Financial bulletin_mmc_nov_2012

Issue 1, Volume 18

The Financial Bulletin

MONEY MATTERS CLUB, THE OFFICIAL FINANCE CLUB OF IBS PRESENTS

Dated 30th November 2012

The stalled Global Recovery

Quantitative easing

From the editors desk Dear Readers,

Advisor Dr V Narendra Faculty Co-ordinator Dr. S Vijaylakshmi Student Co-ordiantor Roshni Nair Editor Hemanta Poudyal

This November, we have witnessed the much awaited US elections coming to an end with Barack Obama looking forward to four more years as US President. India is now focusing on the effect of this outcome in its economy and the economy of China. With China as a competitor, India’s decrease in trade deficit is a matter of concern. Know more in this volume of newsletter where we have focused on the macroeconomics Also, with the disappointing results of 2G auction, we ponder on how India looms over the darkness of corruption. This issue has insights on the Black Economy in India and its presence in every form of Indian society. From the view of global recession, any measures taken by the Government is under the purview of the people so we do question as to why is quantitative easing an option for reforms most of the time - is it really a boon to the economy or not.

We have writers from Indian B-schools sharing their insights on this and many other financial topics.

Happy Reading!

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TH E F I NA NC I A L B U LLE T I N



The stalled Global Recovery - is this time different



Quantitative easing - a a curse



Will mobile phone operators become the new age bankers



Slump in Indian exports widens trade deficit with China in 2012



And he moves “forward”



Quantitative Easing III: Boon or bane for US



Black Economy



Finance Vocabulary



Crossword

blessing or



Rahul Bakshi



Rini Kothari



Thousif Mohammed A



Surbhi Khanna



Shweta Sultania



Souvik Dey



Nilaya Mitash Shanker



Saurabh Paul



Shailaja S

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CONTENTS

CONTRIBUTORS:

TH E F I NA NC I A L B U LLE T I N

THE STALLED GLOBAL RECOVERY : IS THIS TIME DIFFERENT Introduction One more global economic crisis, one more recession but a lot more observations, explanations and reasons on how this one is different from all previous ones and how extraordinary measures are required to solve this one. But as the history tells us that “there is no free lunch” and the statement

programme. We will analyze this as well how various crises can be linked to this borrowing spree of nations and people hoping to rollover the payback infinitely.

The Crisis and Recessions and Depressions The addiction to borrowing is something that has survived the test of times from Government funding wars to politicians using populism for votes to

remains valid in all times. The Governments seems

nations The current crisis, the old wine in the new bottle, the old movie packed with the new characters, the

leveraging

their

currency status to borrow from the world. The empirical data also

indicates

correlation borrowing

the

huge

between

high

times

and

individual

recessions. Critics would argue

borrowers replaced

that the high borrowing was the

by indebted

result

of

recessions

as

nations, people

Governments try to grow their

facing foreclosures

way out of the recession but

and falling incomes to Nations facing austerity measures and falling GDP

situations like Greece suggest that endless borrowing is not a solution to a developed state, rather it’s a highly productive economy and self sustainable

to think the opposite. You can borrow endlessly, pay the interest regularly and everything will be fine.

But that’s not the case as shown by current crisis in

economy with proper control on borrowings and related transparency in disclosures and auditing that lead to sustainable growth.

Europe. There will always be a time in your

Understanding Government’s Psychology

borrowing calendar when your borrowers will take

We have seen how various Governments and nations

note of your huge borrowings, your low revenues

have reacted to crisis and recession in our long

and ultimately refuse to lend you. But why do

history. But why do they behave that way. Why

nations come to this point, why don’t they correct

instant pain relief is preferred over long term

midway and adopt a more sustainable borrowing

treatment. The answer lies in the fact that

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TH E F I NA NC I A L B U LLE T I N

Government is made up of humans and as all humans in times of crisis they will only think about how the crisis can be resolved for the time being rather than taking steps to eradicate the causes to prevent

reoccurrence of crisis. So the mentality of

treating the symptoms rather than the causes is a major reason for the way Government behaves the way it behaves. Look at the subprime crisis in 2008 -09. The US reaction involved a mix of providing cheap sources of funding, buying junk securities, making bigger banks buy bankrupt institutions. But what was done to address the cause which was huge borrowings made by home owners who during crisis were facing foreclosures because of the falling property market. The property bubble was fuelled

How Current times are different from 2007-09

by borrowing pushed in by Banks as well as public institutions like Freddie Mac and Fannie Mae. The Government also turned a blind eye because the process helped a lot of Americans buy their first house.

We can see how there is a complex relationship between maintaining welfare state but also taking care of the sustainability as well as the trust of the markets, investors and citizens in the fiat power of the nation. Moving on to what we are facing now- European debt crisis where a lot of nations have lost the faith of investors and hence either the borrowing markets are inaccessible or they have to pay huge coupons on their bonds. Compare this to transaction between two people with one borrowing from the other. What if the debt or earnings drop or he starts lying about his financial condition or he defaults on one interest payment. Obviously the creditor will either ask for more yields or will stop lending. This leads to inference that the behavior of Governments in times of crisis is no way different from how common individuals behave.

The current crisis, the old wine in the new bottle, the old movie packed with the new characters, the individual borrowers replaced by indebted nations, people facing foreclosures and falling incomes to Nations facing austerity measures and falling GDP. The other similarities include people selling their houses while in current times Governments are selling public assets to fund their deficit. People in 2007-09 and countries today are trying to reduce their budgets while Financial Institutions are at receiving end in both times, they were laden with crappy home loans in 2007-09 while this time it’s the crappy sovereign loans. So the times have changed but the basic characteristics remains the same. But the things that are different cast of spell on how to react to these events. In 2007-09 US came out with various liquidity measures to reduce interest rates thus growing out of the recession but last 5 years experience shows that inspite of three rounds of QE and zero interest rates the economic activity has not picked up. Unemployment is close to double digits while GDP growth rate is in lower

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TH E F I NA NC I A L B U LLE T I N

single digit. A contrarian call has been taken by Germany where austerity measures have been suggested to reduce the nation’s debt/GDP ratio to a more sustainable level so that they can access credit market and run a sustainable budget. The process is painful and thus criticized but it is treatment of cause for the long term rather that the symptoms for the short term.

Conclusion The current crisis and previous ones are different yet so similar. The common thread that runs through these is the borrowing phenomenon either by people or institutions or sovereigns. Hence the solution lies in controlling this borrowing spree through regulation, laws and education. This would lead to sustainable and strong growth for the nations as well as people.

- RAHUL BAKSHI IIM INDORE

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Quantitative easing - A blessing or a curse?

Introduction Quantitative easing (QE) is an unconventional monetary policy tool

As another round of Quantitative easing (QE) by

used by central banks to stimulate the economy when conventional the Federal Reserve is making monetary policy has become ineffective.

To stimulate growth when the nominal interest rate is very low, the

headlines, people are proving skeptical that it would increase discretionary spending. With

central bank may implement QE by purchasing a predetermined amount continued lackluster growth in of bonds or other assets from financial institutions.

The need for QE can be traced to the U.S. real estate bubble, which burst in 2007, and to the more-recent sovereign debt crisis in the Euro zone. When the toxicity of subprime mortgage instruments came to

the job market and a sluggish economy despite the previous two rounds of QE, it is time to raise questions whether this unconventional monetary

light, the U.S. equity market plummeted and financial institutions policy is really a blessing or a suffered huge losses. curse. This article talks about The central banks responded to the crisis by unprecedented levels of the effects of QE and seeks to QE. This led to a sharp increase in developed-market government debt compared to the much lower levels of debt in emerging markets. This also illustrates why emerging markets became a target for excess

justify whether the use of QE is warranted in the current economic conditions.

liquidity.

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TH E F I NA NC I A L B U LLE T I N

Need of QE in the current economic conditions Since 2008, spending in the economy has slowed sharply due to the crisis. The American economic recovery is important from the perspective of achieving global economic recovery. The relative lack of inflation at present gives the Fed room to act on helping the employment scenario.

According to a dismal employment report in September 2012, the unemployment rate remained above 8% and employers could only add 96,000 jobs to payrolls last month. This is well below economists' forecasts of 125,000 jobs.

inflation levels and export competitiveness.

The more specific effects of these cash flows on emerging markets are: 

An increase in liquidity will further aggravate

the inflation to unmanageable levels in emerging markets like India. 

Increased supply of the dollar will improve its

export competitiveness. This will have an adverse effect on emerging markets, which are more dependent on exports. 

QE facilitates ‘currency carry trade’ in which

speculators borrow money at low interest rates and invest it in developing countries at a much higher

As the inflation is below the official target of 2 per

interest rate. This will have the destabilizing effects

cent for both the Fed and Bank of England, QE is

of rapid currency appreciation and asset bubbles.

expected to jump start the economy through stimulus spending.

Currently, the Fed’s concern is that the sluggish economy would result in deflation which is a bigger threat. The housing market in the U.S has experienced a deflation of about 30% since the housing bubble burst. Due to deflation, people are hesitant about buying homes until prices start rising.

The skepticism among home buyers causes the housing prices to fall further in a vicious trend.

Effect on S&P 500 prices QE tends to pump up the prices of stocks and commodities. By forcing interest rates lower, QE makes bonds less attractive and stocks seem like a better alternative. This effectively inflates a false stock market bubble that could burst once the intervention ends.

Hence, the U.S Fed’s launch of QE3, which will pump $40 billion into the US Economy each month, is aimed at reducing the unemployment levels and reviving the housing sector.

Impact on emerging markets QE leads to surplus credit in developed markets.

This surplus flows to the emerging markets and has an adverse effect on their currency exchange rates,

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Effect on Employment With quantitative easing and better ďŹ nancial conditions in place, businesses were expected to be more willing to spend, thus improving employment prospects.

However, unemployment levels have remained stubbornly high over 9% and the population participation rate in the labor force has decreased.

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Effect on Housing Market The Fed has mentioned that QE has been implemented to support mortgage lending and housing markets with lower interest rates. But according to the data released by S&P Indices for its S&P/Case-Shiller Home Price Indices, all three headline composites – the national composite and the 10- and 20-City composites have ended the first quarter of 2012 at new post-crisis lows. This shows that QE has clearly failed to recover the housing sector.

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Conclusion With the use of QE the Fed has not been able to reduce unemployment or create recovery in the housing market.

Another round of QE will add to the already enormous national deficit. Even though the interest rates are already at historic lows, businesses and homeowners are still having trouble borrowing as banks have not taken an aggressive stance on lending. Additional QE may fail to achieve the desired result of boosting economic growth.

Another risk is that the banks and other investors may take the money and invest into assets like shares and commodities, rather than lending it for more productive purposes like business investment.

The massive amounts of flowing into emerging markets will lead to skyrocketing levels of foreign investment into these emerging markets, resulting in an overvaluation of the their currencies and damaging exports.

Also, further QE may add to our problems when the Central Bank has to unload the bonds it has purchased.

RINI KOTHARI

This may drive up the interest rates and stall the economic

MBA (2012-2014)

recovery just when it has finally taken off.

SIBM PUNE

Ultra-easy monetary policies such as QE can be a threat to the functioning of financial markets. Temporary inflation, as a result of QE causes wage and price adjustments and erodes the real value of household debts.

Thus, we can conclude that, supply of additional liquidity through QE is a questionable solution towards resurrecting today’s economy and, not a panacea in creating sustainable demand.

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Will Mobile Phone Operators become the New Age Bankers?

Much competition in telecom sector has reduced the Average Revenue per user for mobile service

providers.

Inorganic

Growth is costly in this sector as it

“Banking is essential to

wireless

telephone

services

provider in the Philippines and

a modern economy.

is a subsidiary of Philippine

Banks are not.”

Long Distance and Telephone

is very capital intensive. This has

—Edward Furash

led Mobile Network Operators

(1993)

Company (PLDT). Smart has been widely appreciated for its role in product development

(MNO) to find new avenues of

targeting the people at the

growth. Mobile banking proves to be the next big

bottom of the pyramid (BOP) market. Smart

opportunity for mobile phone carriers. Even

Communication Inc.’s launched Philippines’ first

though many banks provide some or other forms of

mobile banking service called Smart Money in

mobile banking solution, the penetration of mobile

2000. However, the service witnessed widespread

banking is still in nascent phase in many

adoption only in 2003 with the introduction of

economies around the world. Mobile phone

micro-payment and money transfer. Today, Smart

carriers can fill this gap by providing a portfolio of

Money provides basic current account facilities and

banking services. In addition to it, mobile banking

is jointly operated by Smart in alliance with Banco

by MNO has the potential to bring basic banking

de Oro (BDO), one of the Philippines largest banks.

and financial transactions services to unbanked

In this joint venture, Smart Communications acts as

consumers in the world.

a transport system and hosts around 20 million mobile customers, while BDO’s role is that of a

Mobile Phone Operators as bankers Most of the action in Mobile Banking is happening in developing countries. Mobile banking has huge potential in developing countries where a major part of the population belongs to the unbanked

retail bank providing normal transactional services to its subscribers using the full range of cash and debit card services. Smart’s major source of income in mobile banking is from the SMS charge that is levied for each transaction.

sector. The high penetration levels of mobile phones and low transaction costs involved in mobile banking will fuel the growth for these services. Philippine’s Smart Communication Inc and Kenya’s Safaricom are front runners in mobile banking.

The Smart Money service is provided with a personalised

card

issued

under

the

Master

Card banner, that could be used anywhere a normal debit card could be used. The customers’ mobile prepaid account is coupled into a bank account held

by Banco de Oro so that the user is effectively

Smart Communications, Inc. (Smart) is a leading

operating a BDO account using the phone as the

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TH E F I NA NC I A L B U LLE T I N

transaction medium. Customers can deposit money into his account at any of the Smart or BDO offices or with a range of accredited retailers who had agreed to take deposits. Deposit had to be completed with an acceptable ID. The customer could withdraw from a bank or Smart cashier or accredited retailer in exactly the same way as depositing cash. For retail purchases, the user has two options. One is to use the debit card, in which case the shopping is done similar to purchase of product using debit card. The other alternative is when the retailer initiates a transaction request through a Smart mobile phone terminal. The customer will receive an authorization request via SMS. Once the authorization is done, the retailer and customer accounts are updated and the customer receives an acknowledgement of the transaction via SMS. Finally, Smart Money also allows the transfer

used it.

M-Pesa depends on a network of small shop-front retailers, who registers to be m-Pesa agents.

Customers come to these agents and pay them cash in exchange for loading virtual credit into their phone. Virtual Credit can be swapped and transferred between mobile users with a simple text message and a system of codes even if the receiver is not a subscriber of Safaricom. The recipient can take her mobile phone to the nearest outlet to cash in whenever she wants by swapping her text message code back for physical money.

Success of M-Pesa has lead to opening up of more m-Pesa agents in Kenya and these shops now outnumber the bank branches in Kenya. The success of Safaricom in Kenya underlines the fact that Mobile phone operators can be the new age bankers.

of a credit balance from one customer to another.

The customer initiates a text message indicating the amount to be transferred and the Smart Money

Future Prospects Currently, in different parts of the world, Mobile

customer to whom the transfer is directed.

The mobile phone carrier Safaricom is a leader in mobile banking in Kenya. They have changed the rule of game by providing banking access to anyone who are their customers, irrespective of whether the person holds a bank account or have a permanent address. The revolutionary Mobile Money Transfer service known as M-Pesa or mobile money was launched in 2007. The cost for transferring money using M-Pesa is significantly low compared to traditional transfer process. It costs only 42c to transfer $500 through M-Pesa. The success was almost immediate, as $100,000 was transferred within two weeks of the launch of the program. By 2010, fifty percentage of Kenya’s population had Page 13

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phone carriers or Banks are either going solo or they are going hand in hand in providing the mobile banking solutions. In the long run, Carriers going alone might face problem because they can’t provide the full fledge banking service as they are limited by banking licenses. They might also face stiff competition from mobile phone carriers who have partnered with bank as the partnership helps them to provide a portfolio of services which the solo mobile phone operator can not provide.

On the other hand, banks going solo can provide more services by allowing the consumers to download third party software for mobile banking. It is more practicable compared to the former approach because it allows the introduction of compelling new value propositions to end-users without involving mobile network operators. Similar to Carriers going solo, the banks going solo will face competition from banks who have partnered with mobile phone carriers which will provide them greater cost-savings and foster innovative new services.

The future of mobile banking clearly lies in the partnership between the banks and MNO. There are two options for the banks and MNO- either they can go for an exclusive partnership or an open partnership. In exclusive partnership, banks and MNO enter in to a joint agreement to provide mobile banking and payment services. This partnership greatly reduces the coordination costs and improves the user experience by providing expanded menu of services. However, an exclusive partnership between banks and MNO results in targeting a very limited set of subscribers as the intersection between subscribers of the mobile company and customers of the bank involved in an exclusive partnership is very low. It is not sure whether the cost involved in forming partnership can be recovered from this model. In open partnership, a large number of mobile carries and banks partner with each other to provide services in a shared platform. By forming an open alliance the banks and carriers, can save the cost involved in investing in infrastructure and developing proprietary software.

Conclusion Cross-industry convergence between mobile carriers and banks can transform existing businesses and provide compelling value proposition to the customers. While each of the models has its own merits and demerits, open partnership between mobile carriers and banks will result in sustainable long term growth in the future.

- THOUSIF MOHAMMED A IIM RAIPUR

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Slump in Indian exports widens trade deficit with China in 2012 Indian Exports to China is an integral part of the

billion increase in 2011, pushing the total to $73.3

bilateral trade relations between the two Asian

billion against $16.7 billion in 2012. Although

countries, India and china. Indian Exports to China

there was trade deficit in the year 2011 which piled

focus on mainly primary products which comprises

to $27.07 billion, even under this situation Indian

of iron ores, slag and ash, plastics, organic

exports to China went up by $23.4 billion.

chemicals, and cotton.

The lion's share of India's exports to China, in vivid contrast, is raw materials. The top two products, copper and iron ore, nearly combined half of India's total exports in the year ended March 31, 2011.

Present Scenario However, the India-China bilateral trade which was the largest contributor to the country's overall gap between exports and imports, flourished till last year is now facing a downturn in 2012 with At present, iron ore constitutes about 53% of the total goods which India exports to China. The other items that have potentials are marine products, oil seeds, salt, inorganic chemicals, plastic, rubber, optical and

medical

equipment,

and

dairy

products.

Past trade relationship with China The bilateral trade registered a $12.2

According to the Indian government data, in a little more than a decade, China has moved from India's

overall trade declining to $55.6 billion in the first ten months, while trade deficit for India has ballooned to $23 billion.

seventh-largest source

India and China both have

of imports to its largest

emerged

source, overtaking the

positive

as

the

biggest

economies

in

United States, Germany

bilateral ties, but these trade

and Japan.

figures which are caused due

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to reduction in exports of India, have recently scored trouble in relationship.

Many other countries; U.S., Brazil, and Russia are also running large trade deficits with China. But India's concerns with trade deficit because of reducing exports are especially sensitive; given the countries are neighbouring rivals with clashing strategic interests. India is increasingly worried about China's influence over Indian Ocean shipping lanes, while China is wary of India's oil-exploration in the South China Sea. The India's trade woes have become a serious economic threat for the nation. The country's current account deficit which overall measures the balance of trade with the world was 4.5% of gross domestic product, an all-time high.

This scenario has contributed to a sharp depreciation in the rupee which

affected exports and has put enormous

pressure on India to attract foreign capital. And also as a result, this is discouraging the Indian exporter to market their product in the Chinese market because the returns from that are relatively poor.

Chinese goods are flooding into the Indian markets from heavy industrial equipment to laptops to cosmetics. According to the Indian government data, in a little more than a decade, China has moved from India's seventh-largest source of imports to its largest source, overtaking the United States, Germany and Japan.

It has been found out that the India's struggle to expand exports to China isn't only the result of Chinese market barriers but also the India's inability to produce quality manufactured goods and the exports are no longer viable because of high export duty of 30 per cent and differential freight rate charged on iron ore for domestic and export use by the Indian Railways.

Further, the ban on mining in Karnataka has added to the industry's woes. China has overpowering manufacturing sector and due to slowdown of steel sector and it is becoming hard for India to compete with it.

India's fiscal problems, combined with its growth slowdown, are a matter concern for investors who are looking for the investment in big emerging markets to buoy global growth amid Europe's turmoil and the anaemic U.S. recovery. India's central bank has also cut its forecast for gross domestic product growth in this fiscal year to 6.5% from 7.3%, the reason for this is that currently India's imports are Page 16

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Effect on GDP This trade deficit has also affected the Indian GDP, which is estimated to decline because of the current account deficit which India is facing.

We can see from the data below that every year trade deficit in India is increasing as a result there

more than the exports because of which India is facing current account deficit.

Also the decline in the bilateral trade between the two countries is disquieting because both the countries had fixed $100 billion trade target 2012 to strengthen their relationship.

As the balance of trade constitutes a major part in GDP, decline in exports will adversely affect the growth of GDP in the economy. As the exports decreases, the increasing imports will affect the GDP as negative (X-M) will lead into unfavourable balance of trade situation.

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TH E F I NA NC I A L B U LLE T I N

will be an overall decrease in GDP of the country. The % change in trade is enormous for the year 2011-12 (-62.706) as compared to previous year 2010, the increase in import of petroleum products and gold is the major reason behind it also the depreciation of Rupee as compared to USD has lead to such a situation. All the trade occur through the US dollar, so if the rupee depreciates as compared to US it is going to adversely affect our imports as well as exports.

Side effects of trade deficit Year

Export (X, in

Import (M, in

X-M (in

%change in

Rs. Crores)

Rs.Crores)

Rs.Crores)

(X-M)

2011-12

146,595,939.96

234,546,324.45

-87950384.49

-62.706

2010-11

114,292,192.18

168,346,695.57

-54054503.39

-4.3116

2009-10

84,553,364.38

136,373,554.76

-51820190.38

2.9003

Because of increasing current account deficit, economy had to borrow from the foreign central bank if the capital account surplus is not sufficient to feed the current account deficit. With the decreasing exports and increasing imports, the demand for the US dollar will increase which will further increase the trade deficit resulting in decrease in GDP of the economy.

Due to increase in borrowing the cash flow in the market will also increase which will lead to increase in consumption power of the people in India. As a result, this situation will lead to inflation and rise in price of the commodities. Because of inflation RBI is forced to raise the interest rate which further affected the investment in the economy leading to slow down in the Indian economy growth.

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India-US-China In today's scenario we can't dissect the major economies of the world and say that if they are working poorly it doesn't matter to me. Obviously it does. We all are interdependent on each other either through export, import or through exchange rates.

We all know that US is the only superpower and it is

undeniable

that

the

United

States

some

advantages in China-India-US relations. Both China and India are trying to avoid becoming contained by

SURBHI KHANNA GREAT LAKES INSTITUTE OF MANAGEMENT

the US policies as both wants to maintain a good relationship with the United States.

US constitutes a major part of China's exports and since the US is currently running into the current account deficit situation China is still investing in US as they know that they are the contributors towards their major export. Also the rise of both China and India has drawn close attention from the rest of the world, especially from the United States, which is currently the dominant power in the global world. US are concerned not only for the development in both the emerging countries but also the relation they hold. India, China and US has a strategic triangle and all tries to benefit by the tensions between any two. Now the big question is will US be able to maintain its advantageous position and benefit from the tensions between China and India

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AND HE MOVES “FORWARD” “I believe in an America where no matter what

economic crisis after the Great Depression. During

you look like, no matter where you come from,

his term various economic changes took place.

you can make it if you try”

Spending surged 18% in 2009 which was 25% of

For the first time in the history of United

States

of

America,

an African-American sworn in as

Obama’s re-election as the

GDP, highest since World

President of United States of

War II. Gross Debt saw an

America is going to affect all

increase of over $5 trillion

the nations but it will be

after his inaugural. Deficits

interesting to see how

exceeded for all the years

government of India and India

during his tenure by $1

Inc. react to it.

trillion. And most of all

President on January 20th, 2009 and that was “a new birth of freedom”.

During his first term, Obama brought about many reforms in taxation, healthcare

sector,

employment increased in

employment

the private sector.

scenario and oil sector. He fought for the equal rights and a women’s right to make her

United States of America witnessed a battle

own health decisions. He believed that an economy

between the republicans and democrats in 2012.

only succeeds when it has got a growing thriving

This was a battle between conservative vs. liberal

middle class.

views a battle between Mitt Romney and Barack Obama. Mitt Romney has his credentials as a

He took office during a period which was the worst Basis of difference

Barack Obama

Mitt Romney

Economy

Reduction of tax of mid-

Reduction of tax rate, and limit for deduc-

dle class and small busi-

tions for high class

nesses Healthcare

Signed

the

2010

Against Obama Care

healthcare overhaul bill.

Reduce health insurance premium.

Immigration Global

warming

environment

and

Anti self deportation

Supports deportation

Supports a mandatory

Opposes cap and trade legislation and

cap-and-trade system to

supports keystone XL pipeline.

reduce carbon emissions Abortion

Supports Roe vs. Wade

SHWETA SULTANIA

Believes state should be allowed to ban

IBS HYDERABAD

abortion.

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other two rounds brought him back to the field.

And with this he moves “FORWARD”.

Obama’s re-election as the President of United States of America is going to affect all the nations but it will be interesting to see how government of India and India Inc. react to it. As America is one of the largest trading partners of India, with the removal of trade barriers, bilateral trade is expected to expand to about $100 billion per year.

There are also possible chances of opening of Indian bank branches in America and vice versa.

The implementation of third round of quantitative easing will have a major impact from economic business

executive

and

his

strength

as

a

businessman was an advantage for him in an election dominated by economic discussions.

Obama on the other hand tasted victory on a message of hope, change and unity in 2008, which were obsolete now. So for this term he practiced the strategy of boosting his achievements of the last tenure and indeed it worked well for him. Both Obama and Romney came up with different policies

concerning

economy,

healthcare,

perspective on both the nations. Not only this, the exchange rate will see some major changes. US dollar is expected to show a positive growth, depreciating rupee value. What would be the actual impact of Obama’s re-election on India is something we will have to wait and see.

“We’re moving forward. And that’s why I’m running for a second term as President

of the

United States”- OBAMA

immigration, environment, abortion and various other indicators. But what really differentiated Obama from Romney ?

Along with the differences in the policies, the three Presidential debates played a vital role in Obama’s victory. The first debate focused mainly on the economic and domestic issues like growth, taxes, and healthcare. Obama supported the third round of quantitative easing and was in favour of a mix of spending cuts and tax increases on the other hand Romney criticized QE3 and wished to rein in both discretionary spending and entitlements.

SHWETA SULTANIA

Though Obama lost the first round of debate, the

IBS HYDERABAD

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TH E F I NA NC I A L B U LLE T I N

Quantitative Easing III: Boon or bane for US The Great Depression of 1929 might have been

(T-bill) and credit the amount to the bank from

triggered by a stock-exchange crash, but what hit

which it buys the bond. By this way, banks’ money

the general economy was a disruption of credit.

stock increases and they become more willing to

When an average citizen is unable to borrow mon-

lend out the additional money at a lower interest

ey to do any economic activity, when firms can not

rate. In economic term, it is called Open Market

finance their day-to-day business due to a disman-

Operation. But, when the prevailing interest rate is

tled credit system, it prolongs the recession and

nearly zero (due to Zero Interest Rate Policy), this

pushes the economy to a protracted depression.

bond-buying mechanism can’t bring down the

Hence, for greater good, government or the central

interest rate further (negative Interest is not

bank of the economy sometimes have to step in to

economically possible concept, as then people

unfreeze the

credit system. In

economic term, the mechanism adopted by the apex banks is called Expansionary Monetary Policy.

Quantitative easing (QE) is an unconventional

expansionary

monetary policy used by central banks to stimulate the national economy when conventional mone-

would take loan and earn without do-

Fed launched its third

ing any physical labour).

tranche of Quantitative Easing on

In this dire situation, Ben Bernanke,

September 12 of 2012.

the then President of the Fed came up

Unlike its predecessors,

with his Magic Wand – Quantitative

QE3 has been

Easing (QE). The idea was originated

announced as open-

and tested by Bank of Japan at first.

ended commitment on

During QE1 (from late November

Fed’s part.

2008 to June 2010), the Fed pur-

tary policy has been rendered inef-

chased $175 billion of agency debt

fective. In the wake of subprime

securities and $1.25 trillion of mort-

crisis of 2008 the Federal Reserve Bank (the Fed),

gage-backed securities in addition to purchases of

the central bank of USA has very few options left

Treasuries. QE1 was more of Credit Easing as it

but to increase the money supply in order to boost

clears the long-term credit market. To some extent,

the general economy. In USA, the general interest

QE1 was able to achieve its purpose and it economy

rate at which an average citizen borrow money is

slid back to recession as it stopped. Consequently,

more or less decided on basis of the prevailing

from

Federal Funds rate at a bank lends available funds

mechanism and named it QE2. However, it failed to

(balances at the Federal Reserve) to another bank

spur demand.

August of 2010, Fed had to resume this

for overnight transaction. In general, if the Fed wants to lower down the interest rate to spur the

Fed launched its third tranche of Quantitative

economy, the Fed buys short-term Treasury bill

Easing on September 12,2012 Unlike its predeces-

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TH E F I NA NC I A L B U LLE T I N

sors, QE3 has been announced as open-ended com-

On account of that, more money would come to the

mitment on Fed’s part. Fed pledges to buy $40

economy. On the flip side, as interest rate nosedives,

Billion Mortgage-backed security (MBS) monthly

the pension fund or other investor who want to play

until labour market come of the slump.

safe have to enter the risky territory of equity. Thus,

The rationale behind this large-scale asset purchase

it escalates the systemic risk of the economy.

(LSAP) is it inflates the Fed’s asset side of the balance sheet by purchasing the bonds from private

However, the point here the Fed is forgetting is that

entity- banks or investors. As a result, in the liability

banks require more good, willing, and credit-worthy

side, the reserve that the banks have with Fed

borrowers more than they require addition reserve.

increases. As, bank’s reserve (money stock)

That is what is sadly lacking. Those who are credit

increases they got some extra liquidity to lend out.

worthy are not willing, whose who are willing are

This surge in money

no

supply

worthy. After

results

in

credit-

lowering of interest

the

rate. So, companies

crisis,

banks

will be willing to

have

ceased

invest as the cost of

lendi ng

capital (here, cost of

unworthy

debt or borrowing)

borrowers. We

will

reduced.

end up having

economic

high cash-rich

activity will cause

banks waiting

more employment.

for other banks

These

to lend.

More

be

employed

Subprime

to

labours will spend their

income and

Furthermore,

as a consequence, the whole economy will enter the

there are some upsides of this policy to general

virtuous cycle.

public. As a direct effect of this policy, mortgage rate goes down. Also, the homeowners obtained the

Additionally, the economy would face other indirect

latitude to refinance their mortgage by borrowing

upsides. As the demand for long-term debt goes up

inexpensive short-term loans. But, the downside is

due to large-scale asset purchase, the price of these

the yield of saving account of average citizen de-

assets increases resulting in a low yield in those

creases drastically.

asset class. To get more return investors put money in more stocks and short-term debt. Higher-stock

In macro-economic level, there would be few

price has a psychological factor associated with it.

fundamental shifts as a consequence of this policy.

Investors would reinstate their faith in US economy.

The inflated money-supply would bring down the

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TH E F I NA NC I A L B U LLE T I N

purchasing power of each greenback and as a result dollar depreciates as opposed to other currencies. It has its positive and negative sides too. As a positive consequence, the competitiveness of US economy would increase which would result in more exports. But, on the negative side, dollar may lose its status of a stable foreign reserve currency as foreign sovereign would increasingly replace dollars with gold because the gradual fall of dollar’s value would result in their forex saving loss. Further, on account of lower interest, there is a change of massive capital flow out of US economy which would shatter the economy. On top of it, there remains the fear of inflation, which might push the economy to a painful Stagflation.

SOUVIK DEY IIM LUCKNOW

The whole banking system is built on confidence. So, the Fed is right when it says that QE would boost the morale. But, this perceived importance can’t outweigh the fallout that we might face. Here, the Washington has to pitch in. A concerted fiscal policy can only uplift the economy from this

slump.

They can only lend the

money to the Main Street to “get the economy going.”

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TH E F I NA NC I A L B U LLE T I N

Black Economy .The word black associated with economy is

nuscule amount compared to present level, the

cajoling me to define what does black signifies and

framework was developed then.

its relevance to economy. Speaking scientifically, black is an absence of color. It absorbs and conceals

The most perceivable

all aspect of life. During bad times it contains

black economy occurred after Gandhian and

forewarning of impending unknown. Hence it has

Nehruvian era. It was during this time that the

come to mean deadly, sinful, ugly, hidden, un-

politician who lacked idealism entered the pious

known,

unseen, and mysterious at

all.

So, when black gets associated with economy. It begin to signifies huge impending danger to nation’s economy and well being by concealing the actual figure of GDP, GNP,

development in the

building of the parliament and

Speaking scientifically, black is an absence of color. It absorbsand conceals all aspect of life‌..Hence it has come to mean deadly, sinful,

per capita income etc. thus resulting ugly,

hidden, unknown,

in gross miscalculation of various unseen, and mysterious at numbers resulting into misallocation

engulfed themselves in corruption

leading to surge in

black economy. In the coeval world corruption has pervaded all the sections of the society.

It has been estimated that today black economy id 40% of the

Indian GDP i.e. around

$500 billion.

all.

of funds.

India is a land of paradox. The sum total of wealth of top ten richest people in In-

The epoch of graft in India can be traced back to

dia is 6% of our GDP, while in USA its just 2% of

east India company rule when Warren Hastings, The

their GDP; now the question where does this huge/

first governor-general of India was impeached on

colossal money goes. The answer lies in discus-

accounts of corruption in 1787. Though he was

sion below.

acquitted in 1795, his lengthy trial brought various aspects of illegitimate company activity to light.

What is the cost of running a political party? What

Thus the founding stone of black economy was laid

is the cost of fighting an election? Form where

down by the east India Company through corrupt

does this money come? If we talk about richest

bureaucracy and a parallel economy. During World

political party in India, it is congress party,

War II Indian saw a huge surge in the black

followed by Bahujan Samaj Party (BSP), and then

economy as Indian wealth was plundered to make

comes the BJP. The audited balance sheet of

up the shortage in war ammunition, daily necessity.

congress shows it has a fortune of 525.97crore

Though at that time black economy was only of mi-

(and political party are tax exempt). The congress

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TH E F I NA NC I A L B U LLE T I N

party is a big party with presence in all state and UT

to invest in India and vice-versa. But DTAT has

(direct or indirect). It has been Election Commis-

been widely misused leading to large revenue loss to

sion’s unofficial estimates that on an average the

India.

party spend between Rs 2.5 crore and Rs 5 crore for an assembly constituency (official EC cap: Rs 25

In the coeval world black economy has become

lakh) and between Rs 5 and Rs 20 crore for a Lok

ubiquitous. It is present in almost all things in one

Sabha constituency (official EC cap: Rs 40 lakh). So

form or other (either in cash or in kind). Teacher

expenditure in holistic fashion including viz election

will not teach in the class so that students join his

campaign expenses, organizational and logistical

coaching classes. Doctors will not see his patents in

expenses etc. the cost of running party will dross

government hospital so that patient visit his private

5000 crore. So, who pays the difference? The

clinic

parallel black economy. The richest Indian and

duplicitous and deceptive products, ersatz goods,

corrupt Indian come to rescue of political party,

graft, prostitution, smuggling, control and licensing

helping them and taking return in kind. This endless

system, donation to political party, ineffective

cycle had lead to pervasive corruption.

enforcement of tax law, generation of black money

and

he

can

mint

money.

Pervasive

in public sector and a host of other squalid business Let’s discuss about the tax heaven. There are in total

negotiation that are usually untraceable and hence

77 tax heaven. Major once are LGT, Singapore,

unaccountable has become a norm. Besides,

Switzerland, Mauritius etc. these tax heavens

administrative and bureaucratic work get slowed

sometimes levy small tax or many a time not at all

down, all this

thus resulting into tax evasion. Moreover, because

more money. This percolating black economy led

of extremely feeble rules and regulation tax can be

to parallel economy, which led to policy breakdown

avoided. For Indians the biggest tax heaven is

and social unrest resulting into anti corruption

Mauritius. Initially double taxation avoidance treaty

movement. It is widely reported that Indian black

(DTAT) was signed in 1983 to help Mauritian firm

economy is around 40% of its GDP. Prof Arun Ku-

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is done to mint money and

TH E F I NA NC I A L B U LLE T I N

mar in his book- ‘Black Economy in India’ has estimated that black economy has resulted into loss of 5% of GDP every year since 1970. India’s GDP as per Purchasing power parity (PPP) in 2011 was $4.469 trillion. That means that the current size of the economy could have been around $9 trillion making us the second largest economy in the world. Also, Prof R. Vaidyanathan of Indian Institute of Management (Bangalore) has estimated that the black money in India is worth around Rs. 724,000 crore ($1.4 trillion). Even if the professor's figures are exaggerated, the amount of money in India is huge, very huge. That is why there are so many clamors about checking black money.

At the socio-economic front black economy has led to

NILAYA MITASH SHANKER SAURABH PAUL IIT ROORKEE

high cost and low quality product in international arena leading to brand India dilution. At the social level as people are extremely unhappy with the government, the society as whole has lost its faith leading to rise of movements like Anna Movements. All these direct and indirect cost that black economy imposes leads to distorted

target,

misdirection

of

precious

natural

resources, worsened income distribution, big size unreported segment of the economy, transfer of fund from India to foreign countries, ineffective investment, higher inequality and lower rate of growth, corruption in society and political system.

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TH E F I NA NC I A L B U LLE T I N

PONZI SCHEME Whether it is the namesake, Charles Ponzi whose

reinvest the amount at compounding interest rate.

International postal coupon fraud shocked the

Such fraudulent practises exist not only in US but

investors all over the world in 1920s or the more

all over the world.

recent, Bernard Madoff—the former non-executive

Back in India, there were series of accusation on

chairman of the NASDAQ stock market, we see a

Amway that it is following a pyramid scheme.

history of frauds based on the Ponzi scheme.

Pyramid scheme often confused with Ponzi scheme

Although it is named after Charles Ponzi, the

is quite different as it requires investors to actively

scheme was not created by him. It was prevalent

participate. Unlike Ponzi scheme, the investors in

since 19th century.

pyramid scheme are given the task to promote the

In simple, Ponzi scheme is the process of repaying

product after buying the franchise along with an

the old investors by using new investor's money.

opportunity to get some percent of profit on sales.

But as the numbers of investor

Also, they need to increase the count of the

increases, the

process becomes more complex. The benefit of

members thus benefiting more.

steady returns not only lures newer investors but

If the investment is such that the returns are high

also keeps the older ones on their toes. However

and the time period is less, there is a great risk of

the scheme collapse when the withdrawals exceeds

being caught in a Ponzi scheme. Also, the nature of

deposits.

Ponzi scheme is such that it lures the investors with

The characteristic of Ponzi scheme is visible not

steady returns. But steady return is not a

only in fraudulent companies but also in the

characteristic of risky assets. A good investor would

borrowings of funds by a country. When

definitely sense it. Nevertheless, it is difficult to

borrowings and public debt rises steadily as

avoid such investments when the schemer is reputed

compared to slow economic growth or GDP of a

and operates at a large scale (as in the case of

country, it doesn't take much time for the house of

Bernard Madoff scandal). However, to combat loses

cards to topple. Its consequence starts reflecting

in

the moment the growth stagnates. The most recent

recommend portfolio diversification. The more

Ponzi

diversified your portfolio is, the more you are

sche me’ s

t oppl e

is

t hat

of

www.zeekrewards.com - a US based online website

investments,

financial

advisors

always

bolstered against such loses.

promising daily returns of 1.5%. Its founder Paul R. Burks is accused of using new investor's money to provide a daily 'profit points' to the bidders at

HEMANTA POUDYAL IBS HYDERABAD

the end of each day with the option to withdraw or Page 28

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TH E F I NA NC I A L B U LLE T I N

Crossword - SHAILAJA S IBS HYDERABAD 4

1

10

3 5

8

2 6 7

9

-

-

Across: 1) The smallest measure used in quoting yields on fixed income securities. One ______ point is one percent of one percent, or 0.01%.

3) Market _________ is the market value of the equity of a company. Simply put, it is the number of outstanding shares multiplied by the market price of the company.

5) ________ trading refers to trading where contracts traded today are settled at some future date at prices decided today.

7) The price at which one division or subsidiary of a company transfers products to another division or subsidiary of the company. (2 words) 9) When a stock price increases or decreases by a certain percentage in a single day it hits the _______ ________. (2 words)

Down: 2) The floor of a Stock Exchange.

4) Curve showing relation between inflation & unemployment is ________ curve.

6) Transactions done among members after the closing of the official trading hours _____ dealings.

8) When persons acting In concert with each other collude to artificially increase or decrease the prices of a security, that process is called price ________ .

10) A trader sells shares that he does not own with the intention of purchasing the shares at lower price at the time delivery has to be made, another name for Forward Sale. (2 words)

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Answers:

6.Kerb 1.Basis 2. Bourse 3. Capitalization 4.Phillips 5. Forward 10. Short Sell 9.Circuit breaker 8. Rigging 7. Transfer Price Page 29

TH E F I NA NC I A L B U LLE T I N

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