Financialbulletin_MMC_IBS_Sept_2012

Issue 1,Volume 16

Dated: 30th September ,2012

THE FINANCIAL BULLETIN

From the Editors desk:

Inside this Issue

Dear readers, This newsletter brings to you a ray of hope especially at the time when economy seems gloomy and regulators are head on heels to infuse confidence in investors. Here our writers contribute their ideas and possible solutions .

Plato rightly said: "Nothing in the affairs of men is worth of great anxiety" and so is our aim to invoke you to think beyond the realms of finance and see the horizon way before others.

Happy reading!!!

Introduction of credit default swaps in India

3

Indian forex reserve: Glorious asset or future liability?

5

Retrospective taxation-

10

Implications for India’s Growth All is NOT well-An Asian

14

Perspective Inclusive Growth– An Challenging opportunity

18

India 2012– Is India Headed towards another 1991

22

Hedge Funds– A much needed stimulant

28

Economic Impact of Global Warming

31

Winner for the Article of the month

35

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T HE FI N AN CI A L BU L LE T I N

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The Team: Advisor:

Contributors: 1. Neeraj Bharti 2. Mayank Jain

Dr. V. NARENDRA Faculty Coordinator: "Coming together is a beginning, staying together is progress, and working together is success."

by Henry Ford

Dr. S. VIJAYLAKSHMI Student Coordinator:

3. Nitin Bhat 4. Aditi Vidyarthi 5. Lakkshay Bussi 6. Ashish Jain

ROSHNI NAIR

7. Shovik Kar

Editor & designer:

8. Jatin Kumar

VIKAS SINGH

9. Gurucharan

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After reviewing the final guidelines issued by RBI, it has been found that the regulatory framework under which the CDS will operate in India is quite different from the one followed globally. RBI has kept its main objective of developing the corporate bond market through introduction of Credit Default Swaps in the market keeping in consideration its role in 2008 financial crisis. We can see that RBI has only introduced CDS among the various Credit Derivatives. This is purposed to avoid complexity at infancy stage of the product. Following are the observations from the guidelines.

Firstly, the protection can be bought by only those who actually hold the bonds (except for market makers). Naked CDS by users have been banned to avoid speculation in the markets. Transfer of CDS by the buyer to a third party has also been kept under strict view so as to ensure no possibility of naked CDS. Ensuring all that through strict audit discipline (submission of auditor’s certificate) would be time consuming and lengthy that can be a discouraging factor. I think at this nascent stage speculation is required not only “Learn from yesterday, live for today, hope for tomorrow.”

from market makers but also from users so as to make market more liquid and have better pricing, as users are more updated about the financial health of the underlying entity.

– Albert Einstein

RBI has confined CDS to corporate bonds as underlying. It is a good measure initially to provide thrust to the corporate bond market, which later on can be broadened to loans/ CPs/CDs etc. CDS on Obligations such as asset-backed securities/mortgage-backed securities, convertible bonds and bonds with call/put options have not been permitted.

To make the CDS/corporate bond market more deep and vibrant such underlying must also be introduced.

Unlisted but rated bonds or Unlisted/unrated bonds by SPVs of Infra Companies are eligible for underlying obligation. It would help these companies to easily raise funds from

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the bond markets. Barring other unrated or unlisted bonds also defeats the purpose as the bonds that are low rated and have high risk need to be promoted and sold in the markets. These are the bonds that lack market. Not allowing CDS on that would hamper their development and the entire development of the market.

The list of credit events is extensive and broadly covers the necessary triggers like Bankruptcy, Failure to pay, Repudiation/moratorium, Obligation default, Restructuring approved under BIFR and CDR mechanism. Standardization of the CDS contracts in terms of coupon, coupon payment dates etc. has been asked for. Though this would ensure liquidity in the market, but may lead to inflexibility for the protection buyers who may not get a hedge as per their investment structure.

Settlement methodology mandated for users is physical where as for market makers it can be cash or physical. This is good as it would avoid building of exposures higher than the total bonds outstanding. RBI has specified risk capital charges for banks’/PDs’ bought and sold CDS positions as per underlying bonds. The capital charges are rationally “Advertising has

assigned keeping into consideration asset and maturity mismatches. RBI has asked all

us chasing cars and clothes,

market makers to report their CDS trades in corporate bonds to CCIL trade repository CCIL

working jobs we hate so we can

Online Reporting Engine. It is a good measure to avoid building of any huge gross counterparty exposures among the participants.

buy shit we don’t need.” – Tyler Durden

So it is expected that currently the Indian CDS market will operate in a stricter environment within a limited framework.

CONTRIBUTED BY: NEERAJ BHARTI MANAGER (MMGS-II), BANK OF INDIA

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Today India’s Foreign Exchange Reserve worth around 290B$. It includes dollar, euro, sterling and yen currency asset deposits, gold, special drawing rights and international monetary fund reserve positions. These are the assets under RBI and are primarily used to stabilize the fluctuations in Indian currency (Rupee) vs. dollar exchange rates and for foreign payment obligations in order to maintain the country’s credit worthiness.

“The pessimist complains about the wind; the

http://www.rbi.org.in/scripts/PublicationsView.aspx?id=14350

optimist expects it to change; the

In past the major debate has been about the most appropriate amount a country needs

realist adjusts the sails.” – William Arthur Ward

to hold in its forex reserve which is sufficient enough to fulfil country’s near term payment obligations and simultaneously it incurs the least possible opportunity cost. In 1996 Dr. Rangrajan committee emphasized that emphasis should be on payment obligations along with level of imports.

But we also need to consider the sources of this huge build up in Forex till date. It relates to foreign currency accumulation in India and the major components of foreign currency in India have been net FIIs, NRI deposits, remittances, net FDI and ECB while it is decreased due to continuous current account deficits.

Foreign Institutional investors have been the major source of forex till date. High growth

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rate of Indian economy over developed economies and favourable policies by Indian government to attract foreign capital in order to take care of rising current deficits has prompted the foreign investors to invest a huge amount in the last decade. This continuous source of investment helped India to take care of its current account deficit in terms of foreign currency requirement and resulted in rupee appreciation and reserve accumulation in the period of 2004-08.

Similarly FDI also contributed to forex reserve but its amount has been very less in comparison to FII. After global recession although FII maintained a positive trend whereas due to policy issues in India there has been a continuous negative trend in net FDI investment.

“Everyone thinks of changing the world, but no one thinks of changing himself.” – Leo Tolstoy

http://country-stats.marketline.com/ViewResults.aspx

http://country-stats.marketline.com/ViewResults.aspx

It is clearly visible through investors’ behavior that their motive to bring forex in India has been to earn superior positive returns. FII’s motive has been short term return where as FDI is possible only if investors will get a superior return for their investment in future.

Thus as already witnessed this source will bring substantial dollars in glorious periods but in future if situation worsens it would result in possible capital flight. Even then FDI is suitable for India’s growth perspective but there the major constraint has been poor infrastructure and ambiguous policies.

India’s current account takes care of two major items, net of export and import and remittances. India has been one of the largest remittance recipients from the workers

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primarily in Arab countries and USA. India received about 66B$ in remittances in year 2011. This amount has been continuously rising after 2000 and even was a major source of foreign earnings for India at the time of recession. But it is very alarming that even after a very sharp rise in remittances the total current account deficit is increasing at fast pace.

http://country-stats.marketline.com/ViewResults.aspx

http://country-stats.marketline.com/ViewResults.aspx

India’s share in global trade is continuously increasing. After 1991 crisis Indian policy was to boost export in order to build forex reserve. India’s immediate response was several policy measures such as exports promotion zones like SEZ, tax incentives and export “A journey of a thousand miles begins with a single step.” – Lao -tzu

promotional schemes. India also allowed the import of heavy machinery and technology in order to boost productivity of Indian organizations and to make them able to compete with foreign players. But in the present scenario India’s major export commodities include engineering goods, petroleum products, pharmaceuticals, gems and jewellery, textiles, agricultural products, iron ore and other minerals. Out of these commodities substantial portion is of raw materials and low value products which are converted into valuable products in foreign countries. Even today India imports advanced technology materials like electronic goods, etc whereas China exports substantial amount of electronic goods. India’s other import commodities include crude oil and related products, machinery, gold and silver.

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http://country-stats.marketline.com/ViewResults.aspx

http://country-stats.marketline.com/ViewResults.aspx

Today although Indian exports worth around 300B$ but it is still less than imports of about 450B$ and thus results in huge trade deficit. Another concern is that Indians investment in gold, a non productive asset is continuously increasing due to continuous slow-down. It is also expected that consumption of electronic goods (a major import item) will be ten times in 2020 in comparison to that in 2010.

“Both optimists and pessimists contribute to our society. The optimist invents the airplane and the pessimist the parachute.” – Gil Stern

Finally we can consider India’s external debt. It is the part of the total debt that is owed to creditors outside of India. It includes debt to government, corporations and households by foreign creditors like ECB and NRI deposits. It is continuously increasing at a fast pace.

International investment position is a suitable indicator that reveals the value and the composition of financial assets of residents of an economy and liabilities of residents of an economy to non-residents. The difference between an economy's external financial assets and liabilities is its net IIP.

Although ECBs offer attractive rates to Indian firms in comparison to lending by Indian banks but the effective utilization of that is susceptible to macroeconomic factors. A possible slow down and exchange rate risk can expose corporations’ inefficiencies in their payments which in turn can deteriorate India’s creditworthiness. Similarly although government offers attractive interest rates for NRI deposits but it earns very low interest on forex reserves.

We can conclude that although India holds a substantial forex reserves as an asset but its

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foundation is based on liabilities. To build a healthy reserve asset India needs to invest the same through a separate fund to access advanced foreign technology to build excellent infrastructure. It will attract more FDI and superior technology to promote manufacturing for enhancing premium products export. This phenomenon will control imports,

increase

Indian

manufacturers’

competitiveness,

reduce

government

dependence on FII and NRI deposits and will enhance the healthy forex reserve.

CONTRIBUTED BY: MAYANK JAIN PGDM MDI GURGAON

“Learn all you can from the mistakes of others. You won’t have time to make them all yourself.” – Alfred Sheinwold

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The audacious move on the part of the Finance Ministry to amend the Income Tax act, with retrospective effect sent ripples not only through the Indian markets, but ended up creating a sense of apprehension in foreign markets too, particularly the developed ones. Their fear is not unwarranted, since the retrospective amendment could lead to taxation of offshore transactions involving capital gains, from 1962 onwards! Almost all these are cases in which financial transactions were routed to India through some tax havens. Fresh in memory is the Vodafone case where the latter was asked to cough up a massive US$2.2 billion in taxes for the capital gains made by acquiring the Indian operations of Hutch. It’s not unknown that this decision was later turned down by the Supreme Court, giving the much needed relief to Vodafone.

Apart from Vodafone, several other companies are caught in the crosshairs of the Indian govt., namely SAB Miller, GE, Cadbury and Sanofi. All these companies are being targeted for routing transactions through tax havens for tax saving purposes. From “Derivatives are financial weapons of mass destruction.”

-Warren Buffett

Netherlands and Seychelles to the Bahamas and Mauritius, tax havens are preferred because they levy low to nil tax on such financial transactions. Such havens are generally preferred by Western investors to enter emerging markets like India, since they do not have to pay taxes on capital gains. It is to be noted that this is a perfectly legitimate method of investment and tends to benefit the investor as well as the country where the money is being invested, in this case, India. Under the Double Taxation Avoidance Agreement signed between India and Mauritius, investors routing their transactions through Mauritius have to pay taxes on capital gains in their country of domicile. All that is needed for domicile is an address and a Tax residency Certificate from Mauritius. Since there is no tax in Mauritius, the gains escape tax altogether.

(PARIKH, 2012) Post 1991, when the financial reforms opened up the Indian economy, Institutional investors poured billions into the Indian markets by routing transactions through Tax

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Havens. Funds flowed, the economy flourished, no questions were raised then. Why now? According to our erstwhile Finance Minister, the Vodafone case brought about a realization, being that the Indian Income tax framework could be flexed to a point where in a company like Vodafone could make millions in capital gains and escape without having to pay as much as a single rupee as tax. Such transactions, as estimated by the Finance Ministry, could have cost the exchequer a colossal INR 40,000 crore in the form of taxes. By adding the retrospective element, the Finance ministry is of the opinion that they can plug such routes of transactions and recover the taxes, which could go a long way in bridging the widening fiscal deficit. (5.1% of GDP, 2011-12) (PARIKH, 2012) The retrospective law is coming as part of a bigger package, well known by the name of General Anti Avoidance Rules. Going by these rules, companies can no longer save taxes by routing funds through Tax Havens. These provisions would give unrestrained powers to tax officials, allowing them to question any tax saving deal. (ET news Bureau, 2012) Foreign institutional investors in particular were worried that their investments routed through Mauritius could be denied tax benefits enjoyed by them The cynic says,

under the Indo-Mauritius tax treaty.

“One man can’t do anything”. I

Should these laws be a cause of worry for the economy? Yes indeed, since our

say, “Only one man can do

economic wellbeing is dependent on the continuous and long term flow of FIIs. Ever

anything.” - John W. Gardner

since the financial reforms, FIIs to the tune of $140 billion have found their way into our economy. (Ref: Chart 1) A quick look at some financial facts tell us that 9 out of 10 FIIs investing in India come through Tax havens and about half of them come through Mauritius. (PARIKH, 2012) With GAAR and the retrospective amendments being proposed, it won’t be long before the streams of foreign funds begin to dry up. After the announcements about the retrospective amendments were made during the budget, FIIs clearly gave thumbs down to India. This was reflected in the fact that the month of April saw a net FII inflow of mere $0.4 billion, while the month of May experienced a net outflow of $ 8 billion. (CARE Ratings, 2012) Moreover, due to the amendment in the IT act, India risks facing a bad international publicity it certainly can

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do without right now. A messy arbitration invoked by Vodafone to protect its Indian investments could send across the wrong message about India’s hostile behavior towards foreign investors. (PARIKH, 2012) With our GDP forecast hovering over 5.5-6%, fiscal deficit at 5.1% of GDP (biggest among emerging markets), Current Account Deficit (CAD), again at record high levels of 4.5%, GAAR and its retrospective implications can have an adverse effect on the foreign capital inflows. (PARIKH, 2012) To add to our woes, Fitch Ratings and Standard & Poor’s may strip India of its investment-grade credit rating, citing risks ranging from the fiscal gap to the current-account deficit. Over the last 4 years, we have seen the GDP slump by over 800 basis points, which reinforce the need for capital inflows to sustain the growth momentum in our economy. The disinvestment plan was an utter failure and there seem to be liquidity issues at the moment. With our economy not in its best phase, it is better not to upset the already jittery foreign investors by creating road blocks which impedes their investments. A sudden outflow of foreign funds in the form of dollars would cause our markets to go into a tailspin and cause the rupee to nose-dive further, making our imports costlier and worsening the CAD. “Sometimes when you innovate, you make mistakes. It is best to admit them quickly and get on with improving your other innovations.”

– Steve Jobs

As of now, the proposal has been delayed by a year. But who is to say that once it comes into effect, it will not discourage foreign investment? Typically, an intelligent move now would be to seek the opinion of major stakeholders and financial think-tanks, both national and international, to arrive at a consensus rather than blind bureaucratic implementation of policies.

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Chart 1

Source: SEBI

CONTRIBUTED BY: ADITI VIDYARTHI “The desire of knowledge, like the thirst for riches,

SENIOR ASSOCIATE CONSULTANTS INFOSYS

increases ever with the acquisition of it”. – Laurence Stern

&

NITIN BHAT SENIOR ASSOCIATE CONSULTANTS INFOSYS

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With Hongkong decreasing its forecasts of economic growth to 1-2% from 1-3% recently and so the situation in China, Japan (0.3%) and India, the Asian tigers have started feeling the effects of Global turmoil. Economies around the globe are going through some turbulent times. A majority are facing unemployment problems, debt crisis, rising costs, declining productivity, volatile markets and currencies and some are facing issues such as rising average age of its citizens. Problems are never-ending and to add to it, rating agencies around the globe add spark to fire. We talk of a globalized, rather a glocalized world

now-a-days. In such a situation, every economy gets connected to each other so

much so that it starts depending on others for its growth and development. The problem is not being connected in an intricate network, but what exit strategies do our planners have to prevent a catastrophic situation, is the need of the hour. USA and EU form the two largest economies of the World and their problems are intertwined in nature. A major blow from these regions, which are growing at a pace of snail, could severely blow “The competitor to be feared is one

the financial and trade circuits of developing nations, which boldly recovered themselves

who never bothers

from the 2008 global crisis. According to a recent report by OECD, US along with Japan,

about you at all, but goes on making

economies show a sign of fading growth and others such as India, China, Russia and Brazil

his own business

show a slowdown signal.

better all the time.� – Henry Ford

Fig. Growth slowing across Asia (Danske Bank)

Fig. China slows down, but still stronger than others (Reuters Ecowin)

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What if the major resilient economy such as China meets a contracting economy situation? China’s central bank has cut key interest rates twice since June and reserve ratio requirement 3 times in recent months to boost lending. Clearly such monetary policy actions show how much pressure China is under.

Fig. Exports numbers (Danske Bank, Reuters) The recent slump in exports from China, which is primarily due to weak demand signals generated from the debt-laden economies and US austerity measures, has pinched the World. Although China has built a huge middle-class consumer base that generates enough demand for its products, but the recent inability of this section of consumers to “Success is often achieved by those who don’t know that failure is inevitable.” – Coco Chanel

consume the finished goods has been seen as one of the reasons for a reduced growth forecast. Other main reason was the stagnant spending on Infrastructure projects.

Infrastructure contributes around 12% towards China’s GDP and drives demand for construction material, but the recent slump in sales of houses has affected the country as a whole. China, world’s second largest economy, is probably the World’s largest consumer of

metals and thus creates a positive demand for raw materials and so the

developing and emerging markets depend upon it. Its main trading countries are the US, EU, Australia, SE Asia, Africa, and Japan, from where it mainly imports metals, construction materials, food etc. Indonesia and African countries will be hit if the infrastructure doesn’t pick up in China since these countries are major exporter of metals to China. China is one of the biggest customers of South Africa for coal, but if spending on Infrastructure projects is not addressed at the earliest and if the consumer situation doesn’t change, then even South Africa could be hit to a certain extent. China recently

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projected that its economy would be growing at around 7.5% in the coming FY13, which is a setback from the double-digit growth that it enjoyed in the past. Though such a growth is really impressive during current times when economies are on the brink of contraction rather than expansion. It will be very interesting from here to see how the exports catch up in the mid of fiscal and monetary policies.

Fig. Japan’s growth forecast (Source : Reuters EcoWin, Danske Bank)

Even the situation in east is not welcoming as North Korea asks China for economic help as China is the main benefactor of North Korea, not to forget to mention here that N.K.’s “our most unhappy customers are your greatest source of learning.” – Bill Gates

89% foreign trade is dependent upon China. In the land of rising sun, Japan, the positive impact of reconstruction after the earthquake-Tsunami has waned and the problem of fiscal consolidation still persists. As the govt. has still not taken any key fiscal decisions to tighten the fiscal policies and address public debt issues, growth is all set to be in the region of 1 % only in the coming quarters. BoJ (Bank of Japan) recently cut its production assessments and said "The pick-up in exports has moderated, while production has been relatively weak”. So with India already feeling the macroeconomic pressure and other Asian biggies such as China, Japan, North Korea and SE Asia already hurt in this global turmoil due to this highly inter-connected world, all one can do is to wait for highly effective fiscal, monetary and trade policy decisions that would return the world order.

Now what about our very own India? As Morgan Stanley projects Indian economy to be growing at around 5% in the coming FY citing low private investment and poor

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government finances, “all is not well” here as well. With internal issues of Scams, political weakness, policy delays etc coupled with a persistent inflation, high fiscal deficit, low Forex reserves and weak Rupee, India is not looking in a good shape.

A major challenge for developing and emerging economies would be to design macroeconomic policies along with ensuring a reduced risk to improve investor confidence while balancing inflation, market volatility, energy prices, credit growth etc.

Governments must be cautious while subsidizing its companies so much so that the subsidies should only be given to the most critical ones. Fiscal policy must consider the damage due to subsidizing activities. Monetary policies must ensure that rising oil prices don’t become an inflationary pressure. The need of the hour is to understand and address fundamental problems through effective policy actions. Austerity measures alone can’t solve these big economic issues.

CONTRIBUTED BY: “You only have to do a very few things right in your

LAKKSHAY BUSSI SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES

life so long as you don’t do too many

PUNE

things wrong.” – Warren Buffett

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“If those who are better off do not act in a more socially responsible manner, our growth process may be at risk, our polity may become anarchic and our society may get further divided. We cannot afford these luxuries.”

-PM Manmohan Singh The Indian subcontinent, as an economy is one of contrasts. Growth has diverged across regions, leaving behind the large populous states of North, Central and North East India.

Growth has not been creating enough good jobs that can provide stable earnings for households to climb and stay out of poverty. In the agriculture sector, which employs more than half of India’s workers, growth has been an anemic 2.5% in the year 2011-12.

Government reports for the past few years suggest how growth has left behind a certain section of the population -- females, the 90 million tribal population, some SC groups, religious minorities, etc.—which are lagging behind in job opportunities, earnings, and human development. Underlying the above is the fact that our Public Services fail the poor each time and are the weakest in the poorer states like Bihar and Orissa and then “The only way around is through.” – Robert Frost

there is a certain Kerela, a state that ranks No. 1 in almost all growth indicators like Governance, health & education, infrastructure development, et al. The contrast is indeed very stark.

The 11th Five Year Plan of India (2007-2012) and the recent World Economic Forum (Davos, Switzerland, 2011) along with the above quote by Manmohan Singh are proof enough to emphasize how India has been focusing on the agenda of Inclusive Growth for quite some time now, but statistics remain unfavorable. The current Five Year Plan focuses inclusive growth in social services, agriculture, industry, services and physical infrastructure, but amidst the volley of high profile scams hitting our economy every now and then (the recent one being Coalgate), and the labeling of our ministers as ‘underachiever’ by the international media (TIME magazine and the Washington post), the issues of inclusion have taken a backseat currently at the risk of paying a huge cost in

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future.

It is crucial to mention the 5 elements/drivers of inclusive growth, namely, Poverty Reduction and increase in quantity/quality of employment, Agricultural Development, Social Sector Development, Reduction in regional disparities and Environment protection.

Each of these is discussed below.

The World Bank estimates show that 42% of Indian population is still below the $1.25 poverty line and 80% of the poor are from rural areas. Poverty is concentrated in few states (Bihar, Uttar Pradesh and Madhya Pradesh and Orissa, Chattisgarh and Jharkhand) and is concentrated among agricultural labourers, casual workers, Scheduled Castes and Scheduled Tribes. The Arjun Sengupta Report shows more staggering results in this context. The two-pronged approach of Growth and providing safety nets has made a difference over the years but certain challenges remain. Say, for example, the Public Distribution System (PDS) of providing subsidized food to BPL households needs more transparency in terms of supply-chain management. Even the NREGA scheme needs to deal with the issue of quality of employment and also social security in the unorganized sector.

“You must be the change you wish to see in the world.” – Mahatma Gandhi

The agricultural sector has seen its fair share of deficits, namely, land and water management deficit, investment, credit and Infrastructure deficit, research and extension (technology) deficit, market deficit, institutions deficit and the education/skill deficit.

Here, education/skills are the main constraints. The government needs to promote the rural non-farm sector of fruits and vegetables learning from China, Philippines and Malaysia. Also, India leap-frogged from agriculture to services with less focus on manufacturing while the late industrializing economies of Singapore, Hong Kong, S.Korea and Taiwan (East Asian Miracle) vouched by their industrial growth and are today in the league of developed economies, unlike India, even though we all started with our growth process at the same point in time.

Amartya Sen in his book ‘Inequality Re-examined’ emphasizes the importance of social sector as a driver of inclusive growth and states how Health and Education are the most

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important factors to deal with in this respect. The slow progress can be attributed to significant regional, social and gender disparities, low level and slow growth in public expenditures, poor quality delivery systems and privatization of Health and Education coupled with the ever deteriorating quality of Govt. provisioning. Some areas in India are better provided in terms of health care vis-à-vis others. Say for example, even though Kerela is not richer than any other state of India (infact it is slightly poor on the average), it still has a very wide health care which should be a lesson for all the other states. Also, the African-American population of USA even though many times richer than Kerela has lower chances of survival to mature-ages. If Kerela can do it, so can the other states. Also when it comes to health provision, the incentives have to be provided by public discussion and criticism (as seen in case of the western success stories).

Accordingly, the banks and other financial institutions in the economy have a major role to play in facilitating ‘Financial Inclusion’ which arguably is one of the most important drivers of Inclusive growth. Savings, by their very nature should be channelized into productive investments and this has not been happening in rural India. According to the Rural Finance Access survey, 87% of the poorest households (marginal farmers) do not “Far and away the

have access to credit, around 47% don’t even have a bank account, the rich pay a

best prize that life

relatively low rate (33%), the poor pay rates of 104% and get only 8% of the credit.

offers is the chance to work hard at work worth doing.”

– Theodore Roosevelt

Microfinance is a great step towards achieving this goal but over the years many corrupt practices have seeped into these institutions and there is a need to place a regulator in the microfinance space by the Central Government. Also the IT infrastructure can be employed through the use of UID cards facilitating credit transfers (cash or otherwise) into the BPL accounts.

At the risk of sounding philosophical, social exclusion is a challenge since the change in the ideologies (super-structure theory of Karl Marx) of the excluded section of the society might generate a ‘class struggle’ on their part and the conflict between Productive Forces, Relations of Productive and the Super Structure might lead to the overthrow of the reigning class. This Marxian concept though dates back to the era of Feudalism still bears relevance in the Indian context, otherwise, how else will one describe the

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Anna Hazare revolution? Therefore, the political argument is that no government in a democracy can afford to ignore the large sections of working and non-working population.

All said and done, awareness needs to be generated among the masses regarding their rights and duties towards one another and towards India as a nation. In this context, the Media industry and the NGOs can play a significant role in bringing about this change by striking a fine balance between business and journalism to support Inclusive Growth.

CONTRIBUTED BY: ASHISH JAIN WELINGKAR INSTITUTE OF MANAGEMENT, MUMBAI “Whether you think you can or whether you think you can’t, you’re right! “– Henry Ford

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India, world’s 8th largest & one of the fastest growing economies in the world, is in an economic crisis. Affected by the slowdown in the US, potential financial meltdown in the Eurozone and internal policy paralysis, India’s growth engine has hit a major roadblock. The current economic crisis in India is very reminiscent of the 1991 crisis in India which eventually led to the end of the license raj and beginning of economic liberalization. While some argue that the current economic crisis is a repeat of the 1991 crisis, others put the counter argument that the today’s economy is very structurally different from 1991.

The points of resemblance in relation to the macroeconomic indicators are unmistakable.

1.

The government borrowings for 1991 increased by 12 % annually while the government borrowings have increased by 32 % in the last 5 years (Source: FICCI Report).

“The new source of power is not money

2.

Average increase in non-plan expenditure from 1981-90 was 20% while the

in the hands of a

non-plan expenditure is rising by 30% at present (Source: FICCI Report).

few, but information in the hands of many.” – John Naisbitt

3

Fiscal deficit shows a similar trend. The tax revenue as a percentage of GDP when

compared between 1990 and present is very comparable (Fig.1 and Fig.3).

Fig 1. Gross Fiscal, Gross Primary & Revenue Deficit as % of GDP

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(Source: RBI Database) Fig 2. Current Account Deficit (% of GDP)

Fig 3. Tax Revenue (% of GDP)

(Source: www.tradingeconomics.com) 4.

The INR depreciation shows a remarkably familiar trend - just before the 1991 crisis and in the present situation. The data below shows the INR depreciation versus the USD. From Jan 2011 to Jul 2012 the INR has depreciated by 21.7 % while the INR , from Jan 1989 to Jul 1991, had depreciated by 23.5 % against USD

“Inflation is taxation without legislation.�

-Milton Friedman

Fig 4. The USD-INR Exchange Rate for the two periods under consideration

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Source: www.tradingeconomics.com) ( 5.

Even today India continues to battle high inflation. The inflation has been

consistently high over the last two decades as seen from the data below. The data below shows the annual change in CPI which is hovering around the double-digit mark.

Fig 5. India Inflation Rate since 1989 – 2011 (based on CPI)

“As sure as the spring will follow the winter, prosperity and economic growth will follow recession.”

-Bo Bennett

(Source:

www.tradingeconomics.com)

The Other Side Although there are stark similarities in the macroeconomic indicators, the Indian economy has undergone many structural changes.

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6.

The share of the service sector in the GDP has increased from 43.7 % in 1990-91 to

57 % in 2011-12. The variability of the service sector is far less than the agriculture and the industry. The services sector boosts the exports and also the trade balance.

Agriculture tends to be dependent on rainfall, and deviation in the monsoons, as we have seen this fiscal, has caused havoc with the agriculture-productivity.

7.

Foreign exchange reserves are much larger in the present day versus the forex

reserves just before the 1991 crisis. High forex reserves serves two purposes – The forex reserves are also stated in terms of months of import that it can fund. In



1990, Indian forex reserves were worth 1.8 months of imports while in the present day scenario it is worth 8.7 months of imports.

High forex reserves serves as a protection against speculative attacks against a



currency.

Fig 6. Indian Forex Reserves from 1985-6 to 2010-11

“Our incomes are like our shoes; if too small, they gall and pinch us; but if too large, they cause us to stumble and to trip”.

-John Locke

(Source: RBI Database) 8.

The exchange rate is now market determined unlike in 1990-91. Thus the INR which

was overvalued in 1990-91 is an unlikely scenario in present day as the market determines the exchange rate.

9.

The external vulnerability indicators of the economy are better than those the 1991

crisis period. Debt/GDP ratio, Debt service ratio, short-term debt and concessional

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debt as a percentage of GDP are used to track external sector vulnerability. Foreign inflow of funds is also a measure of estimating the external sector vulnerability. This includes both FIIs and FDI.

Fig 7. External Sector Position since 1990 to 2011

Whether it’s Google or Apple or free software, we’ve got some fantastic competitors and it keeps us on our toes. – Bill Gates

(Source: RBI Database)

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Conclusion Even though the structural aspects of the economy may have changed, the challenges for the policymakers have not subsided. The current economy poses major challenges w.r.t managing fiscal deficit, taming inflation and boosting infrastructure spending and corporate investment to sustain high growth. If fiscal deficit is not controlled, government borrowing in international debt markets will get very costly. Owing to the ballooning fiscal deficit, credit rating agencies had decided to downgrade India to junk status and IMF showed severe concerns about India’s rising fiscal deficit. The recent approval of FDI in multi-brand retail and aviation is a much needed reform. The hike of diesel prices and cap on subsidized LPG will help rein in the growing fiscal deficit. This portrayal of normalcy returning to the fiscal deficit to the rest of the world and will help the govt. in borrowing at lesser rates. Also the government needs to stress on oil & gas projects and infrastructure projects for sustaining growth. Unless the infrastructure shows signs of improvement (indices like HSBC PMI and IIP) there is hardly any scope for a substantial rate cut by RBI as it will fuel inflation (already stoked by increased diesel prices).

I wasn’t satisfied just to earn a good living. I was looking to make a statement. – Donald Trump

CONTRIBUTED BY: SHOVIK KAR MDI, GURGAON PGPM 2011-13

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Hedge funds have always been a hot topic for debate amongst financial regulators worldwide due to their highly risky and speculative nature. Even the country of its Origin i.e. US is not able to give a precise definition of hedge funds; they have remained undefined, unregulated and unregistered as per the federal laws. Amongst the various kinds of funds catering to different strata of the society, hedge funds are specifically designed to cater to HNI’s or institutional clients.

Hedge funds use a wide range of investment strategies to maximize their financial gains.

These funds use a plethora of investment strategies ranging from equity, fixed income, commodity trading advisors, so on, depending upon the way they trade, risk management and their involvement in the portfolio. These funds aim at achieving high returns regardless of the underlying trends in the financial markets Till just a few years ago, hedge funds were in their nascent stage in India in terms of an efficient regulatory mechanism as well as market participation. Being a tightly regulated market, it has failed to catch the attention of large investors and as a result, the entire Why did I want to win? Because I

Indian hedge fund industry has been reserved at around 50-60 major funds. Lack of liquid

didn’t want to lose!

long/short hedge funds, nonflexible regulations for shorting stocks are just a few reasons

– Max Schmelling

to be blamed for the repulsive nature of the investors. On the regulatory front, the protectionist view of SEBI has limited the hedge funds’ leveraging power. Imposed restrictions on the redemptions would not only masquerade a liquidity risk for a given stock and the market, but it might adversely affect the investment climate. Conservative norms such as mandatory registration and licensing regime goes to show an interim approach where SEBI is more focused on tactical regulation in order to address imminent issues. The need of the hour is of regulations which are holistic, proactive and account for underlying investor’s incentives so that it can provide reasonable boundaries without constricting creativity. Further, SEBI needs to develop a local expertise to regulate complex or more systemic issues. These few loopholes in the structure are not doing any

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good in molding a congenial environment for the wider range of investors.

On the encouraging side, gradual developments have started to offer the kind of strategies that can attract big fishes in this industry. The Industry structure has undergone a large scale metamorphosis where there is a greater diversity of strategic mandates as compared to earlier times being dominated by equity-based funds. Changes such as the evolution of short-selling laws over the last few years have helped to make India an attractive region for hedge funds. Recent steps taken by SEBI of giving consent to seven alternative investment funds to conduct business in the country has infused a sense of optimism in Indian Markets.

No other hedge fund region in the world has undergone such a transition as India over the last few years. Before 2004, there were only a handful of hedge funds investing in India, and then the ‘Big Bang’ happened. Hedges started their mad rush for Indian gold.

Between 2005 and 2007 the industry grew at a break-neck pace with more than 100 percent increase in assets year-on-year.

“Winners take time

But markets were badly hit by the financial crisis; strong inflows suddenly turned into

to relish their work,

massive outflows and hefty profits became steep losses. In 2008 the assets under

knowing that scaling the

management in Indian hedge funds saw a dip by more than 70 percent - with murky

mountain is what

returns of minus 50 percent.

makes the view from the top so exhilarating.“– Denis Waitley

Tackling the turmoil, Indian hedge funds came out with stronger fundamentals and today they form as one of the most promising sectors of the global hedge funds industry.

In 2009, India was one of the best performing regions in the hedge fund world, delivering excellent returns of 53.61 percent and in 2011 India continued to be in the healthy state in terms of year-to-date returns. Currently, hedge funds manage around $4 billion (around Rs. 20,600 crore) in India.

The Indian hedge fund industry continues to appeal, and as India’s economic fairy-tale unfurls, the investors would certainly find Indian hedge funds providing diverse investment options and excellent growth prospects. Moreover, few recent progressive

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events such as the launch of more nimble India-based hedge funds – predominantly from Asia as opposed to the West – provide a positive outlook to the global investors.

On a whole, hedge funds are here to stay in India. Holding falsified notions against hedge funds won’t do any good .The current scenario where India-focused hedge funds have outperformed other emerging markets in Q1’2012. The biggest gains in EM hedge funds were from funds investing in India, with the HFRX India Index gaining +18.8 percent during the quarter, outperforming Indian equity markets by 600 bps. These astonishing figures accentuate the fact that the hedge funds offers the best way to capitalize on the exceptional growth opportunities that India has to offer.

No doubt there have been positive amendments offered in type of money coming in, instruments traded and fund domiciles which offer the vital ingredients for hedging to become a blooming yet sustainable story. But still it’s too early to say whether all these changes are for the better.

Although this industry is still in its mushrooming stage, it has gone through a baptism of fire and has already set some incredible trends which promise an out of the ordinary “Workshops and seminars are basically financial speed dating for clueless people.”

-Doug Coupland

perspective, and much more.

CONTRIBUTED BY: JATIN KUMAR, BATCH OF 2011-13, DMS, IIT DELHI

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An intrinsic calamity called Global warming is increasingly becoming viral across the world through multiple means. This natural global peril has been supposedly expected to end up in a severe glooming to the earth in the offing. No much solid preventive measures are taken against this serious phenomenon anywhere. The prevalence of this geographical climatic variance also menaces the variance in the economic climate of the globe to a greater extent. This clearly depicts the direct relationship between these two contemporary consequences.

The awareness of this issue is debile across the borders since people are still skeptic in understanding the grievous factoid behind. They hardly empathize that terrible increase in the average temperature of the earth’s surface from the recent past would end up in extraordinary economic disorder in the near future. Also, no large scale studies have been unleashed to emphasize the importance of this realization among the countries and the “If you work just for money, you’ll never

common inhabitants. Some scary statistics have been emerging by certain scientists in the

make it, but if you

recent years from various countries and many global scientific brains are still working in

love what you’re

determining the actual consequences hidden behind this deathly earthly happening.

doing and you always put the customer first,

Though the economic life of the world is relying upon multiple concerns of the sphere,

success will be

the substantial neurons for survival are generated by agriculture which is indeed the

yours. “– Ray Kroc

anchor of economic ramification. The global warming has indirect harms to the agriculture by gradually depreciating the arable lands and thereby overall food productivity rate would end up in belittling throughout in the offing. Due to uneven extreme climatic changes, the food production would be the severe victim throughout.

There will be a direct impact on timber and other value added wooden production due to slowdown in the growth of the trees. The sequent consequence is obviously the fall in the global exporting and importing of related market.

Scientists also keep stating that further increase in the global temperature would cause

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the excessive melting of ice blocks in the Polar Regions which would result in the terrible increase of earth’s water level. Consequently, the coastal regions would undergo complete diminution and catastrophe of people over there would likely to happen. Also, marine lives would be descending to a greater extent which would end up in the decline of fishing economy. On the other hand, certain other regions of the world would become completely dry and water scarcity would reach its peak. Again, this would terribly affect the livelihood of the people with severe aftermaths. Similar other effects in almost all possible means to engender abysmal impacts on all businesses and investments across the globe in all fields. These economic impacts would reverberate throughout the world.

Economists are getting into serious contemplations on this issue and landing up in foreseeing jeopardizing effects to occur in the offing. They believe that this drastic change in the global temperature will push the global GDP to fall down. They would indirectly cause harm in the growth of global infrastructures. Energy and retail sectors would happen to fall in vain. There are also possibilities of lack in the potential of human resources across the world owing to their poor health and unexpected catastrophes.

“The behavior of any bureaucratic organization can best be understood by assuming that it is controlled by a

Similar related disasters in all means will circuitously affect the global banking and financial flow in heaps of sectors. All these effects would result in huge joblessness globally. In fact, developing countries are more vulnerable to these imminent extreme conditions than their developed counterparts due to serial trickling in their growth rate.

secret cabal of its

Preemptive measures are mandatorily needed to stay safer from the upcoming global

enemies.”

disorder.

― Robert Conquest

This threatening global situation could even have the possibility to devastate future economy and the entire forthcoming generation as well. So, people should never ever consider it as a partisan issue by imbibing politics in it. With the help of United Nations, all countries should work together in formulating the plans and strategies so as to minimize these impacts of climatic disorders in affecting the economic clouds. Certain efficacious initiatives like SEZ, insanitary restrictive industries in infrastructural arena should be excessively encouraged globally to minimize the cosmic effects.

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Need of the hour is to reframe the economy holistically by sticking to the principles of the ecology. All humans on earth are now supposedly cornered to agonize the effects of this environmental perturbation over financial conglomerate. If no call is admitted even in this high time, serious economic hitherto would buttress to its superlative shape. Also, it is a potential fuss across the continents which should again be treated like any other deathly dire epidemic disease of earth and collective contribution should be alarmed to forgo the imminent historical economic recession.

Go Green in ecology and Get Sanity in Economy!

CONTRIBUTED BY: GURUCHARAN RAGHUNATHAN PGPM (1 YEAR) VANGAURD BUSINESS SCHOOL, BANGALORE If you did not look after today’s business then you might as well forget about tomorrow. – Isaac Mophatlane

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WINNER OF THE BEST ARTICLE FOR THE FINANCIAL BULLETIN -SEP2012 NEERAJ BHARTI MANAGER (MMGS-II), BANK OF INDIA

To win without risk is to triumph without glory. – Pierre Corneille

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“You can change only what people know, not what they do.” ― Scott Adams

All rights reserved. Money Matters Club (The official Financial Club of IBS Hyderabad) To subscribe to a personal copy do write us on : financialbulletinmmc@gmail.com Send feedback to : feedbackfbmmc@gmail.com

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MONEY MATTERS CLUB (The official finance club of IBS, Hyderabad) is inviting articles for its newsletter “THE FINANCIAL BULLETIN” for the OCTOBER issue, 2012.

“THE FINANCIAL BULLETIN” has been one of the proactive newsletters of IBS, Hyderabad and has climbed the ladder of national platform by making an Illustrious mark. We Appreciate Creativity and Skill of delivering the knowledge of finance in one’s own words as we are coming up with an open platform for all keen writers to come with their talent .

Submission Guidelines:     

"The pen is mightier than the sword" - by Glancey Jonathan

  

The articles will include contemporary topics in the world of finance and economics.

The articles have to be submitted by 15th of the month to the following emailid : financialbulletinmmc@gmail.com The articles should not exceed 1000 words.

The name of the file should be: your name,college/organization with post_topic name The article should be in ‘Times new Roman’ with a font size of 12 and spacing of 1.5pts between the lines.

The articles should be justified with 0.1pts indent on both the sides and sent as word document only Relevant pictures and graphs that the writer requires has to be included in the article Please mention the references where ever necessary

Rules:   

There is a strict plagiarism check and the articles which are not adhering to the prescribed standards are not published in the newsletter.

Article can be written by one person or jointly but not more than 2 on a single article A passport size picture of the writer/ writers should be attached with the article along with their name. We welcome your efforts and hope you would make the best use of the open platform.

Prizes:-THE BEST ARTICLE WILL BE AWARDED BY THE COLLEGE.

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