Understanding the financial system, investment cycle and their impact from the perspective

of economy and economical growth in the Indian and International Scenario:

The objective of this article is to get a basic & broad understanding of the financial system and related
issues in the context of Indian financial system; the investment cycle and perspectives of a company,
banking and financial institutions, government and as an Individual in the financial system.

Firstly we shall look into the common financial terms and secondly understand the general investment
cycle and thirdly the general correlation of the investment cycle of different entities on the economy.

The common financial terms used in the financial system are:

Revenue / Income, Investments, Funds, Loans, Taxes

Tax – VAT, Service Tax, Excise Duty, Income Tax, Wealth Tax
Loans – Business Loans, Debtors, Loans through World Bank and IMF
Funds – Deposits, Shares (stocks), Mutual Funds, Insurance (general & personal) and other
instruments
Investments – Retails Investors, Private Equity Investors, Financial Institutions, NBFCs, FDI and
FII, Governments, World Bank and IMFs

Means of Transactions – Monetary, Financial Instruments and Commodities exchange

The financial system comprising of various organizations, institutions and the government involving
different kinds of transactions would be:

Banks, Financial Institutions, Insurance, NBFCs

Government Companies
(All industries & PSUs)

Imports Exports

Financial System
Indian companies Controlled by Foreign Investments
Investing in Foreign Ministry of Finance, Commerce & in India
markets Regulatory authorities - RBI, SEBI, IRDA, CBDT

Individuals

Unorganized Business Sector

Agriculture

Schematic representation of the financial system

The below representation depicts the general investment cycle. Depending upon the context there may
be additional factors influencing the cycle in case of organizations, institutions, agriculture or
unorganized business sector.

Resources
Human
Investment Resource
Business (Services)
Operations

Profits Investment Cycle Revenue

Taxes

Less Operational
Expenses Interest on Loans

Representation of General Investment Cycle

Having understood the general investment cycle, replicating the same to organizations, institutions and
other entities, the investment cycle would go through a similar process with few other factors
influencing the cycle. The performance of the financial system would basically depend upon the
investment cycle of the entities forming as part of the financial system across the size, regions and
industry segments. The degree of impact of each of these entities may vary with in the system. The
complexity, scale of investments, timing and need will basically determine the correlation between the
entities on the financial system.

Understanding the correlation between investment cycle of different entities in the financial system and
the demand for the products and services offered by these in the domestic and international market;
calculated, rationalized investment plans will yield improved overall economic growth in the current
scenario.

The economic growth majorly depends upon the collective performance of the above entities; domestic
& international demand for the products and services offered by companies including all the industries;
domestic and international financial risks; agriculture, services and industrial outputs.

After the opening up of economy in 1992 and looking at the rebuild of economy after the recession
period across the world, India will continue to be one of the prime focuses of investments; in addition to
markets including Brazil, China, Russia, African nations by developed countries. Hence well planned
investments addressing the basic issues of the economy will help ensure a steady and sustainable
growth rate of the economy.
The major contribution to the Indian economy comes through agriculture, domestic growth of industrial
goods and services, natural resources of the country and the international demand for the agricultural
products, goods and services and natural resources. The growing rate of import of the goods because of
the demand does concern the economic growth.

In the international context it is important to closely monitor and regulate the investments & flow of
resources into the international markets and vice versa to ensure a gradual, sustainable growth so that
the economy does not take a beating because of irrational investments.

Perspective of Funds, Expenses, Investments, Taxes from the view point as a company, government,
banks and financial institutions and as a common man.

Perspective of Funds / Investments Expenses Taxes Other Savings /

organization / regulatory Revenue/
individual Income
Banks & Deposits Loans to Salary to Income RBI, IRDA & Interest
Financial through companies, employees Tax SEBI statute earned
Institutions salary / Individuals, and other norms from Loans
business Housing,Gold, fixed and
income Tourism, variable
and term Education Expenses,
deposits Interest
Company Loans, Into the Salary to Income SEBI Operational
(including Shares, company employees Tax, Excise revenues
public sector Debts operations on and fixed Duty, and
companies) Fixed and and variable Service Investment
variable expenses Tax revenues
assets depending
upon the
assets,
Interest
Government World Infrastructure Subsidies, None Natural
Bank and Projects and fixed and resources
IMFs, Taxes other variable
investments assets,
Interest on
loans
Unorganized Loans Deposits, Operational Income IT / VAT Revenue
Business Sector Shares, MFs Expenses, tax, VAT through
Insurance & Wages, Tax Business
back in Salary , Operations
business Interest
Agriculture / Loans Bank Deposits Farming None Revenue
Farmer & Insurance expenses through
and wages sale of
agricultural
products
Common Man Term Personal and Income IT Dept Salary /
Deposits, family tax Wages
Insurance, expenses
Shares, MFs

Additional factors influencing the financial system in the International scenario are fluctuations in
Currency exchange rates, Hedging, Futures and Options, Letter of Credits, Market Risks (non financial)
and other policies and instruments. The above table signifies the cycle within each of the organizations
in each financial year or each of financial transactions. The cycle between these bodies will broadly
depend upon the regulations, economy; performance of different industries, international financial
conditions, agriculture, government policies; international trade practices and projects.

Copyright, Ganesh Raj U, Smart Consulting, 2010. All rights reserved