EDITOR’S NOTE Dear Readers, The month of October, we witnessed a lot of controversy in the political, social and cultural arena regarding the beef ban. In our cover story we have tried to visualize this whole scenario from economic perspective, with the objective of making our readers more aware about its financial implications. In the cover article we tried to come out with detailed understanding of the various stakeholders which will be impacted with this decision and how does it affect our industrial development as a whole. Under the Eco Section, this time around we have brought a all new series of Bubble Trouble in which we will try to come up with what all went wrong in the fundamentals of economics which eventually led to financial collapse across the globe in different phases. With this our objective is to make our readers understand the practical relevance of fundamentals of economics .The first of the series we have taken is China bubble as our research, since readers are more aware about since it being the latest. Our faculty section deals with the understanding of the what GST will bring new to the taxation world and why GST is relevant in making our environment business friendly. With winter session approaching GST is widely anticipated from the corporate world so we have figured out what challenges exist in making GST a reality. Lastly, It gives me immense pleasure to announce Gaurav Maheshwari from KJ SIMSR as the Winner of Call for Articles for this edition. I would also like to thank our sponsors Finacue Research and Education ,all our readers, Faculty members and seniors for their constant support and encouragement .
Abhimanyu Singh Chauhan
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CONTENTS EDITOR'S DESK
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COVER STORY
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ARTICLE OF THE MONTH
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ECO SECTION
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FACULTY SECTION
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ALUMNI SECTION
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ARTICLE BY FINACUE
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2015 NOBEL PRIZE
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NEWS BUZZ
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TRIVIA
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COVER STORY BOVINE ECONOMICS AND IMPACT OF BEEF BAN GUNJAN PATHAK-PGDM 2015-17 PRATEEK SINGH-PGDM FS 2015-17
The country is currently embroiled in the controversy regarding ban on slaughter of cows and their progeny. This controversy is not new it has existed for many decades. The reason is that Hindus which constitute 80% of Indian Population (as per the census of 2015) consider cow & buffalo as sacred and hence they oppose the slaughter of these animals. On the other hand Muslim and Christian minorities consume beef extensively as it forms an integral part of their diet. Since the time of independence there has been a demand for the ban on the slaughter of cow and progeny by the Hindus, but due to the secular nature of the Indian democracy, the successive central governments have avoided any attempt to put a ban at the country level. Some states have however succeeded in implementing the legislation at the state or the local level.
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However the recent move by the Bombay high Court to uphold the government of Maharashtraâ€&#x;s decision to ban the sale of consumption of beef in the state has triggered again the debate across the nation. It has led to the emergence of bovine economics (a field of study where the investment in cattle can be attributed to the expected returns we derive from it) which had been a neglected topic till now. We can segregate the consequences of the beef ban on the bovine economics into four different sectors namely the international trade, domestic livestock trading, socio-cultural unrest, industrial setback and ecological uphill. Let us look at each of these domains and understand the repercussions of the beef ban:-
ECONOMIC IMPACT Economically the ban will create a tremendous fiscal pressure on the Indian Economy. Since the meat production in India has been growing at a healthy pace and has more than tripled from 2009 -2014. And in terms of the exports by (000 tonnes) in 2014 India became the largest exporter of beef replacing Brazil as we can see in the table below. Country wise Beef exports (In 000 tonnes*) County
2009
2010
2011
2012
2013
2014
India
609
917
1268
1411
1765
2082
Brazil
1596
1558
1340
1524
1849
1909
Australia
1364
1368
1410
1407
1593
1851
USA
878
1043
1263
1112
1175
1167
New Zealand
514
530
503
517
529
579
Paraguay
243
283
197
251
326
389
Canada
480
523
426
3345
332
378
Uruguay
376
347
320
360
340
350
European Union
139
336
445
296
244
301
Source: US Dept of Agriculture
In terms of the value the, the increase was more than 4 times, also the value of the shipments quadrupled.
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As per the Ministry of food processing the country has 1613 registered slaughter houses the top 5 states including Maharashtra-316, UP-285, Andhra Pradesh -183, Tamil Nadu – 130, & Karnataka -96. Maharashtra was one of the states in the country where the beef industry was flourishing well. The ban will have a significant impact on the stateâ€&#x;s revenue and employment. The beef Industry involves 50,000 personnel; the beef ban will have a direct impact them. Additionally there will be an indirect impact on the estimated 150,000 personnel in the allied activities-leather industry, transportation and carcass management etc. Maharashtra as a state is expected to lose revenue of 10,000 Crore. In the other states like Punjab which is one of the leading suppliers of high yielding cows & buffaloes to the other states; the new regulations regarding the approvals for the cow transportation will lead to significant losses. The beef ban will also impact the leather and leather products industry in India. The sector is very vibrant; with an annual turnover of US$ 11 billion in 2014and a cumulative annual growth rate of about 14.77% (5 years 2009-2014). This sector survives largely on the hides of bullocks and buffalos. So the beef ban will impact the industry severely through the input channels. Moreover the Industry employs around 2.5 million people. These people mostly belong to the weaker sections of the society. Women employment is predominant in leather products sector with about 30% share. The beef ban will lead to an indefinite increase on the unemployment.
INTERNATIONAL TRADE The Indian exports of the animal products were Rs. 33128.30 Crores in 2014-15. We can see in the chart below that the Beef makes around 90% of the total food processing industry. In addition to it the bovine meat is now single biggest agricultural export (overtaking basmati rice).
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Source: http://www.iilfleatherfair.com/leatherfair/leather_industry.php
Out of the total beef produced in India nearly 45.9 % is exported to countries such as Vietnam, Malaysia, Philippians, Saudi Arabia, Kuwait and Egypt. The sale of bovine meat and meat products was worth $3.3 billion compared to $2.8 billion, registering a 16.7 per cent increase. So we can see that the beef ban could severely affect our exports and lead to a further widening of the trade deficit which is presently estimated at $137 billion. Export of the leather supply is going to suffer; currently India is the 2nd largest producer of leather garments & footwear globally. The Indian leather products are high in demand across the various countries; below chart shows the demand across the regions.
Source: http://www.iilfleatherfair.com/leatherfair/leather_industry.php
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Also India holds a major proportion of the global production of hides and skins. The Indian Buffalo Hides production globally accounts for 78%.
Source: http://smallb.sidbi.in/sites/default/files/knowledge_base/
The beef ban will impact the production. It will lead to the demand supply gap widening. A decline in supply would lead to a shortage which will eventually lead to an increase in price level. Also our Make in India campaign which aims at boosting the manufacturing sector could take a setback due to high cost of raw materials in the leather industry.
DOMESTIC LIVESTOCK TRADING Farmers mostly invest in cattle to rear them for dairy products or other activities like ploughing of fields. But once these animals become weak they become economically unviable as they are expensive to maintain. They are generally sold to the butcher to earn extra income for the farmer. The beef ban thus will increase the liability of the farmers. Also India accounts for about 58% of the total world buffalo population. This huge pool plays a significant role in the rural economy and livelihood. Therefore the beef ban will have a detrimental effect.
SOCIO-CULTURAL IMPACT
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India is a diverse country comprising of people with varied ethnicities. We can see that the eating habits of people are primarily derived from this difference in ethnic beliefs. The beef eaters in India are vary across the region, caste &the religions. This controversy has led to the battle lines drawn between the religions and the religious groups. But the data from NSSO shows that beef eaters are not confined to one particular religion or community: Muslims are highest beef eating community and the Hindus at the same time rank the second highest beef eating community. Around 7.5 % of the total Indian population is eats beef.
Source: NSS 68th round data
We can see in the chart below the majority of the consumers of beef belong to the lower sections SC STs.Thus due to the beef ban a large portion of the people would be forced to change their food habits.
Source: NSS 68th round data
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It is also seen that beef is a cheaper source of meat for the lower rungs of the society who suffer from malnutrition.
EFFECT ON THE ECOSYSTEM Our food chain comprises of a sequence where organisms are dependent on the next as a source of food. A lot of zoo animals are fed beef in order to fulfill their nutritional demand as it a rich source of protein. Disturbing this food chain can lead to deficiency of protein in the diet of these animals and eventually lead to their death. The sanctuaries, zoos, national park are attractive as they shelter these animals. If they are extinct the tourist spots will soon turn into deserted forests as nobody would visit it. It can catastrophically affect the tourism industry which will lower our GDP. In order to have a prosperous economy we need to have a utilitarian approach and weigh different options before taking impulsive decisions. We have seen the legalization of alligator poaching in Australia as an alternative to conserve the declining number of alligators as they were seen as a source of income for the households. We all need to think in similar lines order and look for more accommodating policies which donâ€&#x;t single out any community, creed or religion but aims at holistic growth. The issue has raised major controversy; those opposing it view it as an attack on the secular establishment of the Indian democracy as well as the see it to be in stark contrast with the economic reality. On the other hand those supporting the ban have the religious grounds and see the slaughter of the cow and buffalo as the greatest misfortune to their religion. The trade off for the government is a tough nut this time.
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ARTICLE OF THE MONTH
Commodity slump intensifies risks to emerging markets Gaurav Maheshawari PGDM –2014-16 KJ Somiaya
It looks like world markets have got the habit of behaving weirdly. When people thought that Euro zone and Greece woes are settling down, it is the commodity exporters who are standing on thread now. Going by basics, IMF defines a country as commodity exporter when commodities form at least 35% of economy‟s total exports and the net commodity exports account for a minimum 5% of country‟s gross trade. Calculations reveal that there are around 52 emerging and developing economies which can be classified as commodity exporters among which 20 are low income countries. The high no. of exporters under this category is a reason to worry since this means loss in export earnings, less jobs and currency crisis. If estimates of World economic outlook are to be believed, then recent decline in commodity prices could wipe out 1 percentage point from the growth rate of commodity exporters and the number goes to 2.5 percentage points in case of energy related exporters. Therefore it is important to understand if these risks may intensify further, because if once these nations fall, it will not happen in isolation. Overheated Past Growth An Economist once said- "Exporting commodities by themselves doesn't seem to be a very sustainable way of growing, it doesn't employ very many people, and it doesn't allow workers to be skilled up, trained, to use more technology and machinery which increases productivity." A very valid question here is whether the spectacular growth seen by various commodity rich nations was actual or overheated and has this growth indirectly lowered the productivity in these economies. Kazakhstan is one of the examples; it has lucratively enjoyed growth for a decade by bas-
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ing its economy primarily on commodity exports. No wonder its currency recently fell down by 25% as soon as it was freely floated. Why commodities crashed? Understanding commodity slump is a complicated task. Prices of almost all essential commodities like crude oil, gold, silver, platinum, sugar, cotton and soybean are down. Basic explanations revolve around macroeconomic factors such as excess supply and low global demand, over production of oil by U.S. and slowdown in China. But the growth rate of United States is on upward trend and if the largest economy is growing (which means demand should go up), then there are definitely other factors at play rather than basics of demand-supply. Historically, the importance of commodities as a determinant of monetary policy has gone down. In case the real rate (inflation adjusted) of interest starts rising, real commodity prices usually follow inverse path and there are justifications for this. As, when the interest rates are high, the incentive for doing extraction today increases rather than doing it later. This reduces the price of storable commodities and thus increases the pace of oil pumping, metals mining and forests logging, all leading to fall in commodity prices. It also becomes profitable to invest in bond markets if interest rates are forecasted to go up and hence investors pull money from commodity contracts, which again take the prices down. A point to consider further during increasing rate regime is the strengthening of domestic currency. Currency appreciation reduces the price of globally traded
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commodities for the domestic population. Since principal commodities are traded in U.S. dollar and Fed is going to increase rates, the above reasoning becomes significant. The curious case of China As per World Bank, China consumed around half of the metals produced globally in 2012. Statistics from British Petroleum reveal that Chinaâ€&#x;s share in global consumption is around 50.5% and in crude oil, only U.S. is ahead. Large Poultry Industry has made Chinese global leader of Soybean imports, accounting for 60% of total. In terms of metal consumption, 53.5% of refined copper produced worldwide goes to China. For Zinc and Aluminum, the figures are 45% and 59.7% respectively. This all becomes important because the Industrial production of Chinese economy which was once growing at 12% three years back is now hovering around 6.5%. There are excess inventories lying with exporters but the dragon is falling. So, China has undoubtedly become the curious case which is set to intensify risks of commodity exporters in the near future. Should Emerging Nations worry? Five years ago, emerging markets were expected to be next big thing, but since many of them are commodity sellers, the big thing may have to wait for some more years. The future holds good for the users of industrial materials like India, but for commodity rich nations such as Brazil and Russia, they have already started reporting negative GDP growth rates. Capital outflow from markets of emerging economies, fluctuating exchange rates, lacklustre industrial production in Asian region and declining asset prices are some of the factors which might negate any kind of optimistic view. Also, it is not clear on when China would resume stability and the weaker corporate profits add up against any signs of early recovery. Other major factor influencing capital inflow is rate hike risk from Fed. The interest rates in all probability would be increased and that
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will test the stability of emerging markets. In these turbulent times, investors generally flow to safe havens of developed economies. So, in context of emerging markets, it is better to stay cautious than normal. Golden opportunity for India Being a net commodity importer and high forecasted growth of Industrial activity, India stands to benefit from falling prices. Lower cost of raw materials and decreasing inflation will definitely improve the bargaining power of Indian manufacturers. There is a high possibility that capital outflow from China will effectively become Indiaâ€&#x;s inflow as India is one of those few developing economies which is growing upwards. But, all of this would become true only if the Prime Ministerâ€&#x;s massive talk of reforms can do the walk. If Issues such as Land acquisition and GST are not resolved quickly, then India can sit back happily and remain as market follower.
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ECO SECTION BUBBLE TROUBLE ABHIJIT KHADILKAR PGDM FS 2015-17
Idea/Background: “Financial crises are always not necessarily aberrations or anomalies. Although they can have disastrous impacts on the economy and destroy years of wealth, they act as corrective mechanisms which help in re-allocation of funds to more productive sectors.” As the history keeps repeating itself, the patterns or common mistakes that lead to formation of an asset bubble keep repeating over the time as well. For example, many of the exact same patterns that preceded the great financial collapse of 2008 are happening again. Under the series “Bubble Trouble”, this month, team Finly is covering the facts and the reasons behind the slowdown of Chinese economy, leading to the China‟s stock market crash. We will understand how different factors responsible for China‟s economic downturn have triggered a new financial crisis.
CHINA‟S STOCK MARKET CRASH China is world‟s second largest economy by nominal GDP. China‟s economy accounts for 15% of global GDP. Until 2015, China has been the world‟s fastest growing economy with average growth rate of 10% over the last 3 decades. Over the same period China emerged as a global hub for manufacturing as well the largest exporter of the goods by value. For the last two decades, China has been the front-runner compared to all the other economies in the world. China has skyrocketed from low-income to upper-middle income status. The Chinese economy grew from being the eighth largest in the world in 1994 to the second largest in the world in 2014.
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Source: Musing on Markets – A blog by Aswath Damodaran
China‟s development in real estate and infrastructure soared in the early 2000s, causing economic growth and the demand for raw materials hit an upward trajectory. China‟s growth has been particularly raw materials- intensive due to their strategy of undertaking large numbers of ambitious infrastructure projects to create economic growth. As we see in the below chart, because of the high economic growth, from 2005 to 2007, China‟s Shanghai composite index grew six fold from 1000 to 6000, which then came tumbling down to 2000 by the end of 2008.The cause of this boom in Stock markets of China was based on growing Chinese economy in the mid-2000s and bust was a result of imploding global economy in 2008.
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In global financial crisis of 2008 Chinaâ€&#x;s exports plunged and in order to counter that Chinese government launched a massive $ 586 billion economic stimulus program that invested primarily in public infrastructure projects and housing & rural development programs. Chinese government took every measure at its disposal to arrest the slowdown in growth. Local governments, state-owned enterprises were desperately piling on debt in pursuit of an investment-led recovery. The bills for those have now just starting to come due. Chinaâ€&#x;s overall debt load has reached roughly 250% of GDP, which is up by 100% in last five years. Many companies and municipalities are now struggling to service their liabilities. This problem of increasing debt load is being tackled by converting short term maturing loans into government bonds. China identified earlier this year that spending on infrastructure is crucial to maintain Chinaâ€&#x;s overall growth amid slowdown in economy and rightly shifted from monetary to fiscal policy. China started relying on bond-financed fiscal policy to support growth and tripled the quota for bond sales. These bonds offered by the local governments fetched them huge amounts to shunt the hefty debt without compromising on infrastructure spending. However this approach too fell short of saving Chinese economy from a slowdown.
Visible indicators of economic slowdown in China: Most of 2000s China was growing at double digit rates. However, from 2010 onwards economic growth of China has been slowing down. In 2014 growth was only 7.4%. IMF (International
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Monetary Fund) has projected that China would grow at 6.8% and 6.3% in 2015 and 2016 respectively.
Falling commodity prices Earlier, the world was not willing to believe in the slowdown of China because hardly any reliable data was available in the public domain. However, indicators like falling commodity prices started proving the economic slowdown of China. It is believed that the prices of commodities portray a true picture of China. China is the biggest importer of the industrial and agricultural commodities. However due to low economic growth, demand of commodities like coal, steel, iron ore and aluminum is slowing. China has already hit a “peak� in these commodities. China once a sponge for raw materials and commodities is now becoming an exporter of commodities.
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China is loosening monetary policy China has been loosening its monetary policy in order to tackle mounting deflation and lower economic growth. The current economic scenario has given China a wide scope to loosen its monetary policy as there is no inflationary pressure owing to falling commodity prices. The Peoples' Bank of China (Central bank) has cut the interest rates six times since last November. However in China, interest rates are not the main determinant of credit growth. Rather, the direct lending controls that regulators impose on commercial banks are more important. The government has slowly increased the amount that banks are allowed to lend; the total exceeds10 trillion Yuan this year, up from last year‟s 9.8 trillion Yuan.
Some other measures taken by Chinese government to boost liquidity and credit growth:
The biggest measure taken by China so far this year is “pledged supplementary lending (PSL)”, whereby the central bank provides financing at lower rates. The funds were provided at 3.10 percent discount to a few banks. PSL program is designed to help the Central bank better target medium term lending rates and boost liquidity to specific sectors by offering low cost loans to selected lenders including policy banks.
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
The Central Bank has relied on foreign exchange inflows to generate money-supply growth by printing a stream of Yuan to buy dollars entering into the country from both trade and investment.
Unsuccessful transition from an export led economy to the one based on domestic growth: In China, political stability is heavily dependent on the rapid growth and overall economic activity in the country. The ruling party identified that the export-led model that gave China a record breaking growth in 1990s and 2000s was unsustainable, given the larger size of economy and limited capacity of other countries to absorb Chinese exports at the same pace. In order to rebalance growth president Xi Jinping focused more on domestic demand than exports. He provided massive loans to finance infrastructure, construction and more recently brought artificial boom in stock markets. However, instead of aiding real growth, the debt has created huge bubbles in property and stock markets. The efforts of Chinese government to shift from an export-oriented, investment-led economy to one which is more dependent on domestic markets and consumption were futile. Amidst all such bad indicators suggesting cooling off of Chinese economy, by June 2015 the Shanghai stock market had grown by 150% driven by retail investors with borrowed money. The jump was largely due to investors flocking to small and mid-size companies. And a perfect bubble was getting created waiting to burst.
The Crash Between June 2014 and June 2015, China's Shanghai Composite index rose about 150 percent, reaching a high of 5,166 on June 12. Then market started crashing rapidly. In next 3 months, it fell to 2927 i.e. around 43% declines.
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Government interventions helped market to stabilize at 4000 levels. However, investors soon lost faith in this artificial stability and market further crashed by 20% to levels of 3168 in the month of September.
The major reasons responsible for the stock market crash are listed below: Reason # 1: The boom and bust cycle is fueled by debt. In the past few years in order to stimulate the market, regulators have relaxed limits on buying stocks with borrowed money. As a result, the volume of margin trading has soared netting total purchases of around $ 500 billion stocks with borrowed money according to UBS.
Reason # 2: Ordinary Chinese have been getting into stocks in huge numbers: More than 40 million accounts were opened between June 2014 and May 2015. Most of these investors have little or no experience at all. In fact 67 percent of total investors in China have less than a high school education.
Reason # 3:
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Investor restrictions: Chinese class A-shares –are the shares traded on mainland exchanges. Foreign investors are blocked from investing in these shares. That means these are only in the hands of Chinese investors without any balancing force like institutional investors. The irrational behavior and inexperience of individual Chinese investors caused huge speculative activity. Chinese class B-shares - Class B shares, denominated in US $, are only traded on the mainland exchanges. Chinese class H-shares –They are traded in Hong Kong and denominated in HK$. Domestic investors cannot buy or sell class H shares. As a consequence of these restrictions, shares of different classes in the same company can trade at different prices and governments can thus control where investors put their money.
Reason # 4: Opaque financials and poor corporate governance: Even though, China has moved towards adopting international accounting standards, Chinese companies often hold back key information from investors. This non-disclosure problem is coupled with corporate governance concerns at Chinese companies, where shareholders are viewed more as suppliers of capital than as part-owners of the company.
Reason # 5: China’s wasteful investments in Infrastructure: Since last 2 decades, China has achieved high growth through continuous investment in its Infrastructure. Many initiatives were taken by the Chinese government by investing in capacity creation. A huge portion of these investments are wasted as these investments are not generating any revenues.
Ghost Cities:
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Hundreds of new cities in China are largely empty. From shopping malls to soccer stadiums everything is deserted. Still new cities are being built deep in the heart of the country. This is nothing but piling up of Non-Performing Assets for the economy.
Efforts taken by the Chinese Government to arrest the decline: About a year ago, the government decided to pump the stock market artificially. The thinking behind this was to replace debt with equity so that the bull market would help companies with huge loans to raise new capital and pay off overdue debts. But the artificial stimulus efforts were in vain as they were not supported by economic growth and the market tanked. The Chinese government has taken desperate and extraordinary measures to stop the falling stock market. Some of the actions taken by the government are listed below: 1. Financial press was warned not to say anything „negative‟. 2. Government banned major shareholders (those holding greater than 5%) from selling shares 3. Initial public offerings by companies are also not being allowed, so that investors are interested in buying the shares already listed on the stock market. 4. Trading was halted for many shares and government also banned short selling. 5. A bunch of brokers have decided to meet and support stocks – up to $19 billion will be used to buy blue chips and they won‟t sell for a year. Even after taking these actions, government could not stop the market from falling further. So there is a lesson to be learnt that market forces can easily trump even the actions taken by the government.
Aftermath: Yuan Devaluation and currency war:
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Source: http://www.visualcapitalist.com/
As the governmentâ€&#x;s attempt to prop up stock markets failed, China devalued Yuan by 3% in August. Many fear that China is again aiming for the export led growth to revive its economy. A new export push aided by a falling Yuan could provide an alternative source of growth for at least some time. Other economies have started following this by devaluing their own currencies to keep their edge in exports which is resulting in currency wars all over the world. All over the globe, currency after currency is falling against the dollar. The Brazilian real is down over 23% since the start of the year. The Russian ruble has lost more than half its value since 2013. This certainly raises fears that competitive devaluation may have begun which have serious implications on world economies.
Learnings: #1:Wealth Effect: Stock market normally catches up with the economy. Stock market is just a reflection of the state of the economy. A collapse in share prices has the potential to cause widespread economic dis-
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ruption. The people, who have invested in stock markets, will see a fall in their wealth. This will in turn affect financial outlook as it results in fall in consumer spending.
#2: Valuation of stocks: (Valuation vs. Pricing): The stock market in China is young and investors have hardly any experience. Chinese stock market is very volatile as it is dominated by traders and price movements are dominated by mood, momentum and incremental information. Thus it is subject to frequent booms and busts. A healthy market needs both investors (who buy or sell businesses based on the valuation of the businesses) and traders (who buy and sell assets based on what they think others will pay for them). The companies with crazy valuations are bound to collapse as soon as market starts falling. Therefore, from an individual investorâ€&#x;s perspective, it is very important to invest in the companies which are safe and trading at fair prices. A few indicators like PE ratio, Earnings should be analyzed before making an investment. It is important to know the intrinsic value of the company to reduce the risks of investing in the stock markets.
#3: Understanding Leverage and How Markets Can Reward and Kill is very important. Leverage helps investors to increase the potential return of an investment but it comes with a greater risk. There is a possibility of investment moving against the investor. In such a scenario, the loss would be much greater. Leverage magnifies both profits and losses. It is said that investing in the stock market with borrowed money is bound to end in tears.
#4: The scale of the crash:
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This chart gives us the comparison of different stock market crashes since 1929. The impact of Chinaâ€&#x;s stock market crash and gravity is already huge and one must note that this may not be the end of the bloodbath in Chinese markets. With the Greek issue settled temporarily, the problem in China might just be an issue for global worry going forward.
(Facts or uncommon observations)
From Riches to Rags: According to Bloomberg, Wang Jianlin the richest man in Asia, lost $3.6 billion because of the latest stock market crash of China. The world's 400 richest people collectively lost about $124 billion, and Asia's billionaires collectively have lost a fifth of their wealth in the past three months, according to Bloomberg.
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During this cycle of boom, an IPO in China went up 10% limit, for every single trading day for nearly two months.
An article in the Wall Street Journal has highlighted certain technology companies, were trading at obscene valuations of around 600 times their past 12 months trailing earnings.
Within three weeks of the crash, China had lost 15 Greeces in Market capitalization.
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FACULTY SECTION WILL THERE BE BRIGHT LIGHT AT THE END??” – A CASE OF GST By CA SWATI S. GODBOLE Assistant Professor – Finance - SIMSR
The world of taxation in India is complex, full of challenges and has superfluous multiplicity of taxes. Today there are 20 different types of taxes covered by Direct and Indirect tax segment of Taxation. Indirect taxes in India are broadly categorized into: Sales tax/ VAT: Sales Tax is charged on the sale of movable goods. Sales tax on inter- state sale is charged by the Union Government referred to as CST while sales tax on Intra-state sale is charged by state government , which is now referred to as VAT. Every state has their respective VAT act and the rates of taxes are also different. Even though the CST is charged by the Union Government, it goes as revenue to the state from where the movement of goods commences. Service tax: Service tax on the other hand is tax paid for receiving services. In other words, the recipient of the service pays the service tax for consuming the services. Majority of the services are covered by the service tax except for a few under the Negative list i.e. list of exempted services. Custom Duty & Octroi Duty on goods: Custom duty is charged on the goods imported into India and is often payable at the port of entry. The rate of duty depends on the good imported. Octroi, on the other hand, is charged on the goods entering into the Municipal limits or any other jurisdiction for use or consumption or sale. It is nothing but an Entry tax. Excise Duty / CENVAT: This type of tax is charged on the goods that are produced within the country but are exported. This is opposite to the custom duty. Anti Dumping duty: When goods are exported by one country to another country at a lower price than its normal value it is referred to as Dumping. Being an unfair practice, the Central Government imposes an anti dumping duty to the extent of the margin of dumping, to rectify the situation. 28
This multiplicity of taxes at the state and central level substantially adds to the compliance and administrative costs for businesses and often results in avoidable litigation relating to duality of taxation, non-adherence to procedures, etc. Another important point to be noted is that there is no uniformity of tax rates and structure across the states and this is not a good sign as this has and may further lead to the practice of undercutting by states to attract more investors to them. It is important to note that by introduction of VAT, although, the cascading effect of taxes was removed to a certain extent, we still donâ€&#x;t have a mechanism in place for adjustment of tax credit with respect to Inter-state transactions. Vat tax paid can be adjusted against Vat Collected or Service tax paid can be adjusted against service tax collected so on and so forth, however credit of tax is not available against excise paid or vice versa. In the light of the above introduction of a new Tax system which will help in creating a common Indian Market and reduce the cascading effect of tax on the cost of goods and services was felt, which gave birth to the concept of GST. In 2000, The Vajpayee Government set up a committee to design a model for GST. For the first time in the central budget of 2007-08 the announcement that GST would be introduced from 1st April 2010, was made by the then Union Finance minister P. Chidambaram. However it took almost 8 years for the Goods and Service tax Bill or GST Bill (Officially known as The Constitution [One Hundred and Twenty Second Amendment] Bill2014) to be passed by the Lok Sabha (6th May 2015). The Rajya Sabha as on today is yet to pass the same bill. The GST Mechanism and Salient features: With the introduction of GST, Central excise, Service tax, CST, VAT, Countervailing duty and Special Additional Duty, Octroi and Entry tax, Luxury Tax, taxes on Lottery, betting and gambling etc. all these taxes will be replaced by GST. GST will act like a Value added tax which will be charged at every point in the supply chain. In simple words, at the time of every sale, the GST will be charged, however, corresponding tax credit paid on inputs, if any, will be allowed. India will adopt a Dual GST model, implying that GST would be administered both at Central level and at the state level. In other words taxes will be levied on each transaction. Under the
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Dual Model there will be SGST (State level GST- collected by State Government), CGST (Central Level GST – Collected by Central Government) and IGST (Integrated GST- collected by Central Government and which will be aggregate of SGST and CGST). For Example: For a sale in One state and the resale in the same case: There will be SGST as well as CGST on the First sale and on the Resale, again there will be SGST and CGST; however the buyer at first stage and seller at the 2nd stage being same person can take credit for the GST paid by him on purchase called Input credit. ICST will come into picture in cases such as
First Sale in one state and Resale in another state
First sale outside a state and Resale in the state
In addition to IGST, for supply of goods, an additional tax of up-to 1% has been proposed to be levied by the Central Government which will go to the Origin (Destination) state. Benefits:
Various taxes as mentioned earlier will be replaced by GST, which will in turn help in removing the cascading effect.
The Credit mechanism thought about and the removal of cascading effect will help the manufacturers and retailers in reducing the product cost and as a result one can expect the sales price to reduce and t tame the inflation.
With the introduction of GST replacing the various existing tax laws, it will certainly culminate into reduction in the Compliance process, filling of tax returns etc, which in turn will also reduce the procedural / administrative work, cost as well as issues related to the settlement of tax disputes.
Challenges:
Implementation of GST by all the states at the same time / together will play a very vital role for the mechanism to work and to render the benefits to both Manufacturer/ traders, Consumers as well as to the Government as anticipated.
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A common rate of GST is required across all the states to avoid complexity, tedious calculations of tax and tax credit and further litigation.
As explicitly mentioned, since GST is going to be a “Destination based tax” it will be very important that the GST Act, rules clearly defines what will be “State of Destination”
GST, been looked at as a replacement for various existing indirect taxes, will require that the Act , its rules and regulations are simple, clear, robust and free of ambiguity.
These changes will require potential changes to the accounting, Information technology systems and various other methodologies for which we need to be ready for.
Shifting from the existing system to the new system should be carried out in such a way that neither of the concerned parties is impacted negatively.
Last but not the least, the Political environment in India will be an important challenge for the smooth and early implementation of GST.
Conclusions: India is slowly but steadily progressing. Investors worldwide are eyeing for India. Introduction of IFRS, though partially, was a welcome step and so would be the introduction and implementation of GST. Many countries in the world today have an established GST structure in their tax systems, so it is high time it is introduced in India. However with the various impending challenges the question “Will there be Bright light at the end?” remains unanswered, till the implementation of GST.
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ALUMNI SECTION Corporate Risk Management architecture: My experiences at Citi SHWETA S KATHAR PGDM – FS Batch 2013-15
I would like to congratulate the team FINLY for this initiative and also Venkatakrishnan for sharing his wonderful experiences at L&T Infrastructure Finance in the previous edition of FINLY. The purpose of writing this article is to give a perspective about credit risk and give some insights to those who want to pursue this as their career. The intent is not to give any shortcuts, advice or any recipes to success. Finance as a field is vast with a whole lot of opportunities. Credit risk management is just one part of this field. I shall intend to give an overview of credit risk management and share my experience of the past few months. I am currently employed with Citicorp Services India Limited which came to our campus last year. I am part of the Corporate Risk Management team. As far my role goes: I am involved in credit analysis of companies, along with monitoring accounts on a regular basis w.r.t. Credit spreads and key ratios which are important for credit risk. Other aspects which I cover involve:
Credit analysis of Corporates in the Institutional Group portfolio of Citibank
Seeking approvals for institutional credit and monitoring of accounts
Analyzing credit metrics, external industry research and on-going monitoring of assigned industry
Tracking trends in the industry and its operational impact on the corporates, which is an important factor for credit analysis
Preparation of financial spreads and evaluating peer analysis
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Monitoring of rating changes for corporates and assessing its impact on the repayment capacity of the client
Technical aspects like Financial Modeling, Financial Analysis and Key Ratios are important for credit risk. This involves preparation of Credit Proposals wherein analysis is done on various dimensions including internal and external Credit Ratings, Industry Research, Management Information, purpose of loan and other related aspects.
Sensitivity analysis along with impact on different scenarios on corporate.
Citi‟s policy w.r.t. lending standards and different limits is to be followed at all the times. A whole lot of you would be eagerly awaiting and preparing for your placement season and might be having a lot of questions in your mind. My only advice to all of you would be to empower yourselves with the latest happenings not only in India, but also on a global level. Be updated about the latest financial products, banking practices and try to apply them in case studies as well. Also, concentrate on your strengths and identify weaknesses so that you are prepared to take on the corporate world. I convey my best wishes to all my fellow SIMSRites for the road ahead. Do cherish your time at SIMSR and enrich yourselves with all the sweet memories and experiences. I would once again like to thank the Team FINLY and FINTSTREET for this opportunity and wish them greater success on the road ahead. I would like to extend my appreciation to our Program Coordinator – Dr Pankaj Trivedi and all the Faculty members for the guidance and support provided at SIMSR.
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ARTICLE BY FINACUE
FINACUE: The commodity crisis & India: moderating inflation, cheap financing and domestic growth
The global commodity crisis continues unabated with weak global demand led by China‟s slowdown. From India‟s perspective, the low commodity price regime needs to be examined from the point of view of inflation, growth, and availability of cheap money. Moderating Inflation As pointed out in our last article, China has been in a massive Infrastructure binge for the last decade providing an impetus to commodity prices in an otherwise slowing world. While China‟s slowdown coincides with a weak global economic environment, global commodity prices continue to remain weak. S&P World Commodity Index (10 year data; as on 21st Oct 2015)
Source: S&P Rupee prices of commodities also continue to decline. From India‟s context, crude oil is key to track, as 70% of consumption is met through imports. The low crude oil prices have pushed
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wholesale price index (WPI, measuring industrial price inflation) into the negative territory (deflation) over the last ten months. Notwithstanding the poor monsoon which is likely to lead to an uptick in consumer price inflation, the RBI, in end-September, cut policy rates by 50bps. The RBI pointed out that the consumer price index (CPI, measuring consumer price inflation) inflation target of 6% in Jan-16 is likely to be met, and it will now focus on bringing down inflation to 5% by end-FY17. YoY Change of key commodity prices in INR terms
The RBIâ€&#x;s recent move seems to indicate that the low commodity prices are expected to sustain moderate CPI inflation. The RBI, with an eye on stimulating growth, is now focused on ensuring transmission of the rate cut by banks.
Growth : domestic revival key The commodity crisis is indicative of a global slowdown, and is implying a weak global demand environment. This is leading to a sustained weakness in export-data. Exports are falling Therefore, in a weak global environment, reflected by low commodity prices, a domestic revival is key for India.
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Financing: cheap capital can fund Indian infra The global crisis is also ensuring that interest rates are remaining near zero in developed markets. Several countries (India included) are witnessing a fall in interest rates. Countries that have reduced interest rate in 2015
With India‟s Prime Minister making a strong case for investing in Indian infrastructure, several countries are responding. Recently Japan announced that it will finance India‟s first bullet train, estimated at a cost of US$15bn, at an interest rate of less than 1%. This indicates that India‟s infrastructure build-up could get financed at cheap rates, considering the global commodity crisis, which is reflective of weak global demand. Final Word - The global commodity crisis has interesting implications for India (1) inflation is expected to remain moderate with India‟s import bill consistently reducing (2) growth has to be domestic driven (3) India‟s infra build-up could happen at cheaply as global interest rates remain low. Team Finacue - Finacue offers role-specific industry projects in Finance, allowing b-school students to hone their skills in the subject of their choice.
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2015 NOBEL PRIZE
ANGUS DEATON: THE NOBEL PRIZE WINNER in ECONOMICS Angus Deaton is a British Economist. He was born on 19th October; 1945, in Edinburgh, Scotland. He earned his B.A., M.A. and D.Phil. degrees at the University of Cambridge, the last with a 1975 thesis entitled Models of consumer demand and their application to the United Kingdom, where he was later a fellow at Fitzwilliam College and a research officer in the Department of Applied Economics. He has been a professor of Economics and International affairs at Princeton University in the United States since 1983. He was awarded the Nobel Memorial Prize in Economic Sciences in October, 2015, for his analysis of consumption, poverty, and welfare. He has made several fundamental and interconnected contributions that speak directly to the measurement, theory, and empirical analysis of consumption but there are three major achievements that standout: First, Deaton‟s research brought the estimation of demand systems – i.e., the quantitative study of consumption choices across different commodities – to a new level of sophistication and generality. The Almost Ideal Demand System that Deaton and John Muellbauer introduced 35 years ago, and its subsequent extensions, remain in wide use today – in academia as well as in practical policy evaluation. Second, Deaton‟s research on aggregate consumption helped break ground for the micro econometric revolution in the study of consumption and saving over time. He pioneered the analysis of individual dynamic consumption behavior under idiosyncratic uncertainty and liquidity constraints. He devised methods for designing panels from repeated cross-section data, which made it possible to study individual behavior over time, in the absence of true panel data. He clarified why researchers must take aggregation issues seriously to understand total consumption and sav-
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ing, and later research has indeed largely come to address macroeconomic issues through microeconomic data, as such data has increasingly become available. Third, Deaton spearheaded the use of household survey data in developing countries, especially data on consumption, to measure living standards and poverty. In doing so, Deaton helped transform development economics from a largely theoretical field based on crude macro data, to a field dominated by empirical research based on high-quality micro data. He showed the value of using consumption and expenditure data to analyze welfare of the poor, and identified shortcomings when comparing living standards across time and place. Deatonâ€&#x;s research has addressed issues of great practical significance, and his contributions have influenced policymaking in developing and developed countries. His work covers a wide spectrum, from the deepest implications of theory to the grittiest detail of measurement. The common themes are connecting theory and measurement, and linking micro and macro data by using relevant statistical methods. The Royal Swedish academy said that Professor Deatonâ€&#x;s work had been a major influence on policy making, helping, for example, to determine which social groups are affected by an increase of value-added tax on food. By emphasizing the links between individual consumption decisions and outcomes for the whole economy, his work has helped transform modern microeconomics, macroeconomics and development economics. To design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choice. Professor Deaton has enhanced this understanding through his contributions. Angus Deaton has made major improvements to the theory and measurement within three fields: consumption demand systems, the fluctuations of consumption over time, and the measurement of consumption and poverty in the developing world. He has consistently tried to bring theory and data closer together through his mastery of measurement and statistical methods and the analysis of individual and aggregate outcomes closer together by attending to issues of aggregation. Few scholars have employed such a diverse set of methods in their research and, at the same time, helped us better understand the determinants of consumption and thereby human welfare.
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NEWS BUZZ India’s gold monetization scheme may be ready in weeks Indians prize gold as gifts and as a way of storing wealth. The scheme would allow people to put their gold into banks in return for interest payments in an attempt to mobilize thousands of tonnes of the metal sitting idle in Indian households.
Private equity activity in India may hit record high in 2015 Private equity investments in India are poised to hit a record high this year, surpassing its previous milestone of $14.7 billion in 2007. Private equity investments in the first nine months of the year have already reached $13 billion from 504 transactions, according to Venture Intelligence, which tracks PE, venture capital and mergers and acquisitions in India. Some of the large deals in the third quarter included fund raising by Indian e-commerce firms Flipkart, Snapdeal and Ola, according to the research firm .
Venture capital investments in India hit record high this year Venture capital investments in India have hit a record high of $1.44 billion so far this year, surpassing the $1.17 billion for the whole of 2014, driven by a surge in early stage funding. Venture capital investments were particularly active in July-September, hitting a quarterly record of $536 million according to the Venture Intelligence.
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India hopes to roll out goods and services tax in 2016 Prime Minister Narendra Modi said in a speech that goods and services tax would be rolled out in 2016. The GST, currently blocked in parliament, is one of the business-friendly measures. Modi also mentioned his government was speeding up regulatory clearances, reducing licensing requirements in the defense sector and making tax policy more consistent.
Japan offers India soft loan for $15 billion bullet train in edge over China Japan has offered to finance India's first bullet train, estimated to cost $15 billion, at an interest rate of less than 1 percent. Tokyo was picked to assess the feasibility of building the 505-kilometre corridor linking Mumbai with Ahmadabad. The project to build and supply the route will be put out to tender, but offering finance makes Japan the clear frontrunner. Japan's decision to give virtually free finance for Modi's pet programme is part of its broader push back against China's involvement in infrastructure development in South Asia over the past several years.
Modi, Merkel vow to revive trade efforts, promote clean energy Germany pledged over one billion Euros to Indiaâ€&#x;s solar energy push as the two countries struck a deal to fast-track investments from the European powerhouse and revived stalled talks on crucial India-EU free trade pact. Prime Minister Narendra Modi and German chancellor Angela Merkel signed 18 agreements, agreeing to enhance ties in key areas, including defense, intelligence, railways, trade and combating terrorism.
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TRIVIA
World's largest coins were used in Alaska in 1950. At 3 feet in diameter, these 2 feet wide coins weighed 90 lbs each! Having to create jumbo sized wallets may seem like a pain, but the high value of the coins made all worth while. Each coin was valued at $2,500
Wall Street was laid out behind a 12-foot-high wood stockade across lower Manhattan in 1685. The stockade was built to protect the Dutch settlers from British and Native American attacks
According to Forbes‟ real-time tracker, the elusive multi-billionaire founder of European clothes retailer Zara just smashed past Bill Gates to become the wealthiest person on the planet, with a fortune of $US79.8 billion (€71.83 billion or £51.84 billion)
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Life expectancy in the United States has reached a record high of 78.49 years, according to researchers from Rice University and the University of Colorado. The three countries with the highest life expectancies are: Monaco (89.68), Macau (84.43) and Japan (83.91).
The Mars Orbiter Mission was achieved on a budget of $74 million, nearly a tenth of the amount the US space agency NASA spent on sending the Maven spacecraft to Mars.
In the biggest IPO in nearly three years, the Rs 3,018-crore public offer of IndiGo's parent InterGlobe Aviation was over-subscribed by 3.63 times till late afternoon trade on the last of bidding on 29th October, 2015
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