InFINeeti | Summer Edition
June 2016
From the Editor’s Desk
Dear Readers, Greetings from Team InFINeeti! Just less than a decade ago, the business world witnessed the biggest hit by an unexpected form of crisis which paralyzed the world's economic balance. Some economies were trembling before the crisis and some are still finding it difficult to stand up. But we still fail to believe that we live in a financial ecosystem, where the plans of an Asian giant can attack the stability in the American continent. Keeping track of the events around the world, InFINeeti brings you the summer edition of the magazine dedicated to the theme “THE VOLATILE WORLD”. From the crisis in Brazil to the imbalance in the economies of the Asian giants China and Japan and the transformation in US banking system, we present you the strata of the reeling economies and their plans to put their foot back. The opportunities in the African continent proves to be the motivating factor for the economies to pull themselves out of the crisis. From a different perspective, we have dedicated special focus on the financial technology around us which is acting as the facilitator of stability and justice, hats off to the John Does of the Panama Papers, who revealed us the snakes in our farm.
We thank all the contributors, who have made our job challenging by presenting us with articles, giving us a through understanding and analysis of the topics they contributed to. With the motive of making every issue better than before, we have added a new section in the magazine “Indian IPO Ecosystem”, for all those who are still sceptic of investing in the markets despite the knowledge they have. This issue features a diversity in expression. Happy Reading!
Team InFINeeti
InFINeeti | Summer Edition
June 2016
Contents
US Banking System Transformation After Crisis
Page 1 FinTech The Disruptor of Life Page 11
Union Budget 16-17 9 Pillars of Progress Page 13
Indian IPO Ecosystem Page 23
Brexit The Global Aftereffects Page 27
Is India Really The World’s Growth
Panama Papers Leak of the Century Page 37
Brazil The Crisis Prolonged Page 47
Africa
Engine
The Land of Opportunities
Page 59
Page 65
Chronic Deflation in
Crossword
Japan
Page 12, 46 Page 53
InFINeeti | Summer Edition
June 2016
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 Polic y Research (South Cooperation). He has served with the Central ministries of commerce, industries, petroleum, tourism, rural de velopment, 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 welcome the esteemed recruiters to visit the Institute and get a feel of this academic process. I am very confident that you will fid the experience as extraordinary and helpful in locating suitable industry leaders for your organisation. Dr. Surajit Mitra, IAS (Retd.) Ex– Fellow, Queen Elizabeth House, University of Oxford. Ph.D. (University of Cambridge).
InFINeeti | Summer Edition
June 2016
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 summer edition of InFINeeti entitled “The Volatile World” which is aimed at projecting the discussing global business happenings. The magazine has always presented the thoughts and opinions of todays youth on todays problems in the field of business and finance and will continue to do so. 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 s e v e r a l professional bodies including AIMM (Australia). His expertise includes Business Strategy and Strategic Planning.
InFINeeti | Summer Edition
June 2016
1
US Banking System A Fundamental Transformation towards Stability since 2008-2009 Crisis By Anurag Sanghai Senior Director, Credit Risk Fidelity Investments, Boston “Big Six” U.S. bank holding companies
J P Morgan Chase Goldman Sachs
Citigroup Bank of America Morgan Stanley
Wells Fargo These banks have paid $82 billion in fines, sanctions and legal actions in 7 different countries over the past 10 years.
Since the global financial crisis in 2008-2009, a significant number of regulatory initiatives in the US, including introduction of Dodd-Frank Act in 2010 and ongoing stricter higher-quality capital, liquidity and funding requirements under Basel III, have resulted in a stronger/improved balance sheet for the US banking system. Although the US banking system became more concentrated with the big 6 now accounting for more than 60% of system’s aggregate assets of $16 trillion, continued regulatory oversight has significantly reduced the risk taking capabilities, primarily at these large ‘Global Systemically Important Banks’ (G-SIBs), as they were forced to optimize balance sheet.
InFINeeti | Summer Edition
June 2016 2
“If I had seen what was coming, I would have behaved differently. I think the primary cause was an almost universal belief, among everybody and I don’t ascribe particular blame to any part of it—whether it’s Congress, media, regulators, homeowners, mortgage bankers, Wall Street, everybody—that house prices would go up.”
Warren Buffet Data Source: FDIC
Enormous regulatory and compliance requirements, although strengthening banks’ balance sheet, have resulted in a challenging earning profile in this persistent low interest rate environment, where most banks are struggling to achieve a return-on-equity (ROE) above its cost-of-equity (COE). Positive from a credit investor’s perspective, a strong balance sheet and ongoing regulatory oversights [including annual stress test, G-SIB capital buffer, on-site bank examiners, monitoring of operational risk & risk-management practices] has reduced the tail risks, while it has forced large US banks to simplify their business model by reducing reliance on higherrisk volatile capital markets related activities and exiting areas not strategically important. At the same time, banks are incentivized to focus on increasing reliance on stable feebased asset/wealth management as well as custody/securities servicing type of revenues.
In the Perspective of Equity vs. Fixed -Income/Credit Investor
InFINeeti | Summer Edition
June 2016
3
“Until recently, I wasn’t even conscious of what our leverage was, in the sense of, the amount of our gross assets versus our equity.”
On the other hand, an (equity) investor’ worry about both the top line and bottom line growth, has resulted in ongoing cost cutting measures being taken at these banks in order to gain efficiency in such a challenging revenue environment (albeit improving with loan growth). Activist shareholders have gone further ahead and have now started proposing the break-up of big banks (JPMorgan/Citi/BofA) that could boost shareholder value. This is not likely to be accepted given the significant synergies derived from the size and scale.
Lloyd Blankfein CEO and Chairman,
Goldman Sachs
Earnings and Risk
Along with the continuing low rate environment, more than $150 billion of charges associated with the mortgage and credit-crisis related litigations and settlements (albeit abated recently) weighed on US bank earnings since 2011. Although the banks have enjoyed improving asset quality during the same time period (reserve releases amounted to $125+ billion). However, the benefits have started to subside recently as asset quality reaches its cyclical peaks along with growing commercial and individual loan portfolios. Hungry for relatively higher yields in order to drive the topline growth, banks did start loosening lending underwriting standards, primarily in leverage lending as well as in commercial & auto loans. This led regulators to intensify focus on commercial-real-estate and leverage lending practices. A significant amount of risks continued to get transferred to the so-called unregulated ‘Shadow Banking’ system (current estimated size ~$30 trillion), primarily reflecting regulatory arbitrage.
InFINeeti | Summer Edition
June 2016 4
On the other side, the Fed and FDIC are assessing if 12 of the largest banks have so-called credible ‘Living Will’ plan for going through bankruptcy without any taxpayer support, one of the most important mandates under the Dodd-Frank Act which intends to eliminate any potential implicit government bailout assumption. Bank without a credible plan and that continually fails could eventually face sanctions including higher capital requirements as well as forced divestitures. Revenue: Significant market volatility in Jan/Feb and macro concerns surrounding bank’s exposure to commodities and emerging markets including China, weighed on the sector YTD. I expect revenues to decline y/y for 2016 on lower capital markets and lower-than-expected tailwind from netinterest-margin improvement reflecting lesser than anticipated Fed rate hikes Profitability: Banks to continue to focus on achieving positive operating leverage, while earnings could come under pressure due to revenue headwinds, and higher loan loss provisions reflecting loan growth and troubling energy sector exposure Asset Quality: Expected to deteriorate somewhat from current cyclical peak levels, while specific areas of potential risk include energy, commercial-real-estate , leverage lending, auto, and EMs exposure particularly in China Capital: Likely to remain stable to slightly higher with expected higher capital distribution approval post more punitive 2016 Fed CCAR stress test results in June (CCAR = Comprehensive Capital Analysis and Review) Funding/Liquidity: Most banks are well-positioned for rates rise but funding mix less likely to change significantly given limited rate hikes expectation from Fed this year M&A in the sector: Given the rising M&A environment, primarily in the mid-size banking sector (assets size between $10-$50 billion), we expect to see larger number of acquisition/merger by/with mid-large size regional banks, as banks thrive to gain scale and efficiency in this current regulatory and operating environment.
2016 Outlook for US Banking System
“As the stock price dropped from $10 to $3 from one Friday to the next, the lesson for me was that capital strength mattered. I thought Citi had enough capital, but in a dysfunctional market it wasn’t enough.”
Vikram Pandit Former CEO, Citigroup
InFINeeti | Summer Edition
June 2016
5
FinTech The disruptors of the Financial System By Pratik Dokania IIFT Kolkata
The Fintech sector is a very broad field, encompassing the technological innovations which impact the delivery of financial services traditionally offered by banks, insurers or asset managers
It has been more than a decade since a finance company has pursued anything substantial which will change the face of the financial ecosystem. FinTech or financial technology sector is rapidly acting as a democratizing force that contains the potential to change the perception of the finance industry today. The growth of this industry has so much visibility that makes it hard to be ignored. If you think that this all about digital payments and mobile wallets, then you are wrong. The industry has already started venturing into micro finance and insurance industry, and who knows, where big data and automation will take this industry to. It is true that till now only the digital payment companies have been able make substantial impact on the financial world and our lifestyle, where transactions now happen in
InFINeeti | Summer Edition
June 2016 6
split seconds rather than standing in queues. Also, widespread innovation and continuous support of ventures capitalists in this domain has made any future projections futile. The investors’ sentiments are clearly being motivated by the impact this industry is making on the complete financial ecosystem. By the end of 2014, investments in the FinTech start-ups went up to the figure of $ 14 billion, against less than $3 billion in 2012. By the end of 2015, the year’s investment stood at $18 billion, the figure which was projected for the year 2018. Clearly the industry is moving way faster than ever imagined.
Worldwide, 66% of mobile media users carried out a transaction via mobile in 2014; mobile banking was 69%
InFINeeti | Summer Edition
June 2016
7
25% of feature phone users named social media apps as the their number one destination for mobile commerce
14% use their mobile device for shopping while engaging with other media like TV programmes
Payments Made Easy
Feeling the wrath of new age competition, even bank’s spending on future technologies have accelerated with American banks spending close to $17 billion on these future technologies. Banks have even started venturing into the domain of artificial intelligence where DBS is using IBM Watson in reshaping the way they serve their customers. Supported by this trend, DBS has successfully launched India’s first mobile only bank, which is based on this technology. Even big banks like Barclays accept Artificial Intelligence to be the future of the Finance Industry. Now, as a reader it is more important to know how this new age industry is revamping our lifestyle and in what forms. Developing nations are at the top on rankings based on digital and financial inclusions and that is something not superficial. In Kenya more than two-thirds of the adult population use Vodafone m-pesa and nearly 25% of the country’s GDP flows through this platform. Today, Kenya tops the list of Digital and Financial inclusion. Digital currency has not only made payments easy, but also enabled transparency. This technology generates a different set of data on consumer spending, which the big banks never had. Now let’s see some dramatic ways in which this technology has innovated our lifestyle. When I was watching the National Geographic documentary on megacity Hong Kong, I was fascinated by the way Octopus cards work. It is not only a subway card, but a new form of currency. The card can be used to conduct almost any cash transaction in the city, and that was in 2004. That was a card then, now we have a whole digital wallet. No middlemen for paying any insurance premium, or search for an ATM for liquid cash. Digital currency has redefined liquidity. Not only that, there are international digital currencies like Bitcoin and Apple Pay, where there is no need to pay international transfer fees by using services of TransferWise or Western Union. These digital platforms are almost free for users or in some cases,
InFINeeti | Summer Edition
June 2016 8
way cheaper than the existing financial infrastructure. They help keep track of expenses and income, which is not only beneficial for the consumer, but also for small businesses, who now have a cheaper and a transparent option. In the emerging peer to peer business economy, a new revolution of sharing the economy is evolving. There is an advent of a new source of service every day, independent of what you want. Getting rid of your old merchandise is not a burden anymore. Thanks to Quikr and Olx! That is not all. We also have start-ups like Capital float who offers working capital loans to small businesses, who find it difficult to access it from the banking system. Online insurance availability, real estate, medical consultancy and the list goes on.
Services Custom Made Globally only 8% have used a mobile wallet
There is so much in the domain of services that this platform can offer, other than just related to money. Easy lending and smooth access to funds from start-ups like LendingClub or Prosper has the life of entrepreneurs easy. With the emergence of e-commerce in India, these easy availability of funds make it easy for small businesses to be a part of this revolution. Loan refinancing firms like Sofi have started a new bank less world. You do not have to own millions in cash to afford a money manager or an investment advisor, thanks to platforms like Wealthfront and Betterment. If you are unwilling to manage your own money, then online platforms like these will be suitable for medium level savings. Moreover, there are advisors who can even optimize your expenditure for a fee. Platforms like LevelMoney help do that.
Democratizing Investment Services
Today, four major economies namely USA, UK, Germany and China account for nearly two thirds of the global addressable transaction value for FinTech. The FinTech world in these countries have moved beyond mobile wallets POS payments to the domain of business lending platforms, factoring platforms, consumer lending platforms and automated
FinTech in the Developed world
InFINeeti | Summer Edition
June 2016
9
investment services. Our neighbour China is witnessing a CAGR of 115% in the transaction value of digital payments. In India, the FinTech environment is still dull but explosively booming. By the end of 2015, India has more than 750 FinTech startups. E-commerce is growing beyond offers and mobile wallets becoming popular day by day. While only 8% of the mobile users in India have a mobile wallet account, only 6% of them conduct a monthly transaction of more than INR 1000 every month. 78% of the mobile users do not use a wallet because of the scientism of the platform not being safe. Low penetration of
InFINeeti | Summer Edition
June 2016 10
InFINeeti | Summer Edition
June 2016
11
A lack of trust remains the number one barrier in the way of growth. 36%, for example, say it prevents them from using a mobile wallet
internet services in rural India pushes the work of payment banks that are about to come up years behind. Diversity and lack of synchronization in services of these wallets is a major hurdle in accessing these services. EBay India accepts payments from almost all wallets active in India whereas Amazon India accepts not a single payment gateway. User in India find it difficult to maintain wallet accounts. Availability of multiple wallets and little to no service differentiation make it difficult to choose one. Moreover, your family may have a different wallet, your friend may have another and your grocery store might have a third one. But, John Heywood rightly said that Rome Wasn't built in a Day, But They Were Laying Bricks Every Hour. There are differences in ideology among the Indians and the consumer behaviour is being so unpredictable. But FinTech promises to erase all hurdles to access of services and may force us to be prey to this innovation.
InFINeeti | Summer Edition
June 2016 12
ACROSS
DOWN
3 The constant spread that will make the price of a security equal to the present value of its cash flows when added to the yield at point on the spot rate Treasury curve 5 Discount applied on of diversified company
1 20% to 50% Investment in an entity
7 equal footing
4 A chart showing the results of different valuation techniques
8 Part-by-part valuation
2 provision contained in an underwriting that gives the underwriter the right to sell investors more shares than originally planned by the issuer
6 An event involving promotion of an entity in a 9 Post offer defence in which the corporation is pre-IPO stage sold to a third party 10 A mutual fund's price per share
InFINeeti | Summer Edition
June 2016
13
Unveiling Union Budget 2016-17 9 Pillars to Transform India By Nitin Agarwal IIFT, Kolkata It is not easy for any country with a 125 crore population to progress at a rate of 7.5%. But the India is doing so. The Union Budget every year unveils the government’s plans to generate revenue and also the key areas where these will be spent. Every aspect of the union budget directly or indirectly affect us as a minute change in the policy make lead to difference in figures billions of rupees and compromise the government’s plans. Moving straight to what this years Union Budget offers, we will focus on the following nine main areas of interest which has the centre of focus for the nation's development.
Agriculture and Farmers’ Welfare- From “Food Security” to “Income Security”
Rural sector: Transforming villages to transform lives
Social sector including healthcare
Education: Focus on quality
Infrastructure and Investment: Enhanced Quality of Life
Financial sector reforms Building Trust Improving Predictability
Governance and Ease of Doing Business: Minimum Government and Maximum Governance
Fiscal Discipline: Boosting Growth while Ensuring Fiscal Prudence
Tax Reforms: Moving Towards a Simplified Tax Regime
InFINeeti | Summer Edition
June 2016 14
Agriculture and Farmers’ Welfare From “Food Security” to “Income Security” Reviving the agriculture sector is one of the major challenges the government is facing. Agricultural output contracted 0.2% in 2014-15, from a 4.2% growth in 2013-14.In a bid to reinstall growth in agriculture and improve farmers’ incomes, the Union Budget placed a renewed focus on the farm sector by increasing funds for crop insurance and irrigation schemes. The focus now has changed from mere “food security” to Sustainable Income Security with the aim to double farmers’ income in next 5 years. Total Allocation for the farm sector is increased to INR 35,984 crore. Recently launched crop insurance scheme Pradhan Mantri Fasal Bima Yojana (PMFBY) has been allocated INR 5500 crore which is more than double from INR 2,589 crores in 2015-16 (budget estimate). The other focus area is irrigation. Finance minister Proposed in the budget that 2.85 million hectares will be brought under irrigation through the Crown jewel Pradhan Mantri Krishi Sinchayi Yojana (PMKSY) scheme in 2016-17. Also, 89 projects under the Accelerated Irrigation Benefits Programme (AIBP) that are drooping will be fasttracked than doubled. In a country like India where over half of the farm lands are rain-fed, the government has made
irrigation a priority only consecutive monsoon failures
after
two
The budget created a special long-term irrigation fund under NABARD (National Bank for Agriculture and Rural Development), with an initial corpus of Rs.20,000 crore. As said in the budget, an online national agriculture marketplace would be launched to connect 585 regulated wholesale markets across the country. This will help farmers to get remunerative prices. Twelve states have amended their farm produce marketing laws already and more states are expected to join the e-platform. To strengthen procurement at support prices across the country, the Centre will also add an online procurement system, which will be introduced by the Food Corporation of India.
Rural Sector Transforming Villages to Transform Lives Keeping focus on farmers and the vulnerable, Union Budget 2016-17 made a clear shift in emphasis from manufacturing -based economic growth to rural development. Total Allocation for the sector is INR 87,765 crores. One of the most important budgetary initiative that can entirely change the political economy of the country is the allocation of nearly INR 3 trillion to gram panchayats. There are 250,000 panchayats in the country which means each one will get almost INR 1 crore every year. This is by far the most important initiative for the
InFINeeti | Summer Edition
June 2016
15 Allocation of Important Ministries, sectors Actual
Ministry/Department
RE
BE
2014-15 2015-16 2016-17
Ministry of Agriculture and Farmers Welfare
25,917
22,958
44,485
Ministry of Drinking Water and Sanitation
12,091
10,907
14,010
Ministry of Health and Family Welfare
32,154
34,957
39,533
2,728
1,961
5,411
68,875
67,586
72,394
Ministry of Micro Small and Medium Enterprises
2,767
3,021
3,465
Ministry of Minority Affairs
3,089
3,736
3,827
515
262
5,036
Ministry of Road Transport and Highways
33,048
47,107
57,976
Ministry of Rural Development
69,817
79,279
87,765
1,038
1,804
5,784
6,580
7,350
13,254
18,340
24,523
5,480
7,032
6,201
18,539
17,352
17,408
Ministry of Housing and Urban Poverty Alleviation Ministry of Human Resource Development
Ministry of New and Renewable Energy
Ministry of Skill Development and Entrepreneurship
-
Ministry of Social Justice and Empowerment Ministry of Urban Development Ministry of Water Resources, River Development and Ganga Ministry of Women And Child Development
All Figures in INR crores
Sectors Agriculture and Irrigation Social Sectors including Education, Health Rural Development and Drinking Water Infrastructure and Energy
Actual
BE
BE
IEBR
Total for
2014-15
2015-16
2016-17
2016-17
2016-17
31,497
25,988
47,912
1,36,431
1,39,619
1,51,581
-
-
81,908
90,185
1,01,775
-
-
1,85,139
,80,610
,21,246
Figures in INR crores
6,300
25,000
5,42,123
2,46,246
InFINeeti | Summer Edition
June 2016 16
Social sector including healthcare National Digital Literacy Mission (NDLM) Scheme has been drafted to impart IT training to 52.5 lakh persons, including Anganwadi and Accredited Social Health Activist workers (ASHA) and authorized ration dealers in all the States/UTs across the country. It aims to train the non-IT literate citizens to become IT literate so that they can actively and effectively participate in the democratic and development process and also improve upon their standard of living.
budget for Mid-Day Meal scheme got a boost by 5%. The budget for National Health Mission is increased by 2%, while the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA), which according to Mr. Arun jaitley had received its highest allocation again in this budget, enhanced by 4% from the previous years’ budgets. Swachh Bharat Mission (SBM), the frontrunner programme on rural sanitation, saw one of the biggest leaps at 38%. However, this leap is in part due to lower revised estimates. In health, the big jumps in allocation are in health insurance — the old Rashtriya Swasthya Bima Yojana (RSBY) scheme has been renamed and has received a 152% hike (Rs.900 crore). Although, there are certainly some improvements in social sector spending, but this budget is by no means a big bonanza for the social sector, at least in the way that the budget seems to have expressed.
Allocation for Rashtriya Gram Swaraj Abhiyan is INR 655 crore. This scheme will help Panchayat Raj Institutions to deliver Sustainable Development Goals. Under Pradhan Mantri Grameen Sadak Yojana INR 27,000 crore is allocated. This increase in allocation will help better connectivity of rural areas and better and efficient transportation of farm produce thereby Nevertheless, some new initiatives have been taken in the sector. 3,000 Stores is to be reducing costs for the farmers. opened under Prime Minister’s Jan Aushadhi In a noted departure from the previous two Yojana during this fiscal year. ‘National budgets, this year’s budget speech began Dialysis Services Programme’ will begin with a clear commitment to improve social under National Health Mission through spending and to list social sector Public Private Partnership (PPP) mode. Each (healthcare and education) high in the key Bank Branch has to facilitate at least two priorities of this government. Let’s have a projects under “Stand up India” Scheme. At quick look at the numbers: the Sarva least 2.5 lakh entrepreneurs are expected to Shiksha Abhiyan Scheme budget increased be benefited by the scheme. by 2% from previous budget while the
InFINeeti | Summer Edition
June 2016
17
Education Focus on Quality It is an absolute pleasure to find education listed amongst the “9 pillars” of this year budget. Of course, Indian education sector has been the central character on stage during last few months. The government is trying to challenge the status quo, which was expected be seen through the union budget holding a significance for Indian education sector. To tackle big challenges Indian education is facing with respect to enrolment, excellence and employability, the sector was expecting declarations for structured education reforms. However, the Finance Minister’s budget speech sounded more like a manifesto than budget. The budgetary allocation doesn’t create an image of education to be in the top list. Reduction in education sector budget allocation during previous year was also widely criticized by all the segments. In budget 2016-17, the FM announced an allocation of INR 72,394 crore in comparison to INR 68,963 crore for last fiscal year, a 4.9 per cent increase in the education budget. In Previous year budget INR 42,219.5 and INR 26,855 crore was allotted for school sector and higher education sector correspondingly. In this budget, INR 43,554 crore (nearly 3 per cent rise) is allotted for school education and INR 28,840 crore (nearly 7.3% rise) is allotted for higher education. Increase in the education budget
is a welcome step, however, if we consider inflation and GDP growth rate, this year allocation will come out to be lower (as % GDP) than previous year. Even after this increased allocation, education sector budget remains far from desired percentage of around 6 per cent of the GDP.
Infrastructure and Investment Enhanced Efficiency and Quality of Life This year, Union Finance Minister announced a number of impressive measures to boost infrastructure and investment in the country, with a focus on roads and highways. Steps to re-vitalize PPPs were also announced. The FM has provided an outlay of INR 221,246 crore for the infrastructure sector, including railways. Of this a large pie has been provided to the road sector. INR 97,000 crores has been kept aside for road and highway connectivity, including rural sadak yojana allocation. Additional funding will also been attempted to be achieved by issuing tax free infrastructure bonds. To revive certain underserved airports by collaborating with the State Governments, to improve regional connectivity, is also one the agenda of the government this year. In addition to road and air transport, the Government announced that it will continue to modernize Indian ports and increase their efficiency. The Finance Minister also declared the drawing up of an all-inclusive
InFINeeti | Summer Edition
June 2016 18
plan for the next 15 to 20 years to raise investment in nuclear power generation. However, the Budget proposals fell short of announcing innovative measures helpful in widening and deepening the channels of funding for infrastructure. The three point action plan for PPP projects was another critical announcement 1)Formulation of a dispute resolution bill 2)Renegotiation of PPP projects through issued guidelines, and
3)Introduction of a new credit rating system. This could also start the way to complete derailed projects which were awaiting the last mile funding. The phasing out of the profit linked incentive for specified infrastructure facility was on expected lines. However, this is largely compensated by providing an upfront deduction on capital expenditure. In the power sector, additional depreciation @20% shall be available on plant and machinery acquired and installed for transmission activities as an incentive on capital expenditure.
provided to Government by way of civil construction contracts, and services of original works related to an airport or port. But, withdrawal of service tax exemption for original works related to monorail or metro for future contracts seems to be negative for the sector.
Through this Budget, the Finance Minister has further asserted the Government's pro infrastructure pro development stance. The Budget announcements have made it crystal clear that the Government’s focus is on making the infrastructure sector its key growth driver. Overall the Budget has open the way for increased focus on infrastructure sector.
Financial Sector Reforms Building Trust, Improving Predictability The financial sector is all set to revamp in fiscal 2017 as the government has declared to push through amendments to key Acts and important bills such as the bankruptcy code and another on the insolvency of financial firms.
Removal of DDT on dividends is declared on the underlying SPV (Special Purpose Vehicle) to the business trust. This will clear an additional bottleneck for sponsors to set up and establish a business trust.
The government also attempt to improve the management of stressed assets by modifying the rules for asset reconstruction companies (ARCs) and ensuring that infrastructure sector had access to cheaper finance by corporate bond market deepening.
The Finance ministry has also re-established the exemptions withdrawn for contracts entered in previous year, for services
FM, in his third budget, suggested legislative amendments to the Reserve Bank of India (RBI) Act that will give statutory backing to a
InFINeeti | Summer Edition
June 2016
19 comprehensive policy framework. Once a bill is passed in Parliament, the amendments will take effect. The sixmember MPC, is to be formed to decide on interest rates as against the current norm of the RBI governor and his internal team having full control over monetary policy.
The budget also proposed to increase the number of benches and members of the Securities Appellate Tribunal (SAT) under the Securities and Exchange Board of India (SEBI) Act, 1992. According to the latest SEBI data, 520 appeals were filed before SAT during 2014-15, 381 appeals were pending at the end of the year while 103 were dismissed. Besides, 16 SEBI orders were preserved with changes. The proposal will help accelerate cases pertaining to securities markets, and also taking into consideration the fact that apart from the Forward Markets Commission merging with SEBI, SAT is now also the apex body for appeals against decisions by Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority. Along with the proposed multiple benches, Timely appointment of members with relevant expertise to deal with the subject matters will be equally important to ensure speedy justice. A new all-inclusive Code on Resolution of Financial Firms during 2016-17 will aim to resolve bankruptcy situations in banks, financial institutions and insurance companies. The Bankruptcy Code was
introduced in the winter session of Parliament with intention to provide a onestop solution for a firm to dissolve itself. With aim to improve the management of existing stressed assets, there is a proposal to allow sponsors of ARCs (Asset Restructuring Companies) to hold up to 100% stake in these companies and also allow non-institutional investors to invest in securitization receipts. For proposal to come to reality, amendments will be required to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Presently, sponsors of any ARC, typically financial services companies or banks, cannot hold more than 50% stake in such a company. Individuals need to hold the remaining stake.
The biggest challenge in the sector right now is availability of higher and cheaper capital. If the amendment takes place, the ARCs can become majority-owned subsidiaries of their sponsor institution which will ultimately help the companies to take on the challenge of scare and costly capital. Further, the government attempts to bring in a comprehensive legislation to handle the menace of money pooling schemes and illegal deposit-taking. Presently, the Another major change the government is aiming is to allow an individual foreign investor to hold up to 15% in an exchange, which is currently 5%, to improve global competitiveness of Indian stock exchanges.
InFINeeti | Summer Edition
June 2016 20
The proposal was first introduced by SEBI in 2012, and was turned down by the Bimal Jalan committee set up for amendments to regulations related to stock exchanges and clearing corporations. SEBI once again proposed this to the government in June 2014, reasoning that the exchange space is now mature enough to deal with more participation from a single foreign investor various Ponzi schemes end up falling under different regulators. Also, this budget listed six measures to deepen the corporate bond market that has become prominent as a cheap source of borrowing as banks’ loan rates remain on higher side. One of them is to allow LIC (Life Insurance Corporation) to set up a fund that will help in credit appraisal of bonds floated by infrastructure companies.
Governance and Ease of Doing Business Minimum Government and Maximum Governance
11 new benches of the indirect tax tribunals across India have been proposed to be created to prompt speedy ‘dispute resolution’, ‘ease of doing business in India’ and provide certainty in taxation. Along with it, there is a one-time proposal to resolve the cases pending before Commissioner (Appeals) under Dispute Resolution Scheme, 2016. A bill to amend the Companies Act, 201 is also proposed. The proposal seeks to improve the enabling environment for start-ups by mandating the registration of companies in a single day.
A technology driven platform will be established by the Director General of Supplies and Disposal (DGS&D) to facilitate efficiency and remove opaqueness in purchase of goods and services by different Ministries and agencies of the Government. To support market interventions in procuring pulses, The Price Stabilization Fund will be provided with an initial fund of 900 crore rupees. To link States and Districts in an annual event “Ek Bharat Shrestha Bharat” programme will be introduced that will help people unite through exchanges in areas of language, culture, trade, travel and tourism. The programme will start the celebration of 70th Anniversary of independence.
The encompassing theme in terms of ease of doing business is to minimize government and maximize governance. The government’s focus has been not only for corporate entities but also for common people, with efforts being made to remove irritants in their dealings with the To avoid leakage in disbursement of government. With that focus, the government subsidies, following three government has composed a task force for initiatives were announced: streamlining human resources in both the government as well as autonomous bodies.
InFINeeti | Summer Edition
June 2016
21 1.
The Aadhaar framework will be used for targeted delivery of Financial and Other Subsidies, Benefits and Services. A bill will be introduced in the budget session of 2016-17 for it. A social security platform will also be developed through Aadhaar to accurately target beneficiaries. It will be a transformative piece of legislation which will benefit the poor and the vulnerable.
2.
Direct Benefit Transfer (DBT) will be used on pilot basis to deliver fertilizer subsidies in a few districts across the country. It seeks to enhance the quality of service delivery to farmers.
3.
By March 2017, Automation facilities will be provided in 3 lakh Fair Price Shops, Out of the 5.35 lakh such Shops in the country.
Fiscal Discipline Boosting Growth while Ensuring Fiscal Prudence
It is crucial to understand the FM's tradeoff: whether to get more rigid with fiscal discipline or to increase spending on public investment. While a case can be built for both, Mr. Jaitley has made his government's priority clear — that fiscal discipline is first priority in current scenario. Considering the fact that this year the government will have to take care of increased financial burden from the 7th
Pay Commission recommendations and the OROP (One rank one pension) scheme, the target to bring fiscal deficit down to the previously pledged levels of 3.5% of GDP is both brave and commendable. This focus on fiscal discipline and macro-stability will help India stand out among Emerging economies. Keeping the fiscal deficit at 3.5% is an important announcement, which will bring relief for bond markets. This, along with lower government borrowings, will be favourable for bond, currency and equity markets. A lower fiscal deficit, lower government borrowings, bond yields cooling and stable inflation over the last few months build a strong case for a rate cut. The basket of available investment opportunities in the capital markets will be further diversified. This action will make the sector more alive and increase its capacity for sustainable growth.
Tax Reforms Moving Towards a Simplified Tax Regime Over five crore subscribers who have invested in the retirement savings scheme are affected with the Budget proposal to make the Employees' Provident Fund (EPF) taxable. The proposal was that only 40% of the contributions made to EPF after April 1 will be tax free on withdrawal. The remaining 60% of the NPS value
InFINeeti | Summer Edition
June 2016 22
getaway immediate taxation as it is made compulsory to put in an annuity for a monthly pension which is fully taxable. Employees will be greatly benefited with the Budget proposal of exemption for a one-time portability from a recognized provident fund or superannuation fund to the National Pension System. As of now, employees have their savings in several different pots. This one time allowance of portability of funds means that employees can have all their funds in a single scheme which turns out to the rate of return that could then be applied to a much larger value. The government has also proposed tax changes that will increase revenue by way of indirect taxes more than the direct taxes. This continues the legacy of regressive taxation.
InFINeeti | Summer Edition
June 2016
23
India’s IPO Ecosystem By Rashi Bablani IIFT Kolkata Initial Public Offer (IPO), is the first sale of shares by the privately owned company to the public. The companies going public raises funds through IPO's for working capital, debt repayment, acquisitions, and a host of other uses. The IPO Market in India has been developing since the liberalization of the Indian economy. With the introduction of the open market economy, in the 1990s, the IPO Market went through its share of policy changes, reforms and restructurings. One of the most important developments was the introduction of the free pricing mechanism. This step helped in developing the IPO Market in India, as the companies were permitted to price the issues. The free pricing mechanism permitted the companies to raise funds from the primary market at competitive price. International evidence suggests that book -building issues expect to have lower under-pricing than fixed-price issues. In Indian IPO markets, book-building
mechanism since 1999 has gained popularity particularly for relatively larger IPOs. Traditionally, Indian IPOs used to be fixed-price offerings, wherein prices of the stocks on offer were determined prior to seeking investors' bids. It appears that the prime factor causing IPO under-pricing is asymmetric information between the issuer and the investment banker, asymmetric information among investors and asymmetric information between issuer and investment banker. With the plethora of IPOs in line, it is important to understand the factors that affect the pricing of an IPO in India. According to a research carried on by Pacific Business review, the factors that affect the pricing include: 
Global Macro-economic factors including the overall performance of the global economy: Needless to say, in the global scenario when the economies are linked together, recession in one country has a significant impact on others. More so
InFINeeti | Summer Edition
June 2016 24
in case of the burgeoning MNC culture!
Indian Macro-economic factors: These include per capita GDP, political factors, policy rate of RBI and inflation
Size of IPO issue
Time delay between offer losing date and listing date Apart from the above given factors, the image of the merchant banks associated with the IPO has a negative correlation with the mispricing of the issue. On an average the Indian market takes around 6 months to accurately price the issue. Looking at the past performance, in the main board IPOs, Interglobe Aviation IPO was the biggest one that generated INR 3270 crore and Shree Pushkar Chem was the smallest that mobilized INR 70 crore in FY 2015. Among SME IPOs Amrapali Fincap topped the list with issue size of INR 42.48 crore and Navigant Corp was the smallest IPO for INR 1.19 crore. On debt market front too we witnessed fund mobilizations of INR 21365 crore by 18 companies including tax free bonds from PSUs. Figures for main board, SME IPOs and Debt offers for the CY 2014 were respectively INR 1201 crore (5 companies.), INR 267 crore (40 companies) and INR 24216 crore (33 companies) respectively. Further, listing of two pharma sector companies i.e. Alkem Labs and Dr Lal Pathlabs towards the end of 2015 at a hefty premium to offer price
boosted the sentiment for primary market operators. According to an EY report, “IPOs in India are set to hit a six-year high in 2016 as the companies looking to go public, supported by a growing appetite for equities and an uptick in economic growth, are estimated to raise more than US$5b.” In the first quarter of 2016, India was ranked in the top six countries in terms of the number of deals globally and BSE was featured in the top six exchanges in terms of funds raised within Europe, Middle East, India and Africa (EMEIA) region, which amounted to $197 million (nearly INR 1,310.59 crore) from eight deals. According to a research report by EY divestment is expected to be another contributing factor to IPO market with the government looking to list the profitable PSUs, notably the insurance majors. Financial services, life science and automotive are expected to be the more active sectors.
The deal traction witnessed in the first quarter of this year is likely to continue in the coming months as well, largely due to positive sentiment on growth, government’s plans to divest stake in state -owned enterprises and a robust pipeline built up over the past six years.
InFINeeti | Summer Edition
June 2016
25 Top 6 countries by deal volume in FY1 2016
According to Reuters, positive sentiment in the primary market is also attracting several large firms such as Vodafone India Ltd and HDFC Standard Life Insurance Co. Ltd to tap the IPO market. While HDFC Standard Life has announced its intention to complete its initial share sale by the second half of the calendar year, Vodafone India has already mandated merchant banks for its planned $3 billion IPO. The Vodafone IPO of its Indian unit, if successful may surpass the Coal India IPO of 2008, the so-called largest IPO of the country according to the data collected by Bloomberg. Even as much has been talked about the revival in the IPO market, investor participation in the bourses seems to be subdued, raising concerns among analysts about the road ahead. While a lot of
ventures tapped the capital market with their public issuances, it is factors like expensive valuations and volatility in the secondary markets that kept away participants from the primary market. Further, the participation of retail investors has not increased in tandem with the number of issues. A key reason can be the lack of confidence of investors in Indian stock market. Our domestic institutional investor segment too has not grown. Without this support our primary market has always been in doldrums kept alive due to purportedly oversubscribed issues. The question is this under confidence justified? Are the Indian companies loyal enough to the purposes stated in the prospectus with regards to the usage of funds? Much remains to be debated in this context.
InFINeeti | Summer Edition
June 2016 26
Going forward, however, analysts believe that India is likely to see quite a few IPOs if the market and the sentiments continue to be bullish. Also, what the market currently requires is a few success stories that will prompt people to look at the IPO market seriously. Investors continue to believe that there is still an upside available in the secondary market, where risks are comparatively lower and therefore are putting their money there directly or through the mutual funds. This brings us back to the chicken-egg problem. Will the investors look beyond their distrust or will the corporates give an exemplary example of their loyalty to investors’ money? Or will the government and the regulatory agencies step up to provide the much needed confidence? Much needs to be seen.
InFINeeti | Summer Edition
June 2016
27
Brexit The Global Aftereffects By Chetan Dixit $ Vikram Bhardwaj
IIM Bangalore & IIFT New Delhi
Background of the UK-EU relationship
Why Brexit now?
Long & Rocky - that is what best summarizes the history of relationship between the UK and the EU. When Europe envisaged of becoming a “United States of Europe” after WWII, Winston Churchill emphatically supported the idea. But in 1957, the UK’s decision to not join six founding nations of the European Economic Community (EEC) was incomprehensible for many. Since then, from joining EEC in 1973 to holding referendum in 1975 to signing Maastricht treaty in 1992 (while opting out of monetary union and social policy) to controversies over beef and chocolate bans to signing of Lisbon treaty (giving more powers to Brussels) and thereafter subsequent efforts by PM David Cameron to bring back power from Brussels to London, the In-Out debate has always made headlines in the global dailies. In 2013, in the run-up to general elections, David Cameron promised to hold “In-Out” referendum if his party comes to power in 2015 which they did. PM Cameron recently announced June 23rd as the referendum date even as he negotiated a “New EU deal” after 30hrs of long talks. But how (rather, why) has this debate suddenly become so relevant and pervasive now and not before? This quick-shift from now abated “Grexit storm” to “Brexit” was not unforeseen. Its origin can be traced in the deep-rooted Euroscepticism among the Britons that rose rapidly especially after the global financial crisis of 2007-08 and subsequent plight of various EU economies leading to political distrust and instability. In fact, the UK’s relationship with EU was always
InFINeeti | Summer Edition
June 2016 28
Trust in EU among various member countries Source: European Commission
transactional in nature, evaluated on costs and benefits instead of emotional commitment. Since joining EU in 1975, The UK has always complained about and tried to fend off excessive EU interference leading to resentment among British public for EU over time. As opposed to popular notion of only old working class being in favour of Brexit, even young (see Figure1), more educated are fairly Eurosceptic given the recent immigration debate, Euro woes, and migration crisis, all of which have seriously questioned the ability of Europe to act as a union. Numerous In and Out campaigns have been launched from both the sides. “Britain stronger in Europe” led by the Tories is the main campaign ‘trying to convince voters that the UK is better off within Europe. While for the Eurosceptic side, “Vote Leave” – recently chosen by the Britain’s Electoral Commission - is the flag bearing leave campaign fronted by Michael Gove and Boris Johnson.
InFINeeti | Summer Edition
June 2016
29
Remain
Leave
As a EU member, Britain avoids trade tariffs and red tape. More than 45% of its exports go to EU. Better trade terms as a member.
Britain can negotiate new terms of EU relationship without being bound by EU law. It opens opportunities to explore trade deals with other big markets like China, India, and America.
Britain only pays £340/ household and receives more than £3000/ household. Would have to pay any how to access the single market.
Britain paid £13bn to Brussels in 2015 and received only £4.5bn. This money could instead be used in R&D and industrial growth.
Most of the EU regulations bring 28 national standards under one umbrella, thus reducing red tape.
Can avoid unnecessary EU interference in areas of employment, health & safety and other business laws
Other countries trading with EU have higher immigration from EU countries than Britain. Also, immigrant have had a net positive effect on British.
Leaving— only way to stop the expensive system of offering open doors to EU and blocking non-EU immigrants (who could actually contribute to the UK).
Brexit would mean retreating from the network of 21st century global powers. Greater say in world affairs as an EU member.
Little influence inside EU currently. Can build stronger economic and political ties with other countries, if outside of EU. Can fight for institutional seats.
InFINeeti | Summer Edition
June 2016 30
Possible after-effects on bilateral trade relations between the UK-EU Before speculating on the new form of the UK-EU relationship in the event of Brexit, let’s first run through existing groups in European continent through this image.
The EU is the largest trading partner for the UK. In the event of Brexit, any alternative arrangement will definitely have an impact on the size of the trade. Although the EU share in the UK’s trade is going down owing to weaker growth in Europe and shifting focus towards emerging markets, it will continue to be the UK’s biggest trading partner in the near term. Currently, exports to the EU accounts for 9% of GDP directly involving 2.3 million jobs. Consequently, a Brexit will have to be followed up by aggressive negotiations on the UK’s part to avoid as much trade barriers as possible to reduce the impact.
EU Membership groupings
(Source: HM Treasury analysis, 2016)
InFINeeti | Summer Edition 31
June 2016
InFINeeti | Summer Edition
June 2016 32
However, most predict that emergence of tariff and non-tariff walls between the UK and Europe is an unlikely outcome as there are huge incentives and ample precedents for both the sides to negotiate friendly free trade agreements.
UK exports, imports and FDI in billions of Sterling, 2014
Source: Blackrock Investments report
The extent to which Brexit will affect the UK and the rest of the world will depend upon the relationship with EU that’ll follow. Below are few models that might emerge in the Brexit aftermath:
InFINeeti | Summer Edition
June 2016
33
Source: Global Council report 2015
InFINeeti | Summer Edition
June 2016 34
The point to note here is that the most politically feasible option will also be economically most damaging. This conundrum is the Brexit paradox. To understand the true impact of Brexit, we have categorized a few most important channels through which the impact of Brexit on the UK and the rest of the world can be assessed. Their effects have been categorized as moderate (green), significant (orange) and severe (red). As it appears, it is possible for the UK to address some of the downsides of Brexit even if some of them might take time although at significant (arguable) economic costs. Still it is not easy to ascertain even the trend of future growth impact of Brexit. A recent study by Open Europe reported that an exit without a convincing trade deal might lead to a 2% shrinkage of the UK’s GDP by 2030. Also, in most optimistic scenarios, it might even lead to a slight net winner for the UK.
Source: ONS, CBIC
InFINeeti | Summer Edition
June 2016
35
A Global outlook on Brexit - impact on major world economies Brexit &
The US/Canada
Brexit & Asia Japan, China, India, others...
With the extent of interconnectedness that global economies have today, it is needless to say that a Brexit would cause jitters, both political and economic, throughout the rest of the world as well. The recent statements of IMF listed Britain’s 23rd June referendum along with instability in Asian markets especially in China as major risks which might lead to serious regional and global damages.
The US has enough diplomatic clout to quickly sign renewed trade deals and other agreements swiftly with both the UK and the EU in the event of an exit and do business as usual. However, it may lead to the US imposing Chinese-style tariffs on British firms as well. But, the gigantic EU GDP -$13.5 trillion compared to Britain’s $2.8 trillion would lead to unbalanced economic relations of the US with the two along with trickier EU-NATO relations. However, with the imminent turmoil in the forex markets, it might cause a serious blow to the bottom lines in the US as well. For Canadians, a Brexit would see a greater strength in their effort for “free labour mobility zone” between the UK, Canada, Australia and New Zealand. Several Asian governments have publicly stated their interests in Britain within the EU, including China and India. However, there is a difference in the opinions of large corporate houses and SMEs on Brexit. For Asian investors who base their European investments at Britain, the fear of not being able to offer services and products across 28-nation EU will be a big upset. China sees integrated EU market as a possible contender to end America’s market dominance. Indian companies are a major FDI contributor to the UK as they look to expand to foreign markets. Many Indian companies consider Britain as an entry point to the European markets and a Brexit would possibly take away this leverage of the UK and the impending uncertainty would definitely hurt the flow of Indian investments and personnel to across Europe. Japan on the other hand has had a rather relaxed reaction to Brexit. Japanese companies like Toyota and Hitachi have announced no change in their investment plans in the UK even in the event of Brexit.
InFINeeti | Summer Edition
June 2016 36
While the outcome of upcoming referendum is still far from a foregone conclusion, the impact of this news along with the global economic downturn driven by slowdown in China, multi -channel impact of ISIS-threat and increasing political and social instability in Europe (especially in the event of ongoing refugee crisis) might fuel the ongoing atmosphere of uncertainty around the globe and a leadership crisis at the international level. The gains of an independent UK are still not obvious but the wave of Euroscepticism across Britain is what is driving the “leave� campaign. Brexit can also prove to be a potential catalyst of disintegration in the EU member states some of which already have a very strained EU relationship (remember the PIGS!!!). After Grexit and the negative interest rates, once again, Brexit threatens to steer the world into an unchartered territory with multi-channel unknown global implications and complex questions to answer.
Conclusion
InFINeeti | Summer Edition
June 2016
37
Panama Papers The leak of the century! By Gaurav Mandan IIM Indore
What are the Panama Papers? 2.6 Tera Bytes of data leaked which dates back to the 1970’s US$230 billion accumulated fall in stock prices around the world due to the news of this colossal leak Scrutinized by 400 journalists in 107 media organizations in 76 countries for more than a year now First news report published on April 3, 2016 “Biggest leak in the history of data journalism”
Panama Papers refer to a set of 11.5 million documents which contain details of more than 214,000 offshore companies associated with Mossack Fonseca, a Panamanian law firm. The documents were leaked by an anonymous source with alias “John Doe” to the German newspaper Süddeutsche Zeitung (SZ), in batches beginning with the onset of 2015. SZ made these documents available to the International Consortium of Investigative Journalists (ICIJ) which later shared it with the Organized Crime and Corruption Reporting Project (OCCRP). These documents revealed the identity of many influential personalities associated with Mossack Fonseca, who have hidden their assets from government scrutiny. Most of the middlemen, affiliated firms and banks identified, are from the British Virgin Islands and Hong Kong. Government officials and their relatives and associates from more than forty countries came under the scanner.
InFINeeti | Summer Edition
June 2016 38
Mossack Fonseca is one of the biggest law firms (founded in 1977), dealing in offshore financial operations in the world. It operates shell companies in friendly jurisdictions on behalf of its customers. It facilitates them to operate behind a wall of concealment for illegal purposes, kleptocracy, tax evasion and dodging worldwide authorizations.
Mossack Fonseca & Co. Founder: Jßrgen Mossack, a German lawyer Co-founder: Ramón Fonseca Mora, a Panamanian awardwinning Novelist/lawyer and advisor to Panama's President 500+ employees Companies managed: 300,000 and counting‌
It specializes in commercial law, trust services, investor advisory, and international business structures. It also offers intellectual property protection and maritime law services. An internal memorandum revealed in the Panama papers leak noted that 95% of the company's work consists of "selling vehicles to avoid taxes". Other activities found in the files validate Mossack Fonseca involved in changing and backdating documents whenever their client is under government scrutiny. It allows customers to hide their assets by setting up foundations in Panama that initially list non-profit organizations such as the World Wildlife Fund as the beneficiary but at the same time allows the customer to change the beneficiary at will. While labelling this leak as an illegal act of hacking, MF claimed not having done anything illegal. They even issued a statement emphasizing the legal and compliance regimes
Most of the companies come under the jurisdictions of British Virgin Islands, Panama, the Bahamas, Seychelles, Niue, and Samoa Clients in 100+ countries Global presence in 40 countries including Hong Kong, Miami and Zurich
InFINeeti | Summer Edition
June 2016
39
World's fourth biggest provider of offshore services” - Aljazeera
that reduce the ability to use offshore havens for tax avoidance. The law firm reaffirmed that they strictly adhere to FATF protocols (Financial Action Task Force on Money Laundering) which require to identify the ultimate beneficiary of all companies to open accounts and do transactions. With an objective to combat money laundering, the FATF was established during the G7 Summit in Paris, 1989.
The firm has been a target for money laundering and bribery investigation in Brazil called as “Operation Car Wash”.
OCCRP Since its founding its reporting has led to—
Law enforcement froze/seized more than $2.5 billion in assets Ta x a u th o r i ties found $600m in hidden assets Authorities closed more than 1,300 companies Law enforcement investigated, indicted or arrested over 80 persons, including an ex-president Ten go vernment officials resigned or were sac ked, including a prime minister Go ve rnments changed 20 laws, rules or regulations
OCCRP (www.occrp.org) is a network of investigative journalists across Eastern Europe and Central Asia. It has published on its website that the clients of MF include individuals and companies blacklisted by the US government. This was due to their illicit business transactions with narcotics trafficking mafia of Mexico and terrorist groups like Hezbollah. The shocking revelations by OCCR on their website include details about a heist termed as “Crime of the Century”. On Nov 26, 1983, six robbers broke into the Brink’s-Mat warehouse at London’s Heathrow Airport. The loot which was never recovered included – 7000 gold bars, diamonds and cash reaped by melting the gold and selling it. Apparently, these Panama Papers reveal that MF and Jürgen Mossack may have helped Gordon Perry by setting up a shell company called Feberion Inc. Gordon Perry was a London wheelerdealer who laundered money for the Brink’s-Mat plotters. Mossack Fonseca records from 1987 testify that Parry was behind Feberion.
InFINeeti | Summer Edition
June 2016 40
Offshore banking is being practiced in the world for close to a century now. Individuals and companies have been maintaining offshore accounts in tax havens that provide financial and legal advantages like bank secrecy, a principle originated with the Swiss Banking Act of 1934. Under this act, revealing the name of the account holder is a criminal act for the bank. The act strictly limits any information sharing with third parties like tax authorities, foreign governments or even the Swiss authorities. Only concession given is in the case of severe criminal acts like terrorist activities, when a bank is permitted to identify the terrorist’s bank account. However owing to international pressure, Switzerland was forced to amend the law for few countries like Germany, UK and the US. Tax treaties with such countries permit Swiss banks to reveal information about the account holders. Reason behind Panama being the oldest and among the best known tax havens is that it does not cooperate with international tax transparency initiatives. It doesn’t even follow any of the OECD’s (Organization for Economic Cooperation and Development) guidelines for international banking cooperation. Other countries in the same league are Vanuatu and Lebanon. OECD has removed 18 nations, including Switzerland, Liechtenstein and Luxembourg, from a supposed "grey list" of countries that did not offer adequate transparency, and has regrouped them under "white list" countries. Nations that don't go along may confront sanctions. An outstanding exemption is Panama, whose Panama Canal is required by every single Western country for trade. The canal furnishes it with an exceptional kind of safety to global pressure. Given the growth of the canal to facilitate bigger shipping, it is dubious that Panama would succumb to universal weight towards transparency anytime soon.
Tax Havens Top 10 Tax Havens Luxembourg The Cayman Islands Isle of Man Jersey Ireland Mauritius Bermuda Monaco Switzerland Bahamas
Why Panama? Panama's offshore jurisdiction offers a wide array of financial services, including offshore banking and incorporation of offshore companies, There are no taxes imposed on offshore companies that only engage in business outside of the jurisdiction.
InFINeeti | Summer Edition
June 2016
41 The volume of data leaked in Panama Papers (2016), in contrast with the previous leaks of Wikileaks Cablegate (2010), Offshore Leaks (2013), Lux leaks (2014), and Swiss Leaks (2015).
Very strong steps have been taken by SĂźddeutsche Zeitung to ensure security of the leaked documents and the partners investigating them. The data is stored on computers which have never been connected to the internet. To safeguard the PCs from stealing of their drives, the investigators made them more tamper evident by painting their screws with nail paint. The graph above shows the sheer volume of data leaked in Panama Papers (2016), in contrast with the previous leaks of Wikileaks Cablegate (2010), Offshore Leaks (2013), Lux leaks (2014), and Swiss Leaks (2015).
Mega Leak
Details of the leaked documents
InFINeeti | Summer Edition
June 2016 42
Clients of Mossack Fonseca
VLADIMIR PUTIN President of Russia
Edward Snowden tweeted about the leaks calling it the "biggest leak in the history of data journalism". Gerard Ryle, director of The ICIJ mentioned that the leak was "likely to be one of the most explosive leaks of inside information in history in the nature of its revelations". Aljazeera has reported Sergei Roldugin, a close acquaintance of Vladimir Putin, to be at the centre of a scheme in which money from Russian banks was hidden before. Another revelation is about a shell company in Panama owned by Lionel Messi and his father. An expert in offshore banking, Charles Intriago, was quoted saying that this is just one case of the many probable ones. There may be more than 60 such countries where firms like MF are operating and are still unheard of.
The list, contains names of about 500 prominent Indians including megastar Amitabh Bachchan, Ajay Devgan and Aishwarya Rais, besides politicians and businessmen. Across the globe, heads of state from Argentina, UAE, Iceland, Ukraine and Saudi Arabia are among those who have been named as the clients along with the below: Vladimir Putin, The President of Russia Khalifa bin Zayed Al Nahyan, President of the United Arab Emirates, the Emir of Abu Dhabi and the Commander of the Union Defence Force Petro Poroshenko, President of Ukraine
LIONEL MESSI
Salman bin Abdulaziz Al Saud, King of Saudi Arabia
Argentinian professional footballer
Sigmundur DavĂĂ° Gunnlaugsson, Prime Minister of Iceland Ahmed al-Mirghani, Sudanese President Silvio Berlusconi, former PM of Italy Hamad bin Khalifa Al Thani, The Emir of Qatar Bidzina Ivanishvili, Prime Minister of Georgia Ali Abu al-Ragheb, Former Prime Minister of Jordan Ayad Allawi, Iraq Politician
InFINeeti | Summer Edition
June 2016
43 Hamad bin Jassim bin Jaber Al Thani Former Prime Minister of Qatar Ilham Aliyen, President of Azerbaijan Pavlo Lazarenko, Former Prime Minister of Ukraine Ion Sturza, Former Prime Minister of Moldova The deceased father of British Prime Minister David Cameron
The brother-in-law of China's paramount leader Xi Jinping The son of Malaysian Prime Minister Najib Razak The children of Pakistani Prime Minister Nawaz Sharif The children of Azerbaijani president Ilham Aliyev
Clive Khulubuse Zuma, the nephew of South African president Jacob Zuma Nurali Aliyev, the grandson of Kazakh president Nursultan Nazarbayev Mounir Majidi, the personal secretary of Moroccan king Mohammed VI Kojo Annan, the son of former United Nations SecretaryGeneral Kofi Annan Mark Thatcher, the son of former British Prime Minister Margaret Thatcher Eugenio Figueredo, The former president of CONMEBOL Michel Platini, Former President of UEFA Jérôme Valcke, Former secretary general of FIFA Lionel Messi, Argentine player for Barcelona Antonio Guglielmi, The head manager of Metro Aishwarya Rai Bachchan | Amitabh Bachchan | Ajay Devgan Jackie Chan | Emma Watson Kushal Pal Singh,CEO DLF Anurag Kejriwal, Former chief of the Delhi Lok Satta Party
According to Mossack Fonseca’s brochure, the law firm specialises in “trust services, investor advisory, offshore/ onshore structures, commercial law and asset protection”. Its main function is as an incorporation agent, licensed by various tax havens to register companies there. If a client wants to set up an offshore firm or trust, MF will register it and take care of the local paperwork – for a fee, plus an annual charge. It will set up bank accounts. It will even provide nominee directors to sit on the “board” of your
InFINeeti | Summer Edition
June 2016 44
The trove of files leaked as Panama papers is so far the largest
leak of documents in the history of journalism and has stirred
The Way Ahead
a huge debate over the tax evasion loopholes. Stringent investigations in tax evasion has been instilled in countries all over the world. Major Banks in the US are also under investigation for possible links to Mossack. New York state Department of Financial Services has asked four banks (including Goldman Sachs and BNP Paribas) to hand over information on dealings with the law firm. Singapore’s Ministry of Finance and central bank are reviewing the latest
Corruption is at the heart of so many of the world’s problems
data and have reaffirmed that any wrongdoing will be treated with enforced action. On May 12, London’s anti-corruption summit 2016 was attended by leaders from tax havens and other countries. The leaders convened to decide new measures to take on the issue of offshore financing and shell companies. Countries like Britain, Afghanistan, Kenya, France, Nigeria and the
Netherlands agreed to publish their lists to help authorities identify the true owner of a company, as a strong step to curb tax avoidance. On the other hand, smaller tax havens like the Isle of Man, Bermuda and the Cayman Islands censured larger countries especially the US, for asking them to sign up to
public registers of “beneficial ownership” when it held itself to lower standards. The US state of Delaware was a specific target in this regard along with Nevada and Wyoming. The state has minimal taxes and more than 25% of its public budget is raised from incorporation fees.
At the same time, protesters took part in demonstration against tax havens in London by throwing fake money. The protest, organized by Oxfam, ActionAid and Christian Aid, turned part of Trafalgar Square into a ‘tropical tax haven’; to highlight tax dodging as the international corruption summit
was hosted by David Cameron. (Source: The Independent)
We must overcome it if our efforts to end poverty, promote prosperity and defeat terrorism and extremism are to succeed.
InFINeeti | Summer Edition
June 2016
45
Global Declaration
Against Corruption
The sudden spotlight on tax issues has pushed other countries to revise frameworks and close loopholes responsible for tax avoidance. India has amended a tax treaty with Mauritius and will start taxing capital gains on investments made via that
country in April 2017. The pact has been in place for more than three decades to prevent double taxation. But Indian companies have been caught making investments by way of Mauritius to skirt taxes at home. The latest revisions will increase transparency and cut down on tax avoidance, the
The first ever global declaration against corruption announces leaders' shared ambition to tackle corruption.
Indian government said. Apart from the investigations, the Panama papers leak calls for looking beyond this dire situation. It can be safely assumed to be just a ripple in the ocean of money laundering. There may be many more firms similar to Mossack Fonseca, operating behind closed doors who have gotten more hawkeyed now. They are aware of the implications of such potential leaks in the future and would devise new surreptitious alleys for channelling black money. Hence the investigating agencies need to be even more vigilant.
Ending Note
InFINeeti | Summer Edition
June 2016 46
InFINeeti | Summer Edition
June 2016
47
Brazil
The Crisis Prolonged By Mihir Morbia & Riddhi Baid
NMIMS, Mumbai
“God have pity on this nation” Eduardo Cunha while casting his vote in favour of Rousseff’s impeachment
The Background
The longest recession in a century, the largest bribery scandal in history and the most unpopular president in living memory. These are not the sort of records that Brazil was hoping to make in 2016, the same year in which country is hosting the Olympics – South America’s first-ever Olympic games. In 2009, Brazil’s President Luiz Inacio Lula da Silva announces the nation’s biggest oil discovery as its “passport to the future”. In the same period, Rio de Janeiro was awarded 2016 Olympics along with the famous 2014 FIFA world cup. Brazilians were on the top and were seeing their rising international standing. And at present, the economy of Brazil has sunk into its biggest slump in a century. An ongoing investigation of corruption into the state-run oil giant Petrobras, dubbed Carwash has entrapped many political and business personalities. Lula has been charged for hiding assets from authorities. His successor, Dilma Rousseff is fighting to stay in the office after the lower chamber of Congress voted to impeach her on April 17. What went wrong with Brazil? Can Brazil shine again? The seeds of the crisis were sown in 2003 when Lula was elected as the president. With the aim of combating high inflation, he opted to adopt orthodox economic policies which were centred on balanced budgets, an independent central bank and a free-floating currency exchange rates. However, it was completely reversed when Government banks were ordered to give out low-interest loans to pretty much anyone, but especially to people with government connections.
InFINeeti | Summer Edition
June 2016 48
Huge amount of public money started pouring into the real estate market. The government implemented a policy in which any worker with a formal job would receive a government backed loan of at least 100 thousand reals (about US$30K at the time). The outcome being - overnight 100 thousand reals became the floor price of any home, in any condition in Brazil. As a result a construction boom started, as massive amounts of government credit flooded the real estate market. Real estate prices sky rocketed and there was a shortage of construction workers, which pressured wages across the economy. Also a commodity boom provided cash to the public who went shopping and boosted growth. But Brazil is slowing down with China slowdown and dropping commodity prices. The commodities bubble burst (down by 41% from its peak in 2011) has hit economies around the world but Brazil was hit the worst because of its structural weaknesses – high dependency on raw material export, poor productivity and misdirected public spending. Loose monetary and fiscal policies of Rousseff government led to high inflation and shattered investor confidence. Currently, Brazilian President Dilma Rousseff is facing impeachment charges. On the surface, it is all about allegations that Rousseff cooked the government’s books and hid Brazil’s deficit problem during 2014 election campaign. But there are other bigger problems also – most importantly, Petrobras scandal. Brazil’s largest company and one of the largest corporations in the world, Petrobras, between 2004 and 2014 engaged in one of the biggest corruption schemes of about US$5.3 billion. Petrobras was handed to one of Lula’s union friends. He set forth Petrobras’ vast financial resources to work on expensive projects of questionable economic value like a US$17 billion refinery in Lula’s home state. Many technical experts in Petrobras criticized the investment, as such refinery was imprudent in a poor and remote home state. Those critics were silenced and the project was placed on a fast track.
When President Luiz Inacio Lula da Silva left office in January 2011, Brazil was widely regarded as Latin America’s gold standard for economic development and social progress. But today, with his handpicked successor, Dilma Rousseff, facing an impeachment trial, the country is viewed as an economic failure.
Petrobras scandal and Political turmoil
InFINeeti | Summer Edition
June 2016
49
Formed in 1953 as Brazil’s national oil company
Petróleo Brasileiro is one of Latin America’s largest companies
The government holds a majority stake, but it is also listed in São Paulo and New York and counts thousands of ordinary Brazilians among its shareholders
Another questionable investment by Petrobras was the construction of a massive shipyard for an acquisition of a refinery in Texas from a Belgian company for aboutUS$900 million, which had been acquired by the company for US$42 million only 4 years prior.
Hence, the stage was set for the tragedy that would follow. The artificial real estate boom gave Brazilian a false sense of economic prosperity, as they believed the value of their homes were tripling or quadrupling in just a few years. Consequently, many of them went into deep consumer debt believing the high value of their homes as backing. Whereas Petrobras, as a consequence of the many new investments, became the most indebted energy company in the world. So, Brazil today not only has a nearly insolvent Petrobras, its state-owned banks are also in hundreds of billions of dollars of bad loans. Having to rescue the banks, the government is facing one of the largest budget deficits in modern history. The constructions of subways, bridges, power plants, and roads have all been put on hold having caused thousands of construction workers to lose their jobs.
InFINeeti | Summer Edition
June 2016 50
This was devastating for Rousseff. There is no evidence of her direct involvement but she was the chairwoman from 2003 to 2010 on the Petrobras board. So all this supposedly happened under her watch and questions her judgment and competence. Presently 32 sitting members of Congress from her coalition are under investigation for bribery charges.
Economic crisis making things worse
In a two-year investigation known as Operation Carwash, prosecutors have uncovered what they say is a huge kickback and bribery scheme at the oil giant, which has become the biggest corruption scandal in the history of Brazil
Source: The Economist
InFINeeti | Summer Edition
June 2016
51 To make things worse, Brazil is also going through an economic crisis. Country is facing a recession and its currency the Brazilian Real is rapidly losing its value. Brazil’s economy may be 8% smaller by the end of 2016 than it was in 2014. GDP per person will be down by 20% since its peak in 2010. Two rating agencies downgraded Brazilian debt to junk. It is hard to tell the difference between inflation rate (into double digits) and the President’s approval rating (~12%). So the country is in a serious problem. Pension expenditure is 11.6% (more than Japan). So by the end of 2014, government was running a primary deficit (deficit before interest payment) of US$13.9 billion. (See chart) Mr. Levy, finance chief, tried to fill the fiscal gap by raising tax. But tax receipts have been hit hard by the recession. Analysts at Barclays, expect that Brazil’s debt will reach to 93% of GDP by 2019. This may be seeming safer compared to 197% in Greece and 246% in Japan. But they are richer countries than Brazil. As a proportion of the wealth, Brazil’s debt is higher than that of Japan and almost double that of Greece. Facing inflationary pressure, government devalued real. The Central Bank increased its benchmark rate by three hundred basis points since October 2014 to 14.25%. But real continues to depreciate. The real has fallen 31% and stock market is down by 12.4%since 2015.Also increasing spending on serving public debt is also raising inflation.
Way Forward
The impeachment battle has paralyzed the Brazilian government at the time when country is set to host the Olympics and facing epidemic Zika virus (birth defects in newborns). President Rousseff suffered a crushing defeat on April 17 as corruption tainted Congress voted to impeach her. President facing impeachment charges in court will have substantially weakened power to pass new legislation for reforms. Even if she survives the corruption charges, a legal investigation is going on to find if Rousseff’s 2014 presidential campaign took Petrobras kickbacks. So there is a possibility that court can rule election null and throw Rousseff’s
InFINeeti | Summer Edition
June 2016 52
presidency. Even though she survives both, weak governing coalition will make it difficult for her to achieve anything meaningful before her term end in 2018. In case of Rousseff’s impeachment, Vice President Tamer will take over. Business lobbies are looking for Tamer to restore business confidence and growth of the economy. Brazil’s stocks and currency are rising on the bet that Rousseff will be removed from the office and the move will allow Tamer to implement more market-friendly policies. Even though investor’s confidence on Brazil rebounded recently, they are near historic lows because of higher borrowing costs and inflation.
Brazil’s economy shrank by 3.7% last year, and forecasts for 2016 are similarly gloomy
Then Brazilian political system is in chaos. President is facing impeachment, Tamer is also being investigated over campaign kickbacks, leading opposition and former leaders are also facing serious charges. So when Brazilian public is looking at their options, they see a thoroughly corrupt and incompetent elite. With ongoing economic crisis, this can lead to the rise of previously weak or entirely new party in the country’s 2018 elections. A former high-flyer among the BRICS and Latin America’s biggest economy is facing changes such as double-digit inflation, corruption scandals, political turmoil, unemployment and negative growth rates. Earlier riding the wave of commodity boom, Brazil’s economy crash-landed with weaker demand from China. It was further deteriorated by ill-advised monetary and fiscal policies by the first Rousseff administration (notably surge in public spending). It led to surge in inflation, reduced confidence from investors and rising unemployment. Brazil needs to reform its policies, social security and pension system to shore up fiscal accounts. To do this that all the Brazil’s politicians come together, act together – without cutting and pulling down each other. And if they do not, things will get worse for Brazil.
Conclusion
InFINeeti | Summer Edition
June 2016
53
The rising sun sets into the lost decade
Chronic Deflation in Japan—Revised By Shrirang Lichade
KJIMSRS “Thus Inflation is unjust and Deflation is inexpedient. Of the two, perhaps Deflation is . . . the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier.” —John Maynard Keynes
In this article, we are going to examine the two decade long deflation in Japan which was triggered by popping of the asset bubble. When we look back at the history, the popping of asset bubbles has nearly always been tragic. Social, political and economic turbulences have a bad habit of following asset bubbles, also wealth destruction is a guaranteed feature. Now let’s consider the opinion of Keynes who spearheaded a revolution in economic thinking and is considered as the father of modern economics. Keynes’s observation aptly describes the current situation of deflation inflicted Japan. Many economist and members of intelligentsia still quibble over the fact whether Japan is in deep trouble due to its own opulent or spiritual way of life. That’s the ironic part of Japan’s ultra-development saga. The ‘Land of the rising sun’ has the world's third-largest economy ($4.210 trillion) by nominal GDP and the world's fourth-largest economy ($4.843 trillion) by purchasing power parity. But startlingly, however, the Japanese economy dramatically deteriorated in what is now called the ‘Lost Decade’ of the 1990s. The growth rate declined to less than 1 per cent per annum on average, and it was negative in some years. The ‘lost decade’ has extended also to the new century. Now economists are referring it as the ‘Lost Two Decades’. Many problems have been pointed to as contributing factors that explain the “lost decade” in Japan. Let’s find out the key causes which lead to the chronic deflation.
InFINeeti | Summer Edition
June 2016 54
Financial deregulation was an important factor which established a conducive environment for a land price bubble, which in turn enabled firms to borrow heavily in order to invest in commercial real estate.
Financial Deregulation
It also prompted the acquirement of differing financing options, which lessened the corporations’ dependency on banks for funding. In the 1980s, the Japanese banks shifted their main target of credit supply from manufacturing to nontraded-goods industries such as real estate, finance, and other services that were not well disciplined by global competition
Japan is one of the excessive savings glut countries in Asia. During 1980’s when Japan was growing at faster pace, people of Japan were saving 15% of their after tax income. This contradicted with Keynesian principle that when investment exceeds saving, there will be inflation. If saving exceeds investment there will be recession. One implication of this is that, in the midst of an economic depression, (in this case deflation after crash) the correct course of action should be to encourage spending and discourage saving. Thus this was the major problem which is still ongoing in Japan and President Abe is urging people to go and spend money which could lead to higher inflation rate.
Unsolved excessive saving
InFINeeti | Summer Edition
June 2016
55
Asset Price Deflation By August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth monetary tightening by the Bank of Japan (BOJ). By late 1991, asset prices began to fall. Even though asset prices had visibly collapsed by early 1992, the economy's decline continued for more than a decade.
In the first half of the 1980’s, control on capital movements were pulled down, interest rates on deposits was close to zero. Japanese banks lost large corporations to global capital markets, but eventually banks found their new customers in SME’s. These enterprises were able to borrow for risky projects simply against real estate collateral. During this time, people got much more money due to financial deregulation and easy money policy. So this excess liquidity was invested in real estate. 1987-1990 is termed as the “bubble period”, from the viewpoint of the coexistence of three factors indicative of a bubble economy, that is, a marked increase in asset prices, an expansion in monetary aggregates and credit, and an overheating economy.
Thus, in the latter half of 1980’s, central bank of Japan realized that this was not sustainable and to check the further repercussions on the economy, tried to tighten the policy by increasing the interest rates. Which in turn lead to burst of the asset prices and Nikkei stock index had plummeted to half its peak. This collapse lead to a total loss in asset values of 1000 trillion yen by the middle of the decade, or 2.4 times the country’s GDP. This was a huge loss, even compared with the United States’ capital loss of 1.9 times GDP during the Great Crisis after 1929.
InFINeeti | Summer Edition
June 2016 56
Since the loans were disbursed against land, and land price plummeted through 1990 to 1998, the number of loan going bad increased drastically. Japanese banks were hard hit since loans were given mainly to industries against land. Thus, increasing bad debts for the banks. In the global circle, many entities accused banks in Japan of cooking the books to hide the losses from the customers and shareholders.
Non-Performing Loans
The list given above is non-exhaustive. Since many facets which are still debated like muddled monetary policies, advent of ICT and liberalization. Alas, we need to consider long lasting ramifications of deflation in terms of economic and social effects. Labour problems: Since more than two-thirds of Japanese workers are employed by SME’s , these business failures were among the most important causes of the rising unemployment in the country. The unemployment rate in Japan increased from about 2 % in 1990 to3.60 % in 2015. However, the concept of unemployment in Japan is loosely defined, thus real unemployment statistics is believe to be double the given number to be comparable with Western economies. In the given scenario, the unemployment rate in Japan would be comparable with the depressed European economies. Rising unemployment, bonus and overtime payment cuts and the use of cheaper part-time workers have led to a significant reduction in household income. Unsurprisingly, domestic consumption demand has been depressed since the beginning of the 1990s. Investment demand Stagnation: Investment demand stagnated over the years, given the existence of idle capacity. Thus, the bad loans of the Japanese banks have not been cleared up and, instead, they have fed the deflationary spiral of the economy. The result has been a vicious circle, with banks facing difficulties due to their bad loans and shrinking capital base, medium and small firms running into difficulties due to the credit crunch, and the resulting deterioration in workers’ employment and income leading to depressed consumer demand and deflating real estate and share prices.
Economic issues
Just 15% of people in Japan expected the country’s economic situation to improve in the “next 12 months,” down from 40% who were similarly hopeful in spring 2013, after Prime Minister Shinzo Abe took office.
InFINeeti | Summer Edition
June 2016
57
Social Issues
Japan’s working-age population (ages 15 to 64) is expected to plummet to 55.2 million in 2050 from 81.2 million in 2010, a 32% decline, according to UN data. In 1970, 69% of Japan’s population (71.4 million) was of working age, compared with 64% in 2010 and just 51% projected in 2050.
Japan’s elderly population is expected to grow to 39.6 million in 2050 from 29.2 million in 2010, a 35% increase. The country’s median age is expected to rise to 53 from 45.
Youth is refraining from consumption: Traditionally Japanese people are known for content lifestyle. But economically this is hurting the nation. Japan raised its consumption tax rate in 1997 from 5% to 8% which lead to reduction in consumption to this day. Government has started declaring holidays so that populace can go and buy things and economy can run again.
Declining birth rate: The financial burden of raising children and obtaining education, medical services and care for elderly parents has not been addressed by public spending, and this burden has increased due to the deepening fiscal crisis of the state and its imposition of neoliberal social policies. One of its consequences is that the average birth rate of Japanese women has declined sharply, from above two at the beginning of the seventies to 1.29 in 2003, leading to a rapidly ageing society. Japan is grappled with what is supposed to be ‘New world’ problems.
Popping of the bubble by central bank by tightening monetary policy was a critical mistake: It is still a debatable topic among the economists whether a bubble should be deliberately popped beforehand. It is universally accepted that asset price is closely related to general price level, thus asset prices should remain stable in the long run. But using monetary policy to collapse the booming asset prices was a
InFINeeti | Summer Edition
June 2016 58
The inadequate responses after the burst of the bubble: Asset prices in Japan have been falling for the last two decades, which is unusual for the developed economy as that of Japan. The policy reactions were too little too late, marked by a repetition of stop and go, without coordination of fiscal and monetary policy, which lead to chaotic environment for the private investors and dried up investments.
Bad loan problems: The major focus during the period was the bad loan problem. It is still debatable about the relationship between the bad loan and macroeconomic performance. The banks were lending too much to inefficient firms and industries so that they survived unduly: Zombie lending. Even though its economic impacts were unclear, it was no doubt that there was a series of government’s mistakes not to deal with the bad loan problem as soon as it appeared. The ministry of finance did not recognize the magnitude of the problem, postponing and prolonging the necessary measures to deal with the problem lead to severe deflation indirectly.
If you can’t explain it simply, you don’t understand it simply. - Albert Einstein
InFINeeti | Summer Edition
June 2016
59
Is India really The World’s growth engine? By Anuj Mishra & Pratik Agarwal
KJSISMR
“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”
In order to conclude whether India is growth engine or not, we first need to define the parameters on which analysis can be done. First thing that comes to our Management mind is Gross domestic product. But is GDP really a measure of country’s progress and wellbeing? Does it count for country’s quality of education, our health or the overall nation as a brand? It does not include the soulfulness of our music or the strength of our athletes, the intelligence of our debate or the integrity of our public officials. It does not measure patriotism for our nation!! In short, it measures everything, except what makes life worth living for.
Parameters
– Adam Smith
Standing 2.288 trillion USD )6102(
GDP GNI ( Per Capita ) Inflation( CPI)
6,598 USD PPP )6106( 5.39 % (April, 2016)
Human Development Index
130th Rank (2015)
Ease of doing business (In terms of developing nation)
2nd Rank (2016)
Different Economic parameters and India’s Stand
InFINeeti | Summer Edition
June 2016 60
Looking at economic snapshot it would be fairly simple to say that India is growing at a good rate and has been performing well in BRICS, SAARC and in almost all the trade blocks it is associated with. Writing on India’s growth can be fairly wide so we will just address two concerns that are associated with it, which are at the moment overlooked by newspaper columns. Is depreciating currency an issue for Indian economy? And isn’t India falling into middle income trap? Further ahead we move on to discuss steps needed to make India global growth engine. How INR works? Since we are moving towards a manufacturing based economy which would possibly be export-oriented, it is imperative for us to understand how INR’s rise/fall will effect on India’s ambition of becoming growth engine of the world. Though we see value of rupee falling with respect to dollar, and by looking things superficially it might so seem that it will boost our exports but sadly it won’t. Because rupee is not depreciating it is actually appreciating. The correct way to measure rupee appreciation or depreciation is through a metric called Real Effective Exchange Rate – It is the weighted average of a country's currency relative to an index or basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one country's currency, with each other country within the index. How rupee appreciation can hurt India? Say that, Tata International produces shoes at INR 20 per pair to export it to Africa. They have a competitor in Thailand who produces shoes at 15 Baht per pair. Currently 1 Baht = 1.90 INR and thus, Thailand shoes are actually expensive for the final customer in Africa. Tata International's export order is accepted and thus creates more jobs for Indians. Now, let’s assume rupee appreciates against Baht and 1 Baht equals 1.0 INR. The cost of a pair of shoe in Thailand still might be 15, but now they are cheaper than the one from Tata’s.
“In a bid to thwart the rupee’s rise, RBI bought $19.7 billion worth of rupees in the four months to end of February, and the market suspects it intervened in March as well. The central bank’s persistent intervention has fuelled inflation and money supply, which are both running above its target levels.” Livemint 23rd May, 2016
InFINeeti | Summer Edition
June 2016
61
Reforms needed for India to develop?
“It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country.”
- Adam Smith
As of Gregorian calendar month 2016, here are the most important reforms required to be pushed by the central government. 1. Taxation reforms: Our states operate like separate countries once they get involved in the movement of products. It’s onerous for corporations shipping product across states to contend with the embarrassment of taxation systems. 2. Bankruptcy reforms: Once someone is unable to repay loan, it ought to be quite simple to declare him bankrupt that might be win-win for everyone. But whenever a case like that of Mr. Mallaya shows up, obtaining him looks quite onerous. Developing countries don’t have a transparent law on company bankruptcy. Provincial insolvency Act, 1920 fails to properly outline the terms bankruptcy, insolvency, liquidation and dissolution, and has a lot of loopholes that are later exploited by chartered accountants and financial consultants. 3. Land reforms: Make it unexacting to accumulate massive property for business development. 4. Labour reforms: It’s demanding to contend with labour in India. This has created it terribly onerous for major producing players to setup factories in India. The government has a bunch of old pre-1947 era laws that control how firms operate. Education for everybody The reality is that nowadays, more than half of our students in Standard-5 cannot read a Standard-2 text or solve a straightforward subtraction problem. The socio-economic circumstances where a toddler is born, determines the kind of faculty/school they attend, various co-curricular opportunities that are available to them. This also determines the personality that they are going to exhibit which again gets transmitted to their children and this cycle never breaks.
InFINeeti | Summer Edition
June 2016 62
Get staff prepared The skills required for five hundred million Indian to be workready in ten years aren’t solely a matter of national urgency but is also astounding in its scale. Thus far, the skill building has been driven by the necessities of the market; whereas abundant progress has been created with appreciable facilitate from the government, it's a travesty that small has been done to know the requirements of the learners. India lags way behind in transmission ability coaching as compared to different countries. Out of the overall work force within the country only a few receive some formal training (2% with formal coaching and 8% with informal coaching). Further, eightieth of the entrants into the work force don't have the chance for skill building.
We need a lot more additional labour tribunals and lot less labour laws to make our business environment more effective
InFINeeti | Summer Edition
June 2016
63 Make it simple for business
Workers will get paid only if there are businesses which will hire them. Some people think about Scandinavian countries as socialist nations. That may be a bit different from the reality - those countries are capitalist dynamos as seen from International Bank for Reconstruction and Development rankings; Ease of doing business in Scandinavian country - or the economic freedom index - Country Rankings.
Current Labour
Regulation Framework
Make it simple to shop for, register or sell property. Land records have to be compelled to be clear
Archaic: the present legislation that governs employment regulation is that the Industrial Disputes Act (IDA) 1947, the clauses that were planned underneath British rule Restrictive: In 1976, changes to UN agency were created in order that companies using 300+ people ought to get government permission to impact lay-offs, retrenchments and closures. This was restricted to companies with 100+ staff in 1982, creating hiring or firing new staff extraordinarily tough even though they're inefficient (Sharma, 2006) Convoluted: There are regarding forty seven Unions laws and 157 State laws that overlap, this creates a sense of confusion for the companies with have factories in multiple location in India (Kant, 2012) Keep stuff moving Modern businesses will run solely wherever stuff move quickly. Our Lorries move at a snail's pace through the unstable roads. If the traffic forecasts are correct, the government is ought to increase investment within the road network well throughout ensuing decade. This needs new semi-permanent funding streams. Reducing the space between people, markets, services and data – or just ‘getting folks connected’ – could be a nice a part of what economic process is all about.
InFINeeti | Summer Edition
June 2016 64
Conclusion
Looking at economic snapshot and various trends, India is definitely poised to become global growth engine with almost every factor heading its way. But it also necessary to realize that there are lot of focus area which we need to look and improve if we truly want to become global growth engine. We do see India becoming global growth engine in long run but in the words of John Maynard Keynes - “Long run is a misleading guide to current affairs. In the long run we are all dead.�
Long run is a misleading guide to current affairs. In the long run we are all dead. John Maynard Keynes
InFINeeti | Summer Edition
June 2016
65
Africa The Land of Opportunities By Ani Mehrotra XLRI
Africa has been the secondfastest-growing region in the world over the past 10 years, with average annual growth of 5.5% over the past decade
In the last two decades Africa has witnessed rapid growth at an average rate of 5.5%. The new growth has not gone unnoticed, inspiring much optimism among journalists, economists, business fraternity and investors over the fate of a region which not so long ago seemed doomed to failure. Every media report has been touting it as the next big thing. An important feature of this boom is that it has largely been shared by all countries in Africa, with a few exceptions due to conflicts. Ethiopia, Chad, Congo Republic and Tanzania have emerged as the fastest growing economies among the African countries. However, there are concerns among many about whether this growth in the African continent is real and if this economic growth has really percolated down to the general public.
Analysts are sceptical about this economic boom and question its impact on human development and the widespread inequality present in the African countries. Looking into the future, certain sectors hold more promise and better growth prospects than the others. For the African governments, improving business climate should be the prime focus area. Moreover, the general economic context is now turning less favourable with growth slowing down, especially in oil and mineral exporting countries. Looking at the bigger picture, overall growth is expected to continue, but at a slower pace.
InFINeeti | Summer Edition
June 2016 66
Real GDP Growth Rate (By Countries) By 2035, Africa's labour force will be bigger than that of any individual country in the world, which offers a chance to reap a demographic dividend
Source: World Economics - Global Growth Tracker (March 2015)
As can be seen in the adjoining graph, Africa has experienced the highest real GDP growth in the last 20 years after the Asia -pacific region. Other regions like America and Europe are lagging far behind these two fast growing economic regions. This has made these two regions, especially Africa, the favourite destination of many businesses to chart their global expansion. Among the different regions of Africa, while West Africa achieved high growth despite its battle with its Ebola virus, Southern Africa struggled as the region was affected by labor conflict and chronic electricity shortages and the key South African economy grew just by 1.5%. North Africa has been growing very slowly with the exception of Egypt and Morocco, which have experienced stronger growth. Algeria is
Growth Story Today 40% of Africans have some secondary or tertiary education. By 2020, it will be nearly half.
InFINeeti | Summer Edition
June 2016
67 suffering from low oil prices. In Libya, the macroeconomic situation is expected to worsen with a fiscal deficit of more than 55% of GDP and a current account deficit of 70% GDP, but the country still holds considerable foreign currency reserves.
Source: African Economic Outlook (2015)
While 33% of Africans in the labour force receive secondary education, 39% of workers in India and 66% in China receive education at this level.
This vigorous economic growth has also left its mark on the socio-economic conditions of African countries. Africa has a fast growing middle class which accounts for much of the economic growth through its spending. Africa’s combined consumer spending was USD 680 billion in 2008 and is projected to reach USD 2.2 trillion in 2030 which gives an average compounded annual growth rate of about 5%. In this regard, Nigeria and South Africa lead this expansion of consumer demand. By 2030, the number of middle-class households across the 11 fastest-growing countries in Africa will have increased to 40 million from today’s 15 million households. This vigorous economic growth has also left its mark on the socio-economic conditions of African countries. Africa has a fast growing middle class which accounts for much of the economic growth through its spending. Africa’s combined consumer spending was USD 680 billion in 2008 and is projected to reach USD 2.2 trillion in 2030 which gives an average compounded annual growth rate of about 5%. In this
InFINeeti | Summer Edition
June 2016 68 Source: World Bank, IMF
regard, Nigeria and South Africa lead this expansion of consumer demand. By 2030, the number of middle-class households across the 11 fastest-growing countries in Africa will have increased to 40 million from today’s 15 million households.
Africa has about 60% of the world's unused cropland, providing it with a golden opportunity to simultaneously develop its agricultural sector and reduce unemployment. On current trends, African agriculture is on course to create 8 million wage-paying jobs between now and 2020.
InFINeeti | Summer Edition
June 2016
69
Source: African Economic Outlook (2015)
High transportation and input costs, duties and bureaucracy are some of the obstacles that have hindered African manufacturing. The continent needs to open itself up to foreign investment too
The telecommunications boom has also played a central role in Africa’s growth story. Cellular phone penetration has been increasing at a rapid pace in the last decade. This has aided in giving an impetus to internet penetration in the last 5-7 years. Increased use of mobile phones and rapid internet penetration has spill-over effects in other economic sectors like financial services and this has pushed Africa’s growth further. This spurt is additionally supported by increased activity in R&D which is evident from the decadal growth of about 18% in patent applications since 1995. Together, technological and scientific progress has created a favourable cycle where these advancements lead the economic growth further. African countries have made significant strides in all dimensions of human development. Although, these strides have immense inequality within the nations. If we consider growth of education in African youths who are between the age of 20-24 years, East and West African countries have experienced faster rates of improvement compared to Central, North and South African countries.
InFINeeti | Summer Edition
June 2016 70
Source: World Bank, IMF
Lesotho, a country of just 2 million people, has 100 times South Africa's exports of apparel to the United States on a per capita basis because it made investment attractive to foreign players and put the necessary rail and distribution infrastructure in place
InFINeeti | Summer Edition
June 2016
71
Source Statistics Department, ITU-D (2015)
Roadblocks
Source: African Economic Outlook (2015)
But all is not well in this stupendous African growth story. There is still a lot of ground to cover if Africa has to establish itself as the new growth engine like it has been touted by the many analysts and journalists. For starters, as mentioned earlier African countries have significant inequality within and between countries with regard to human development parameters with HDI much lower than the world average.
InFINeeti | Summer Edition
June 2016 72
Out of 44 nations worldwide which are considered to be in low HDI segment, 36 nations are from Africa. That paints a worrisome picture. The underlying drivers of inequality are significant disparities in access to health and education.
Source: African Economic Outlook (2015)
Traditional economy dependent on the informal sector, insufficient improvements in agriculture and service sector productivity are major reasons for the slow translation of growth into poverty reduction. Although accounting for 12% of the world’s population African nations produces only 1.5% of the world’s nominal GDP and despite continued growth, most African countries have a GDP per capita valued in PPP lower than USD $5000.
Violence by Non-state actors and public protestors (2004-14)
Source: African Economic Outlook (2015)
InFINeeti | Summer Edition
June 2016
73 In the 2000s, Africa enjoyed world’s third highest increase in GDP per capita after South Asia and East Asia but its growth rate was only half the rate of these two regions.
In Ethiopia, Egypt, Ghana and Nigeria, nearly three-quarters of groceries are bought in tiny informal outlets. If barriers to foreign players were removed and action was taken to boost the share of modern retail outlets, this industry could finally hit its stride
Africa’s current growth could also be derailed by noneconomic factors. A study by World Bank in 2013 which stress -tested the resilience of Africa’s economy found that the biggest risks are drought and conflict. Agriculture remains fragile, given its economic importance to the country and its exposure to climate change impacts. According to Africa’s Pulse 2015 by World Bank, a new type of conflict is rising, different in nature to the conventional and large scale conflict events and civil wars of the 1990s: election-related violence, extremism, terrorist attacks, drug-trafficking, maritime piracy, criminality and war fought by armed insurgents (e.g. Boko Haram in Nigeria). It puts economic progress at risk, especially in the affected countries. High corruption levels discourage the inflow of investments. According to World Bank data, out of 189 countries 33 African countries are beyond the rank of 100 in Corruption Percentage Index.
Source: African Economic Outlook (2015)
Business climate remains a weakness for Africa’s growth prospects. In terms of the ease with which companies do business in different countries in Africa, the continent does not rank highly and a majority of African countries are among
InFINeeti | Summer Edition
June 2016 74
those placed at the bottom of the World Bank’s ranking for 189 countries. There are, however, a few notable exceptions. Mauritius ranks 32nd in the world, followed by Rwanda (62nd), Botswana (72nd), South Africa (73rd), Tunisia (74th) and Morocco (75th). But overall the scenario is grim. Consequently, Africa’s attractiveness, though still strong, is at its lowest since the past 5 years.
More than 300 million Africans will remain in vulnerable jobs in 2020. And even if governments are successful at promoting job creation, the number will keep rising for at least another 20 years because the labour force is expanding so quickly.
Source: World Bank, IMF
We explore and elaborate on the growth potential of different sectors of African economy through the graph in the next page. Agriculture accounts for 32% for GDP and employs 65% of Africa’s labour force. African agriculture and Agri businesses are expected to generate US $1trillion by 2030. Africa hosts 30% of Earth’s mineral reserves with South Africa as the biggest player. Botswana and Mozambique are the potential mining destinations for diamonds and coal respectively. Africa’s proven oil reserves have grown by 130% in the past 30 years. High quality oil in Nigeria and large reserves in Libya make them potential destinations.
Future Potential Mining, oil, and gas contribute significantly to Africa's GDP, but these sectors employ less than 1% of the workforce
InFINeeti | Summer Edition
June 2016
75
Businesses and investors are beginning to take note of the continent's potential – not only its wealth of natural resources but its human capital. Africa may prove to be one of the next great global stories
Nigeria, Ghana, and Angola are the fastest urbanizing economies driving the real estate
Africa attracted only 6% of the world’s tourists but it is expected to double by 2030. Fastest growing destinations are Congo, (150%), Togo (49%) and Sierra Loene (33%). Total ongoing infrastructure projects amount to US $378 billion growing at 10% annually. High focus is on transport (road and port), and energy (thermal and hydropower). Household consumption is growing at 12% with Nigeria being the biggest contributor. Urban population is estimated to increase to 56% of total by 2050. Mobile phone represents more than 90% of all telecommunications in Africa. Mobile users are growing at 5% and advanced markets have reached 100% penetration. Retail Banking is projected to grow at a compounded rate of 15% till 2020. Contribution of financial services to GDP is expected to grow to 19% from 11%. IT industry is expected to contribute up to 10% of GDP by 2025. South Africa, Nigeria and Kenya have the potential to become the future IT hubs. Growth has been fast, but forms a low base, and consequently Africa still has a lot to do to catch up with other regions of the world.
InFINeeti | Summer Edition
Meet the Team Pratik Dokania, Editor-In-Chief
Production Engineer from NIT Trichy
Former Market Analyst, Futures First Info Services Pvt. Ltd.
Specialization in Finance
Nitin Agarwal, Senior Editor
Mechanical Engineer from MNNIT, Allahabad
Former Executive Engineer, Honda R&D
Specialization in Finance and wants to pursue a career in Investment Banking
Loves to read non fiction
Rashi Bablani, Senior Editor
Bachelor of Commerce, Sri Ram College of Commerce, New Delhi
Specialization in Finance and pursue a career in Investment Banking
Likes to read fiction novels
Vaibhav Agarwal, Senior Editor
Computer Science Engineer
Specialization in Finance and Marketing
Die hard fan of football and loves to spend time on novels
June 2016
InFINeeti | Summer Edition
June 2016
Hope You Hope You Enjoyed Enjoyed Reading !!! Reading !!!
For Feedbacks, please contact Team InFINeeti
infineeti@gmail.com | infineeti@iift.ac.in Published by
Indian Institute of Foreign Trade New Delhi | Kolkata All rights reserved.