Financial bulletin november issue

Page 1

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The Financial Bulletin

FROM THE EDITOR

Money Matters Club IBS, Hyderabad Estd.—2005

Dear Readers,

Editorial Enquiries Contact Money Matters Club Contact No +918187896530 +918187896351

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Newsletter Coordinator

Dr. Sudhakar Reddy

Saurav Kumar Singh +91 8187896530

This issue narrates the story of India’s optimistic growth along with the favoring external situations such as the fall of crude oil prices and the advantages of recycling of iron and steel.

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It gives me the immense pleasure to come up with the November 2014 issue successfully. We are happy to announce the winner of “Article of the Month” award, Saptarshi Sarkar from SIBM, Pune for his outstanding write up on “India and its journey towards an optimistic growth rate”.

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But here we also hear the stories of shadow banking and the differences of developed vs emerging economies of this world. This issue and contains a wide variety of information, some of which are raiding us regularly and some which we should know for the benefit of ours and those who believe in us. For every information increases the horizon of knowledge and knowledge gives wisdom and a good wisdom makes you stand at par from others.

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FB

THE QUANTATIVE EASING PROGRAM OF U.S. By Pushpanjali Mitra , Symbiosis Institute of Management Studies

It seems the whole “bailout bubble” started off with the

US’ Quantitative-Easing Program

net infusion of almost $5 trillion of money in the economy by the Federal Reserve has

After the US sub-prime crisis, the economy slowed

finally helped the US to come out of the

down, sales plunged and a recession started setting in. Then the US treasury came up with what it is known as

recessionary phase

the “bailout bubble”. An infusion of $700 billion was

Introduction

done by the US government - the

In the mid June of this year the newspapers were

biggest bailout in

flooded

the history of the US government known as TARP

with the headline – “If All Goes Well, Fed to End

(Troubled Assets Relief Program) - to shore up the

Quantitative Easing by October”. This followed a lot of

common man’s confidence and capital by buying out the

discussions amongst various economists across the world on

toxic assets of the

how this decision will impact the global

housing bubble burst was followed by a series of

economy,

financial institutions. The

besides sending the equity markets for a roller-coaster ride.

important events.

Some say that the ending of the

government sponsored enterprises (GSEs), established to

easing promises market

Fannie Mae and Freddie Mac, the

uncertainty especially because of the ongoing economic

buy up the

slowdown in the other side of the globe i.e. China, Japan

over by the Fed. Lehman Brothers, the fourth largest

and Euro zone. This article explains the concept of

investment bank of US went bankrupt. Merrill Lynch

Quantitative Easing- the most powerful monetary tool

was on the verge of bankruptcy and underwent an

which was adopted by the US government to fight with the

acquisition by Bank of America for $50billion. Bear

aftermath of the US Great Recession 2008.

Sterns was bailed out by the Maiden Lane Transactions

Quantitative Easing in layman’s term is the unconventional

created by the Federal Reserve of New York and was

supply of money in the economy by the Central Bank by

acquired by JP Morgan Chase at a rate of mere $2 per

buying assets from the commercial banks thus giving

share.

mortgage backed securities were taken

money in the hands of the people. Whenever an economy goes through a phase of liquidity crunch or money shortage,

The official first cycle of easing started off right after the

the first impact is seen on the consumption rate of goods.

collapse of Lehman Brothers; the biggest repercussion of

Since the availability of

the US housing bubble of

money in the economy is low

2007-2008 .The dual

therefore, the purchasing power of the people decreases

agenda - of maintaining the dollar’s value (i.e. managing

which hits the inflation rate of the country. Most of the

inflation) and

economies have a target inflation rate which needs to be

– led to the Fed’s consecutive 3 cycles of the QE

maintained and if the rate falls below the target, the

program.

economy can fall into a deflationary trap like Japan.

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managing the rate of unemployment


FB With the initial pumping of $1.7 trillion of QE1 (first

Impact on India

cycle of QE) in the economy the process was

Increase

in

the

Interest

Cost: The end

of

followed by an infusion of another $600 billion

during

stimulus is going to impact the yield of the

QE2 and eventually the third cycle of QE, QE3. QE 3

international bond market. In near future, there is a

was initiated with the amount of $40 billion per month

possibility that the Fed will increase the interest rates.

but then the value jumped to $85 billion. Later in 2013,

For companies which have gone for

Ben Bernanke announced a $ 10 billion tapering of the

using the route of debt will be in a problem since the

value. Then finally in July 2014 the package was tapered

interest cost will rise.

acquisitions

by $10 billion per month leading to the declaration of

ending the

program by the end of October this year.

Depreciation of the Home Currency: Many FIIs have

been investing in

the

emerging

markets

including India because of the high interest rates. The high returns of the US bonds will attract back these FIIs to the USA and this might act as one of the reasons for rupee depreciation. Setback in FII flows: As the yield of the

tr easur y

bills will increase, the spread between the US T bills and Indian G-Secs will narrow down making the debt

investments in India a less

attractive option for the

FIIs. In spite of apparent adverse effects the ending of the QE is going to have on the Indian markets, there’s a brighter side to the story too. There is a very high possibility that the QE will not have any major long term impact on the Indian economy if India is able to fix the economic situation in the right way. If India is The ending of QE indicates the improvement of the economic situation of the country. The economic factors show improvement like low unemployment rate, a stable home currency (USD), high mortgage value of the

able to work out with the

been lagging all these years like the GST bill, Land acquisition bill, temporary.

houses, stable inflation, increase in the GDP figures and purchasing ability of the country. It seems the “bailout bubble” started off by the Federal Reserve has helped the US to come out of the recessionary phase after infusing almost $5 trillion of money in the economy.

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various reforms that have

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then the effect of this event will be


FB By Vihar Shrenik Shah , IBS Hyderabad Introduction:

by scrap metal merchants owing to the value of the

Recycling can be simply defined as the use of a material over and over again. Recycling of iron and steel

is

an

important

activity

worldwide.

Main

benefits of recycling include the conservation of natural resources, as well as reduction in energy consumption and in the amount of disposable waste. It is the most efficient way to reduce the metal waste. Recycling involves collecting and reusing scrap metal and metallic wastes to produce new

metal

scrap

is

further

Prompt scrap is scrap generated during fabrication and manufacturing processes. It consists of turnings, borings, stampings and even rejected parts. Obsolete scrap refers to finished goods that are worn out, broken

or

otherwise

no

longer

useful,

e.g.

automobiles, ships, aircrafts, machineries etc. Scrap processes: Before the scrap is charged into a

focuses primarily on the methods

furnace

and technology used to recycle

for

processes

the scrap.

are

melting, done

on

certain it

like

collection, separation and sorting,

Scrap:

size

reduction

detinning,

Scrap iron and steel are major

and

compaction,

blending,

incineration

etc.

raw materials in the production of new iron and steel. On the

Collection

bases of origin, scrap metal can

This involves collection of iron

be divided into two categories:

and steel scrap from a variety of

Home scrap

sources, such

as

salvage

yards,

automobile wreckers, steel produc-

Purchased scrap

ers, and

Home scrap is gener ated within

available in different foundries in

pro-

duction process. Home scrap is scrap generated at the mill, refinery, or foundry, and is generally remelted and used again at the same plant. Home scrap never leaves the plant. Some examples of home scrap are: risers and gating systems removed from the casting after solidification of the casting, rejected castings etc.

manufacturers. This

scrap can be either home scrap

the facilities of the producer and

the form of

rejected castings,

risers and gating systems detached from the casting while cleaning it or purchased scrap, purchased from different sources as mentioned above. The value of most scrap is determined by the grade under which it is sold. The collected scrap must be transported to the processing facilities.

Purchased scrap is bought by a dealer or br oker and resold to potential users. Large goods e.g.

vehicles and fridges have historically been collected 5

Purchased

categorized as either prompt scrap or obsolete scrap.

metal or goods such as chemicals. This article

recycled directly into the

recovered.

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FB Separation and Sorting

material out of the magnetic field, allowing it to

Separation of iron and steel scrap from the other metals serves two purposes. First, it controls impurities that will alter the

prop-

erties of the iron or steel produced from it (i.e. scrap). This is particularly important to foundries because they do not use ladle refining technology. The other purpose served by separation is the recovery of additional products that are valuable and can be recycled. The separation methods commonly used for iron and steel scrap are hand sorting and magnetic

sorting.

drop free of the drum to be collected. While a magnetic separator works on the same principle, except that the magnet is located between two pulleys, around which a continuous belt travels. Electromagnet: An electromagnet uses an electric current passed through copper windings to generate a magnetic field. Electromagnets can be operated at higher

magnetic field strengths and can be turned on and off to pick up and drop items. They are used to separate scrap in stationary piles by picking up the magnetic portion of the material, but they are generally used to move scrap from one point to

Hand separating Hand separating involves the removal of components

another.

from the scrap by hand. It is most advantageous

Magnetically

when used to remove miscellaneous items from the

impurities

scrap or when handling the scrap is unavoidable,

materials attached in some way to the magnetic

such as when loading or off-loading small scrap

material

shipments. Items being sorted are usually identified.

undesired magnetic metals such as nickel and

This is used when large quantities of iron and steel scrap must be separated from the material. There are basic two types of magnets viz permanent magnet and electromagnet.

Permanent magnets are metal

alloys that, once

magnetized, retain their magnetic properties. They are used in conjunction with magnetic drum and belt separator, the most common type of separation equipment. In a drum separator a permanent magnet is located rotating stainless

steel

shell. Magnetic

material on a conveyor passing under the drum is attracted to the magnet and picked up off the

be

reasons.

collected.

In

still Non

contain magnetic

addition

other

The most common method of removing these materials is hand sorting because they are usually identified by sight. Size Reduction and Compaction

truck bodies, structural steel, and large castings,

must first be cut to facilitate handling and to enable them to be charged into furnace. Shears, hand-held

torches, and crushers are required to

cut the scrap n desired size. . Other form of large scrap such as automobile and white goods can be reduced in size by shredding. The shredded scrap can then be magnetically separated into magnetic iron & steel fractions and .

conveyor. As the shell turns, it carries the magnetic 6

will

several

can

Large items such as obsolete ships, railroad cars,

Permanent magnet:

a

for

scrap

certain stainless steels, will be collected as well.

Magnetic Separation

inside

separated

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FB nonmagnetic fractions.

be taken when blending scrap to ensure that its

Brittle items are shattered, which liberates many components previously joined together. Other products such as nonferrous metals and plastics can

be

recovered from the nonmagnetic fractions

final

composition

is

acceptable

to

the

metal

producer . 6. Incineration: Incineration is used by some scrap processors to

Loose scrap that has a high surface area and low

remove combustible materials such as an oil or

density such as lathe turnings, punching, and surplus

grease coating on the scrap as well as wood or

sheet metal from stamping is normally compacted by

paper mixed in with the scrap. Incineration can also

bailing or briquetting. Bailing involves pressing the

be used to remove volatile metals such as lead and

scrap into cubic bundles. In a briquetter, small scrap,

zinc.

such as turnings, is compacted into pockets as it

7. Melting:

passes between two

counterrotating drums. Baled

and briquetted scrap has a higher value due to the advantages It gives to the furnace operator.

After completing as these processes the scrap is taken

into

furnace

for

melting. After

melting,

impurities are removed, the molten metal is refined

In particular compacted scrap is easier to handle and

and the chemistry analyzed to determine what final

oxidizes less during melting, which results in better

adjustments are necessary for the specific type of

metal

stainless steel being produced.

recoveries. In

operator, the

addition

for

electric furnace

Increased density means fewer scrap

charges are required per heat.

billets before production of plate, sheet, coil, wire

Detinning: Recycling

and other forms in preparation for use by industrial tin

plate

scrap

generated

during

the

production of steel food and beverage cans requires specialized processors,

commonly called detinners.

In the detinning process, the scrap is leached with a hot

The molten stainless steel is then cast into slabs or

alkaline solution that usually contains sodium

manufacturers. Advantages of Recycling: Every tonne of steel packaging recycled makes the following environmental savings:

hydroxide and sodium nitrate. Metallic tin dissolves

1.5 tonnes of iron ore,

quickly, while the tin that has

0.5 tonnes of coal

alloyed with the

Iron takes additional time. Tin content of steel is reduced up to an acceptable limit of 0.03% by this process. The steel plate is relatively unaffected by the leach and is washed and baled for

recycling.

40% of the water required in production 75% of the energy needed to make steel from virgin material

5. Blending:

1.28 tonnes of solid waste

When levels of impurities are considered to be low,

Reduction of air emissions by 86%

or when the total quantity of

Reduction of water pollution by 76%

contaminated scrap

Is small, a processor can upgrade the scrap by blending it with scrap of a higher purity. Care must

7

55 kg of limestone

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FB For stainless steel mills, scrap is important because recycled stainless steel contains valuable raw elements including chromium, nickel and

molybdenum that are gathered, processed and reused in the production

process. The more scrap used in furnaces by mills, the less raw materials are required in the production process.

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FB

INDIA AND ITS JOURNEY TOWARDS AN OPTIMISTIC GROWTH RATE By Saptarshi Sarkar, SIBM Pune

Section I Reasons pertaining to sluggish growth rate (I) Fiscal and Current Account Deficit: The internal debt of the Government stands around 48% of GDP in the last two years. The declining trend of the debt ratio post fiscal 2009 has been driven more by high inflation rather than lower fiscal deficit or faster GDP growth. In the coming days, a strong commitment to fiscal consolidation will be the key to lowering India’s debt-to-GDP ratio.

(II) Volatility of High Inflation Rates: .RBI has set a target of bringing down inflation to 8% by January 2015 and 6% by January 2016 and has talked of breaking the back of inflation once and for all. Inflation is likely to head lower with international crude oil prices falling further and the winter vegetable crop likely to push prices down. Sound fundamentals are very essential for the growth of Indian economy and the RBI has probably hit the head on the nail when it said “it is actually not interest rates, but other factors that have been hindering growth”. Combating those “other factors” has been one of the key agendas for the current Prime Minister as well as the RBI Governor.

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FB

(III) Reforms being Stalled or Policy Paralysis: The state of policy paralysis in India has hurt almost all sectors in India. The key priorities being closely monitored by the PMO are financial inclusion, implementation of the GST, the Digital India campaign, rural sanitation and the Make in India manufacturing-for-export initiatives. The Government’s focus should be on consolidation, execution and ensuring that the policies are rolled out efficiently.

Source: CMIE, Economic outlook

(Figure 3)

(IV) Slow Industrial Growth in India: The India Industrial Production Index gives us a clear view about the growth and development of industries in India. The current IIP stands at around 2.5. The volatility in the industrial numbers has not really helped in devising a growth strategy for the Indian economy. High inflation and weak IIP data are two of the main causes of concern and the government has to devise ways in order to shore up manufacturing and industrial production within the country.

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FB

Figure 4

Table 2 (V) Global Economic Uncertainty: India’s economy is attached to the United States and the global economy. This is very evident from the fact that with the slightest movement of the US dollar, Indian rupee tends to react in a big way. This gives rise to volatility in the Indian economy. Even if we compare India with the rest of the world, India lies at a lowly 126 in the GDP per capita (1498.87 USD). In order to ensure a balanced growth, we have to ensure a self-sustained growth of Indian economy which is only possible through industrialization and globalization. Section II Key factors required for 9% growth rate (I) Increased productivity and efficiency: Productivity level of India has slowed down considerably in the last 2-3 years to about 2.5%. Considerable efforts and reforms should be put into place to ensure an increase of the productivity level by about 5% through a combination of structural and administrative reforms and executive actions. (II) Increase in Foreign and Domestic Investment: Accelerating economic growth requires an increase in the investment rate in India. India needs to increase its investment to around 45% of the GDP from 30% currently through a proportionate increase in the savings rate, FDIs, lower inflation and fiscal consolidation. But most importantly India needs to create a large employment pool in order to engage them in the rebuilding strategy of India and also to ensure a self-sustaining growth level of 9%-12%. Unemployment rate in India stands at 7.6% reaching an all-time high of 9.4% in Dec, 2010.

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FB Unemployment rate in India stands at 7.6% reaching an all-time high of 9.4% in Dec, 2010.

Figure 5 (III) Eradicating poverty & ensuring a healthy environment for all

Urban water 96%

Improved source Improved sanitation

54%

Rural 84%

Total 88%

21%

31%

In 2008, 88% of the population had access to improved water source, but only 31% had access to improved sanitation. So efforts should be devoted to improve the health, water and sanitation conditions in the rural and urban colonies. In 2013, the Government of India put the population under the poverty level at 21.9%. So to encounter poverty, the Government has come up with various policies and reforms in order to alleviate the poverty rate in the country and to ensure a healthy and prosperous life style for the people.

Source: www.tradingeconomics.com 12

(Figure 6)

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FB Section III Growth Plan for the Next Few Years Through the data collected during my research, we will understand that the keys factors to a 12% growth are increased investment which will contribute to an addition of 4% to the annual GDP figure, an increased productivity which will contribute to a 2% net increase in GDP and Labor Force Addition whose contribution is approximately .5%.

Figure 7

Conclusion A growth rate in Indian GDP means an increase in average per capita income from the current $92 to around $400, thereby giving thousands of Indian youth an opportunity to be lifted out of unemployment. The early signs have been quite ominous. India’s exports are expected to rise by 5.2% to $329.5 billion in 2014-15 as well as there are signs of improvement for India’s merchandise trade deficit and foreign investment inflows. The report released by Investment Bank Morgan Stanley probably sums up our sentiments: “If our projections were to come to fruition, India’s economy would pass the $5 trillion mark (by 2025), a feat that has been achieved by only the US and China thus far and would make India the fifth largest economy in the world. Accordingly, India’s consumption and investment opportunities would rise to $3.6 trillion and $1.9 trillion, respectively.” It said in a report titled The Next India: From a cyclical downturn to a structural upturn.

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FB

DEVELOPED V.S. EMERGING ECONOMIES By Venkatesh K.G

Although most researchers, particularly in finance, hold

firms,

the view that firms should not diversify into foreign

incumbents to improve their products. Well-developed

markets or unrelated product markets to reduce risk when

capital market has the ability to assess business

investors

operations and supplies needed capital for promising

are more efficient in reducing such risk in a perfect

posing

constant

challenges

to

industry

projects.

capital market, this view may need major modifications

Furthermore, an active external market for corporate

in many parts of the world where market systems

control facilitates the acquisition of inefficient firms .

deviate significantly from perfect market assumptions. For example, diversified business conglomerates often dominate the competitive landscape in many countries outside the United States. This phenomenon seems to contradict the extant theoretical argument that high levels of product diversification are detrimental to firm performance..

High levels of factors, allowing firms to develop specialized

market

capabilities and

subsequently

transact with other efficient producers at low costs, compel firms to develop expertise in specific product markets. Domestic competition demands that firms keep improving their competitiveness to avoid deterioration of market positions or the innovative edge to

Firms that develop the capabilities and adopt the

competitors. If a firm refrains from adopting an

corporate diversification strategy appropriate for a

aggressive

specific country resource environment are likely to

competencies, such complacency is likely to draw

achieve

attacks

higher

levels

of

performance.

Such

a

strategy

from

by

competitors.

resting

on

Therefore,

its firms

past are

macro-micro linkage allows us to better understand firm

required to keep sharpening their market capabilities,

capability and corporate diversification.

such as R&D skills, marketing expertise, or continuous process improvements, to meet constant

Developed Economies In these economies, such as the USA and the UK, country resources, that is factors and institutions, are

abundant and well developed. Abundant factors imply that competitive advantages would be mostly based on how well firms can maximize the benefits provided by those country resources. Abundant institutions enable firms to enjoy specialization benefits facilitated by the availability of market transaction mechanisms. Since most of the firms have easy access to various kinds of factors, they possess the ability to consistently challenge one another’s competitive positions. Strong institutions, such as antitrust regulations, facilitate the entrants of new 14

challenges. In these economies, firms have efficient access to an abundant supply of environmental resources and competition is fierce. Accordingly, firms would find it beneficial to place greater emphasis on best utilizing those resources. Low levels of product diversification allow firms to devote more attention to a single or a few

related

product

markets

to

sharpen

its

competitive edge in production efficiency or enjoy economies of scope. With a portfolio of businesses that are closely related, specific skills developed by one business unit can have positive spillover effects on other business units, resulting in lower total costs and

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FB increasing competitiveness. Because the sources of

country’s institutional environments in determining the

competitive advantages in these economies rest on

rate and development of technology, which also

continuous

contribute to developing these firms’ international

improvements

in

market

capabilities,

in-depth, specialized knowledge and skills in certain transformational

activities,

leading

to

technology

patents or consumer loyalty, constitute high levels of production

barriers

to

entry.

Furthermore,

sophisticated consumer demand also drives firms to improve continuously.

Managing a diverse business portfolio may also cause significant strain on managerial information processing capacity, negatively affecting overall firm performance in these economies, which often demands substantial managerial efforts to keep track of the dynamic competitive landscape. Besides, managers may be constrained by their dominant

logic

to

manage

myriad

of

unrelated

businesses successfully. Viewed in this light, low levels of product diversification, which enhance firms’ abilities to compete in one or a few related product markets by developing specialized resources and skills, are likely to be optimal in these economies. Abundant country resources allow many firms in these economies to command competitive advantages over most firms in other economies. Pursuing international diversification advantages

helps in

leverage many

firms’

competitive

countries.

Valuable

ownership-specific advantages developed and possessed by firms in their home countries, such as superior technology

or

valuable

trademarks,

are

crucial

components for firms’ subsequent international success. Firms may also enjoy scale or scope economies and learn from international diversification. Aided by their superior market capabilities developed within the in these economies often compete

country, firms

successfully, learn

or present themselves as valuable cooperative partners in the global arena. In a similar vein, theories of national

innovation systems emphasize the importance of home 15

competitive advantages. Emerging Economies Because the emerging economies, such as Indonesia, Russia, Ukraine, and Venezuela, are relatively deficient in most types of country resources, possession of resources becomes particularly crucial for firm

competition. Not only do insufficient factors limit country

resource

availability,

but

inadequate

institutions also mean that firms that potentially have better transformational capabilities may experience difficulty in obtaining needed country resources. In these economies, a firm’s competitive advantage can be secured by constricting competitors’ inherent capabilities by monopolizing country resources. Rather than improving production efficiency, firms can erect

institutional barriers to entry, barring competitors from the resource environments, in order to enjoy prolonged competitive advantages. This is especially the case because the government often assumes a more direct role in resource allocation in these economies. For example, a firm can succeed in competition by securing monopoly status in certain product markets, thus limiting competitive entry without the need to improve market capabilities in

technological expertise or marketing skills. Gasprom, a natural gas monopoly in Russia, represents a good example. Gasprom is described by critics as ‘a caldron of secrecy, nepotism and corruption’. Apparently relying on its political connections in erecting institutional barriers, it has been able to maintain monopolistic status amid calls for more competition. When faced with the threat of foreign entry, these firms generally resort to lobbying the government to impose restrictions on foreign direct investments or at least to

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FB impose behavioural guidelines to be observed by foreign entrants. Because the government usually assumes an active role in resource allocation in these economies, firms may benefit from using their nonmarket capabilities to co-opt government bureaucrats into their social systems through political contribution. In return, the government may offer subsidies in the forms of state contracts or monopolistic rights to these firms. In addition to political influence, these firms may overcome external capital market failures by enjoying the benefits of internal financial economies by allocating capital within firm more efficiently. Because of inadequate transaction mechanisms in these economies, firms in these economies have the incentive to transact among internal subsidiaries or related companies to enjoy internal product market. Substituting for an inactive external labour market that characterizes these economies, firms often can create an internal labour market by training and allocating talented employees internally, thus maximizing their contribution. Although firms in these economies may prefer international diversification strategy to seek foreign resources, most lack the abilities to successfully operate in other countries. Redeployment flexibility or fungibility of firms’ maximize their benefits. The competitive

competitive advantages

determines how firms may optimally

advantages of diversified firms in these economies are essentially

Institutionally based, principally built on their capabilities in fostering social ties among closed group of economic or political actor. These capabilities often are not tightly restricted to any specific product market, thus allowing firms to maximize returns across a

larger number of product markets. On the other hand, these capabilities are localized in

nature and likely to dissipate in foreign countries because firms cannot

effectively transfer their non-market

capabilities to other countries. Hence, despite their dominant positions at home, these firms often lack the global owner-specific advantages to expand to other countries.

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FB

ASSET BUBBLE IN THE OFFING?

By Sainath Zunjurwad,Sydenham Institute of Management Studies,Mumbai Raghuram Rajan was prescient when he predicted the

Industries meant that they were the deficit in the

mortgage crisis in the United States that snowballed into

economy. However, these artificial controls led to

the 2008 economic crisis that engulfed the entire world

uncontrollable rise in prices, inflation set in, and the

and set major economies back by a decade (India’s

economy suffered.

included). When such a man speaks, one listens. Mr. Rajan, who went on to become the governor of India’s Reserve Bank of India, has warned that the bells

Since the financial crisis of 2007-2008, central banks

are tolling again. A crisis is imminent. This time an asset

have strived to put the economy back on track by

bubble is waiting to explode.

lowering interest rates (by printing money) in the hope of people borrowing more, spending more, and thereby

Let us put things in perspective. What’s an asset bubble?

propping back up the businesses and refuel the stagnant

It’s the economists’ fancy word for an economic crisis.

economies. The bankers have reduced the interest rates

Or rather it is the first sign, or indicator of an impending

to dangerous lows (and the major culprit behind

economic crisis. The dictionary defines an asset bubble

bubbles, as every economist will tell you, is the

as “When the prices of securities or other assets rise so

indiscriminate

sharply and at such a sustained rate that they exceed

simultaneously putting the economies at disinflationary

valuations justified by fundamentals, making a sudden

risk as well as creating asset bubbles. This financial

collapse likely - at which point the bubble ‘bursts’ ”. All

leveraging has meant that major financial institutions

economies go through an asset bubble sometime or the

are playing a dangerous game of borrowing and buying

other. India has had its fair share of such bubbles. Most

unviable assets. And now even the retail investors seem

notably, during the times of central planning when the

to be going berserk. They are piling in the money even

government tried to control inflation by levying heavy

though quite aware that the prices of these assets and

taxes to kill the purchasing power of individuals. This

commodities are rising not because of underlying

resulted in a scenario where the individuals were the

demand, but simply because of ‘easy money’ that the

surplus sector and the profligate ways of the private

central banks are providing. They unreasonably hope

lowering

of

interest

rates),

that the central banks will continue the accommodative monetary policy and even if the banks don’t, they will get out before the others. Classic case of behavioral finance- Greater Fool Theory. The Federal Reserve of USA and the European Central Bank (ECB) are cutting down on their Quantitative easing programs (which is really a fancy word for printing money). The bubble is already in place. These actions could precipitate the bubble into bursting. This loose monetary policy was aimed at refueling growth. As the Bank for International Settlements pointed out the role of accommodative monetary policy 17

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FB was to buy time to put reforms in place. Instead, it

major cities. Booms without fundamental changes are

warned, “The time has not been well used, as continued

always a surefire sign of coming pain.

low interest rates have made it easy for the private sector to postpone deleveraging, easy for the government to

The solution to this lies in coordinated policies by

finance deficits, and easy for the authorities to delay

central

needed reforms in the economy and the financial

everybody

system.”

beggar-thy-neighbor policies. Governments are trying

bankers

of

major

seems

to

economies. However, be

implementing

to shift demand from other countries to their, rather It is widely understood that such policy results in

than changing the level of world demand. These

inflation, this is accepted in the hope that the policy will

policies try to rescue domestic businesses at the

energize the economy. However in the current scenario,

expense of foreign. Which leads to trade wars,

the prices are not just rising, they are surging. But this

sanctions and an overall debilitating effect on the world

has not been on the back of stronger demand, but only

economy.

due to leveraging. Cheap money has pushed up the prices. Capacity building has not unfortunately happened. This is a recipe for disaster.

Bubbles come and go. They are an economic certainty. We cannot prevent all bubbles, not when even two out of top ten economists cannot agree on what is a bubble

The exchange rates of Euro against other major

and how to identify one! However, what we can do, and

currencies continue to be high. There is still a lot of pain

must do is to make sure that these minor or major

in the Eurozone, it has not yet recovered. Recent news

bubbles don’t ‘burst’ into full blown economic or

doesn’t exactly make Italy look rosy. Banking problems

financial crises. That is the central bankers’ task.

in Portugal are touching France’s shores. The contagion seems

to

be

spreading again. Economists

are

getting troubled by

booms

shares,

in

bonds,

and commodities

in

the

India,

USA.

too

has

seen the stock indices

going

through the roof, with

no

fundamental changes in policies seen as of yet. The real estate bubble that crippled the American economy in 2007 seems to have come to India, with property rates skyrocketing in 18

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CURIOUS CASE OF OIL PRICE DECLINE— REASON AND REPERCUSSION By Sandeep G Y , IIM Lucknow

Introduction:

Why are the Oil prices plummeting?

The sharp drop in the oil price from a high of $114 this

Oil prices have been high, hovering around $100/

year to ~$83 is arguably the most important topic to

barrel, from 2011 and it recently touched $116

grab the attention of the policy makers and general

because of the turmoil in Iraq. However, oil price has

public alike.

fallen by 20% this year and the reasons range from a

Supply disruptions amidst global tensions in the Middle

simple supply-demand phenomenon to the resurgence

East during this year were expected to lead to an

of slowdown in the euro zone and the world’s most

increase in the crude oil prices. However, an unexpected

populous country, China.

trend of decline in the oil prices caught everyone off

Supply-demand phenomenon

guard.

The global oil market appears on the verge of a pivotal

If the prices keep on declining, it can have far reaching

shift from an era of scarcity to one of abundance. As

repercussions among the major economies, principally

the supply from the unconventional oil and gas

oil producing countries such as Russia and the Middle

revolution, the share gas technology, appears to bear

East countries. OPEC countries have been fighting

fruit, the oil imports by the US has decline

bitterly on how to respond to this unexpected

considerably. The oil production has soared to

phenomenon. Saudi Arabia is unwilling to go for

30- year high. The US share revolution has added 1

cutting down its production as it affects their market

million bpd to US output in each of the three years.

share and hence adopted for a price cut. This has

For most of the past decade, the oil market has been

resulted in a price war among these countries and

defined by severe shortage. Before 2008, the oil prices

further exacerbated the situation.

were fuelled by the surging demand from Asia,

Figure 1: Brent Crude Oil Source: ww.nasdaq.com

especially China, years of underinvestment and the inability of the OPEC to keep up with the demand. Hence, the oil price touched $150/barrel by mid-2008. However, the financial crisis of 2008 that crippled the demand across the world led OPEC to cut its production which is, incidentally, the major cut in the last six years. The breakthrough in share gas technology and muted demand led to the slump in the prices post financial crisis. But it didn’t last long.

The frequent supply disruptions in the middle-east targeting oil wells specifically to create the maximum damage in the enemy’s economy has held oil prices resolutely above $100/barrel till this year.

19

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FB The disruptions in Libya have started easing a bit over

unconventional monetary polcy,QE3 and weaker than

the last few months. Libya’s oil industry has started

expected growth in the global trade have also

pumping out oil again. Its exports rose unexpectedly by

contributed to the cut in its previous forecast.

810,000 barrels in the month of September. The tension created Islamic State in Iraq and Syria (ISIS) appears to

Deeply divided response of OPEC

ease and it is unlikely to inflict damage on biggest oil

The Organization of the

fields in the southern part of Iraq.

Countries

Earlier in this month, The International Energy Agency (IEA) has cut its global oil demand growth forecast by 200,000 bpd to 0.7 million bpd due to weaker economic growth and evidence of lower consumption. In 2015, it expects demand to expand by 1.1 million bpd to 93.5 million bpd, up by 1.2% but 300,000 bpd less than previously forecast. Slowdown in euro zone and China Another reason which has resulted in the slump of the oil prices is the slowdown the world’s manufacturing hub, china and the region with the maximum impact, Euro Zone. The World Bank, earlier this month, cut its 2014-16 growth forecasts for developing East Asia, noting that China is likely to post a lower growth due to its policies aimed at putting its economy on a more sustainable footing. It has maintained cautious optimism on the growth in Euro Zone. A possible rise in the US interest rates by Federal Reserve post winding up of the

20

(OPEC)

is

Petroleum Exporting an

intergovernmental

organization dedicated to stability in and shared control of the petroleum prices. It includes Saudi

Arabia, Iran, Iraq and Venezuela and produces 40% of the world’s oil. Its goal is to secure a steady income to the member states and to collude in influencing world oil prices through economic means OPEC is sharply divided over how best to respond this unexpected phenomenon of plummeting oil prices. They can coordinate and cut down their production, in theory, to stop this decline in the oil prices. A few OPEC nations need very high prices to break even on

their budgets for oil production. For instance, Iran needs to sell at ~$130/barrel to break even where as Saudi Arabia can afford to sell oil at $90/barrel. This divergence in the breakeven prices led to price wars among the countries with Saudi Arabia taking plunge to cut its oil price to maintain the market share instead of cut in the production.

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FB The meeting of the OPEC countries in November could bring a clear picture of the emerging scenario in the oil prices. How sustainable are these lower oil prices? Oil is still much pricier that what it was a decade ago (figure 1). And it’s entirely possible that the recent slump is temporary. It may be disturbed by any unexpected tension in the terrorist infested nations. For instance, the gunning down of Malaysian Airlines in eastern Ukraine, earlier this year, has caught everyone off guard. The oil price did fall in 2012 and 2013 as well, although temporarily, only to rise again amidst tensions in the middle east. In addition to that, if the oil prices slide further, it will squeeze budgets from Caracas to Moscow, which may lead to U.S. drillers curbing activity in the event of a "sustained pullback" below $80 a barrel (Breakeven point in US) However, if the current slump in the oil prices is sustained, it can have far reaching implications to the world economy.

21

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FB

ENTREPRENEURSHIP IN INDIA-BEHIND THE SCENES By Tarun Budhawani , Government College Of Ajmer

Introduction

Over regulation-Entrepreneurship should not be killed

"Government should play the role of a facilitator

in order to protect consumer interest. Most prominent

not a regulator of entrepreneurship." –Krishna

entrepreneurs and leading mentors in the corporate

Tanuku, Executive Director, Indian School of

world believe that there are too many roadblocks for

Business

the aspiring business personalities. For instance, Indian

Red-tapism has clogged entrepreneurship in India to

online life insurance and general insurance comparison

its finest. The Scrupulous laws made it a double edged

portal Policybazaar.com is facing the brunt of over

sword. Not only the laws but the poor labour market

regulation. The firm is allowed to earn maximum profit

and the lack of quality mentors are becoming the

of Rs 10, whether a customer is buying a policy worth

"unconventional

RS.1Lakh or more through their lead.

liquidation

factors"

for

young

entrepreneurs. Impaired government policies and

"What is the need of a regulator to fix the cost of a

byzantine laws are creating irrelevant suffocation in a

lead, it should be left to market forces," says

green park.

Yashish Dahiya, 40, founder of Policybazaar.com.

BOTTLENECKS Registration

of

Corruption-Corruption is chewing India’s economy a

company-Incorporation of a

brutally and corporate world is like some sweetener

company is very tedious and apathetic in our country.

for corrupt officials. In a global index that ranks

Here it takes almost 30 days to finish the registration

countries with least amount of corruption India

process as compare to the 0.5 days in New Zealand, 3

ranked 94th.Sometimes, people pay money to just

Days in Singapore, 5 days in US and 15 days in

hasten processes and do not ask for any undue

Russia as we can see in figure1. The delay is

favors.

generally due to lengthy list of legislations, licenses & permits and of course the corrupt bureaucrats.

FIGURE 1

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FB Infrastructure-Companies faces huge losses due to

Doing Business rankings. Even after presenting a

delay caused by poor infrastructure of India. The

liquidation petition to court it may take years to shut

facilities like roads, highways, railways, ports,

down the firm officially.

airports, are in bad state causing high transport and supply-chain costs. It is clear from figure 2 that Ministry of entrepreneurship and skill development has to pay sincere attention to the basic infrastructure of the country. The figure

below shows the

proportion of paved road in total road network of

India as well as of other Asian countries.

Indian liquidation procedure is defunct, not merely dysfunctional. Apart from the conventional problems above, entrepreneur faces several other obstacles like inflation, access to financing, tax regulations, instability in government policies, crime and theft, foreign

currency regulations and poor public

health. These regulations are forcing Indian FIGURE 2 (SOURCE-BHARAT RAKSHAK)

entrepreneurs to set up their companies outside

Poor labor market-Lack of manufacturing capability

India, the finest example is Flipkart. Government

in India has been attributed to red-tapism and

recently introduced FDI policy which did not permit

corruption, but the low productivity of labour is also a

FDI in the B2C segment. Flipkart needed foreign

big factor. Skill development has been a theoretical

investment to compete with giants like Amazon and

topic in India since ages. Most of the companies

So the only option was to split the company and take

complain about the quality of labour India produces.

the technology end abroad and raise funds through

Due to the low productivity of workers companies are

an IPO at a higher valuation after divesting the risk

"hiring slow and firing fast".

that lay largely in the operational portion.

Winding up process-While opening a company in

REFORMS

India is troublesome, liquidation is tormenting. India

India's progress is at a halt. For the continuous

ranks 128 (of 183) in the ‘resolving insolvency’ WB

growth, we need to reform some of the conventional

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FB laws. Foreign Direct Investment in B2C sector should be allowed to for m a r obust economic str uctur e. Most of the developing countries are eating fruits of FDI where as India is still counting seeds. Company laws should be simplified in or der to facilitate aspir ing entr epr eneur s. It takes 13 long pr ocedur es to register a company in our company as compare to 3 in Singapore. Liquidation process should be completed within 3 months of the petition filed in the court. Skilled labour force is a basic r equir ement for efficient pr oduction. Ministr y of Human Resour ces

Devel-

opment can work together with the Ministry of Entrepreneurship and Skill Development to upgrade the skills of the

workers by providing necessary vocational and technical training. Rural development will play a vital role in this context. Robust Infrastructure is r equir ed for the oper ational envir onment. Paved r oads, highways, better por ts and airports will provide a stable supply chain. With India spending 13% of the total budget in infrastructure and trade, it’s a perfect time for the other reforms too. Conclusion From the legal point of view, India is not the best place to start a company but with the emergence of the

Minis-

try of Entrepreneurship and Skill Development some reforms can be expected from this new business friendly government. “We will make it easier for entrepreneurs to set up businesses, thereby creating strengthening India’s growth rate. We will also create an ecosystem that fosters

employment and entrepreneurship and

makes it easier for entrepreneurs to obtain licenses and permits for their businesses. “-Sarbananda Sonowal, India’s first Union Minister for Skill Development and Entrepreneurship. If the above manner, entrepreneurship won’t be a double edged sword in near future.

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reforms take place in a legitimate


FB

THE ECONOMICS OF INDIA By Rohit Sreekumar Menon & Praveen M

Our country India has been an economic powerhouse

rupee started trading at record lows at the

from time immemorial. During many parts of world

national market and GDP growth slowed down to a

history our economy has dominated world economics

mere 4.4%, the lowest since the early months of

such as

2009. This has led many investment banks to give

In 1 AD when we had a 52.9% share of world income

negative forecasts about investing in our economy.

inter-

The situation was looking bleak and the price of

In the 1000s we had a 33% share

rupee was depreciating at faster speed than Usain

In the 1500s we had a 24.5% share, and

Bolt running a 100m race.

Although the Indian

rupee and the economy as a whole has stabilised to

In the 1700s we had a 24% share

some degree (mainly due to the elections of 2014),

From all this we can understand that our country has

the situation still looks

always been one of the richest in the world since

portant decisions need to be taken by the Indian pol-

ancient times. But since the Colonial era our fortunes

icymakers if they are to

have taken a sharp U-Turn. Many factors has led to

return the Indian growth

story to about 10%. Some measures that Indian poli-

this downfall among which illiteracy and exploitation

cymakers can take are:

of natural resources by foreign entities had played a major hand. To counter this and to disassociate itself

dangerous and some im-



First and foremost necessity for a growing

place

country like India is a stable government. Due to

Post-Independence, Independent India took every step

the large number of parties and huge population,

possible to distance itself from globalisation and

India for the past few decades have seen only

having an open market to the World. This became

coalition governments come to power. In such a

much more profound during the leadership of Prime

situation even a small party with less than 10

Minister Indira Gandhi, which and many other factors

seats in the parliament can act as a kingmaker and

such as the fall of the Soviet Union, Political

decide on the policies the government has to take.

instability etc. led to the first major recorded econom-

Most of the time they take up

ic crisis that India faced in 1991.

istries and provide benefits for their states while

from

the

Cold

war

that

was

taking

The economic crisis of 1991 changed our country

from a semi-closed economy into a much more open market which greeted foreign investment and led to the IT revolution which shaped our economy into a services based economy. Though this did lead us into a better state and helped us some sense of stability

ignoring the rest of the country. A prime example for this has been the railways, which was misused

in favour of Bihar during the time Lalu Prasad Yadav was railway Minister and then again during the tenure of Mamta Banerjee when undue favour was shown to West Bengal.

even when the whole world reeled under recession in 2008, the effects started to wear off and eventually resulted in the slowdown we have been facing since the beginning of 2013. The

25

lucrative min-

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FB 

Promotion of small scale industries is also of

Implementing the correct policies can lead to maybe

utmost importance, many of our SSIs have closed

even doubling of our current growth and greater

down in recent years due to the non-committal

investment inflow which can be used to better the

policies of the government which has led to it

infrastructure in the country which in turn will again

being unable to cope with the competition from

lead to more investment.

other International players such as China. 

Even though there are many factors that are

Privatising of public sector companies can also

currently working against us, we do have the

lead to massive growth. In India, Colleges,

manpower and resources, and now with a stable

Hospitals, public utility, transport, even many

government in the centre we may even have the

businesses such as BHEL are run by the

impetus to successfully combat this situation.

government. These companies seldom run in

Economics and the market never allows one person,

profit and mostly incur heavy losses which are

or country to lead for too long. But as the saying

provided for by the Taxpayers money. Due to this

goes “When the going gets tough, the tough get

a large income that should have been generated

going”. As Prime Minister Narendra Modi rightfully

for the economy is lost. On the other hand

said, “the time is past when we used to play with

privatizations of some of these industries have

snakes and ropes, our youth will change the world

yielded high profits, which in turn have boosted

with a click of the mouse”.

our economy. Privatising saves the money

government would otherwise spend on subsidizing them and also crease productivity. Reliance power is a classic example of a privatised public utilities company that gives high profit. 

Efficient taxation is another simple step that can greatly increase our growth. Many of these inefficient and illogical taxation on the part of the government has led to huge tax frauds and bribery which in turn is consuming the money of the

country in the form of Black Money. 

Improvement in infrastructure is also a major divide that has weakened India in the minds of foreign investors when we compare with other developing superpowers such as China.

Reforming labour laws is also a must. The current draconian labour laws such as “The Industrial Disputes Act” have only added to further tension between the labour class and higher management

and as such needs to be repelled at the earliest. 26

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WHAT ON BUSINESS? By Dani Dissosa, IFET College Of Engineering

The most important field of world and every human kind

but, condition on another side

depends on one thing to get, to satisfy, or to fulfill the

retaining

deeds of everyone .so all is going to be business .what

something that they have already acquired and

exactly the business is and how it’s going on to the peak

personalize their experience .And if goes either both

day by day. Usally people make themselves to attain

Merchandiser and customer depend on each of them.

with things that are availed from the business. Even

As heart, digital marketing point out the internal which

starting from a tooth paste up to the expensive car, is

has become both communication vehicle and a

stick with the business. Peoples depend on things and it

powerful medium as the latest tool.

can be obtained from the source that stands as business.

Now Revolution has been found everywhere and every

Exactly it is a cycle created for the consumers to make

place. So why not in marketing? That’s why it goes

everything under control and profitable. The ancient

with

business was really a makeable one because; people got

marketing be a backbone of business, but the internet

the things by exchanging of goods both importing and

stands behind the Digital Marketing. So, giving out

exporting, to the fact that was called as business on those

more space to internet and technology leads to the boon

days. Then from where the money comes into the

of Digital Market in economy. The CMO Survey found

business. From ancient India formed the coins that are

that thousands of top marketers twice a year to look for

valuable and slowly along with the revolution of the

marketing trends over time and they found optimistic

world the currency has made. This revolution of world

marketers has increased. This increased optimism is

has made a great impact on technology and it

based on positive perception of consumer trend. And

transformed to the business. Where the people stands

the consumers today totally stick with technology and

there the business exits. From 20th century the peoples

internet. So, the concept of digital marketing means

are found mostly on digi5tal platform because of the

recognizing the online nature of customer relationship

internet and online facility. Now everything has been

and deploying a story Digital Marketing strategy.

digitalized using technology and internet. Then why not

Online business and shopping made the digital

in business? The digital marketing is the trending root on

marketing more sensitive. And when customer needs to

business as for now. Starting from the existing of

get products they totally depend on advertisement and

internet upto date filpkarts big billion days was made on

so the introduction of online metrics, like click through

digital marketing.

rate (CTR) and cost per acquisition (CPA) by online

“DIGITAL

customers focus on

MARKETING”.

May

be

the

advertise has made it easy for marketing managers to TRENDING DIGITAL

MAR-

KETING&BRANDING

justify online ad spending. And this digital marketing is a term that mostly well defined, encompassing things

Nothing doubt in that Marketing is the backbone of every

like banner advertising, search engine optimization

business and that is the purpose mainly for what the

(SEO) and per click including with RSS, voice broad

business and that is the purpose mainly for what the

cast, broad cast, video streams, pod casting, blogging,

business is meant for. It has to reach to consumer.

wireless text messaging and instant messaging.

Actually, people those do business invest good amount of

money in order to acquire new customers day by day 27

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FB To me aware of that each digital marketing technology is

Everything is digitalized and people moving on with

different and they cannot all provide the same types of

the internet world and even many of health consultation

reports. In fact digital marketing is statically evolving

are made through online. Businesses that thrive online

and new technologies are being created all of the time.

today will be able to master the challenging intricacies and coveted strategies of digital marketing success. it is

And to be noticed that if people found in internet then

true that trend of marketing have changed dramatically

most of them would be in social media and market

with help of social network and proliferation of

slowly goes here. Because it automatically reaches the

devices ,applications. The customers are trying to

people whether they want or not. The Marketing have

communicate with merchants and they can easily

dramatically shifted to rise of Social media and its

connected with the customers and it fall as user friendly

devices,

he

program to make better products and improvements in

personalization of customer and merchant are typing to

the business. The social media is useful for small to

communicate safely through social media and we can

medium business who wants to use new media as a

listen and respond faster, then even before. At the same

vehicle of growth. In that sense the digital media

time this faster and personalization offers more new

marketing is found as great tool for the future business

opportunities and challenges for marketers with digital

in the field of digital world

platforms

and

application.

And

marketing it is easy to fall behind. Only digital marketing will access the

organization to the social media and

Survey of marketers & service providers:

digital marketing strategy helps to identify areas of

Capturing now:

improvement through a combination of case studies,

E-mail-71%

exercises, strategies for finding, engaging and it helps to

Search (seo & keyword)-72%

leave a concrete application for the business. Also this

Mobile marketing -50%

program is especially useful for individuals from small to

Online display advertisement-50%

medium. Sized business who wants to use new media as

Losing:

a vehicle for growth.

News paper & magazine-91% Direct mail-55%

So it shows that digital marketing can bring customer to

Broad cast (TV& radio)-54%

sellers, along with power of search engine optimization,

paid search, social media, and online advertising. it

So, these are the status according to the 2013 survey.

reflect that if technology and electronic media increases

The more the technology grows then more we lose

then we find more space for the marketing. (e.g.: tablets,

something behind. The way of digital marketing is the

laptop, note etc..,) these channels in a way that support

innovative business technique and it has to develop

digital marketing and discovering of social media

according to benefits of the customers and at same time

monitoring and data analysis can be to improve

it should stand as a pillar for the growth of country’s

marketing and product improvement activities. The fu-

economy.

ture is fully going to ruled and activated by the technology and internet, because already many of the reforms have been achieved among the society. 28

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FB

FINANCIAL LITERACY IN INDIA - AN ANALYSIS By Lokesh Arora, SIBM PUNE

Introduction As a kid I never liked reading and I had a hard time becoming literate from illiterate. But thanks to my school that I got over this hard part, and once I did I soared. And this transition from being illiterate to literate was very well handled by schools for all of us. But there is one type of illiteracy that is prevalent even in most of the adults – financial literacy.

Why is Financial Literacy important? At the March 2013 Organisation for Economic Cooperation and Development (OECD)/World Bank/ Reserve Bank of India Conference on Financial Education, it was recognized that empowering financial consumers has become a “necessity in an evolving societal and financial context” given the fact that financial literacy is low among consumers and the

The OECD defines financial literacy as –“A combination

financial landscape is getting more and more riskier and

of awareness, knowledge, skill, attitude and behaviour

complex.

necessary to make sound financial decisions and ultimately achieve individual financial well-being.” Simply put financial literacy is primarily concerned with having the ability to handle one’s finances. Financial literacy is a gradual process, it doesn’t end just with

Also, financial education not only helps in achieving one’s financial well-being, but it can also help in combating poverty and sustaining long-term growth for an economy.

imparting knowledge; its main objective is to empower

Financial literacy also accelerates the pace of financial

consumers such that they can take requisite actions for

inclusion as it enables the common man to understand

their financial well-being.

the need and benefits of the products and services

MasterCard Index of financial literacy segregates financial planning into three key aspects – basic money management, financial planning and investment giving 50%, 30% and 20% weightages respectively. The latest MasterCard Financial Literacy Index, based on a survey conducted between April 2013 and May 2013 among 16

offered by the banks. It is important for all, no matter what age group you belong to, whether you are currently studying in school or working or retired. For a developing economy like India, financially educated people can help drive its economy and counter poverty in the country.

countries in Asia pacific region, puts India at the bottom

Most of the poor in India store cash at home and

of the list with Japan being the only country to be fared

borrow money from private lenders at high rates of

worst. It also highlighted one distinct fact about India

interest. This behavioral pattern of handling their

that, the younger cohort (aged less than 30) scored better

finances worsens their financial situation, as they pay

on in financial literacy than the older cohort (aged less

high interest amounts and their savings earn no interest

than 30) scored better on in financial literacy than the

while they have a high risk of theft at home. A better

older cohort (aged 30 and above).

knowledge on how to handle their finances can transform their lives for better.

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FB How to Improve Financial Literacy? Research has shown that young people determine their attitude about handling money by the time they finish the 5th grade. Thus it becomes imperative to start imparting financial literacy right from the school. And it is not just the duty of government but also the obligation of parents, so that their children are better prepared to handle any financial crisis in the future. For the first time in India, Reserve Bank of India (RBI) entered a school campus in Patna and discussed the financial inclusion with the school children. Government is already working on improving financial literacy in the country with its various initiatives. And if you visit Reserve Bank of India’s website you can find some great and colorful stuff as a part of its Asian countries are known for their higher savings rates

financial education initiative. But this initiative has

(gross domestic savings as a percentage of GDP) as

mostly been limited to urban and semi-rural areas. RBI

compared to other countries. But the trend is changing,

needs to expand this initiative into rural areas as well.

with savings rate in India falling for consecutive five years now (in 2012-13). With increasing urban

Pradhan Mantri Jan Dhan Yojna is one humongous

population and more buying power of people now,

effort for widespread financial inclusion. On the first

savings has reduced. Now more than ever, we need to

day itself approximately 15 million accounts were

focus on rural areas to increase household savings.

opened. But for financial inclusion to happen people need to be aware of the advantages in it for them. . Further, it needs to go beyond that, as more and more complex financial products are coming up people need to be made aware of them. A financially savvy consumer is more likely to save money and compare different financial products and services before buying one. More savings means more money with banks, means more money for corporates to borrow, which further implies increased production and hence drives growth in the economy.

30

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FB Conclusion With just more than half of India’s population having a simple savings account, the first step required is to make consumers aware of the benefits of having a savings account. Then we need to impart them financial knowledge than can help them choose among a wide variety of products and services available and thus make an informed financial decision, which is also vital for the healthy functioning of financial markets. Financial literacy has long been ignored, but after 2008 sub-prime crisis it has become even more imperative and crucial to focus on it. With financial markets getting more and more complex with new products and services coming up, financial literacy will need to keep up pace with the market place. And it is hoped that with increasing financial

literacy the impact of such crises can be significantly reduced, if not completely avoided.

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FB

CAN INDIA ACHIEVE 9% GROWTH IN THE NEXT FIVE YEARS By Shailesh Periwal, IMT GHAZIABAD

The growth story so far

2012-20133. After declining to a lifetime low of

The Indian economy crossed one trillion US$ GDP

Rs68.85 against dollar, triggered by the expected

mark for the first time in April 2007 against the

tapering of quantitative easing by United States, the

backdrop of over 9 percent growth during the period

rupee gradually strengthened and closed averaging

2006 - 2008. However, economy suffered a set-back

at Rs61 per dollar for March 2014 owing to

when the growth slowed down on account of 2008

measures taken by Government and RBI6. The

global financial crisis. Just when the global economy

foreign exchange reserve has also increased from

was on the recovery path another crisis struck in the

US$305.48 billion as on April 1, 2011 to US$315.13

form of sovereign debt crisis in Euro Zone stalling the

billion as on October 31, 20144. There has been

pace of economic recovery. India was no exception to

improvement in the fiscal front as well. The fiscal

it and growth plummeted to around 6 percent for the

deficit declined from 5.7 percent of the GDP in the

period 2011-2012 and further to dipped to a decadal

year 2011-2012 to 4.9 percent in the year 2012-2013

low of 5 percent during the period 2012-2014.

and further to 4.5 percent in the year 2013-20145. The improvement in the twin deficits would

Inflation and its effect on the economy

undoubtedly lead to a higher growth rate, but the

In addition to growth slowdown, inflation also posed a significant challenge. The wholesale price index (WPI) inflation declined to 6 percent in 2013-2014

vis-à-vis 8.9 percent in 2011-2012 and 7.4 percent in

pace of recovery may be slow. Global competitiveness and Indian Economy

Burdened by the economic challenges for almost

2012-2013. The wholesale price index (WPI) inflation

past five years, India has slipped to 71st position out

plummeted to five-year low at 1.77 percent in October

of 144 nations – the lowest among BRICS

2014 versus 2.38 percent in September 2014. The

– in an annual global competitiveness list. The

consumer price index CPI) inflation also slowed down

annual list, released by Geneva based World

to 5.52 percent in October 2014 on account of lower

Economic Forum, comes at a time when the new

food and fuel cost1. Inflation is likely to head even

government has completed it 100 days in power.

lower with international crude price falling further.

The rankings are based on WEF’s GCI based on

Global crude prices have dropped to four-year low of

scores that

around $77 per barrel2. Persistent high inflation has

economy has declined in most areas assessed by the

led

Global

to

monetary

policy

tightening

and

RBI

nation

covers twelve different categories. The

Competitiveness Index (GCI) since 20076.

withholding interest rate cut to boost investment and

The

use it as a springboard to fuel economic growth.

factors for doing business in India. Also, globally,

Burgeoning current account deficit and fiscal deficit

India stands at 158 in the ranking of 189 economies on the ease of starting a business according to Doing Business 2015 report7.

The external sector has also witnessed a significant turnaround after the first quarter of 2013-2014. The year ended with a Current Account Deficit at 1.7 percent of the GDP as against 4.7 percent in the year 32

index also lists down the most problematic

THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com


FB Way forward and economic reforms coveted

the service sector.

In order to take the economy back on growth

Fourth, the industr ial sector is cur r ently

path, government first needs to contain current

witnessing a slowdown in growth on account

account deficit (CAD). The country’s CAD

delay in project clearances, slow pace of

marginally widened to $7.8 billion (1.7% of

implementation of critical reforms like National

GDP) during the first quarter of FY2015 from

Manufacturing Policy and National Electronics

$1.2 billion (0.2% of GDP) in fourth quarter of

Policy, supply side bottlenecks, high cost of

2013-2014. The deficit widened as imports rose

financing,

while export declined as rupee strengthened. One

external environment and loss of investors’

of the reasons for widening of CAD is increase in

business confidence. “Make in India’ is one

net gold import from $5.3 billion in last quarter

such program through which manufacturing

of FY2014 to $7 billion in first quarter of

sector can be revived.

2014-20158. As growth picks up non-oil and non-gold import will start picking up and will put pressure on CAD. Hence government needs to curb gold import so that the impact on rise in non -oil and non-gold import can be reduced.

persistent

inflation,

unfavorable

Fifth, the gover nment needs to impr ove the investment climate in the country. This can be done by moving all rule-making for foreign investments to one department. At present, the

foreign investment is looked into by three

Second in line is the concer n for fiscal

entities – the finance ministry, the RBI and

consolidation. The Food Security Bill has added

Department of Industrial Policy and Promotion

staggeringly to the government expenditure

(DIPP).

without any corresponding rise in revenue. The

differences to creeps into the policy and

government now has the leeway to cut oil price

clearances, at times hurting investments and

subsidy with crude oil touching at $77 per barrel.

project clearances.

This

causes

inter-departmental

Sixth, easing of WPI inflation and CPI Third, India’s growth will be largely driven by

inflation to 1.77 percent and 5.52 percent

the expanding services sector. The thrust on

respectively in October has set the ball rolling

infrastructure development, more focus on export

for RBI to reducing the borrowing cost and

of services, major initiatives for financial

increase investment. Indian businesses have

inclusion will help boosting the service sector.

been beseeching for a cut in interest rates,

The 12

th

plan proposed to sustain the IT-ITeS

which are highest among Asian nation and kept

industry’s growth momentum through creating an

unchanged

enabling policy environment, supporting SME,

consumption in a demand-driven economy. The

creating innovation fund and incubation, building

RBI is meeting on December 2, 2014 to review

world class infrastructure in identified Tier II and

policy and lots of expectations are there on .

Tier III cities etc. will give the much need push to 33

THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com

since

January,

to

stimulate


FB rate cut. Finally, ther e should be focus on implementation which is India’s weakest link. There should be a consistent, transparent and stable tax policy regime and implementation of recommendations of various committees must be done at the earliest.

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FB

SHADOW BANKING IN INDIA : A CONUNDRUM By Abhirup Chakraborti, SIIB-IB

The world of finance can be divided into two on the

was exposed during the 2008 crisis.

basis of timeline: pre 2008 and post 2008. The 2008

strong connection between the NBFCs, mutual

US recession changed the workings in finance sector

funds and commercial funds. The crisis in US and

drastically. So bloody was the recession that its after

Europe market caused the investors to pull out their

effects are still felt today in 2014. The regulators

funds in liquid and money market funds. The

came down heavily on the banks and all other

NBFCs was caught in a liquid mismatch situation.

financial institutions. Banks became more risk averse.

Since RBI does not guarantee such investments

The regulators tightened their hold on the banks in

(RBI guarantees FDs in commercial banks) the risk

terms of liquidity requirements. As a result bank

involved

lending in America is still 6% less than its 2008

considered as shadow banking operations. The

numbers. The euro zone lending is 11% less than its

inter-linkage of gold loan NBFC and formal banking

2009 peak and in Britain it plunged by almost 30%.

system is very strong. The borrowings from bank

With such reduced lending the businesses required

which is considered as liability for the NBFC

money to carry on their job. This is where shadow

accounts for 47.3% in 2012 and the assets for the

banking stepped in to fill the void. Shadow banks are

NBFCs is the loans and advances which accounts

similar to banks except that they are not under

any

for 85% given against gold. Gold is considered

regulations. According to Financial Stability Board

pretty stable collateral but the recent free fall in gold

(FSB) shadow banking is “A system of credit

price affected the collateral value of gold. These

intermediation that involves entities and activities

shadow banks aim to increase their market base in

outside the regular banking system and raises

the small and medium enterprises (SME) as loans

systemic risk concerns and regulatory arbitrage

availability for SME from formal bank is very

concerns�. For more clarity, In India Shadow banking

cumbersome. Due to low income, lack of income

operations are executed using non-banking financial

and high chances of default the formal banks deny

companies (NBFC), nidhis, chit funds, commodity

loans to the poor. The microfinance NBFCs filled

trade financers, gold saving companies, pawnbrokers

the void by providing loans at higher rates with not

and money lenders.

much collateral. In due time the number of

In recent times we have seen a lot of scams coming to

microfinance NBFCs increased and the loan

light which can be traced back to the shadow banking

granting process became more liberal. This resulted

operations and its dubious nature. The fragility in

accentuated.

Gold

loans

There was

are

also

in doling out loans to less deserving borrowers.

shadow banking lies in the way it sources its funds.

Proper due diligence to find out the expenditure of

They

the loan amount was not done. The loans were

borrow

short

term

funds

from

market

term financial

availed to fulfill social obligations which provided

instruments like commercial papers, MMMF and repo

no returns and as a result the number of defaulters

agreements and lend for long term and eventually

increased and also the number of suicides. The situ-

institutions

and

rely on

short

creating a liquidity mismatch. Also there is strong

ation became severe in Andhra Pradesh in 2006

interlinking among these institution and with formal

which forced the government to intervene and

banks. Any shock to one entity can cause the whole system to come down. This vulnerability of NBFC 35

control the microfinance NBFCs. It is not necessary

that shadow banks are bane for the country. On a

THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com


FB positive note shadow banks perform a complementary

regions such as Bihar and East/North-East receive

role to the formal bank. They increase the flexibility

very little share of the priority sector lending from

of the financial system in the country and act as a

banks. Priority sector lending is considered to have

spring absorbing any shocks to the primary institution.

low returns to the bank shareholders. The formal

They can provide secondary financial institution

banks find more profit to loan the amount to the

should the primary institutions become impaired. The

public through shadow banks rather than loaning

reason for opting for NBFCs rather than normal banks

directly to the public. This opaque inter-linkage

can also be attributed to their quicker decision making

between the formal banks and the shadow banks

ability, customer orientation, low transaction cost of

should be understood and addressed by the

their operations and prompt services.

regulatory bodies.

But the

Policies like high capital

examples in the last paragraph show that although the

adequacy ratio will only reduce the fund access to

shadow banks are messiah to the poor and businesses

the SMEs. The crisis in Andhra Pradesh in 2006

but if not properly regulated it may not be a while

shows the exploitation of the poor by the NBFCs.

before it turns into a demon. The government realized

The NBFCs did provide loans in times of need but

the importance of regulating the NBFCs and

the high interest rate made the poor indebted for life.

organized a working group on NBFCs chaired by

Such situation should be avoided by imposing a

Usha Thorat. The committee came out with

ceiling on the interest rate on instruments offered by

suggestions which would reduce the risks associated

these institutions. Shradha Scam in West Bengal

with lending by NBFCs.

exposes the modus operandi of chit funds to dupe

If the asset of a NBFC is more than Rs 100 crore then it is considered as systemically important.

the less financially literate in India. Currently the chit funds are under the jurisdiction of the state that allows such fraudulent schemes to prosper. All chit

All NBFC-D (NBFC with deposits) should be rated by

funds and other related shadow banking practices

rating agencies. Those failing to get ratings are not

should come under SEBI or another centralized

allowed to raise deposits from public.

body. Even though the shadow banking sector is

The asset classification and provisioning norms should

very less compared to its counterparts in developed

be at the same level for banks as well as NBFCs.

countries and compared to the formal banking sector

Currently for banks non-performing asset norms is 90

in India ,as per UNCTAD, India requires better

days in delinquency for banks and 180 days for

regulatory supervision based on the functions of

NBFCs.

shadow banks to reduce any scope of regulatory

Proper RBI approval is required if any change in control or major increase in shareholding is undertaken by large NBFCs.

arbitrage even if it at the cost of lower GDP growth. (UNCTAD 2011). FSB which is an advising body to the G20 countries suggests that proper checks and balance should be in place to address bank-like risks

The government should try to fund the SMEs and poor.

to financial stability emerging outside the regular

Low financial inclusion is encouraging shadow

banking system and such move should not be

banking in the less privileged regions. As per data

construed as a barrier to growth but as a safety

domestic credit to private sector is dismally small at

switch. The approach is activity specific and not

51.5% of GDP. Besides the financially excluded

entity specific. Moreover proper encouragement

36

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FB should be provided to any non-banking financial models which do not pose threat to the financial system as a whole. At this juncture when we have the US recession and Eurozone crisis in hindsight it makes total sense to put the financial system in order from the beginning else we would be looking at another bubble to burst.

37

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