InFINeeti -Vivaan 2016 Special Edition

InFINeeti Vivaan 2016 - Special Edition

August 2016

FROM THE EDITOR’S DESK

Photo Caption

Dear Readers, Greetings from Team InFINeeti!

The ripple effect that the Great Britain has left us in, has prompted the whole world to think beyond London as the world’s financial hub. India and the world economy seems to be immune of the great effect of Brexit. But is it so? The growing dependence of India Inc. on exports to the European Union and other developed worlds has enticed us to dedicate the theme of this special edition of the magazine to “BEYOND EU”.

This special edition, intends to provide an in depth analysis of the global ecosystem, after the independence of the nation which built the world’s fifth largest economy by colonizing the world for centuries. But, more important than that, the response of the Indian economy towards these global events is worth discussing.

The aggressive change in India’s bureaucratic environment has projected India as a Chinese substitute for investment, where the Asian giant is restructuring itself, leaving India in a wave of opportunities. The increase in foreign investors’ sentiment has helped keeping the growth curve upright and prompted us to explore opportunities in other emerging nations. This has also presented India with an opportunity to plough back the industrial base that it missed in the previous century and exploit the huge domestic market rather than depending on imports.

With this edition, we have tried projecting India at the center of the world, where it faces some domestic challenges and also has been presented with global opportunities.

Happy Reading!

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CONTENTS

CONTENTS 1

BREXIT - An Unwarranted Mistake in The European Integration Process

9

Farmer Producer Organizations - Agrarian Panacea or Neo-liberal Concoction?

14

CHINA - The Desperate Dragon

17

The Greater Fool - Market sentiments do mislead

23

US Presidential Elections - Will the TRUMP CARD work for U.S.?

28

Brexit - Disintegration at the time of crisis

34

THE OIL FOR DRUG DEAL - Can India pharma cos strike deal with debt-ridden Venezuela?

40

THE DISTORTION OF SUBSIDIES - Are we better off without subsidies?

47

Olympics - Harbinger of Crisis

53

Does India need NSG membership?

58

The Trade Trinity - India, Iran and Afghanistan

64

CROSSWORD

65

The Real Plight of Indian Farmers - Can we save them?

73

Equity Research Report - Asian Paints

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From the Director’s Desk

Indian Institute of Foreign Trade stands for academic excellence in international trade, a legacy established over half-a-century of outstanding performance. IIFT has always focused on India's industrial growth by enabling industry leaders with required skills. It gives me great pleasure to introduce the current batch of IIFT students who are ready to take their positions of prominence in the corporate world.

Dr. Mitra is an IAS Officer of 1977 Batch from Assam -Meghalaya cadre and a Doctorate in Economics from University of Cambridge, (U.K.), fellow of Queen Elizabeth, University of Oxford (International Trade) and Hon' Professor in the Centre for Policy Research (South Cooperation).

He has served with the Central ministries of commerce, industries, petroleum, tourism, rural development, communication, defence, home and finance in different capacities.

Given the paradigm shift that the corporate landscape in India has been experiencing over the past few years, our institute has evolved a strategy to always stay a step ahead to produce not just participants in India's growth story, but leaders who can shape it. Industry remains the core focus for us as we constantly reassess and update our course and curricula to suitably address ever changing needs of international corporate world. In this regard, our faculty, alumni and recruiters play an important role in determining the way forward.

The concept of industry-preparedness all over the world has changed over the years. Keeping with the changed requirement, we ensure our students to have adequate exposure to the whole gamut of domains in management education. From finance to marketing, strategy to trade, our students are offered a vast array of subjects to build a strong academic knowledge base. A wide range of electives helps our students to fid their field of interest with clarity as they delve deeper into the preferred domains.

I take this opportunity to congratulate the team InFINeeti for bringing out Vivaan edition titled “Beyond EU” . I hope it will help widen horizon for all the readers across B-Schools.

Dr. Surajit Mitra, IAS (Retd.)

Ex– Fellow, Queen Elizabeth House, University of Oxford.

Ph.D. (University of Cambridge).

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From the Centre Head’s Desk

The Indian Institute of Foreign Trade in its more than five decades of existence has always connected with the industry and policy makers alike. In this endeavour, it has hosted various dignitaries and offered a platform for enriching dialogue through a variety of activities.

I am happy that this year too we are bringing out the Special Vivaan Edition of InFINeeti titled “ Beyond EU” which throws light on relevance of EU in the wake of Brexit and other global issues.

The magazine has always presented the thoughts and opinions of the youth on contemporary problems in the field of business and finance and will continue to do so. It also highlights current innovations and trends in the industry. The magazine keeps increasing its readership from its quality content and diverse inclusion. I thank all the contributors for participating in making this magazine better than every previous edition.

Dr. K Rangarajan Head - Kolkata Campus, Head - Centre for MSME Studies

Prof. K. Rangarajan is an Accredited Management Teacher (AMT conferred by AIMA) and is a member of several professional bodies including AIMM (Australia). He is also amongst the Board Of Directors of The State Trading Corporation of India Limited (STC).

His expertise includes Business Strategy and Strategic Planning.

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BREXIT An Unwarranted Mistake in The European Integration Process

By Victor Ganguly Indian Institute of Foreign Trade, Kolkata

The writer was part of Summer School in EM Strasbourg Business School, ‘16

The first woman Secretary of State of United States of America, Madeleine Albright once famously quoted “To understand Europe you have to be a Genius – or a French”. And I am neither one of them, but my recent experience in European Integration course allowed me to appreciate the scenario much better and write the very nuances between the different Political Institutions. So in order to understand what can be the future of Europe after the exit of United Kingdom from the Union, we need to first understand about Europe and its Institutions. The first part of the article deals with how it all started and journey that Europe took for its unification.

The European Union is a unique political partnership comprised of 28 European countries. It came into existence after the World War II to foster economic cooperation: the idea being that countries that trade with one another become economically interdependent, and thus likely to avoid conflict. The EU is based on the rule of law: everything that it does is founded on treaties, agreed by all Member States. 9th May, 1950 it was the beginning, when the French Foreign Affairs minister Robert Schuman gave the famous Schuman Declaration based on the ideas of Jean Monnet. The proposal was that France and the Federal Republic of Germany pool their coal and steel resources

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in a new organisation which other European countries can join. The very age old rivalry of France and Germany was being vanquished by this very noble idea. It culminated to the establishment of European Coal and Steel Community which came into force in 1952. The member countries were Belgium, the Federal Republic of Germany, France, Italy, Luxembourg and the Netherlands. Here an important point to be noted is, there is no UK in the initial part of the membership.

UK was twice vetoed by France for not being part of the Community.

In 1957, European Economic Community and European Atomic Energy Community were established. And finally, in 1973 UK joins the European Communities.

The famous Schengen Agreement was signed in 1985 with the aims of abolishing checks at the border.

And finally what we commonly known as European Union was created in place of EEC in 1993, when the Treaty of Maastricht came into force. And soon many other treaties like Amsterdam Treaty, Treaty of Nice and Treaty of Lisbon followed. This was the brief background of European Union. Do refer the timeline which has been given for better understanding.

9th May is celebrated as the Europe day, this day Robert Schuman came out with his famous declaration ECSC comes into force in 1952, signed by the initial 6 countries

Denmark, Ireland and UK join the community.

Norway stayed out after the referendum

The first direct elections to the 410 seat of European Parliament

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Austria, Finland and Sweden join the EU, bringing its membership to 15. Norway stays out again The Amsterdam Treaty came into force. 11 EU countries adopted Euro

Creation of a Convention to draft the European Constitution Euro notes and coins got introduced in the 12 Euro area countries The European Constitution was adopted in Rome (was subject to ratification by

One of the more confusing part of Europe is its Institutions. Rather being rhetoric, the names tend to baffle a person. This part minutely deals with the different institutions in Europe and its functions. The values of human dignity, freedom, democracy, equality and rule of law has been upheld and conserved by these Institutions. Following are the European Union Institutions: The European Parliament It represents the EU’s 500 million inhabitants and is the only directly elected EU body. It plays a key role in electing the president of the European Commission. The EP is a unique example of multinational and multilingual democracy at work. The elected members like any other parliament engage in public debates and play a major role in shaping the policy of the EU. The European Council he EU’s broad priorities are set by the European Council, which brings in together national and EU level leaders. It is led by its president and comprises national heads of state or government and president of Commission.

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The Council of the European Union It represents the governments of the individual Member States. The presidency of the Council is shared by the Member States on a rotating basis. The Council of the EU decides jointly with the EP on laws of that affect the daily lives of the Union’s citizens.

These include topics such as freedom of travel, food safety and consumer protection, the environment and most sectors of the economy. It also develops EU’s common foreign and security policy, hence an essential EU decision maker.

The European Commission This is an important body, as it is the EU’s executive body, it is responsible for proposing and implementing EU laws, monitoring the treaties and the day to day running of the EU. And also the main part, it represents the EU outside Europe specially by negotiating different trade agreements between EU and other countries. Also in order to emphasize how important this body becomes, Theresa May has to appeal to the European Commission for a better exit deal for UK. Other important EU institutions ate the Court of Justice, The court of Auditors and the European Central Bank. I won’t be dealing much into these as they are self-explanatory. But another important institution of Europe is the Council of Europe.

The council of Europe: it is the leading human rights organisation of Europe. It has 47 member states, including the 28 members of the EU. The Council of Europe works in close partnership with the EU, and co -operates with the UN and with partner countries to protect human rights, democracy and rule of law. It works on what our society needs today, answers on racism, child welfare, terrorism, organised crime and

Leave won by 52% to 48%. The referendum turnout was 71.8%, with more than 30 million people voting

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and corruption, drug addiction and protection of the environment.

These were the important Institutions of Europe, holding up the very value of Democracy. Care must be taken in understanding the institutions like The European Council, The Council of European Union and The Council of Europe. When we say Council it is always the Council of European Union.

England voted strongly for Brexit, by 53.4% to 46.6%, as did Wales, with Leave getting 52.5% of the vote and Remain 47.5%.

As we are living in turbulent times in our history, the financial and economic crisis and now the Brexit, it seems that people are losing faith in politics and in institutions. The lack of confidence has already effected the European Integration process. People need to be more rationale and should take out more time in discussing the pros and cons of any event. If the EU from now wants to come back to life again, it needs to demonstrate the ability to solve problems that are important to its citizens. What EU started with, has already done with a great success, of not creating another war. But now the problems are larger than just war, tackling to Economic growth of most of the EU nations and Unemployment.

After half a century, EU already has fulfilled its promise. A war between EU Member States is, I won’t say impossible but merely unthinkable today. The common market together with open border is a daily reality for half a billion Europeans. Even for a tourist or a student like us, it becomes very important for free movement and having single currency and visa.

Hence, the very idea of peace, freedom, stability and prosperity has been fulfilled by EU, but it faces new challenges in the years to come.

Serena Williams won this year coveted Wimbledon finals, but strangely lost $380,000 because Pound plummeted against Dollar in 30 years after the referendum. Well it’s pretty evident that she might have been the first one to pray against the Brexit.

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So after understanding the basics of European Union in the first part, it’s time for us to appreciate the given topic. It was quite an irony that initially United Kingdom wanted to join, vetoed twice and now has applied for Exit. One of the major reason what I feel is the rich history that this country had. At one point of time, Britain was ruling the world through its colonies. Such kind of imperialism has diminished into Neo imperialism for Britain, leaving behind the existing rich and cultural heritage. People are proud of being British and hence carried forward the economic growth. Most of the perception about the tax money getting into the development and others did not please the British people specially the Older generation who were worried about their pensions.

Here it is important for us to understand the expenditure of Britain specially in the daily expenses of running the EU institutions, and these expenses are directly proportional to the GDP of the country.

It is also interesting to see few facts that during the day of referendum, like in the city of London, where mostly the better educated, higher income and nonwhite voters, was a strong hold for the Remain campaigners, but unfortunately due to heavy rains and transport chaos people turned out to be less. So this very well went in favour of the Leave campaigners, resulting in nearly 52% people voting for Exit. Also the variation in the vote can be explained through the demographics. In the age group of 18-24, around 73% voted for Remain, while 60% of voters aged 65 and over voted for Leave. Similar divisions were apparent across education levels: 57% of degree-holders voted to stay in the European Union, while most of those with only secondary-school educations wanted to leave.

Strangely, it was Scotland, Northern Ireland and Gibraltar wanted to remain with the EU.

Scotland and Northern Ireland both backed staying in the EU. Scotland backed

Remain by 62% to 38%, while 55.8% in Northern Ireland voted Remain and 44.2% Leave

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For the UK to leave the EU it has to invoke an agreement called Article 50 of the Lisbon Treaty which gives the two sides two years to agree the terms of the

split.

So after the exit news, there were shock waves in the financial market. The pound plunged by 9% against the dollar and as much as 13% against the yen. The next step for UK was to invoke article 50 of Lisbon treaty. Under Article 50, the terms of Britain’s departure have to be agreed by the other 27 EU countries, without a British vote. So Brexiteers would prefer to negotiate informally, without invoking Article 50. The other 27 countries are unlikely to go for this.

For European leaders, now the most pressing question is how to deter contagion. That means making Britain’s exit look like an unattractive option, and preventing it from enjoying the benefits of EU membership once it has left.

As of now for jobs cut or taking out the offices to other parts of Europe, it is pretty clear things are not going to happen that soon. Companies specially the Automotive companies which rallied for Remain in EU, will not undergo drastic changes in the Operations in UK. Things are uncertain, but the best part as the Pound has lost its value it might help the exporters.

But then firms will not welcome tighter immigration rules, which will happen after the Exit. And also half of Britain’s exporters rely on imported components, which will become more expensive. Another problem for Britain is that it has a huge current account deficit, which needs to be financed. There is much talk about the way that a weaker pound can boost exports, but it also raises the costs of imports as discussed earlier which will widen the deficit in the short term. A weaker pound will also lead to higher inflation. Two things can happen in this case. Either wages can rise in compensation, in which case business costs will rise and the competitive advantage of devaluation will be eroded. Or wages won’t rise and people's living standards will be eroded. Hence these kind of after effects are pertinent, but then things are very uncertain, and definitely goes with the support that render for a unified EU.

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One another major issue is immigration. Now, after Exit stricter laws will be in place for immigration.

According to a think tank its actually beneficial for UK’s economy as EU migrants are more likely to be university-educated, less likely to claim benefits and more likely to be in a job than the native-born population. And according to the current laws, out of all the immigrants, 71% have stayed for more than 5 years which makes them eligible for permanent residence. Also it is more likely that in future, migrants are subjected to tougher laws.

And specially in the Trade sector, UK will face a major jolt. At present, UK companies are able to trade with the EU on a tariff free and quota free basis. Not only it is being considered to impose 5% tariff on the UK goods, but also considerable amount risk is there of quotas being imposed on the goods and services being exported to EU. Now such kind of restrictions will hamper people on both the sides and not only UK. Here major role will be played by Germany, as UK is the third largest market for German goods. So for Germany, having a free trade pact with UK will always be beneficial.

All the problems stated clearly depicts problems for UK and an unwarranted mistake. But I much more concerned about the structural flaws that Brexit has exposed on the European Integration process, as this would mean changing the past decisions. Also it clearly depicted that European integration process is not irreversible. And this is the worrisome part, as once the Exit formally takes place, it might lead to Domino effect leading to other countries in EU to ask for exit. Unification is very important in any kind of process, and in this where it took half a century, Integration process is necessary not only for Europe but also for the world and its economy.

The state pension

'triple lock' could be cut if Britain votes to leave the EU, the prime minister

has warned. The so-called 'triple lock' means state pension payments rise each year by the higher of

prices, earnings or 2.5%.

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Farmer Producer Organizations Agrarian Panacea or Neo-liberal Concoction?

By Manomi Nair & Anant Anupam Tata Institute of Social Sciences

Unlike their richer peasant brothers and the landlord-turnedcapitalists, the marginal farmers

failed to capitalise on the incentives.

Agriculture in India, although erstwhile considered as backbone of Indian economy, has been on a poor performance spree since independence. The immiseration of small and marginal farmers, who comprise over 86% of all farmers, has been a long running process.

First it was the socialist agenda which drew surplus away from agriculture to fund the protected industrialisation of infant India followed by the uneven success of Green Revolution and liberalisation of imports. Unlike their richer peasant brothers and the landlordturned-capitalists, the marginal farmers failed to capitalise on these incentives. Falling efficiency coupled with an increasing neglect of the central and state governments in the agriculture sector translated to its falling share of contribution to India’s GDP, reportedly from nearly 50% after independence to about 14% at the turn of the millennium. So, when more than half of the population relies on a sector for employment which doesn’t yield even a sixth of the nation’s income, vulnerable members of this population group are confronted with a steep crisis that needs resolving.

This crisis has slowly multiplied since the opening up of the Indian economy after the economic crisis of 1991. The structural adjustment programme backed

by IMF did not create any notable change in the lives of small and marginal farmers.

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Worsening prices, increasing cost of inputs which yielded less and less viable produce, and lessening government support for credit and subsidies pushed them further into the abyss of debt. Rural credit availability faced a squeeze, with banks reducing priority sector lending, making agriculture an expensive activity adding to the woes of the small farmers. The regulations on import and export of agricultural products were also relaxed considerably. All these measures, though intended as a move away from government patronage of agriculture to transform farmers into independent, efficient producers, had a decelerating effect on agriculture with the per capita food grain output and the rate of employment generation falling post 1991. While cooperatives had helped ease the strain from the agrarian crisis to an extent, the latter rocked the economy again in the new millennium. It is in these circumstances that the revision of collective action in Indian agriculture in the form of Farmer Producer Organisations (FPOs) and Producer Companies took place.

In 2011-2012, under the initiative of the Ministry of Agriculture and the state governments, approximately 2.50 lakh farmers were mobilised to form 250 member-based Farmer Producer Organisations (FPOs), each with an average membership of 1000 farmers. The primary objective of this project, executed through Small Farmers’ Agribusiness Consortium (SFAC), was to improve production, productivity and profitability of agriculturists, mainly small producers. FPOs were guided by the Resource Institutions (RI) in skill development and creating market tie-ups while enhancing their negotiating power. The economic and social impact of this pilot project looked promising enough for the Central government to encourage state governments to directly support FPOs under the XII plan (India. Department of Agriculture & Cooperation, 2013).

While cooperatives had helped ease the strain from the agrarian crisis to an extent, the latter rocked the economy again in the new

millennium.

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While FPOs might look like the panacea for the agrarian crisis faced by lakhs of small and

marginal farmers in the country, the hidden agenda behind this apparent turning of tables in favour

of agricultural sector should not be ignored.

As a form of ‘new generation cooperatives’, FPOs aimed at losing the welfare-oriented, inefficient, corruption-ridden image of cooperatives. While FPOs might look like the panacea for the agrarian crisis faced by lakhs of small and marginal farmers in the country, the hidden agenda behind this apparent turning of tables in favour of agricultural sector should not be ignored.

With the economic reforms failing to accelerate agricultural growth and the sector sliding into a crisis, small and marginal farmers were left out to compete with the global players in the market unsuccessfully.

Integrating farmers with global agro-food supply network could be pushing them into an unequal relationship. Indian farmers stand a greater chance of being in a compromised, unequal position because it is a difficult process to customise their traditional ways of agriculture to suit the industrialised model of corporate agriculture. As a result of which mostly large farmers alone benefit from the integrated network.

And these farmers are usually of a higher caste and class, who could hold onto their land despite the land reforms. The redistributive land reform policies did not aid the small and marginal land holders, who fell short in the race of the economies of scale, bargaining capacity, market access and capital accumulation etc.

The government then introduced the concept of Producer companies (PCs) with the intent to inculcate the principles of business in the farmers and integrate them into the neo-liberal supply network with the opportunity to either compete with or against the corporate giants in the market. Aims of economies of scale helping in the reduction in transaction cost and coordination cost, which for individual small producers tends to be high due to low capacity, lack of infrastructure and proper information etc., and increased bargaining power, access to credit and market and

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improved incomes were some of the other stated reasons in favour of this. Though this hybrid organisational setup of a collective action and private company might deceptively look like a win-win situation for both the producers and the corporate players, the fact that the renewed agro-network does little to increase productivity or add value to the producers’ end, except for cutting down the cost of involving intermediaries, should not be overlooked.

Given the trimming away of services available from the government to these PCs, the latter are presented a scenario where they are still facing a steep competition with the lead market-share holders, and are simultaneously encouraged to either compete or collaborate with these market giants. Big players like Cargill and Monsanto exert stronger control over the modes of production so as to maintain quality and safety while ensuring traceability and guaranteed supply. Thus, their focus lies on catering to the highly specific demands of the market rather than producing sustainably. This drives the primary producers further away from the safety of food-crop farming for at least their communities’ subsistence, into a risk-filled market where the success or failure of the enterprise is solely the responsibility of the PC, minus any burden on the government for support in times of failure.

Even SFAC directly aids the FPOs in carrying out contract farming with corporates, leaving them with low bargaining power. However, given the challenges they face, just as the market ‘takes care’ of weaker market players, FPCs with smaller farmers or lesser capital to put at risk will also be ‘taken care of’ by the demand-supply system of the market. Alongside the inflow of multinational corporations, the neo-liberal Indian state and its structural reforms restrict the state from providing the basic stimulus to growth like it did post 1947 extending institutional protection & other services like credit technology etc to agriculture

Big players like Cargill and Monsanto exert stronger control over the modes of

production so as to maintain quality and safety while ensuring traceability and guaranteed

supply.

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The government displays

engagement with the small and marginal producers in the form of promotion of participatory civil bodies like FPOs and SHGs, drawing out electoral support, but follows

through with substantial cuts in public expenditure.

Terms of trade are no longer controlled by the government, and without a reasonable (or any) minimum support price, inflation and volatility in market prices for inputs and outputs respectively, leave no scope for re-investible surplus for a small producer (Murthy, 2013). Investment in agriculture becomes counterproductive for the neo-liberal state, and so does surplus generation pointless. And yet, in 2013, FPOs began to be suggested and aggressively promoted by the second term UPA government, while simultaneously cutting the proportion of central funding to various welfare schemes, making money available to be diverted capitalist friendly investments. Such a move serves three vital purposes in a neo-liberal economy freeing the state from running a fiscal deficit incurred from financing welfare schemes for the needy; presenting these changes in the vocabulary of decentralised participatory empowerment and employment generation; and be a welcoming agent for movement of financial capital in a globalised economy while foregoing the positive multiplier effects of spending on its own population.

The only way such a strategy fits for the Indian economy, polity and society is the power of franchise that the small producers, which make up a large proportion of the Indian population, hold. The government displays engagement with the small and marginal producers in the form of promotion of participatory civil bodies like FPOs and SHGs, drawing out electoral support, but follows through with substantial cuts in public expenditure.

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CHINA The Desperate Dragon

By Mayank Bawari & Saurabh Tomar IIFT Kolkata If one is to believe what one of the greatest minds that ever lived said on the significance of a historical event, then it would absolve the Communist Party of China, and Mao Zedong, or Chairman Mao, of the genocidal social and reformative policy it undertook to leap itself in the world scenario leading to some of the greatest human atrocities ever committed, after it ousted the Kuomintang and united China under one party system.

Myopic, inhumane and desperate measures on one hand, did irreparable damage to the indigenous demography and on the other, accelerated China abnormally at breakneck speed, where it currently stands as the second largest economy in the world and is poised to overtake United States in the near future. Knee jerk Chinese policies have started paying dividends, and this is a cause of great alarm in this volatile desperate global scenario. The rise of collectivism and communism after the Second World War is unequivocally linked with China’s current economic woes and its uncertain future.

On the economic front, the second highest number of enterprises in the Fortune 500 are Chinese, ahead of contemporaries like UK, France and Germany combined, and it may seem too soon to call to order their manufacturing woes, but on average these firms have registered a net profit growth of only 8% compared

“In historic events, the so-called great men are labels giving names to events, and like labels they have but the smallest connection with the event itself.

Every act of theirs, which appears to them an act of their own will, is in an historical sense

involuntary and is related to the whole course of history and predestined from eternity.� - Leo Tolstoy

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to the world average of 27% profit growth rate of Fortune 500 companies.

China’s manufacturing is struggling with low end and small value produce, which does not inspire confidence in the banking sector, making banks apprehensive in investing in this low profit margin sector, whereas banks themselves make colossal profits. Add to that the unnatural growth of real estate in China and manufacturing is further dampened as it makes the booming real estate market a more lucrative investment choice.

In simple economic terms, overcapacity is

when demand of a product falls below what an industry is capable of producing.

Business Sector Banking Manufacturing

Number of Firms in Top 500

Total Size

17 5.5 Trillion Yuan 260 23 Trillion Yuan

Year on Year Profit 1.23 Trillion Yuan 462.3 Billion Yuan

As per the state planning commission, around 1.8 million jobs would be shed in the near future, in the notoriously inefficient and indebted state run steel and coal industries. This comes as a rude shock for a generation of workers living in pitiful conditions with health problems and for whom labor unrest is the norm. In a country found on revolution it is ironic that there is a ban on strikes, unions and mass protests.

In 2014, Taiwanese shoe making firm Yue Yuen lost $221 million to disrupted productions and strikes.

In simple economic terms, overcapacity is when demand of a product falls below what an industry is capable of producing. China throughout the years has dealt with the problem of overcapacity, wherein globally traded commodities such as steel and cement have seen a sharp decline in demand over the years, but the supply of steel from China is still on the rise, surpassing combined output of India, Russia, US and Japan.

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Japan. This has led to trade tensions, as Chinese steel producers seek to export surpluses, resulting in tariff impositions on steel produce from China by US, Europe and other foreign governments.

Territorial disputes with India, Japan, Mongolia, in the South China Sea with its nautical neighbors, and daily skirmishes and disputes along these geographic fault lines have propounded China’s big gun diplomacy.

Adding to that, the strange status quo established among Hong Kong, Macau, Taiwan is anyone’s guess.

According the UN Projections, 2 billion of the world population will be above the age of 60 by the year 2050, with China contributing 30% of this figure. It is no secret that more people are leaving the Chinese workforce on average than those coming in, resulting in labor issues throughout the economic diaspora.

This majority working population that gave China a distinct edge on the global scale is fading rapidly. As a result of the hastily implemented draconian “one child” family planning policy adopted in the post-Mao China in 1979, a whole generation of working populace will be phased out of the workforce in 2017.

In 1958, when Mao Zedong said “Let 100 flowers bloom”, not many predicted that it was an underhanded tactic to weed out discontent rather than an effort to form critical political expression. Adding to this, a maelstrom of leadership challenges, party politics, devaluation of Yuan and other external influences make China an unenvious proposition in the near future.

Sun Tzu, in his war treatise said “Do not press a desperate foe too hard.” and made the world wary of a desperate foe. This holds true for the mighty China which, though in a corner, with seemingly no way out, can through some trick escape its fate. In the end it is for China to decide whether it is a desperate dragon.

In the coming years, China perfected this art

of self-censorship, with paid scribes and a determined propaganda machine.

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The Greater Fool Market sentiments do mislead

By Smrutinjay Mishra and Arpit Maheshwari IIFT Kolkata

Market sentiment is the feeling or tone of a market, or its crowd psychology, as revealed through the

activity and price movement of the securities traded in that market.

The greater fool is actually an economic term. The greater fool is a patsy. For the rest of us to profit, we need a greater fool someone who will buy long and sell short. Most people spend their lives trying not to be the greater fool. We toss him in the hot potato, we dive for his seat when the music stops The Greater fool is someone with the perfect blend of self-delusion and ego to think that he can succeed where others have failed. This country was made by greater fools On June 24th 2016, Britain announced its plans to exit the EU following a public referendum‌ and the world of finance fell apart. By the time people were picking up the pieces, the loss to major stock markets globally was to the tune of $2.1 Trillion in a single day (twoday loss, including Monday, June 27th was a combined $3 Trillion)! To put things in perspective, the biggest one day loss following the bankruptcy of Lehmann Brothers and GFC (Global Financial Crisis) in 2008 was $1.9 Trillion, although to be fair the GFC was a greater loss in percentage terms. And what makes the current situation even worse is that as the financial world shifts from fundamental analysis to short-term sentiment, the crests and troughs are expected to keep getting worse.

In the 134-year long history of the Dow-Jones, eight of the ten biggest crashes ever have occurred post 2000, in the past sixteen years. On the other hand, all

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top ten highest one-day gains have also occurred after 2000. What this means is that the market today is experiencing unprecedented volatility and fluctuations with greater rapidity than ever before in world financial history. As we know, market analysis is divided into three major categories – fundamental analysis (economic scenario & indicators, interest rates etc.), technical analysis (study of past data to predict outcomes) and market sentiment (attitude of investors towards market). However, over the past few years the influence of market sentiment has been overwhelming the other two analyses. This has been further exacerbated by the availability of news and social media presence at our fingertips.

“I finally know what distinguishes man from the other beasts - financial worries.”

-Jules Renard

A few particular instances would be : 

A 2013 fake tweet from the hacked Associated Press account, claiming that the White House was bombed and President Obama injured sent Dow Jones crashing by 150 points ($136 billion loss in equity). The markets rebounded in 3 minutes once it was discovered to be a fake, but the damage was done.

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"I've always said, the key organ here isn't the brain, it's the stomach. When things start to decline - there are bad headlines in the papers and on television - will you have the stomach for the market volatility and the broadbased pessimism that tends to come with it?"

- Peter Lynch



Tesla announced a fake launch of a rival to Apple Watch on April Fool’s Day 2015. Nevertheless, the stock jumped about $2 within minutes of the announcement.



Oil prices jumped by around $2 to $92/barrel when an account claiming to represent the Interior Ministry of Russia (wrongly) announced the death of Syrian President Assad.

Trade pundits claim that markets calm down after knee-jerk panic reactions, when hoaxes are exposed.

However the damage is done, often in a matter of seconds. In particular, when volatility is so high, it leads to extensive arbitrage opportunities for large firms employing algorithmic trading. The downside is with the small traders and the middle-class workers who invest their hard-earned savings in stocks and markets. The “Efficient Market Hypothesis” theory tells us that the stock market is absolutely fair and square and that it is impossible for anyone to beat the system.

Insider trading is a particular case when people take advantage of short term market reaction to news. As insider trading grows to be a menace, we are facing a growing disparity between large firms employing the latest technological advances, and small traders and individuals who invest in stocks based on fundamentals.

Many people make the argument that since insider trading is by and large a victimless crime, the

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reprisals should be low. However, it violates the spirit of free and open market, and introduces additional barriers for those who are not privy to insider information. Also, with the Indian Judiciary under a massive burden of over 3 crore pending cases and media pressure to prioritize sensational violent crime, the government and regulatory bodies are unable to devote sufficient resources for prosecuting white-collar criminals and such perpetrators often get away scotfree. Under such circumstances, it is easy to forget that the stock market was created on the premise that anybody could own a stake in a firm, and that all are equal in the eyes of the law.

To take a particular case of misleading market sentiment, oil prices dropped by about 5% ($49.5/barrel to 47/barrel) overnight following the announcement of Brexit (The exit of United Kingdom from the European Union). The market perception was that a destabilized Europe would have lower energy requirements and lesser demand for oil. If anything, the opposite is true since many companies such as Deutsche Bank, HSBC and JPMorgan Chase have announced plans to shift operations from London to mainland Europe, which would require high expenditures and would inject money into the economy.

Another case would be the excitement around IPOs, which tend to create hype and drive up prices in the short term (although of course many companies do live up to the hype and sustain earnings over the long term – Facebook and Google for instance) – Zynga Limited for example launched its IPO at $10/share, but has fallen every year and is currently trading at $2.86/share. Very similar is the story of India’s most successful IPO of Coal India Limited (CIL) ( Rs 245/ share).

Its stock is currently trading at Rs323/share and thanks to record coal production the company has an overwhelmingly bullish rating on major stock forums.

This undermines the current economic scenario, with China (world’s largest coal consumer) on a slowdown, steel consumption (which requires coal as a major raw material) on the fall and the whole world undergoing a gradual shift to renewable and non-polluting

Nintendo Co. shares plunged by the most

since 1990 after the company said that the financial benefits from the worldwide hit Pokémon Go will be

limited. The correction comes after Pokémon Go’s release almost doubled Nintendo’s stock through last

week’s close, adding $17.6 billion in market capitalization.

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“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

- Peter Lynch

“The stock market is a device for transferring money from the impatient to the patient” - Warren Buffet

energy sources. What many investors fail to realize is that a successful IPO is not a guarantee of future success just as (fortunately) a failed IPO is no guarantee of long term failure.

The biggest casualties of market volatility are the traders and stock-owners who trade on margin but don’t have instantaneous access to financial news and trading, are unable to exit their positions in time and thus have their account reach critical position and get liquidated. The solutions are to keep a diverse portfolio and hedge their positions. Hedging is an unwilling proposition for small traders who are looking for bigger profits, but it is critical to safeguard one’s position before one can expand it. Also, an untapped market is allowing a fixed-deposit period in stocks, wherein a person’s portfolio gets locked for a predefined period, thereby insulating him from any short term knee jerk movements.

Naturally there is an element of risk involved in such a situation (bankruptcy/liquidation of stock), but with careful analysis of past trading patterns of users, an insuring entity can make a fortune. Another safeguarding, though controversial move would be to put restrictions on short selling during periods of extreme market downturn (George Soros made a fortune by taking a large short position around Brexit). While this goes against free market theory, the priority of any regulating body is to ensure protection of those at risk of losing everything, even if it means curbing the rights of those who stand to make fortunes in turmoil.

The love affair between the stock market and the public in general make it possible for builders, visionaries and entrepreneurs to raise capital and bring dreams to life. The fabled American Dream was found on this concept and the Indian society has come to embrace this concept as well, as depicted by the all-time peaks of NSE and Nifty, both hit less than two years ago. Therefore, it’s on us to defend this structure rather than let it be eroded by a lack of scruples. A shift to fundamental and technical analysis is needed, rather than short-term impressions creating havoc on the market.

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US Presidential Elections Will the TRUMP CARD work for U.S.?

By Prateek Paliwal and Ayush Sharma

IIFT Kolkata Donald Trump has emerged as the Republican candidate for the Presidency of the United States of America. If somebody would have predicted this two years ago, he would have been lampooned.

"If you are a little different, or a little outrageous, or if you do things that are bold or controversial, the press is going to write about you.”

-Donald Trump

There has been a wind of change in the build up to the US elections in 2017. It has been different from the typical, politically correct opinions and debates lingered with occasional peppering. Donald Trump has approached things in a blunt demeanor, making his appreciation and discontent quite apparent. He has been a regular at mudslinging and he has made thinly veiled jibes at fellow contestants, the Democrats, the Muslim community, TV show hosts and whosoever has come in his way.

It was expected that such brandishing from an inexperienced wannabe would result in him being comfortably cast aside in the nomination for the Republican candidacy. But, that hasn’t happened. On the contrary, Mr. Trump has become the Republican Presidential nominee. And, on top of that, he has garnered 43% of votes according to a CNN/ORC poll for the choice of President.

The American economy is of utmost significance, both nationally and internationally. From the off, Mr. Trump positioned himself as the brash outsider, the only Presidential nominee with real economic know-how. As the New York Review of Books recently noted, millions of Americans have come to know him as the man they saw on "The Apprentice:", “the grand vizier of

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capitalism, the business magus, the wise man of the boardroom, , a living confection whose every step and word bespoke gravitas and experience and power and authority.”

Mr. Trump was pessimistic when asked about the prospects of the US economy. He also claimed in interviews that the economy was in a bubble which was soon to be burst and that it was headed for a bad recession. In an interview with the Washington Post in April, he claimed that he could “fix it” and “fix it pretty soon”.

Mr. Trump’s economic plan, on its face value at least, is simple and straightforward. As per his website, “too few Americans are working, too many jobs have been shipped overseas, and too many middle-class families can’t make ends meet.” He seeks to achieve four targets: relief in taxation for middle-class Americans, simplifying the tax code, growing the economy by discouraging corporate inversions, and not burdening the national debt.

So what are the various economic policies that Donald Trump has in store for the world? There have been some that he has openly declared and some that have been inferred from his speeches. So let’s try and analyze these policies and see if they can be the trump card for USA or will they rather open the Pandora’s Box for his country.

As per Donald Trump’s policy, if an American is single and earns less than $25,000 or married and jointly earn less than $50,000 then there will be an exemption from tax. If this policy applies then more than 50% of the households will be not paying any income tax. Also he has suggested reducing the number of tax brackets from 7 to 4 in his policy. The new brackets will have the rates of 0%, 10%, 20% and 25%. For the businesses, he has suggested that no business whether large or small will have to pay more than 15% of his tax as a business tax. All the three policies are as sugar coated as they can get, but some analysis reveals that they might not taste that sweet to the natives of his country if implemented. Firstly, reducing the large amount of tax that Trump has suggested will cut down on a

“Yes, I think the Republican nominee is unfit to serve as president,” -Barack Obama on Donald Trump

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“When Mexico sends its people, they’re not sending the best.

They’re not sending you, they’re sending people that have lots of problems and they’re bringing those problems wit us.

They’re bringing drugs. They’re bringing crime.

They’re rapists…

And some, I assume, are good people.”

-Donald Trump

tax that Trump has suggested will cut down on a huge amount of revenue that the government generates. This revenue has to be paid by someone, else the deficits will skyrocket and this will create an imbalance between government spending and expenditure.

According to the tax policy center, a non partisan project of the Brookings Institution and the Urban Institute, Trump’s suggested plan would eliminate 22% of the federal revenue generated over the last 10 years. Another reason why Mr. Trump’s tax policies are flawed is that the richer people in America will get away with paying an extremely smaller amount of taxes. His new tax rate has the maximum rate of 25% down from 39.6% in the current scenario. This will allow the richer people in USA to get away by paying an extremely small amount of tax.

Tax Rate

Long Term Cap Gains

0%

0%

10%

0%

20%

15%

$50,001 to $150,000

25%

20%

$150,001 and up

Income

Single

Married

Fillers

Filers

$0 to $25,000 $25,001 to $50,000

$0 to $50,000 $50,001 to $100,000 $100,001 to $300,000 $300,001 and up

Heads of Household $0 to $37,500 $37,501 to $75,000 $75,001 to $225,000 $225,001 and up

As soon as Donald Trump came into the contention for the post of President, he started lambasting China and Mexico. His suggested economic reforms could have massive repercussions on American trade. He suggested erecting a wall on the borders of Mexico, which seems like a farfetched, unattainable dream.

His list of extremities doesn’t end here. He also suggested imposing 45% import duty on goods imported from China and 35% import duty for US companies that have moved offshore. On a cursory glance, Mr. Trump’s policies promote the households and businesses back home but they would be

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detrimental in the long run. Is the US economy self sufficient to sustain itself without imports from China and Mexico? The import statistics in the US provide an insight.

China and Mexico contribute a staggering 34.7% in the net USA imports. Putting trade restrictions on these countries will only put undue pressure on the USA economy by inflating the price of goods imported from there and thereby creating a panicky situation.

Just like China and Mexico, illegal immigrants have been a constant thorn in the eyes of Mr. Trump. He has vowed to deport all the illegal immigrants, which amount to 11.2 million. But what are the economic impacts of this policy? Well there can be some serious repercussions of this policy. A majority of the labor force in USA comprises of the immigrant population.

Deporting them would only result in the loss of labor, thereby affecting the GDP which could be reduced by $1.6 trillion according to a center-right organization American Action Forum(AAF). The organization has illustrated in its report that completing all the deporting formalities could take somewhere between $400 billion and $600 billion. Mr. Trump would be wary of such humungous expenditure for deporting.

In a recent statement released by Mr. Trump, he has vowed to invest $500 billion on infrastructure projects. In his earlier statements, he had also talked about increasing the military expenditure. But the

One in five Republicans want Donald Trump to be voted out considering current circumstances.

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pertinent question in this scenario is how Mr. Trump will fund his infrastructure activities. He claims, he would use the infrastructure bonds to get financing from citizens which would fund his projects. But such debt financed spending will increase the already debt- ridden US economy and if Mr. Trump goes ahead with his plan then the debt crisis of USA might prolong in his tenure, a situation which is diametrically opposite to his take on government debt. Though activities like tax reduction can spur economic growth by providing people with more disposable income, they have to be properly complemented with cost cutting. Also increase in military spending seems like a novel solution.

Donald Trump has suggested many extravagant solutions. Some seem to be new; some seem to be like mere gimmicks while others tread on the boundaries of realism. Unless properly implemented they might result in more losses than gains. Will the Trump Card work for US Economy? It seems to be quite unlikely as of now.

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Brexit - Disintegration at the time of crisis

By Preetika Tayal & Ayan Das

IIFT Kolkata United Kingdom decided to join European Union on 1st January, 1973. It was now an integral part of European community, which meant any economic, political and sovereign issues faced by a European Union member would directly affect the activities in Britain. Europe as a whole was expected to do extremely well at that time and the benefits were expected to be reaped by all the nations. Yet, many nations did not realize the repercussions they would have to face if even one economy crumbled, or if one economy did not cooperate.

This came as a blow to many nations when situation in Greece deteriorated in 2010, while the leaders of the nation refused to cooperate and implement austerity measures. Germany was adversely hit when the PIIGS nations (Portugal, Italy, Ireland, Greece and Spain) were facing slowdown, while some were on the verge of being bankrupt, other were actually bankrupt and were looking to exiting the European conglomerate. Yet, the collective efforts taken, such as European Financial Stability Facility (EFSF) & European Stability Mechanism (ESM), and the debts given by the ECB, the US Federal Reserve, the central banks of Canada, Japan, Britain & the Swiss National Bank helped these nations to survive for a longer period of time.

However, the economic scenario in Europe remained

PIIGS Nations Portugal Italy Ireland Greece Spain

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weak.

In the midst of the European Sovereign Debt Crisis, the leaders of United Kingdom decided to vote whether it wants to stay in Europe, or wants to leave it. The issue of exiting the European Union was put to vote on June 23, 2016, in which 51.9 per cent of the voters, without realizing the consequences, decided to exit European Union – giving birth to a well known term today – BREXIT.

The issue of exiting the European Union was put to vote on June 23, 2016, in which 51.9 per cent of the voters decided to exit European Union.

The present article attempts to identify the key reasons for Britain’s exit; its expected impact on Britain, major world economies, and currency; the new challenges that the world faces now and the road ahead.

Why BREXIT? One of the major reasons that caused BREXIT was the shrinking dominance of European Union on the World Economy, and the shrinking influence of United Kingdom on European Union decisions. For example, contribution of European Union to World GDP is expected to decline from 37 per cent in 1973, to 22 per cent in 2025.

The fear of rising immigrants was another major reason Brits opted for BREXIT. Being a part of European Union meant that the nationals of other European Union member countries could freely move in and out of Britain. This led to a huge increase in the immigrant population in UK. It is widely believed that it is the fear of immigrants snatching the domestic jobs in UK that led to Brits deciding in the favour of leaving European Union.

Other reasons and expected consequences for the same are listed in the graphic provided on the next page :

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Immediate Impact

When the results of poll were declared against the expectations, there was a turmoil in global financial markets, with high volatility felt across the equity, bond, currency and commodity market. Effectively, UK’s domestic currency depreciated tremendously, hitting a 30-year low – 1.389 Pound/ USD. While the Pound Sterling depreciated by 11.08 per cent, Euro, Australian Dollar, Swiss Franc, Canadian Dollar, Chinese Yuan and Indian rupee depreciated by 4.15 per cent, 4.03 per cent, 2.34 per cent, 2.32 per cent, 2.08 per cent and 1.43 per cent respectively. On the contrary, Japanese Yen appreciated by 6.73 per cent.

Equity market too registered downward spiral and sharp corrections during the day.

Further, investments in safer assets rose sharply and the riskier ones declined, because of which prices of assets like gold rose sharply, and that of G-Secs declined.

UK’s domestic currency depreciated tremendously, hitting a 30-year low – 1.389 Pound/ USD. While the Pound Sterling depreciated by 11.08 per cent.

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Post BREXIT, the negative reaction received worldwide by the major players has indicated the unexpected quotient of the event. Given the strong United Kingdom – Europe trade ties, BREXIT was totally unanticipated

Source: ICICI Research

Impact of BREXIT on World Economy Post BREXIT, the negative reaction received worldwide by the major players has indicated the unexpected quotient of the event. Given the strong United Kingdom – Europe trade ties, BREXIT was totally unanticipated; as the costs that both may have to bear would obviously outweigh the possible gains. Yet, when the Brits failed to see these costs, there was a global unrest amongst the investors.

However, even though global GDP growth may initially witness a decline due to the strong UK-EU trade relations, as the time passes, these extra costs will be incorporated, and become implicit.

BREXIT may lead to continuous devaluation (over and above what has already happened) of Pound Sterling.

This is because, as the UK trade declines, the economy weakens, leading to weakening in the currency. Further, it may be considered that weakness in pound sterling would lead to strengthening of the US Dollar, and other currencies, relatively. This would make goods produced in UK cheaper, leading to a rise in exports. Given such a situation, one cannot claim with confidence whether the net effect would be a rise in trade, or decline in the long run. But in the short run, the net trade

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would decline, leading to a slow growth of UK economy.

Further, it is necessary to point out that the World Economy is already weak, and was showing signs of recovery when BREXIT took place. This further pressurized the struggling world economy.

Fortunately, the global financial markets recovered very soon, yet, the net effect of BREXIT is still to be seen.

Impact of BREXIT on Europe United Kingdom is a very special nation for European Union, as it contributes over 16 per cent to the European Union GDP. Clearly, Britain’s exit from Europe will lead to weakening of the Union’s clout.

Further, BREXIT may give the nudge to existing deflationary tendencies in the fragile European economy.

However, as the rest of the financial instruments may weaken, sovereign bonds of Germany and France are expected to benefit, as they are considered to be safe investments.

Growth of GDP of UK on Quarter-on-Quarter basis Source: ICICI Research

United Kingdom is a very special nation for European Union, as it contributes over 16 per cent to the European Union GDP.

The growth of GDP of United Kingdom registered a growth of 0.4 per cent on Quarteron-Quarter basis, which is lowest since 2012.

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Impact of BREXIT on United Kingdom The growth of GDP of United Kingdom is already being trimmed, hurt by the fears of possible repercussions of BREXIT amongst its trading partners. It registered a growth of 0.4 per cent on Quarter-on-Quarter basis, which is lowest since 2012.

Further, fears of BREXIT have kept a lot of capex spending on hold. The clear impact of the event would be clear only when these investments are made, and the economy improves.

Challenges Triggered

Volatility in the financial markets is expected to exist and may move higher, leading to increased volatility across asset classes.

United Kingdom is expected to witness economic and political volatility as the newly formed government would have to navigate the consequences of withdrawal from European Union very efficiently.

Also, a major 48 per cent of the Brits voted to stay with European Union. It would be a difficult task for the government to convince these people as to the progress of the nation.

Further, the newly formed government would be facing huge expectations of delivering better economic growth and prosperity, where two-thirds of the investment in the nation was made by European Union. In such a scenario, European Union may become more agile and flexible as an economic block to the growth of the country.

Clearly, volatility in the financial markets is expected to exist and may move higher, leading to increased volatility across asset classes. Bank of England may be considering rate cut, yet the outcomes of it are unknown, and can only be speculated. On the other hand, the demand for US treasury is likely to surge sharply, thereby depressing yield further and pushing rate hike expectations in US even lower for 2016.

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THE OIL FOR DRUG DEAL Can India pharma cos strike deal with debt-ridden Venezuela?

By Amit Shaw & Yashovardhan Prabhakar

IIFT Kolkata

VENEZUELA THE CORE PROBLEM The unravelling of Venezuela’s socialist economy has triggered triple - digit inflation (currently at 180%) and a full blown economic and political crisis. The country, unable to pay its bills is facing severe shortages of food, water and medicines. Venezuela's economy shrank 5.7% in 2015 and according to the International Monetary fund it is expected to contract an additional 8% this year.

In the year 2016 according to the IMF forecasts the country’s GDP will shrink by 8% and inflation may rise to around 500% or may be more. Acute shortage of food and medicine, exacerbated by widespread looting, makes daily life a misery in the country.

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In response to increasing social unrest due to above conditions the government has cracked down on mass uprising and political opposition. Luis Almagro, secretary-general of the Organization of American States, has called an emergency meeting to be held later in June to discuss whether Mr. Maduro’s government has violated the democratic principles set out in the organization's charter. The bolivar, Venezuela's currency, is worth less than a penny on the black-market exchange now.

Stricter forex controls in Venezuela have made repatriation of funds difficult for the Indian pharma companies operating in the country . This is directly related to high inflationary situation prevailing in Venezuela

Once the cornerstone of Venezuela's economy and the source of funding for many of Hugo Chavez’s, ( the country’s populist president of 1999-2013) social programs - the country’s oil exports are going down now because, global oil prices have fallen more than 50%, leaving Venezuela in dire financial crisis ,especially as much of the country's oil output is of lower quality. Venezuela isn't even averaging $30 a barrel on the oil they manage to export because their crude oil is heavy and sour, which results in prices in the mid-teens when Brent and WTI are averaging significantly higher, Eric Smith, an associate director of the university's Tulane Energy Institute, said in an analysis piece for CNN. At a time when most OPEC countries are increasing oil production, Venezuela produced only 2.15 million crude oil per day (as per S&P) as of June. Oil accounts for 96% of Venezuela’s total export and oil and gas sector accounts for 25% of the GDP, in such a scenario cut in oil production is something which will further exacerbate the situation of acute poverty and sky rocketing inflation. The production levels are at the lowest in the last 13 years. And this is a matter of great concern for a developing country like Venezuela which is experiencing serious economic downturn.

Low investment: Lately the country has not been investing enough money in its oil industry .

Oilfields naturally deteriorates over time, and so do the facilities that service the field. All this has been in place since considerable time but were masked due to

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high price of crude, now when prices are down more than 50% of what they were 2 years ago , the issue is getting amplified .

Power outages: The country has alw ays faced power problems, but the situation is crucial because of droughts in the past 3 years which has depleted the vital Guri hydropower reservoir .

Sky – high cost: Venezuela is having an inflation rate of 500%. Due to such a high inflation rate the cost of production for the oil companies is increasing, and that coupled with low global crude prices has left no option other than cutting production. Over the weekend Kleenex maker Kimberly-Clark (KMB) suspended its business operations in Venezuela, the reasons for the same according to the company are country's "rapidly escalating inflation" and "continued deterioration of economic and business conditions." Oreo-maker Mondelez and Pepsi also have said they will stop accounting for Venezuela sales.

The supermarkets in Venezuela are running out of stocks of essential goods.

The Venezuelan government spends subsidizing everything from rural homes to rice. And now it cannot pay its bills, especially because the oil prices have collapsed, so it is printing money. The last time we saw such a thing was in Zimbabwe in in the early 2000s. According to the IMF predictions the inflation in Venezuela will be somewhere around 700% this year, a figure Zimbabwe hit in 2006 . According to IMF and World Bank predictions there is a chance Venezuela may go the path that Zimbabwe had to go through.

In a critical economic condition like this, the Bondholders’ faith will soon be tested. On February 26th 2016, Venezuela was due to pay $2.3 billion, mainly to hedge funds and investors that specialize in emerging-market debt. There was little doubt that it will make the payment and it did hold true. After that, the risk of a default on Venezuela’s remaining

WHY IS VENEZUELA PUMPING LESS OIL?

Venezuela was one of the founding members of the international organization OPEC

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$64 billion of foreign-currency denominated bonds have appreciated sharply. With Venezuela’s heavy oil, virtually its only export, selling for as little as $30 a barrel, the country’s main source of foreign currency is drying up. At the recent low price for its oil, Venezuela would earn as low as $22 billion from exports this year, a drop of 77% from the year 2012.

India and Venezuela The Oil for Drug Deal India and Venezuela have had cordial relations both culturally and economically. The bilateral relations have been strengthened in the past by the volume of trade they indulge in. While India imports crude oil (Venezuela became India’s third largest oil exporter in 2012), iron, steel and aluminum from Venezuela, it plays the role of supplying metals and metal products, chemicals, textiles and pharmaceuticals to the oil rich country. But more than half of India’s export volume to Venezuela is comprised of pharmaceuticals.

This is emphasized by the fact that heavyweights of Indian pharmaceutical sector like Sun Pharma, Dr. Reddy’s, Glenmark, Claris, Cipla are now major

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players in Venezuelan market as well. Shortage of basic medicines in Venezuelan markets largely benefitted the Indian pharmaceutical companies to consolidate their market share. Also Indian pharmaceutical companies chose to invest in newly emerging markets like Venezuela (healthcare market was growing at a rate of 14% till 2014), which offered alternative to slower growing economies like USA, whose sales percentage of generic drugs is expected to see a decline of about 8-9% over the next five years. India’s pharmaceutical exports to Venezuela was valued at around $140 Million. Such is the stake of Indian pharmaceutical companies in Venezuela that any political movement in Venezuela has a direct impact on stock prices of Indian pharmaceutical companies.

But the recent developments in Venezuelan politics has left Indian pharmaceutical companies high and dry with large chunk of their payments still unpaid.

The crisis hit oil producing country still owes the Indian pharmaceutical companies around $ 100 million. Indian exports to Venezuela have gone down by around 50 percent to around $125.5 million, pharmaceutical exports forming the bulk of the sum.

With a combined debt amount of $110 Million being owed to two of the biggest Pharmaceutical companies - Glenmark and Dr. Reddy’s, Venezuela is in a precarious situation to repay the amount at a time when its socialist economy is in the dumps with oil prices hitting a nadir and inflation rates as high as 180%. In such a scenario where Venezuela is unable to pay back its debt it owes to Indian Pharma companies, so Indian officials are considering a proposal that would allow the Latin American country to swap oil for its drug debt.

After a failed attempt on India’s part that Venezuela’s emerging economy would be a good place to hawk Indian pharmaceuticals, the debt is now increasing and poor crisis management coupled with the longrunning oil price fall has left Venezuela too cash strapped to pay.

Indian Pharmaceuticals and their plight

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Venezuela problems could worsen significantly later this year. The government must pay about $5 billion in a series of debt payments in October and November. The country's foreign reserves are already withering at 12year lows.

Prominent among Indian companies are Dr. Reddy’s Laboratories Ltd to which Venezuela owes $65 million and Glenmark Pharmaceuticals Inc., another major investor with $45 million. Like global pharmaceutical companies which enjoys a lower exchange rate in Venezuela — Indian producers too have been hit badly by the collapse of the Venezuelan currency (Venezuelan bolivar). Officials, on the condition of anonymity, said that Ministry of Trade had proposed a payment mechanism that would allow Venezuela to repay some of the amount owed with oil. The proposal says that Stat Bank of India would act as a mediator for the transfer. The plan is now due for approval on the Indian side from the Ministry of Finance and the Reserve Bank of India. India, one of the world’s biggest oil importers along with the U.S. and China, had in past similarly executed barter deals with Iran, swapping rice and wheat for oil. The officials said Venezuela had agreed to the plan on principal, but they have not made any concrete commitments as of yet. Officials said a meeting with Venezuelan officials was due in the coming months to discuss the proposed deal. Both Dr. Reddy’s and Glenmark have now stopped business in Venezuela.

But, neither has said anything about pulling out as of yet.

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THE DISTORTION OF SUBSIDIES Are we better off without subsidies?

By Ashok George

IIFT Kolkata Imagine a fine piece of article by a top economist. An article containing years of hard work and analysis of data. Now imagine a drop of water falls on the article.

The drop magnifies the words under it. If I were to just peruse the article, only that word appears, loud and bold. But that word isn’t necessarily the gist of the article. Often, we find economic policies of nations to be along similar lines. Inherently they are great pieces of architecture and can lead the nations’ wealth building and people development projects very well. But as is the case, they become muddled with policies that appear counterproductive. India has seen tremendous growth in the agricultural sector since the days of Independence. There has been a substantial increase in available food-grain per capita.

Irrigation facilities have also improved with nearly 35% of Indian agriculture under canal and irrigation dam supply. Indian rice production is in itself worth around 40 Billion USD, second to only China’s 100 Billion USD. All this growth, and yet we have it as our perennial fall guy to blame when we talk about lack of development in the last 65 years. It is not so much about the lack of the growth but the methods employed in the past. Let’s take a case here. The average income of a farmer in 2015 comes to 6426 INR. The data given below reveals a peculiar

Why this fuss about Subsidies?

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trend.

A subsidy is a benefit given by the government to groups or individuals, usually in the form of a cash payment or a tax reduction.

The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public.

(Source : The Hindu )

It is impossible for a farmer to survive just by farming. Multiple jobs are required to sustain a family. For a food crop like Rice, which is one of the most labour intensive and irrigation intensive crop, the margins are worse. So the question now is, why the disparity? On one hand we have a really extensive agriculture policy, shelling out thousands of crores in every budget for R&D institutes, better seeds , increasing irrigation cover and better MSP.

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We can agree that the data can be reflective of the last 2 years of drought that we faced. But the gap between the CAGR in the last 7 years of 8.3 % and incomes of farming households in India is bone chilling. Since the times of Green Revolution, we have recognised the importance of keeping up with the modern aids in assisting in agriculture. While on one side we focussed on getting agricultural productivity higher, we have been silently sweeping something under the carpet of assisting the small farmers.

Subsidies. Like all things subsidized, the BMWs and Audi’s have been filling their tanks full of subsidized diesel while the common man drives his 800, running helter skelter wondering what went wrong? Subsidy in agricultural sector has been such a grim issues that, in 2016, 2.27 lakh crore has been set aside for food, fertiliser and petroleum subsidy. Let’s try and understand the bottomless pit this has put us into from an example. Fertilizers and Chemicals Travancore (FACT) is a PSU in Kochi that produces fertilizers and other industrial chemicals, primarily focussed on delivering low cost additives for farmers and help them against inflation in prices. FACT was incorporated in September 1943 as the brainchild of C.P. Ramaswami Iyer. It has since made huge contributions not only to the Kerala’s economy, but also to the agrarian economy of south India.

Factamfos, a mixed fertilizer brand from FACT, is the company’s sales driver and is in great demand among farmers, who seek protection from low quality fertilizer mixes from unscrupulous players. Between 2001-02 and 2011-12, the fertilizer company’s fortunes undergo thanks to issues that are typical to cash-strapped, big public sector companies. The company paid 140 crore as interest alone last year and the company’s loss is about 40 crore. If there was no burden of this interest, the company could easily have a profit of 100 crore. This interest had been building up for the past 15 years or so. And

"We are steadily moving from mandates, subsidies, and reliance on the public sector banks for inclusion to creating enabling frameworks that make it attractive for all financial institutions to target the excluded, even while the interests of the excluded are protected through education, competition and regulation," - Raghuram Rajan

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Ananth Kumar, Union minister for Chemicals and fertilizers has already prepared a package of 1000 Cr. for the interest payment and expansion of the debt crunch at FACT.

Do citizens have a collective macroeconomic sense?

Now the big question, how did a company, making products millions of famers in India and millions around the world use extensively in their farms, accumulate such high debts? Why, when there is demand for the product and is cheaper than other alternatives, should the product sales not be able to cover the debts? The answer is not really a simple word. Of course, at the core is the subsidy issue. The government was remitting the subsidy cost of the fertilizer. But what happened was that FACT was getting its bulk revenue simply by showing the sale of its fertilizers and getting the payment for the respective subsidy from govt. Things started spiralling out of control. As an example, the subsidy on fertilizer was going above 50% of the production cost.

Nefarious business practices led to FACT depending on the subsidy rather than the actual sale of the fertilizer.

Now that we have looked at the issue of agricultural subsidy, let’s diversify. Indian electricity sector is a sector reeling in both power crunch as well as economic crunch. Power in India is highly subsidized and especially so for agricultural practices. Now farmers in tube well irrigated farms are using the unconditional supply of free electricity at non-peak hours (2200 to 0600) to suck the ground water dry.

During the last year’s grave drought that India faced, this has been attributed as one of the primary reason.

Overuse of ground water is triggered by the subsidy on electricity prices. Even in cities and the other urban towns, corporations supplying water charge very low rates, as water is usually considered as highly abundant commodity.

Typical water rate in India is Rs. 1.5/ cubic meter

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while for an already developed country like USA, with much better water resources, in both quantity and quality, charges are around $2/cubic meter. The rate jump is nearly 8000%. Shocking!! This is obviously an unstable model. This never ending cycle of feed and keeping feeding them is what has led to this situation. So if subsidy has so many demerits, both economically and socially, then why do developing countries adopt this policy? The rationale is simple.

People like governments which keep the prices under control. Which brings us to the ultimate question that I wish to ponder upon?

The recent imbroglio over the BREXIT and the associated fear amongst Indian tax payers of whether this will result in a drastic domino effect on the economy has once again demonstrated the frivolity of democracy, for lack of a better word, when it comes to economic development. Of course the definition of democracy tells us that people’s participation can be through elected representatives. Taking this idea forward can lead to dangerous consequences. Firstly, people have no idea what is good for the country. It’s natural because a citizen only thinks for himself. It’s classic whodunit situation in England today. Is the government to blame or people? Giving people mandate is good, but deciding where to put a check on it is also important. The government has to stop bowing down to people’s need for subsidies, simply because they aren’t doing the people any favour. IMF studies have shown that 61% of the benefits of petroleum subsidies go to the richest 20% of the citizens, a rather paltry attempt at Pareto principle. It highlights the fact that subsidy is indeed not reaching the destination where it is intended to.

Consider the case of Ukraine and Latvia. Both countries were created out of the USSR partition in 1991. Both had similar economic conditions at that time. Latvia today has a much smaller GDP at $30 Billion compared Ukraine’s $90 Billion. But, according

To keep prices of essential goods low is sound politics. However, it is poor economics if it does create productive assets or leads to higher government borrowing.

Subsidies can only add to the inflationary pressure in such a situation and hurt the very consumers they intend to protect.

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to the World Bank, energy intensity, a measure of the amount of energy used per $1,000 of GDP, is twice as high in Ukraine as it is in Latvia, only because of subsidies. The larger question remains, as to what subsidies have done to India on a macroeconomic scale.

“Giving subsidies is a two-edged sword. Once you give it, it's very hard to take away subsidies. There's a political cost to t a ki n g aw ay subsidies.”

- Najib

Razak

Region

Social Security Program

Cost (US$

Pan India

Total Subsidy FY 2013-14

60

Pan India

Food Security(PDS)

20.83

Pan India

Petroleum(Subsidy)

16.17

Rural

Fertilizer(Subsidy)

11.00

Rural

NREGA(Subsidy)

5.50

Rural

Child Development(ICDS,Non

2.95

Rural

Drinking water and sanitation

2.53

Keeping prices under control has been a big achievement for the governments since independence. When India gained independence, more than 75% of the population was rural. Most Indians were uneducated and had little access to capital for education and business. Any country’s development of human capital is the most important asset it can have. And providing an essential basket of goods to the entire public at a discounted rate paved way for subsidies as we know it. Of late, realizations regarding the fallacies of the theory have started materializing among the Indian public as well as the govt. departments. The last budget has shown signs of the changing landscape amongst the policy makers. They have shown some inclination towards parting way with subsidies that are not doing any good for the people it is intended to benefit.

India is expected to spend Rs 2.27 lakh crore ($37 billion) on major subsidies during the fiscal year starting April 1, 2016. Out of Rs 2.27 lakh crore,

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India is to provide Rs 1.24 lakh crore ($20.11 billion) in food subsidies. But overall, subsidies on food, fertilizer and petroleum have been reduced by over 10 per cent for 2015-16, mainly due to a sharp cut in petroleum subsidies. Of the total food subsidy, nearly Rs 65,000 crore is for implementation of National Food Security Act (NFSA), which cannot be called a subsidy per se. Petroleum subsidy has been halved to Rs 30,000 crore for 2015-16 from estimated Rs 60,270 crore. So signs are looking good for reducing subsidies. With the pale crude oil prices and deflation of prices of most commodities in the exchange, India can capitalise on the situation. India is on the upward trend today and after the IT boom of the late 80s, the hunt is on for the next big thing.

Subsidy for

2016-17

2.27 Lakh Crore

4% less than the Previous year’s Budget allocation

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Olympics Harbinger of Crisis

By Abhinav Pandey & Akshay Sharma IIFT Kolkata

Sydney 2000: $4.7 billion

More than 10 thousand athletes, 38 venues, 28 sports and 306 sets of medals. The Games of the XXXI Olympiad or what we like to call as the Rio 2016 is all set to kick off in the city of Rio de Janeiro, Brazil. This mega event of 2016 Summer Olympics is scheduled to last from 5th of August to 21st August. But with the Brazilian President undergoing an impeachment trial, the mosquitoes carrying potential Zika virus and the economy witnessing its longest recession, perhaps since the time of 1930s, the Rio Olympics seem to be clouded by a looming tumultuous crisis.

Athens 2004: $10 billion

But this would not be the first time that a country hosting the Olympics is staring at the face of an economic crisis.

Cost of last 4 Olympics:

Beijing 2008: $42 billion London 2012: $11 billion

To host the Olympics can pose serious risks to the country’s economy. The bid to host the prestigious event is itself a competition where several cities battle to win the title. This process isn’t cheap as it requires the city to propose that it is ready to offer an infrastructure adept at handling the event, and making this proposition requires huge sums of investment even before the bid is made. Once a city is selected to host the Olympics, the city undergoes serious expenditures to address 3 major sectors: accommodation, transportation and of course, the play arenas. The rails and

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roads are revamped, hotels are built and stadiums to host the events are towered. This puts a pounding pressure on the resources of the city. An Oxford University study that examined the Olympic Games from 1962 to 2012 stated that on an average, an alarming cost overrun of around 179% is experienced by the hosting city.

Few of the Olympic events that brought the economy of the host nations tumbling down: Barcelona, Spain (1992): Europe was caught in the midst of the Exchange rate mechanism crisis in the year 1992, which led to the devaluation of currencies of many of the major players of Europe, and Spain was one of them. The period of 1992 marked a recession period for Europe which was justified by the fact that it was preceded and followed by two relatively lengthy expansions.

No doubt, Barcelona was expected to suffer in this tumultuous period as it was to host the games. However, a significant amount of direct and indirect investment was made which was 26.2% and 73.8% of the total investment respectively.

The currency of Spain between 1869 and 2002 was Peseta. A total sum of 9,56,630 million Pesetas was invested in the Barcelona Olympic Games in different areas as shown in the pie chart below.

An Oxford University study that examined the Olympic Games from 1962 to 2012 stated that on an average, an alarming cost overrun of around 179% is experienced by the hosting city.

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In fact, the economy of Spain continued to decline post the Olympics. The growth rates of Gross Domestic product, gross investment, employment and government expenditure kept on declining from 1988 to 1994. Economic recession in Spain was able to offset all the development that accompanied the development attained by hosting the games.

The growth rates of Gross Domestic product, gross investment, employment and government expenditure kept on declining from 1988 to 1994.

Athens, Greece (2004):

Many believe that the economic plight Greece faces today is somewhere attributed to the profligate spending that Greece underwent for the 2004 Olympics to be held in Athens. An estimated amount of â‚Ź9

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billion (approx $10.6 billion as per today’s rate) was spent to host the event. This amount spent was almost twice as much as the budget proposed. A major reason for the budget overshoot was the delay in the construction of various facilities which resulted into huge sums of inefficiency and cost. At the end of the event, Greece witnessed grave public debt and deficit figures and as such it had to become the first EU country to be placed under fiscal monitoring in 2005, by the European Commission.

Rio de Janeiro, Brazil (2016): The latest country to be added to the jinxed list is Brazil. Francisco Dornelles, the acting Governor of Rio de Janeiro state issued a decree on 17th June, stating that the state faced a “public calamity” which could lead to a “total collapse” of public services, including health, security and education. An expected budget deficit of around $5.6 billion poses some serious questions as to whether the state is in a fit state to host the Olympics and if it will be able to deliver on the infrastructure related promises for the events.

Source- The Economist

*- Expected

Falling oil prices have managed to pull down the royalties that formed a major share of Rio’s revenue. The scepticism among the tourists and players regarding the threat of Zika virus has only added to the state’s

An expected budget deficit of around $5.6 billion poses some serious questions as to whether the state is in a fit state to host the Olympics.

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woes. Brazil’s GDP had taken a hit after hosting the 2014 World Cup, shrinking by around 3% in the year 2015. A similar shrinkage is expected in the year 2016 as well. With all this economic depravity engulfing Rio Olympics, the question that lingers around is that What shall happen to Brazil once the Olympics are over?

The Success Stories:

Brazil’s GDP had taken a hit after hosting the 2014 World Cup, shrinking by around 3% in the year 2015.

There have however been instances where the Olympics have not brought misery. In fact, Japan and Korea not only pulled off their Olympics well, but also managed to boost their economies under the banner of the Olympics.

While earning profits after hosting Olympics was a rare feat in itself, Japan improved its economic growth a great deal when it hosted the mega event in the year 1964.

The Japanese Government laid greater emphasis on public investment which led to instant development in construction, manufacturing and services, to name a few. ‘The Boom of Tokyo 1964 Olympic Games’, as it is famously known as, proved out to be a turning point in Japan’s economic history. The annual growth rate after the Olympic Games increased from 10.1% to 26.1%, surpassing the likes of heavyweights such as France, England and Western Germany and finishing as the second largest economy of the world. Hard to digest, isn’t it?

A similar feat was achieved by Korea before and after the 1988 Seoul Olympic Games when it was pushed into one of the Newly Industrialized Countries i.e.

NICs from the list of developing countries. Some of the turnarounds that Korea was able to carry out were: Employment 12.4%

to 3,30,000 workers

rise in annual national income (1981-1988)

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¡GDP per capita boosted from 2300 US Dollars to 6300 US Dollars The impact of the games on any country largely depends on its economic structure. Hosting the Olympics leads to huge investment and also ensures a splendid increase in the gross domestic product of the host nation. In fact, the average growth rates of Tokyo 1964 and Seoul 1988 were above 15% following the games. Similarly, advanced economies such as United States of America and Australia hardly faced any negative impact.. On the other hand, the repercussions of hosting the event were evident on economies like Greece and Spain, and a similar crunch is evidently being faced by Brazil.

Before bidding for any such event, the issues concerning the nation need to be analysed and duly solved by the bidding country. Hosting the Olympics is by no means a miniscule task and it requires a lot of work in the form of investment in various sectors.

Years of planning is required and all the concerned authorities related to the event need to be on one page to ensure that the Games leave a lasting memory in the minds of the people, to cherish for ages. Recently a gang of 12 was arrested in Brazil as they were alleged to have planned of committing terrorists acts during the event. The 1972 Munich massacre and a recent arrest of 12 terrorists in Brazil underline the very simple fact that the host nation has to be extra cautious and well equipped to tackle any unforeseen situation. An extensive research is therefore a must by the bidding cities and the IOC. Many academics are of the view that hosting the Olympics makes no economic sense anymore and do not find it as an intelligent investment. It is due to this notion that almost every city that was supposed to be the potential host city for the 2022 Olympics has pulled out of the bidding.

Will the Rio 2016 Olympics justify this belief or help clear the negativity surrounding the Olympics and its repercussions on the economy, remains to be seen.

The impact of the games on any country largely depends on its economic structure.

Hosting the Olympics leads to huge investment and also ensures a splendid increase in the gross domestic product of the host nation.

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Does India need NSG membership?

By Manjula Vadde and S.Priyatham Swamy IIM Indore

“China has never stated that it opposes the membership of any country to the NSG. Of course, we have never stated our support to any country ever.”

-China

Nuclear Suppliers Group, commonly known as NSG, was formed in the aftermath of the Indian nuclear test conducted in May, 1974 in Pokhran which used fuel from one of its nuclear reactor that was supplied for peaceful purposes. NSG is a group of nuclear supplier countries that aims to ensure non-proliferation of nuclear weapons and controlling nuclear technology, materials and equipment by implementing two sets of guidelines for nuclear exports and nuclear related exports. Initially established by a group of seven nuclear suppliers, now NSG has 48 members in it.

NSG was formed with the thinking that NonProliferation Treaty (NPT) alone wouldn’t suffice for controlling the manufacturing of nuclear weapons.

Currently, all the members of NSG are members of NPT. However, the scope of rules of NSG continued to extend beyond the mandate of the NPT. WHY INDIA SHOULD BE A MEMBER OF NSG? NSG Membership to India will provide greater certainty and a legal foundation for India's nuclear regime and thus will bring-in greater confidence for those countries that are making huge investments in India to set up ambitious nuclear power projects. India can have following benefits by becoming a member of NSG: Nuclear Power as a conventional resources:

substitute

to

other

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Among the top 17 countries that generate the most Nuclear Power, 15 countries are NSG members and the remaining two are India and South Korea. India generates only 3.6 percent of total electricity through nuclear energy whereas the average score of other NSG member’s is 28.32 percent. That is, countries that are part of NSG rely on nuclear energy to supply at least one-quarter of their total electricity. By 2032, India aims to increase this capacity to generate as much as 63 GW, two-thirds of which can be contributed by suppliers which can be made possible only through NSG membership.

Source: Business Insider Boost Indian Thorium Programme: With the entry into NSG, India can gain access to technology used for various purposes from medicine to building nuclear power plants in India. India is rich in thorium reserves and consists of 30% of global thorium reserves. These reserves are the base for Indian Thorium Programme which can also be used for electricity generation. India has done a lot of neutron physics research work on Thorium and has the highest number of publications in the thorium area. In the thorium reactors, there is a great need for fissile materials like uranium and plutonium which are responsible for the chain reactions. But, currently India has only 1-2% reserves of uranium. However

“The issue is about the way of the entry of new members, the procedure that they will follow.

The entry, in NSG, by non-NPT signatories. You know, China is one of the P-5 of the UN Security Council and the security environment surrounding China is very complex.”

-China

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“Part of the problem is that unlike all current Nuclear Suppliers Group (NSG) members, India is not a party to the Nuclear NonProliferation Treaty (NPT), and it has not subjected its nuclear activities to any multilateral restraints,”

without these fissile materials, thorium alone can be used to generate uranium in the fuel cycle. But through this process, estimations predict major thorium reactor construction to be completed by late 2040 or some even past 2070. India can’t wait that long.

India has its own indigenously developed technology, but it should procure fissile materials from international market, bring in state of the art technology that NSG members possess and export its thorium reserves to other nuclear supplier countries. This can be possible only by gaining membership in NSG. To keep its promise of reducing dependence on fossil fuels: As per International Energy Agency, India records highest oil consumption with 6 million barrels per day and also energy generated through coal and fuel amounts to 58 percent of total energy. As a result, India’s energy related CO2 emissions are estimated to be increase several fold in 2040 compared to 2016 and if this continues, India will be the largest contributor to rise in the emissions during this time period.

So as a part of India’s emission reduction commitments, India promised to raise use of renewables and clean energy to 40% and reduction on dependence on fossil fuels. Hence there is a pressing need for the access to nuclear power and India’s NSG membership is the need of the hour.

-Mark Hibbs

Source: World Energy Outlook 2015

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Access to sophisticated technology and increase trade relationships: In India’s civil nuclear energy cooperation pact with Sri Lanka, people are trained in making use of nuclear energy in peaceful purposes which include nuclear safety, radiation safety, radio-active waste management and also nuclear disaster mitigation. Through NSG membership, India can get access to advance and sophisticated nuclear technology that can be useful to upgrade its own breeder reactors and sell them to countries like Sri Lanka, Bangladesh etc. This helps in building trade relationships with the members of NSG. India, having this ability of offering its nuclear plants and related technology to the world implies spawning of nuclear industry and related technological developments. India’s plan of entering NSG was welcomed by major Indian giants like Jindal Power, Tata power, BHEL etc., as they saw a nuclear energy market of US$40 nex10-15 years. With the help of NSG, India can commercialise its nuclear power equipment production, bring innovation and boost high tech manufacturing. This is also helpful in boosting Make in India programme.

Views of Counties Opposing India’s Entry: China’s argument is that India, being a non-signatory of NPT and Comprehensive Test Ban Treaty (CTBT), cannot become member of NSG. Also, while considering India’s application for NSG one will also have to consider the fact that accepting India’s entry can pose problems like applications for NSG membership from other Non-NPT members like Pakistan and Israel. The other arguments were, if only India is given entry, it can lead to nuclear imbalance in South Asia and India may engage in nuclear weaponization programme. China’s final statement says India’s membership will threaten its national interests and also cause insecurity to its ally Pakistan.

NPT membership is not a requirement for membership in the NSG, but ‘adherence’ is a factor in INFCIRC/539, and many participants would favor India making binding legal commitments — including to NPT Articles I and VI and to the Comprehensive Nuclear Test Ban Treaty — that would bring India closer to the global nonproliferation mainstream,

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Criticism of China’s stand: China has been carrying nuclear collaboration with Pakistan building its own nuclear plants which includes a new 1100 mw plant with an investment of USD 6.5 billion assistance in Karachi. China also helped Pakistan in building 4 nuclear power plants.

This drew criticism to China, selling out its nuclear technology to Pakistan, from other members of NSG.

Arguments in favour of India’s NSG Membership:

The NSG Chair for 2015-2016 is Argentina.

As of 2016 the NSG has 48 members

Till now India gained support from most of the NSG members except China, Turkey, South Africa, Ireland and New Zealand. Following are the arguments that were made by India and countries supporting it: 

India has made a civil nuclear deal with US in 2008 committing to separate its civilian and military nuclear programmes. India even though not an NPT signatory, its non-proliferation records for past eight years ensures that its indigenously developed technologies have not been leaked to any other countries, unlike Pakistan which sold its nuclear technologies to countries like North Korea.

Also NPT is only a guideline but not a mandate while considering a country’s application for NSG.



India has adhered to the guidelines of International Atomic Energy Agency (IAEA) and ratified additional protocol of IAEA which implies all civilian reactors of India are open to and are under safeguards of IAEA for inspections. This insures greater transparency of operations from India.



India’s membership into Missile Technology Control Regime (MTCR) on 7 June 2016 has gained the support of all 34 members of MTCR who are also part of NSG.

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The Trade Trinity India, Iran and Afghanistan By– Sai Sridhar Vedantam

IIFT Kolkata The four Asian countries- India, Pakistan, Afghanistan and Iran are located sequentially on the world map.

Many things in the world would have been different if India and Pakistan were friends but as that is not the case, Afghanistan had to take a different route to reach India. Yes! I am talking about the tripartite agreement between India, Iran and Afghanistan.

Before delving into further details, let us have a look at the relations between India and countries with a little more detail.

India-Afghanistan India has always been a close-aide to the war-torn Afghanistan. During the Soviet-Afghan war (197989), India extended humanitarian aid to Afghanistan when no other South Asian nation even recognized its existence. India has so far provided 2 billion USD of financial assistance and played a pivotal role in

India has always been a close-aide to the war-torn Afghanistan.

During the SovietAfghan war (197989), India extended humanitarian aid to Afghanistan when no other South Asian nation even recognized its existence.

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India built a new parliament building worth 90 million USD for Afghanistan and Prime Minister Narendra Modi inaugurated the building along with Afghan President, Mr. Ashraf Ghani on 25th December 2015.

In December 2015, India delivered three Mi-25 Russian attack helicopters to Afghanistan to bolster its defence ties. India hosted the ‘Heart of Asia’ conference in April 2016 and the objective was to bring peace and stability to Afghanistan.

India built a new parliament building worth 90 million USD for Afghanistan and Prime Minister Narendra Modi inaugurated the building along with Afghan President, Mr. Ashraf Ghani on 25th December 2015.

India and Afghanistan have undertaken the landmark ‘Friendship Dam’ project in Herat province. This deal would irrigate 44000 hectares of land and generate 30 MW of electricity.

How would India benefit from this?

There is enormous potential for growth in the Infrastructure sector in Afghanistan and that would benefit Indian companies investing there. In addition to this, good relations with Afghanistan would mean that Pakistan is locked as its border activities could be under vigil both on the eastern and western ends.

India-Iran India and Iran share very close economic and commercial ties and major connecting factor between

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the two countries is crude oil. Iran is one of the largest producers of crude oil and India on the other hand is always in need of oil. India imported 22 million tons of crude oil from Iran in 2009-10 and the estimated value of the deal is about $ 10 billion, which makes it the third largest market for Iranian crude.

India’s major exports to Iran included Petroleum products, Rice, Machinery, Iron & Steel, Drugs and Rubber. Given below are the trade figures between these two countries over the yearsYear 2008-09 2009-10 2010-11 2011-12 2012-13

Exports (million USD) 2534 1853 2492 2411 3351

Imports 12376 11540 10928 13556 11603

Total Bilateral Trade 14910 13394 13421 15968 14955

Source: MEA India has always maintained a deficit with Iran in terms of bilateral trade and the trade balance is always more than 8000 million USD. Apart from the trade aspect, Iran is strategically very important for India as it acts as a gateway for India to gain access to European and Russian markets directly. In Narendra Modi’s recent visit to Iran, the first in 15 years by any Indian Prime Minister, 12 agreements were signed between both the nations.

The following agreements were worth a mention-

Apart from the trade aspect, Iran is strategically very important for India as it acts as a gateway for India to gain access to European and Russian markets directly.

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th

On 24 May 2016, a historic deal was signed among India, Afghanistan and Iran to develop the Chabahar port in Iran and build it as a strategic transport and trade corridor.



India-Iran Cultural Exchange Programme



Dialogue between governments and interaction between think tanks



Training of diplomats and exchange of eminent speakers



Chabahar port development for trade.

The Trade Trinity

Let us go back to 2003 and talk about the Route 606.

India, Iran and Afghanistan have signed a trilateral agreement to strategically connect with one another.

Under the agreement, Iran has to build a highway from Chabahar to the Afghanistan border.

On the other hand, India would build a road connecting Delaram (Afghanistan) to Zaranj (Afghanistan). The 200 KM long Delaram-Zaranj road was called as Route 606. India’s idea was to gain quick access to Asian markets by reaching out to Iran through Chabahar port and take advantage of the road network and tap the market potential of Central Asia.

This stood a distant dream because Chabahar port is not fully developed and India has requested Iran over the years to look into the issue with care else the 600 Crore rupee investment on the Route 606 would go in vain.

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On 24th May 2016, a historic deal was signed among India, Afghanistan and Iran to develop the Chabahar port in Iran and build it as a strategic transport and trade corridor. As per studies, this deal could cut the cost of trade to Europe from India by 50%.

Here is what Prime Minister Narendra Modi said after the deal was signed among the three countries in the presence of Afghan president Ashraf Ghani and Iranian President Hassan Rouhani- “We want to link with the world. (The) agreement can alter the course of history of the region!”

Gwadar vs. Chabahar

China signed an agreement with Pakistan and they have established a CPEC (China-Pakistan Economic Corridor) extending from Kashi in China to Gwadar in Pakistan. This 46 billion USD agreement would not only mean trade facilitation but also provide an easy access to Indian waters for China.

Chabahar is 72 KM away and India looks to off-set Pakistan’s presence in Gwadar. The port will be used to ship urea and crude oil, thereby reducing the transportation costs.

Ircon, a state-owned construction firm has signed an

China signed an agreement with Pakistan and they have established a CPEC (ChinaPakistan Economic Corridor) extending from Kashi in China to Gwadar in Pakistan.

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agreement to lay a rail line from Chabahar port to Zahedan and this will provide a rail-network at the receiving end of Cargo.

The port will link India to International North-South Transport Corridor that will expose Indian exports to Azerbaijan, Turkmenistan and other Central Asian markets.

Quick improvements

Iran would benefit given the fact that Chabahar port will be developed as part of the deal and open avenues with other nations in the future for trade.

Indian will invest $500 million in phase-1, including $150 million line of credit from Exim Bank to the Iran’s Maritime and Ports Organisation for making jetties and berths at Chabahar.

The possibility of setting up a 0.5 million tone aluminium smelter at Chabahar free-trade zone is being looked after by Nalco but the catch here is that Iran should provide cheap natural gas.

A joint venture between the Jawaharlal Nehru Port Trust and the Kandla port, India Ports Global is all set to invest $85 million in developing two container berths with a length of 640 metres and three multicargo berths.

Essar Oil and MRPL cleared $1.2 billion dues owed to Iran for crude oil imports and agreed to pay 1.5% interest on the remainder of $5.2 billion in dues as a goodwill gesture.

Conclusion The deal, in all helps all the parties involved and contributes to some developmental aspect of every economy. India with a lot of hindrance from Pakistan and China on the North would find a new route to access Asian markets. It would also help India cut spending on movement of goods to Central Asia. Afghanistan would get funding for the much needed infrastructure development and recognition on the global map. Iran would benefit given the fact that Chabahar port will be developed as part of the deal and open avenues with other nations in the future for trade.

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64

CROSSWORD

DOWN

ACROSS

1 investing that aims to generate specific beneficial social or environmental effects in addition to financial gain.

2 the process of selling all the assets of a business, paying off creditors, distributing any remaining assets to the partners or shareholders and then dissolving the business.

3 a tactic utilized by companies to prevent

3

7 Small public companies with a market

4 5

a trading position where the seller of an option contract does not own any, or enough, of the underlying security to act as protection against adverse

6

An investment fund that selects securities based on quantitative analysis.

8

the level of marginal significance within a statistical hypothesis test representing the probability of the occurrence of a given event. it is home not only the Bombay Stock Exchange but also a large number of other financial institutions.

9

Solution sheet provided on page 72

paradox in decision analysis in which two individuals acting in their own self-interest pursue a course of action that does not result in the ideal outcome.

Oracle of Omaha

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August 2016 65

The Real Plight of Indian Farmers Can we save them?

By - Anson Antony and Arjun S IIFT-Kolkata Agriculture plays a very important role in the present day Indian economy. The share of the agriculture sector in the overall GDP for Financial Year 2015 was 16%. The sector underwent a growth of 8.3% year on year for Financial Year 2015, and future forecasts hold good for the sector if the yield output alone is considered.

“The share of the agriculture sector in the overall GDP for Financial Year 2015 was 16%”

In spite of strong growth indicators for the agriculture sector, the conditions of the farmer sect of the population is not improving. Even though, over 58% of the rural population subsists on agriculture for their livelihood, the share of the agriculture sector towards the total GDP value isn’t very encouraging.

Current Scenario The number of suicides among the farmers has been a cause of concern. Though much better than the condition at the beginning of the 21st century, the numbers haven’t dwindled significantly.

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The majority of farmers who commit suicide are agricultural labourers who don’t own any land, if we segregate them on the basis of their work nature.

Among the different states, Maharashtra has had the highest suicide rate in 2014, owing to severe drought conditions. Even though advancements in technology has happened, the benefit of most hasn’t reached the Indian agriculture industry. Leveraging the full potential of technology so as to tackle adverse variations in climatic conditions like in the USA is what the Indian market is lacking.

Among the different states, Maharashtra has had the highest suicide rate in 2014, owing to severe drought conditions.

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Challenges in Agriculture

India’s food security depends on producing cereal crops, as well as increasing its production of fruits, vegetables and milk to meet the demands of a growing population with rising incomes.



Landholding Pattern: I ndia’s Population has more than tripled since independence but landing holding of our farmers has come down drastically.

This highly fragmented landholding pattern is due to continuous division of land as it is passed from one generation to another. As a result average land owned by a farmer has come down to 1.3 hectares in 2013 from 2.3 hectares in 1971. This hampers farmer’s productivity and his earnings thereby pushing him into the hands of vicious moneylender for funds. To overcome this problem, farmers should pool together their land for cultivating and adopt latest technology which will improve farm productivity.



Lack of Storage/ Warehousing Facilities: Lack of storage and warehousing infrastructure have impacted food supply in our country because of food wastage. The total dry storage facility in our country 85 million MT and shortfall is 70 million to 80 million MT. To add to the problem, warehousing industry in India is highly unorganised and fragmented with low capacity and poor handling, monitoring facilities. Encouraging entry of more private players into warehousing business will help in decreasing shortfall of storage facility and improve the efficiency of these facilities.



Limited reach of Mandi: I nefficient procurement system has failed to address the problem of lack of market accessibility to the farmers. According to various sources, a farmer on an average has to travel 12 kms to reach nearest mandi and more than 50 kms in NE India.



Long and Inefficient supply chain: The above mentioned

problems

have

led

to

long

and

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68

inefficient supply chain with too many intermediaries.

As a result, farmer is cut off from customers and receives poor price for his produce.

Government Initiatives 

Pradhan Mantri Krishi Sinchayee Yojana: The scheme was launched with a vision to provide water to each and every farm in our country.

Under this scheme, emphasis is laid on improving water conservations skills on the field, enhancing the potential of the aquifer and increasing the usage of waste water from the Municipal Corporation etc. through private investments



Paramparagat Krishi Vikas Yoaja: I t w as launched by the NDA government to promote biofarming in the country. This scheme encourages farmers to adopt bio-farming by forming clusters (at least 50 farmers with 50 acres of land). Under this scheme, each farmer will be provided with Rs. 20,000 over a span of three years to purchase bioseeds, for harvest related activities and transportation.

While agriculture’s share in India’s economy has progressively declined to less than 15% due to the high growth rates of the industrial and services sectors, the sector’s importance in India’s economic and social fabric goes well beyond this indicator.

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Seed is a critical and basic input for attaining higher crop yields and sustained growth in agricultural production.

Distribution of assured quality seed is as critical as the production of such seeds.



Soil Health Card Scheme: This scheme w as launched by the government on February 2015.

Under which the Government will hand out Soil Health Card to the farmers which can be used to assess the health of the soil.



Pradhan Mantri Fasal Bima Yojana: Government of India has launched Pradhan Mantri Fasal Bima Yojna to provide relief to the farmers who suffer crop damage. This scheme aims to reduce the burden of premium on farmers and helps in expediting the cases.



A dedicated Kisan Channel has been started

by Doordarshan to address various issues concerning farmers



National Agriculture Market (e-NAM): I t is an all India trading portal that aims to bring together several markets related to agriculture product marketing committee thereby allowing the seamless trade of goods from one agricultural market to the other. It would also help in removing the several duties imposed by the producers thereby ensuring that the consumers get the goods at a fair price.

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70



Warehousing Development & Regulation Act: This act was introduced in 2007 to ensure that the farmers are able to keep their produce in certified warehouse and use the warehouse receipt as negotiable instrument. With this receipt farmers can take loan from the bank and avoid distress sale in hour of need.



Government has allocated Rs 14,389 Crore for Pradhan Mantri Gram Sadak Yojana to provide all weather road to the rural areas



Infrastructure projects worth Rs 30,000 Crore such as scientific warehousing infrastructure and Rural Infrastructure Development Fund was made during 2014-15 to address the infrastructure issues in agriculture and rural areas



An initial Corpus fund of Rs 4,000 Crore was set up in NABARD to give a boost to long term investment credit in agriculture .



To address the problem of agriculture infrastructure in our country, Government has permitted 100 per cent FDI in agriculture infrastructures such as cold chains, warehousing and food parks.

Private Sector Initiatives ITC e-Choupal: E- Choupal is an initiative started

by ITC in 2000 with a dual objective of helping farmers and forming a unique agro raw material supply chain thereby cutting off all the intermediaries in the process. E- Choupal is a virtual market place where farmers come to meet the processor to make transactions.

E-Choupal is based on hub and spoke model with two dimensions. The first dimension is the internet kiosk which is set up in villages to help the farmers to keep

Although India is the second largest irrigated country of the world after China, only onethird of the cropped area is under irrigation.

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themselves updated with the wholesale prices of various produce in local mandi as well as the price offered by ITC Ltd. The second dimension is the hub which consists of warehouses and training facilities.

Some of the warehouses also offer facilities like retail stores, fuel stations, soil testing labs and food courts.

Storage facilities in the rural areas are either totally absent or grossly inadequate. Under such conditions the farmers are compelled to sell their produce immediately after the harvest at the prevailing market prices which are bound to be low.

As of now E-Choupal is operational in 40,000 villages across 10 states empowering 4 million farmers approximately.

Conclusion Post independence agricultural sector was the major contributor towards the overall GDP however over the years with globalization and opening up of the Indian Economy, emphasis on agriculture dwindled as the service sector took over. The flaws in the distribution system owing to the long and fragmented supply chain with middle men deprived farmers a sizeable chunk of their dues thereby aggravating their financial conditions.

With the government coming out with schemes like Pradhan Mantri Krishi Sinchayee Yojana and Pradhan Mantri Fasal Bima Yojana the farming sector would be benefitted in the long run. Moreover with the active participation of private players like ITC and Star Agri in addressing the infrastructure problem in agriculture, the farming is bound to see better times in the days to come.

InFINeeti Vivaan 2016 - Special Edition 72

CROSSWORD SOLUTION

August 2016

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Equity Research Report

Asian Paints

By Neha Bansal IIFT Kolkata

Headquarters Mumbai

Started in 1942, Asian Paints is India’s largest and Asia’s second largest paint company with a combined turnover of INR 155.34 billion. It operates in 19 countries across the globe. The company along with its subsidiaries covers 54% share in Indian paints market.

CEO K. B. Anand

Founders Choksey Brothers Arvind R Vakil

In order to find out the intrinsic value of a share of Asian Paints, we need to first look at the Industry Analysis of the paint industry.

The paint segments:

industry

is

broadly

divided

into

two

Decorative: Major segments in decorative include exterior wall paints, interior wall paints, wood finishes and enamel and ancillary products such as primers, putties etc. Decorative paints account for over 70% of

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74

of the overall paint market in India. Asian Paints is the market leader in this segment.

Industrial : User industries for industrial paints include automobiles engineering and consumer durables. The industrial paints segment is far more technology intensive than the decorative segment.

Using Porter’s five forces analysis, we get the following information with regard to this industry

Bargaining Power of the Supplier: Since paint industry is dependent on a large number of raw materials in order to manufacture paints, and a large number of suppliers are also present in the Indian market to supply the needs of majority of raw materials, the bargaining power of suppliers is low to medium.

Threat of new entrants: P aint industry is highly organized. Companies already established in India boast of brand name, extensive distribution network, operational exposure and technological advancement.

So entry into India paint industry is difficult for new players. However some of the Japanese players are gearing up to enter into the Indian market.

Threat of Substitute goods: People have very low propensity to use substitute products in place of

Asian Paints operates in 19 countries and has 26 paint manufacturing facilities in the world servicing consumers in over 65 countries.

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traditional paints. However there are a few substitutes available. For example lime wash used instead of traditional paints in some rural areas, use of wallpapers instead of decorative paints in urban areas. However there is no immediate threat considering the present outlook towards these substitutes.

Asian Paints acquired 51% stake in Sleep group, a kitchen solutions provider, in 2013.

It also acquired the front and sales business of Ess Ess Bathroom products Pvt. Ltd.

Bargaining Power of the buyers: Buyers belong to both decorative and industrial segment. In the decorative segment, availability of multiple options is the prominent factor which enables the customer to choose one among the key players. On the other hand in the industrial paints segment, price conscious customers who have good knowledge of the fair prices compels the paint manufacturers to reduce their margins. So power of buyers is medium to high in both the segments.

Threat of Competition: P aint industry in I ndia is highly dominated by 4 major players and there is intense competition between them for expanding customer base. Strong advertisement and marketing is the highlight if the Indian paint industry. So overall the companies have to be updated in innovation, marketing as well as IT infrastructure in order to survive this highly competitive sector.

India is the second largest consumer of paint in Asia.

The current size of paint industry in India is approximately INR 350 billion and is expected to grow at 1.5 times to 2 times the GDP in the next five years. Decorative paints segment is expected to witness higher growth going forward. The fiscal incentives given by the government to the housing sector have immensely benefited the housing sector which in turn will benefit the paint industry in the long term.

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76

Major growth driver of Indian Paint Industry are: 

Increasing level of income and education: There has been an increasing trend in the disposable income which is leading to a change in consumer habits. With more income at disposal people are opting for better products and paint is no exception. Education too has helped in making people brand conscious. The companies offering additional features like non-toxicity, weather protection, texture, eco-friendly production, etc. attracts more demand.



Increasing Urbanization – Urbanization has resulted in a shift from temporary house to permanent houses. People opting for permanent house in urban areas are looking for well-designed interior and exterior aspect which leads to more houses being painted. Interiors are becoming a matter of style statement for the people residing in urban areas and thus an increase in the per capita consumption of paint is witnessed.



Increasing share of organized sector – There has been considerable decrease in taxes on raw materials. This has helped improve the status and position of the organized players. The organized sector is expanding and its distribution network Is growing. The adoption of installing tinting machines at retail outlets has helped the paint sector grow at a much faster rate.



Growth of Realty, Automobile and Infrastructure sector - P aint industry is highly dependent on development of realty and housing sector. For the total paint demand, over 70% is generated from the decorative segment.

Automobile segment generates over 66% of the demand of industrial paint.



Availability of financing options – Easy financing is available for housing and automobile.

Asian Paints has the highest market share in the organized Indian paints

market - 53%

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This is expected to favor more people to buy houses and travel in personal vehicles. This in turn drives the growth of housing and automobile sector for which paint industry get its share.

Asian Paints is India’s leading paint company with presence in 19 countries and has 26 manufacturing facilities in the world. In order to enter the Home Improvement and Décor division, it acquired 51% stake in Sleep group, a kitchen solutions provider, in 2013. Asian Paints also acquired the front and sales business of Bathroom products Pvt. Ltd.

The group operates around the world through its subsidiaries Berger International Limited, Apco Coatings, SCIB Paints, Taubmans and Kadisco.

As per the company’s website, Asian Paints is expanding its water-based paint manufacturing capacity at its Tamil Nadu plant from 1.4 lakh kl per annum to 2 lakh kl per annum. The company also reported a 12.3% YoY increase in revenue to INR 39.7 billion.

In order to give the recommendation of buying or selling the stock, we have performed a discounted cash flow analysis on this stock to find its intrinsic value.

Terminal Values 

Total revenue from operations: INR 29,340.56 crore



Total value: INR 104,703.87 crore



PV factor: 0.58



Present value: INR 60,347.69 crore

Our findings generated the following result: 

Intrinsic value per share: INR 716.04



Market value per share: INR 1,137.95



Our recommendation: SELL

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78

Asian Paints performance with respect to the index (SENSEX) and its competitors: Asian Paints has the highest market share (53%) in the organized Indian paints market and is one of the best performers amongst its 3 major competitors i.e., Berger Paints, Kansai Nerolac and Akzo Nobel.

Asian Paints has rewarded its investors with a return of over 1000% in since July 2008 till now. The corresponding returns from BSE was close to 55%.

Source: Dion Capital Returns to investors of Asian paints compared to its competitors is also highly competitive in nature, with Kansai Nerolac and Akzo Nobel giving a return of 800% and 200% respectively compared to 1000% of Asian Paints in the 8 year period since July 2008.

Source: Dion Capital

Asian Paints was included in Forbes Asia’s ‘Fab 50’ list of Companies in Asia Pacific in 2011, 2012, 2013 and 2014.

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August 2016 79

DCF Calculation of Asian Paints in INR Cr

FY14A

Gross revenue (A) 14567.20 growth (in %) Net Revenue from operations (A )

12,714.80

growth (in %)

FY15A

FY17E

FY18E

FY19E

FY20E

18037.30

20382.15

23439.47

27189.79

31540.15

12%

10.5%

13.0%

15.0%

16.0%

16.0%

23,623.64

27,167.18

29340.56

14.0%

15.0%

8.0%

11,811.82

13,583.59

50.0%

50.0%

14,182.80

7971.50

% of sales Other Operating Expenses % of sales EBITDA margin (in %)

57.7%

56.2%

3376.20

3975.90

26.6% 2132.10 16.8%

28.0% 2405.10 17.0%

D&A

245.70

265.90

EBIT

15,534.10 9.5% 8,205.60

52.8% 4,519.90 29.1% 3009.30 19.4%

17,864.22 15.0% 8,932.11

50.0%

20,722.49 16.0% 10,361.24

50.0%

5,359.26

6,216.75

7,087.09

8,150.16

30.0% 3,572.84 20.0%

30.0% 4,144.50 20.0%

30.0% 4,724.73 20.0%

30.0% 5,433.44 20.0%

748.06

800.32

829.29

1,046.84

288.00

1886.40

2139.20

2721.30

2824.78

3344.18

3895.43

4386.60

margin (in %)

14.8%

15.1%

17.5%

15.8%

16.1%

16.5%

16.1%

Capex

496.00

597.00

% of sales

676.00

742.08

878.29

1,003.54

1,144.68

3.9%

4.2%

4.4%

4.2%

4.2%

4.2%

4.2%

D&A

245.70

265.90

288.00

748.06

800.32

829.29

1046.84

Net Capex

250.30

331.10

388.00

-5.98

77.98

174.24

97.84

Receivable Turnover Ratio

12.8

12.8

12.8

12.8

12.8

12.8

Closing Receivable 1110.3

1179.85

1618.94

1845.60

2122.44

Opening Receivable

1110.3

1179.85

1248.26

1322.21

1470.58

1658.09

69.55

68.41

147.90

296.73

375.02

464.35

5.23

5.23

5.23

5.23

5.23

5.23

Change in Receivable Payable Turnover Ratio Closing Payable

1745.72

1548.75

1,248.26

1,590.10

Opening Payable

1745.72

1548.75

Change in Payable

-196.97

41.35

Change in WC

266.52 30.0%

Tax rate

30.0%

Terminal Value

16325.20

11.50%

Cost of goods sold 7340.70

FY16A

FCFF TV Year PV Factor Present Value Firm Value Cash and cash equivalents

69103.46

Enterprise Value

68683.03

420.43

1,396.16

1,025.03 1,590.10

1,188.67

1,355.08

1,558.35

1569.43

1579.76

1574.59

-565.07

-380.75

-224.68

-16.25

27.06

712.98

677.49

599.70

480.60

30.0%

30.0%

30.0%

30.0%

30.0%

1777.85

2018.41

2385.78

2782.16

3539.03

1 0.90

2 0.80

3 0.72

4 0.64

5 0.58

104703.87 5 0.58

1592.34

1619.16

1714.15

1790.36

2039.77

60347.69

InFINeeti Vivaan 2016 - Special Edition

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80

Calculations Tax rate

30.00%

Post Tax Cost of Debt

NA

Beta

0.92

10 Years Treasury Bond Yield (Rf)

8.00%

Cost of Equity

11.65%

Debt/Capital (Wd)

0.00%

Equity/Capital

100.00%

WACC

11.65%

Debt (In INR crore)

0

Equity (In INR crore)

95.92

Market return (Rm calculation)

BSE SENSEX Financial Year

Open

Close

2011

17,055.04

19,463.11

14.12%

2012

19,063.11

17,429.96

-8.57%

2013

17,029.96

18,890.81

10.93%

2014

18,890.81

22,455.23

18.87%

2015

22,455.23

27,954.86

24.49%

Average Return: 11.97% *Source: www.bseindia.com

Annual Return

InFINeeti Vivaan 2016 - Special Edition

August 2016

MEET THE TEAM - SENIOR EDITORS

Pratik Dokania (Editor-In-Chief) 

Production Engineer from NIT Trichy



Former Market Analyst, Futures First Info Services Pvt. Ltd.



Summer Intern at Tata Steel Limited



Specialization in Finance with minors in Operations, Trade and Strategy

Nitin Agarwal (Senior Editor) 

Mechanical Engineer from MNNIT, Allahabad



Former Executive Engineer, Honda R&D



Summer Intern at Tata International



Specialization in Finance and wants to pursue a career in Investment Banking

Rashi Bablani (Senior Editor) 

Bachelor of Commerce, Commerce, New Delhi

Sri

Ram

College

of



Summer Intern at Goldman Sachs



Specialization in Finance and intends to pursue a career in Investment Banking

Vaibhav Agarwal (Senior Editor) 

Computer Science Engineer



Summer Intern at Oxane Partners Limited



Specialization in Finance and Marketing



Die hard fan of football and loves to spend time on novels

InFINeeti Vivaan 2016 - Special Edition

August 2016

MEET THE TEAM - JUNIOR EDITORS

Neha Bansal (Junior Editor) 

Bachelor of Commerce, Commerce, New Delhi

Sri

Ram

College

of



Former Business Analyst, KPMG Global Services



Intends to specialize in Finance and pursue a career in Investment Banking

Nilesh Dakalia (Junior Editor) 

IT Engineer from Nirma University, Ahmedabad



Intends to specialize in Finance and Marketing



Loves to play cricket and follows Warren Buffet religiously

Sarthak Khanna (Junior Editor) 

Electronics and Communication Engineer



Intends to specialize in Finance



Loves to play Table Tennis and spend time on newspapers and business magazines

Shashank Sharma (Junior Editor) 

Electronics Engineer Chandigarh

from

Punjab

University,



Former Systems Engineer, Infosys



Intends to specialize in Finance and Trade



Pink Floyd fanatic, loves photography and nonfiction books

Hope You Enjoyed Reading !!!

For feedbacks, please contact Team InFINeeti

infineeti@iift.edu

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Kolkata | New Delhi All rights reserved.