India Not Doing Enough to Attract Foreign Capital

Financial management in India: Some challenges

By Vipin Agnihotri

A developing country like India is characterized by extensive government regulation over its financial system and investment activity. Moreover, it has an under-developed capital market. As a result, financial managers in India have to grapple with the following:

Restriction on capital structure- In an advanced country like the US there are hardly any restrictions on the capital structure a firm may employ and the interest rates the firm may pay on its borrowings. In India, however, restrictions apply to capital structure and interest rates payable on borrowings.

Fewer instruments of financing- In advanced countries business firms can employ a broad range of financing instruments. In the US, for example, a firm may employ several types of equity and preferred capital and a variety of debt instruments. In India, however, the choice of financing instruments is rather limited.

Rationing of commercial bank credit- Commercial banks in India, saddled with the responsibility of serving the needs of a priority sector like agriculture, small scale business and weaker sections of the society, are unable to cope with the credit requirements of industry, which is expected to reduce its dependence on bank credit.

Restriction on investment opportunities- The areas in which a business firm, particularly a large business firm or a foreign concern, can invest in India are somewhat restricted. The opportunities for investment, however, have been widened recently.

Poorly developed securities market- Securities market in India is poorly developed. Trading activity is confined to a small proportion of securities listed on stock exchanges. The secondary market for debentures is virtually non-existent. As a result, many firms find it difficult to raise funds through the securities market.

Greater uncertainty in the supply of inputs- Business firm in India have to contend with erratic and inadequate availability of power and irregular supply of essential raw materials. This renders the task of forecasting and planning difficult. Often, unanticipated developments create financial strains and difficulties.

Complex and tardy bureaucracy- Corporate investment and financial activities are subject to numerous governmental regulations. Financial managers have to wrestle with complex and time- consuming bureaucratic procedures to obtain various sanctions, concessions, reliefs and subsidies.