation is lower in the intermediate regime despite higher money supply and exchange rate depreciation. They also find that currency depreciation boosted export growth in the floating regime.Chowdhury and Siddique (2006) have analysed the exchange rate pass through to domestic inflation in Bangladesh. 4 Th e experiences of some countries in the region which implemented major changes in their exchange rate regimes in recent years can provide useful lessons for Bangladesh. I have tried to focus the comparison among different economic indicators between Bangladesh and some of the South Asian Countries (Afghanistan, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka) all of which adopted independently floating exchange rate regimes.Trade and financial policy measures are very important for the country’s economy and out of that consideration, Bangladesh has taken a new exchange rate policy according to the obligations of IMF (article number: VIII), as on 24th March,1994 introducing current account fully convertible. At the same time, Bangladesh was under pressure since it is the member of IMF. As a result, Bangladesh took floating exchange rate system in current account on 31st May, 2003. After that, IMF agreed Poverty Reduction and Growth Facility (PRGF) for our country with a new exchange rate system i,e, floating exchange rate system.However, Younus et al (2006) showed that free floating exchange rate system can arrange the prevention of overvaluation of local currency as it might make the export unattractive in the international world as well as alternative items of importable goods became difficult to bit with import goods. He illustrated that the prime goal of free floating system of exchange rate is supposed to avoid the main misalignment of exchange rate, specially, to stop unpredictable appreciation of real rate of exchange that might affect the demand of the total export of the country.The illustrations also included the encouragement of the export situation and decline the shortfall of the current account, control inflationary situation, and increase the position of inward remittances. Since the independence of the country, Bangladesh is following an dynamic exchange rate system that has been replicated in the nominal exchange rate that were de clared by the central bank of the country time to time. Islam (2003) stated 89 modifications in the exchange rate of Bangladesh currency with USdollar since 1983 and among them, 83 were depression.Aziz (2003) illustrated 41 depreciation in nine years (1991-2000). Younus et al (2006) showed that 130 times depreciation took place between 1972 to 2002 in Bangladesh Taka that also reduce balance of payment deficit. So, this paper, correctly identifies the exchange rate as the main important thing for economic changes of the country. After independence, Bangladesh fixed its Taka’s value with British Pound Sterling on 3rd 1972. Since 1972 to 1990 the Taka was overvalued. So there was a huge deficit in Balance of payment that hurt the economy badly.From 1990 the gap began to narrow down. The exchange rate regime worked quite well in terms of balance of payment, inflation, export and remittance. So there were some debate about incipience of this floating and criticism also rose about competence and preparation of Bangladesh Bank. But Bangladesh Bank performed well in managing the ‘new born’. But there is some volatility in the market in recent past. Bangladesh Bank, as a central bank of the country intervened prudently to curve the volatility and market became stable though Taka remains undervalued.The experiences of South East and South Asian countries showed that they had to intervene in the market for smooth moving. The experience supports the Mr. Kindleberger beliefs that â€Å"market work well on the whole† but occasionally â€Å"will be overwhelmed and 5 need help† from a lender of the last resort. (The Economist, July 19th 2003). So the regulator should be watchful about the market’s behavior and intervene when needed without hesitations. In the developing country these kind of intervention should be proactive rather than reactive.Naeem and Rasheed analyzed another important issue of whether stock prices and exchange rat es are related or not has received considerable attention after the East Asian crises. They said that during the crises the countries affected saw turmoil in both currency and stock markets. If stock prices and exchange rates are related and the causation runs from exchange rates to stock prices then crises in the stock markets can be prevented by controlling the exchange rates. Moreover, developing countries can exploit such a link to attract/stimulate foreign portfolio investment in their own countries.Similarly, if the causation runs from stock prices to exchange rates then authorities can focus on domestic economic policies to stabilize the stock market. If the two markets/prices are related then investors can use this information to predict the behavior of one market using the information on other market. They also claimed that most of the empirical literature that has examined the stock prices-exchange rate relationship has focused on examining this relationship for the develo ped countries with very little attention on the developing countries.This paper will assess whether the exchange rate regime change indeed has created any significant impact on the economy of the nation as well as the comparative analysis with the neighboring countries situation. There are some potentialities as well as difficulties in market based system, so in this study there are some recommendations for the regulator and for the market players. To manage the floating exchange rate, full automation as well as transparency is essential in banking sector. As the capital account of our economy is not convertible there is little scope of capital flight.If the inception of floating exchange rate is the beginning to liberalize capital account immediately that won’t be a wise decision. 6 Chapter 3 Exchange Rate Evolution in Bangladesh Introduction: The world economy experienced some sort of fixed and flexible exchange rate. Before 1875 there was Bimetalism of exchange rate and th en the Gold Standard (1875-1914). During Interwar period (1914-1944) the classical Gold Standard broken down and in July 1944 representatives of 44 countries succeeded to establish the ‘Bretton Woods’ system.Again the oil shock in the early 1970s and the dampen of demand broken down this system and world economy shifted to flexible exchange rate. Bangladesh has been experienced two major exchange rate regimes since the country’s Independence from 16th December1971. A Fixed Exchange Rate Regime from 1972 to 1979 and a Floating Exchange Rate Regime since May 2003. Among the time frame from 1971 to 2003, there were different exchange rate arrangements in terms of the currency mechanism, like: Pegged to Pound Sterling (? :1972-1979;Pegged to a basket of major trading partners’ currencies(? as the intervening currencies):1980-1982;Pegged to a basket of major trading partners’ currencies(US$ as the intervening currencies):19831999;Adjusted Pegged System:2 000-2003;Floatig Exchange Rate System: May 30, 2003Present. All the policies of exchange rate system Bangladesh implemented, with the objectives of accelerating exports, reducing import pressure and improve the balance of trade. After independence, Bangladesh fixed its Taka’s value with British Pound Sterling on 3rd 1972.Since 1972 to 1990 the Taka was overvalued. So there was a huge deficit in Balance of payment that hurt the economy badly. From 1990 the gap began to narrow down. The exchange rate regime worked quite well in terms of balance of payment, inflation, export and remittance. 3. 1 Factors Affecting Exchange Rate: Under Floating Exchange Rate Arrangements Exchange Rate is primarily determined by demand for foreign currency and Supply of foreign currency where demand and supply of foreign currency is also affected by some other sensitive factors.According to Jeff. Madura, (International Financial Management) theoretically demand for foreign currency is determined by several factors like, import payments, service payments which includes income payments, debt service payments, foreign investment (outward) and foreign investment (outward). The supply of foreign currency is composed of export Receipt, service receipts which includes income receipts, debt service receipts, foreign aid (inward) and foreign Investment (inward).Besides those some other factors affect the exchange rate movements. The factors are a)Purchasing Power parity; b)Interest rate parity; c) Relative income differential; d)Government Control; e)Expectations etc. 7 3. 2 Performance of previous and current FX-Regime in Bangladesh To evaluate the performance of Bangladesh considering the two different exchange rate regimes, some data comparison have been made among three neighboring countries in South Asia. Those are India, Pakistan and Sri Lanka. 3. 2. Growth rate of GDP Comparing the percentage of growth rate with major neighboring Countries, the following table shows that Bangla desh was more or less in a similar situation before the adoption of floating exchange rate regime. Since 2003 with the new floating exchange rate system, there is also a positive trend of the GDP growth rate except 2009-2010. The global recession affect the overall growth of the country at that time. Table 3. 1: Growth rate of GDP (% per year) Y Country Banglades h India Pakistan Sri Lanka 2001 5. 3 5. 8 1. 8 -1. 5 2002 4. 4 4. 0 3. 1 4. 0 2003 5. 3 8. 2 5. 1 5. 9 2004 5. 7 7. 4 5. 5 5. E 2005 A 2006 R 200 7 6. 4 9. 2 6. 8 6. 8 6. 0 6. 6 7. 6 9. 7 5. 8 5. 8 5. 5 7. 7 200 8 6. 2 6. 7 3. 7 6. 0 200 9 5. 7 8. 0 1. 2 3. 5 2010 5. 8 8. 6 4. 1 7. 6 2011 6. 3 8. 2 2. 5 8. 0 Source: Asian Development Outlook-2004 and 2011, ADB 3. 2. 2 Current Account Balance In comparison to other major South Asian countries, the table no. -2 shows that Bangladesh's achievement in terms of containing current account balance is better after the adoption of floating exchange rate regime (since 2003). It has d one consistently better than some of the neighboring countries like Sri Lanka, Pakistan, and India in all recent years excepting 2005.Table No. 3. 2 Current Account Balance as Percentages of GDP Y 2003 0. 5 0. 7 5. 9 -2. 2 E 2004 0. 0 0. 3 3. 0 -3. 0 A 2006 1. 3 -1. 2 -3. 9 -5. 3 R 2007 1. 4 -1. 4 -4. 8 -4. 3 Country Banglades h India Pakistan Sri Lanka 1999 -1. 5 -1. 1 -3. 0 -3. 6 2000 -1. 1 -0. 8 -0. 4 -6. 4 2001 -2. 3 0. 2 0. 6 -1. 5 2002 0. 4 0. 8 4. 6 -1. 8 2005 -1. 5 0. 3 2. 1 -3. 5 2008 0. 9 -2. 4 -8. 5 -9. 5 2009 2010 2. 7 3. 7 -2. 8 -5. 7 -0. 5 -3. 0 -2. 2 -3. 8 2011 0. 2 -3. 5 -1. 7 -4. 0 Source: Asian Development Outlook-2011, ADB 8 3. 2. Inflation Situation Exchange rate regime and inflation are relevant because a change in the exchange rate is almost certain to cause a change in the domestic price of tradable and indirectly the price of non-tradable also. The international competitiveness of the economy is badly eroded by inflation. It generally encourages capital fligh t, exacerbates income distribution, gives rise to inequities in income distribution and aggravates poverty. The relevant data are presented in the following table no. -3. Table 3. 3: Inflation in Bangladesh and Selected South Asian Countries Y 2002 200 3 2. 8 4. 4 3. 4 3. 5 10. 2 5. 3 3. 1 2. 6 E 200 4 4. 5. 0 4. 0 A 2005 5. 2 5. 0 6. 2 2006 7. 2 5. 2 7. 9 10. 0 R 200 7 7. 2 5. 0 7. 8 15. 8 Country Banglades h India Pakistan Sri Lanka 1999 8. 9 3. 3 5. 7 5. 9 2000 3. 4 7. 2 3. 6 1. 2 2001 1. 6 4. 7 4. 4 11. 0 200 8 9. 9 8. 7 12. 0 22. 6 200 9 6. 7 2. 1 20. 8 3. 4 2010 7. 3 9. 2 11. 7 5. 9 2011 8. 0 7. 8 16. 0 8. 0 Source: Asian Development Outlook-2011, ADB It is showing that there is an increasing trend of inflation since the adaptation of floating exchange rate regime. Data on inflation rates represent period averages. Except for India, which reports the wholesale price index, inflation rates presented are based on consumer price indexes.The higher inflationary situation take plac e due oil and food price hike in the international market as well as several natural disaster like, Sidor, flood etc. 3. 3 Justification of Floating Exchange Rate: From the above mentioned data analysis, it can be said the previous regime performed quite well in certain criteria. The major reasons behind the adoption of new exchange rate system is mainly the government’s commitment to the liberalization of the country’s economy and to take the appropriate steps to create suitable environment of the economy for entering into capital account convertibility regime.Rather than this, there was IMF's ‘conditionalities' to enter into new floating exchange rate regime. 3. 4 The Transition from Fixed to Float: To meet up the economic demand and to fulfill the IMF conditionality, on 29 May, 2003 Bangladesh Bank issued a circular stating- effective from 31st May, 2003, Bangladesh Bank floated its exchange rate and followed a fully market based exchange rate for Taka. Under this arrangement, exchange rate is determined on the basis of demand and supply of the respective currencies.Immediately after the inception of floating exchange rate banks, economists, currency traders and businessmen have welcomed the deregulation of the exchange rate saying that 9 the country's foreign trade and remittance would get a boast up due to it and it would make the currency market more efficient and effective. Since the introduction there is no unusual raise of exchange rate till mid 2004. Most of the time Taka maintains appreciating position during this period and Bangladesh Bank show a tremendous performance managing the ‘new born' exchange rate system.During mid 2004, Taka faced significant volatility against USD and it continued up to August 2004. After that period, the volatility of exchange rate of Taka against USD eased but resulting to appreciated USD till mid January 2005. In recent times, Taka has depreciated significantly against USD in the inter-bank m arket. This has happened as because of price hike in oil price and scrap vessel in the international market created a surge on import settlements. Figure3. 4: Exchange Rate Movement immediately after inception of Floating Exchange Rate Movment 58. 7 58. 65 58. 6 58. 55 58. 5 58. 45 58. 4 58. 35 58. 3 58. 25 58. Exchange Rate TK/$ Jun'-01 Jun'-04 Jun'-08 Jun'-11 Jun'-15 Jun'-18 Jun'-22 Jun'-25 Jun'-29 July'-03 July'-07 July'-10 July'-14 July'-17 July'-21 July'-24 July'-28 Banking days Source: Bangladesh Bank Unpublished Data Behavior of Real Effective Exchange Rate (REER) and Nominal Exchange Rate: REER is considered as a guiding FX-rate to the policy maker as well as the market participants and it also shows the international competitiveness of countries goods and services. The policy makers are always tried to keep the Nominal Exchange Rate near to the REER. Before 1990 Taka was overvalued (see table no-01,02 and 03. that distorted our international competitiveness and that was the causes of prolonged Balance of Payment crisis. Figure3. 5: Comparison of month end Real Effective Exchange Rate (REER) and Nominal Exchange Rate between 2003-2004. 10 July'-31 62. 00 61. 00 60. 00 Behavior of REER and Nominal FX-Rate Rate TK/$ 59. 00 58. 00 57. 00 56. 00 55. 00 54. 00 REER-2003 53. 00 Nominal TK/$-2003 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec REER-2004 Nominal TK/$-2004 Months Source: Bangladesh Bank Unpublished Data After 1990, Taka remained undervalued. The gap between Nominal Exchange Rate and REER were widened over the period.Before inception of floating exchange rate Taka was almost running on a free float for the last 12-15 month as rates were decided according to demand-supply situation and liquidity in market. Bangladesh Bank was also not virtually selling any dollar that time. This means the market has already factored in floating exchange rate. Moreover, before inception Bangladesh Bank took some measures for strengthening regulation, such as, keep ing close observation of Authorized Dealer’s (AD’s) daily activities; especially on ‘Open Position’, gave pressure for reconciliation of NOSTRO account balance, encourage every bank to set up dealing room and ressurized to make payment in due time etc. So we can obviously say that way to the floating exchange rate was prepared. 11 Chapter 4 Performance of Floating Exchange Rate System On Macro Economy of Bangladesh Introduction of floating exchange rate was debatable issue and also there were some criticisms about the competence of Bangladesh Bank's from some corner. But Bangladesh Bank performed a tremendous performance. There was no volatility; no speculation in price and market behaves rationally. If we consider the market statistics, we find that macro economic variables have positive performances over the period of time.Three major variables have been considered for evaluating the impact of exchange rate with them. The variables are Export, Workers Re mittances and Foreign reserve. 4. 1 The Export Situation: The export trend from 1998 to 2011 shows an increasing trend. It is shown here that there is upward trend of export after 2003,i. e, after adopting the floating exchange rate regime, the export has a robust growth in the economy. Figure:4. 1: The Export Volume in US$ Source: Bangladesh Bank Quarterly, January-March 2011 During the global recession, the export trend of Bangladesh was not that much affected mostly for the RMG sector.In the FY 09 and FY 10, the export volume increased significantly. 4. 2 Enhancement of Workers Remittance: The Inward remittances from Bangladeshi nationals working abroad remained strong in FY10 even in the face of global economic slowdown and continued to play an important role in strengthening the current account. Receipts on this sector increased by 13. 4 percent to USD 10987. 40 million in FY10 from USD 9689. 26 million in FY09. The underlying reason was that Bangladesh Bank has simplified the approval policy of drawing arrangements between foreign exchange houses and domestic banks.As a result, 40 banks 12 have been allowed for establishing 885 drawing arrangements with 300 exchange houses all over the world for collecting remittances, (of which approximately 650 drawing arrangements with 250 exchange houses are operative now). Figure-4. 2: The Workers Remittance Source: Bangladesh Bank Quarterly, January-March 2011 Considering the growth rate of workers’ remittances, it has been observed that the rate is quite higher after the free floating exchange rate regime that is 20. 52 % (2003-2010) than that of fixed exchange rate regime of Bangladesh which is calculated as 11. 9% (19932002). The increasing amount of workers remittance helps to balance the trade deficit in a prudent manner. 4. 3 Reserve Position: The amount of foreign exchange reserve has been increased significantly over the last couple of years. During the FY 2003 to FY 2005, the trend was quite steady and flat. But, it has an upward trend after FY 2007. The main sources of foreign reserve are workers remittance, foreign loans and grants and exports. 13 Figure-4. 3: The Foreign Reserve Position Period Reserves($) 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 469. 6 2705 2930 3483. 8 5077. 2 6148. 8 7470. 9 10749. 7 10911. 6 Source: Bangladesh Bank Quarterly, January-March 2011 After the inception of floating exchange rate regime, the foreign exchange reserve boosted up due to huge amount of workers remittance and increasing trend of export. 4. 4 The Growth Rate of GDP: The GDP growth rate reaches upto 6. 7% during FY 11. From 1994 to 2010, the average growth rate of GDP was 5. 47% reaching at high of 6. 63% in June 2006. The record low rate was 4. 08% during June 2004. For the last couple of years the growth rate was 5% above and Bangladesh is onsidered as a developing country. Figure-4. 4: Bangladesh GDP Growth Rate Source: Bangladesh Bureau of Statistics,2011 14 4. 5 The relationship among the variables: The relationship between the exchange rate and three variables i,e, export, remittance and reserve reflects quite positive in correlation. The correlation has been computed considering the data from 2002-2011. Correlation Exchange Rate Export 0. 928315219 Remittance 0. 859373146 Reserve 0. 825444493 One regression analysis has been done with workers remittance and exchange rate.The purpose of the quantitative analysis is to identify if there is any relationship between exchange rate and workers remittance of Bangladesh. The monthly data of workers remittance from the financial year 2007-2008 to financial year 2011-2012 has been taken for the calculation. The regression model, exchange rate is independent variable and remittance is dependent variable. The regression model is: Y=66. 15+. 010385 remittance The value of R square is . 37 which means that the regression model explains 37% variation in exchange rate. T he coefficient is very low which is and P value is quite high that is 3. 74.So, the remittance does not show any significant impact on foreign exchange rate. 15 Chapter 5 Exchange Rate Situation 5. 1 Exchange Rate Movement: In the recent Taka depreciates against US$ drastically: Over the period, July 2010-January 2012, from Tk 70 to Tk 86 — a depressing 23% fall down. Figure-5. 1: Exchange Rate Movement Source: Website OANDA The sharp fall of taka against US dollar continues for last couple of months. US dollar has been weakening against many other strong currencies like Euro, SF, Yen and GBP but getting stronger against Bangladesh Taka. Exchange rate depreciation creates the economy in a challenging situation.Continuous depreciating tendency higher the inflation rate that ultimately increase the trade deficit. The ongoing depreciation of Bangladeshi taka is becoming the challenge for the central bank as well as the Government. The increasing trend of the trade deficit (figur e: 7) also shows the possibility of the shortage of supply of the foreign currency i,e, US$ in the market. 5. 2 Reasons for Currency Depreciation: The reasons behind the currency depreciation are influenced by economic fundamental, exchange rate regime and Trading rules. There is a slow trend of capital inflow in the country for the last couple of years.The main reasons for that are low tendency of foreign direct investment and increasing trend of trade deficit. 16 5. 2. 1 High Inflation: Inflation is appearing as a major threat in the economy in the recent past. Inflation had a moderate trend upto 2003 within 6%. It started increasing from 2004 and got sharp rise in 2008-2009 and the increasing trend is still continuing. The main cause of high inflation in Bangladesh is oil and food price hike in abroad. Figure 5. 2: Inflation Source: Monthly Economic Trend-Bangladesh Bank, January 2012 The high level of inflation in the economy leads to lower the value of local currency taka.To co ver the deficit budget, Government borrowings from the Central Bank (BB) and overall money supply increased leads to high inflation in the market. 5. 2. 2 Low Foreign Direct Investment: The growth rate of foreign direct investment is showing a declining trend. The data has been used from 1996 to 2011. After 1998 and so on, the trend started to decline sharply. It increased a little bit during 2004-2005 but again has a very declining trend. 17 Figure-5. 3: Growth Rate of Foreign Direct Investment Source: Monthly Economic Trend-Bangladesh Bank, January 2012 In the recent past, the FDI growth rate is severely low.So, proper steps are supposed to be taken by the government authority. 5. 2. 3 Trade Deficit: Though the export volume has an increasing trend since the inception of floating exchange rate regime, there is huge amount of trade deficit with an increasing trend. 18 Figure: 5. 4 Trade Deficit of Bangladesh Source: Monthly Economic Trend-Bangladesh Bank , January 2012 The amount o f import has been increased sharply after 2006-2007. The gap between export and import becomes huge during the last financial year 2010-2011. Due to huge import payment, government debt has increased significantly in the country and demand for foreign currency increased. 9 Chapter 6 Recommendations and Conclusion Considering the above mentioned discussions, some recommendations have been formulated in order to bring stability in the foreign exchange market in the short run and long run for the Government and Bangladesh Bank i,e, the central bank of the country. Those are discussing as follows: 6. 1. Control Inflation: Effective measures are needed to be taken by the central bank to control inflation by reducing money supply in the economy. The formulation of the tighten monetary policy by the central bank is an important factor for controlling inflation.But the deficit budget of the Government creates huge Government Debt and prolong inflationary atmosphere. The related factors for reducing deficit budget 6. 2. Reduce Trade Deficit: One of the important components to reduce the trade deficit is to enhance export volume of goods and services. Bangladesh is a import depended country. The main importable items are petroleum and food. Local industrialization is utmost important specially in the food sector (substitute food items production) and other exportable items to reduce huge liability of the Government. 6. 3 Enhancing Foreign DirectInvestment: Sufficient inflow of foreign direct investment could enhance the capital inflow in the country for long term. Bangladesh Government has specific policy for inviting FDI. Ensuring good governance, Infrastructural development, Utility, political stability will help to promote more investment from abroad in the country. 6. 4 Short Term Foreign Borrowings: Borrowings from abroad is another option for supplying liquidity in the market. But the problem of short-term borrowing is that the country may fall into â€Å"Debt-tr ap† due to be unable to pay the money on time.Once the foreign currency injects in the market, it is difficult to recollect form the market as well. The Central Bank of Philippines in early 1990 can be remembered here. Due to short-term borrowing to meet the local market demand, got huge foreign liability. Continuous losses eroded it’s capital base and made it bankrupt in 1993. It took 25 years to reestablish the new central bank in that country. So, Instead of foreign borrowings, Concessionary loans at a low interest rate from World Bank and ADB and other bilateral donors might be a better option to meet the ongoing gap in the market. . 5 Effective Capital Market: The capital market development is utmost important in order to bring the steady situation in FX market. Ensuring enough flow of Foreign Portfolio Investment (FPI), good governance and security in the capital market is time demand. 6. 6 Derivatives Market: Introduction of various derivative products as options , currency swap, interest cap, interest swap, futures, forwards etc, as well as ensuring huge portfolio investment might bring the positive impact in the exchange rate market. 20 6. Formation of Domestic FX Market: A formal forex market forum should be created, with the participation of independent professional bodies and with representation from the dealers association, Bangladesh Bank and other relevant government officials. This forum would provide the logistic support and platform for the forex market. Ideally, this forum would develop a secured web-based market to which only the members or participating organizations would have access. From this website, all the logistic support required for completing the forex dealings among the members/participating organizations could be provided. 6. Autonomy of the Central Bank: The autonomy of the central bank is desirable issue for the economy. The central bank should operate and perform independently with full automation. Conclusion: Th is study shows that floating exchange rate regime has constructive effect on economic growth. The transition period from Fixed rate regime to Floating rate regime was quite smooth and stable. There is significant growth in the fundamental economic variables on the long path of the new exchange rate regime. The trend of export, workers’ remittances and foreign reserves have been analyzed and found considerable growth on these variables.Nevertheless, the ongoing exchange rate depreciation along with high inflation is becoming a challenging issue for the regulators and Government as well. The gap between demand and supply of foreign currency in the market is getting bigger in the high inflationary economy which lead continuous loses in the value of the local currency. The key reasons have been found for the currency depreciation are inflation, government debt, trade deficit, low FDI etc. The study recommended some issues for Government’s and Central’s bank’s part. The regulation should be proactive rather than reactive.There are some potentialities in this new regime; to reap this potentiality, Government as well as regulators should take effective steps. 21 REFERENCES Asian Development Bank. 2011. Asian Development Outlook 2010 Update. Asian Development Bank. 2006. Asian Development Outlook 2005, ADB: Manila, Philippines. Asian Development Bank. Manila,Philippines. 2005. Asian Development Outlook 2005, ADB: Asad Karim Khan Priyo, June 2009,Impact of the Exchange Rate Regime Change on the Value of Bangladesh Currency. Bangladesh Bank Annual Reports. 2010.Dhaka Bangladesh. Bangladesh Bank Monthly Economic Trend. January 2012 Bangladesh Bank, Scheduled Bank Statistics. July-September 2011. Financial Sector Review, 2006, Bangladesh Bank. Hossain, Akter. 2002, Exchange Rate, Capital flows and International Trade. Hossain, M. A. , and Alauddin, M. , (Fall 2005), Trade Liberalization in Bangladesh: The Process and Its Impact on Macro Variabl es Particularly Export Expansion, The Journal of Developing Areas, Volume 39, Issue 1, 127-150. Jeff. Madura, International Financial Management, 10th edition. Islam, Mirza A. 2003): â€Å"Exchange Rate Policy of Bangladesh – Not Floating Does Not Mean Sinking†, Keynote Paper presented at dialogue organized by Centre for Policy Dialogue, Bangladesh – January 2, 2003. Nusrate Aziz . June 2008. The Role of Exchange Rate in Trade Balance: Empirics from Bangladesh. The IMF, Annual Report 2010, Financial operations and transactions, The International Monetary Fund. Younus, S. and Chowdhury, M. I. , (December 2006), An Analysis of Bangladesh’s Transition to Flexible Exchange Rate Regime, Working Paper Series. 22 APPENDIX I Trade Deficit of Bangladesh Export Import Year (in million USD) (in million USD) 1994-95 3472. 5250. 6 1995-96 3882. 4 6237. 9 1996-97 4418. 3 6436. 8 1997-98 5161. 2 6768. 0 1998-99 5312. 8 7205. 4 1999-00 5752. 2 7536. 6 2000-01 6467. 3 840 1. 5 2001-02 5986. 1 7686. 0 2002-03 6548. 4 8691. 8 2003-04 7603. 0 9812. 9 2004-05 8654. 5 11832. 1 2005-06 10526. 2 13271. 7 2006-07 12177. 9 15441. 0 2007-08 14110. 8 19481. 4 2008-09 15565. 2 20291. 4 2009-10 16204. 7 21388. 2 2010-11 22928. 2 32398. 4 Source: Monthly Economic Trend-Bangladesh Bank , January 2012 Trade Deficit (in million USD) -1778. 1 -2355. 5 -2018. 5 -1606. 8 -1892. 6 -1784. 4 -1934. 2 -1699. 9 -2143. 4 -2209. 9 -3177. 6 -2745. 5 -3263. 1 -5370. -4726. 2 -5183. 5 -9470. 2 23 Yearly Reserve Position In million USD Reserves($) Period 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Source: Monthly Economic TrendBangladesh Bank , January 2012 2469. 6 2705 2930 3483. 8 5077. 2 6148. 8 7470. 9 10749. 7 10911. 6 24 Yearly data of Workers Remittance: Remittances Year/Month 2011-2012* 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005 2003-2004 2002-2003 2001-2002 2000-2001 1999-2000 1998-1999 1997-1998 199 6-1997 1995-1996 1994-1995 1993-1994 1992-1993 In million In million US dollar Taka Growth Rate 2117. 7 11650. 32 10987. 4 9689. 26 7914. 78 5998. 47 4802. 41 3848. 29 3371. 97 3061. 97 2501. 13 1882. 1 1949. 32 1705. 74 1525. 43 1475. 42 1217. 06 1197. 63 1088. 72 944. 57 157668. 7 829928. 9 760109. 59 666758. 5 542951. 4 412985. 29 322756. 8 236469. 7 198698 177288. 2 143770. 3 101700. 1 98070. 3 81977. 8 69346 63000. 4 49704 48144. 7 43549 36970. 4 Average Rate Growth 13. 39772078 22. 41982721 31. 94664639 24. 90541207 24. 79334977 14. 12586707 10. 12420109 22. 42346459 32. 8903884 -3. 448382 14. 28001923 11. 82027363 3. 389543316 21. 22820568 1. 622370849 10. 00349034 15. 2609 20. 51706112 11. 89409131Source : Foreign Exchange Policy Department, Bangladesh Bank Bangladesh Bank Annual Report 2009-2010 Growth rate is self calculated 25 Yearly data of Inflation Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Point to Point 1. 66 3. 58 5. 03 5. 64 7. 35 7. 54 9. 2 10. 04 2. 25 8. 7 10. 17 11. 59 12 months average 1. 94 2. 79 4. 38 5. 83 6. 48 7. 16 7. 2 9. 94 6. 66 7. 31 8. 8 10. 91 Source: Monthly Economic Trend-Bangladesh Bank , January 2012 26 Yearly data of Export, Remittance, Reserve and Exchanger Rate (In million USD) Workers Year FX Rate Export Remittance in mil US$ (in mil US$) 62. 691 2501. 13 FY02 5985. 89 63. 2216 3061. 97 FY03 6548. 54 64. 0869 3371. 97 FY04 7602. 99 68. 0508 3848. 29 FY05 8654. 52 73. 9865 4802. 41 FY06 10526. 16 74. 1681 5998. 47 FY07 12177. 86 73. 4636 7914. 78 FY08 12685. 4 73. 8228 9689. 26 FY09 14170. 7 74. 5518 10987. 4 FY10 14763. 8 79. 1877 11650. 32 FY11 20313. 8 Source: Monthly Economic Trend-Bangladesh Bank , January 2012 Reserve (in mil US$) 1582. 9 2469. 6 2705 2930 3483. 8 5077. 2 6148. 8 7470. 9 10749. 7 10911. 6 27 Monthly data of Remittance and Exchange Rate Year Month Remittance ( In million USD) Ex rate (average) Year Month Remittance ( In million USD) Ex rate (average) 007-08 2008-09 2009-10 July August September October November December January February March April May June July August September October November December January February March April May June February March April May June July August September October November December January February March April May June 567. 11 470. 95 590. 67 559. 05 617. 39 635. 34 710. 74 689. 26 808. 72 781. 71 730. 26 753. 58 820. 71 721. 92 794. 18 648. 51 761. 38 758. 03 859 784. 47 885. 67 840. 99 895. 3 850. 5 784. 47 885. 67 840. 99 895. 3 850. 5 885. 38 935. 15 887. 57 900. 70 1050. 4 873. 86 952. 39 827. 96 956. 49 922. 16 903. 05 892. 15 73. 6518 73. 4389 73. 5663 73. 3004 73. 2946 73. 473 73. 4672 73. 4063 73. 2738 73. 4847 73. 2841 73. 3473 73. 38 73. 4947 73. 2884 73. 6468 73. 7971 73. 691 73. 7961 73. 8126 73. 8073 74. 1052 73. 9459 73. 9413 73. 8126 73. 8073 74. 1052 73. 9459 73. 9413 73. 9214 73. 6394 73. 7567 73. 7551 73. 5378 73. 8549 73. 8181 73. 9592 74. 2051 74. 0648 74. 4125 74. 6026 2010-11 2011-12 July August September October November December January February March April May June July August September October November December 57. 31 963. 92 837. 71 923. 85 998. 64 969. 10 970. 54 986. 97 1102. 98 1001. 97 998. 42 1038. 91 1015. 58 1101. 79 855. 44 1039. 48 908. 79 1147. 22 74. 5447 74. 4778 74. 5078 75. 0673 75. 3246 75. 5892 75. 8669 76. 0948 76. 8504 77. 8919 78. 42 78. 843 79. 6805 79. 534 79. 7888 80. 9414 81. 9104 84. 1857 28 Source: Monthly Economic Trend-Bangladesh Bank , January 2012 Regression Analysis: Exchange Rate and Remittance SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 0. 610778 0. 373049 0. 360993 2. 020275 54ANOVA df Regression Residual Total 1 52 53 SS 126. 2866232 212. 2385435 338. 5251666 Standard Error 1. 622261594 0. 001867047 Lower 95. 0% 62. 90219774 0. 006638903 Upper 95. 0% 69. 41280968 0. 014131912 MS 126. 2866 4. 08151 F 30. 94114904 Significance F 9. 36275E-07 Coefficients Intercept X Variable 1 66. 1575 0. 010385 t Stat 40. 78103 5. 562477 P-value 3. 7402E-41 9. 36275E-07 Lower 95% 62. 90219774 0. 006638903 Upper 95% 69. 41280968 0. 014131912 2 FOREIGN DIRECT INVESTMENT (FDI) INFLOWS AND STOCKS BY COMPONENTS IN BANGLADESH (In million US$) Inflows Period 996-97 Jul-Dec Jan-Jun 1997-98 Jul-Dec Jan-Jun 1998-99 Jul-Dec Jan-Jun 1999-00 Jul-Dec Jan-Jun 2000-01 Jul-Dec Jan-Jun 2001-02 Jul-Dec Jan-Jun 2002-03 Jul-Dec Jan-Jun 2003-04 Jul-Dec Jan-Jun 2004-05 Jul-Dec Jan-Jun 2005-06 Jul-Dec Jan-Jun 2006-07 Jul-Dec Jan-Jun 2007-08 Jul-Dec Jan-Jun 2008-09 Jul-Dec Jan-Jun 2009-10 Jul-Dec Jan-Jun 2010-11 JulyDec. Jan-Jun Source : Stocks Total 366. 85 157. 63 209. 22 603. 30 366. 07 237. 23 394. 10 339. 23 54. 87 383. 22 254. 25 128. 97 563. 92 449. 67 114. 26 393. 76 240. 21 153. 56 379. 18 174. 75 204. 43 284. 16 145. 82 138. 34 803. 78 322. 06 481. 72 744. 61 363. 54 381. 07 792. 4 411. 41 381. 33 768. 69 285. 03 483. 66 960. 59 602. 65 357. 94 913. 02 342. 22 570. 80 Equity Capital 136. 71 40. 79 95. 92 349. 02 236. 14 112. 88 195. 54 167. 63 27. 91 152. 98 109. 56 43. 42 372. 27 306. 76 65. 51 230. 11 168. 27 61. 84 163. 98 71. 97 92. 01 111. 23 64. 13 47. 10 361. 14 108. 79 252. 35 447. 22 173. 24 273. 98 464. 50 229. 67 234. 83 545. 69 166. 78 378. 91 535. 42 430. 34 105. 08 515. 14 113. 47 401. 67 Reinvested Earning 151. 27 79. 92 71. 35 181. 31 92. 10 89. 21 120. 71 100. 67 20. 04 80. 71 56. 19 24. 52 81. 00 53. 25 27. 75 84. 66 37. 26 47. 40 164. 97 69. 42 95. 55 161. 38 74. 58 86. 80 297. 1 152. 99 144. 12 198. 64 103. 36 95. 28 281. 00 169. 46 111. 54 197. 71 101. 70 96. 01 336. 61 149. 72 186. 89 331. 10 178. 05 153. 05 Intracompany Loans 78. 87 36. 92 41. 95 72. 97 37. 83 35. 14 77. 85 70. 93 6. 92 149. 53 88. 50 61. 03 110. 66 89. 66 21. 00 79. 00 34. 68 44. 32 50. 23 33. 36 16. 87 11. 55 7. 11 4. 44 145. 53 60. 28 85. 25 98. 75 86. 94 11. 81 47. 24 12. 28 34. 96 25. 29 16. 55 8. 74 88. 56 22. 59 65. 97 66. 78 50. 7 0 16. 08 Equity Capital †¦ †¦ †¦ †¦ †¦ †¦ †¦ †¦ †¦ 1010. 45 968. 83 1010. 45 1182. 07 1215. 54 1182. 07 1408. 98 1325. 97 1408. 98 1579. 15 1472. 70 1579. 15 1854. 10 1818. 86 1854. 10 2123. 50 1940. 7 2123. 50 2468. 63 2268. 39 2468. 63 2857. 96 2736. 50 2857. 96 3719. 99 3068. 07 3719. 99 3909. 60 3823. 32 3909. 60 5014. 96 4426. 69 5014. 96 Reinvested Earning †¦ †¦ †¦ †¦ †¦ †¦ †¦ †¦ †¦ 505. 89 492. 80 505. 89 470. 44 470. 37 470. 44 505. 13 494. 15 505. 13 637. 75 550. 10 637. 75 708. 43 649. 08 708. 43 880. 01 822. 04 880. 01 974. 18 904. 81 974. 18 1146. 22 1133. 87 1146. 22 873. 76 1109. 59 873. 76 903. 65 742. 04 903. 65 544. 21 474. 06 544. 21 Intracompany Loans †¦ †¦ †¦ †¦ †¦ †¦ †¦ †¦ †¦ 459. 04 428. 96 459. 04 454. 29 475. 85 454. 29 448. 82 382. 08 448. 82 410. 64 427. 89 410. 64 321. 16 408. 03 321. 16 362. 10 328. 7 362. 10 322. 72 363. 95 322. 72 364. 23 316. 86 364. 23 210. 68 221. 12 210. 68 325. 94 250. 66 325. 94 410. 29 378. 17 410. 29 Total †¦ †¦ †¦ †¦ †¦ †¦ †¦ †¦ †¦ 1975. 38 1890. 59 1975. 38 2106. 80 2161. 76 2106. 80 2362. 93 2202. 20 2362. 93 2627. 54 2450. 69 2627. 54 2883. 69 2875. 97 2883. 69 3365. 61 3090. 68 3365. 61 3765. 53 3537. 15 3765. 53 4368. 41 4187. 23 4368. 41 4804. 43 4398. 78 4804. 43 5139. 19 4816. 02 5139. 19 5969. 46 5278. 92 5969. 46 118. 31 211. 57 12. 64 131. 64 233. 62 71. 26 Statistics Department, Bangladesh Bank. 342. 52 436. 52 5196. 21 5143. 70 533. 65 612. 69 342. 21 462. 67 6072. 07 6219. 06 3

A Microeconomic Analysis of Indian Retail Industry

MODERN RETAIL MICRO ECONOMICS PROJECT REPORT ABSTRACT The growing number of modern retail outlets in India on the one hand and frequent sale seasons and talks of underperformance on the other point to a mixed bag and make us wonder whether the sector is on the right growth trajectory. In this report, rather than providing with just the facts, we have tried to understand the modern retail sector from an economist’s point of view and visualize its future-whether it is in its expansion or contraction phase.Motivated by the rising per-capita incomes and increased spending on consumer goods, modern retail stores are coming up with new strategies and plans to unlock the Pandora box of the untapped and unorganized retail sector. In the course of the report, we try to find out – how the retail sector works, major regulations that affect its functioning and the challenges that await the sector and summarize with our analysis and recommendations. Note: We have used where weâ€⠄¢ve analyzed the situation from a micro-economic point of view. INTRODUCTIONThe retail sector in India can broadly be classified as organized and unorganized where the share of unorganized sector is more than 93% of the total and includes the kirana stores, mom and pop stores and the ilk. The organized or modern retail sector on the other hand captures a mere 7% of the total market share. Modern retail is defined as a form of retailing whereby consumers can buy goods from a similar purchase environment across more than one physical location and operates under three levels: Specialist stores catering to some particular category of product such as footwear, pharma & beauty, food and grocery etc. classified under level I. Departmental stores that cater to a few categories of retail put under level II, and malls where we find an agglomeration of many departmental stores, hypermarkets etc – classified under level III retail. The figure 1 below shows the various players at differe nt levels of retail. Retail stores can also be classified under ‘lifestyle’, ‘value’ and ‘luxury’ formats based upon the consumer income segment they target.Figure : Players operating at different levels Figure: Organized Retail Although, the sector boasts of covering almost all the verticals, a look at the markets under different verticals shows that Organized Retail Penetration is extremely low – 2. 4 percent – for the food and grocery, which in contrast makes up for the biggest part of the total retail market. The apparels, foot wear and home decor are the major contributors under organized retail and have been prospering at a rapid pace.The figures below depict the market share and Organized Retail Penetration in different verticals. Figure: Market Share of Different Verticals in Organized Retail Source: CRISIL Figure: Organized retail penetration (%) in different verticals Source: CRISIL Retail almost accounts for around 15% of India’s GDP and thus plays an important role in determining the Indian economic indicators. Organized retail became the apple of everyone’s eye when Vishal Mega Mart profited from its operations in different parts of India.Soon, other players started with their own retail chains such as V-Mart, Big Bazaar, Subhiksha, Pantaloons et al and the market turned into a very competitive market, probably lowering the economic profits of the retailers, and consequently the situation now is that Vishal, Subhiksha and others stand nowhere compared to the biggies such as Reliance, Big Bazaar and others. The major reasons for this are the marketing mix of these brands and benefits from economies of scale. However, because a number of factors go into determining business profitability, it would not be correct to give all credit to the above mentioned factors.Let’s now look at the major player in organized retail in India. MAJOR PLAYERS The organized retail sector of India h as many domestic corporate houses competing with their ventures such as Tata’s Chroma, Reliance Trends, Reliance Fresh, Futures Pantaloons, RPG & so on. Other than these, fascinated by the Indian demographics and potential market, international players have entered through joint ventures with national players and are planning to compete for the share through such strategies.Major players along with their brands are shown below. * Landmark (books and music) * Croma(multi-brand electronics) * World of Titan (watches) * Tanishq (jewellery) * Titan Eye+ (eye wear) * Westside (lifestyle retail store) * Star Bazaar (hypermarket chain) * Fashion Yatra(family fashion store) * Central (shopping mall) * Big Bazaar (hypermarket) * Pantaloons (fashion outlet) * Blue Sky (sunglasses) * Brand Factory (multi-brand readymade garments) * KB's Fair Price (essential products) * Navaras(jewellery) Planet Store (multi-brand sports and lifestyle speciality retail) * aLL(fashion garments) * Ethnici ty (Indian ethnic wear) * Home Town (home needs), * eZone(electronics), * Furniture Bazaar (home furniture), * Electronics Bazaar(under Big Bazaar, electronics stores) * Home Bazaar (satellite version of Home Town) * Collection I (lifestyle furniture) * Gen M ; One Mobile (mobile phones) * M-Port (electronics) * Shoe Factory (footwear) * Depot (books and music) * Reliance Fresh (neighbourhood store) * Reliance Mart (supermarket) * Reliance Super (mini-mart) Reliance Digital (consumer durables and information technology) * Reliance Trends (apparel and accessories) * Reliance Wellness (health, wellness and beauty) * iStore(Apple products) * Reliance Footprint (footwear) * Reliance Jewels (jewellery) * Reliance TimeOut(books, music and entertainment) * Reliance AutoZone (automotive products and services) * Reliance Living (home ware, furniture, modular kitchens and furnishings) * Music World (music and home video store) * Books ; Beyond (book store) * Spencers (multi-format retail stor e) K RAHEJA Shoppers Stop (clothing, accessories, fragrances, cosmetics, footwear and home furnishing store) * Crossword (book store) * Inorbit Mall (fashion, lifestyle, food and entertainment) and Hyper City (hypermarket) As we can see that all major groups in India have opened up their retail stores catering to different sections of the society providing for different needs of the customers. This has resulted in a sort of monopolistic competition in organized retail market in metro and Tier 1cities owing to the large number of variants being offered to the customers.However, in Tier 2 and 3 cities there are fewer of such modern retail stores and the market situation can be compared to oligopoly, but however because of local players and unorganized retail the effects of oligopoly generally don’t show up. The presence of competitors thus affects not only the player, but the industry and the nation as whole. Let’s discuss in brief the effects of competition. COMPETITION AND RIVALRY Competition is one of the means to achieve economic efficiency.It restrains prices and encourages companies to innovate ; provide better quality of products. In the retail sector competition is driven by many factors, including variety, products, price, quality, service, location, reputation, credit and availability of retail space etc. It can broadly be classified under: 1. Competition because of Internal Factors The large number of groups in multibrand retail such as TATA, Raheja et al and also single brand established foreign players such as Adidas, Nike etc pose a threat to speedy expansion of Indian Retail. . Competition because of External Factors The organized retail industry in India is facing immense competition from the unorganized sector. Traditionally, retailing has been established in India for centuries. It is a low cost structure, mostly owner operated, has negligible real estate and labor costs and little or no taxes to pay. The unorganized retail sector constitutes over 93% of India’s total retail sector and thus, poses a serious hurdle for organized retailers.Because of the largely unorganized nature of Indian retail, inefficiencies have crept in and large number of intermediaries exists, reducing the functional and productive efficiency of the retail industry. The government in power has thus been keen to promote FDI in retail in India. Hundred percent FDI in single brand retail invited global companies for competition in the Indian retail sector. With this the companies are working with a strategy so as to be able to cater to the needs of the consumers and grow volumes by ensuring footfalls, while being able to reduce costs, withstand downturns, and face competition.Here we also see a common practise to prevent other companies from affecting the economic status quo of a country, by imposing barriers and caps on FDI, for example what has been done in multibrand retail. As of now, FDI in multibrand retail cannot exceed the specified cap which has kept global retailers such as Walmart, Carrefour et al from entering the Indian market, although they still do exist in whole sale cash and carry segment.The market structure of the modern retail is that of monopolistic competition in metros ; tier I cities which usually have hundreds of shopping alternatives including multi-brand retail outlets, single brand outlets in the shopping malls and nation-wide chains. Whereas in the tier II ; tier III cities the market structure is oligopoly in nature as they have fewer stores and somewhere only a single super centre or shopping mall. Also if we look at prices of different products in various retail outlets, we find that there is not much difference between the prices, except during periods or seasons of sale.This shows that because of the very competitive nature of modern retail, which now also includes online retail, the players are almost operating at zero economic profit, and thus don’t have much scope to offer different prices for similar products. Moreover almost all use similar technologies and processing techniques to provide the final product and thus the prices cannot be increased significantly, for fear of loss of market share. For example, Pantaloons and Westside have almost the similar brands in offering for the customer, leaving little scope for differentiation or price discrimination.Price discrimination can however happen when we compare lifestyle or luxury and value format stores, value stores charging lesser price for the same product sold at a higher price in lifestyle stores. To gain advantage in such a competitive environment major retailers have started to distinguish themselves by providing products under ‘private labels’. In India, fresh produce purchases are made more often from cart vendors who buy their stock from wholesalers. Retailers have tried to bridge the gap with direct farm procurement  eliminating middlemen and introducing  Ã¢â‚¬Ëœ private labels'.They are coming up with new ideas to grab a major share of the market which is prospering (see figure below) because of the following factors: The average income of the middle class population has been increasing at a rate of around 12%, which will result in increased expenditure Increasing proportion of working women in the country Increasing population of employed youth Increasing desire for better standards of living and trends in consumer expenditure Increase in the use of plastic money Emerging markets in Tier II and Tier III citiesFigure: Sales (in million Rs. ) plotted against the financial year Source: Company official website These factors may cause a shift in the demand curve, but more number of retailers will be willing to enter and eventually the price would not be impacted much. There would, infact a gradual shift from unorganized to the organized retail. All these and a huge untapped market potential that’s locked in the unorganized retail has mo tivated modern retailers to invest heavily in marketing and advertising, to grab customer attention and retain them.ADVERTISING Promoting the modern retail brand is very important – especially in metro and Tier I cities. The retailer must strive hard to communicate the USP of the brand and help the end-users know to which brand a particular product belongs influencing the buying behavior of the customer. Not only in India, retail industry all over the world spends large amount of funds on advertising. The figure below shows comparison of expenditure by the retail sector with others on online advertising in the United StatesFigure 5: US Online Ad Spending The growth of online video ads among the brand marketers and Social networking are primary contributors to the growing market share of the retail sector. Advertising in modern retail is broadly done under the following three categories: Traditional Advertising Traditional advertising means advertising using traditional media such as TV, newspaper, radio, circulars, hoardings etc. For eg. we frequently see advertisements from major retail players such as Big Bazaar, Chroma etc in newspapers.Digital Advertising This form uses advertising using digital media. Video advertising, Mobile advertising etc are some of its examples. Alternative Offers Under this we may have guerilla marketing where the marketer may use graffiti, fliers, deal of the day type offers, groupon etc to promote or advertise the product. Website Communication or on-site communication evaluates how well retailers currently collect the kind of information that helps them localize their own communications with consumers.For this category, we evaluate two criteria: whether the retailer offers localized information about their own stores on their eCommerce site, and whether they solicit customer information – email address and mobile number, prominently on their site. The expansion of the retail sector and the creation of meta-mediarie s has provided with increasing job opportunities. JOB CREATION With a CAGR of around 14. 5% in the last five years and the bright prospects of expansion , the the no of jobs in this sector are expected to grow at a fast pace.The existing players will have to face competition from the new players and this would also lead to opening up of new stores and thereby increasing the job opportunities in the country. Shift in consumers preference from traditional stores and shops to departmental stores and hypermarkets is definitely going to put pressure on retailers to provide for adequate staff and services, thereby increasing the number of people employed and thus creating job opportunities. The rural market is home to the 46% of the rich and prosperous people of the country. Besides, these people stay in 17% of the villages of the country.The infrastructure costs in setting up retail outlets in these places are going to be lower compared to the cities. This will encourage the emergence of regional players and would again lead to creation of jobs in many regions. However, some more prospering regions or cities which have shown good growth rates will have an edge over others, even in the same state. Whatever is the case, the supply has to be met with the demand, especially when there is no dearth of labor in India and job creation is highly likely, an event when it comes to the retail sector expansion and penetration.FDI in multi-brand retail is going to be a deciding factor in creation of jobs as well. Once permitted, this will lead to aggressive competition. The entry of new players would balance the supply chain and farmers will be benefitted. If this happens, more people will be attracted towards farming, also contract farming would lead to creation of rural jobs. Moreover, entry of foreign investors is likely to shift the production possibility frontier outwards(see figure below), because they are more likely to invest in storage, supply chain and other capital g oods.Retail sector is expected to expand by leaps and bounds in the near future and this would create a lot of jobs. The advancement of technology though can also reduce the manpower required in the long run and the jobs created over a period of time may get killed. The entry of multi brand retailers may also adversely impact the local kirana walas, because they will be able to recover there fixed cost easily and gain from economies of scale. Further, because all food and grocery require very similar capital investment, they also stand to gain from economies of scope.Figure: Expansion of Production Possibility frontier (not by reducing consumption but with introduction of new technology) RECENT TRENDS Growth of Modern Retail India moved from being 10th largest economy in 1990 to 4th largest in 2010 according to Purchasing Power Parity (PPP). The growing economy has driven the growth in per capita income of Indian consumers. Indian retail sector (organized and unorganized) has grown by 14. 5% from 2006-07 to 2011-12 and is valued at $396 billion out of which 5-6% is the share of organized retail.Organized retail has had growth more than double of total retail. With the overall rise the penetration of organized retail sector has increased and is expected to grow its share to 10% by the year 2016. Changing shopping behavior Shopping behavior has changed over time, with growing urbanization there has been rise in affluence and growing attraction towards branded goods. The parameters over which modern retail has been faring better than traditional retail are product assortment and range, quality, everything under single roof model. FDI in retail FDI in Single Brand:In 2006, FDI in single brand retail was permitted to the extent of 51% which has recently been increased to 100% in Jan, 2012. There is also a mandate of sourcing of goods from local SMEs and local dealers. FDI in multi-brand sector: International retailers are allowed 100% ownership in cash ; carry whol esale trade stores. But similar initiative in multi-brand retail stores, i. e. allowing 51% FDI has been met by widespread rejection and has been put on hold. Online Retailing Online retailing is gaining popularity in India with growing penetration of internet.It is expected that online retail will triple in size by 2014-15. It will be dominated by branded, low ticket size, easily transportable, lifestyle products and books. Flipkart and Yebhi. com have already established themselves as major players in this segment in the Indian market. Challenges posed by recent developments Indian government intended to bring 51% FDI in multi-retail sector but due to its widespread opposition, it has not been approved yet. This has put entry of world’s leading retail chain in Indian market. A lot has been said about possible loss of potential job and infrastructure development due to this.Besides that the suggested provision of sourcing from local SMEs is also proving to be a deterrent. IN DIA AND THE INTERNATIONAL MARKET The graph below shows India’s status wiz a wiz status of organized retail in other countries. It can be observed that India still has a long way to go if it wants to increase the share of organized retail in the retail market. Figure: Organized retail as a percentage of total retail in different countries Source: CRISIL In the second half of the 20th century, many countries opened up there markets for Organized Retail and some also opened for multi-brand retail.There were some countries who felt a positive impact of the same, China is one such example; while there were others such as Uk which were adversely affected. India should also proceed with implementing FDI in multi-brand retail in phases, looking for any drawbacks, before it opens up fully. REFERENCES CRISIL Research, http://crisil. com/research/list-of-industries. html# Dun and BradStreet, http://www. dnb. co. in/IndianRetailIndustry/overview. asp Indian retail News, http://www. india retailnews. com/ Tata group official website, http://www. tata. com/company/profile. aspx? ectid=oH90Rc8X7Dg= Croma retail, http://www. cromaretail. com/ FDI in Retail, http://cci. gov. in/images/media/ResearchReports/FDI%20in%20Indian%20Retail%20Sector%20Analysis%20of%20Competition%20in%20Agri-Food%20Sector. pdf Futures group Official website, http://futuresgroup. com/ BIBLIOGAPHY Economics by Samuelson and Nordhaus ——————————————– [ 1 ]. Lifestyle formats include departmental stores and specialty stores [ 2 ]. Value formats include supermarkets and hypermarkets [ 3 ]. Retailers can use price differentiation to gain from the consumer surplus [ 4 ].Private  labels or private  brands  Ã‚  are the brands that are owned and sold by  Ã‚  retailers at their stores   and are typically  priced lower  (5-15 percent)   as compared to  the existing  brands. [ 5 ]. These factors will result in a shift of demand curve to the right [ 6 ]. Source: CRISIL [ 7 ]. Organised retail penetration expected to cross 10 per cent by 2016-17 [ 8 ]. In such cities, the number of market players is very large forming a monopolistic market, brand positioning thus becomes very important to create great brand recall value. [ 9 ]. Unique Selling Proposition [ 10 ]. Opened up multi brand retail in phases.