India’s five-year plans (FYPs) highlighted the import substitution policy under India’s inward-looking strategy. This meant that the goods that can be produced domestically should be produced domestically rather than importing from the foreign market. The domestic producers could thus sell their products in the Indian markets without any foreign competition. The main aim here was to boost the economic growth of the nation and achieve self-sufficiency. Such an economy is also known as a closed economy. Up until the 1990s, India chose to remain as a closed economy.

The system of import substitution and import restrictions was implemented with the help of a number of different methodsー through the imposition of a) Tariffs, b) Quotas.

Extremely high tariffs were levied on imported goods making them very expensive for the Indian consumers. This eventually forced them to buy goods that have been made domestically rather than the imported items.

The quota system led to the fixing the maximum limit on the imports made by a domestic consumer. Only a certain amount of very essential items such as raw materials and capital equipment were allowed to be imported and used. That means, if the producers wanted extra materials, they had to fend for themselves.

No doubt that the inward looking strategy brought a rise in the foreign trade sector with the domestic producers gaining exponentially but towards the early 1990s, the Indian law makers realised that there are many loopholes in the current foreign trade policy that they adopted. The main problem was that the domestic producers made no sincere efforts to step up the quality of their products, forcing the Indian consumers to purchase whatever was supplied by them.

In 1962, a review committee was formed to discuss the changes required in the government’s existing foreign trade rules and hence, in 1985, then Finance Minister V.P. Singh announced the EXIM Policy (short for Export-Import Policy) which formulated the export and import policies of the country. Initially, the policy was meant to be followed for a period of three years. Later from 1991, the policies were revised every 5 years in view of the changing international economic context. The EXIM policy came into being to get a better view of the trade situation of the country and to correct trade deficits, if any.

In the year 1991, India received a major setback. The Indian government availed a loan of $7 billion from the IMF (International Monetary Fund) and the World Bank due to its inability to manage the economic condition of the country. In order to avail the loan, these international agencies expected India to liberalise, privatise and globalise its economy. The Indian government thus announced the New Economic Policy (NEP), popularly known as the LPG (Liberalisation, Privatisation, Globalisation) policies. Under the New Economic Policy, quantitative restrictions that were imposed after independence were substantially removed. For example, by the year 2001, import restrictions on manufactured consumer goods and agricultural products were completely eliminated. Similarly, tariffs were removed to a great extent in order to increase the competitiveness of the domestic goods in the foreign markets and to improve the quality of the products.

The first EXIM policy came into effect in 1992 and was effective until 1997. This policy aimed at removing the various protectionist measures that were taken by the Indian government previously. After that, the second EXIM policy started in the same year (1997) and stayed up until 2002. This time the focus was on making India a globally oriented economy through the adoption of a set of schemes such as the Export Promotion Capital Goods Schemes and Advanced License Schemes aimed at increasing investments from abroad. The next EXIM policy emerged after 2 years i.e. in 2004 up to 2009 (major trade decisions were taken under this EXIM policy which is why it is also called the ‘Trade Constitution’), under which newer policies such as Target Plus which focussed on providing incentives to producers and exporters with duty-free credit and Free Trade Zones. Soon after, the fourth EXIM policy came into effect from 2009 till 2014 which brought in new initiatives known as Focus Market scheme and product market scheme to help exporters compete in foreign markets and incentivise the export of those products which have high employment intensity. The fifth EXIM policy came after one gap year and came into effect in 2015 and stayed till 2020. This policy focussed on the export as well as the manufacturing services to improve the ease of doing business to increase India’s exports and thus increase its participation in the global market.

Fig 1. Imports of goods and services (% of GDP) – India | Source: World Bank

Fig 2. Exports of goods and services (% of GDP) – India | Source: World Bank

On March 31, 2020, the Government of India decided to extend the Foreign Trade Policy 2015-2020 for one year in light of the Covid-19 situation. It was to expire on March 31, 2021, but the Directorate General of Foreign Trade (DGFT) again extended FTP 2015-20 up to September 30, 2021, and it has been operational since.

References:

1. Arora, S. (2019). What are the objectives of Foreign Trade Policy in India? Legodesk. https://legodesk.com/legopedia/foreign-trade-policy-india/

2. India’s International Trade Policy – EXIM Policy. Economics Discussion. https://www.economicsdiscussion.net/international-economics/indias-international-trade-policy-exim-policy/4241

3. Soares, N. (2014). Foreign Trade Policy of India since 1980. Slideshare. https://www.slideshare.net/NikhilSoares/foreign-trade-policy-of-india-since-1980

4. Saluja, N. (2021). Govt extends current foreign trade policy till September. The Economic Times. https://m.economictimes.com/news/economy/foreign-trade/govt-extends-current-foreign-trade-policy-till-september/amp_articleshow/81777971.cms

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The Formula and What It Means

The formula for calculating the expected return of an asset given its risk is as follows:​

ER_i =R_f + β*(ER_m − R_f)

where:

ER_i = expected return of investment

R_f = risk-free rate

β = systematic risk (of the potential investment)

ER_m = expected return of the market

(ER_m − R_f) = market risk premium

In the stock market, investors are compensated for the risk they take and the time value of money. In the CAPM formula, risk-free rate R_f accounts for the time value of money. In other words, it’s the rate of return one would earn on an investment that has 0 risk.

In practice, a representation of the risk-free rate is given by the yield on 10-year government bonds. They are considered risk-free because the probability that the Indian government defaults and is not able to pay the return is very small.

R_m is the expected return of the stock market. It is what you can expect to earn on an average if you invest in a broad market index. The market risk premium is the difference between the expected return of the market and the risk-free rate. So, it’s like an expected reward for taking the extra risk. Using an estimate of the expected market return (R_m) gives an estimate of the return of the stock (R_i).

The β of a potential investment measures how much the stock moves when the market index moves up or down. The market, by definition, has a β of 1. A β of 1 means that the stock moves exactly like the market in both directions. A β greater than 1 means that the stock moves more aggressively with respect to the market so it gives you more upside potential when the markets are in bullish territory but it also carries a higher risk of money loss in a market downturn. Finally, a β smaller than 1 indicates that the stock is more defensive than the market, so there’s a lower risk but it also results in a lower return when things go well.

The market risk premium multiplied by the factor β [β*(ER_m − R_f)] is termed as ‘securities risk premium’.

So, for example, if the risk-free rate R_f is 5%, the expected return of the market ER_m is 13% and the systematic risk β of the security is 1.2. Then the expected return will be:

ER_i =R_f + β*(ER_m − R_f) = 5% + 1.2*(13%−5%) = 14.6%

Now, what does this mean to a potential investor? If the expected return they are looking for is equal to or more than 14.6%, then this asset is a decent option to invest in.

What the CAPM Implies

The CAPM depicts that the expected rate of return of an investment is fully determined by two factors: the risk free rate Rf and the securities risk premium i.e. the market risk premium multiplied by the factor of β [ β*(ER_m − R_f) ].

Greater Expected Returns require Greater Risk

The graph shows how greater expected returns from an investment(y-axis) require a greater expected risk(x-axis). Starting with the risk-free rate, the expected return increases as the risk increases.

Assumptions that don’t match reality

The CAPM is based on several critical assumptions. Some assumptions which potentially have some issues include:

1. Markets are efficient and all investors have equal access to information captured in the market. Now this generally won’t hold because institutional investors (a professional investor or organization that trades in large quantities) may have much better access to information, i.e., they have analysis, reports and other tools which make them more adept at evaluating securities than a retail investor (an individual or a non-professional investor). Also, different institutional investors are going to have different access to information.

2. Moving on to investor behaviour, markets are assumed to be dominated by risk-averse and rational investors which doesn’t generally hold because all investors do not act rationally all the time. They might invest emotionally or they might invest in things that particularly interest them.

3. Markets are frictionless i.e., there are no transaction costs, taxes or any kind of restraints in the market and one can buy and sell assets without incurring any kind of additional costs. Now, obviously this assumption doesn’t hold up in real life. While trading, there are a number of consequences that can’t be avoided. If you just think about when you trade shares, you incur a fee while buying or selling. You will also incur a bid-ask spread (the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept). Institutional investors, when they trade significant blocks of shares, also incur market impact costs i.e., the impact their trade has on share prices. Which means if they sell a lot of shares, they might depress the price. And, of course, taxes are a real concern. For example, Securities Transaction Tax (STT) is one such tax payable in India.

4. Under CAPM, it is also assumed that all investors invest in the same time horizon. Investment horizon is the term used to describe the total length of time that an investor expects to hold a security before selling it off. This assumption also normally doesn’t hold in markets because all investors usually have different time horizons which varies according to their investment goals.

The CAPM is a very useful tool to calculate a discount rate or expected return rate but it’s not the only one. There are other modern approaches such as Arbitrage Pricing Theory and Merton’s Portfolio Problem. There are also a few Multi-Factor Models at work as well. But the CAPM still remains popular due to its simplicity and utility in numerous situations.

References:

1. Bleve, M. (2020). Capital Asset Pricing Model (CAPM) Explained. The Finbox Blog. https://finbox.com/blog/capital-asset-pricing-model-capm-explained/
2. Capital Asset Pricing Model. University of South Wales. http://research.economics.unsw.edu.au/jmorley/econ487/CAPM_lecture.pdf
3. Kenton, W. (2021). Capital Asset Pricing Model (CAPM). Investopedia. https://www.investopedia.com/terms/c/capm.asp

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The major perspective of Financial Modeling is to predict the future of a business on the basis of past and present data. The predictions are based on the company’s past financial information, the information that is currently available about the company and the industry, and assumptions about how the future will unfold. Conclusions from a Financial Model are then used for analysis and decision making in the company.

Another aspect of Financial Modeling is to perform the valuation of a company/business. It helps investors determine whether the share price of potential investment options is undervalued, overvalued or valued accurately. This valuation is done on the basis of financial statements. For example, the results of a Financial Modeling done on the basis of financial statements gives a particular insight into the valuation of the company, which is then compared to its share price. Imagine that the share price of the company turns out to be less than what the model predicts, then it indicates that the company is undervalued and should be invested in.

Types of Financial Models

There are numerous types of financial models used by professionals but the most relevant ones in today’s corporate finance world include:

Three-Statement Model

As the name suggests, this model includes three financial statements- the Income Statement (also called the Profit & Loss Statement), the Balance Sheet and the Cash Flow Statement.

1. The Income Statement gives the details about the revenue and expenses generated by the company over the required time period.
2. The Balance Sheet tells about what assets (such as cash in the bank, inventory or real estate) and liabilities (like bank loans, debt to suppliers) a company has at a given point of time. Subtracting the liabilities from the assets gives the net worth of the company at that given point in time.
3. The Cash Flow Statement shows how much cash or anything equivalent to cash entered and left the company over the required time period.

These three statements are dynamically linked with formulas in Excel and financial analysis is then performed on the model.

Discounted Cash Flow (DCF) Model

Free cash flow is that part of cash flow that is not required for day to day business operations of the company. Anything done with the free cash flow doesn’t affect the existing business and it is available for distribution among the investors (both debt or equity) of the organization. Free cash flow is used because it shows actual economic value, while metrics like net income or profits may be misleading.

There are two steps in the DCF model- estimation of the company’s free cash flow in the future and then discounting (the opposite of ‘compounding’) it back to today using the appropriate rate to find the present value of the business (called Net Present Value or NPV) and ultimately, the value per share of the business.

The DCF model takes into consideration the initial free cash flow (the average free cash flow generated by the company in the last 3 years), the annual growth rate of the free cash flow of a company (predicted with the help of historic data), terminal growth rate (it is assumed that the cash flow generated at the end of forecast period grows at a constant rate forever, this is because estimates made far off in the future should not be aggressive) and finally the discount rate or the expected return from the business.

To arrive at the discount rate, a measure called Weighted Average Cost of Capital (WACC) is used. The weighted average cost of capital (WACC) is a calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. All sources of capital, including common stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation.

So, for example, if the calculated WACC is 9%, it is used to discount expected cash flow to see what it is worth today. So, if cash flow is expected to be ₹100,00,000(1 crore) in 2 years for a company being valued today, that ₹1 crore in 2 years is worth ₹91,74,312 today.

Formula to calculate present value

= future value/(1+WACC)^time

= 10000000/(1+9%)²

= 9174311.9

If the company we’re considering has 1 lakh outstanding shares, dividing ₹91,74,312 by 1,00,000 gives a present value of ₹91.74 per share. If our predictions about future cash flows are accurate, this is what the stock is worth today.

Imagine that this stock is trading at just ₹70/share in the market. This indicates that it is undervalued and should be invested in. But, if this stock is trading at ₹100/share, then it means that it is overvalued.

Mergers & Acquisitions (M&A) Model

As the name implies, the M&A Model is an analysis of the combination of two companies that come together through an M&A process. A merger is the “combination” of two companies, under a mutual agreement, to form a single entity. An acquisition occurs when one company completely takes over the other company. In both cases, a single company emerges. This is usually done to reduce competition, increase operational efficiency and for growth.

This model builds on both the Three Statement Model as well as the DCF Model and hence has all the standard components of a Three-Statement and DCF Model. The steps followed in a Merger Model include:

1. Forecasting the valuation of the first company (acquirer)
2. Forecasting the valuation of the second company (target)
3. Combining the two frameworks and making adjustments for various types of synergies

Sum of the Parts Valuation (SOTP Model)

The sum-of-the-parts valuation is typically used for companies that have diversified businesses, i.e., when a company is a conglomerate and derives its revenue through business units in different industries that cannot be valued using a single relative valuation technique. In such cases, the different parts of the business are valued differently and then they are all summed up so as to obtain the final number or the Total Enterprise Value (TEV). For example, Reliance Industries owns businesses engaged in energy, petrochemicals, textiles, natural resources, retail, and telecommunications.

The steps followed in an SOTP Valuation include:

1. Determining the different business segments
2. Valuing each segment
3. Combining up the total to get the final result

In the following example, the multinational company Amazon has been divided into different separately valued segments and then added together at the end.

Leveraged Buyout (LBO) Model

Whenever a private equity firm purchases a business using a significant amount of borrowed money and then uses the profits generated by this business to eventually pay down the debt, ultimately reducing the debt and increasing the level of equity, it is called a leveraged buyout.

The private equity firm may borrow as much as up to 70 or 80 percent of the purchase price from a variety of lenders(Banks, NBFCs, Financial Institutions) and fund the balance with its own equity.

Over time, as the debt is paid off, the equity portion increases significantly and over a long time period, the equity investors can achieve an Internal Rate of Return (IRR) of up to 20-30% or even higher.

Comparable Company Analysis (CCA) Model

In this method, a company is valued using the metrics of other businesses of similar size in the same industry. For example, the valuation of an e-commerce startup like Flipkart must be done by comparing it with an e-commerce company like Amazon India.

Using valuation measures like P/E Ratio, P/B Ratio, P/S Ratio, EV/Sales, EV/EBITDA etc, it is determined if a company is overvalued or undervalued.

The basic steps followed while performing CCA are:

1. Finding comparable companies
2. Determining relevant valuation measure
3. Validating key fundamental metrics (this refers to excluding non-recurring expenses and/or income which might reflect in the numbers)

References:

1. Ahern, D. (2020). Explaining the DCF Valuation Model with a Simple Example. https://einvestingforbeginners.com/dcf-valuation/
2. Chen, J. (2020). Comparable Company Analysis (CCA). https://www.investopedia.com/terms/c/comparable-company-analysis-cca.asp
3. Hargrave, M. (2021). Weighted Average Cost of Capital (WACC). https://www.investopedia.com/terms/w/wacc.asp

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Target-Oriented Population Control during the Emergency Period (1975-1977)

A major breakthrough in the population control process took place when then Prime Minister Indira Gandhi announced a nationwide emergency in 1975 and rigorously enforced mass sterilization programmes to bring down the population growth rate. About 6.2 million Indian men were sterilised in just a year which, according to a 2014 BBC news report, was 15 times the number of people sterilized by the Nazis. Vasectomy was a safer procedure than tubectomy, especially at that time, as it required less recovery time and follow-up hence poor men became the main targets of this gruesome campaign. The campaign to sterilise men involved many levels of harassment. There were even reports of police dragging the men to mass vasectomy camps. Men were considered easier targets for threats like job loss or fines, since they were more likely to be employed outside the home, to take public transportation and to go out or pick up government food rations.

Incentives and disincentives were given on a large scale for acts such as getting oneself sterilized or convincing other citizens to get sterilized. From offering plots of land in return for sterilization to threatening the loss of a government job for those who refused the procedure. While both men and women could be sterilized, the medical system was equipped to do many more vasectomies than tubectomies. Records have shown that the sterilization process mostly targeted the poor citizens and that wealthier Indians were able to buy their way out of the system. The coercive measures and the sterilizations caused a great deal of anger among the people. This unrest caused in the country is also considered as one of the reasons why Indira Gandhi’s government was voted out in the 1977 elections.

Voluntary Period since 1997

The next major breakthrough happened after the emergency period where the Indian government took a 180° turn and began to turn its family planning policy towards women. Female sterilizations became by far the most popular method of contraception. Family planning programmes further extended to rural areas through the network of primary health centres. The most fundamental change of the Indian population policy since 1977 was that family planning became mostly voluntary. The Indian government now put more emphasis on incentives to attract people to accept family planning voluntarily instead of forceful measures. During the Seventh Five Year Plan period between 1986 and 1991, the Indian government’s population control policy extended to including both long term and short term as well as specific goals. The long-term goal was to fix the net reproduction rate to be achieved by 2001 and the short-term goal focused on the female minimum age of marriage and the practice of contraception. The specific goal was to promote a two-child norm by increasing awareness among the people about family planning and responsible parenthood. The government efforts in population control now also extended to increase the literacy rate of the population and especially women.

Formation of the ICPD (1994)

The year 1994 is considered to be a noteworthy one in the history of family planning programmes in the world since the International Conference on Population and Development (ICPD) convened under the United Nations at Cairo in 1994 made some recommendations that were accepted by many developing countries including India that changed the direction of family planning programmes. The conference recommended that family planning programmes should not be driven by demographic goals but instead, they should be based on women’s reproductive rights and reproductive health, keeping in mind the well-being of everyone (International Institute for Population Sciences, 2016).

Adoption of NPP in the year 2000

India adopted the National Population Policy (NPP) in the year 2000 which decentralized the decision making to local government and improved the coordination between the government and the local and non-government organizations. Stress was given to improve the status of mothers and children. The programme focuses on the improvement of health care infrastructure and services and the empowerment of women. It also gives more emphasis to use of contraceptive methods like IUCDs, promotes delayed marriage for girls, provides a policy framework for imparting free and compulsory education up to 14 years of age, seeks to achieve universal immunization of children against all vaccine preventable diseases and to reduce infant mortality rate to below 30 per 1000 live births. Insurance is provided for the deaths, complications and failures caused by sterilization; compensating those who accept sterilizations and increasing male participation in family planning. Family welfare is now promoted as a people-centered program.

Endnote

Overpopulation is the root cause of numerous problems like low per capita income, unemployment and overburdened natural resources among many others. Therefore, the need of the hour today is a more effective measure to reduce the population growth in Indian society. Importance has to be given to population education, achievement of equal status for women and lower caste people, development of economy, urbanization, and modernization of the whole society. When socioeconomic conditions improve, the birth rate will be lower and the overpopulation problem will be reduced (Population Control Policies and Implementations in India, 2019).

References

• Biswas, S. (2014). India’s dark history of sterilisation. BBC. https://www.bbc.com/news/world-asia-india-30040790
• Srinivasan, K. (2016). “India’s Population Issues and Policies: Professionals’ Perceptions”, Working Paper No. 11, International Institute for Population Sciences, Mumbai. https://www.iipsindia.ac.in/sites/default/files/IIPS_Working_Paper11.pdf
• Wang, G. T. Population Control Policies and Implementations in India. https://doi.org/10.15640/jssw.v7n2a14

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Objectives and Goals

The NPP 2000 emphasised a series of important measures including an increase in the monetary compensation for sterilization, introduction of ‘population education in the Indian education system, increase in the usage of mass media in rural areas to increase awareness about family planning and contraceptives etc and thus sought to promote responsible and planned parenthood on a voluntary basis, aiming to freeze the population figures at the 1971 level until 2001 till the farthest extent possible. Broadly, the NPP 2000 can be summed up into three main objectives: short, middle and long term objectives.

Short term objectives:

1. To address the unmet needs for contraception, healthcare infrastructure and health personnel.
2. To provide integrated service delivery in consonance with the guidelines of WHO.

Middle term objectives:

1. To control the population through intersectoral operational strategies which include intersectoral collaboration between health and education to prevent problems like adolescent pregnancy and thus bring down the total fertility rate.

Long term objectives:

1. To achieve a stable population by the year 2045 by attempting to satisfy the economic needs of the present generation but in a manner that sustains natural resources and the environment for future generations.

The following goals were formulated to be achieved in the first decade after the introduction of the National Population Policy in 2000:

1. To address the unmet needs for basic reproduction (contraception), child health services, supplies and infrastructure (health personnel).
2. To make school education up to age 14 free and compulsory and reduce dropouts at primary and secondary school levels to below 20 per cent for both boys and girls.
3. To reduce the infant mortality rate to below 30 per 1,000 live births.
4. To reduce the maternal mortality rate to below 100 per 100,000 live births.
5. To achieve universal immunization of children against all vaccine-preventable diseases.
6. To promote delayed marriages for girls, not earlier than age 18 and preferably after 20 years of age.
7. To achieve universal access to information/counselling, and services for fertility regulation and contraception with a wide basket of choices.
8. To achieve 80 per cent institutional deliveries and 100 per cent deliveries by trained persons.
9. To achieve 100 per cent registration of births, deaths, marriages and pregnancies
10. To prevent and control communicable diseases, especially AIDS and sexually transmitted infections (STIs).
11. To promote vigorously the small family norm.
12. To integrate Indian Systems of Medicine (ISM) in the provision of repro­ductive and child health services, and in reaching out to households.

In order to achieve these goals, certain promotional and motivational measures were also undertaken.

Current Outlook

Despite all the efforts and steps taken towards population control and family planning, the programme has failed to deliver any kind of desired results. According to a UNICEF report, in India, 67,385 births happen in a day. The reasons for the programme’s failure can be attributed to several reasons including large size of the population in the reproductive age group, higher fertility due to unmet needs of contraception, higher desire for fertility due to high infant mortality rate, ignorance of the rural masses about birth control techniques and the preference of a male child etc.

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