1
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
Faculty Co-ordinator
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.
Sahil Kakwani For Advertising Contacts +918187896351
Can we help? For
further
queries,
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”.
subscription
advertisement :email us @ mmcnewsletter1@gmail.com You can login to http://moneymattersclub.com/
All rights reserved.
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.
Money Matters Club, The official Finance Club of IBS Hyderabad.
Happy reading!!!
Visit us at for further information.
Swarnendu Chakravartty Editor
2
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
3
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
4
various reforms that have
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
8
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
9
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
10
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
11
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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)
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
13
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
16
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
FB
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
22
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
23
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
24
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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-
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
FB
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
29
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
31
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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.
34
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
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
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com
Our monthly newsletter is circulated to all prestigious B-schools, Corporates, Faculties are reading The Financial Bulletin since last 8 years and our mission is to nationalize the magazine soon. If you wish to subscribe to our monthly newsletter then kindly visit our website and subscribe http://www.moneymattersclub.com/p/newsletter.html
THE FINANCIAL BULLETIN Money Matters Club Official Finance Club of IBS Hyderabad 38
THE FINANCIAL BULLETIN | NOVEMBER 2014 | moneymattersclub.com