Arbitrage Magazine - September 2019 - Finance & Investment Club | IIM Rohtak

SEPT 2019 Vol 3 Issue 7

Articles of the month: Analyzing the factors behind the fall in Private Investment in India

Recent Economic slowdown in India : cyclic or structural

INDEX

S.No.

Article

Page No.

1

Analyzing the factors behind the fall in Private Investment in India

1

2

Recent economic slowdown in India: cyclical or structural

13

3

Invest in India- Investment sentiment Analysis

17

4

Bigger banks are a necessary evil - Public sector bank mergers are a good

19

time to think of what scale banks should ideally be 5

How are Government Investments Helping to Boost Startups in Indian

22

Economy 6

What organizations need to do to survive the Uncertain Economic

25

Conditions?

7

An insight into poverty – Can Economics help overcome?

28

8

Corporate tax rate cuts: Why it matters?

32

9

Financial Inclusion

35

10

The Big Bank Merger

40

11

A financial crisis is a great time for professional investors and a horrible

45

time for average ones 12

The Economic slowdown in India

48

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Analyzing the factors behind the fall in Private Investment in India : By Ishan Mittal and Sameer Gadhave (IIM Lucknow)

SUMMARY Dearth of Private investment has been a teething problem for the Indian economy since last few years. Even though India’s Gross Domestic Product grew at an average rate of 7.14% for the period of 5 years from 2013-2017, outpacing China and the world which grew at an average rate of 7.13% and 2.79% respectively during the same period, India’s economy in the same period was mostly consumption driven. The private investment as a percentage of GDP has witnessed a gradual decline during the last few years. This has led to Indian economy’s overdependence on Private Final Consumption expenditure which in the long run can create inflationary pressures in the economy. The fall in private investment thus poses a serious problem to the stability of Indian economy. This fall in private investment can’t be attributed to a single factor since it has been due to a number of factors acting in tandem.

Through the scope of this paper, we aim to understand these factors which have been responsible for this fall in the twelve-year period of 2006-2017. The factors have been divided into Demand side factors like increased corporate deleveraging, Global slowdown etc. and Supply side factors like fall in Gross Domestic Savings, Ease of doing business and various supply shocks. We provide relevant data for each of the arguments for further corroboration.

Towards the end we devote some time to understand some constructive measures which can be taken to tackle the demand side and supply side factors discussed.

INTRODUCTION Investment plays an essential role for the development and progress of a country. A lot of countries depend on investment to help solve their various economic problems like unemployment, poverty etc.

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India’s Gross Fixed Capital Formation (GFCF, used as a proxy to the investment) as a percentage of GDP has seen an alarming downward trend since 2007 where it peaked at 35.57% to 28.49% in 2017. Even though India saw an unprecedented Foreign Direct Investment (FDI) in 2008(3.657% of GDP), we have seen GFCF falling consistently thereafter (Graph 1) suggesting India’s investment climate still hasn’t recovered from the Global financial crisis. For two almost similar levels of FDI in 2006 (2.176%) and 2015(2.093%), the GFCF has fallen drastically from 33.81% to 28.47%. (Graph 2)

(Graph 1)

(Graph 2)

Moreover, the GFCF change has been different across different industries (Graph 3). Industries like mining, transportation and construction led the fall in investment with investment to GDP falling by greater than 30% (Graph 4) in these industries when a comparison is made between the levels of 2011-12 and 2015-16.

(Graph 3)

(Graph 4)

Even though the fall in 2016-17 can be attributed to supply side shocks like demonetization and rolling out of Goods and Services Tax which suppressed the animal spirits, the trend has been long standing and not cyclical. This points to some structural problems inside the Indian economy on a whole.

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OBJECTIVES OF THE ARTICLE This article focuses on two main objectives.

1. To understand the demand side and supply side factors which have contributed to the fall in GFCF for a twelve-year period of 2006-2017.

2. To suggest some measures to tackle these factors.

ANALYSIS The demand side factors that have been analyzed are as follows.

1. Demand side of Twin Balance Sheet Problem - Corporate Deleveraging.

2. Incremental Capital output Ratio using Harrod Domar Model.

3. Global Trends.

The supply side factors that have been analyzed are as follows.

1. Gross Domestic Savings 2. Ease of Doing Business 3. Supply side shocks.

1. Demand Side (i) Demand Side of Twin Balance Sheet Problem - Corporate Deleveraging The global financial stability report by IMF in 2014 pegged Indian corporate sector’s debt to equity ratio at 83% which was one of the highest among its emerging market peers like Brazil, South Africa etc.(Graph 5) Even though Indian corporate debt as a percentage of GDP is far better than other economies like China, Japan, USA etc. (Graph 6), in case of interest coverage ratio which is calculated as a ratio of Earnings before Interest, Tax , Depreciation, Amortization (EBITDA) to interest expense, India fares poorly when compared to other economies.(Graph 7) This is mainly due to two reasons: 1) A comparatively higher rate of interest in India when compared to other countries. 2) Slower growth of revenue of the firms in debt.

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(Graph 6)

(Graph 7) Citing this increasing debt and falling interest coverage ratios, a deleveraging drive was undertaken by Indian firms (Graph8) to improve their capital structure hence putting a freeze on fresh borrowings and therefore investments.

4

(Graph 7)

(Graph 8)

However, this decrease in Debt to equity ratio and corresponding increase in Interest Coverage ratios should be taken with a pinch of salt since a lot of corporate restructuring was done under IBC forcing banks to bear with large haircuts on their loans. (ii) ICOR using Harrod-Domar Model Another view of the investment growth can be taken according to the Harrod-Domar model, which says that the growth rate depends on the rate of investment and the efficiency of the use of capital, given by Incremental Capital Output Ratio (ICOR). ICOR gives the value of additional capital required to increase the output by one unit. A higher value of ICOR points to inefficiency of capital usage. With the growth rate of 9.26% in 2006 on the back of a GFCF of 33.81% leading to an ICOR of around 3.65, the corresponding figures in 2017 are 6.68% (GDP growth rate), 28.49% (GFCF) and 4.26 (ICOR) (Graph 9). This points to a decrease in the efficiency of capital usage hence leading to a fall in fresh demand. This doesn’t come as a surprise since the capacity utilization has fallen from 78.25% in 2009 to 73.07% in 2017(Graph 10). This points to inefficient use of the resources at hand.

(Graph 9)

(Graph 10) 5

(iii) Global Trends The world GDP has also seen a slowing trend with its growth rate declining from 4.3% in 2006 to 3.1% in 2017. Even though India’s exports grew by an average of 13.92% in the period 2005-06 to 2016-17 as compared to an average growth of 13.08% in imports, its trade deficit has grown from $ 59.32 billion to $108.50 billion in the same period, i.e. a growth of 82%. India’s export share to China (measured as a total % of its exports) fell from 6.56% in 2006-07 to 3.69% (a fall of 2.87%) in 2016-17 (Graph 12)signaling a fall in demand of Indian goods in the Chinese market, however its export share in the US market saw a rise by a miniscule amount of 0.37%. However, the advent of trade war between the world’s two largest economies since early 2017 has seen India’s export share to China rise back to 5.17% in 2018-19(Apr-Dec) and to 15.91% for the US. However, this is no reason to elate as these are short term benefits which are likely to disappear over time (RBI Financial Stability Report). Therefore, India needs to increase its export competitiveness to attract more investment.

Analyzing the import data (Graph 11), the share of Chinese imports in Indian import market has grown from 9.41% in 2006-07 to 15.95% in 2016-17. This points to the domestic demand being filled up by foreign goods rather than the domestic industry. The trade deficit with China has also seen a constant growth from $ 10.89 billion for the year 2006-07 to $ 51.11 billion for the year 2016-17.

(Graph 11)

(Graph 12)

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2. Supply Side (i) Gross Domestic Savings The supply of capital is determined by the availability of funds for investment which is determined by gross domestic savings as a percent of GDP which have also seen a decline in recent years. The Gross domestic savings as a percentage of GDP has fallen from 33.2% in 2006 to 29.5% in 2017(Graph 13). This has been, mainly led by a fall in the household savings which fell from 25.7% in 2006 to 20.3% in 2017 after achieving a high of 34.3% in 2010(Graph 14).

(Graph 13)

(Graph 14) However even though gross domestic savings have seen a downward trend, the SavingsInvestment gap has remained positive since mid2012 (Graph 15) pointing a sharper decline in investments and unused savings. The S-I gap was calculated to be 1.02% of GDP. (Graph 15)

(ii) Ease Of Doing Business India has seen its Ease of doing Business ranking improve to 77 in 2018 from 100 in 2017.

However, breaking down this ranking, India performs well on metrics like starting a business, dealing with construction permits, getting electricity and getting credit when compared to the world average. However, in terms of registering property, India performs considerably poor since

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it requires an average of 69.1 days (Graph 16) when compared to the world average of 49.12 days.

The corresponding figure for China is just 9 days.

(Graph 16)

(Graph 17)

The other major reasons for fall in the new projects announced in due to business bottlenecks viz. lack of funds, fuel/raw material problem, land acquisition problem and lack of environmental clearance which amounted to 14.8%, 13.2%,7.3% and 6.3% of the total reasons of the projects stalled respectively (Graph 17). (iii) Supply Side Shocks The Indian economy experienced a downward trend in investment from 2010 to 2014. The investment revival seen in 2014 was then subjected to two major supply side shocks: Demonetization in November 2016 and GST in July 2017.

(Graph 18)

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The analysis of Quarter wise data (Graph 19) shows that new investments captured fell sharply at the end of December 2016 quarter as compared to June 2016 quarter which can be attributed to demonetization. The new investments captured fell by 804 Billion rupees. 86% of this fall was from the private sector. Another low point was seen at the end of Sep 2017 quarter where investments captured fell by 3653 billion rupees. This was due to lingering after effects of demonetization as well as heightened policy uncertainty due to the much-awaited implementation of GST. Again, the majority of this fall (56%) can be attributed to the fall in private sector investment.

(Graph 19) RECOMMENDATIONS Below are some of the recommendations to solve the problems discussed.

1. Easing the costs of starting a business. This shall involve expediting the removal of bottlenecks like land acquisition, environmental clearance etc. by creating a robust framework for the same.

2. Reducing the interest rates in the short term given that the headline inflation now is towards the lower end of the band.

3. More investment in programs like Make in India so as to substitute the foreign goods catering to Indian markets as well as to gain export competitiveness.

4. Improving the falling capacity utilization by making efficient use of the resources in hand.

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5. Sustained recovery of domestic demand so as to protect the country from global shocks and slowdowns.

6. Improving the efficiency of Insolvency and Bankruptcy code since the resolution process has remained slow with almost half the cases admitted to NCLT exceeding the intended deadline of 180 days.

7. Trying to acquire double digit growth.

CONCLUSION Indian investment slowdown witnessed in the last few years is a structural problem inside the Indian economy. The problem is not due to a single factor but a result of a number of factors acting in confluence. The fundamental problem lies in the fact that the Indian investment slowdown is a problem rooted deep within the balance sheets of the corporate firms as well as the banking system which will take its due time to revive. The problems of low incremental capital output ratio and falling capacity utilization have only worsened the situation.

Therefore, India needs to pay urgent attention to this problem if it really intends to have a selfdependent and robust economy and hence become an economic superpower in the future.

REFERENCES 1. India’s Investment Cycle: An Empirical Investigation, RBI Working paper series, by Janak Raj, Satyananda Sahoo and Shiv Shankar 2. IMF Working paper: Financial Frictions, Underinvestment, and Investment composition: Evidence from Indian Corporates by Sonali Das and Volodymyr Tulin 3. Economic Survey 2016-17, Government of India, Ministry of Finance.

4. Economic Survey 2016-18, Government of India, Ministry of Finance.

5. IMF Global Financial Stability Report, 2014.

6. IMF Global Financial Stability Report, 2016.

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APPENDIX List of Graphs Graph No.

Description

Source

1

GFCF as a % of GDP in India from 2006 to 2017

World Bank

2

FDI as a % of GDP in India from 2006 to 2017

World Bank

3

Industry wise GFCF as a % of GDP in India for IMF Research Paper 2011-12 and 2015-16

4

%age change in GFCF from 2011-12 to 2015-16

IMF Research Paper

5

Debt to equity Ratio of Indian corporate sector

IMF Research Paper

6

Non-financial corporate debt as a % of GDP in India Bank of International settlements

7

Interest coverage ratios of Indian corporate sector in IMF Global Financial Stability Report 2010 and 2016

2016

8

Corporate deleveraging

Business Standard

9

Incremental Capital Output Ratio from year 2006 to Calculations done on data obtained

10

2017

from World Bank

Capacity Utilization from 2006 to 2017 in India

Calculations done on data obtained from RBI Database

11

India’s import share from China

Ministry of Commerce and Industry

12

India’s export share to China

Ministry of Commerce and Industry

13

Gross domestic Savings as a % of GDP

National Account Statistics

14

Household savings as a % of GDP

National Account Statistics

15

Savings- Investment Gap

Calculations done on data obtained from World Bank

11

16

Average number of days required to register World Bank property in India, a comparison

17

Reasons for stalling of projects

CMIE

18

New Investments captured from 2006 to 2017 in CMIE Capex India

19

Quarter-wise new investments captured since CMIE capex demonetization

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Recent economic slowdown in India: cyclical or structural : By Shaubhik Das (IIM Lucknow)

While there is no doubt that India is going through a slowdown since the last 3 quarters or so, however, we observed wide variants of opinions regarding the explanation of recent economic slowdown in India ranging from those who think it’s entirely cyclical or structural and others somewhere in between. But before indulging into the hottest debate in the current economic scenario, let us first understand what’s the difference between a cyclical slowdown and a structural slowdown. A cyclical slowdown is one which occurs majorly due to demand fluctuations or faulty fiscal/monetary policies at times. It prevails in the economy for a short period of time with proper stimulus through fiscal or monetary means and self-correcting mechanism of a capitalist economy.

A structural slowdown, on the other hand, is one that occurs due to changes in demographics, technology or whole political/economic setup. This continues from medium to long term depending on the seriousness of the problem and can be solved through structural changes, e.g., New Economic Policy of India, 1991. In this article, we are going to look into the macroeconomic facts and data rather than opinions and base our conclusion upon that.

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India's Real GDP Grpwth (RBI Data)

10 5 0 1980

1990

2000

2010

2020

2030

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A careful observation of the GDP of past 30 years (refer to figure in the right) will reveal that GDP growth is picking up (confirmed by an upward rising dotted trend line). At the same time, we can see a lot of cyclical patterns in between. But the major concerns are the fact that on one hand, it’s taking too much time for the next upward spike, and on the other hand, we can notice a flattening downward spike, giving signals that the slowdown may stay for some more time. In laymen terms, đ??şđ??ˇđ?‘ƒ = đ??śđ?‘œđ?‘›đ?‘ đ?‘˘đ?‘šđ?‘?đ?‘Ąđ?‘–đ?‘œđ?‘› + đ?‘ƒđ?‘&#x;đ?‘–đ?‘Łđ?‘Žđ?‘Ąđ?‘’ đ??źđ?‘›đ?‘Łđ?‘’đ?‘ đ?‘Ąđ?‘šđ?‘’đ?‘›đ?‘Ą + đ??şđ?‘œđ?‘Łđ?‘’đ?‘&#x;đ?‘›đ?‘’đ?‘šđ?‘›đ?‘Ą đ??śđ?‘œđ?‘›đ?‘ đ?‘˘đ?‘šđ?‘?đ?‘Ąđ?‘–đ?‘œđ?‘› + đ??¸đ?‘Ľđ?‘?đ?‘œđ?‘&#x;đ?‘Ąđ?‘ − đ??źđ?‘šđ?‘?đ?‘œđ?‘&#x;đ?‘Ąđ?‘ It’s clearly evident from the above figure that consumption, which accounts for nearly 60% of our

Growth of components of GDP (RBI Data) 20.00% 15.00% 10.00% 5.00% 0.00% 2013-14

2014-15

2015-16

2016-17

2017-18

2018-19

-5.00% -10.00% Consumption Expenditure

Government Consumption

Exports

Imports

Private Investment

GDP has become flattish along with private investment (almost 35% of GDP) since 2015-16. We can see a sharp fall in imports as well as government consumption. One thing is for sure, there is no sign of external impact on the recent slowdown as the data shows a rather increasing export growth in the recent past. But when almost 90% of the GDP slumps, the GDP growth rate is bound to fall. One takeaway from this analysis is that the current slowdown is mostly fueled by demand side factors, but the supply side impediments can’t be ruled out as well.

The following events and factors have definitely contributed to the slowdown that we are encountering right now. However, the degree of contribution is something that can be debated forever:

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1. Demonetization: The sudden withdrawal of 500 and 1000 denomination notes from the economy have definitely affected the economy in the short run for sure. It’s very much possible that people are not yet able to get out of the shock they received and a result delaying their purchases over time. Also, this caused a huge blow to the huge informal retail sector which runs on cash.

2. GST Implementation: While GST was something about which the government could come to an agreement after almost 20 years, but its implementation has definitely hit the economy. The business community in India was more or less used to the previous indirect system, how good or bad it was. Rolling out of a new tax reforms at such a scale and further changing of tax slabs for different industries might have led to delay in private investments.

Low investment means low income generation and obviously, the consumption gets hit.

3. BS VI Reforms: The talk of implementation of Bharat Stage VI reforms is in the air. The news or expectation of a roll out of BS VI has not only created confusion for potential buyers of vehicles but also the manufacturers. The buyers might be delaying their purchase on one hand, and on the other hand, manufacturers might be delaying their investments in new products. The cumulative effect is a slowdown in the automobile sector.

4. Crisis in Financial Sector: The bankruptcy of NBFCs of the size of ILFS, owned majorly

by LIC, SBI, etc. caused a lot of ripple effects in the economy for sure. This not only degraded the faith of common people on NBFCs but also on their regulator, i.e., RBI. The huge setback of ILFS immediately affected all the NBFCs and banks’ market value as well.

The subsequent default by DHFL has only added fuel to the sector that was already burning.

Today, most of the automobile and housing loans are lent by NBFCs and HFCs. This kind of events in the sector’s leading layers will definitely cause the buyers of automobiles and houses think twice. This also is mind-set of the banks from whom the NBFCs majorly borrow funds. On top of all these NPA level in banks was 9.3% on March, 2019. This kind of performances of banks has led to reduction in loans, decreased faith on saving depositors on banks. This crisis in banking and non-banking financial sector is having ripple effects on the economy as a whole.

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5. US-China Trade War and global slowdown: India enjoyed a huge inflow of foreign funds through FDI and FPI route. With the escalation of US-China trade war, Hong Protests, German slowdown, Brexit deal issue, etc. coupled with the domestic issues, the foreign investors are not in favour of taking risks of investing heavily in India. This is leading to the continuous fall of Indian secondary financial markets and domestic investors are losing trust on the Indian companies.

6. Lack of attention to rural India: We have heard a lot about doubling the farmer’s income by 2022 but the ground reality is that rural India is not getting the boost it requires. There’s a huge untapped market which is struggling with poverty. A little rise in income of rural will spur the economy exponentially. The slowdown in FMCG sector has been majorly due to slowdown in rural demand.

While the events such as GST, demonization and BS VI reforms will affect the economy for a short duration, but NPAs and lack of growth in the rural sector are things that Indian government need to seriously think about and which might have long term implications. Over time, the government might have to take some bold steps to mitigate the issues. But overall, one major learning for India is that rolling out too many reforms at a time will lead to chaos and eventually a slowdown in economy. And it’s also understood that the need of the hour is to boost household consumption demand, which can be done through a reduction of policy rate cuts, tax cuts by government and huge government expenditure. In conclusion, we can say that the slowdown is not exactly a cyclical one, but caused by some recent economic decisions, the effects of which will wither away with time. However, there are some structural issues, such as low income in rural India, that might not have played a major role in this recent slowdown but a major cause of concern for all the well-wishers of Indian economy.

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Invest in India- Investment sentiment Analysis : By Sneha Bharti (IIM Rohtak)

On 25 September 2019, speaking at the Bloomberg Global Business Forum, Prime Minister Narendra Modi invited global business to invest in India, saying historic reduction in corporate tax rates by his government creates golden opportunity. “If you want to invest in a market where there is scale, come to India… If you want to invest in start-ups with a huge market, come to India… If you want to invest in one of the World’s largest infrastructure ecosystem, come to India,” he told global corporates. He also listed the ‘4Ds’ factors- Democracy, demography, Demand, and Decisiveness, which makes India a reliable and unique destination for investors.

Indeed, Prime Minister has almost made a campaign speech of “Padharo Mhare Desh.” It is like campaign rhetoric. For investment as a whole, I think pitch was very reasonable, realistic as well as is based on a decision – an ordinance was issued wherein the tax rates were significantly reduced, and more importantly the maze of exemptions were sought to be removed by making the Indian taxation system far more transparent and far less dependent on discretion and prone to litigation, that was taken on 20 September 2019 by Finance Ministry. How much lure is it for foreign investors to come in now and invest in India? Companies that wished to avail themselves of lower rate of taxation of 22% of basic tax, 10% of surcharge and 4% of cess amounted to 25.17% would have to give up all the exemptions, so it is like saying that you may have 28 different exemptions which you are availing yourself off but if you want to get out of this maze, come clean and clear, here is a lower taxation incentive for you, pay up 25.17% and be done with it. This is what the headlines message but the real message was about the new companies, and particularly the new manufacturing companies that were to set shop in India after 10 October 2019 wherein the corporate tax rate was to come down to 15%, and it is as attractive as that prevails in Singapore or Hong Kong if you take into account the surcharge and cess. The broad message was that the tax rate is now as competitive as anywhere in the world. Prime Minister made a 360-degree pitch by reiterating the structural advantages that India has. He talked about 2000 hospitals to be built, about the realty sector, food processing, and more, all-encompassing pitch to the investors. If we see, just a month ago, there was a buzz about C-word "Crisis" in the Indian market. With just a

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corporate tax cut, the sentiment has improved quite tremendously. Also, we have politically handled Kashmir issue very well, which also adds to the kitty. Now we can look forward to some substantial focus on the economy and hoping we deliver on this tax cut, and there are more rate cuts from the RBI side. So, we are in for a short-term bull drag going forward.

The next big question is what MNC looks for when they want to invest in India, and are we in a position to provide that conducive environment for them now? MNCs look for the size of the market, predictability and certainty about policies remaining in place, the tax rate (the more competitive it is, the more profits and repatriate profits they have) and the ease of doing business.

India has a great potential market, and fresh investment can take place in Infrastructure where there is a huge unmet demand. Also, defense demands are well known. In service sectors- as many service companies were facing problem in establishing their claim under MAT (Minimum alternative tax), now Mat has been simplified such as if you are a new company, you don’t even need to go for MAT, you can go straight for 17% rate. Apart from that, because of US-China trade war (which seems to be going on and won’t be resolved till next November when US presidential election takes place) so many large corporations, MNCs are already looking at opportunities to invest in other countries with a large domestic market which can provide an ecosystem for them to prosper. India, on terms, will be very attractive for foreign investors at this juncture. On top of that, PM gave a huge assurance by saying that he will be a go-to person between investors and state agencies to sort out problems, which is a cherry on the cake.

Net on net, we have laid a red carpet for the investors. If the policy (tax cut) will be supplemented with proper realistic exchange rate policy, then India will have a double benefit because investors will come here, add value, and then India can become the export hub for a large number of markets.

In the absence of this, we may suffer from Dutch disease. What we need to worry about is how do we increase and widen the basket to make sure that more people come under the tax net and economic growth booms, and we get to collect more money.

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Bigger banks are a necessary evil - Public sector bank mergers are a good time to think of what scale banks should ideally be : By Siddharth Gupta (SIBM Pune)

“Banking is defined as the accepting for purpose of lending or investment, or deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft order or otherwise.”- The Banking Regulation Act, 1949.

India has always witnessed the mergers of banks to allow the weaker banks to be controlled by the stronger ones and thereby increase the banking efficiency of the country and protest consumer interests. Public sector banking emerged in India by the advent of SBI in 1955. After this came the first merger of Imperial bank of India with RBI. Since then India has witnessed various banking reforms; The Pre-Nationalization, Post Nationalization and the Post Liberalization period all dealing with the bank mergers for better business growth. In the recent past, India has witnessed the merger of Dena bank and Vijaya bank with Bank of Baroda and though it’s too early to comment on the success or failure, it is reported that the functionality hasn’t been affected much.

Finance gave rise to the recent economic reform on August 30th,2019 by the Finance Minister to consolidate 10 PSBs into four thereby reducing the number of the PSB to 12 from 18. The Reserve bank of India holds the prime position being the sole authority and the supervisory body for all the banking operations.

The Indian banking system is divided into scheduled and non-schedule banks. The scheduled banks have Commercial and Cooperative Banks. Under this, the Commercial Banks deal with the Public sector, Private sector, Foreign banks, and Rural banks.

Merging means consolidation of two or more banks into one. It is documented that there are three reasons behind a bank merger: For the economic gains, when the value of the target is higher than the actual target market value and to pursue own interests to engage in a takeover at the expense of the shareholders.

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Studies conducted by Attaullah, Cockerill, and Le (2004) show that Large Indian banks have performed better than the small ones. A small bank finds it difficult to operate profitably in the Indian economy.

Coming to the merger scheme announced by the Finance minister the effects still need to be seen.

Looking at the size of the banks being merged; Indian banks would still not be able to become global in size because the is divided merger taking place between PNB and with OBC and United bank would still not be anyway near to the size of the 50th largest bank in the World. So why the merger? Mergers are basically done to reduce the cost of banking operation. It will result in better NPA and risk management. Decisions regarding NPAs and high lending’s can be taken swiftly without holding tonnes of meetings. A large bank brings with itself a consumer base, more geographical coverage, and better product portfolios.

But like every coin has two sides so does every new reform. As we have rightly observed the pros of consolidation we need to keep in mind if it is the right time and decision to actually merge banks when the economy is in a worldwide slowdown?

So, what happened to the bank stocks post-merger?

When investors look at a stock, they decide whether to buy/hold/sell based on the value of the stock. Now the way each investor might decide might vary. But when they all come together with their ideas, more often than not you get a better estimate, ergo, the wisdom of crowds. Think of it as a classroom discussion. If you have just one opinion on a matter, that version might be lopsided.

However, if everybody chips in their inputs, you’ll have a better representation of the truth. The truth here is the true value of the stock. And when lots of people buy and sell a stock, you’ll kind of get a gist of what they think about it overall. Well, the decision is unanimous. Most people sold their stocks and bailed. Why? Well, for one, maybe it’s because these banks will now focus more on integrating their operations than doling out new loans. Obviously, fewer loans mean lower income for the banks. Or maybe it’s because most people hate uncertainty. There’s little clarity on what this merger means for the entire ecosystem and uncertainty doesn’t bode well for stocks in general. So, despite what one thinks of the long-term benefits, the short-term verdict is clear. It’s a bit of a miss. Even though M&As are usually expected to be a win-win situation, in reality there's 20

only one winner. Mostly, it would be the target because the acquirer would overpay (winner's curse). Sometimes it would be the acquirer (maybe in cases of hostile takeovers). But this seems to be a loss-loss situation wherein the share value of all the parties involved has been reduced. It'll be interesting to see what happens once the swap ratio is finalized. Usually, the swap ratio is based on the market price as at the time of the merger announcements. However, it could also be based on the valuation of assets and liabilities. If it is based on them-cap, then there will be a further dilution in the book value of the merged entity. If additional shares are issued, there will be further dilution. In any case, these bank stocks don't look like good investments for the time being.

If North Block is done and stops here this merger may achieve nothing or worse. You have merged numbers- easy but you need to merge people and culture- tough. Govt now needs to take the next step and privatize these entities except SBI and spend that money on infrastructure to pump prime the economy. It has its share of problems too but the shareholders bear that cross, not the taxpayers.

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How are Government Investments Helping to Boost Startups in Indian Economy? : By Aastha Agarwal (Shaheed Sukhdev College of Business Studies)

If buying milk becomes expensive, then it is better to invest in a cow.

This just summarized the current global scenario. With the slowing down world economy, global trade wars, inflationary pressures and potential recession threats, the future development and favorable employment trends of majority of countries are at stake. This rings an alarm for building self-sufficiency in our own nations and suggests that we can’t afford to be dependable on any major power for employment or resource generation anymore. This similar thought enthusiastically convinced the Indian government to support and invest aggressively in the young budding startups.

In Indian perspective what came to be known as ‘Start-up India ‘or ‘Stand-up India’ initiative by the leadership promoted huge crates of investments in entrepreneurship in collaboration with certain banks who are now rolling out low interest business loans with zero or minimal collateral requirements. In terms of education and training for entrepreneurship where India ranks last, government coordinated with few portals, companies and institutions to ensure easy access to unofficial training networks, which drastically increased over the three-year period. The initiative provided better reach to research parks, incubators and startup centers among others. With such a set of initiatives, the government ensured greater resource availability. This actually helped! A total of 18, 861 startups have come under recognition since the launch of Startup India Initiative in 2016 with the present average frequency to be more than 1 startup being registered per hour.

This rise in startups came up with an overwhelming rise in the employment, providing jobs to about 5.6 lakh people. The major challenge resolved by the government in the process was lack of monetary assistance or funding. The government created a ‘Fund of Funds’ with support of Small Industries Development Bank of India (SIDBI) who committed Rs. 2,570 crores to 45 Venture funds catalyzing investments of more than Rs 25,000 crores. The government budget allocated 20,000 crores to set up a specialized bank for SME sector, called as Mudra Bank, earmarking 10,000 crores for support to startups.

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The second set of initiatives taken up by government in India improved the ease of doing business. Under this, greater focus was given onto easy licensing and approvals as well as tax benefits were provided to startups. This reduced friction and transformed the perception of startups in the minds of struggling entrepreneurs. It came in the form of ‘Angel Tax’. The government eased rules for ensuring relief to start-ups facing tax demands for selling shares at a premium to their fair market value. Simultaneously, it even expanded eligibility of companies who can avail this benefit. The move was aimed at encouraging wealthy individuals to invest in startups. They even replaced the multiple layer permission pyramid with a smooth mechanism and a major chunk of startups were also granted rebates in patent filing or trademark filing fees.

Hundreds of patents were granted. With this enormous support of government policies and easing of the legal procedures, startups saw a new morning.

The third set of initiatives undertook by the government successfully steered a passion of entrepreneurship in youngsters and promoted innovation to sieve out entrepreneurs for tomorrow. ‘Make in India’ promoted inception of Indian startups as the scheme would now guarantee a supporting manufacturing infrastructure and economies of scale in the nation. This marked India as an emerging market and hence, a business opportunity for idea generating heads and businessmen to invest in their new ventures. ‘Atal Innovation Mission’ was another initiative which encouraged the youngsters to develop a passion of starting something new when the government will fully support the innovation. This was started with a hope of bringing up some appreciable innovative business models on the globe. The government initiatives are even balancing the skewness in the kind of startup models that are usually seen in India where support to the rural groups is nurturing business models which are aimed at rural development.

Hence, with India’s dual strategy, some startups to competing at global level to increase GDP while some of them are ensuring internal rural development of the country. Even entrepreneurial summits organized by government is providing startups with international exposure and a competitive advantage, which presents another boosting incentive. In fact, if government stops supporting and investing in the startups anywhere in the world, the major IT cities will lose its grace and startup industry will face an abrupt halt.

But despite all the support and pampering by the government, there is still a long way to go. The new startups are still vulnerable to the global competition atrocities as liberalization and 23

globalization implies stiff competition for market share in the Indian markets. The increasing FDI and the rising brands in the Indian markets are posing a huge threat to the success of these startups.

It seems like a war between David and Goliath and David only win in stories. Government needs to come to their rescue or the dream of attaining self-sufficiency will just remain a dream.

But at this point, it is not wrong to conclude that with a stress-free access to education, training, funding, loans and government support with increasing ease of doing business and tax benefits, the aspirations of Indian startups are taking a high rocket flight.

Beware of the meteors!

Sources: 1. https://knnindia.co.in/news/newsdetails/sectors/startups-are-in-boost-after-startup-indiainitiative 2. Daily news articles

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What organizations need to do to survive the Uncertain Economic Conditions? : By Soumya Kushwaha (IIM Ahmedabad)

Here is a 6-point check list that can assist businesses in staying put through the rough tides of volatility, uncertainty, complexity and ambiguity: 1. Staying Agile and Flexible- Nothing can reward a business in a VUCA environment than staying alert about, being aware of and detecting events as soon as, or even before, they take place. Imagine how valuable it can be if your business can respond immediately and decisively in the light of an event happening that holds the potential of shaking the entire industry. Many a mishap can be avoided only by taking the right action well in time, before it’s too late. This lesson becomes extremely important in today’s era when any news/incident spreads like wild fire through social media and can potentially create a havoc for a business if it fails to arrest the fire. Imagine the kind of competitive advantage it can give. For example, Google has successfully achieved omnipresence in the lives of billions of people by being proactive in identifying their changing needs and demands and being swift in providing relevant services and delivering unparalleled ease and experience as Google Pay, Google Cardboard etc. As of 2018, Google held 65.6% market share of all Internet searches made in the US.

2. Planning for Contingencies- Given the uncertain nature of the business environment these days, it is only wise to consider and prepare for multiple scenarios. Sure, every scenario will not have an equal probability of occurring but as long as the probability is significant, it is worth being prepared for it. It is rightly said that putting all eggs in one basket is the stupidest blunder a business can make in the VUCA it operates in today. Have alternative plans ready and be cognizant of applying the right one when the need be. For example, before making any advancement to a client Citi Bank tries to predict the earning potential under various circumstances and only if there is a possibility of generating returns after

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due diligence and considering various scenarios does the bank go ahead. Similar practices are followed by many other Financial Institutions and banks.

3. Building on Strengths and Minimizing Weaknesses- It can be suicidal to focus only on one’s strength. In the changing times, it is equally important to be aware of one’s weaknesses and constantly work on eradicating them as in the event of uncertainty, these weaknesses can be the biggest cause of failure. An easy way of countering the weaknesses could be to gain fresh, independent, outside perspective into improving things or seek help from business experts such as management consultants. For example, ITC has successfully worked on improving its reputation from a tobacco company to a diversified FMCG company with over 30 brands under its umbrella. It was important from the standpoint of gaining more acceptability in the society as well as for growth and risk mitigation.

4. Constantly Challenging the Existing Assumptions- What might have worked for a business before may not work for it again. That is why it is a VUCA environment. Many managers find it so hard to realise this that they end up in a trap where they fail to identify the real problem. They wonder why things aren’t working out. The reason is although their actions might be right but they are not solving the right problem anymore. The problem is altogether different, thanks to the uncertain business landscape. Therefore, an easy way to avoid this trap is to constantly question yourself, about even those things that proved to be successful in another situation or at another time. For example, CavinKare challenged the assumption that FMCG products can’t penetrate rural India owing to lower WTP of the rural people. It introduced innovative packaging- Sachets, which helped the company tap a huge untapped market. CavinKare’s Chik shampoo becoming no. 1 in South India. Many other FMCG companies such HUL and others followed suit.

5. Identifying the Predictable elements of the uncertain environment and relying on them- No matter how uncertain the future may be, there are always some aspects that can be reliably predicted. Think of it this way, just because you don’t know which day it is going to rain, you won’t sell your umbrella. The least that you know is it can rain any day.

Therefore, you can safely decide to keep the umbrella. Similarly, you might not know what 26

new processes and demands may arise in the market tomorrow but you do know for sure that things are going to evolve. So, the least you can do is to be mentally prepared to align with the new market formulation and have things prepared such as maintaining a contingency fund, investing in R&D, training employees etc. For example, when Patanjali initially launched its ayurvedic products, it was a largely untapped market in India.

However, the company still took that risk because it was aware that Indian customers wanted purer, better, and more reliable products than the ones they had to choose from.

They weren’t quite satisfied with what was being offered to them and would certainly try things that align with their tastes better. Thus, with this reliable prediction about customer needs, Patanjali products hit the market and the rest is history. Today the company is valued at Rs. 32 billion or Rs. 3000 crores.

6. Taking measured risks- It is important to take risks because rewards follow risk. In other words, there are no free lunches in the world. If you want to achieve more, you need to risk more. However, the key to taking risk is being sure about the exposure one is going to take up. It is foolhardy to take blind, uncalculated risks as the repercussions can be dangerous to devastating. Step back, analyse the situation, build hypotheses, make reasonable predictions and then decide how much risk is worth taking to reap given returns. For example, when Elon Musk first invested $ 80 M in Tesla, the concept of electric vehicles was not a big thing. In fact, electric cars were considered slow and ugly. Nevertheless, he went ahead with the investment because he believed that the future belongs to alternative energy resources and electric cars will inevitably be a part of this change. In retrospect, there are little regrets about the decision.

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An insight into poverty – can economics help overcome? : By R. Meenalochni (Sri Krishna college of engineering and technology)

1.

Introduction:

Economics, as we know, is a social science. It is concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, Governments, and nations make choices on allocating resources to satisfy their wants and needs, and tries to determine how these different groups should organize and coordinate efforts to achieve maximum output. When we say maximum output, it refers to the output of goods and services which are meant for consumption by the individuals. In other words, economics is concerned with providing the people with adequate quantity of goods and adequate services for consumption to keep them satisfied.

Economists have a moral obligation to play their constructive role and contribute their expertise in ensuring that the people in their society lead an economically comfortable life. Every country, for that matter, frames its own economic policy. Economic policy is the deliberate attempt to improve the economic welfare of people. Economists have a greater role to play in the framing of economic policies.

Economic concepts were prevalent even 2500 years ago. Hesiod, a Greek poet who is believed to had lived between 650 and 750 BC had given his economic thoughts in his works. Fan Li (born 517 BC), a Chinese statesman had written on economic issues. In India, Chanakya (born 350 BC), who was a philosopher, economist, jurist and royal advisor wrote his work Arthashastra, which talks about economics and politics. During the past 2000 years, many economists had given their contribution to this domain. All said and done, if economics does not address its main objective of ensuring economic well-being of the people at large, it can’t be said to have served its purpose. It is estimated that about 1.3 billion people live in extreme poverty in the world, earning less than $1.25 a day. According to UNICEF study about 22000 children die each day due to poverty. These figures trigger the urgent need to revisit the poverty alleviation measures being adopted by the different countries across the world.

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2. Poverty, a curse on humanity Poverty is a curse on humanity since it robs people of their right to live a dignified life. Poverty leads to hunger, lack of shelter, unhygienic living conditions, lack of education, poor physical and mental health, suicide, death, deprivation and exploitation at the hands of the rich etc. It is the bounden duty of economists to arrive at solutions to tackle poverty; else they don’t do justice to their profession. The solution to any problem lies in identifying its root cause and eradicating it.

However, the solution cannot be generic when it comes to eradication of poverty because of the reason that every country differs in its characteristic. This makes it essential to study the nature of poverty in each country and to arrive at appropriate solutions. Since every country is governed by a Government of its own and as the Governments have a greater stake in policy formulations and implementations, it is through the Governments that the remedy can be infused. This needs a conducive climate where in the Governments heed to the views of the economists in the larger interest their nations.

3. Poverty Trap Poverty Trap is defined as a situation in which a person who is poor is unable to escape from poverty. Poverty Trap is formed by the operation of vicious circle of poverty. According to the principle of vicious circle, the income level of the poor remains low; low level of income leads to low level of saving; low level of saving leads to low level of investment; low level of investment leads to low level of production, which in turn leads to low wages. Thus, an economy that is caught in this vicious circle remains trapped there and the people in the economy continue to remain poor, unless the vicious circle is broken by some external influence.

4. The evading solution Economists have proposed solutions to come out of the poverty trap. Most economists viewed the problem either from the supply side or demand side and suggested remedial actions. The supply side argument says that poor economies cannot overcome the poverty trap since their production is very low, leaving them to spare nothing for capital formation by which their standard of living 29

can be raised. The demand side argument says that in a poor economy, the demand for capital is less due to low investment; the low investment, in turn, is the result of low purchasing power of the masses. This limited market for goods leads to reduced investment.

Many economic theories have suggested remedies for coming out of poverty trap. Classical economics puts forth that individuals are ultimately responsible for poverty, thus supporting and laissez faire attitude of people. By contrast, Neoclassical (mainstream) economics suggests that market failures are the main causes that are beyond individuals’ control. According to Keynesian economics, Government has a key role to play through financial intermediation to bring people out of poverty trap. Some economists have strongly debated in favor of private market and some in favor of Government command as the approach to lift people out of poverty trap. In spite of many arguments for and against the two approaches, a unique solution for overcoming poverty trap still remains elusive. Though every country tries its best to alleviate poverty, not all of them succeed. Even today we find many countries trapped in poverty.

5. Improvement of health conditions, a pre-requisite When economic and financial intermediations have not provided a panacea for poverty alleviation, the issue of poverty needs to be viewed from a different perspective. A closer scrutiny of the issue throws light on the unhealthy, disease-prone life being led by the poor as an impediment to come out of poverty. This has been identified and spelt out by a few economic and social thinkers.

Though the crux of the problem lies here, this has not received the due attention that it deserves.

In countries that are trapped in poverty and also in the sections of the societies in a country that is under continuous poverty, it is observed that the people are under nourished; they live in unhealthy living conditions, making them prone to acquiring diseases. Although some of them attempt to climb the ladder, an unexpected obstacle in the form of disease, injury, death, natural calamity etc., brings them back to poverty and they again start from square one. In the absence of affordable healthcare facility, the poor who are affected by such eventualities find it difficult to recover and in the process whatever little they saved also gets wiped away.

6. The role of education Another issue closely connected to healthcare is education. The poor in general lack proper education and hence land up in poorly paid jobs, without any social security arrangements. Lack 30

of education also keeps them unaware of the tenets of providing themselves with healthy living conditions. Unable to pay for educational expenses, children end up as child laborers, foregoing education. Thus, lack of education, poor health and poor earnings act as complementary to one another, leading to a situation with very little scope to come out of poverty.

7. Conclusion The obvious scope for poverty alleviation lies in proving adequate free/affordable health care facilities to the poor, providing free education up to primary level, providing free/affordable education up to secondary level and creating awareness among the poor of preventing diseases and getting educated. Though these may appear to be so simple a solution, once this is achieved, the poor will be in a better position to fight against poverty. After all a soldier can fight a war only if he is fit enough. Once this is ensured, any financial intermediation will work well. In this regard it may be noted ‘Pradhan Mantri Bhartiya Janaushadhi Pari yojana’, the scheme launched by The Government of India in the recent past to make available quality medicines at affordable prices is a boon to the poor. However, the scheme has not reached the poor to the extent desired, which is due to lack of awareness, which in turn is due to lack of education. Hence, the two-pronged approach of providing free primary education and free/affordable healthcare facilities to the poor is the first step to be taken followed by appropriate financial/market related intermediation, in order to create an environment conducive for the poor to come out of poverty trap.

References: 1. Paul A. Samuelson and William D. Nordhaus (2012): Macroeconomics, Tata McGraw Hill Education Private Limited, New Delhi 2. Joseph Schumpeter (1954): History of Economic Analysis, McGraw- Hill, New York.

3. World Bank (1993): The East Asia Miracle: Economic Growth and Government Policies, World Bank Report, Washington D.C., 4. https://hubpages.com/education/-VICIOUS-CIRCLE-OF-POVERTY 5. http://www.globalwaterforum.org/2010/08/30/why-we-need-pro-poor-water-resourcesregulation/ 6. http://www.economicsdiscussion.net/poverty/3-major-causes-of-vicious-circle-of-

poverty-with-diagram/4592

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Corporate tax rate cuts: Why it matters? : By Dhruv Modi (Symbiosis Institute Of International Business)

Finance Minister Nirmala Sitharaman on Friday 21st September made a series of announcement to revive a sagging economy. Among the announcement was also the government’s decision to reduce the corporate income tax rate from about 30 percent to an effective rate of 25.17 percent.

There has been a persistent demand of the Indian corporate companies that they have been pointing out to the government, that they are overtaxed compared to the competitive peers in China and rest of the world, which was actually holding it against them. The government has gone ahead and made an announcement, and will be effective as the government has brought it through an ordinance.

Ordinance with subject to this is an unusual thing because income tax rate changes generally are brought through the budget because it requires amendment in the Finance bills. The government has gone ahead and demonstrated its urgency in showing that something serious is required to revive the economy and one way of doing it is to bring an ordinance and bring changes in the corporate Income Tax rates. In fact, the government have actually lowered the tax rates for newer manufacturing companies, companies that are set up after October 1, 2019 will be now subjected to a lower income tax rate of only 17.01 per cent. This is a massive incentive for small and medium enterprises to setup manufacturing units through new companies. Not to forget that Micro Small & Medium Enterprises (MSME’s) are actually the life blood of Indian manufacturing sector.

The government has also brought down the Minimum Alternate Tax (MAT) rate from 18.5 per cent to 15 per cent and also announced exemption to taxes to foreign portfolio investors which means that the government has demonstrated to the world that India should remain a preferred hotspot and also a preferred investment destination so far the foreign portfolio investment is concerned. Basically, the government has addressed the supply side problem completely just ahead of the festive season buying, this is nothing short of an early Diwali for the Indian corporate community that has been asking the government for a set of measures to revive the economy. With 32

the tax cuts, the stock market soared over 5% on that day, a jump of 1921.15 points in Sensex and 569.50 points in Nifty. Both the indices posted their biggest gain in a decade.

The Income tax rate cut means loss of revenue for the government but the way the Indian industry presently is, the decision will certainly give a boost to them, it will also attract foreign direct investment, new entrepreneurs, new companies that are wanting to manufacture in India. Further, lowering of these corporate income tax rates will increase investible surplus within the corporate sector and will encourage them to invest, and as the economic activity or the turnover goes up, that may compensate for the lower tax rates. But this has to be also accompanied with the other factors, most importantly demand. Moreover, there are companies who have originally set up operations in China are wanting to move out of the country, not only because of the US-China trade war but also because of the fact that wage rates or the labor costs in China have also risen up. Most of these companies look around in this part of world i.e. South and South-East Asia. Many of them have gone to Vietnam, Malaysia and Indonesia, many of the textile industries have gone to Bangladesh, but very few are coming to India. The rate cut decision is going to be one of the important inputs to convince these foreign enterprises to come and invest in India.

There are many other things also which can be done to repair the economy. Firstly, the cost of Equity, economy cannot be grown on debt alone, equity should be grown and should look more attractive than debt. The foreign investors are really concerned about capital gain tax, many countries do not have long term capital gain tax. In 2018, the government announced a 10% tax on LTCG from equity which was quite a shocker for the market. Now, from 2018 till date the stock market have only gone down, meaning there is no loss of revenue for the government at the moment when it comes to capital gain tax, the government can look at giving exemption on capital gains may be over 3 years investment and that is how the country will get long term investors.

Government may also look in bringing positive changes with respect to dividend distribution tax to attract more global investments. Secondly, Ease of doing business, the reason behind to make it easier for doing business is not just for foreign companies but also for Indian companies, people will be able to start their own businesses if it is easier and people have not to go through many different windows before they get clearances.

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Investment decisions are majorly long-term decisions and a cut in these corporate tax rates would likely make it cheaper and much more profitable for businesses to function in the Indian economy.

Therefore, the government’s step to cut tax rates is a step in the right direction, but it should be followed with many more such decisions as well in the coming time.

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Financial Inclusion : By Anurag Singh (Management Development Institute Murshidabad)

Financial Inclusion refers to universal access to a broad scale of financial services at a equitable cost. These include not only banking products but also other financial services Financial inclusion paves the way for sustainable growth in the economy, it helps to eradicate poverty and boost prosperity in the Country. Formal credit is necessary for different type of needs, like building houses, medical facilities, education and for other purposes. A formal banking helps to create borrowings and discover credit worthiness of the person for further borrowings.

World Bank took an initiative in 2015, Universal Financial Access (UFA) to provide access to formal financial services to every eligible individual around the world. This initiative majorly works on 25 countries where almost 75% of people are unbanked, in 2017, after two years of the initiative still 1.7 billion people are unbanked. 56% of all unbanked adults are women. Women are overrepresented amid the unbanked in economies where only a minor portion of adults are unbanked, such as China and India, besides in those where more than 50% are, such as Bangladesh and Colombia. Between 2014 to 2017, the portion of adults own an account with a financial institution or through a mobile banking service increased globally from 62% to 69%. In developing countries, the share increased from 54% to 63%.

Source- Kaur et al (2017)

According to the reports published in 2017 of World Bank out of 1.7 billion unbanked people around the world 1 Billion belonged to women. The gender gap in access to financial inclusion in developing countries remains still at nine percentage, the gap is even more in some regions, 18 35

percent in South Asia, and in the Middle East, where men are twice as likely as women to have an account.

Financial Inclusion in India World Bank appreciated India for its efforts in the generation of Financial inclusion through various schemes and developments. Improvements are being done to enhance the financial literacy of the population; a pilot project was launched by the central government with the help of the Reserve Bank of India to ensure the use of various tools for dissemination of financial awareness message to rural India.

India showed the fastest growth in enhancing the financial inclusion, Jan Dhan Yojna was launched in 2014, this is termed as the biggest financial inclusion scheme till date. According to Crisil report (2017), from 53% banked adult in 2014, India managed to get its 81% adults connected to formal banking services.

Source- IMF Banks are the important source of any form of financial access for the residents of an economy.

The Indian banking system consists of Scheduled banks and Non-scheduled banks. The data provided in annual reports of various years of RBI highlights the number of branches of scheduled commercial banks has increased over the span of past years.

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Source- Reserve Bank of India Pradhan Mantri Jan Dhan Yojna, 2014 This scheme was launched on 28th August 2014. This was the period when rural India was facing a tough challenge to get connected to the formal transaction system, this scheme helped rural India to get connected to formal banking. According to the government reports, there are 37.05 crore beneficiaries of this scheme and â‚š103531.05 crores is deposited into Jan Dhan accounts. Also, to provide a greater impact of financial inclusion in the country some schemes like the Pradhan Mantri Jeevan Jyoti Bima Yojana, The Accident Insurance Scheme, and Atal pension Yojana scheme was launched. Post demonetization gave Jan Dhan Yojana a great boost, demonetization led to rise in the percentage of registered account holders and active and advanced users of registered accounts, bank and post office accounts. Impact was seen across demographic groups: Nearly every groups showed gains in financial inclusion and the great increases occurred among women and rural residents. According to Business Standard, cash to aggregating Rs 42,200 crore was deposited in 3.74 crore Jan Dhan accounts between November 8, 2016 and December 30, 2016.

Mobile banking- use of mobile phones is increasing each day, there are about 800 million mobile phone users in India. Interestingly, no active bank account users are much lesser than mobile phone users. Awareness regarding the use of mobile banking can help the country to eradicate the 37

financial exclusion problem prevailing in the country. Mobile banking will not only connect the unbanked population to formal banking services but also helps the economy to go cashless and fight corruption.

Problems Though more than 80% of Indian adults have a bank account there are a mere 52% active bank accounts users in India. Financial illiteracy is the major problem in the country, it is a major problem among women in India, the major chunk of the unbanked population belongs to the women. The people, especially in rural India, still don’t find the necessity to use bank accounts and they trust local lenders of the villages more. ‘One account per family’ mentality is also one of the reasons due to which people avoid joining the formal banking sector, especially women avoid bank accounts as one account of Men in the family is termed as enough, due to these small savings of women fails to join in the economy. Also, most of the people are unaware of the way of availing bank services and the benefits of a formal financial system. most of the developing nations have few people borrowing from the formal institution. The large proportion of population in the developing economies are taking credit from informal sources like friends and families, money lenders or different other means. This generally leaves borrowers exploited and vulnerable to the hands of lenders, thus generating a vicious circle of poverty. Poor becomes poorer, and rich becomes even more rich thus it increases the gap between haves and not-haves.

Conclusion Financial Inclusion can lead a country towards sustainable growth, Financial inclusion and economic growth of the country is positively correlated. It is a great tool to remove poverty and reduce inequality in the economy, it exposes poor to opportunities. If every money of the economy will be deposited in the formal Banks, it will help in Capital creation as the bank will be able to lend more, this will enable greater investments in the economy. Financial inclusion will ensure an increase in demand as it will expose the population to low-rate borrowings, which can also help in small and medium scale business opportunities. One of the major benefits of Financial inclusion is Direct Benefit Transfer, this helped the Indian Government to transfer the benefits, subsidies of various social welfare schemes like LPG subsidies, MNREGA payments, Pensions directly into 38

the beneficiaries Bank accounts. Direct benefit transfer helps an economy to reduce corruption and strengthens the economic situation of the country.

BIBLIOGRAPHY https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20 report_chapter2.pdf https://www.rbi.org.in/Scripts/AnnualPublications.aspx?head=Branch%20Banking%20Statistics https://www.sciencedirect.com/science/article/pii/S2214845019301267 https://www.worldbank.org/en/topic/financialinclusion/brief/achieving-universal-financialaccess-by-2020

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The Big Bank Merger : By Anurag Kothari (IIM Ahmedabad)

The health of the Indian PSU banks (PSBs) had been deteriorating for the last few years, and it was becoming evident that without the doctor prescribing a booster dose, they would not survive for long. Let’s crank up some numbers from the past – how serious was the illness of the 27 PSBs? A quick look at the financials of these banks brings out some horrendous figures – FY16 – the banks reported a loss of Rs. 28,490 crores; FY17 – a paltry profit of Rs. 474 crores; while in FY18 – the loss swelled up to Rs. 85,371 crores. Clearly, the PSBs were suffering from a deficiency of vitamin C (capital), and all this was only putting more burden on the promoter of such banks – the Central Government - to pump in more and more money to keep them alive.

Finally, on the 30th August, 2019, came the inevitable announcement. Citing the success of the merger of Vijaya Bank and Dena Bank with Bank of Baroda, the government made the massmarriage announcement - 10 PSBs were handpicked to be merged into 4 PSBs, with the total number of PSBs operating in India to come down from 27 earlier to just 12 after the mergers. The entire scheme of consolidation of PSBs is as follows:

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Together with this, the Government also announced a booster dose of Vitamin C of Rs. 55,000 crores into 10 PSBs as follows: Who got what: 10 PSBs will get a total of Rs 55,250 crore.

PSB

AMOUNT (Rs. Crore)

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Punjab National Bank

16000

Union Bank of India

11700

Bank of Baroda

7000

Canara Bank

6500

Indian Bank

2500

Indian Overseas Bank

3800

Central Bank of India

3300

UCO Bank

2100

United Bank of India

1600

Punjab & Sind Bank

750

But was this mega-merger called for? What would its impact be? Let’s analyze these disturbing questions a bit deeper.

The Positives: •

Achieve economic growth and improve the risk appetite of PSBs: The idea to merge smaller PSBs and create bigger banks seems to have been influenced from the rapid economic growth witnessed in other Asian countries like China, South Korea and Indonesia. The mission to make India a $5 trillion economy in the coming 5 years has prompted the government to build the size of the balance sheets of the banks large enough to fund large infrastructure projects and the ability of banks to maintain a perennial flow of credit even in times of slowdown. The move is expected to increase the risk appetite and operational efficiency of banks and cost-cutting through branch rationalization.

•

Improved efficiency: The smaller PSBs have long been considered less efficient than their bigger counterparts. The idea of merging them with bigger PSBs thus ensures improvement in the efficiency of the entire banking system in the long run. This would lead to lowering of lending rates and decrease in operational costs. On the operational front also, there are potential benefits as the smaller banks with outdated technology would now be able to come up at par with the latest technologies and security features. The governance and

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compliance environment are also expected to improve post-merger, for the banking industry as a whole.

•

Faster decision making: The governance and compliance environment is also expected to improve post-merger, for the banking industry as a whole. Bigger banks are expected to allow the managerial bandwidth to deal with the industrialists and ministers with more confidence and take decisions quicker due to less bureaucracy.

The Pain Points: •

Does not solve the bad loans problem: While the government might say that one of the motives behind the proposed mega-merger was to control the mounting burden of bad loans, the merger could actually increase the risk of recoveries. In the case of certain stressed assets, the creditors’ pool may be common, with different banks having different positions in the hierarchy of the list of creditors. There might be situations where one bank has a view different from the other bank regarding the stressed asset, prolonging the recovery process due to the conflict of interest.

•

Realising cost synergies - a far-fetched idea: The limited flexibilities involved in the restructuring and rationalization exercise, together with other hindrances and conflicts could make it practically difficult to realise meaningful cost synergies. The proposed merger might not turn out to be as simple as the Bank of Baroda merger due to divergences in the culture and working style of the merging entities.

•

Losing focus on growth in the short-term: In the wake of the economic slowdown, the government needs to push lending and investments. With the merger process underway, the management and staff would be too pre-occupied to monitor credit and lending. The recent mergers involving SBI and Bank of Baroda are ample proof of the fact that focus on integration hampers near-term growth.

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Will banks become stronger? – Highly doubtful: The mergers as announced, demonstrate varying degrees of financial strength. For example, let us take the case of Indian Bank. The Indian Bank is considered to be the financially strongest among the 10 banks with a net NPA of 3.8%, as compared to 5.2% of Allahabad Bank. The merger, thus, is going to adversely affect the health of Indian Bank, instead of making it stronger.

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Culture fit: Post-merger integration can be difficult at times, especially when dealing with resistance to change of the employees and different cultures of the merging entities. As such, the banks would have a hard time in seamlessly integrating the technology, employees, processes and the culture.

Conclusion: The merger of the PSBs is credit positive as it enables them to scale their lending and help strengthen in sub-scale segments of low customer wallets and low retail loans. While the step seems to be taken with the right intent, the timing looks a bit wrong, given the existing bad loan problem and the economic slowdown, coupled with the NBFC crisis. As such, the government has taken a very bold step where it feels that the existence of 12 PSBs along with some 20-odd private banks is enough to fund the needs of the growing Indian economy. Only time will tell whether this decision proves out to be a game-changer for the banking sector and the Indian economy.

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References 10 public sector banks to be merged into four. (2019, August 30). Retrieved from LiveMint: https://www.livemint.com/news/india/pnb-obc-and-united-bank-to-be-merged-nirmalasitharaman-1567158678718.html Bandyopadhyay, T. (2018, June 12). How bad are our public sector banks? Here are some vital stats.

Retrieved from LiveMint: https://www.livemint.com/Opinion/nioD0s2ZNJSsXxh2Nges4N/Howbad-are-our-public-sector-banks-Here-are-some-vital-sta.html Bureau, E. (2019, September 02). Big Bank Mergers : Government turns ten PSBs into four. Retrieved from The Economic Times: https://economictimes.indiatimes.com/news/economy/policy/bigbank-mergers-government-turns-ten-psbs-into-four/articleshow/70918585.cms?from=mdr But is big-bang bank mergers a solution? (2019, September 12). Retrieved from The Economic Times: https://economictimes.indiatimes.com/industry/banking/finance/banking/but-is-big-bang-bankmergers-a-solution/articleshow/71087411.cms Online, E. (2019, August 30). Finance Minister Nirmala Sitharaman announces mega merger, 10 PSBs amalgamated into 4 entities. Retrieved from The Economic Times: https://economictimes.indiatimes.com/industry/banking/finance/banking/nirmala-sitharamanpnb-obc-united-bank-to-be-merged/articleshow/70909247.cms Tripathi, K. (2019, September 09). Modi’s mega bank merger: Indian lenders still dwarfs on global stage; only one bank among top 100. Retrieved from Financial Express: https://www.financialexpress.com/industry/banking-finance/indian-banks-a-dwarf-on-globalstage-this-bank-will-be-indias-lone-entry-for-years-to-come/1699918/

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A financial crisis is a great time for professional investors and a horrible time for average ones : By Sparsh Gupta (Shri Ram College of Commerce)

An Overview Robert Kiyosaki was pretty appropriate when he quoted the above statement. A financial meltdown or an economic downturn is undoubtedly a nerve-wracking situation for all investors, the majority of them being average ones. While savvy and professional investors see this phase of economic turmoil as a unique window of opportunity, mediocre stockholders take it as an end of their world.

The drop in S&P 500 Index of USA by 46%, retirees losing their amassed wealth stored over decades and young and inexperienced investors freaking out due to the implosion of the Lehman Brothers during the 2007-08 crisis is a testimony to this fact. But what is a financial crisis?

Well, a financial crisis is any predicament in which the nominal values of some financial assets abruptly dwindle and see a stark decline, financial entities start facing liquidity crunch and many business houses are likely to default on their debts. Banking panics is the leading reason behind such crisis. Stock market crashes, sovereign defaults, currency crises, bank runs and bursting of financial bubbles (assets being traded at higher quotations than intrinsic value) are other elements which might induce a recession. Few infamous financial contagions include tulip mania, credit crisis of 1772, stock crash of 1929 and the most recent 2007-08 global financial crisis. Not only it spawns losses in the stock market but also adversely affects crucial economic aggregates like investments and GDP growth, generating catastrophic conditions in the economy. In this article, let us gather some more insights into a financial crisis and how can one invest astutely in such a state of a debacle.

The Strategical Difference

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As much as finance excites professional investors, it terrifies the average ones when the market collapses and bubbles explode. There is a striking contrast between their strategies. A crisis commences on the onset of a financial shockwave which alters the present status quo of the economy and further escalates. Euphoria sets in and every other amateur enters the market, say real estate. They go on rushing in the trap while the smart ones wait for ‘the moment’. With a pinch of financial distress and market reversing, they turn from buyers to sellers realizing they owe more than the worth of their property and prices fall drastically. Even banks stop lending and people go on defaulting on their debts, and this is the moment for professional investors to shine. With panic accelerating, they dump their assets at meagre values which are then bought by savvy investors.

This fact can be easily substantiated with the housing market crisis of 2008. The movie, ‘Big Short’, is a fascinating depiction of real-life smart folks who saw it coming and made huge fortunes by taking the assets at remarkably low quotations as the bubble busted and people couldn’t afford their mortgages. Personalities like John Paulson, a head fund manager, made $3.7 billion by betting against the US housing market and Andrew Lahde made unbelievably high 870% returns by shorting the sub-prime market. During equity downfall, the most successful investors of all time, Warren Buffet, bought American stocks in Goldman Sachs, Dow Chemicals and Swiss Re and made billions. The key was providing them liquidity during the tumultuous crisis. When market reverts to normalization, professional stockholders procure substantial gains. The strategy of paying little or no heed to subjective predictions of the market make investors wealthy. Same strategy could work wonders in the 1929 crisis. When speculation drove the prices to immoderate levels, profit could be made by short-selling against the bull market. And when the crash ascends, you would make millions. Another tactic for professional investors is holding onto companies which are relatively undervalued by the stock market.

History dictates the businesses which thrive even in the darkest time of markets, therefore, investing in these particular securities can be profitable. Healthcare, utilities and military components and technologies are relatively reliable industries as no matter what the big picture is, they would be still be used and pay a solid recurring dividend. Even if the market crashes, gold still maintains its values and resource commodities are considered top-performing securities during turmoil. While economic correction goes on in crisis phase, cost-conscious outlets see a rise in customers. So, by investing rationally, professional investors survive the downside and earn gains.

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The Bottom Line

Smart investors are the ones who adjust their portfolios when they get a hint of potential financial weakness while the average ones remain blinded by the mirage of bubble. Signs of economic slowdown can definitely be seen in India right now. Investing in firms with strong balance sheets comprising of reasonable cash flows and low debt would prove advantageous. Judiciously managing exposures, reserving capital and mitigating risks can work wonders!

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The Economic Slowdown in India : By Sahil Raj (Deen Dayal Upadhyaya College, DU)

Nearly three and a half months have moved past us in the blink of our eyes, since the Narendra Modi-led NDA Government came into power at the Centre to mark its second tenure after winning the Lok Sabha Elections 2019. The general public seemed to be happy with what this government did in its first tenure, and the election results were nothing more than the representation of the public’s faith in them. But in the past few weeks, there are various propositions that indicate the slowdown in the Indian economy that merely represents the fact that the all-in-all ‘Acche Din’ are far bleaker than what it seemed earlier. This has caused outrage and disruptions in various sectors, and even the public has taken this in a disastrous way. Just because of their inability to analyze the exact facts and figures has driven them mad at the Government for no particular reason at all. And, the aftermath of this is that now they are making some seriously wrong assumptions which needs to be clarified before it starts to hamper the economy at large. So, it’s time to breakdown the premature dynamics, in order to set a correct metric for judging the actual progress-or-slowdown of the Indian Economy.

Let’s look at the Gross Domestic Product (GDP) growth rate in India for 2019 and its impacts. The economic survey conducted by the Indian economists for the Ministry of Finance reflected a cut in the GDP growth rate to 6.2% in 2019 which was 0.6% points less than the earlier projection of 6.8%. This could be seen as a huge dip in the growth rate. Even the annual report of the Reserve Bank of India for the fiscal year 2018-19 (or FY19) confirmed that the Indian economy has indeed hit a rough patch. And, to add to these facts, the GDP growth rate of the Indian economy has seen a further slip of 5 per cent in the first quarter of FY20. The basic assumption that can derived from these dynamics is that these are just indications of tougher times ahead for the economy. A further projection of 6.7% has been made by the survey committee, which is 0.1% less than the desired projection for 2019. This shows the setbacks that are about to come in the economy in the upcoming year. But according to some of the independent economists, a cut of another 0.6% points is expected as from the current status of statistical inputs. Another point to be discussed here is 49

that it is also expected that a slip of nearly 5% can be expected in the GDP growth rate for the first quarter of FY20. So, it can be assumed that the various economic sectors are definitely going to have to face a bit hit in their production as well as it will be a huge blow towards the consumer consumption rate also. And, if this scenario actually comes into being, then it will be the LOWEST in over six years.

Now, it’s time to breakdown the different parameters or rather effects of this unexpected gradual slowdown. To start with, take a look at the disastrous collapse in the automotive industry. The country’s largest carmaker Maruti Suzuki India has witnessed a decline in its sales for the past six months. It reported a dip of nearly 33.5% in total sales to 1,09,264 units in July 2019. The sales of Hyundai Motors India fell by a huge 38% to 57,310 units in the same month. But this was not the sole case for these two companies, indeed each and every automaker company was hit by this phenomenon. Even some of them recorded the lowest sales in their car making history. From the likes of Mahindra & Mahindra to Honda and TVS Motor Company, all of them recorded a fall in their sales varying from the range of minimal 13% (in case of TVS Motors) to a huge 48.67% (in case of Honda Motors).

Now taking a dig upon the rising numbers of Non- Performing Assets (NPAs) in the country. As per the reports issued by RBI, the provisional estimates record a total volume of Rs 10.35 lakh crores as NPAs in the economy, which is a very huge number to take into account for such a big economy. And to add to it, about 85% of these NPAs are from loans and advances of the public sector banks. For instance, the State Bank of India has solely created NPAs worth a whopping Rs 2.23 lakh crores. And to the major part of these, are now irrecoverable by any means. This has not only created a burden on the public but on the banks as well. And, the major impact to arise from this is that in the near future for sure, the credit facilities going to face a huge blow affect the public in need of credit at that time. The rates are going escalate like mountains making it harder for the public for even getting the credit from the banks. At till this point, the Government cannot be solely accused of the slowdown but at the same is not at all totally innocent of all of the allegations put on them.

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On 11th September 2019, while addressing a press conference in New Delhi, Nirmala Sitharaman stated that the automotive industry was under stress because of “the mindsets of millennial, who now prefer to have Ola or Uber rather than committing to buying an automobile”. Now, take a deep look on her statement, she was just explaining the consumption pattern of the millennials which has inadvertently affected the economy. And, during a TV interview, when the public’s opinion was taken. They said that a “drop in car sales was not just because of mobile app-based taxi services but due to several other economic factors”. On analysis, it can be stated that Mrs. Sitharaman’s statement was just an excerpt from the whole crisis situation.

But this is not the first time that India was hit by an economic slowdown. In fact, there have been three major instances of economic slowdown in the history of India Economy. The first economic slowdown was recorded somewhere near June 2008. Then, the country again saw the economic crisis around March 2011. And to this point in time, the economy has witnessed a ‘Growth Recession’ for the first time since 1979. Growth Recession is a term in economics that refers to a situation where economic growth is slow, but not low enough to be technical recession, yet unemployment still increases. Or in other words, it can be referred to as ‘Negative Growth in the Economy’.

At last, the economic slowdown has not affected the public directly but rather through its adversities ranging from automobile industry to other economic gradients. It would totally insane for the people to put the burden on the Government for the crisis, but indeed they are rather responsible for the crisis to the same extent as the Government. It can be concluded that both the public as well the Government should complement each other to ease the burden of this whole crisis situation. And, hopefully, the Government is working on some sort of plan that could work out in the first place towards the situation to be handled effectively and efficiently taking the public interest into consideration as well.

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