Arbitrage Magazine - JULY 2018 ISSUE- Finance & Investment Club | IIM Rohtak

JULY 2018

VOL-2 ISSUE NO. 7

Finance & Investment Club

Editor’s Note We are pleased to publish the eighteenth issue of ‘Arbitrage’ – Finance and Investment Club’s monthly magazine. Arbitrage aims to cover a diverse range of topics under the wide domain of Finance and Economics. Our goal is to ensure that we provide significant value to the readers through informative articles and articles on current affairs.

We would like to thank all the authors for contributing their articles for Arbitrage. In the Article of the Month – ‘Is the fastest major economy…fast enough”, the author Mr. Saransh Yadav from IIFT Kolkata, has thrown light on the recent leaps India have made in regard to the GDP, leaving behind France to become the world’s sixth largest economy.

We hope for the continuous support of our authors and readers to make this magazine a success.

-Finance and Investment Club, IIM Rohtak

FINANCE AND INVESTMENT CLUB IIM Rohtak 2018-19 Parag Nawani

Siddhesh S Salkar

Vineeth Harikumar

Naveen Kumar

Sankalp Jain

Pavankumar S

Bibekjyoti Roy Nandi

Aditi Patil

Finance & Investment Club

CONTENTS 1. Is the fastest major economy‌fast enough?

02

2. Do you know Mr. Covenants?

06

3. Indian Fintech Ecosystem: An optimistic transformation wave

09

4. Will India survive the trade war?

15

5. A case for basic income in India

18

6. Trade War: Impacts and Challenges

21

7. Green Bonds

26

8. Mutually alleviating poverty by mutual funds

28

9. Air India privatization: How did it fail?

31

10. Global Trade War

35

11. NPAs: On weakening Indian Banking System

40

12. Bank Recapitalization

44

Finance & Investment Club

Page | 2

Is the fastest major economy‌fast enough?

ARTICLE OF THE MONTH

Saransh Yadav Indian Institute of Foreign Trade

The Indian economy has evolved from a largely agricultural & trading society during the Indus Valley civilization to a mix of manufacturing & services. It has also witnessed times of being the world leader, along with Ming China, in manufacturing by generating one-fourth of the industrial output during the Mughal era to contributing just 2% to the world’s manufacturing output under the British rule. The economic drain theory supports the fact that the British East India Company imposed high taxes on the weaker Indian economy and depleted food & money stocks, which led to famine in 1770s. The British also left us with another economic strain of partition. This refugee settlement led to division of India into complementary economic zones. As a result of which India inherited some economic problems at the time of independence after missing the early train of industrialization. The repercussions proved

to be catastrophic as growth in India remained at around 3.5% from 1950s to 1980s, whereas, South Korea grew by 10% and Taiwan at 12% during the same period. Indian growth has grabbed some pace after economic liberalization in 1991.

Recently, the World Bank has put India ahead of France in terms of GDP being just $25 billion short of the United Kingdom. As China’s economic growth has slowed down, people are looking for the next big driver of growth and India seems to fit the bill. Under the Narendra Modi regime, India continues to be the beacon of growth in the South Asian region. This is the main reason that many multi-national companies are excited about India, dreaming of selling fast food, smartphones and fast fashion to a rapidly growing middle class.

And companies like Walmart are paying top dollars for business deals in India. While most of the Asian

Finance & Investment Club

Page | 3

nations are ageing, India has a median age of only 27.3 years, compared to China’s 37.6 years & Japan’s 47.1 years. India is on a track to reap its handsome demographic dividend. The “Make in India” campaign is eventually proving its firepower as India has ascended in the list of world economies.

But what does this mean for Indians looking from within? Not much, if one juxtaposes the per capita statistics graphs of India and other top economies of the world. The ground realities can only be discovered if we link the size of an economy with its geography, population and workforce. And purchasing power parity is an appropriate metric to look at in India’s scenario. According to the World Bank figures, India has an estimated per capita

income at purchasing power parity of $7060 while France has $43,720, around six times more than that of India. And India stands 6th in terms of GDP but is at the 123rd position in terms of per capita income at PPP while France smiles at the 25th spot. Thus, we would find an average Indian far poorer than an average Frenchman if we use per capita yardsticks for measurement. India has a population of approximately 134 million as compared to 67 million French people. One could cite India’s large population as a major reason for its lower per capita figures if China hasn’t had 2.5 times per capita income than that of India (whereas, Chinese’s per capita income was almost comparable to that of Indians in 1960).

Finance & Investment Club

Page | 4 Also, the difference in GDP per capita between China & India swelled from 9% in 1960 to 80% in 2016. South Korea is a perfect example to attain a realization of how India performed in comparison to a nation that has gone from being a developing to a developed one given it historically suffered extensive poverty and has hostile neighbors like that of India.

India’s GDP per capita in 1960 was 49% lower than South Korea. Today India’s GDP per capita is 94% lower than that of South Korea.

The not-so-satisfactory employment scenario in the country substantiates the importance of per capita figures at PPP of the nation. India has about a million population entering the labor force every month, we need significantly more growth to get them good jobs as it’s a big number that has to be absorbed. Recently, 90,000 railway jobs found applicants more than the number of people residing in Australia. Decent stable & salaried jobs for most of the employable youth is still a major challenge for the economy. Almost 80% of Indians depend on the informal sector to make their living. Agriculture contribution has sunk from 50% at the time of independence to just 15% at present but still employs majority of the Indian population. India anticipated a manufacturing revolution in 2014 but still the service sector is carrying a huge share of India’s GDP on its back. Within our country, domestic investment has fallen, as businesses have been hesitant to invest.

The Goods & Services tax is also baffling some businesses for taxing some products. India’s exports have dropped despite incentivizing the exporters further in mid-term review of India’s foreign trade policy 2015-20. On observing the rising oil prices trend and India being the 3rd largest oil consumer after United States & China, Moody’s & Goldman Sachs have cut their growth projections for India.

Oil prices were very low in 2014 at around $40 per barrel. Then, the government was easily able to impose taxes on diesel and petrol with minimal rise in inflation. And now, the government has become strongly dependent on these taxes, which made up 17% of India’s total revenue last year.

Unfortunately, the Indian rupee has been the worst performing currency in Asia this year & is expected to weaken further. India is under double hammer attack of a weakening economy and rising oil prices.

Finance & Investment Club

Page | 5 The spurt in Indian economy was mainly due to consumer & government spending after a slow down blamed on demonetization & chaotic implementation of the GST. India’s GDP has doubled in the last decade & is expected to power ahead as an important economic engine in Asia. But it will take at least a decade for India to reach the level of prosperity enjoyed by the Chinese although growth in China has slowed down. The demographics of the two nations are almost comparable but the GDP stands at 1/5th of that of China. India should be able to generate at least 50% of the Chinese GDP in the next 4-5 years to make the macroeconomic figures start translating into common man’s livings & his per capita. We are amongst the most unequal countries in the world and are still way under our true potential. We are the world’s fastest major economy at the moment but our country needs some structural changes to boost the growth path especially in the current scenario where protectionism & trade war is escalating, as unlike United States, which is an isolated economy,

we are more export-oriented and international trade dependent.

Despite its challenges, India continues to grow quickly. Our current growth reflects the hard work of the government & its people, but we need to repeat this continuously for at least next 20 years to give every Indian a decent livelihood. Our outperformance is spotlighted because the world’s growth is weak, but our growth is under sufficient to satiate hunger of every Indian. Most of the major statistics have shown India as the fastest growing economy in the world. These macroeconomic parameters’ horse races and their numbers do matter and work to shape world opinion, and more importantly we hope, influence investment decisions. And these numbers have certainly lifted India’s image on the world’s pedestal but is the pace of India’s growth fast enough for its people? remains a question in the eyes of 1.3 billion people. The visualization of facts implicitly states that our nation is either walking fast or running slowly.

Finance & Investment Club

Page | 6

Do you know Mr. Covenants?

Parag Nawani Indian Institute of Management, Rohtak

Mr. Covenants is liked by banks and feared of by companies, which take loans from banks. He is a vigilante who keeps an eye on the performance and the major transactions performed by those companies. Let’s try to know this interesting person.

When corporations plan to raise money from the market and take loans from banks, this power in the form of money does not come alone. Along with it, come responsibilities in the form of COVENANTS. This article tries to delve into an understanding of covenants.

Covenants are a series of restrictions that dictate the way the borrowers can operate and carry themselves financially. The three types of loan covenants areAffirmative, Negative and Financial.

Affirmative covenants describe the actions the borrower must take to comply with the loan. These include Disclosure covenants, Inspection rights, Insurance and Use of Proceeds.

Negative covenants are the opposite of Affirmative covenants, and they state the activities, which the borrower must not do to comply with the loan.

These include Negative pledge, Limit on debt, Fundamental change and New Investments.

Financial covenants describe the minimum financial performance required by the borrowers to maintain safety levels for the banks. These include Datespecific covenants, Performance-based covenants, and Hybrid covenants.

 Performance- This ensures generation of adequate earnings to sustain the business and meet its obligations as they come due. These earnings will also be mainly used in operating activities, financing of new assets and payments to lenders.  Liquidity- This certifies that the borrower has access to enough cash resources to meet the business’s obligations. Banks consider that cash is the only asset without which the companies cannot survive. It’s akin to oxygen, a business that doesn’t have it, dies. Following are the key ratios and financial aspects covered in covenants



Coverage ratios- These include ratios like Interest charges coverage ratio, Fixed charges coverage ratio, Debt service coverage ratio.

Liquidity ratios- These include Current ratio and Minimum working capital.

Objectives of Covenants The lender’s target is to devise a set of financial triggers that are initiated well before the borrower flops to generate the earnings to service its obligations or runs out of cash.

Covenants are generally aimed at addressing the lender concerns in the following areas:

Finance & Investment Club

Page | 8 the loan covenants, along with its subsidiaries, then those subsidiaries will be known as Restricted subsidiaries. The subsidiaries to which the covenants of the holding company do not apply are known as Unrestricted subsidiaries. The holding company is free to conduct business activities with the Restricted subsidiaries, on the other hand, the Unrestricted subsidiaries are considered as thirdparties, and all transactions with them must comply with the covenants.

Default The occurrence of an event which has a material adversarial effect on a borrower’s financial condition or its capacity to comply with specific obligations under the banking documents will normally constitute a default.

Maintenance vs. Incurrence covenants

Indenture Analysis

Maintenance covenants are financial metrics that must be satisfied on an ongoing basis and are usually checked at quarter ends. Incurrence covenants are not monitored on a regular basis, but will only kick in when the company initiates a particular action (new debt incurrence, merger, acquisition, asset sale, etc.). They are applied to high –yield bonds in which the creditors are institutional investors.

For example, a financial covenant might specify a limit of 6 for the debt-to-EBITDA ratio. If it is a maintenance covenant and the ratio exceeds 6, then it is a breach of covenant. Or if it is an incurrence covenant, it will be considered a breach only if the company initiates a new action, but won’t be a considered a breach if it is due to a fall in EBITDA.

Restricted vs. Unrestricted subsidiaries

The legal contract that defines the rights and obligations of the two parties to a bond issue is known as an Indenture. The bond indenture analysis is as critical as the business and financial analysis underlying the bond transactions. An analyst should focus on the following aspects while performing indenture analysis:



 Issuer  Ranking of the bond  Security Covenants- The analyst should have a clear understanding of the affirmative, negative and other covenants in the indenture to measure the extent that the covenants prohibit the activities of the borrower, and the contingent events which might take place in the event of a default. Thus, we see the importance of analyzing the loan covenants to better understand the financial health of a company. I hope this article has given you some idea about Mr. Covenants.

If a company has many operating subsidiaries, has taken a loan from a bank, and is in compliance with

Finance & Investment Club

Page | 9

Indian Fintech Ecosystem: An optimistic wave of transformation Pranav Kahalekar SIMSREE, Mumbai Upon hearing about portmanteau “FinTech” I often wonder who coined it and how old it is! It can be perceived to be a marriage of Finance with Technology. FinTech is a buzzword these days and is talked about extensively across conferences or seminars. However according to me finance and technology should not be seen as newlywed couple.

Finance is yoked with technology since decades.

Let it be invention of pantelegraph by Giovanni Caselli in 1860 , fed wire system for RTGS fund transfer in early 19th century , first ATM from Barclays in 1960s or credit cards & internet banking thereafter, “Fin” and “Tech” have always been clasping hands. Therefore the term FinTech revolution seems parochial to me. It is FinTech evolution and not revolution that substantiates today’s prominent and much vaunted technological advancements in finance sector. Throwing light upon transformation of Indian FinTech landscape over decades, it can be said that electronic revolution, Economic Liberalization and IT revolution have led a strong foundation to India’s recent promising performance in this sector. It is needless to say that, for FinTech ecosystem to thrive, Government, Regulatory Bodies, Investors, entrepreneurs, technology vendors, Financial Institutions, Universities, and consumers should work in liaison and play their roles responsibly.

To be a driver of FinTech growth on global scale, India, unlike developed economies needs to do groundwork in terms of improving infrastructure, financial inclusion, financial literacy and Internet penetration. According to a report by Deloitte [1] currently only 52.8% of India’s population has bank accounts well below global average of 60.7% and only 22% of people use payment cards. According to report from Kantar IMRB and IAMAI [2], although number of mobile phone users in India is around 1 Billion but Internet users in India is around 500 Million, which is not even 50 % of India’s

population. However around 80% of people in countries like USA, UK have Internet access [3].

These statistics and benchmarking show that a lot of groundwork needs to be done by India in terms of building a solid infrastructure and creating a convivial atmosphere for FinTech growth. However these challenges are complemented by favorable macroeconomic factors of country in recent years.

Government of India through India Stack Program, has provided state of the art technological framework to corporations and entrepreneurs.

Recent endeavors from government include rolling out of Jandhan Yojana which is aimed at providing banks accounts for all. Combination of Jandhan, with Aadhar and mobile telephony, which is called as JAM trinity, would prove to be one of the key drivers in FinTech growth. With demonetization coming in, digital payments got a push. Unstructured Supplementary Service Data (USSD) based mobile banking, Aadhar Enabled payment system, UPI for mobile payments all witnessed rapid growth post demonetization. The launching of BHIM app which witnessed 17 Million download in first 2 months [4] again justifies Government’s agenda. All of these initiatives epitomize Government’s aggressive push towards building a strong infrastructure, which would eventually fortify nation’s FinTech aspirations especially in fund transfer and payment sector.

Indian regulators have taken laudable efforts to build a comprehensive regulatory framework around FinTech innovations. However they may be at stretch to balance the time required to create a structured regulatory framework and a pace with which Indian FinTech landscape is transforming.

The financial regulations so far have been defined keeping in mind the existing banking sector players and are often archaic from FinTech perspective. To bring more clarity in regulations, the regulatory

Finance & Investment Club

Page | 10 bodies must espouse a cautious approach around consumer protection and try to benchmark the already existing FinTech related regulatory policies of developed countries. The regulators of the countries like UK, Singapore, and UAE have built a regulatory sandbox wherein fledging FinTech firms operate in controlled environment and regulators monitor key metrics of sandbox and adjust regulatory parameters on periodic basis. After successful testing of different regulatory solutions in sandbox, the FinTech firms are allowed to enter the mass market. The working panel appointed by RBI has suggested to make use of such Sandbox in Indian context which shall be administered by RBI and Institute for Development and Research in Banking Technology [5]. Implementation of this suggestion will ensure collaborative work of regulatory bodies with FinTech firms and allow the ecosystem to come up with comprehensive regulatory framework which will not only nurture

the growth of FinTech hubs but also safeguard the interests of consumers.

When it comes to investors, India has far less number of angel investors (1800) as compared to USA (300000)[6]. However India is witnessing increasing interest level in startup funding.

According to the report by KPMG [7], FinTech Investment in India increased manifold from USD 247 Million to USD 1.5 Billion in one year. Indian VC firms have been early stage investors of FinTech startups. The banks and financial institutions are also either venturing into building fintech

infrastructure in house of their own or investing into startups. The table depicts the way with which VC backed FinTech investment in India has increased.

India’s VC backed FinTech Investment Trend over the 5 years in USD Source: FinTech Trends Report 2017 by PWC and Startupbootcamp

Finance & Investment Club

Page | 11

Combination of Jandhan, with Aadhar and mobile telephony which is called as JAM trinity would prove to be one of the key drivers in FinTech growth. With demonetization coming in, digital payments got a push. Unstructured Supplementary Service Data (USSD) based mobile banking, Aadhar Enabled payment system, UPI for mobile payments all witnessed rapid growth post demonetization. The launching of BHIM app which witnessed 17 Million download in first 2 months [4] again justifies Government’s agenda. All of these initiatives epitomize Government’s aggressive push towards building a strong infrastructure, which would eventually fortify nation’s FinTech aspirations especially in fund transfer and payment sector.

Indian regulators have taken laudable efforts to build a comprehensive regulatory framework around FinTech innovations. However they may be at stretch to balance the time required to create a structured regulatory framework and a pace with which Indian FinTech landscape is transforming.

The financial regulations so far have been defined keeping in mind the existing banking sector players

and are often archaic from FinTech perspective. To bring more clarity in regulations, the regulatory bodies must espouse a cautious approach around consumer protection and try to benchmark the already existing FinTech related regulatory policies of developed countries. The regulators of the countries like UK, Singapore, and UAE have built a regulatory sandbox wherein fledging FinTech firms operate in controlled environment and regulators monitor key metrics of sandbox and adjust regulatory parameters on periodic basis. After successful testing of different regulatory solutions in sandbox, the FinTech firms are allowed to enter the mass market. The working panel appointed by RBI has suggested to make use of such Sandbox in Indian context which shall be administered by RBI and Institute for Development and Research in Banking Technology [5]. Implementation of this suggestion will ensure collaborative work of regulatory bodies with FinTech firms and allow the ecosystem to come up with comprehensive regulatory framework which will not only nurture the growth of FinTech hubs but also safeguard the interests of consumers.

Finance & Investment Club

Page | 11 Expected Annual ROI on FinTech Investment of India vis-Ă -vis other countries

Source: FinTech Trends Report 2017 by PWC and Startupbootcamp

According to FinTech Trends Report 2017 –India

by PWC-Startupbootcamp [8]. India tops the list and is well above global average when it comes to expected FinTech annual ROI Index. When government, regulators and investors are playing their pivotal role in creating conducive environment for FinTech ecosystem, very few entrepreneurs are audaciously venturing into

FinTech startups. India has over 600 Start-ups venturing into FinTech with the 12000 Startups worldwide [9]. In India there is a dearth of skilled workforce which results into outsourcing or importing of talent and technology .In nutshell, Indian entrepreneurs have tried to become enabler of FinTech ecosystem in India rather than becoming disruptor of FinTech on global scale

Finance & Investment Club

Page | 13

Leading FinTech Startups in India Source: FinTech Asia (http://www.fintechasia.net/top-fintech-companies-india/) Apart from the aforementioned stakeholders, Universities/research institutes should also contribute to entrepreneurial mindshare in India’s talent and build incubators and innovation labs to create competent entrepreneurs. The financial institutions also have instrumental role to play.

By embracing FinTech innovations, mentoring the FinTech startups and investing in building technical excellence they could thrive in the

competitive market. They can pursue global competitiveness by treating FinTech not as a threat to compete with but as an opportunity to collaborate with. Thus rising consumerism and stiff competition from peers have left financial institution with no choice but to shed their grey hair of conservatism.

Finance & Investment Club

Page | 14

FinTech Adoption Index of India Vis-Ă -vis other countries Source: EY FinTech Adoption Index 2017 Report

According to EY FinTech Adoption Index, India has the second highest FinTech adoption rate among digitally active consumers at 52 percent [10]. According to NASSCOM [11] Indian FinTech market is expected to touch 2.4 Billion USD by 2020. These all pompous statistics point to the fact that India has been up to the mark so far. However, FinTech being a broad concept encompasses lot of sectors like payments, money transfers, peer-to-peer lending, insurtech, roboadvisory, wealth management and crypto currencies. From the aforementioned propositions made so far, it can be proposed that India has

done exceptionally well in sectors like payment and money transfer but there is a long way to go in other sectors. zealous efforts from all stakeholders will make sure that FinTech startups will continue to create transformational waves across the financial ecosystem in India. They will not only help financial institutions improve their back-end and frontend processes but will also offer customers a smooth user experience, more value added services and an interactive marketplace.

Finance & Investment Club

Page | 15

Will India survive the trade war?

Jatin Mahajan Indian Institute of Management, Lucknow

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win!”

– Donald Trump, Twitter post (March 2, 2018) “This (import tariffs) act is typical trade bullying… it seriously jeopardizes the global industrial chain and hinders the pace of global economic recovery” – China’s Ministry of Commerce (July 6, 2018) “I'm ready to go to 500 (extend tariffs to USD 500 Bn imports from China) … We have been ripped off by China for a long time, and I told that to President Xi. I could go through every country” – Donald Trump, CNBC interview (July 20, 2018)

Ever since news of the US import tariffs on Chinese goods hit the stands, every tradeparticipating nation has hung on tenterhooks.

Scores of analysts have published countless reports measuring, predicting or analyzing the impact of the impending trade war on major world economies.

In India’s case, a quick search through Google will give the impression that impact of the USChina trade war will be indirect and largely

minimal. This is primarily because the trade volume in question is roughly 4% of the USChina trade and hence has limited binding on other markets. While this notion may be true, it is pertinent to know that India’s largest export market is America and its largest import partner is China. The fact that both these countries are embroiled in a hefty trade war has serious considerations for India.

Finance & Investment Club

P a g e | 15 The short road ahead With the two largest economies closing their borders to trade, opportunities open up for emerging economies, including India, to take the centre stage.

Most prominently, India can move to fill the void in China’s Soybean demand that was previously catered by the US. From the high of 36,000 tonnes last year to near zero currently, the US Soybean exports to China have dropped drastically. The situation gets all the more promising as the Chinese government has dropped tariffs on Indian Soybean imports from 3% to zero. However, question arises if India will be as nimble as Brazil, whose Soybean exports to China have already risen by 33%.

Similarly, India could address the US market by exporting products where it has an edge.

Economist Upasna Bhardwaj from Kotak Mahindra Bank sums it up neatly in an interview with Livemint - “India can become more competitive in segments such as textile, garments and gems and jewellery.”

Yet another indirect benefit of the trade war that some spectators are vouching for is the softening of crude prices if China rejects the US shale in retaliation to the tariffs. Such a softening relief can benefit the Indian economy by easing pressure on rising interest rates and depreciating INR. However, the picture turns murky when we consider Indian metal manufacturing. India represents 2% each of steel and aluminium imports to America, and tariffs on both will hit domestic metal players as global prices will rise consistently. Further, there is a high possibility that India finds itself at the centre of steel dumping led by trade diversion from previous US steel exporters.

The bigger picture Trade wars have never brought fortune to any nation. While they have direct repercussions on participating economies, the more pernicious effects are felt globally. For India, it’s not just a matter of facing tariffs, but also the deeper implications on manufacturing capital outflow, depreciating currency and rising inflation.

Firstly, with rising tariffs, manufacturers across the globe will face the brunt of high import costs.

For instance, many countries will be under pressure as their raw materials are utilized in the Chinese exports to America. Similarly, the Chinese tariffs on US aircrafts will hurt Indian manufacturers who provide steel & aluminum as raw materials. The overall situation will push manufacturers to tread on paper-thin margins forcing a slowdown in global output.

The second big consideration is the tightening of monetary policy by the US Federal Reserve.

Already on course to hike interest rates to prerecession levels of 2008, the Fed may be hard-

pressed to accelerate its pace given rising consumer prices. If the interest rates peak faster than expected, India will definitely face capital outflows as American investors will chase higher returns back home. Already, the returns on government securities have declined for last seven months in light of US yields shooting up from ~1.5% per annum to over 2.8% now.

Trade wars generally follow sharp currency volatility. As countries involved in the trade wars raise import tariffs, they are also on the lookout of boosting exports by weakening their currency.

A global currency depreciation will impact the INR negatively, which already has plunged 7% this year.

According to Prakash Sakpal, an economist at ING, the INR could reduce to as low as 72.80 to USD within the next year.

The fourth important concern for India is the case of rising inflation. Rising manufacturing costs will translate to increase in consumer prices.

Already pressured to arrest decline in the INR and evade capital flowing outside the country, the RBI will be forced to raise rates sharply.

Consequently, domestic producers will be squeezed from both sides – high import tariffs leading to stiff margins and higher interest rates hitting financial support. A worst-case scenario could see domestic companies filing for corporate bankruptcies as an outcome of the trade war.

Finance & Investment Club

P a g e | 16 India’s options Whichever country India sides with, it inevitably faces 20% tariffs. At the moment, India has played safe and followed the route of its European counterparts in extending retaliatory tariffs to the US. Although, it has simultaneously offered to increase its American imports of aircrafts, and oil and gas purchases. With regards to China, it has shown considerable muscle in standing tall to China with respect to the Doklam

plateau problem. This balanced diplomatic approach should be exercised going ahead – much more significantly in bringing the contesting parties for sustainable resolutions at the WTO level. After all, it is the strength of WTO that is critical in facilitating rule-based global trade & minimising disruptions arising out of any future trade wars for any country, including India.

Finance & Investment Club

Page | 18

A case for basic income in India Vatsal Chaturvedi, Shreyash Sinha Symbiosis Institute of Business Management, Bengaluru

The solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income.

-Martin Luther King Martin Luther King said these words while addressing the issues of poverty during his time; it finds resonance in this time in our country, where the people in lower echelons are finding it hard to sustain themselves given the hardships caused by various societal and economic forces.

Basic Income is a program under which the citizens of a country get periodic cash payments high enough to make sustenance, but limited enough to provide enough motivation to work.

The idea of a state-run basic income dates back to the late 18th century when English radical Thomas Spence and American revolutionary Thomas Paine both declared their support for a welfare system in which all citizens were guaranteed a certain income.

In the current scenario all the economies in the world run some form of social security schemes intended to benefit the underprivileged, India also runs over 900, central and state sponsored social welfare schemes with the intention to aid and uplift the people living in the lowest rung of the society. Since independence these schemes have done a decent job in reducing the poverty rate from around 70% at independence to 22% at present, but they also have been supported by economic reforms such as Green Revolution, White Revolution and LPG policies of 1991.

However, in the current scenario we find that the benefits of these schemes have not been distributed equally among the citizens of the country because the current system is flawed by perpetual leakages, and poor targeting.

The advent of the fourth industrial revolution brining in automation in each and every dimension of life.

'Technology could fundamentally disrupt the pattern of traditional economic path in developing countries', a research by World Bank has shown that automation could threaten around 69% of jobs in India. These developmental disruptions along with the inefficient targeting of the schemes would aggravate the situation the people are already facing.

In the face of these situations Basic Income seems to be a solution worth considering, instead of separate welfare programs it could be one income or a basic payment the welfare programs could add to, being much simpler and transparent it could also curtail the major inefficiencies of leakages and poor targeting. UBI in India has the potential to liberate from anxiety of the tyranny of wage slavery and provide opportunities for people to pursue different occupations and develop untapped potential for creativity.

Finance & Investment Club

Page | 19

Source:https://www.moneycontrol.com/news/business/economy/can-india-implement-universal-basicincome-2457035.html Major arguments against UBI: 1. Lack of incentive to work: Critics of Basic income believe that detaching payment form work will lead to drop in productivity and growth as people will not have the incentive to work. However, survival is not the sole motivator of people working, if the above argument were to be true the richest 10% holding 76% of the wealth in USA would have stopped working, provided that their generations could live on the wealth that they have accumulated. Work provides people respect, dignity and a purpose, which are bigger motivators.

2. It’s expensive: Although it is not completely untrue, it is possible to implement basic income as the income which is proposed to be paid will be just livable, to cover just the necessities of the life. Given the large number of schemes and the funding, which the government has allocated can be diverted to fund it.

With more formalization of the Indian economy, improvements in productivity and revenues for the firms and individual, improved financial inclusion will lead to better tax compliance and hence increased tax revenue for the government in the future. A chunk of that revenue can be used to Fund basic income program.

Finance & Investment Club

Page | 20 Implementation and Funding Given the magnitude of the scheme to be implemented in India, we need to start it of by implementing in a phased and regulated manner.

For this purpose, we need a central body, which would monitor the implementation and implications of the scheme. We can fist start it on the pilot basis by carefully selecting the areas to be targeted and then monitoring the impact. As the time goes with increased capacity we can increase its scope and target the poor living in all parts of the country.

Now comes the most important part: funding.

Most of the critique argue that it would be very expensive to implement such a scheme but doing so in a phased manner may not be that expensive.

The minimum mages in India is 176 Rs per day.

So, the per person cost would come out to be 63,360 (176*30*12). We can start this off by choosing a region for a pilot program. For example, Dadra and Nagar Haveli (a union territory), which has a population of 3.34 lacks out of which 55.9 % (2010 data) i.e. 191,737 are living below poverty line. So, if we target that region for our first pilot project then the total cost will be around 12,148,456,320 Rs. Getting 1214 cr per year out of government treasury, which is 0.0074 % of India’s GDP is not a big deal, but the impact of this on the lives of poor living in region such as Dadra and Nagar Haveli would be

massive. We will not only be able to lift them out of poverty but will also be able to improve the economy of that region by significantly boosting up the demand. The gains will be significant enough to recover the amount, which we may spend. On the other hand, if we were to implement such a project in state like Uttar Pradesh we will need around 3,986,734,400,000(2.7% of our GDP).

Interestingly, this is the amount government spends on education in India. But as the economy is assumed to grow and become $ 6.84 trillion economy by 2030 (USDA), which is around 3 times the current GDP. So, it is possible to increase its scope and cover more regions simultaneously. But yes, we must be sensible enough to understand how deep our pockets are and increase its scope in a way that our economical sustainability is not jeopardized.

Basic Income is a good initiative to bring people out of poverty in a much quicker and efficient way. But at the same time, it should be limited to the purpose for what it has been proposed and should slowly be phased out gradually once it has achieved it. The way it is different from other scheme is that it provides people a choice to spend the income the way they want to, which empowers them like no other scheme in existence.

Finance & Investment Club

Page | 21

Trade war: Impacts and Challenges Tamanna Roy Symbiosis Institute of Business Management, Bengaluru Abstract US declared a trade war against China on July 6 by imposing a 25% tariff on $34 billion worth of Chinese goods. China strategically retaliated by imposing tariffs on agricultural goods imported from China, which may negatively impact the vote bank of Trump. US have also launched trade wars with its close allies like Canada, Mexico and European Union over metal imports. These countries have also responded by imposing tariffs on US goods. The trade war has a critical effect on the currencies of these countries. Lastly, coming to the Indian perspective, India may gain in the short term, but in the long term, the demand for Indian exports is likely to be hit.

Introduction This paper attempts to discuss the impacts and challenges of trade war. It aims to discuss the effects of the most recent trade war imposed by US on China. Trade war is not a new phenomenon. The history of trade war dates back to the year 1930 when US imposed tariffs on items imported from countries like Germany, Canada, UK and France, which is thought to have aggravated the Great Depression.

Trade War: Definition A trade war is caused when two countries try to attack each other's trade with taxes. Imposition of

tariffs by one country causes the other to respond in a tit-for-tat escalation. This negatively impacts the economies of both the nations and causes political tension between them.

Initiation of US-China Trade War Discussions regarding trade war started way back in March 2018. However, on July 6, the trade war was triggered off with US imposing a 25% tariff on $34 billion worth of Chinese goods. US said it will impose another 10% tariff on $200 billion of Chinese-made products, ranging from food to electronics, by August 30.

Reasons for Trade War The main reasons that US put forward as reasons for the trade war are: 

Theft of Intellectual Property (American technology): US have accused China of stealing their intellectual property through forced technology transfer and conducting cyber attacks on US companies to access trade secrets.



To reduce huge US trade deficit : US wants to reduce the huge goods trade deficit of $375.23 billion with China

Finance & Investment Club

Page | 22 

Vote bank politics: Stepping back from trade deals like North American Free Trade Agreement (NAFTA) and TransPacific Partnership (TPP) appeals to Trump’s base of voters in America’s Rust Belt. According to Trump, these trade deals would have wiped out millions of blue-collar jobs in US manufacturing and automobile industries as it allowed companies to move factories to other countries where labor is cheaper.

China’s reaction China responded with “equal scale, equal intensity”. China retaliated to this strategically by imposing tariffs on chief US exports like

soybean, orange juice, corn crops and rare earth metals used in the manufacture of electronic gadgets and automobiles. These items are mostly produced in the Rust Belt of US. Hence the tariffs are a potential blow to the rural states of USA that backed Trump in 2016 Presidential election.

Ground Reality Actually the current trade war between US and China is much more than market restrictions, violation of intellectual property rights and US trade deficit. On a deeper level, this reflects an escalating economic and military rivalry between two superpowers: America, a status quo power and China, one of the most remarkable growth missiles in history.

China emerging as economic power:

Fig. 1 [Source: http://www.imf.org/external/datamapper/NGDP_RPCH@WEO/CHN/USA/OEMDC]

Finance & Investment Club

Page | 23 Fig. 1 shows that the real GDP growth of China is much higher compared to US, and other developing nations, which implies that China has the potential to become the global economic superpower in the near future.

China is now going head-to-head with US in advanced manufacturing and digital technologies.

Xi Jinping, President of People’s Republic of China wants to reimagine China into a technological powerhouse, competitive in robotics, new-energy vehicles, chips and software under his “Made in China 2025” initiative. China envisions ruling the world in Artificial Intelligence by 2030.

China as military power:

China has the capital to make rapid technological progress in defense, particularly air –to – air missile systems that pose a strategic challenge for US, and its allies.

Thus it is a battle for global influence. It is a clash between US, a market-driven system and China, a state-driven system.

Trade War by US with other nations China is not the only victim of the trade war. One month before US tariffs were applied on Chinese goods, on June 1, US imposed a 25% tax on steel and 10% tax on aluminium from the European Union, Mexico and Canada (close allies of US) in the name of national security.

Fig. 2 [Source: https://www.bloomberg.com/news/articles/2018-07-17/scaramucci-s-path-to-20-billionruns-through-a-hot-china-market] Fig. 2 shows that US imports steel mostly from Canada and EU, which are its close allies.

Finance & Investment Club

Page | 24 Actions taken by different countries Deeply aggrieved by the tariffs, other countries retaliated back by imposing tariffs on goods imported from US. Canada imposed a 25% tariff on certain types of American steel and a 10% tax on yoghurt, whiskey and roasted coffee. Mexico imposed new duties on steel, pork legs and shoulders, apples, grapes and cheese. Europe responded by imposing taxes on 185 US exports like whisky, Bourbon, yachts and boats.

China, Canada and European Union have filed dispute complaints in World Trade Organization (WTO) challenging the legality of Trump’s metal tariffs. China has also lodged a complaint over Trump’s pledge to impose tariffs on $50 billion worth of Chinese goods. On the other hand, US and EU have lodged WTO disputes challenging

China’s technology transfer policies. But the method adopted by US and China to justify their tariffs undermines the ability of WTO to mediate.

This is because both US and China are justifying tariffs under domestic law, rather than following WTO procedures. In case of aluminum and steel (tariff on metal) Trump is invoking a seldom used clause: Section 232 of US Trade Expansion Act, 1962 that gives him the authority to curb imports if they hamper national security.

Implications on Currency The US-China trade war has proved to have serious implications on the currency of both the countries and this has led to the all-new currency war. Chinese Yuan is a pegged currency and thus is controlled by the government, so not traded freely in the market.

Fig. 3 [Source: https://www.moneycontrol.com/news/business/economy/how-a-currency-war-can-helpchina-neutralise-us-tariffs-2768691.html]

Finance & Investment Club

Page | 25 Fig. 3 shows that the yuan has depreciated 7.81% since March 2018. Slight changes in the value of a currency can have huge impacts on the local economy and also on global trade. China is the biggest export economy in the world. By allowing its currency to depreciate, Chinese goods will become cheaper in foreign markets. China is self-sufficient in the energy sector, but petroleum products account for around 12% of total imports. With global crude prices on the upswing, a weaker yuan will aggravate the woes of Chinese energy companies thus affecting its import value in an adverse way.

On the other hand, American dollar is becoming the safe haven for investors, which have led to increase in the FDI and home-based investments.

It is viewed by the economists that the dollar would outperform most of the major currencies, as the world’s most liquid bond market would offer higher yields.

soybeans to any substantial degree, as India produces only 3% of the global crop and India’s soybean crop accounts for roughly 10% of China's annual consumption.

However as global trade contracts in the long term, the demand for Indian exports may be hit.

US are planning to review the Generalized System of Preferences (GSP) through which Indian exporters get preferential market access to the US. This measure could expose billions of dollars of Indian exports to harsh tariffs. In May, US also filed a counter-notification against India for the first time in WTO’s history, alleging that India’s Minimum Support Price (MSP) program for certain agricultural products surpasses permissible levels of domestic price distortion.

This trend in US policy could bring in more aggressive protectionist actions targeting India in the future.

Impact of Trade War on India

Conclusion

In the short term, the US-China trade war is likely to have a positive impact on the Indian economy. India could capitalize on the situation by partially filling the vacuum in soybean supply created by order cancellations and tariffs targeting US. Rajiv Kumar, Vice-Chairman, Niti Aayog floated the idea of India fulfilling some of China’s demand for soybean and sugar at the India-China Strategic Dialogue held in Beijing in April. In June, the Chinese Cabinet declared cut in tariffs on a wide range of imported goods from India including soybean, which came into effect from July 1. These developments seem to point to a bigger role for India as a critical agricultural exporter to China. However, India needs to adopt a strong boost in technology to supply China with

The Bank of England has estimated that a fullfledged global trade war could hit global GDP by 2.5% over three years. It has also simulated that US would be the biggest loser, with a 5% reduction in growth.

If US extends the tariffs to all Chinese goods imports, many US firms like Apple, that have outsourced industrial production to China will also be adversely affected. US consumers will also suffer as much as US businesses, as the goods they buy, many of which are imported, will become more expensive.

On a concluding note, if the trade war continues for long, it is going to be self-destructive for all the nations involved in it.

Finance & Investment Club

Page | 26

Green Bonds Dwarampudi Siva Hemanth Reddy Indian Institute of Management, Shillong What is a Green Bond?

A Green Bond or Climate Bond is specifically set aside to of use for climate and environmental related projects. They are asset-linked and backed by the issuer's balance sheet. They are meant for the encouragement of the organizations to take up the projects, which help in sustainability and environmental protection.

Advantages The advantage of green bonds to the issuer is that they carry less interest rate compared to the commercial bank loans. So, when compared to other forms of debt, green bonds present an attractive option for the issuer. For the investor, green bonds provide lesser return when compared to other bonds, but it helps in increasing their socially responsible investment (SRI). Investors will also reap tax-exempt on interest from the green bonds they hold.

Drawbacks The disadvantage of holding green bonds is the lack of liquidity. The market is still small and getting in and out will not be easy. This is likely to change in the future since demand for new issuances are high and the market is growing. But for now, green bonds should be subscribed by those who are willing to hold them till maturity.

Another challenge is the lack of a precise definition of a green bond. Investors might not know exactly where their money is going,

meaning that it could be potentially used for the wrong reasons.

Green Bonds In India Yes Bank is the first company in India to raise a capital of Rs 1,000 crore via a ten-year green bond in Feb 2015. Later in March, Exim Bank of India issued a five-year $500 million green bond, which is India’s first dollar-denominated green bond. In 2016 the issuance of the green bond was doubled to $81 billion worldwide. This is just a beginning as the governments and other entities need to invest almost $90 trillion in infrastructure over the next 15 years to achieve the goals prescribed by the Global Commission on Economy and Climate. In India alone they stood at $2.16 billion in 2016, propelling the country to 7th position worldwide. In 2015-2017, Asia as a whole has issued $65 billion in green bonds with China leading the pack.

India has set itself an enormous target of building 175 gigawatt of renewable energy capacity by 2022. Establishing this requires a massive US$200 billion in funding, and this proves the growth potential of green bonds in India. After expanding their market at a rapid pace, for the first time, the issuance of the green bonds worldwide fell by 15% in the Q4 of 2017. In India, the situation of the issuance of green bonds is similar, and about $6 billion worth of green bonds in India are stuck.

Finance & Investment Club

Page | 27 Why are Green Bonds in Decline?

The bond market is directly related to investor confidence in the government. The recent furore over the magnitude of frauds at public sector banks has added to the pile of non-performing assets the banking sector is saddled with. Welfare programs like the National Health Protection Scheme, dubbed Modicare and the increase in the minimum support price (MSP) for farmers to 1.5 times the cost of production required large-scale government funding. For Modicare alone the allocation the government would need, to pay just the premiums, is about Rs 1.2 lakh crore. But if the system is not flush with funds, the government has to go into debt; and that has a bearing on the economy. Debt in the economy affects the confidence the investor has in the country’s future. To counter the investors lose of interest in the bond market, there will be a hike in the interest rate of bonds. In India, at the start of September 2017, the 10-year government bonds yields were at 6.48 percent. It closed April at 7.77 percent, a whopping rise of 129 basis point. The increase in interest rate depicts the loss in investor confidence in the economic performance of the country.

Increase in the interest rate of the bond will discourage the issuers as they will be paying more to the investors. So the projects for which they have planned to issue bonds to raise capital will be set aside. The fall in the bond market, in turn, affects the economy as a whole as the number of new undertakings will decrease in the country. Because of this $ 6 billion worth Green bonds are still stuck in India because of the issuer's unwillingness to pay higher interest.

When the Interest rate on the bonds increases, investors flock to buy them as they are relatively safer proposition than the stock market, which causes the equity market to go down.

How should a government tackle this?

The government should take measures to contain the fiscal deficit of the country. It should fund the government programs by borrowing the money through floating rate bonds as well as consumer price index benchmarked inflationindexed bonds. The government can also take the amount from small savings and encourage FDI in government securities. These measures will reduce the sovereign demand for funds thereby protecting the investor confidence in the country.

Finance & Investment Club

Page | 28

Mutually alleviating poverty by mutual funds AP Joshua Indian Institute of Foreign Trade “Poverty is the worst form of violence”, said Mahatma Gandhi. Seven decades after Gandhiji’s demise, India continues to be one of the poorest countries in the world with 30% of its population living under the $1.90 a day poverty measure (as per the World Bank in 2013). That’s less than Rs. 150 a day. These figures would make Gandhiji and other founding fathers of India turn in their graves.

India got independence in 1947. Has it? Has each Indian become “Independent” in the truest sense of the word? Yes, we got rid of the oppressive British Raj but what about the “Poverty Raj”? If close to 27 crore people are living under the poverty line, we as a society have collectively failed. We are still under the rule of poverty.

The Government alone cannot change the state of affairs unless we help people break the fetters of poverty. We can try to bring a change by changing our investing habits, and those of the uneducated people we know.

Mutual funds can fuel every poor person’s dreams. It can help a chaiwallah in establishing a big shop. Look no further than brands like Chaayos. India runs on tea. Why can’t a roadside tea vendor have a well-established tea shop with

a wide menu of different teas? Mutual funds can help budding parents sow the seeds of the best gift they can give to their baby — that of education. By just investing Rs.500 a month, a 25-year-old man can earn close to 50 Lacs in 30 years. That's a small price for an eventful postretirement life!

Well, Einstein wasn’t wrong when he said that compound interest was the 8th wonder of the world. Those who understand this, earn it. Those who don’t, pay it.

Why then does the 8th wonder elude us?

The Indian mutual fund industry has grown by leaps and bounds and had a total AUM (Assets under management) of Rs. 7.66 trillion in FY2013 as compared to Rs. 6.13 trillion in FY2010; However, the growth has been less than salubrious recently. This is because of sluggish participation by a large part of India. The malaise in the mutual fund industry is indicated by the lackluster AUM/GDP ratio for India. This ratio stood at approximately 7% for the country as a whole in 2013. This translates to approximately 7% of the country's GDP getting invested into mutual funds. Only! The equivalent ratio for the USA is close to 90%!

Finance & Investment Club

Page | 29

And as if the AUM/GDP ratio wasn’t dismal enough, a report by PWC in 2013 claimed that the distribution of AUMs is highly skewed. The top 15 cities (T-15) contribute to 87% of the entire AUM in the country; Hence, the lopsided distribution creates further developmental schisms as AMCs (asset management companies) only concentrate on the high AUM areas.

Mutual funds grant benefits such as those of diversification, access to debt and equity markets at low transactional costs and liquidity to its users. And no, not all mutual funds are risky. Au contraire some funds invest in government bonds and are safer than bank deposits. Why then are Indian households so apprehensive of mutual funds? Mutual fund SIPs (Systematic investment plans) accounts stood at 2.23 crores during May 2018 (according to the association of mutual funds in India). While that number indicates robust growth, it’s nothing to write home about.

A study discovered that demographic and social indicators such as adult literacy and bank penetration were weakly correlated with mutual

fund penetration. Rather, the areas with the most discernible presence of mutual funds were those where the proportion of households earning more than 3,00,000 per annum and IFA (Independent financial advisors) presence coincide. IFA account for the maximum sales of mutual funds outside the T-15 cities; Hence, the study concludes that the AUM levels can be increased remarkably if IFAs acted efficiently in the right areas. Other supply-side factors such as bank concentration, distribution channels, restrictions in the securities business and the costs of setting a new fund also affect the mutual fund industry.

But a large part of the problem lies in the demand-side. It’s a dangerous concoction of ignorance, risk-aversion and mutual fund complexity that is responsible for the low retail participation in mutual funds. People are usually intimidated by the complexity of financial instruments such as mutual funds. They also like to invest in more tangible assets such as gold and real estate. It is here that a three-pronged strategy can work wonders.

Finance & Investment Club

Page | 30 First, we need to help ourselves. No matter what our age, each one of us should pledge to invest a part of our income in mutual funds. This era is one with scarcity of resources. Agreed. But, we have an abundance of information. Let's leverage information from correct sources to make wise mutual fund buying decisions. The wealth created would take care of other scarcities. AMCs offer panoply of mutual funds based on the riskappetite of an investor. There's something for each one of us.

Secondly, once we have a portfolio of mutual funds, we need to pat our backs! We are on the

right track. We now need to ensure that we pass on this newfound knowledge to every person we know. Do you have a maid that does the dishes?

Tell her that the next Diwali raise would be high only if she starts investing in mutual funds. And it doesn’t need to be a big amount. Just Rs. 500 every month is enough. Yes, a person earning Rs. 3000/ month would have qualms about investing a sixth of their income in something they can’t see. Here’s where we intervene and inform them about the magic of compounding. We need to tell them about the immense benefits mutual funds will accrue to them over a period of time.

The 8th wonder at work! A SIP of Rs. 1000/month for 20 years will result in a total investment of Rs. 2.4 Lakhs in 20 years.

The total corpus would depend on the returns one earns.

Thirdly, people want to invest in assets they can see or in traditional assets such as bank deposits.

According to a survey conducted in 2008 by Max New York Life, Indians like to keep 65% of their savings in liquid assets like banks, post office deposits, cash etc. and 23% intangible assets such as real estate and gold. A paltry 12% goes in instruments such as equity or mutual funds; hence, if we help people download RTA apps such as KARVY or CAMS (Registrar and Transfer agents), considering someone in their family will have a basic smartphone, they can keep track of their mutual funds. This will have

an added advantage of making people technosavvy. That’s no mean feat; therefore, if the extant supply-side challenges are dealt with, by the respective institutions, and if we collectively take responsibility to deal with the demand-side challenges, we will mutually alleviate poverty. A poverty-free India should be every Indian’s aim.

Remember, “Poverty is the parent of revolution and crime”. If we don’t start the first, we’ll help the second.

Let’s start a revolution. Let’s all step up our mutual fund game!

Finance & Investment Club

Page | 31

Air India privatization: How did it fail?

Deepak Rawtani KJ SIMSR

Ever heard of the word hemorrhage? Some of estimated debt of the bleeding carrier hovers you might be knowing what the word signifies, around ₹48,877 crore at the end of March 2017 of while for others I will help you out. Hemorrhage which ₹31,517 crore is working capital loan means a damaging loss of valuable people or while ₹17,360 crore is aircraft loan. Thus, not resources. Don’t you think the word Hemorrhage only creating a hemorrhage type situation but also best reflects the status quo of our national airline pushing Air India into a debt trap.

Air India? According to government figures, the Now let’s start with a little history and causes of decline.

Air India, with its hub at New Delhi’s IGI airport, was founded by J.R.D. Tata as Tata Airlines in 1932. After its nationalization and split in 1953

by the then Jawaharlal Nehru led government, the International wing was named as Air India and domestic wing as Indian Airlines.

Finance & Investment Club

Page | 32 The economic liberalization of 1991 and promulgation of open sky policy in aviation sector led to sprouting of Low Cost Carriers (LCC) like Jet, Indigo etc. and the plethora of international carriers like Emirates, Etihad Airlines resulting in Air India and Indian Airlines to squander their respective shares to the new entrants. Thus, in order to sustain competition and benefit from the concept of economies of scale, Air India, and Indian Airlines were merged to create Air India Limited. Other factors like aircraft sharing, volume discounts, staff sharing, and savings from Aviation Turbine Fuel (ATF) etc. were taken into consideration before the historic merger.

However, things didn’t go as planned. The consolidated debt of the two erstwhile profit-

making entities got transferred to the newly formed Air India Limited, a debt trap still haunting Air India. This along with an ill-timed and inflated order of 68 aircraft increased the already ballooned debt on Air India’s balance sheet. A massive workforce of 27,000 employees is/has created a financial burden on the national airline. All these factors coupled with unviable routes, free or cheap tickets to government servants and politicians, poor management has led the government to infuse a staggering ₹23,993 crore since 2011-12!! A whooping figure isn’t it? Also, a sheer waste of taxpayers’ money.

The amount is more than enough to feed 20 crore Indians who sleep hungry daily, constructing shelters for 12 lakh homeless Indians, a dignified life for 22% Indians who live in abject poverty etc.

To pull out Air India from this quagmire, Government of India invited Expression of Interest (EoI) from interested parties for 76% stake in Air India Limited, 100% stake in Air India Express, its low cost international

subsidiary and 50% stake in Air India SATS airport services, Air India’s ground level cargo handling arm. However, the Indian government failed to receive even a single bid for the bleeding carrier despite multiple extensions.

Finance & Investment Club

Page | 33 Some possible reasons for lack of interest in the proposed disinvestment A) One of the primary reasons stated is debt burden that the buyer will incur. With a debt of ₹48,877 crore, the buyer will have to incur approximately 37,146 crore! A huge amount considering the miniscule 13.5% market share of Air India in Aviation Industry.

B) With, Indian government disinvesting 76% stake while keeping 24% stake with

D) With 27,000 workforce, Air India is overburdened with employees. Thus, an unnecessary financial burden will fall on the shoulders of the prospective buyer.

This coupled with the high price of Aviation Turbine Fuel (ATF) might have discouraged interested buyers.

E) The stake sale doesn’t include the prime real estate properties of Air India at Mumbai’s Nariman Point and Delhi’s upmarket Vasant Vihar. The value of the prime Nariman Point property is

itself, potential buyers won’t be having complete autonomy to run the airline and could be subjected to government’s interference.

C) For foreign firms, the 49% FDI clause would led them to the cumbersome process of scouting a suitable partner for Joint Venture.

anywhere between 2000 crore to 2500 crore.

F) A factor that could have to no-show by prospective buyers is the uncertainty associated with 2019 Lok Sabha elections.

G) Government of India is blaming high oil prices and fluctuations associated with it as one of the possible reasons for noshow.

Finance & Investment Club

Page | 34 Some possible solutions to end the logjam A) First, start with the issue of debt. The government should be ready to bear the burden of at least some portion of whopping ₹48,877 crore debt. The government can use its good offices to write off some part of the debt; ask state insurance companies like LIC to pick up some portion of the debt. Anyways; equity infusion is always on the table of the government.

B) Central Government can provide grant-in aid to the potential buyers to meet day to day operational expenditure of Star Alliance affiliated Air India for a period of say 5 years. It will make up for the debt repayment the buyer has to bear.

C) The issue of 24% government stake is bothering buyers. The government should allay the anxieties of buyers with a winwin management control division.

D) Prime real estate of Air India should be included in the stake sale.

E) With high price ATF comprising as high as 40% of operating expenditure of some airlines, the government should start talks of ATF’s inclusion in GST which could lower its cost or it can use its good offices to pressurize states to reduce their taxes/VAT on ATF.

Conclusion Through, Air India disinvestment Mr. Narendra Modi led NDA-II is carrying on the disinvestment legacy of NDA-I. With a whopping debt burden, the regular equity infusion and management shuffling has provided no solution and resulted in continued financial trouble for the Maharaja, thus, it is apt from the government’s

angle to sell the stake in the national carrier. The no-show by interested buyers is definitely a setback for the government but not the end of the road. Changing the terms and conditions and making them attractive like the above-mentioned ones for buyers could result in the change of fortunes both government and Air India.

Finance & Investment Club

Page | 35

Global Trade War Nikhil Puri, Grisha Dhingra SRCC, Delhi

The year 2018 will not just be remembered for the denuclearization deal between North Korea and The USA,or for the progress of Brexit but this year would definitely be remembered for the start of something unpleasant, “Global TradeWar”.

When the name itself contains the word ‘war’,the impact is less likely to be positive. It can be estimated from a report of Bloomberg-Economics which says that a full-blown trade war could cost the global economy $470 billion & could shrink the global economy by 0.5% by 2020 than it would have been without any tariffs. So from bird’s eye view, any trade war is not going to be favorable for the global economy. But if we all know that free trade is the best trade practice, what stops the leading economies to follow it in the real scenario?

Before we analyze the current situation, let us discuss about one of the drivers of the trade war, Import-tariffs. According to Investopedia, ‘Tariffs are used to restrict imports by increasing the price of goods and services purchased from overseas and making them less attractive to local consumers.’

Theoretically, the tariffs benefit the government of the country imposing it as it leads to increased revenues for the government. Also, by this, the government can help domestic players to compete and sustain. Tariffs could also be a measure to protect a country against unsuitable trade practices followed by its trade partner. So, tariffs can be seen as a tool for protection and development of the economy but in the practical interconnected world it isn’t as simple as it seems.

Finance & Investment Club

Page | 36

The beginning Earlier this year, the US, world’s largest economy by nominal GDP,under the presidency of Donald Trump revised its trade policies by imposing safeguard tariffs on solar panels and washing machines from China.It was followed by Import tariffs on steel and aluminium majorly imported from China and EU exempting its NAFTA partners-Canada and Mexico with few others.

Donald Trump has been clear on his policy of ‘America-First’ which he had announced while contesting US presidency elections in 2016 and

Along with the growing deficit,another major concern for US is the declining workforce over

imposing tariffs on steel and other imports have been justified by him as a step to revive its own domestic industries and creating more employment opportunities for Americans.

Another reason under his justification umbrella is to improve US trade deficit, which increased to 2.9% of GDP in 2017,up from 2.7% in 2016 and Trump clearly doesn’t like it, especially with some of the large economies like China,which can be a threat considering the pace China is growing at.

time(in-pic) and he considers the move as a step forward for making it better. In one of his recent

Finance & Investment Club

Page | 37 statements,Trump cleared his intention about EU by saying that ‘EU was possibly just as bad as China,just smaller’.Not just China and EU,America’s trade policies is likely going to affect its trade relations with India, South Korea,EU and other nations.This clearly indicates

how strict Trump has become in his protectionist policies and it’s not against any one country but against all those who might become a hindrance in his policy implementation, and this may arise the possibility of ‘America Alone’ rather than his agenda of ‘America First’.

Reaction to the action: As every action has an equal and opposite reaction, the steps taken by the US government has given rise to retaliatory actions by other countries.US announcement of tariffs on $200bn worth of goods imported from china, sprung up the news that over 128 product(including products, wine& pork) imports from US were being targeted by China as a retaliatory measure.

Since then, China has not left a chance to retaliate

whenever US announces a list of fresh tariffs.

Even the European Union slapped tariffs on almost $3.2bn worth of US imports including

When every country starts trying to protect its own interests, the whole economy cannot grow altogether because trade,at its very first place,is

there to benefit the end Consumers by providing them with cheaper,better & extensive range of

whiskey, tobacco & even Harley Davidson, just to give a strong message to the US. The list of countries retaliating to US import tariffs just goes on and on including its NAFTA partners strongly opposing Trump’s protectionism policy.

Finance & Investment Club

Page | 38 products thereby increasing standards of living and boosting the world GDP growth.

Is the US ‘winning’?

Donald trump tweeted which said,“Trade wars are good, and easy to win”. However, the question is if US is actually getting what it intends and is really on the winning side, if there is any.As compared to the China’s import of US products(nearly about $130 billion),USA's imports of china products is approximately 4 times larger($505 billion).This number game might support the strong stance of US in the war but US will still have consequences to worry about. American farmers can be affected the most because retaliatory actions from other countries will be mostly on the farm and dairy products.Besides the farm belt, other sectors are also likely to get affected because of the adverse impact on the exports after the retaliatory tariffs.This has lead the businesses in US to move out of the country and produce in those where they cannot export their products without facing high tariffs and this move does not align with the employment generation motive of Trump. Not only this, but the US consumers have to face high cost of goods and may be lesser variety if import tariffs are applied.

How does China, being an export led country, gets affected through this trade war?

From China’s perspective, China has no option but to retaliate whenever US imposes fresh tariffs on Chinese goods in the same intensity if possible because the matter doesn’t seem to stop by ignorance and is surely going to impact Chinese economy. But, since the amount of goods China imports from USA (worth $180-$200 billion) is much lesser than what China exports to US every year, it will have to come with some creative ways to Trump’s measures. For instance, China could also limit visits to the United States by Chinese tourists, which according to a business state media is worth $115 billion, or shed some of its U.S. Treasury holdings. What’s good for China is the value added in its exports, to the U.S.

in particular, is less than 3 percent of its economy. As China has not got much in the bag as its imports from USA are limited and it can only threaten US upto a point, this is why it has to look for other non-tariff measures to react. US is trying to hit the right spot by targeting essential goods such as furniture, electronics, machinery, textiles and fibers which will put immense pressure on China’s trade surplus with the US. Major part of the export industry of China will be threatened by tariffs because it is the primary source of hard currency and place substantial strain on the capital-control system. That, in turn, will jeopardize China's dreams of signature international investment and potentially destabilize its finances as it becomes harder to balance capital flows.

How India can make a deal out of it?

The supposed beginning of trade war through tariffs imposition on steel and tax by US has an effect on India but a significant fact to be considered is that India’s Steel exports to US is about 1% of its annual production capacity and this number does not seem to create much stress for India. Direct tariff effects are not the one India should be concerned of but yes, second order effects are something to be prepared for.The trade war could affect global prices for some commodities and if one of them is oil, India can be in a problem then as it spends a lot in importing it.

However for now, with much focus of US reducing its trade deficit with China and EU, India can make a way out and in turn can create opportunities for it to progress. India can try to substitute Chinese exports to US in which it already has an expertise such as textile, garment, gems etc. If India can make itself capable of producing the export demand of US, it can cover up its trade deficit and hence does not have to heavily depend on foreign investments for balancing its BOP, which is likely to get affected when this tariff war possibly impacts the capital flow.

Finance & Investment Club

Page | 39

What’s the future of world economy, if this persists?

While different countries would be affected in rippling effect over short, medium and long different ways, it is quite evident that the Global terms. It has been estimated by Bloomberg Economy will ultimately have to pay the price of Economics that if the current scenario prevails, the ongoing Tit-for-Tat Tariff war. Since the global trade could go down by 3.7 percent, manufacturing of many products is dependent on thereby reducing the overall productivity and the the Global Supply Chain, which involves various sustainable growth rate. So the question remains, countries at different stages; this could have a Would there be any winner in this World-Trade War? Or would any country wave the white flag and put a halt to this before it’s too late?

Finance & Investment Club

Page | 40

NPAs: On weakening Indian banking system Pramod Gupta SCMHRD, Pune

As of March 31, 2018, the gross non-performing assets (NPAs) of Indian banks stood at Rs. 10250 Billion (or 10.25 trillion). This was a 16% rise from the immediate preceding quarter (Q4 – 2017). The consistent growth in the NPAs has been a critical issue of restlessness for the banks as these assets are eating up bank’s capital.

A banks’ capital, also known as the net worth of the bank, is the buffer comprising of cash and good quality assets that helps it during tough times. Since, the capital is formed by the assets which the bank holds, it is very essential for these assets to perform and generate revenue in terms of interests.

But the current situation is entirely opposite. The assets of the banks, mainly the loans extended to various firms and organizations, are becoming non-performing and valueless. This in turn is reducing the capital, which thereby is reducing the gross profits of the banks. In tandem with this, the capital adequacy ratio (CAR) is also

dipping due to rising NPAs. In India, the set benchmark for CAR is 12% with Tier-I capital ratio benchmark being 10.5% and Tier-II capital ratio benchmark being 2%. But, as per the financial stability report of June 2018, the CAR ratio of Public Sector Banks stands at 11.4% which, by March 2019, is projected to dip to reach 8.55% - an alarming situation for Indian banking systems.

Public Sector Banks: Of the total NPAs of Indian banking system, 88% (Rs. 8966 Billion) belongs to the PSU banks. And the direst situation among all the PSU banks is with the India’s largest public-sector bank – SBI which have gross NPAs of Rs. 2234 Billion i.e. one-fourth of gross NPAs of all the PSU banks.

The league is followed by the Nirav Modi-hit Punjab National Bank with Rs. 866 Billion. And the best part is that there are no signs of relief in terms of slipping these NPAs!

Finance & Investment Club

Page | 41

of the bank shows that the bank is not in the good health and its market capitalizations also dips – resulting in fall of bank’s credibility. Also, banks are no more capable of lending money. Thus, this results in stagnation of bank in terms of growth.

Impact of NPAs: 1. Rising NPAs erodes a bank’s capital as they stop earning interests and the principal itself gets stuck, thereby resulting in dip in the profits. Now, when the profits of the banks falls, the Return on Equity (ROE) also falls. A fall in ROE Rising NPAs

Fall in bank's earnings

Dip in profits

Dip in ROE

Bank's Credibilty falls

People refrain from investing in that bank

Fall in income of bank

Fall in lending

Finance & Investment Club

Page | 42 2. The dependency of the banks on the Government increases. To meet the Base II norms and stay operational, banks seeks help from the government. Seeing this, the government infuses capital in these banks. The capital that is being infused in the banks blocks the development part (resulting in infrastructure projects getting delayed), thereby resulting in dip in economic growth.

Private Banks: The situation with private banks is quite stable vis-à-vis their public counterparts, with NPA share of 12% (Rs. 1282 Billion) on their report card. Among all the private banks, the worst

Bank SBI PNB IDBI BOB BOI UBI Central IOB ICICI Axis

NPA (in crores) | March’2018 | 223427 86620 55588 56480 62328 49370 47468 38180 54063 34249

Capital (in crores) | March’2018 | 191898 88331 33686 92897 95882 49441 39228 26544 75713 43454

situation is with the Chanda Kochhar-led ICICI Bank followed by Axis Bank which contributes Rs. 540 Billion (circa 42%) and Rs.342 Billion (circa 27%) respectively.

On Capital Erosion: Rising NPAs are eroding the capital of the banks.

The impact is more visible in PSU banks vis-àvis Private banks. Data from various sources reflects that for most of the banks, the capital is either less or slightly more than their NPAs in absolute terms (Refer Table-1). It is also visible that across three years, the CAR ratio has come down, and it lies somewhere close to the Basel III norms of minimum 12%. Only private banks have a good CAR of above 16%.

CAR’16 (in %) 13.12 12.89 11.67 13.17 12.01 10.56 10.41 9.66 17.02 15.29

CAR’17 (in %) 13.11 11.28 10.70 13.17 12.14 11.79 10.95 10.50 16.64 14.95

CAR’18 (in %) 12.60 11.66 10.41 12.13 12.94 11.50 9.04 9.25 17.39 16.57

Table 1: Indian Banks and their data

Finance & Investment Club

Page | 43 Dipping bank capital increases the risks of banks getting burst during crisis. It is the bank capital, which acts as a shield during tough times, but given the current situation, the capital is shrinking.

For banks like – PNB, IDBI, BOB, UBI, Central Bank and the like, the situation is such that, in case of a financial crisis, these banks would be the first one to die.

Even though the government and RBI has put 11 PSU banks under the Prompt Corrective Action (PCA) Framework for restructuring and increasing the overall efficiency but nothing substantial has been achieved yet. Also, with Insolvency and Bankruptcy code (IBC) intervention, the banks are trying to rebuild their capitals by seizing the assets and properties of fraudsters, but I think, there’s still a long way to go for Indian Banking System to come again to full swing.

Finance & Investment Club

Page | 44

Bank Recapitalization Ritesh Indian Institute of Management, Raipur Introduction PSBs had always been a driver of economic and social development. The first and foremost objective of these PSBs is to be in reach of all sections of the society and making the availability of banking services to them even they if they have to compromise with their profitability. All of the govt. schemes are now available through PSBs, be it related to anything like subsidies,

pensions, skill development, scholarships etc. But their capability to reach masses and maintain adequate capital ratios is hindered by the huge losses due to the non-performing assets (Refer to figure 1). Given the huge importance carried by the PSBs, it becomes quite important for the govt. to recapitalize them as to save them from the threat of closure.

Source: RBI Handbook of Statistics on Indian Economy What is bank recapitalization?

Bank recapitalization means the injection of capital in the public-sector banks so that they could meet their interest obligations and other regulatory capital requirement. Recently, the govt. had announced to infuse ₹11,300 crores in 5 PSBs which will be first ever capital infusion of this fiscal year as part of ₹65,000 crores to be infused by the govt. as announced last year. The further details are given below.

Major PSB’s recapitalization last year:

Last year, the govt. announced to infuse ₹2.11 trillion in PSBs to check the huge losses incurred by them. Recently, The Govt. of India had announced to infuse ₹11,300 crores in 5 public sector debt ridden banks to provide capital support and to help them catch up with the regulatory capital requirements. The banks in which this capital will be infused are Corporation Bank, Indian Overseas Bank, Allahabad Bank, PNB & Andhra Bank. It will be the part of ₹65,000 crores which had to be budgeted by the govt. out of its annual

Finance & Investment Club

Page | 45 budget in the next 2 years. Corporation Bank, Indian Overseas Bank & Allahabad Bank has been put under the RBI’s corrective Action Framework. Even though the other 2 banks haven’t been put under the PCA but there is a consistent threat looming over these 2 banks due

to mounting huge losses and inadequate capital requirements. In 2017-18, PNB had suffered a record loss of over ₹12,000 crores.

Source: The Wire Effect on the Indian Economy of such recapitalization: The Indian banking situation has become that of a patient in an ICU. Here, the PSB’s are on the ventilator, and huge amount of oxygen in the form of taxpayer’s money is continuously pumped in the patient. The effects of such a move can be bifurcated as both on positive and negative sides.

Positive effects:  It will give a huge push to the weak credit growth in the system.  Now, the banks will be able to manage their stressed loans accounts.  It might prove a huge support of recovery for various distressed pockets of industrial sectors.  It will be helpful in accounting improvement of balance sheet of PSBs.

Negative effects:  Inflation: If the PSBs doesn’t recognize losses, their books continues to be bloat with capital. Even though the types of bonds, which will be issued by the govt., aren’t announced yet but most probably these will be marketable bonds. If these will be marketable bonds, there will be inflation in the market by which the bond yields will go up.  There will be huge interest payments, which have to be made for the bonds issued. Thus, adding to the fiscal deficit of India.  All such capital infusion other than by recapitalization bonds will be done through the budgetary allocations which will led to the increase in fiscal deficit and thus increasing the inflation and will led to the effect of crowding out.

Finance & Investment Club

Page | 46 Is this enough?

Even though all the banking analysts agree that such capital infusion is a positive thing for stressed banks but nobody is sure that how positive will the impact be? Some estimates by the analysts suggest that if the PSBs has to fulfill the capital adequacy requirements under Basel III norms then around 2.3 lakh crores of capital have to be infused to improve the efficiency of Indian Banking system.

How will the India’s fiscal deficit be impacted?

The infusion, which has been announced, recently will be allocated directly out of the budget, which directly has an impact on the inflation, increase in taxes and thereby reducing the purchasing power in the economy. But, if the infusion is from the recapitalization bonds which has been allocated by the govt. for â‚š1.35 lakh crores, such infusion, under IMF conventions,

isn’t included to the fiscal deficit but the interest payments burden will always be there because the govt. had to pay interest and eventually had to repay on their maturity. But the question is largely dependent on what kind of these bonds will be. Even then, the burden of interest payments will always be there.

Conclusion This recapitalization will definitely improve the balance sheets of the banks and hence, it will be easier for them to provide credit and maintain the adequate capital and hence, it will lead to higher profits. This might lead to the higher profitability and hence better dividend on the capital and also, it might offset the interest burden on the recapitalization bonds. But, the major point on which everyone will be eyeing on will be how efficiently the PSBs will be able to make use of this capital infusion.

Finance & Investment Club

CALL FOR ARTICLES Finance and Investment Club of IIM Rohtak invites articles from all Business Schools across India. The article should be original and should be related to finance and economics. All the reference should be cited and sources of images should be mentioned clearly.

The winner of the article of the month will get Rs.500/- with an ecertificate. All the other selected articles will be published in our magazine ARBITRAGE Instructions: 1. Please send your articles before 30th August, 2018 on www.dare2compete.com 2. Do mention your NAME, INSTITUTE and BATCH with your article 3. Font: - Times New Roman, Size: - 12/11 in word .doc/.docx 4. Please DO NOT send PDF files and kindly stick to the format 5. Number of authors 2 at max 6. Maximum Word Limit: 1200 words, Minimum Word Limit: 700 words 7. Naming Convention: Name1_Name2_CollegeName.doc 8. Any Image without the source or label will not be accepted IMPORTANT: The article should be original and should not have been/should not be published elsewhere. You will be disqualified if you violate the same.

Finance & Investment Club

Finance and Investment Club Indian Institute of Management Rohtak Disclaimer: The views and opinions expressed in this magazine are those of the authors and do not necessarily reflect the opinion of the stakeholders of IIM Rohtak.

Finance & Investment Club

All Rights Reserved Finance and Investment Club Indian Institute of Management Rohtak Sunariya, Rohtak, Haryana For any queries/feedback/comments mail to fi@iimrohtak.ac.in Website: https://fi9522.wixsite.com/home

Follow us on Facebbok https://www.facebook.com/FIclub.IIMRohtak/ LinkedIn https://www.linkedin.com/in/fi-club-iim-rohtak/

Finance & Investment Club