August 2014

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It gives me the immense pleasure to come up with the August 2014 issue successfully. We are happy to announce the winner of “Article of the Month” award , Mayank Mehre from IIM Kozhikode for his outstanding write up on “Canvassing the Picture of New India” This issue reflects the ideologies of New India and the effects of Middle East problems on it.

The sudden ups and downs of share markets and the people’s behavior towards it. The Buyback of shares by INFOSYS and the effect of GST on business and economy.

Brics issue still moves on with the India’s position and in it and the effect on global economy.

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Swarnendu Chakravartty Editor

FB

Canvassing the Picture of New India

By Mayank Mehre, IIM Kozhikode

A painting is a canvas endorsed by combination of great

To promote growth India needs to push manufacturing.

colours conflated in perfect harmony but the secret of any

According to planning commissioning report over the

great painting is the touch of Artist. India for a long time

next decade India needs to create job for 15 million

has been blessed with all the right “colours” in its

young Indian every year. India should adopt model of

pallet - diverse demography, huge base of natural

creating industry clusters similar to China. Such

resources, sprawling economy, democratic parliamentary

clusters become engines of self-sustaining growth. The

system. But still India is not able to rocket itself out of

NMIZ (National Investment and manufacturing zone)

restricting orbit of economic stagnation. In the last

program should be agenda of prime importance.

decade had a homerun of near double digit growth rate.

Emphasis should be to distribute growth over the newer

But as its old masters became incompetent to drive

urban centres and move people from farmlands to the

growth, nation felt the need of new artist to canvas the

jobs with higher social security. This would not only

new India growth story. This finally convoluted to

push the growth of complementary infrastructure like

th

emergence of Modi-fied India on 16 May 2014.

new roads, educational institutes across the country but

The new government has promised to take all the

also would lead to rise of exports and foreign exchange

measures to bring India on right tracks, but important

reserve for the economy.

questions linger: Can the new Modi-fied India breakout of its

Encouraging

Fig1: China’s industry cluster (Mckinsey)

entrepreneurship:

economic shackles? How should we re-emerge has as “shining”

Government alone cannot create jobs for

example to world?

Propelling

entire country when demand is so high. The planning commission report states that

Indian

many

economic scenario: The top priority for the new government is to get India

large

businesses,

public

sector

companies have failed to create job opportunities. Given entrepreneurial nature of Indians,

back on its near double digit growth rate. For that on a

positive business environment in terms of ease of doing

short term perspective India needs to yoke off all the

business, regulatory measures, capital flows will help to

roadblocks on its way to achieve this growth rate. India

solve employment problem of nation.

also needs to learn to engineer this growth rate for next

Today very few Indian companies have been able to

couple of decades. India has to learn from its other Asian

compete like Flipkart against global giants like

rivals who aggressively pushed their economy through

Amazon. Flipkart is example of how if incubation done

rapid industrialization and rise of manufacturing and

right, Indian companies can compete against global

maintained a steady growth over the last decades

giants. Technology oriented businesses today require small initial capital requirement as compared to traditional companies.

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FB One such example is Kochi start-up village which was

Brazil has

launched with funding of 2 million USD (10 crores INR)

cash transfer has helped to addressed the needs of poor

has till now supported than more than 650 companies. If

and also provide facilities like health and education to

similar entrepreneurship initiatives are taken these

them. Such technology based initiatives are the only

ecosystem will become bedrock of technological revolu-

solution

tion in India and we would hopefully see many more

Government has to make efforts to make Aadhar its

Infosys, Flipkarts making a dent in global space.

priority over the next few years, to reduce systemic

Reducing corruption and Red tape:

leakages and for efficient

Corruption is one of the major factor that has plagued the

The Leadership crisis in India:

demonstrated the benefits of how direct

to

our

sickened

distribution

system.

utilization of government

resources.

‘shining’ image of the economy. Ideally corruption should reduce as countries progress but India’s rank fell

India has great ideas but the main challenge is to make

to 94 from 72 in terms of transparency ratings in 2012.

all these proposed initiatives work in harmony. Polio

Also India’s rating also fell to 132 in terms of ease of

eradication program, Delhi metro program, Aadhar

doing business. The rising number of Indian companies

scheme are some of the most efficiently run and

like Tatas, Birlas have attributed the shift in focus to

effective mega scale projects carried out in this country.

foreign markets instead of capturing the value of

The major reasons behind the success of these

domestic

reason.

programs is single minded focus and efficient

Government needs to take steps to clear up major

leadership. The managers like E Sreedharan, Nandan

investment projects, make bureaucratic systems more

Nilekani should be nominated to lead projects of prime

transparent with use of technology, speed up the

importance. If there are 20-30 people to carry out

clearance procedures for the businesses.

important projects for Government many of the

markets

because

of

the

same

Addressing Indian poverty:

hampered projects will see light of day very soon.

India does not lack resources to solve its problem but

According to Mckinsey study, there are currently more

only hindrance lies in governance and execution. The

than 500 million people in India who live life of

ideas proposed would push India’s growth momentum

desperation and are deprived of modest necessities for

and bring it on right track. After all there are more than

living. Every year government spends major chunk of its

one billion reasons for India to do better.

budget to make life better for this section of population by providing subsidies in food, fuel and basic amenities.

But according to research conducted by World Bank economists, only 20% these subsidies actually reach poor. To solve this problem, for the first time in 2009 government initiated Aadhar program, to provide identity to this permanently neglected population. Though currently this scheme has many inconsistencies, they need to yoked off and efforts should be made for

nationwide coverage of this initiative.

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FB

Is BRICS still the growth driver of the world?

By Mufaddal Dahodwala, JBIMS

BRICS - Brazil, Russia, India, China and South Africa has been amongst the fastest growing economies since last 15 years. But, recent economic crisis and various internal issues have marred the growth in these emerging nations. Emerging markets account for more than half of global GDP growth as the BRICS economies didn’t succumb on the growth parameters and have shown dou-

economies that are continuing to recover.

Emerging economies have a higher growth rate than the developed ones but recently this trend is getting reversed. According to IMF estimates, China is estimated to grow at just 7.8% while India at 5.6% and Brazil at 2.5%.

ble digit progress. But this year the growth regime of

Now, whether the developing countries have this poor

BRICS countries is seen a bit jittery due to global

performance for a temporary period or it will continue

downturn that has left world economy in lurch. The high

haunting most of the Indian companies is a matter of

volatility in markets and investor sentiments along with

time. Many are confident about the sustainable growth

the flat commodity prices has shown the other way.

in emerging markets as the fundamental forces are

In terms of net foreign exchange outflows from India's debt and equity markets, an important concern is the extent to which US growth recovers and the Federal Reserve's purchases of longer-term Treasuries and mortgage securities start "tapering" down. The UK

economy and the euro zone has started to do better and the unemployment rate is decreasing. To sum up, there is little that India can immediately do to reduce oil or gold imports, or to directly address risks arising from the G7

5

strong here. China and India’s demographic dividend unlike most developed countries like US and Japan is still young which enhances the availability of skilled workforce

and

increased

levels

of

domestic

consumption. There was a time when success of Asian countries like Singapore and South Korea was seen as an aberration however today’s times have changed and we can see that their combined GDP is more as compared to UK also.

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FB BRICS has a vital role to play in developing the economy

India too has seen recent reforms in economic policies

together and improving the overall dampening condition

and new

prudent RBI governor along with the entire

in terms of economic as well as environment concerns.

finance

ministry which has led to the radical tax

The intellectual property rights issue has also to be dealt

system to get more robust and help to solve most

in a way that all the concerns regarding

bank’s issues.

social and

political stability are maintained. The interests of the people should be legislated in a proper way by enforcing

Specifically for India, it is the individual state

reasonably good law.

performance that matters and proper coordination with the centre will ensure drive the economy. The

BRICS countries is moving to BIITS as China and Russia

agricultural output remains robust with a strong pickup

are replaced by Indonesia, Turkey, Mexico, etc. and India

in rabi sowing. Trade deficit of India has narrowed and

has to now also tackle with funds from international

CAD falling to 2.5% in year 2014 from 4.8% last year

banks and institutions

also boosts investor’s confidence and we can see that

It has been reported that India will invest about $4.5 billion in International Bank for Reconstruction and Development bonds to be able to borrow exactly the same amount from the IBRD, since we have reached the country risk limit for

borrowings from that

institution. IBRD bonds are issued at yields of about six-month dollar Libor, or London interbank offered rate, minus 20 basis points; and IBRD loans carry

foreign exchange reserves have grown since

August.

For many countries around the world, China has become an

important trade partner. Even as China is

among the world's leading recipient of foreign direct investment, Chinese companies make significant overseas investments as they expand into newer markets.

interest

With the growing prominence of China in global trade

rates of around six-month dollar Libor plus 80 basis

and investment, will the Chinese Renminbi replace the

points.

US dollar as the primary reserve currency of the world?

If the information that India will invest in IBRD bonds is

The Chinese Government has identified urbanization to

correct, it is surprising that we are prepared to bear an

play a key part in China's future development and

additional interest cost of one per cent to borrow an

growth plans. The household registration or 'Hukou'

equivalent amount from IBRD along with delays related

practice is a key

to project clearances. Economic cycles work according to

achieving and ensuring holistic percolation of the

what is hot in one decade and what is not and so the shift

benefits from increased urbanisation. What are the steps

in BRICS economies is taking place. But this phase can

have

drastic

effects

considering

the

unprecedented scope of expansion. By 2007-08, more than 100 economies had growth rates of 5% and more which was a global boom and brought these

spectacular results.

China has heavily invested in infrastructure projects which will serve them good in long term.

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constraint in policy makers

FB that

there

is

bullishness

for

which wreaked the economies of South Korea,

mature

Malaysia, Indonesia, etc. but since then the perception

economies over the coming decades. I am definitely

has changed and the emerging market led global growth

optimistic for Brazil’s economic future. It’s easy to forget

in history.

emerging markets compared

on

the

prospects

to

those

of

that Brazil, with a population of slightly under 200 million, is Latin America’s largest economy, and will continue to be the engine of the region’s growth. For investors, structural changes in Brazil’s economy are a necessity. The country’s economy needs to change from

one dependent on exports and infrastructure spending, to an increased consumer economy.

Although the economies of India and Brazil have squandered the opportunity by not going in for the second generation of reforms and as a result having to do with lesser growth rates than one may have imagined. Also commodities prices have fallen due to increase in supply and decreased demand from developed economies. The rich countries are not in the

Many Brazilian small and medium sized enterprises are

mood to import more and more which has led to

being challenged by the country’s low growth rate,

disastrous performance of BRICS exports. They are

inflation, and the difficulty in obtaining equity or debt

instead trying to improve the employment rate ad

financing from within the country. It’s increasingly clear

competitiveness amongst their own resources

to many long-term investors that Brazil and many other emerging

markets will

outperform

most

mature

BRICS position in climate changes:-

economies over the coming decades. But, it continues to

The BRICS’ position traditionally has been that global

be a challenge to convince management of Brazil’s

climate

smaller companies that now there is global equity capital

principally by wealthy industrial nations, which have

available

long-

not only the wealth and technology to provide

term investment horizon. Future outflows from the debt

solutions, but also the moral responsibility to do so

market by foreign institutional investors (FIIs) would be

because they have produced perhaps as much as 80% of

limited since residual foreign investment in government

the GHG emissions to date. However, some developing

debt stands at about $20 billion. FII equity outflows too

countries seem to be accepting they have to contribute

should have an upper bound. If there are net equity

to climate change mitigation, e.g., China. Other BRICS

outflows of, say, $15 billion, this would cause market

are also making efforts. The more vulnerable they are

levels and the rupee to plunge and it would be

to climate change, the greater incentive there is for the

counterproductive for FIIs to sell more. However, if

BRICS to accept binding GHG emissions cuts. If the

India's credit rating is downgraded, as per FII investment

Kyoto commitment is not enough to solve the problem,

norms, they would have to reduce exposure to India.

developed countries should do more about GHG

Another source of risk is that the last four years of

emissions reductions before they ask developing

extremely low interest rates in the larger G7 economies

nations for commitment. Large developing countries

have created several asset bubbles. As US interest rates

such as China, India, and Brazil will not commit

inevitably rise, bond market bubbles would be among the

internationally to material reductions in their GHG

first to be pricked. Further, although real interest rates are

emissions in the absence of some comparable

low in India, investment decisions are based on nominal

commitment by, say, the US. Conversely, the US has

rates. We did have examples of the Asian crisis in 1990’s

not participated in the Kyoto Protocol, and will not

7

from

global

investors

with

a

change

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mitigation

must

be

addressed

FB agree to mandatory GHG emissions reductions targets

Percent and will be impacted by Brazil’s central bank’s

due to concerns about a loss of competitive advantage,

indication that it will raise rates to try to rein in

relative to developing countries that are not subject to the

above-targeted inflation. Developing

same obligations. Rich countries generally favour the

form of aid and the promotion of clean technology .

idea of placing more responsibility on key developing country emitters such as China and India, whereas

countries in the

Conclusion:-

developing countries continue to favour an approach that

In spite of having diverse histories, the BRIC

would implement a second phase of the Kyoto Protocol,

economies are receiving roughly similar treatment from

which allows them to opt out of GHG

the

emissions

wealthiest nations. Either through coercion or

reductions if these pose a threat to development. In fact,

negotiation, the BRICs are being pressured to adopt a

authorities from the BRICS have emphasized that the key

Western concept of intellectual property protection.

to success in climate negotiations lies in commitments

That means formal titling of inventive works,

by rich countries to slash GHG emissions and boost

enforcement through statutory regimes, and the

funding to .

inevitable demand for even greater protection as the diffusion of technology enables cheaper and more

policy makers must adopt to reform the Hukou system while ensuring that any such steps are financially and socially sustainable? Even in the context of the impact of the Federal Reserve’s tapering of quantitative easing on

all emerging markets. Recent economic news from Brazil has been disappointing. It was glad to see good news from Brazil with the Brazilian Institute of

Geography

and Statistics announcement that unemployment in six of the country’s largest metropolitan areas an

decreased to

average of 5.4 percent last year, from 5.5 percent

in.2012. When viewed in the context of unemployment in the U.S. or the euro zone, this is a very low unemployment rate. But short-term growth in

Brazil is

another matter. The country likely finished 2013 with growth around 2.1 percent, the third consecutive year of growth below 3 percent. Inflation in Brazil is also an issue. Inflation likely ran close to 6 percent last year, higher than the government had targeted. It

wasn’t sup-

posed to be this way. At the beginning of last year, Brazil’s government optimistically projected 2013 growth of 4.5 percent, citing an expectation for an overall improvement in the global economy. It doesn’t look like there will be a turnaround in Brazil’s economy anytime

soon. Growth for this year is likely to be around 2 8

effective methods of pirating products.

The average dip in growth rates of emerging economies is about 4% which means except China, it is 2.5%.The

dominant BRICS economies have bore the brunt of this slowdown the most and with China’s debt burden becoming more than 200% of its GDP. According to IMF data, only 35 out of 185 countries can be termed as “developed” as no other country can sustain the growth for more than a decade. Only 6 countries have managed a growth rate of more than 5% over a period of four decades. The average income gap of advanced and emerging economies has not changed over half a century and people in emerging economies are bound

for a

dismal quality of living. The global economy is

going through rough and turbulent times and lower sales and investments in emerging markets is a big worry. The recent splurge in innovation and new ideas that are

patented in BRICS countries can be washed

away if the global economy is under threat. The performance of emerging markets matters a lot to the developed recovery of

,

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economies and the future impact to the markets cannot be ruled out.

FB

INFOSYS and its share buyback demand.

By Kishorekumar, IBS Hyderabad

The Management Change in the company is inevitable

The Infosys board and the management receives

but its lack of consistency raised concerns in stakeholders

requests on a variety of subjects from shareholders and

minds. The "abrupt nature" of management change at

investors, on an ongoing basis. These are addressed by

Infosys had initially raised "serious concerns, not only in

the board and the

our minds but among many stakeholders". In an analysis made from April to July 2011 BSE IT index gave 47.9% returns out of which TCS share price rose to 119.2% but Infosys shares grow only by 4%. In general Infosys

holds cash and cash equivalents of around 30,000 crore and generates operating cash flow 12,000 crore a year but

management in due course."

Now, with the management exuding confidence and the Infosys' share price still depressed, there is a need for the Board to announce a large and consistent buyback programme to show confidence in the management and

the business model, going forward.

there is no clear strategy on effective use of cash. The

The demand comes at a time when Infosys is in the

Infosys Return on capital em-

middle of biggest leadership transistion in its history.

ployed has fallen to 36% from

On 1st August, former SAP AG

41% in two years due to which

executive Vishal Sikka took

Company has not made any big

charge as the first non-founder

acquisition for many years. As of

CEO at the company, while all

now

Infosys is perhaps the most

founders led by N. R .Narayana

overcapitalised company in Indian

Murthy either retired or took up

corporate history.

non-executive roles with the

The former executives T.P. Mohandas Pai and

V.Balakrishnan, former senior vice-president

Prahlad want Infosys to Immediately go for a share buyback of Rs 11,200 crore, roughly 40% of the existing cash and cash equivalents. Pai was Infosys' CFO before becoming its executive director responsible for human resources, administration and training. Balakrishnan, who quit the company last year, had long been the CFO and a

board member at the company. Prahlad was among the first few employees of the company. Interestingly,

board. After a series of top level exits, Infosys top management has undergone a change recently, with Vishal Sikka assuming charge of its CEO and MD replacing S D Shibulal who retired. Sikka is the first non-founder to head the company. The Infosys first non-founder chief executive Vishal

Sikka has

already started experiencing the first signs of pressure from some minority shareholders who were once key executives of the

information technology services

firm.

neither Pai nor Balakrishnan had favoured shareholders'

Infosys shares have consistently under-performed those

demands for share buybacks during their respective stints

of its peers in the past few years as growth slowed

as CFO. This buyback should be at the 52-week-high

down at the

price of Rs 3,850 a share. The Company should announce

During the same time, rival TCS increased the gulf

an ongoing buyback programme to the extent of 40% of

between the two companies valuation (Now, TCS is

the previous year's net profit on a consistent basis. They

valued at Rs 4.85 lakh crore compared to Rs 2 lakh

believe the

company must do so because there is a

crore for Infosys) on account of superior sales and

valuation disconnect" between the shares

profit growth. But in the Financial column, the former

"dramatic

of Infosys and its peers, and this needs correction.

9

company once vaunted as the Indian IT.

top executives dismissed analyst concerns that

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FB buybacks will not do the company any good – that

The company's trailing 12-month (TTM) EPS was at

such measures are merely temporary props and stock

Rs 185.71 per share as per the quarter ended June 2014.

price movement is ultimately decided by actual financial

The stock's price-to-earnings (P/E) ratio was 19.13. The

performance – and cited the examples of Accenture and

latest book value of the company is Rs 733.03 per

Apple who executed buybacks in order to boost

share. At current value, the price-to-book value of the

shareholder wealth. “Accenture, a company in the same

company is 4.85.

business, has single-digit growth rates and has doubled its market cap using buybacks”. “Tragedy forced a change of leadership at Apple. The incoming CEO was

reminded of cash reserves by shareholders and they started a buyback and dividend programme which has met with shareholder approval. Nothing bad has

happened

to Apple either except becoming the most valued company.” The executives also added that even if Infosys were to buy back shares worth about Rs 11,000 crore, acquisition is a flawed argument. purchase a large-scale company. “Big acquisitions are very risky at best. (HP and Autonomy is a good

recent example). Assuming that Infosys will not bet all of its cash pile on the big ones, there is adequate money for small ones and hence this ‘hoarding’ for an acquisition is a flawed argument.

Besides, one can always use stock

instead

of

cash”.

Finally, the trio added that the reason they did not want to “vote with our feet” – a term used to describe exiting a stock - if they were unhappy with the company’s performance was because, having worked for the firm, they were “emotionally attached” to Infosys. “It is indeed painful to see Infosys lose it position of eminence and play catch up.”

On August 20, 2014, Infosys closed at Rs 3552.50, up Rs 1.40, or 0.04 percent. The 52-week high of the share

was Rs 3847.20 and the 52-week low was Rs 2894.00.

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FB

Is the rise of Sensex justified‌??

By Avishek Somani and Mr. Daga, IMT Ghaziabad

One of the funny things about the stock market is that

If we recall, before the Budget there were concerns that

every time one person buys, another sells, and both

FIIs

think they are astute‌

purchasing debt, but that has clearly not been the case,

would

switch

from

purchasing

equity

to

with FIIs investing in equity as well. Even for the FIIs, In the first half of 2014, the BSE-Sensex gained close to

from a rational perspective, India makes sense to pump

5,000 points. Rallying over 24 per cent so far in the year,

their funds into. Out of the BRIC nations, India's

the Indian stock markets are now taking a relief and

indices have performed the best year to date (12.56% in

setting new standards. The indices rose sharply after

Brazil -7% in Russia, 24.3% in India (Sensex), and -4%

hitting their lifetime high on 25th July, 2014. The BSE

in China).

Sensex hit a fresh lifetime high of 26,300.17 and the Nifty rose to a record high of 7840.95 in trade.

Apart from this, as per the budget the Cabinet has given go-ahead to hiking the foreign direct investment (FDI)

In the past the Indian markets has been crumpled with

cap in insurance to 49 per cent, which will pave the

slowdown and sluggish growth in the market decision

way for inflow of as much as Rs. 25,000 Crore foreign

making by the coalition government of Congress having

funds thus boosting the sector. There has also been

been the key worry for investors including FIIs. Now

discussion in the government where they may soon take

with the present Government of BJP having a clear focus

a decision on easing FDI in railways and defence

on economic turnaround and

sectors. Besides, the FII

taking pro-business proposals in

limit for investment in

a faster and more transparent

government

approval processes, it is no

has been hiked by $5

surprise that the markets have

billion, within the total

reflected the sentiments of the

cap

people.

Government of India is

of

securities

$30

billion.

also in talks with rating The overseas investor is betting

agency to improve their

big on the government's reforms

rating but the agencies

agenda. They have poured in

are going for wait and

more than $5 billion in the

watch policy.

Indian market in the month of July 2014 taking the total inflow

According to most ana-

to over $25 billion since the beginning of this year. The investment has been in the debt market for $3 billion (Rs 17,829 crore) and $2.2 billion (Rs 13,166 crore) in the

lysts,

hope-based

rally is largely over and the markets are likely to consolidate in the near term, but the broader

equity market.

11

the

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FB trend for the market largely remains on the upside. The

potential to reach 31,000 but to reach that number the

rise in volatility was expected in the last week of July as

price to earnings ratio has to be 20 times and the earn-

many traders would be closing on their position on

ings of the corporate has to grow by around 18-20%

account of F&O expiry. They would also be looking at

which doesn’t seem that difficult. The problem lies

the numbers for Consumer Price Index (CPI) for

with the fact that Sensex also comprises of commodi-

industrial workers which wasn’t very impressive either.

ties companies and for them to grow the GDP growth also has to take off. So if GDP growth fails to take off,

What stocks to look for??

chances of higher Sensex won’t be justified.

Investors should look at Large Cap companies which is

So a better approach for the investors would be to

offering dividend yield in the range of 3-4%, so that they

follow a bottom up approach in picking the stocks.

can clear junk in the stock market. Dividend payout is

Bottom up approach is a concept which focuses on the

also an important factor that investors should not be

company’s individual stock rather than focusing on the

ignoring. In FY2013-14, these payout rose to 30.8% of

overall market or industry.

net profits from 23.2% of net profits in a span of five The bottom line is that the markets in

years.

India are looking bullish and rising

Some of the most common stocks to look

but awareness towards corrections

out for according to big players like

and minor pits and loop holes have to

Goldman

America,

be watched and accordingly the

Deutsche Bank, etc includes ICICI Bank,

investors of all kinds from intraday

Power Grid, L&T, Maruti Suzuki. The

players to long term investors; from

reason for the same accrues to the fact

local biggies to FII; all have a lot to

that there has been an increase in

regain from the markets after a

economic activity which is clearly evident

sluggish market of 2013 and take their

Sachs,

Bank

of

from the recent release of IIP numbers, where there has

money back from the market by reinvesting it in the

been a better performance in manufacturing sector

potentially right areas as mentioned above.

growth and passenger vehicles sales, adding to that there has also been increase in cement and power production.

So all in all I would like to just say the famous quote of

The Cabinet Committee on Investments (CCI), with the

Warren Buffet:

push of the Project Monitoring Group, has been clearing a lot of stuck capex projects -- 159 projects, out of the

Rule No.1: Never lose money.

446 accepted for consideration, have been cleared.

Rule Future Outlook –Some of the analyst believes that the

No.2:

Happy Investing…!!

Sensex has the

12

Never

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forget

rule

No.1.

FB

Is India’s stand on the food security at WTO justified? YES!

By Rahul Gogawat, SIMSR

Introduction (What is the buzz about?):

According to the provisions of WTO, the

agricultural

The WTO meeting held at Bali to discuss the

subsidy provided by a developing country cannot

long pending issue of trade facilitation, agriculture and

exceed 10% of the total agricultural output. If a country

interests of the least developed countries (LDCs)

violates the clauses of WTO, other nations have the

concluded successfully on 7th December 2013. This was

right to challenge them in the international disputes

seen as a big step forward for improvement of world

court of WTO, which will call for penalty and

economy and shed the image WTO had for not being

restrictions on future trade. The agricultural output is

able to come at a consensus and finalise agreements.

calculated based on the international price of 1986-88

There was an uphill task for the WTO secretary Roberto

(known as “External Reference Prices ERP). This

Azvevedo to again smoothly conclude the next general

causes the subsidy to further dilute to a very low level

meeting. The second round of meeting which recently

which is tough to maintain with increasing inflation.

concluded at Geneva could not meet the same fate, as

India wants this clause to be modified and that subsidy

India vetoed that the Bali package should be sealed on

prices be calculated on a more recent year or should be

31st December, 2014, citing reasons that agricultural

indexed to inflation. This proposal was only supported

subsidy should be modified in the

by Bolivia, Venezuela and Cuba while the other BRICS

interests of developing nations. This

nation were opposed to this and

was not extolled by most of the

wanted TFA to be sealed as soon

nations and

as possible.

regarded India

as

impervious to trade facilitation.

The US Secretary of State, John Kerry said, “India’s stand on TFA does not send

India’s stand:

good signal to the world about

The meeting concluded at Bali was

India’s view”. USA should be

based on the three pillars of discussion, which were:

the last nation to lecture about protectionist policy and

A)

low

Trade

facilitation

agreement:

which

allowed

subsidy for agriculture in developing countries

developing nations to open their markets for developed

like India. United States itself adopted the protectionist

nations, cut red tape and provide quick customs

policy in its developing phase. John Kennedy described

clearance. B) Agriculture. C) Interests of Least developed

the cause of Great depression as the prevalent

countries. After the Bali meeting, there were 20 more

protectionism adopted by the last government. Both

meetings conducted out of which only 2 were earmarked

Europe and

for agriculture. This shows that the entire Bali package is

proposing lower tariffs and high subsidy for its

contorted in the interests of the developed nations and if

agricultural produce, while they themselves have

only the Trade Facilitation Agreement (TFA) is taken

protected their farm sector composed of high prices and

forward, there is a high probability that the developed

non-tariff barriers by subsidizing it heavily. This clearly

nations will not be interested in coming back to the table

illustrates that the farm sector is highly skewed in the

to talk about other clauses.

interests of the developed nations which have

United States criticised India for

reclassified these subsidies as green-box subsidy.

13

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FB This mechanism of subsidy calculation is quite discriminatory.

Conclusion: India is not of the view of opposing trade facilitation

The USA is backing the idea of open markets, improved

between nations but to clear the entire Bali package

customs regulations and protection of Intellectual

along with the food security issue critical for

property rights (IPR). The IPR issue has been giving

developing nations in one shot. As the developed

sleepless nights for US pharmaceutical industry as the

nations would not be interested in it after the TFA has

Indian law only provides patent on the process of

been signed. India is open to discuss the issue in the

manufacturing drugs rather than on the life saving drug

next meeting of WTO to be held in September, 2014

itself. On the other hand in the 1980s, America itself

and if other economies are willing to negotiate about

imposed restrictions on exports from the rapidly growing

the curbs on Indian farm sector then it can pave the way

Japan. Today, due to the increasing dominance of China

for a smooth conclusion of the entire package. It is a

in world trade, USA is entering into two huge trade

challenge to bring all 160 nations to the deal’s table

treaties with other nations, namely The Trans Pacific

again but it should not be concluded that WTO has

Partnership and Trans-Atlantic Trade, which do not

collapsed as there is still time till 31st July, 2015 before

include any of the BRICS nation. These pacts will be

which, constructive discussions can clear the Trade

governed by its own trade agreements and will

Facilitation Agreement for betterment of the world

garner a

large share of world trade. This is in sharp contrast to the

economy.

FTA stand of America, if it wants WTO to succeed why

is it entering in other trade agreements?

Knowing the fact that The Trade Facilitation agreement will induce a fresh $1trillion of GDP in the world economy and provide 21 million new jobs, India cannot ignore its 50% population which depends on agricultural produce and more than 300 million of its population which is below the poverty line. Taking a stand to protect the interests of its masses is the least a State can do and that’s what India has done. It should not

be bullied to sacrifice its own self-interest against that of the developed nations.

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FB

Finance and Economy.

By Mukul Sinha, IBS Hyderabad

The Indian economy is the ninth largest economy of the

several NBFC and the nationalized banks are opened in

world and also one of the fastest growing world

the rural region. Many new reforms have been

economies. This growth is attributed to various Indian

established by the RBI for the upliftment of rural

industries

women. RBI has introduced a new scheme of provid-

which

have

grown

tremendously

post

independence to increase national income, to generate

ing business loan of 3 lakhs to the rural

employment and to generate foreign earnings. India was

interest. This is promote the rural business in India.

initially an agriculture based economy but after liberalization norms of 1991 particularly, the services

The three game changers to India economy are

sector has taken a lead contributing the most to the gross

1.Goods and services tax(GST)

domestic

2.The insurance laws amendments bill

product.

Presently

the

agricultural,

manufacturing and service sector account for 16, 27, 57 percent of GDP respectively.

3.Uniform financial code recommended by FSLRC GOODS AND SERVICE TAX:

DIFFERENT SECTORS CONTRIBUTING IN

woman at 7%

1. GST is a comprehensive tax

INDIA’S ECONOMY

applicable

on

1. Banking and Insurance

manufacture, sale and consumption of

2. Real Estate

goods and

3.It and ites

2. It brings down all the taxes at a

services at national level.

common level

4.Manufacturing sector

platform by breaking

tax barriers between states.

3. It will boost the economy in each and every sale and purchase of goods

1. BANKING AND INSURANCE

in supply chain.

Banking industry has contributed in Indian economy.

4. It is estimated that India will gain $15 billion a year

Insurance

sector is the main cause of growth in

industrial sector. There are four

different sectors in

a public sector bank.

by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth.

1. Public sector bank 2. Private sector bank 3. Cooperative sector bank

The insurance laws amendments bill 1. The capital required for a health insurance

Over the years, the reach of banking has widened

company is now reduced to 50 cr instead of

significantly to include relatively under-banked

100 cr because of encouraging health insurance

regions, particularly in rural areas. Commercial bank credit as per cent of GDP picked up steadily from 5.8 per cent in 1951 to 56.5 per cent by 2012. Post

schemes in India.

2. This will also attract foreign companies in India

to invest in health

nationalization 15

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insurance sector.

FB 3. Introduction of FDI upto 49% in insurance sector will also be

considered a boom for the

country’s economy.

Real Estate: 1. The contribution of the real estate sector to India's GDP has been estimated at 6.3 per cent in

4. It will result in better product design and management, better risk

management, and

higher investment.

2013, and the segment is expected to generate 7.6 million jobs in the same period, according to a report.

Uniform financial code recommended by FSLRC

2. Due to large population size real estate firms share has increased a lot in the past few years.

FSLRC was headed by Justice Shrikrishna. It helped the

BN

3. Migration of the people from rural areas to urban

consumer in

areas (inter- state migration) has boost the industry

several ways like protection of the consumer from fraud in financial market.

in a large area.

4. Migration of NRIs to some cities (Mumbai, Delhi,

It also helps to keep the financial market in

etc) in India is also contributing a lot in the rise of

future.

Real Estate sector in the near future.

It and Ites:

Manufacturing industry : 1. Manufacturing industry has

1. IT industry contributes a huge

the slowest growth in recent

share in Indian GDP.

past.

2. The IT and IT enabled services industry

in

India

2. In order to increase the

has

economic growth of the country

recorded a growth rate of

manufacturing industry can play

22.4% in the last fiscal year.

a key role.

The total revenue from this sector was valued at 2.46

trillion Indian rupees in the fiscal year 2007.

3. In recent future manufacturing industry can increase the employment of many poor farmers and rural people.

3.Most of the outsourcing for the giant MNCs happens from India which again generates revenue in the market.

4. Several Indian IT firms are involved in both outsourcing and development and production which contributes a major chunk to the economy of India.

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Inflation protected securities

By Aditya Singh, IIM Ranchi

As students of finance have often been introduced to many different financial instruments being used in today`s market. These instruments cater to the needs of different investors mitigating some form of risk and ensuring returns. In December 2013, RBI introduced Inflation Indexed National Savings Securities to protect investors from inflation risk. These are inflation-linked bonds a.k.a Inflation protected securities, where the government

ensures an interest of 1.5% per year above the rate of inflation as measured by the Consumer Price Index (CPI).

.How do they work?

Consider a hypothetical IPS bond which pays 9% coupon for 5 years.

The below table gives a pretty easy depiction of how an Inflation protected security (IPS) works. As we can see, that unlike a conventional bond which pays a fixed interest every period. An IPS pays interest over and

above the standard coupon and accounts for the additional interest, which is derived from the CPI.

What are Inflation Protected Securities & Why use them?

Year Yr1 Yr 2 Yr 3 Yr 4 Yr 5

Coupon (%)

Inflation (CPI) 9 9 9 9

0 3 5 6

Principal($) 1000 1030 1081.5 1146.39

9

8

1238.1012

Adjusted Principal 0 30 51.5 64.89

Standard Coupon 90 90 90 90

91.7112

90

Before the introduction of Inflation-indexed bonds, investors in conventional fixed income securities had

Inflation portion

Total Payment

0 2.7 4.635 5.8401

90 92.7 94.635 95.8401

8.254008

98.254008

Comparing TIPS and Conventional Treasury Bonds:

constantly faced the risks associated with the nominal

To compare the two, we must understand the

interest rate. The risk of a decline in fixed income

differences arising in their respective yields.

portfolios caused by a rise in nominal interest rate has

Treasury Nominal Yield = Real yield + Expected

been a major concern for most investors. Inflation risk is

Inflation rate + Inflation Risk Premium

the risk that returns which are earned across the investor’s time horizon fall short of actual inflation i.e. when actual inflation exceeds the “expected rate” of inflation that was built into market interest rates at the time the investor purchased the bond. This results in decline in the bond portfolio’s “real” (inflation-adjusted) value. However, with the advent of IPS and similar securities, which

TIPS Nominal Yield = Real yield + lagged actual inflation rate From the above, we can clearly see that the differences

between expected inflation and lagged actual inflation and Inflation risk premium give rise to the difference in yields of the securities.

provide for inflation-adjusted increases in both principal value and interest payments. This helps investors manage the extent to which their fixed income portfolios are subject to inflation risk.

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FB Monetary Policy and Inflation:

lower-income investors (having an annual income of less

When actual inflation is greater than expected inflation hurt conventional Treasuries and benefit TIPS, causing TIPS to perform better and reducing correlations of returns for the two types of bonds. This often prompts the

than 500,000 rupees) and have a lower tax rate. These bonds are suitable for savings that is not needed for many years.

Market Growth of Inflation-linked government bonds:

Central Bank (RBI) to tighten the money supply by

As of April 2012, the global market value of

substantially raising short-term real rates.

inflation-linked government bonds was approximately

In periods, when actual inflation is lower than expected

$2.0 trillion. The United States is the largest issuer with

inflation (deflation). The inflation risk premium that had been priced into the conventional bond turns out to be excessive. The prices of conventional bonds rise as inflation expectations decline and result in lower nominal rates. Deflation likely would reduce real interest rates as well, this effect would probably be more than offset by the downward inflation adjustment to IPS principal. The result could be a fall in the market price of IPS. This often prompts the Central Bank (RBI) to loosen the money supply by lowering short-term real interest

rates.

Whereas, when in periods when actual inflation is close to inflation expectations, the total returns of IPS and conventional Treasuries will be closely correlated.

The performance of both types of bonds will be driven by changes in real interest rates. RBI is not likely to take any action in such a case.

$866 billion, followed by the United Kingdom with

Who should invest in IPS?

$549 billion, France with $235 billion.

In India, IPS might not be as attractive as they sound for

Inflation-Indexed Bonds across the globe:

the Higher-income investors (those who have an annual income of more than one million rupees per year) and have sufficient capital to invest in the long-term. These investors should be buying tax-free bonds issued by infrastructure

companies

such

as

Power

Finance

By

the

data

below

we

can

compare

inflation-linked bonds offered by governments around the globe and see that there are different methods used for measuring these bonds. These methods are

Corporation Ltd and IDFC Ltd. Since the interest on these bonds is not subject to tax.

Financial advisers are of the opinion that the inflation

protected securities make are a viable option for the 18

given

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FB categorized by the Inflation- index used and whether the government provides floor protection to the investors or not.

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FB

NDB - alternative to the World Bank and IMF?

By Sourav Roy Choudhury, IIFT Delhi

Proponents of the new BRICS bank hope that it

conventional counterparts, in some of the

will be a strong alternative to the World Bank

countries such as the China Development Bank and

and IMF

Brazil’s Brazilian Development Bank (BNDES) and

BRICS was a term coined by an investment banking analyst, Jim O’Neill, comprising of 5 emerging countries with approximately 40% of the world’s population and 20% of the world’s gross domestic product (GDP) Brazil,

Russia, India, China and South Africa. It became a reality when 4 out of the 5 countries’ leaders first met in New York in 2006. Further down the timeline, they constituted a formal group at a summit of 4 of the current 5 members in Yekaterinburg in 2009 and later joined by South Africa. BRICS now has a National Development Bank with authorized capital of $100 billion and equity share capital of $50 billion and has been welcomed by the World Bank. NDB is being purported as a challenge to the global financial order created by the currently

dominant economies in the Organization for Economic Co-operation and Development (OECD) after World War Two, which revolved around the International Monetary

they have been operations,

expanding their international lending especially in other developing countries,

in recent years. But, the case of NDB is different from the financial architecture point of view. NDB relatively has a large authorized capital base of $100 billion and

the paid-up capital commitment of $50 billion which is more or less along the lines of the capital base of the International

Bank

for

Reconstruction

and

Development (IBRD) (the core lending arm of the World Bank) - $190 billion of which only $36.7 billion is available as actual equity and the rest is the capital that countries have committed to provide when called upon to do. But, the NDB should serve better the interests of capitalist development in the underdeveloped and developing countries than would multilateral banks that are dominated by and serve as instruments of the developed countries.

Fund and the World Bank. India gets the first chair of a rotating president ship, China gets to host the bank’s headquarters in Shanghai, South Africa gets to host the first regional office, the first chair of the board of governors is from Russia and the first chair of the board of directors from Brazil.

The establishment of the New Development Bank is a significant development which could have some impact on multilateral lending for infrastructure in the developing and the underdeveloped countries. It is estimated that in around 20 years, the NDB could reach a stock of loans of up to US$350 billion exceeding World Bank finance. Though, there are large development banks, which focus on long term financing, and provide credit to more capital-intensive projects, especially of an infrastructural kind, unlike their 20

BRICS

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FB Today in the modern world, there are enhanced

While the common opinion is of keeping NDB different

possibilities of mobilization of private resources in debt

to west controlled IMF and World Bank, the NDB has a

and equity markets but the developing and the least

policy flaw quite contrary to what is expected. Coming

developed countries are discriminated against and are

to the parties to the NDB, China runs surpluses with all

kept out of such markets and hence very little capital

its BRICS partners and is a manufacturing superpower

infusion in those countries. Since the NDB is owned and

amongst the 5 countries. Russia and Brazil are

backed by governments of emerging economies, it is

commodity- and energy-rich exporters and South

more likely to mobilize substantial resources at

Africa is mineral- rich exporter. But India lacks in

reasonable cost from private markets and channel them to

natural resources as well as manufacturing depth. It has

those countries. The NDB’s lending is to be focused on

manufacturing-gross domestic product ratio among

large

cash-strapped

emerging economies at 16 per cent which is abysmal as

developing country governments and the private sector

compared to other countries in BRICS. In addition to

are unable or unwilling to fully fund those large projects,

that, India’s financial and structural health is not so

making the role of development financing institutions

strong.

infrastructural

projects.

Both

like NDB crucial to development. The NDB is also more likely to respect the sovereignty of the borrowing countries by framing appropriate lending rules. However, being a bank, though a development one, it as to ensure its own commercial viability. Thereby, the bank must not undertake any form of socially concerned lending that does not yield a return adequate to cover costs.

Nevertheless, the NDB poses some political and policy

Another factor is foreign policy of the member countries of BRICS. China has never come out in the open on friendship with Pakistan while agreeing to

signing projects worth Rs.3,400 crore in Pakistan occupied Kashmir. This policy towards Pakistan worries India. For Russia and China, their foreign policy interest is seen to as anti-Americanism. NDB standing opposite to US and other western giants means India taking an anti-American policy. Russia and China are authoritarian regimes with economic and political might to stand up to the US. India has neither. Also, after the MH-17 incident the Indian government took a stand against Russia.

What needs to be observed that how the BRICS

challenges. If we go back to the past, in 2009 there were over 550 development banks worldwide, of which 32 were in the nature of international, regional or sub

countries stay united and gain synergy by going against the west in the aspect of operating the NDB and whether it stands as an alternative to IMF and World Bank.

regional (as opposed to national) development banks.

Also, NDB reminds of Banco Del Sur which resulted from the similar efforts by the regime of South American countries that eventually was a failure.

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FB

IMPACT OF REGULATION AND POLITICS ON INDIAN FINANCIAL MARKETS By

BhargavPadullaparthi ,Sovit, Wellingkar Institute, Mumbai

The financial market always increases or decreases due

is on a freefall and it is not able to ascertain its lower

to some information. At present, financial markets have

limit.

been showing extremely unpredictable movement, which is only due to new pieces of information, and news or events. The economy of any country is evaluated by the on factors such as, politics, inflation, interest rate, exchange rate, GDP, GNP, changes in ruling parties, elections, etc. Now, what are the factors

that ultimately lead to market fluctuations is a big question? Thus, questions arise that whether the market movements are affected due to politics? Due to inflation? Due to interest rate? Due to exchange rate?

Due to GDP? or Due to GNP? A key reason why India’s economic growth has halved from 9% to 4.5% per year is that, in search of inclusive growth, the courts and legislatures have increasingly made legitimate business difficult. Indian economy is

described as a economy which is tenth largest in world by nominal GDP and third largest in terms of purchasing power parity. This economy was growing at a fast pace in recent past has been plagued by such a slowdown that our currency

Economy of a country depends on number of factors which are divided in three general categories like Primary, Secondary and tertiary. Independence-era Indian economy till 1991 was based on a mixed economy which combines the features of capitalism and socialism resulting in interventionist policies and import substituting economy. This economy has always given much emphasis on agriculture which is called as backbone of the nation as the percentage of people dependent on it is approximately 60% of the total population. But the misery is that its contribution in total GDP of the nation is less than 10%.

Looking on the various sectors that contribute to make the Indian economy like agriculture, trade, services etc. In context of Indian economy, the most important

one is the trade aspect that consists of import, export and various business processes. Trade aspect alternately tells us about the industrial growth of a nation and its dependence on other nation. Recent slowdown of economy is attributed to the fact that import has exceeded the level of export that lead to heavy deficit of balance of trade.

The most important factor in the slowdown of Indian economy is the poor infrastructure, low growth in

agriculture production and industrial activities. After the independence there were many changes that have taken place in almost all sectors of the Indian economy, especially in the liberalized period of the Indian economy.

22

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FB With the liberalization in the licensing policy many of

Still the various policies in this economy are formed

the Indian firms entered into business with individual

on the influence of certain groups which have political

or with joint ventures to do export and imports

ground. Throughout India, if we consider the scenario,

business. Many of the foreign countries which were

failure to keep a check on the NPAs resulted in the

members of the trading blocks like SAARC, WTO

results as follows: Bad loans have currently increased

entered

imports

to Rs 33,486 crore in 2014 which when compared to

business. Our country is rich in number of metallic and

Rs 19,832 crore in 2013 and Rs 17,272 crore in

non-metallic minerals which has given a strong base for

2012.Excerpt from “The Statesmen�

into

India

to

do

export

and

the rapid industrialization. But there are few types of natural resources which are present in scarce amount like petroleum, natural gas, gold, silver etc. So to fulfil the gap created by this scarcity India has to buy a heavy amount of this resource from foreign players who are also in the arena of global power fight. Also the global currency is now provided with the base of gold reserves of a country. These factors have made the India, a nation heavily dependent on import from different countries. This heavy import always exceeds the margin created by our exports which are mainly concentrated in

the field of raw material. So to have a control on the issue of petroleum, it has to explore alternatives like LNG and other alternatives. Economic condition of a country is also decided by the physiographical, social and political condition existing in that nation. Looking from the perspective of India one can easily ascertain

India, a nation with vast manpower, sufficient amount

of natural resources, suitable natural location for global trade has good amount of potential which can make it a superpower. But to achieve the top slot, it has to look at various loopholes present in its planning section as well as implementation section. But if a nation has to exist and maintain itself as a leader in economies, it has to keep his pace with global standards.

There are certain other aspects that it can adopt to reduce its dependence on global economy

such as

increasing its R&D share, establishing good relations with its neighbours so that it can reduce its heavy expenditure

on

defence

sectors,

planning

economic- centric schemes which try to maximize the capital part along with social responsibility.

the upheaval condition existing due to its distorted

Politicians have to understand the fact that time has

relation with its neighbours, dangerous internal

come when they have to realize the importance of the

condition due to rampant corruption, narrow minded

moment and resolve their differences on economic

politics involving communal forces etc.

issue and bring out a plan that can boost the factors

Politicians involved in making the framework for Indian economy are not ready to understand the seriousness of the situation due to their vote bank politics.

23

responsible for growth of domestic industries. These policies must be freed from the local influences and have a global outlook.

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Domestic Systematically Important Banks (D-SIBs) : An analysis of long term benefits

By

Anshu Kumar, XIME Bangalore

Taking lessons from global credit meltdown, Reserve

such a small time. These series of events lead to busting

Bank of India came up with “Frame work for dealing

of the bank and engulfing the whole economy, if it is

with Domestic Systemically Important Banks (D-SIBs)”

large and interconnected with financial system of that

and soon it became a common topic of discussion among

country.

Indian Bankers.

The present frame work asks for additional common

D-SIBs are banks of national economic importance

equity tier (CET 1) requirement ranging from 0.2% to

whose failure can severely strain the entire banking

0.8% of risk weighted assets (RWA). Selection of such

system. These banks would be subjected to differentiated

banks would be done in a 2 stage screening process.

supervisory requirements and higher intensity of

Firstly, Indian and foreign banks having assets beyond

supervision based on the risks they pose to financial

2% of Indian GDP would be taken as sample.

system.

Secondly,

These measures are

associated weightage, their systematic importance shall

part

of

Basel

norms on Risk

based

on

following

parameters

and

be calculated:-

III Su-

1.Size-40%,

pervision, to be implemented in phases, during

2016-2019.

The ultimate aim of this categorization is to

minimize the

possibility of

financial crisis and instill financial

discipline among top Indian banks. In 2008 crisis, it was

2.Interconnectedness- 20%, 3.Availability of Substitute -20%, 4.Complexity- 20%

observed that a handful of large, highly interconnected banks, when

subjected to financial distress, end up

Accordingly, a level 1 to 4, systematically lower to

with system wide collapse and may need public money to

higher

rescue the

and applicable norms will be implemented.

financial system.

systematic importance will be created

The main sources of funds for any bank are equity and

Apart from capital

deposits. As a bank expands and grows, its deposits also

quidity surcharges, tighter large exposure re-

grow, but share capital remains the same, resulting in

strictions, will also be

abnormal equity to deposit ratio. Banks also see it as

frame work.

inflow of cheap credit as equity is costlier due to risks associated with it. So, depositors start playing a dual role

adequacy, norms like liincorporated in the

The first list of such banks is expected to be

of fund supplier as well as risk taker, though

declared by RBI in August, 2015 and the frame

unknowingly. But, in case of any loss of confidence, it

work will be implemented and monitored in a

may lead to a situation of Bank Run, and the bank is

phased manner, starting in April, 2016. It would be

unable to cope up with the demands made by depositors

an annual calculation exercise, done on basis of

as advances made to customers can’t be reclaimed in

annual financial statements of selected banks.

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FB From recent banking developments, we know,

In-

Analysts and bank experts are in opinion that following

dian public sector banks are sound in terms of capi-

banks would make it into the final list- State Bank of

talization, but need capital injection from

India, Punjab National Bank, Citi Bank, Standard

govern-

ment to meet additional capital requirement.

But, they are poorly capitalised, when compared to banks of other

emerging economies. Analysts believe 9%

would be comfortable level for any Indian bank. But, India’ largest lender SBI and 2nd largest public lender Bank of Baroda, just touch this magical numbers, with 9.5% and 10.1% respectively. On the other hand private banks enjoy a better position, as their range is 12-14%.

Merits

Baroda.

These guidelines should not prove to be a problem for banks profitability, as most of Indian banks have capital which is well above the proposed regulatory level.

Banks would be in a better position to absorb severe

losses, with more equity, thus ensuring financial stability in economy. Also, these measures will act as a buffer for government as banks will not depend on it to mitigate losses and would discourage banks to take irra-

The main merit of following these frame works would be - enhanced ability to withstand stress situations, a bank’s financial

Chartered Bank, ICICI Bank, HDFC Bank and Bank of

fighting

strengths

and

competitiveness.

However, it will lead to higher lending rates and lower deposit rates. Thus, loans would be available only for safe customers. Meeting capital requirements of public sector banks, which would be in tune of Rs. 2.4-2.8 trillion, will be a huge challenge for banking industry and government. However, private banks will benefit as they enjoy better current capitalization and internal accruals.

The prime motto of this move is to reduce the frequency and severity of banking crisis.

tional risks.

Higher capital requirements are an essential instrument in strengthening the financial stability of the banking sector. They ensure that banks are in a better position to absorb risks and compel banks to improve their risk

control, as they bear the costs of those risks themselves.

The result will be that banks will reduce their risks and will control them more effectively. This will strengthen the banking sector. Banks with a healthy business model will be able to keep up their lending and remain competitive.

The Financial Stability Board has studied how banks

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FB practically respond to increased capital requirements in reality. And, it has found two key things. Firstly, they reduce their risk-adjusted balance sheets (lending less risky business) and secondly by raising equity. Both these measures make a bank, more efficient and safe in functioning.

Testimony of the benefits of increased capital adequacy is the two papers released by the Financial Stability Board and the Basel Committee on Banking

Supervision. Both papers conclude that stronger capital and liquidity require-

ments bring significant benefits for banks- and doesn’t affect much adversely, as perceived. These researches emphasize that such measures will help to insulate efficient banks from problems faced by weaker ones. These measures would result in reduced frequency, severity, and public costs of financial crises.

So, the decision of Reserve Bank of India (RBI) to categorise important banks as Domestic Systematically Important Banks (DSIBs) would help Indian banking industry in a long run and ensure a robust financial system for longer times.

It is a justified reform made to make Indian banks more competitive and safe.

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FB

Behavioral Finance By

Utkarsh Bisen, TAPMI

In finance the first thing which we hear is that people are

too many choices lead to decision paralysis.

rational “wealth maximizer” who seek to increase their

Behavioral Solution: The design of a default option is

own well being. According to conventional economics

critical for overcoming decision paralysis. Many studies

emotion has no part to play in the financial decision a

show that the low participation rates in company pension

person makes. But reality is not so simple. Humans as we

plans in USA can be increased by changing the default

know are the most irrational animal. I can say this

option. Normally, employees in USA have to make an

because from purely logical point of view the odds of

active and conscious choice to join a pension plan: They

winning a lottery is very slim for a ticket holder

have to tick a box if they wish to join unlike in India

approximately 1 in 146 million. But still we thousands of

where it is a default option. This makes people to join as

people buying tickets. These anomalies prompted

not joining will require conscious effort from their side.

academics to look to cognitive psychology to account for

As a result the same can be implemented in USA as well.

the irrational illogical behavior which the modern finance has failed to explain.

Focusing on trees and ignoring the forest

Behavioral scientists in finance combine economic

According to economic theory, investors should not worry

theory and psychology to find

about the single securities in their portfolio but should

why people make

decisions which they do and what

look at the whole portfolio performance. However, in the

makes them deviate from the

real world, that is not how stock

rational thinking as stated in

investors

books. They specifically look

investments. What happens in the

into the investment decisions of

investor’s mind is something called

people and mark out the various

mental accounting. By doing mental

biases which prevent them to

accounting investor tends to measure

follow the capital market theory.

the success of each investment

In practical terms, people should

against the initial price of each

keep aside their emotions and instincts while investing.

investment. So while selling a good

Here we will talk of few behavioral traps that plague the investors. They are: Choosing by not choosing, Looking at trees and ignoring the forest and Focusing on the familiar.

Choosing by not choosing One of the main challenges for investors is choice overload. Large numbers of choices have two main effects on the investment decision making. First, people tend to rely more on default option.

27

performing

stock,

they

usually

feel

handle

happiness,

their

selling

underperforming ones bring them mental suffering. As a

result investors cling on to a single stock and create strong psychological barriers to losses. Thus in order to recover their initial investment they tend to hold on to loss making stocks way too long. In other words, they do not consider the future earnings of their investments, compare them with other investment options in their portfolio, and buy and sell accordingly. Instead, they keep holding on to the stocks hoping for a miraculous change in their fortunes.

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FB Behavioural Solution: An effective way to get ar ound this investment tr ap is to make a conscious and ciplined effort to shift the perspective away from

dis-

mental accounting. In other words, avoid caring about individual

securities, and look at the portfolio as a whole. In short risk measures and return expectations should be at portfolio level.

Sticking with the Familiar People have a habit of focusing on what they know, and they tend to rely on information that is available or bered easily. The same tendency affects

international investing. While the conventional wisdom of capital mar-

ket is to diversify your portfolio as much as you can, investors largely invest in their known or per IMF, the share of domestic

remem-

familiar sectors. As

equities in US portfolios in 2005 was 87 percent; for German portfolios, 72 percent.

This points to the fact that they are under-diversified, implying that they are over exposed to risk for a given level of returns, or they are letting go of higher returns by

investing in perceived lower risk known sector.

Behavioural solution: Fr om the point of view of investment, the

familiar ity bias can be counter ed by making

conscious efforts to diversify one’s portfolio as widely as possible in terms of countries, asset class etc. Another way is to educate and make oneself aware of all the various aspects of investing rather than focusing only on few known information. Since this is difficult for

private investors, financial advisers and the mutual fund industry emerged to deliver

decision support and easy-to-use tools.

The rise of behavioural finance demonstrates that taking into consideration cognitive biases into account one can help investors improve the performance of their investments, and may be help remove the irrationality in the market.

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FB

Financial Sector Legislative Reforms Commission By

Introduction

Pratik Mishra, IIFT

It was in this backdrop that the Financial Sector Legis-

In the aftermath of the 2008 economic crisis,

coun-

lative Reforms Commission (FSLRC) was constituted

tries all over the world were faced with the challenge of

under the Chairmanship of Supreme Court Justice BN

understanding what went wrong. Even with scores of

Srikrishna in March 2011 with the mandate to review

regulating institutions overseeing every aspect of the fi-

the existing financial-legal system and suggest

nancial system, the combined wealth of the world was

measures to correct weaknesses in the current scheme

cut down by $15trillion. How this could happen was the

of regulation

central question that grappled countries. The Financial

Crisis Inquiry Commission was constituted in America

KEY RECOMMENDATIONS AND IMPACT ON

and the Financial Policy Committee in the UK with the

FINANCIAL SECTOR

mandate to examine the causes of the crisis and suggest

UFRA

measures to

The FSLRC submitted its report in October 2012 and

correct them. Among the key recommen-

dations was the overhaul of the financial regulatory

recommended a complete overhaul of the regulations

framework in these countries. And thus came into being

governing the Indian Financial sector. Among its key

the

recommendations was the creation of a draft “Indian

Financial Policy Committee in UK and major

overhaul of the financial system in America. Also most

Financial Code” which will eliminate more than 20 of

of the acts and regulations governing the financial sector

the current 60 odd laws governing financial markets

in India are archaic and date back to the Stone Age. For

in India and will merge some of the most powerful

example- Indian monetary policy’s pillars rest on the

Indian Financial Regulatory bodies into one “Unified

Reserve bank of India Act, 1934. Similarly, the Insurance

Financial Regulatory Agency” body.

Act of 1938 governs the Insurance sector in India

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FB In effect, UFRA would subsume the functions of

However, it should be pointed out that the FSLRC

Insurance Regulatory and Development Authority

does leave room for the Governor in the form of a

(IRDA), Securities and Exchange Board of India

veto against any decision of the MPC.

(SEBI), Forward Markets Commission (FMC) and

CONSUMER PROTECTION

Pension Fund Regulatory and Development Authority

Consumer interest protection is one of the key

(PFRDA). In addition, there would be 6 other agencies

concerns of the Committee. India’s current laws do

including three new ones which the FSLRC has

not provide for compensation to buyers of financial

proposed.

products even if they have been fraudulently enticed

UFRA and RBI would have to present a cost-benefit

into

analysis

Once

recommends the disgorgement of proceeds from

implemented, the regulation would have to undergo

such misleading sellers and recommends the

performance reviews every three years by an external

creation of the Financial Redressal Agency (FRA)

agency and a call would be made on the efficacy of

to attend to consumer complaints in the financial

the regulation.

sector (except the banking sector) across the nation.

for

any

proposed

regulation.

Market Securities Market Insurance Pension Forwards Market

buying

these

Market Size(in $ billions) 1068 66.4 33 264*

products.

The

FSLRC

Regulator SEBI IRDA PFRDA FMC

ROLE OF RBI

All financial service providers are required to set up

The monetary policy of India is under the exclusive

internal

control of the Governor of RBI. The Deputy

redressal and to educate the consumer of their right

Governors provide their inputs but it is up to the

to seek redressal. If the consumer is unsatisfied with

Governor to either reject or accept their views. An

the appropriate handling of their issues by the firm,

example of this is when the RBI sets interest rates

they can approach the FRA and will be eligible for

bimonthly. These rates are released by the Governor

compensation in case the seller of a financial

after taking the ‘unbinding’ advice of the deputy

product has adopted unethical means and violated

governors. The FSLRC proposes that formulation of

regulation

monetary policy be moved from the top-down

CHALLENGES

approach currently followed to a board-driven

Justice Srikrishna points out that transition from

approach where a Monetary Policy Committee (MPC)

multiple agencies to a unified authority would re-

would be responsible for making decisions. This

quire induction of talent on a large scale. He further

Committee, however, would comprise of members

adds that streamlining would be the next issue.

nominated by the Government. Simply put, this would

There would be regulators who are opposed to the

give the Government a say in the formulation of

existence of a unified agency. Bringing them on

monetary policy. The underlying principle here is that

board would be a challenge.

of accountability. Since the Government alone is responsible to the Parliament, it should have a greater

say, on what the monetary policy encompasses.

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mechanisms

for

consumer

grievance

FB While it may be too soon to tell whether all recommendations of the FSLRC will see the light of day, one thing is certain. The FSLRC has highlighted some noteworthy issues about the current financial institutional structure.

However, whether the Government is successful in bringing all stakeholders on-board and execute reforms is something only time will tell.

ANALYSIS & CONCLUSION .In trying to amalgamate various regulators into one body, it has tried creating the much-needed synergy in regulation. By proposing to make RBI and other regulators responsible to the parliament, it has tried to make them answerable to the people of this country. In increasing the weight of the government in formulating India’s monetary policy, it has tried to bridge the gap between the country’s monetary and fiscal policies and has made the government further answerable to the people of India. In the words of Dr. Raghuram Rajan, though he himself is one of the biggest critic of the committee’s recommendations, “FSLRC report is one of the most important, well researched as well as

well-publicized re-ports in Indian Financial History. The report’s influence will be felt for many years to

come”. Enough said and done.

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FB

Middle East Crisis Threatening India's Growth Story By

Sainath Zunjurwad, SIMSREE

Once upon a time the Middle East was the channel

at snail’s pace, derisively called the ‘Hindu rate of

through which the knowledge of Asia flowed into

growth’. However the nineties ushered in reforms

Europe. The Arabs had a flourishing culture and they

and liberalization, and our economy took off. And

had built an empire that stretched from the Indus in

with it, the country’s thirst for oil increased

the east to the Mediterranean Sea in the West. They

multifold. It has a ravenous appetite now and it is

were well versed in Warcraft, arts, and science. They

increasing at a greater rate than its GDP.

had almost every element needed to brew the cauldron into a great culture. But somewhere along the lines,

the Arabs faltered. The promise that they had dissipated

into

internal

strife,

extremism

and

dissipation of scientific thought. Thus, the Arab world plunged into the blackness that has been its hallmark for the past several centuries. And this people would have been forgotten and become a mere footnote in history books, but for the miraculous discovery of that potent liquid-Oil, which Arabia had in abundance.

It has come to be accepted that the fate of this nation

is tied to that of the Middle East. Something happens in far off Iraq, and its tremors are felt in Mumbai’s Dalal Street. The Indian economy’s engine is run on the fuel of oil supplied by the Middle East. The government has to consider all the permutations and combinations before taking a decision that can have a bearing on the political situation in the Middle East. It has had a passive strategy, but needs to actively

With the discovery of this oil,

pursue its foreign

the world’s interest in the af-

the deserts of Arabia, if for

fairs of this land was reinvigor-

nothing else than to safeguard

ated. Americans and Europeans

its interests.

set up gigantic companies that

At the heart of the matter is

came about to dwarf nations in

India’s need for a stable

terms of their monetary and economic power. The

Americans needed oil in

plentifuls to grow their

economy. The Americans

came in and propped up tin pot

policy in

dictators, and made

sure they had tight control over the oil fields. Where troublemaking rulers came to power, they had them deposed or assassinated. Where the locals

rebelled,

they were put down with cruelty. There have been popular uprisings. The Middle East continues to be a hot cauldron with many unknowns, and

treacher-

ous paths. It is a very unstable region, to put it mildly.

source of oil. It has achieved much in the past 20 years, since the economic reforms. Its economic growth took off in the previous decade, the middle class expanded and so did its

income levels and living standard. The country had been able to bring a lot of people out of poverty on the back of these structural reforms, which trickled down to the poorest of the poor. Our economy is booming. Defense, IT, retail all sectors are in the fast paced growth phase. Our financial systems, capital markets,

regulators are becoming more and

Like the Middle Eastern peoples, another nation had

more efficient. In terms of purchasing power parity

risen from the ashes of colonialism. India. But unlike

our economy is the third largest and would become

the Middle East, it chose the path of democracy,

the second largest by 2030. The world believes that

secularism, and development. For many years, it grew

we might well be the next

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superpower.

FB The common man is just learning to dare to dream, we have a multitude of opportunities. India can become the growth driver for the world. We are on the way to prosperity.

dictated the prices.

China is going the same way as the west. It is cautiously

exploring in the region for its own

constant supply. India, if it is to survive in these

However, all this could come crashing down because

turbulent times, must get its act together. Find its

of a single linchpin-petrol. Our nation has not yet

own constant supply, make deals with ‘sober’

stabilized to the extent that the European countries

nations, and actively promote its interests. It needs

have. We haven’t yet developed the

buffers

to take a hawkish stand when it comes to its energy

necessary to protect us from the external shocks. With

requirements. It need not go down the same path as

the recent turbulences seen in Iraq, the tussle between

the west, it can enter into a fruitful relationship with

Iran and the USA, unending clashes among the

one of the stable players. Rather than being

Israelis and the various broken splinter groups, and

antagonistic, it could be collaborative. Be it any

Palestine factions. With a single flare up, the whole

way, by hook or crook, by negotiation or

region will go up in flames.

coercion, it must get its supply lines in place.

Our oil supply will be hit. Oil prices will go sky high. Its demand will far outstrip its supply.

The

railways,

aero

planes, buses trucks would shut down. like

Common food

commodities

items,

vegetables,

toothpaste would become scarcer. India will enter into a

hyperinflationary

period. Riots would start all over the country. With decreasing petrol supply, VALUABLE petrol would have to be used by the security forces to quell civilian PROTESTS. The nation might become vulnerable to external attacks.

This

is

indeed

a

nightmarish

situation.

One

linchpin-petrol. We ensure its steady supply and we are safe. This has been the ‘guiding principle’ behind the West’s active interference in the Middle East affairs. They simply could not leave it to the nomads to ensure smooth supply. They colluded with the sheikhs

and

sultans,

paid

hefty

bribes

and

systematically looted those countries. That’s what is behind the anger felt in Arabia against America. Not

only did they take over those oil fields, they also 33

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