NOVEMBER 2019 Vol 3 Issue 9
Article of the month Active vs Passive Fund ManagementA Comparative Study
INDEX
S.No.
Article
Page No.
1
Active vs Passive fund management- A Comparative Study
1
2
Modi 2.0 and $5 Trillion Economy: A Rocky Road
4
3
Importance of ‘Triple Bottom Line’ in a business
7
4
Risk Factors behind Aramco IPO
9
5
The challenges to capitalism- Rising Income Inequality
11
6
Nissan’s Reemergence
14
7
India’s instance on Regional Comprehensive Economic Partnership
25
8
Globalization and Protectionism: Is either one inevitable?
27
9
Six measures to revive economy suggested - Dr. Manmohan Singh
32
10
Apple- New Credit Card or Just another credit card
35
i
Active VS Passive fund management- a comparative study By: Mayukh Mukhopadhyay(IIM Trichy) India has the second highest gross savings rate (30%) after China (46%) in the world, yet the penetration in the Mutual Fund market stands at 11%, well below the global average of 62%. Yet, underperformance of the physical assets and commodities and growing awareness of the retail investors, accompanied by catchy taglines like “Mutual Fund Sahi hai” have shown positive results. Within mutual fund, we have observed the share of AUM (Asset Under Management) for most of the Asset Management Companies (AMCs) have been skewed towards the actively managed funds.
AVERAGE AUM FOR QUARTER ENDER SEPTEMBER 2019 Active Schemes
Passive Schmese and ETFs
6%
94%
But are the actively managed funds worth investing? Or it is time to switch to the pocket friendly passive funds? As on August 2019, active large cap funds clocked an average return of 8.4% on an annualized trailing threeyear basis. Over the same period, BSE Sensex showed a return of 11.33%. The scenario has been no different for multi-cap funds, which are easier target for fund managers for alpha generation. The average trailing threeyear equity based multi cap fund returned 6.41% against the 8.04% benchmark of S&P BSE 500 total return index. But let us not jump into the conclusion that it’s time to go passive. The 10-year period return doesn’t give us any conclusive result. The active large-cap funds managed to put up a return of 10.2%, marginally lower than the BSE Sensex benchmark of 10.3%. But the flexible multi-cap funds fared well with a return of 11.3% over the benchmark of 8.8%. Reason for current performance But we are yet to claim Indian market to reach a level of efficiency where active fund will not generate any positive alpha over the benchmark. There have been several other reasons for the poor performance of the active funds over the years. 1
First, SEBI’s mandate dated February 1st, 2018 of benchmarking fund performance against total return indices rather than plain price indices. Plain price indices only consider the capital appreciation of the stock, overlooking the dividend payout. Thus, it showed the actively managed funds on a brighter light against the benchmark. On a yearly basis, dividend contribute about 1.2-1.3% of the indices like Sensex and Nifty, as per the previous year’s trend. Secondly, recategorization of the schemes by SEBI as on October 2017 has an impact of the poorer alpha generation. As per the new mandate, SEBI has laid down strict norms on sticking to the fund mandate of largecap, mid-cap, small-cap. Previously, the fund managers took take advantage of the bullish market to invest large-cap funds in small-cap stocks and generate alpha. During the bearish phase, the small-cap funds could sustain because of their exposure to large-cap securities. Hence, with limited flexibility to the fund managers, active funds have failed to generate abnormal alpha in the recent times. Lastly, the institutionalization of the market has played a key role in jeopardizing the active funds from abnormal alpha generation. The shareholding patterns of the listed companies reveal that direct equity holding by retail shareholders have downsized over the years while the share of institutional investors like AMCs and insurers have grown. Hence, the equity market has grown matured over the years, thus making it tough for fund managers to find mispriced securities. Why to stick to actively managed funds? There are several reasons to stick to active funds. First, the index has been a poor performer over the years. More than half of the BSE 500 stocks have registered a loss over the past three years, with around 70 stocks experiencing cuts as deep as 60%. The index has still managed to bloom because of a handful of top performers like Tata Consultancy Services, Hindustan Unilever, Infosys and Reliance Industries Limited, to name a few. Hence, blindly investing in the index may not seem prudent given the heavy dependence of the index performance on a handful of stocks. Secondly, there is still a death of good passive instruments in the market. Although the Exchange Traded Funds (ETFs) have gained popularity with AMCs coming up with new ETFs, their trading volume has been a concern. As on August 2019, only nine out of the 55 listed equity ETFs have a trade value over INR 1 Crore. The thin volume gives rise to liquidity risk to the investors. Moreover, this also gives rise to mispricing of the ETFs which makes retail investors lose faith in this passive mode of investment. Thirdly, lack of sector diversification in the indexes also makes the indexes riskier than actively managed funds. Diversification has been the backbone of portfolio management. But a closer look at the NIFTY and Sensex will expose us to the futility of the market capitalization-based indexing. Leaving aside the sector specific indexes like S&P BSE Energy, S&P BSE Finance or S&P BSE Industrials, the sector exposure of SENSEX and S&P BSE Large-Cap have been highly skewed to sectors like banking, technology and oil & gas.
2
Sector Weightage- SENSEX (As on 29 Nov 2019)
Banking/Finance
Technology
Oil & Gas
Others
So, are the picture of active funds all rosy? Not really. The active funds have been expensive as compared to the passively managed funds, with the spread widening in the recent years. The Total Expense Ratios (TERs) of the index funds have been reduced as per SEBI regulation, unlike the TER of actively managed funds. Recent Value Research analysis reveals median TER for a large-cap index fund stood at 0.17% against 2.32% for actively managed funds in the same category. Thus, unless an actively managed funds generate an alpha of more than 2%, it makes no sense investing in the actively managed funds. Parking the, hard-earned wealth in passive indexes would be a better option instead. According to a Bernstein Group strategist Sarah McCarthy, active funds have performed poorly as compared to the benchmark indexes in 2019 in US and European market. The Berlin based management consultancy group believes that the trend is unlikely to alter in 2020. Final Verdict But the Indian market is likely to take time to gain efficiency and bridge the gap between active and passive funds. Hence, there is a bleak chance for active fund managers to go jobless, at least in the near future. Source: • • •
AMFI Mutual Funds Insight, October 2019 Nirmal Bang Research Report 2019
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Modi 2.0 and $5 Trillion Economy: A Rocky Road By: Sameer Shaikh(FOBA(GLSBBA, GLS University) The Narendra Modi government’s ambitious target of a $5 trillion economy by 2024 has triggered interesting debates. Some see this as mere wishful thinking—an unachievable target. There is another set who argues that the prime minister is asking for less. Dreaming big is essential; for only a target-based approach backed by a solid roadmap has delivered in economies that have achieved great scale. But, before targeting the $5 trillion mark, India will have to get its act together in a range of areas, unclog the sizeable number of stalled projects, and remove policy shortcomings and blunders that were strictly avoidable. Finally, the government must understand the problem areas that are pulling it down in the race among peer economies.
Figure 1
Source: Economy Survey 2018-19
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Challenges: On Paper, The Narendra Modi government’s ambitious target of a $5 trillion economy by 2024 looks grand. It is inspirational. But a closer look shows that notwithstanding all the grandstanding, some core pieces are missing. Achieving the $5-trillion goal requires policy measures that will help the economy surge over its current banking crisis, high unemployment rates, and a pathetic global environment. International experience, especially from high-growth East Asian economies, suggests that such growth can only be sustained by a “virtuous cycle” of savings, investment and exports catalyzed and supported by a favorable demographic phase. 1. Investment The importance of funding, and to an equal extent design, may be seen in the letdown of the quite prudent aspiration, ‘Make in India’. Though technically applicable to every sector, it was clearly focused on manufacturing. Expressed very early on in Mr. Modi’s 1st term (2014-19) and accorded a certain prestige in the pronouncements that followed, it played out as a damn squib. One of the reasons for this was the absence of proportionate investment outlay. To raise the share of manufacturing in the economy from its present 16% to 25%, an ambition declared by both the United Progressive Alliance (UPA) and National Democratic Alliance (NDA) governments, requires a scaling up of investment. This did not come about. Investment there must be and if the private sector is, not coming forward to invest, for whatever reason, then the government must. This is no more than accounting, but Mr. Modi’s government seems to be unfavorable to this analysis. The problem in front of India today is weak demand curtailing incentives for private investment. Consequently, any amount of easing constraints to investment might not work, simply because there is not enough demand to soak up the output of the private sector. The automobile industry, for case in point, has been grappling with a drastic decline in sales. 2. Infrastructure Another most important challenge is the depressingly slow pace of infrastructure development in the last decade. India is still at the position where China was 20 years ago in terms of infrastructure development. The 2019 Union Budget by Finance Minister Nirmala Sitharaman has laid out an ambitious roadmap. It talks about plans with a pan-India focus to give a further boost to Sagarmala, Bharatmala and UDAN projects, besides the dedicated industrial and freight corridors. The plans are ambitious, but the problem is resources. The government estimates Rs 100 lakh crore infrastructure investments over the next five years. This is a far cry from what is spent on infrastructure currently which is barely one-third of what is estimated. Again, the question arises, where this money will come from. India does not have powerful institutions that can fund long-gestation infrastructure projects. Banks do not have enough long-term liabilities to match such loans. Lenders have gone terribly wrong in the past by not following healthy lending practices. About 70 percent of the banking system (read state-run banks) is at the mercy of the government for capital for its survival. India does not have a deep bond market to take up the financing burden. This clearly portrays the government's plan to borrow off-budget is risky and unadvisable. The question that comes up again is, who will fund the multibillion infra dream? 5
3. Are exports feasible? As far as The Economic Survey and the Union Budget 2019 concerned, both talk about the need to electrify exports. But exports are possible when the global economy is growing, and trade barriers are brought down. Currently, both problems confront India and almost every other country. The deficit augmented to $57.2 billion or we can say 2.1% of gross domestic product (GDP) in 2018-19 as against 1.8% in the previous year. The Current Account Deficit (CAD), which is the net of foreign exchange inflows and outflows, had stood at $48.7 billion in 2017-18. It said the widening of CAD has been driven by a deterioration of trade deficit from 6 percent of GDP to 6.7 percent across the two years. The survey stated that India is the largest foreign exchange reserve holder and eighth-largest among the major economies running current account deficit in the world. Conclusion: Experts state that pushing the Indian economy to $5 trillion by 2024-25 would depend on several factors, including the real growth rate, inflation and currency movement. The dream of doubling-up the size of the economy in five years is an impressive one but the path is not as easy as it is being put up. The cooperation of states in helping India achieve the target of $5 trillion economy i.e. each state should aim to increase their own economy by 2-2.5% and focus on exports as the export sector is an important element in the progress of developing countries. All states should recognize their core competence and work towards raising Gross Domestic Product (GDP) targets right from the district level. Further, the need for proper implementation of schemes and decisions is vital as the country is moving towards a governance system characterized by performance, transparency and delivery. Sources • •
(2018-19). Economic Survey. NITI Aayog. (2019). Union Budget . Government of India.
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Importance of ‘Triple Bottom Line’ in a business By: Shreya Mohta (Xavier University, Bhubaneswar) John Elkington in the year 1994 introduced an accounting framework called the ‘Triple Bottom Line’ or TBL. This framework went beyond the usual measures of profit, shareholder value, return on investment; and incorporated social and environmental dimensions as well to depict a holistic picture about any company. Coming up with this framework during those times was quite a modern thought. Triple Bottom Line consists of three aspects- profit, people and planet (3Ps). Annual reports of companies are looked upon by stakeholders and prospects not just to evaluate the position and performance of the company, but also to analyze its triple bottom line. It makes the company more attractive for the investors to put their money in, for the distributors to sell the company’s goods and services, and for the consumers to consume it. TBL is an important tool to attain sustainability goals by considering the inter-related 3Ps. TBL concept basically says that if a company only focuses on its profits, ignoring the social and environmental factors, it cannot account for the entire cost of doing business. Companies these days are very conscious of their socio-economic responsibilities. CSR activities are executed in full swing by firms. It’s not so only because of the 2% rule imposed by the government, but also because the leaders today actually care beyond making profits. TBL stems out of the idea of sustainable development itself. Businesses, non-profit and government entities- all can apply TBL. A key challenge in implementing TBL is measuring the social and environmental factors. Profits are quantitative in nature and hence easy to measure and compare. But what about the other 2 Ps? Another challenge is allocation of resources in order to strike a balance between the progress of 3Ps. Favoring one aspect, at the cost of the other is something that should be forbidden by firms. There is no universal standard method of measuring TBL. This allows the user to adapt a general method as per the suitability of its entity- business, non-profit or government. The Genuine Progress Indicator (GPI), for example consists of 25 variables compromising of economic, social and environmental factors. These variables are converted into monetary units and summed into a single dollar-denominated measure so that all three factors can be measured in the same unit-i.e. dollars. Minnesota developed its own progress indicator encompassing 42 variables that focused on the goals of a healthy economy and gauged progress in achieving these goals. TBL provides a competitive edge to the firms, using it. Incorporating it in the balance sheets of businesses increases its efficiency and also sparks innovation. These drivers increase their profitability and inculcate a value proposition within their employees to continue the good deed of adapting a sustainable and humane approach. Cascade Engineering is a company which doesn’t use any index to measure its TBL. However, it has defined few parameters within the 3 dimensions of 3Ps. For example, it measures its economic factors by the amount of taxes it pays; social factors by average number of working hours of trainee/employee, employee attrition rate, charitable contributions; environmental factors by safety incident rate, lost workday rate, greenhouse gas emissions, use of post consumption and industrial recycled material, water consumption, amount of waste to landfill. Using these variables, it generates its TBL scorecard. There are many other firms which incorporate TBL through different approaches. Recently, Unilever announced that by 2025 it would recycle, reuse or compost 100% of its plastic packaging on the Global 7
Recycling Day. It shared its plan for achieving its target publicly through an article as well. Coca-Cola is another company which has set an ambitious goal for itself. It aims to collect and recycle the same number of plastic bottles or cans that it sells by 2030. DHL has announced its ‘Mission 2050: Zero Emissions’, i.e. to reduce its logistics related emissions. They also plan to train 80% of its workforce to become Go Green specialists. In 2009, Dow Jones Index did a research analysis on 99 companies and found that the organizations which indulged in sustainable activities to protect the environment surpassed their market peers. It has been recognized that companies who compromise on the social good and their employees suffer from high economic costs and low profits. IKEA company recorded a whooping grand profit of 37.6 billion dollars in the year 2016. Instead of keeping the profits as reserve surplus, it decided to invest in recycling the waste material that it generates in making few of its top-selling products. Its known for adding zero waste to the landfill. Adapting TBL increases transparency and allows the stakeholders to know about information that is usually hidden. It surely helps businesses in building their brand image, thereby enhancing their brand value. Organizations become accountable for their actions. It ensures sustainable growth of companies and also improves the status of the economy. Business purposes are strengthened. In order to mitigate the harm caused to nature and people, business leaders innovate and go out of their ways to set things right. This out-of-the box thinking saves the business from public scrutiny. Before being pointed at for the wrong doings, companies come up with ideas that rather fetch them a pat on their backs, and further motivate other industries to do the same. With severe environmental threats that our planet is fighting against, and the lack of jobs around the world, further clubbed with a consensual lack of job satisfaction among majority of the employed people, TBL approach is very essential. It propels us to make the world a better place to live in!
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Risk Factors behind Aramco IPO By: Deepak Kushwaha (IIM Amritsar) Aramco is a state owned oil company of Saudi Arabia. It is the largest oil company heaving control over a quarter of total oil reserves, and almost ten times the oil reserves of Exxon Mobil which is current leader among oil companies in terms of market capitalization. It produced 13.6 million barrels of oil every day in 2018 and reported revenue of $335 billion in the year 2018. Further it generated operating revenue of $212 billion and net revenue of $111 billion. The company is poised for an IPO and has valued itself for $2 trillion which could be by far the biggest ever IPO. However, the figure of $2 trillion looks hugely bloated and might get reduced by up to 40% percent when the firm goes public. In a poll of Bloomberg, it was found that majority of respondents (greater than 40%) put the firm under a valuation of $1.5 trillion and over 20% put it even below $1.1 trillion. Though Aramco has a strong balance sheet and much stronger future projections on its side, but the overwhelming risk factor rules out the gains by a great extent. Aramco has made it clear that it will not transfer the decision making powers and all the decision making powers will stay with Saudi Government. It will pay a fixed dividend return and will trade at Saudi Stock Exchange which faces liquidity crunch. Hence it is poised that much of the returns from Aramco will be in the form of dividends. Further the geopolitical arena is also very turbulent because of the tensions in the Middle Eastern region. Saudi Arabia is an autocrat form of government and a potential regime change could also factor in as a risk because much of the Middle East has gone through the transition. Even after the IPO, much of the loyalties of Aramco will still lie with the government and the capital consolidated through the offering will be used towards diversifying the Saudi economy. Hence apparently Saudi government will invite prospective investors in oil economy to decrease its dependence on oil economy. This shall also be seen in the backdrop that global energy sector is rapidly investing in alternative sources of energy. Hence a fall in projection towards the IPO of Aramco is not surprising. Investors might find Aramco as a promising perpetuity, but tremendous risks hovering makes the deal a big gamble. The risk with Aramco is an example of Truncation risk. Truncation risk is the likelihood that the business will not continue to flourish and eventually it will end making ultimate return on investment to be zero. In the case of Aramco, the truncation risk is due to the likelihood of the regime change. Saudi Arabia being an autocratic regime, offers a stable set of policies that sustains uniform growth in the country. However due to political nature of Middle East, a regime change of Saudi Arabia is not unprecedented. Countries like Iraq, Libya are live example of the disruption that not only change regimes but also cause huge economic turmoil.
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While dealing with truncation risk, investors typically follow two type of approaches: •
•
Hike up discount rates: Analysts typically hike up the discount rate when the possibility of business failure emerges into valuation. General conception behind this method is to generate greater premiums in order to cover up for the risk. Scenario analysis by certain range of values: In this case analysts typically create best and the worst scenarios and give different valuations for each scenario. Hence while valuing Aramco, one scenario will be about regime change and other about the continuation of present regime. A value in between this range will be the value of Aramco.
Regimes are a very important factor whenever we value companies like Aramco. Hence it is important to study about the government that is functioning in the country before deciding on the prospective investment. Democracies are often regarded as safe options with low level of returns while the aristocracies are regarded as risky options but with high level of returns. Democracies are subjected to frequent regime changes and these changes does not guarantee the investors about tax rates, trade duties and other economic policies. While aristocracy gives a stable business environment as they do not have to take public sentiment into account while deciding on a policy. However, aristocracies have the biggest risk of regime change which has the potential to flip the whole business upside down. Hence investors always prefer democracies with a business friendly population. Sources: •
https://www.investopedia.com/the-risks-surrounding-saudi-aramco-s-ipo-4775623
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THE CHALLENGES TO CAPITALISM – RISING INCOME INEQUALITY By: Agniv Bhattacharya (IMT Ghaziabad)
“As long as poverty, injustice, and gross inequality persist in our world, none of us can truly rest.” - Nelson Mandela We live in a world which is becoming more and more compact, where we witness what Peter Thiel, co-founder of PayPal and early investor at Facebook, would refer to as the power law- 80% of the power and wealth is in the hands of 20% of the people all around the world, and this gap between the rich and the poor is increasing every day, every hour, every minute and unfortunately, every second. We are witnessing economies crumbling all over the globe, poverty, hunger, and deprivation making the headlines over the news now and then- yet the pertinent question remains as to how can we reduce inequality in income among the population or in the least case, how can we control such a phenomenon? In this article, we analyze the phenomenon of rising income inequality via proper reasoning. Capitalism primarily refers to the economic system in which private entities own capital goods. It emphasizes the significance of freedom and equality in the sense that there is freedom to conduct trade and justice for all human beings under the law, thereby envisaging the maximization of wealth for all. However, as Thomas Piketty pointed out in his book Capital in the Twentieth Century, there exist significant variations in the measures of inequality in different major capitalist countries, however over a while, the existence of such variety within capitalism suggests that there is a possibility of reducing inequality itself. Today, according to a report by Oxfam International, the top 10% of India’s population hold 77% of the country’s wealth while alarmingly, 67 million of the poorest part of the population were witness to a 1% increase in their wealth. Moreover, billionaires’ fortunes increased drastically over ten times over a decade, and their total wealth has had been higher than the entire Union Budget of India during the fiscal year 2018-19.
These figures raise a few distributed in such extreme proportions?
questions- how is wealth
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How is the country we live in symbolize two sides of the same coin- one, that of the glitz and glamour of development and progress highlighting the glory of a Modern India, while the other is a diorama of a poor Bharat, under the perpetual black veil of poverty, illness, shelter-less and foodless proletariats who spend every moment dreaming about when and if they will live to see another day? However, the fact is that income inequality is a function of many dependent variables- social status, type of economy, history of the population, and most importantly, time. For instance, a rich man might be rich for several reasons- his hard work is complemented by his luck, his being from a higher caste, his being in a developed economy where the standard of living is much higher than that of developing and even many developed economies so to speak of, his ancestors’ property and wealth, and the timing and of his transactions, as Malcolm Gladwell put the concept in his book Outliers, success is not only a result of hard work but is highly dependent on the serendipity of good fortune. Similarly, a poor man might be poor due to the potential losses he had made in his trade, his being from a lesser developed economy, his being from a lower caste, his ancestors being traditionally poor and ill timing of his transactions. We must remember that each of these parameters is interconnected, and not all people satisfying a criterion would be in the same position. In other words, not every person from a higher caste would be having the privilege of earning high, in the same manner as the fact that not every person from a low caste would be making low. So, how can we stop the gap between the rich and the poor from widening further? Before answering that, we need to remind ourselves that some amount of income inequality is required- in case it is zero, then it would imply equality of wealth which might incline the world order towards the era of communism, with the potential horrors of a centralized power like in Orwell’s 1984. Measures such as increased tax bases for the higher income class are more of short-to-medium-term solutions, as that must primarily devise who is earning how much, a difficult question to solve in an era where information regarding the underground economy remains mostly hidden. Likewise, the idea of a minimum income guarantee or schemes of the like make no point when data can be manipulated. Again, if a scheme is rolled out which aims to provide the lowest income percentile with some bonus amount, it might incentivize the percentile just above that class to manipulate their income data and that small manipulation can make significant variations in the broader set of data (something that was pointed out as a drawback for Congress’ NYAY Scheme during the last general elections). What can be a starting step towards attaining reduction in income inequality is responsibility and honesty of the protagonists involved in the process of transactions- because once there is a miscalculation or manipulation, from thereon starts a journey of more and more deviations from the ideal value of the trade for both sides- the buyers and the sellers, affecting income. Rising income inequality is a concern for the present age, given that it adversely affects employment and reserves of an economy and the world order at large. We must deal with it head-on so that we can prevent catastrophes that it can otherwise lead to. As former Fed Chairman Ben Bernanke said, income inequality, among other things, is significant to control because it otherwise affects the progress and advancement of civilization in the long run. Thus, let the war against inequality go on!!
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NISSAN`S RE-EMERGENCE By: Dr. Arindam Banik (KIIT School of Management)
________________________________________________________ ABSTRACT: This case enlightens about the remarkable comeback of Nissan Motor Company – Japan`s Second Largest Car Maker, under the transformational leadership of Carlos Ghosn. Nissan started losing its way due to its tough, emerging competitors in the early 90s. Significant debt-traps and other problems within the organization threatened its existence. A Ray of Hope was seen in the form of Renault which formed an alliance with Nissan in the year 1999. Carlos Ghosn thereafter took-over as the Chief Operating Officer of Nissan and brought one of the most magnificent turn-arounds of all time by saving Nissan from getting dissolute in the near future and back to its profitability & absolute-advantage in just 2 years. ___________________________________________________________________________ Keywords: Debt-traps, Turn-arounds, Profitability & Absolute-advantage.
Key highlights: In January 2003, Carlos Ghosn – CEO and President of Nissan Motor Co., created the new car design studio in London. 8 new Nissan and Infiniti cars were expected to be in the market showroom in 2003. Ghosn was successful to meet the goals under the 3- year Nissan Revival Plan (NRP). The Complete Re-emergence of Nissan is indeed dramatic for a company which was falling as a victim of bankruptcy 4 years ago. Renault, being the sole stakeholder had 44 percent stake in Nissan. CARLOS GHOSN: The Man Behind the Successful Fight-back of Nissan Carlos Ghosn - Born in Brazil. His father was a business-man from Lebanon & his mother was a housewife, hailing from France. At the age of 6 years, he shifted to Lebanon along with his sister and his mother to undergo schooling from a French Jesuit School. After spending Ten years there, he became one of the three-hundred students to be admitted in the prestigious Ecole College in Paris for a degree in engineering. After that, he got admitted in the Ecole Des Moines de Paris for graduation. After graduation, Ghosn has joined Michelin, the French tire maker. As Chief Operating Officer of Michelin`s operations in Brazil at the age of 31, within a time period of just three years, he had restored profitability in the country plagued by hyperinflation. After Four years, he moved to South Carolina where he had seen the Michelin Company`s North American tire interests and completed merging with Goodrich Uniroyal. Since, 13
Michelin was a family run company, Carlos Ghosn`s upward mobility looked limited. He was searching for some better opportunities out there, when Renault`s CEO, Louis Schweitzer finally decided to recruit him in the year 1996. Carlos Ghosn shook up the French car maker by closing plants, purchasing and manufacturing operations. His initiative saved an estimated $3 billion a year and revitalized Renault. Schweitzer seemed convinced that Ghosn was the right man to rescue the ailing Japanese car manufacturer – Nissan Motor Co. Ltd.
INTRODUCTION Nissan was Japan's second largest car maker, having technological competence throughout 1970 - 1980. Nissan and Toyota paved a way for the Japan's breakthrough into the US car market. Nissan was exporting 8,30,000 vehicles to United States and was the second largest exporter after Toyota. But in late 1980s its market demand steadily started declining due to heavy competitions from its emerging competitors such as Toyota as and Honda. The bureaucratic structure of the organization was one of the major causes of its downfall. A sudden appreciation of Yen (currency) also contributed to its downfall. When Japan's economy boomed, which was in the year 1987 - Nissan doubled its production levels by doubling its units of sale. The burden of debt increased to $22 billion by the year 1999. When the economy of Japan suffered from recession, Nissan was dreadfully affected by significant debt traps. By the late 1990s, there was almost no returns and the margins were nearly negligible. Nissan has lost $1000 for every single car it sold in US. It constantly made losses and the net domestic market share had drastically declined to 13.3 percent by mid-1999 (from 17.4 percent). Its global market share has drastically fallen to 4.9 percent (in 1999) due to the indebtedness which was as high as ÂĽ2.1 trillion. The problem within the organization were accountable as the managers lacked responsibilities and coordination. Huge debt burden & lack of formulation of new models in the product lines were the other marked causes that led to the tragic down-trend of Nissan. Priorly, Nissan had massively invested in real estate markets and non-core financial activities in the form of Keiretsu.
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THE MERGER: The alliance between Nissan and Renault was finalized in March 1999. More than hundred people from both sides were involved in the process. June - July 1998: Both Nissan and Renault made formulations regarding the alliance about their respective potential gains July - September 1998: Various workgroup came into action in various sectors, in terms of market, product lines, manufacturing, distribution etc. Renault had a little presence in Asia. Renault implemented the use of Nissan's high-end technological resources and support the Japanese car industry with marketing and contingent designs. Nissan was strong in manufacturing luxury cars and trucks while Renault made mass-market cars. Renault had collaborated with its expertise as well as experience and it could take advantage of Nissan's aggregate demand certain regions around the globe. September-December 1998: A letter of intent between the two companies was prepared by calculating the economic value of the alliance and an agreement was made for the next three months. Renault had subscribed to a net equity issue comprising of 1,464 million shares for ¥400 share. It has purchased 22.5 percent share in Nissan Diesel for ¥9.3 billion and 100 percent of Nissan's Finance Subsidiary in Europe for ¥38 billion. Renault had an opportunity to rise its holding to 39.9% in 4 years and 44.4 percent in the following fiscal year and also exercising warrants at ¥400 price per price share. December 1998 – March 1999: The agreement was negotiated. Renault board had approved the alliance on 27th March 1999. An announcement was made that $5.4 billion deal Renault would only get 36.8 percent stake in Nissan. Renault has admitted that this was a high-risk, yet a highly rewarding strategy, which seemed to be a sort of desperation for both the parties. Nissan had only 1.2 percent return on equity. The prime motive of Renault rescuing Nissan was likely similar to the French reviving the Japanese economy.
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Source: https://www.asahi.com/special/carlosghosn/en/ POST-MERGER STORY-LINE: Renault sent Carlos Ghosn for a new upbringing of Nissan. Soon after merging, a Global Alliance Committee (GAC) was formed to exploit the synergies between the two companies. It included the CEOs of both Renault and Nissan as well as 5 personnel from each of the two companies. Nissan clearly suffered from lack of profit margins as well as lack of customer centricity as it concentrated much on competitiveness with the newly emerging rivals or competitors. There were many cultural differences between Renault and Nissan. Decision making processes, communication, labor management, accountability were the few major ones. Nissan relied on consensus for making decisions, whereas, in Renault decisions were primarily taken by the top-level managers. went ahead by formulating his plans but there were quite a few basic problems in management. Ghosn had to do things that made business more profitable. Ghosn didn't want to demoralize Nissan, he quickly given away the traditional and orthodox Japanese practices such as the seniority-system, but instead providing payments and promotion to the employees according to
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tenure and age. He developed a merit-based career progression system. Ghosn began to Nissan accounted for group performances, while Renault mainly focused on individual achievements of the employees. Carlos Ghosn had formulated the Nissan Revival Plan (NRP). He brought some of the key managers from Renault and made sure that English was the common language for each and every employee of the company. For instilling better cooperation among the employees, Ghosn formed nine cross-functional teams and employed them in the following departments: 1. business development, 2. marketing and sales, 3. purchasing, 4. manufacturing, 5. financial management and 6. research and development. Ghosn decided to tackle all the problems of capacity utilization, development of new models, shutting down plants, retrenchment, repayment of debts etc. Ghosn faced strong defiance from the Government officials. He was brutally attacked by some of the business leaders. Toyota chairman Hiroshi Okuda expressed his doubts about Nissan's success in terms of the revival plan. Laying-off employees was not a solution to the problems, according to him. Ghosn was determined and offer newer options and bonuses, which amounted to one third of the yearly salaries. He made several areas accountable and eliminated the irresponsible employees and gave all the executives of the company, direct authority. Nissan marched towards progress by cutting down the costs. By April 2001, the purchasing costs were below 20 percent from the pre-NRP levels. The number of parts-suppliers were now as low as 40 percent – declined from 1,145 to 700. The number of service suppliers who transacted with Nissan declined rapidly by 70 percent. Nissan extended its networking in Japan through rationalization. 355 unprofitable over-lapping outlets were accounted which was about 10 percent of the total sales division which were shut down. The number of wholly owned subsidiary dealers declined by 20 percent (i.e. to 80) through the mergers of selective subsidiary dealers or by selling to the other dealers. Velocity joints, fuel tank, aerospace and other divisions were separate and independent business entities now. The non-core business yield more than ¼530 million within two years after merging. The funds were utilized in clearing bad debts. Ghosn shut down 5 plants. Initially, 7 plants manufactured cars complied to 24 platforms during the launch of NRP, but now 4 plants produced cars based on 15 platforms and the platforms were much more simplified. Ghosn had cut the workforce from 1,48,000 to 1,25,100 and it has gone beyond the NRP`s target which was 1,27,000. This reduction was attained due to the splitting of non-core businesses that increased the number of part time employees, voluntary retirement and attrition rate. The net sales rate had fallen in Japan to below 17.4 percent in 2000, but it has climb back to 18% in 2001. It was behind Toyota, which had about 42.2 % share of the Japanese market. Ghosn thought that the share would rise above 20 percent in between 2003 and 2005. In the United States, Nissan had lost share from 4.3% to 4.1% in 2001. It has reduced its incentives and made other operations more viable profitable in North America. 17
He had freed the designers from engineering jobs, allowing them to to make their own decisions without manufacturing considerations. Designer Shiro Nakamura was hired from Isuzu, for individuality into Nissan`s bland cars and trucks. Newer models were formulated to bring about stronger identity, comprising of styling and hot engines. In 1999, 4 out of 43 vehicles were profitable. By 2000, it was 11 out of 40; but in 2001, it was 18 out of 38. In 2001, Nissan launched series of new products which helped it to increase its profit margins and market share in in certain areas, in spite of having the economic slow-down. In America, Nissan's innovation Altima became a super-duper hit and it gained a vast popularity in no time and was conferred the prestigious recognition of “North American Car of the Year�. In 2001, there was a steady up growth in the sales of other car models of Nissan such as Maxima (by 9 percent) as well as Central (by 14.3 percent). Nissan had increased its network across the globe. Before the NRP, US and Japan hosted two of the most dominant markets for Nissan but by 2002, other countries were accountable for 10 percent of its overseas sales.
2002 No. of units
2001
Nissan
Renault Alliance
Nissan
432017
1869251 2301268
454378
of sales. Western
Renault Alliance C 1905635
2002-01 change
2360013
-2.50%
Europe North America
804186
7
59972
5.80%
Japan
773726
2414
776140
731615
2778
734389
5.70%
Latin America &
257511
132482
389993
227983
148644
376627
3.50%
153086
68120
221206
140346
68481
208827
5.90%
Other regions
315004
331708
646712
266463
287500
553963
16.70%
Sales Worldwide
2735530
2403975 5139505 2580757 2413038 4993795
2.90%
Mercosur Africa and Middle East
Source: www.nissan-global.com Nissan and Renault, both the companies had identified widespread prospects and opportunities to learn from each other. They both benefited each other in terms of quality and manufacturing.
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Nissan benefited Renault in marketing designs, platform strategies and financial sales of its units as well as providing efficient services. In research and development (R&D), areas of common interest like driver assistance, safety, fuel cells etc. where identified. More than 30 employees from Renault joined Nissan in various departments such as purchasing, marketing and sales etc. and began to work for Renault. Likewise, Nissan employees began to work for Renault in various departments such as vehicle engineering, manufacturing, powertrain engineering etc. In 1999, Renault and Nissan collaboratively developed their first common platform which served as a base for successors such as Renault Clio, Nissan Micra etc. In 2001, both the companies established a joint platform for selling mid-range cars - Meganne and Almora models and within the next five years the Alliance expected to manufacture more than 2 million vehicles a year. By 2010, the Alliance had promised to have platforms. Renault had planned to collaborate their engines as well as transmissions; and had aimed at reducing the number of engine families to 8 and number of transmission families to 7 by 2010. Renault started using Nissan`s 3.5 liters V6 gasoline engine for Vel Sates as well as Nissan`s transmission for the four-wheel drive vehicles. In April 2001, Renault and Nissan participated in Convisint, a web-based marketplace. It held 5 percent equity interest in Convisint. The online platform provided options among auto-makers and their suppliers. In April 2001, Renault and Nissan collaboratively opened up a joint subsidiary, better known as Renault Nissan Purchasing Company (RNPO), which accounted for about 30 percent of the total procurement i.e. ($14.5 billion annually). Commercial Organizations were set up in seven European countries across a wide geographical area. Each of them handled all the back-office and service functions such as spare parts etc. without considering the brand. In 2001, Renault and Nissan established marketing entities in Netherlands and Switzerland. Then they collaboratively focused on cutting costs by sharing their production capacity In Mexico, during the year 2000, Renault`s Scenic model was being manufactured at Nissan`s Cuernavaca Plant and in 2001, Renault`s Clio was also being manufactured at Nissan`s Aguascalientes Plant. In Spain, Renault and General Motors collaboratively developed the New Traffic model, which was initially proposed to be manufactured in Nissan`s Barcelona Plant. Renault and Nissan jointly established their first, inaugural production facility in Brazil (in the year 2001), which was basically an assembly plant for commercial, light-weight vehicles. This plant gained widespread popularity and marked Nissan`s entry into Brazil and thereby increased Renault`s commitment. In the year 2000, Renault moved back to Mexico and Nissan strengthened its presence in Mercosur with the help of Renault`s support. The New Frontier Pickup model was proposed to be manufactured at the Brazilian plant, was the first and lone Nissan vehicle to be manufactured in Mercosur. Renault thereby signed an agreement with Nissan`s commercial partner in Taiwan to expand its business reach with newer and innovative car models. Renault vehicles began to be marketed in Australia, with Nissan`s collaboration. 19
Renault also signed an agreement regarding the import and distribution with Nissan`s partner in Indonesia and moved to Peru, being backed-up by Nissan. On 28th March 2002, Renault upriser its stake in Nissan from 36.8 percent to 44.4 percent. The newly owned subsidiary i.e. Nissan Finance Corporation Limited acquired a 15 percent of non-voting equity stake from Renault. In order to make the Alliance unbreakable, the French state reduced stake in Renault. 10 percent of total number of shares sold by the state was now offered to the current and former employees of Renault and companies that were more than 50 percent owned by Renault. Nissan Revival Plan: Business Development:
Launch 22 innovative models by 2002. Introduce a Mini-car design in Japan by 2002.
Purchasing
:
The number of suppliers to be cut by half. Costs to be reduced by 20 percent over 3 years.
Manufacturing and Logistic: 3 assembly plants to be closed in Japan. 2 powertrain plants to be closed in Japan. Enhance capacity utilization in Japan from 53 percent (in 1999) to 82 percent (in 2002). Research and Development: Move to a globally integrated organization. Increase output efficiency by 20 percent per project. Sales and Marketing: Shift to a single global advertising agency. Marketing expenses to be reduced by 20 percent. Subsidiary dealers to be reduced by 20 percent in Japan. 10 percent of retail outlets to be closed in Japan. Develop prefecture business centers or common back offices. General Administration: Reduces sales, General and Administrative (SG&A) cost by 20 percent. Reduce global headcount by 21000. Finance and Cost:
Dispose of non-core assets. Automotive debt to be cut by half to $5.8 billion net. Inventories to be reduced.
Product Phasing Out: Number of plants to be reduced in Japan from 7 to 4 by 2002. Number of platforms to be reduced in Japan from 24 to 15 by 2002. 50 percent reduction in the variation in parts for each model. 20
Organization:
Establish world-wide corporate head-quarters. Establish regional management committee. Empower program directors.
Implement performance-oriented compensation and bonus packages, including stock options. (*Source: Harvard Business Review, January 2002, Pg.- 40-41.)
THE PATH FORWARD. After being successful on implementing the “Nissan Revival Plan� (NRP), Carlos Ghosn introduced a plan named `Nissan 180`. It aimed at achieving three targets by the end of 2005. These were: 1 = Selling of additional 1 million units that will account for 3.6 million vehicles globally. 8 = The Total Profit Margin that Nissan wanted to gain. 0 = Automotive debt amount to be represented in the company`s balance sheet. The plan was based upon: higher revenue generation, lower costs, effective synergies and better quality. In May 2005, Carlos Ghosn became the President and Chief Executive Officer (CEO) of Renault, concurrent with his role in Nissan.
TIMELINE OF NISSAN (1999-2018) March 1999
Alliance is inaugurated under Carlos Ghosn with Renault $5 billion financial rescue of Nissan, the former buying 36.8 percent of the latter`s stock.
October 2001
Renault increased its stake in Nissan to 44.4 percent while Nissan on the other-hand, buys 15 percent stake in Renault
2002
Renault and Nissan create Renault-Nissan BV, a strategic management company owned 50-50 by the two automakers and based in Netherlands
April 2006
With encouragement from General Motors shareholder Kirk Kerkorian, the alliance and GM explore the possibility of strategic cooperation, but the talks fail.
April 2010
Alliance announces strategic cooperation with Daimler AG worth 2 billion euros over 5 years.
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July 2012
Alliance announces investment of $160 million in Renault Samsung motors of South Korea for production of Nissan Rogue.
December 2012 Alliance becomes controlling shareholder of AvtoVAZ, Russia`s largest car-maker. July 2013
Ghosn confirms development of a modular vehicle platform to be designed in India. It becomes the first all-new platform designed from scratch by Renault and Nissan.
October 2016
Nissan buys a one-third stake in troubled Japanese automaker Mitsubishi Motors, effectively adding the automaker to the alliance.
September 2017Ghosn revealed “Alliance 2022�, a six-year plan that aimed at doubling the yearly synergies among the alliance members to 10 billion euros annually. February 2018 Alliance announces it has sold 10.6 million vehicles during the previous year, claiming top status as seller of light vehicles globally.
Source:https://images.app.goo.gl/7xX6mAE4VRyz8aTf6
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REFERENCES “Nissan Motor Co. Ltd” by Michael Yoshino and Masako Egawa, HBS Case, December 2002. “Saving the Business without Losing the Company” by Carlos Ghosn, Harvard Business Review, January 2002, Pg. 37-45. “Renault and Nissan - Marriage for reason” by Anne Claire Flament, Sumie Fujimura, Pierre Nilles and Philippe Lasserre, INSEAD Case 2001. “Renault and Nissan post 2.9 percent increase in unit sales to over 5.1 vehicles in 2002”, Fortune, January 31, 2003. “Asia's Business Man of the Year” Nissan`s Turn-around artist Carlos Ghosn is giving Japan lesson in how to compete” by Alex Taylor III, Fortune, February 18 2002, Pg. 34-40. “The Man Who Vows to Change Japan Inc.” by Alex Taylor III, Fortune, December 20, 1999. “An outsider takes on Japan” by Allan R Gold, Masao Hirano, and Yoshinori Yokoyama, McKinsey Quarterly, 2001- No. 1. “A New Order at Nissan”, Business Week, October 11, 1999. Business Week Website: http://www.businessweek.com. “Nissan on its Knees”, Economist Magazine, May 19, 1998. “In the shadow of Ghosn”, Economist Magazine, November 9, 2000. “Halfway down a long road”, Economist Magazine, August 8, 2001. “Marriage in name only”, Economist Magazine, February 28, 2002. Economist Website: http://www.economist.com. Hoovers Website: http://www.hoovers.com. “Nissan share rise 15 percent” by Rahman, Bayan, Financial Times, September 29, 2000. Nissan Motor Co. Ltd – Annual Report 1999. Nissan Motor Co. Ltd – Fact File 2000. Nissan Motors Website: http://www.nissan-global.com. Renault`s Annual Report, 2001. Renault Website: http://www.renault.com.
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India’s stance on Regional Comprehensive Economic Partnership (RECP) By: Rituraj Paul (IIM Kozhikode)
The Regional Comprehensive Economic Partnership was meant to bring together 16 member nations; the 10 members of the Association of South East Asian Nations (ASEAN) along with China, Japan, South Korea, Australia, New Zealand and India. It was a proposed trade agreement that promised to remove trade barriers between the member nations. This proposed agreement was supposed to cover half of the world’s population that accounts for almost 40% of the world’s trade transactions and contributes to 1/3rd of the world’s GDP. The most recent RCEP conference held in Thailand from 31st October to 3rd November saw significant development with one of its key participants, India, choosing to not be a part of the deal. The reasons cited were related to India not being satisfied with the free trade agreements, that didn’t account for its outstanding issues and concerns.
(Prime Minister Modi walking past Malaysia’s Prime Minister Mahathir Mohamad (left) and China’s Premier Li Keqiang (right) at the latest Bangkok RCEP summit, at the end of which India’s decision to opt out was announced) Source:https://www.scmp.com/comment/opinion/article/3037455/indias-shock-rcep-exit-makes-domesticeconomic-reforms-more-urgent
A deep dive into the issue reveals the plausible reasons that led India to move out of the agreement. India has a trade deficit with at least 11 out of the 15 RECP countries. An exact figure of trade deficit shows that it has doubled from $54 billion in 2012-13 to a whopping $105 billion in 2018-19. According to an India Today article, India ships 20% of its exports to the RECP countries while it receives 35% of its imports from them. Moreover, 60 % of these deficits are with China itself and the RCEP agreement would have matters far worse. With India’s economy already facing major slowdown, it felt that the present agreement would flood its domestic market with import of cheap Chinese goods, as well as dairy products from New Zealand and Australia, thus making matters worse. On the other hand, most of India’s exports are service based, like IT. 24
However, services don’t figure prominently in these trade agreements making India’s position a precarious one. The government also saw it being detrimental to its Make in India initiative. India, though did try to push for an auto trigger mechanism to ensure that when the volume of imports would cross a certain permissible threshold, safeguard duties would be imposed to contain the increasing level of imports. However, member nations refused to budge in, thus eventually leading to India not being a part of the deal.
(Source:https://economictimes.indiatimes.com/news/economy/foreign-trade/india-decides-to-opt-out-of-rcepsays-key-concerns-not-addressed/articleshow/71896848.cms)
When seen from a neutral point of view, India’s stance does not seem to be too bad. The very purpose of a trade agreement is to promote increased flow of goods and services between member nations and see to it that trade deficit goes down. However, going ahead with the current set of agreements would have led to worsening of the already existing exorbitant trade deficit. Although, India decided to move out of the deal, the door has not been completely shut out. A joint statement post the latest summit in Thailand stated that while the 15 nations (except India) would start formal work towards inking the deal in 2020, efforts will still be made to resolve India’s objections. Now, it remains to be seen what decision India finally takes. A satisfactory resolution in its favor might eventually see India being part of the deal, whereas an unsatisfactory resolution would result in no change in its present stance.
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Globalization and Protectionism: Is either one inevitable? By: Kalyani Tayade (IIM Calcutta)
Introduction All the countries of the world thrive to achieve financial stability, economic growth and high standards of living. Countries have taken different paths to achieve these goals by national economic and political policies. [1] A common factor which links these growing economies is their support and active involvement in the global economy. Over past 20 years, as several economies have become more open to the global economy, the percentage of the developing world living in extreme poverty (defined as living on $1 per day by IMF) has been cut to half. The term globalization began to be used more commonly in the 1980s, depicting the technological advances that made it easier and quicker to complete international transactions. In a broader sense, Globalization is the spread of products, technology, information, and jobs across national borders and cultures. [2] The growth in global markets has helped to promote efficiency through competition. With this growing competition came a time when governments across the countries started looking inwards and there evolved a new notion called Protectionism. It refers to government actions and policies that restrict or restrain international trade for the benefit of a single domestic economy. [3] Looking at the definitions, globalization and protectionism seem opposing ideas. We have found multiple instances in which these ideas co-exist in countries. Analysis of the need for each of them gives us sparkling evidence to suggest that neither of the two can be avoided. This paper aims to explain each of them one by one with the concerned pros and cons and their results in the modern world.
Globalization Globalization in economic terms describes an interdependence of nations around the globe fostered through free trade and financial flows. The term sometimes also refers to the movement of people and knowledge across countries.[4] It is a social, cultural, political and legal phenomenon. The free trade is based on the David Ricardo’s comparative advantage theory, which states that an agent will produce more of the goods and services in which they have a comparative advantage (less opportunity cost) as compared to their trade partners
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* Trade-in Goods and Services indicating the globalization over the years in the world (https://www.imf.org/external/np/exr/ib/2008/053008.htm)
Global trade offers a bigger market to cater. But this bigger market cannot ensure that the benefits are shared equally and that’s where the problem comes into the picture. According to some scientists, globalization was present 100 years ago, but what helped modern globalization to integrate more is the presence of electronic communication. 20th century saw enormous growth and increased average income by the countries, but the progress was not evenly distributed. It is found that the gap between rich and poor countries is indeed increased. Globalization can raise the standard of living in poor and less developed countries by providing job opportunity, modernization, and improved access to goods and services. On the downside, it can destroy job opportunities in more developed and high-wage countries as the production of goods moves across borders. Understanding the relative costs and benefits can pave the way for alleviating problems while sustaining the wider payoffs. [8] Protectionism Protectionist policies are usually implemented to improve economic activity within a domestic economy but can also be implemented for safety or quality concerns. Tariffs, import quotas, product standards, and subsidies are some of the primary policy tools; a government can use in enacting protectionist policies.
Proponents of protectionism argue that the policies can help to create domestic jobs, increase gross domestic product production, and make a domestic economy more competitive globally. The factors used to support the protectionism are high unemployment, unused capacity, low levels of economic activities, trade deficits, and increased import penetration. [8] With US yield curve being the flattest since Mar 2017, it is considered as a sign of unemployment., which is causing unrest in people and protectionism is the way they could find some way out. [9] 27
All things are not rosy in case of protectionism. Disadvantages of protectionism[10] are limited choices for consumers which leads to the creation of cartel by selected sellers, Increase in prices due to lack of competition which becomes a strain on the income of people, Political and cultural isolation which is by far the most important point in the today’s connected world, No #Metoo movement would have been propagated unless the world was open to embracing one culture that is humanism, No incentive for R&D, it is kind of the moral hazard in which you would not spend money for the betterment of consumer if you can ripe more benefit by the current condition.
*The data reveal a split between emerging markets and the West, which is increasingly turning its back on globalization. [11]
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Interlinking Globalization and Protectionism
Globalization
Protectionism
Some researchers worked to find the interdependencies of globalization and protectionism. S. Garman found out that globalization induces countries to increase agricultural protection. [12] Agriculture being the primary sector of the economy, the development process starts from it. As a country develops workforce is moved from primary to next levels. This means that the induced protectionism is expected to get transferred to the subsequent economic sectors. Globalization changes incentives policymakers to gain from foreign trade. Many times this foreign trade puts domestic producers in pressure leading them to oppose free trade which we saw in the US presidential elections, in which, people supporting America First movement voted for Donald Trump. Now Trump levying more and more tariffs on China is a kind of protectionism only. Left-wing parties in advanced industrial countries advocate more protectionist policies than do right-wing parties. [13] These findings remain true even when holding many other political and economic factors constant. Inequality tends to increase anti-globalization positions of parties, net of pro-globalization positions, an effect that does not significantly differ across party families or levels of actual globalization. Multi-level analyses by Hidde, Roza and Marcel in their study shows that globalization affects cultural protectionism negatively, providing support for the diversification interpretation. [14] Commercial and financial integration before World War I was more limited. Given that integration today is even more pervasive than a hundred years ago, it is surprising that trade tensions and financial instability have not been worse in recent years.[15]
Conclusion From the analysis of all the work done so far on the globalization and protectionism and the recent happenings in the world, we get an idea of what the modern world is heading to. Just like any common phenomenon people want to maximize their gain, looking from the political point of view, the government wants to maximize the welfare of people and would support the globalization so that people would get cheap goods and service and the incoming human capital is expected to increase the development speed of the nation. But again, there comes the point where competition becomes too stiff wherein in domestic entrepreneurs feel that they are at a disadvantageous position and they rebel, better foreign capital leads to increase in unemployment of the local people. The aggression of people pressurizes political party and the government indeed to take some steps to protect them from the hyped globalization phenomenon. This leads to government resorting to the protectionism policies. To me, this seems like a never-ending cycle in which too much of one view leads to 29
support other. For years may come and go, the government may change, no one will really know the perfect balance between the free trade and self-dependence.
References: https://www.imf.org/external/np/exr/ib/2008/053008.htm https://www.investopedia.com/terms/g/globalization.asp https://www.investopedia.com/terms/p/protectionism.asp https://www.imf.org/external/np/exr/ib/2000/041200to.htm#I https://en.wikipedia.org/wiki/Comparative_advantage https://www.investopedia.com/terms/c/comparativeadvantage.asp https://www.piie.com/microsites/globalization/what-is-globalization.html https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1465-7295.1981.tb00347.x https://www.ft.com/content/70f043c2-b9f3-11e9-8a88-aa6628ac896c https://corporatefinanceinstitute.com/resources/knowledge/economics/protectionism/ https://www.economist.com/graphic-detail/2016/11/18/what-the-world-thinks-about-globalisation
S.Garmann / Food Policy 49 (2014) 281–293 https://doi.org/10.1177/1465116512467546
European Sociological Review VOLUME 29 NUMBER 5 2013 1040–1052 (DOI:10.1093/esr/jcs080) NBER Working Paper No. 7195 Issued in June 1999
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Six measures to revive economy suggested - Dr. Manmohan Singh By: Suraj Chaudhary (IIM Rohtak)
Indian economy is in worrisome situation. As per the RBI report, the slowdown in the economy is cyclical and not structural. Dr. Manmohan Singh have a different point of view on this. He believes that it is both structural and cyclical. There are certain structural issues in the tax regiment, growth model and governance of economic growth. Government rapid changes in economic reforms such as Demonetization and GST has contributed to the slow down. Demonetization was a huge blow for many sectors but mainly the agricultural Sector. Which constitutes about 15% to the GDP of the country and operates mainly on cash. There are six key points suggested by the former prime minister Dr. Manmohan Singh to come out from the well of recession and have asked Prime Minister Narendra Modi to act sensibly to fix this slowdown. Though Singh said it will take time to get out of the well of this slowdown but it is possible. FY16 and 17 were the golden periods in which the country secured the growth rate of 8% and 8.2% respectively. Then due to economic reforms such as Demonetization (November 2016) and the introduction of GST (July 2017), there was an impact on FY18 growth. Our FY19 growth rate was 6.8%. If the government wants to meet its goal of becoming a $5 Trillion economy our country should have at least 8% growth for consecutive years.
Growth Rate 9.0% 8.0% 8.0% 7.0%
8.2%
7.4%
6.0%
7.2%
6.4%
6.8%
5.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% FY13
FY14
FY15
FY16
FY17
FY18
FY19
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6 Key points for revival 1.Changes in GST: The Indian Government should make changes in the GST regime even if it results in loss of revenue in the short run. First let us understand the current tax slabs 5% (Spices, Mustard Oil, etc.), 12% (Processed Foods),18% (Soaps, Toothpaste, Smartphones, etc.), 28%(Cars) and 28% plus cess on luxury cars, tobacco, etc. Singh states that the government should bear the loss of reducing the tax otherwise growth rate is not going to touch an 8% bar. People are not ready to buy cars as there is approximately 30% tax. Which is quite hefty. Arun Jaitley also gave a hint in 2018 that GST might become twotier tax with only 12% and 18% tax slabs. But there was no action taken on the same till now. Institutional equities have estimated that a 10% GST cut on automobiles will cost ₹ 45,000 Crores in a year. But the government must imbibe this loss for the betterment of growth rate. As the reduction of 10% from 28% to 18% will attract buyers to purchase and will result in the growth of the manufacturing sector. Minister, Nitin Gadkari also suggested the reduction in the tax rate for the automobile sector. Although the GST rate has been reduced to 5% from 12% for electric vehicles. 2.Revive Agriculture: The aim should be to increase rural consumption and improve the agricultural sector. As of July 2019, Punjab millers are yet to pay ₹ 989 crores, Gujarat and Bihar have an outstanding of ₹ 965 and ₹ 923 crores respectively to sugarcane farmers. Overall the arrears are about 20,000 crores. If government could work on this part and money reaches to farmers then surely the consumption will improve they can buy new machines, equipment and tractors. Therefore, condition of agricultural sector will improve. 3.Liquidity Crisis: Government has planned to infuse ₹ 70,000 crores in Public Sector Banks to improve credit facilities. But the issue is that NBFCs are also suffering. To take care of this part the government can provide them any relief in terms of tax or provide some capital. So that NBFC could also be brought back on the track. 4.MSMEs: Micro, Small and Medium Enterprises generate most of the employment. Sectors such as textiles, auto, electronics must be assured priority lending in order to improve employment. Infusion of 70,000 crores in PSB can play a huge role in this. Also, PSBs must develop a mechanism through which loans can be provided in a short period. 5.Boost exports: The government needs to find options through which India can take the benefit of Trade war between the USA and China and try to address export markets that have resulted due to the trade wars. 6.Corporate Tax: Reduction in corporate tax was in talks from 2015. First, we should understand how the government earns money only then you will be able to understand the importance of corporate tax.
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If the government has earned â‚š 1 then the maximum amount is coming from Corporate tax about 21 paise and this is the highest contributor. Although a reduction in corporate tax can hurt the government. To take the benefit of the Trade War between the USA and China government must reduce it. US companies in china are not coming to India they are going to Singapore, Thailand, and Vietnam as they have a corporate tax of 17%, 20%, and 20% respectively. In India corporate tax on a new company is 25% which is higher than the above-mentioned countries thereby India is losing the opportunity.
Corporate Tax rates of different countries
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APPLE – NEW CREDIT CARD OR JUST ANOTHER CREDIT CARD By: Spandana Karna (IIM Rohtak) In March, Apple has announced the release of a new credit card. People became very excited about the titanium structure of cards with names printed on it. It was created by Apple itself and not by a bank, which is linked to Apple Pay and is available on the wallet app. Goldman Sachs has partnered with Apple to create this credit card which works like a normal traditional card for all the transactions. The idea behind the launch of an Apple credit card is to replace all the traditional credit cards with smart and secure payment methods across both online and offline stores. It also represents values like simplicity, transparency, and privacy for which Apple stands. Apple card is available on the wallet app on iPhone 6 or later which is running on the latest version i.e. iOS 12.4 or later. User has to simply tap on the Apple card interface and follow the activation steps. All the information such as first and last name, date of birth, phone number, home address, country of citizenship, last four digits of Social Security Number and annual income can be pulled from Apple ID; hence the process takes minimal time to setup. After the credit report of an individual is reviewed and qualified, the credit card would be made available immediately for digital payments. On request by the user, Apple also ships out a physical credit card similar to other traditional cards. The individual must of age 18 years and above and must be a USA citizen or USA resident with USA residential address.
Apple card can be used with other credit or debit cards stored on the wallet app by Apple users. It can be used for store purchases on iPhone or online purchases on Apple products. For non-apple purchases, one can use the Apple credit card which is also in partnership with Mastercard; hence it can be used where Mastercard payment is accepted. The card does not consist of CVV, credit card number, expiration date, and signature, unlike a traditional card. All this information is stored by Secure Element; a special security chip used by Apple Pay. The main advantage being with this advanced technology it would be difficult for usage if someone finds or steals the card as the information is available only in the wallet app and also every time a purchase is made Apple generates a different, onetime dynamic security code.
During the event on 25 March, Apple CEO Tim Cook noted that only 70 percent of the US retailers have accepted Apple pay as compared to 99 percent in Australia. Hence, Apple is nudging its consumers towards the usage of Apple Pay, which will compete with offerings from Square, Amazon, and Venmo and with cards from traditional banks that offer similar cash-back programs. During the event, Bailey stated that the main 34
idea was to help everyone live a healthier financial life. For instance, Amazon gives 3 to 5 percent cashback on Amazon and Wholefood purchases whereas Apple provides a daily cashback of up to 3 percent. It has clear benefits for loyal fans of the brand and who regularly purchase Apple products. Apple also plans to take information from Apple Maps which will help consumers understand and keep track of their spending tracks. Keeping in line with other credit cards, there also exists a credit card limit and it varies from person to person. A better credit score would give a higher credit limit and it increases over time. It offers APR between 12.74 – 23.74 percent depending on credit score. Apple wants to increase its range of users and hence has approved credit cards to users having credit scores in the 600s which is usually 750 or above. Apple is trying to increase its recurring revenue for the company by venturing into the service sector as well such as Apple card, News+ which is subscription news costing $10 a month. Apple has taken this step to find new sources of revenue as the global smartphone market is slowing down as people are holding onto their devices for a longer period. For instance, in January the sales of the iPhone fell significantly short of expectations which stands at 15% in the last quarter of 2018 and will continue to weigh on financial results. Apple is also planning to produce its own films and TV shows for a subscription service. So, in short Apple is venturing into a new video subscription service, a news subscription service and also a credit card to apply and pay for these two services. This would help Apple in revenue generation and retention of the customers.
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