Citius, Altius, Fortius Dear Niveshaks, This month can be marked as an important step in the Indian capital market where the market indices reached their all-time high values. The bull run continued on the share market after a brief hiccup that happened during the budget announcement. The fall in crude prices, proceedings from insolvency cases, higher
reported quarterly and annual earnings are some of the reasons that could be accounted for this move. We also saw two of the largest companies in India, TCS and RIL, achieving the market capitalisation of 1 trillion USD. On the international front, the rising trade war between China and USA was on the headlines
throughout the month. In the recent times, there has been surge in the news around the word, “FinTech�. The Article of the Month by Pranav from SIMSREE, Mumbai, breaks the myth around the around this buzzword and explains the FinTech landscape in the country. Unlike most other countries, India still relies
a lot on the agriculture sector. The issues related to welfare of the farmers keeps coming from time-to-time and has also been a political issue for very long now. Establishment of Minimum Support Price (MSP) for various crops has been a significant step in this regard. But, there are various problems with MSP that needs to be addressed which is discussed in the Cover Story of the month. Since the last few years, India has been in news for the high growth rate of GDP and the projections around this. The article in the FinGyan section, written by Saransh Yadav, IIFT takes a critique on the idea of “India as the fastest economy”. The FinView section takes the views of Mr. Debasish Mallick, Deputy Managing Director of Export-Import Bank of India on the issues around trade and bilateral relationships of India with rest of the world. His rich experience in the international trade can be easily seen in the way he analysis each topic. To help the students who have joined the restless curriculum of MBA, the Juxtapose section shows the differences between CFA and FRM course. To improve the knowledge of our readers, the classroom section touches upon the topics of “Smart Beta” and “Alternative Beta”. Hope you have as much fun in reading the magazine as we had in making it!
Stay Invested, Team Niveshak
THE TEAM Aayushi Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta Samprit Shah Shievav Dosi Sriya Gupta
All images, design and artwork are copyright of IIM Shillong Finance Club
© Finance Club Indian Institute of Management, Shillong
Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.
Contents NIVESHAK: JULY 2018
05 07 09 . . . The Month That Was
Niveshak Investment Fund
Article of the Month: Indian Fintech
13 18 23 . . .
Cover Story: Perfecting MSP
FinGyaan: Is India Finview: Growing Fast Enough? Mr. Debashish Mallick
26 27 . . Juxtapose: CFA vs FRM
Classroom: Smart and Alternate Beta
NIVESHAK | JULY 2018
THE MONTH THAT WAS GST rate rationalisation After improvement in the nation’s direct tax collection in the past year due to GST implementation, the government and all the stakeholders involved were looking for a rate rationalisation in the next meeting for GST. As expected, in the meeting on 21st July, which was 28th meeting this year after the launch of GST, government slashed the rate of some consumer durables like refrigerators, washing machine, paints, etc from 28 percent to 18 percent. This government is expected to lose Rs 7000 crore in the coming year due to this change. Also, to improve and simplify B2B and B2C trading, new simplified tax filling forms were introduced as well which was being expected from the past 6 months. SENSEX-NIFTY all time high After a lot of highs and lows in the past month, by the close of month the SENSEX and NIFTY indexes rose to all time high. With SENSEX breeching 37500 point and NIFTY going up to 11328, which is a record till date, made the news. The reason for the same have been varied with fall in
crude prices one of the biggest contributors to this improvement. The Q1 2018 results are expected during this time, and there is a lot of optimism attached to it which derive the indexes price upward. Also, world economy has performed better on stock market this month, after an initial hiccup where Facebook lost 20% of its market valuation in a single day. America- China trade war The ever-growing deficit which US owes to China now averages up to greater than $300 billion for USA. The trade war is basically the outcome of strategies and practices used by China to protect their firms from external and international competition. There are various restrictions which do not allow American firms to improve exports in China. By following these practices,
China have lead to claim itself an exports economy. It is also said to be the reason for greater hold of China in Asia and neighbouring areas. Recently, in May the Chinese government laxed the import rates on US imported goods, to compensate for the otherwise overpowering Chinese rules and regulations. [5]
THE MONTH THAT WAS
NIVESHAK | JULY 2018 BRICS summit The 10th BIRCS summit took place towards the end of this month at Johannesburg. This was a major summit from the point of view of the time during which it was carried out. At the onset of America – China war, a moment where American President was looking out for Russian Prime Minister’s support, the summit of growing economies in the world is very important to decide the course of action in the world for the next few months.
majority in the parliament. If the motion would have been passed, the ruling government would have had to resign.
This is the first no-confidence motion faced by the current prime minister in his 4 years. Last no-confidence motion that was put against the BJP government was against Atal Bihari Vajpayee in 2003. Since then, this is the first no-confidence motion against BJP in 15 years. The political scenario in India is going to get more stressed due to upcoming elections of 2019.
TCS and RIL join 1-trillion club TCS and RIL, both the companies with the market capitalisation of Rs 7.51 lakh and Rs 7.43 lakh crore respectively, have joined the 1 trillion club from India. The last to join the list was RIL, the Mukesh Ambani led conglomerate surpassed the IT giant TCS to become most valuable company. No confidence motion defeated The market price of shares has A no confidence motion was moved up multiplied by more than 5.5 times in the Lok Sabha against the ruling since the issue of the shares on the party this month. The motion needed back of profitable and consistently majority vote to pass the test. Although growing petrochemical, retail and Jip the motion was defeated as the NDA business. RIL’s net profit increased government was able to retain its by 28 percent in the financial year 2018. Indian PM Narendra Modi also attended the summit, where he backed the multilateralism, international trade and a rule-based world. The summit also saw the extension of support to Joint Comprehensive Plan of Action (JCPOA) to deal with Iran nuclear issue. US, as a country have always been against this support.
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NIF PERFORMACE EVALUATION As on July 30th, 2018
July Month's Performance of NIF 108 106 104 102 100 98
Scaled Sensex
30-Jul-18
28-Jul-18
26-Jul-18
24-Jul-18
22-Jul-18
20-Jul-18
18-Jul-18
16-Jul-18
14-Jul-18
12-Jul-18
10-Jul-18
08-Jul-18
06-Jul-18
04-Jul-18
02-Jul-18
96
Scaled Portfolio
265 255 245 235 225 215 205 195 185 175 165 155 145 135 125 115 105 95
Performance of Niveshak Investment Fund since Inception
Sensex Scaled values
Total Investment Value : 10,00,000 Current Portfolio Value : 24,49,960 Change in Portfolio Value : 141.22% Change in Sensex : 77.1%
Portfolio Scaled Values Value Scaled to 100
Risk Measures: Standard Deviation NIF: 33.27 Standard Deviation Sensex: 16.10 Sharpe Ratio : 3.42 (Sensex : 4.29) Cash Remaining: 96,190
Comments on Equity market and NIF’s Performance: Sensex and NIFTY scaled record highs in the month of July. After three consecutive months of net FII outflows, a trend reversal was observed as FIIs were net buyers for the month of July. The rupee continued its glide on downward spiral and touched record lows. RBI hiked repo rates for second consecutive time. Given current global geopolitical headwinds fumed by possibility of trade wars, the current volatility is here to stay. For NIF, India bulls Housing, ITC & Westlife Developers were the biggest gainers for the month of July earning returns of 20.15%, 14.76% & 11.76% respectively. While the biggest losers for the month were PVR, PPAP Automotive & Lupin. Going forward the NIF team remains bullish on FMCG and Automotive sectors. Rising discretionary incomes fueled by increased MSP and a strong monsoon would continue to fuel rural demand.
NIVESHAK INVESTMENT FUND INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE Monthly Performance Portfolio Weight
NIF Sectoral Weights 11.20 2.42 % % 0.78 % 7.84 %
28.43 % 0.80 % 6.31
29.75 %
9.54 %
% 2.93 %
Auto Infrastructure Chemical Media Financial Services FMCG Pharma Telecommunication
TOP GAINERS FOR THE MONTH
• Indiabulls Housing (+20.15%) • ITC (+14.76) • Westlife Developers (+11.76%) TOP LOSERS FOR THE MONTH
• PVR (-17.08%) • PPAP Automotive (-7.91%) • Lupin (-7.62%)
ARTICLE OF THE MONTH
INDIAN FINTECH LANDSCAPE
-Pranav Umesh Kahalekar SY MMS (Finance) Batch 2017-19 SIMSREE, Mumbai Upon hearing about portmanteau “FinTech” I often wonder who coined it and how old it is! It can be perceived to be a marriage of Finance with Technology. FinTech is a buzzword these days and is talked about extensively across conferences or seminars. However according to me finance and technology should not be seen as newlywed couple. Finance is yoked with technology since decades. Let it be invention of pantelegraph by Giovanni Caselli in 1860 , fed wire system for RTGS fund transfer in early 19th century , first ATM from Barclays in 1960s or credit cards & internet banking thereafter, “Fin” and “Tech” have always been clasping hands. Therefore the term FinTech revolution seems parochial to me. It is FinTech
NIVESHAK | JULY 2018 evolution and not revolution that substantiates today’s prominent and much vaunted technological advancements in finance sector. Throwing light upon transformation of Indian FinTech landscape over decades, it can be said that electronic revolution, Economic Liberalization and IT revolution have led a strong foundation to India’s recent promising performance in this sector. It is needless to say that, for FinTech ecosystem to thrive, Government, Regulatory Bodies, Investors, entrepreneurs, technology vendors, Financial Institutions, Universities, and consumers should work in liaison and play their roles responsibly. To be a driver of FinTech growth on global scale, India, unlike developed economies needs to do groundwork in terms of improving infrastructure, financial inclusion, financial literacy and Internet penetration. According to a report by Deloitte [1] currently only 52.8% of India’s population have bank accounts well below global average of
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ARTICLE OF THE MONTH
NIVESHAK | JULY 2018 60.7% and only 22% of people use payment cards. According to report from Kantar IMRB and IAMAI [2], although number of mobile phone users in India is around 1 Billion but Internet users in India is around 500 Million, which is not even 50 % of India’s population. However around 80% of people in countries like USA, UK have internet access [3]. These statistics and benchmarking show that a lot of groundwork needs to be done by India in terms of building a solid infrastructure and creating a convivial atmosphere for FinTech growth. However these challenges are complemented by favorable macroeconomic factors of country in recent years. Government of India through India Stack Program, has provided state of the art technological framework to corporations and entrepreneurs. Recent endeavors from government
include rolling out of Jandhan Yojana which is aimed at providing banks accounts for all. Combination of Jandhan, with Aadhar and mobile telephony which is called as JAM trinity would prove to be one of the key drivers in FinTech growth. With demonetization coming in, digital payments got a push. Unstructured Supplementary Service Data (USSD) based mobile banking, Aadhar Enabled payment system, UPI for mobile payments all witnessed rapid growth post demonetization. The launching of BHIM app which witnessed 17 Million download in first 2 months [4] again justifies Government’s agenda. All of these initiatives epitomize Government’s aggressive push towards building a strong infrastructure, which would eventually fortify nation’s FinTech aspirations especially in fund transfer and payment sector. Indian regulators have taken laudable
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ARTICLE OF THE MONTH
NIVESHAK | JULY 2018
efforts to build a comprehensive regulatory framework around FinTech innovations. However they may be at stretch to balance the time required to create a structured regulatory framework and a pace with which Indian FinTech landscape is changing. The financial regulations so far have been defined keeping in mind the existing banking sector players and are often archaic from FinTech perspective. To bring more clarity in regulations, the regulatory bodies must espouse a cautious approach around consumer protection and try to benchmark the already existing FinTech related regulatory policies of developed countries. The regulators of the countries like UK, Singapore, and UAE have built a regulatory sandbox wherein fledging FinTech firms operate in controlled environment and regulators monitor key metrics of sandbox and adjust regulatory parameters on periodic basis. After successful testing of different regulatory solutions in sandbox, the FinTech firms are allowed to enter the mass market. The working panel
appointed by RBI has suggested to make use of such Sandbox in Indian context which shall be administered by According to FinTech Trends Report 2017 –India by PWC-Startupbootcamp [8]. India tops the list and is well above global average when it comes to expected FinTech annual ROI Index. When government, regulators and investors are playing their pivotal role in creating conducive environment for FinTech ecosystem, very few entrepreneurs are audaciously venturing into FinTech startups. India has over 600 Start ups venturing into FinTech with the 12000 Startups worldwide [9]. In India there is a dearth of skilled workforce which results into outsourcing or importing of talent and technology .In nutshell, Indian entrepreneurs have tried to become enabler of FinTech ecosystem in India rather than becoming disruptor of FinTech on global scale. Apart from the aforementioned stakeholders, Universities/research institutes should also contribute to entrepreneurial mindshare in India’s talent and build incubators and innovation labs to create competent
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ARTICLE OF THE MONTH
NIVESHAK | JULY 2018 entrepreneurs. The financial institutions also have instrumental role to play. By embracing FinTech innovations, mentoring the FinTech startups and investing in building technical excellence they could thrive in the competitive market. They can pursue global competitiveness by treating FinTech not as a threat to compete with but as an opportunity to collaborate with. Thus rising consumerism and stiff competition from peers have left financial institution with no choice but to shed their grey hair of conservatism. According to EY FinTech Adoption Index, India has the second highest FinTech adoption rate among digitally active consumers at 52 percent [10]. According to NASSCOM [11] Indian FinTech market is expected to touch 2.4 Billion USD by 2020. These all pompous statistics point to the fact that
India has been up to the mark so far. However, FinTech being a broad concept encompasses lot of sectors like payments, money transfers, peer to peer lending, insurtech, roboadvisory, wealth management and crypto currencies. From the aforementioned propositions made so far, it can be proposed that India has done exceptionally well in sectors like payment and money transfer but there is a long way to go in other sectors. zealous efforts from all stakeholders will make sure that FinTech startups will continue to create transformational waves across the financial ecosystem in India. They will not only help financial institutions improve their back-end and frontend processes but will also offer customers a smooth user experience, more value added services and an interactive marketplace.
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COVER STORY: PERFECTING THE MINIMUM SUPPORT PRICE SYSTEM
NIVESHAK | JULY 2018
COVER STORY
In the early 1960s India was in deep trouble with a critical shortage of cereals of other food grains. The country was procuring only about 12 million metric tonnes of wheat and was facing a shortfall of about 10 million metric tonnes more. In 1965, the government managed to import 7 metric tonnes from the united states under the PL-480 scheme. This set the stage for a radical change for our agriculture sector. The very next year, 18000 tonnes of high yielding what seeds were imported initially on a trial basis kicking off the Indian Green Revolution. The government also set up the Food Corporation of India to provide the infrastructure and facilitate in the procurement of the food grains. The about of the comment was to procure these produces at remunerative prices redistribute these procurements across the country through a public distribution system as well as maintain a buffer stock. Over the last 54 years, the FCI has since become a Goliath in the Indian agriculture industry. The government has since set up a agricultural prices commission to come up with an indicative list of products and the support prices to be offered. With time however, the government came to the realisation that the farmers at the bottom of the pyramid were not reaping the benefit of these MSP operations. The redistribution of the food grains from a limited number of prolific procuring states to all the many consuming states was much too expensive and wasteful. With this in
mind, the government introduced a scheme for decentralised procurement of food grains in 1997-98. Many states including Andhra Pradesh, Chhattisgarh, Gujarat, Bihar, Karnataka, Tamil Nadu, Maharashtra, MP, Odisha, West Bengal, and Uttarakhand have since joined the government’s decentralised procurement scheme. The states now take the responsibility of procurement of major food grains like wheat and rice, its storage and distribution under the Public Distribution System. Yet, there are several states where procurement apparatus is or even nonexistent. In Assam, for example, only about 24,000 metric tonnes of rice have been procured this year. The other states in the North East fare even worse with little to no procurements. Even in larger rice producing states like Bihar and West Bengal, the procurement exercise and infrastructure is not nearly adequate to ensure that farmers receive MSP for paddy. In West Bengal, which is the largest producer of Paddy, of the 149 lakh MT of produce, only about 45000 tonnes have been procured, while in Bihar, the procurement figures stand at 7.93 Lakh tonnes of the 73 Lakh MT produced in the state. In Bihar and Jharkhand, mandi system was abolished in 2006 with no alternative procurement mechanisms coming up in place. With no wholesale markets where farmers can bring their produce and get fair remuneration, the sale to wholesalers happens on the roadsides where the farmers face rampant exploitation. Open auctions do not take place and there are no government employees to monitor the price at which farmers sell their
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COVER STORY
NIVESHAK | JULY 2018
produce. Similarly, in Bihar, now a major producer of maize, due to the absence of procurement, the market prices of maize rule below MSP year after year. The chart Below shows the impact of policy application in the state of Assam before and after it was enforced around December of 2017. That said, there is also a problem of over-procurement. With extreme political exuberance, the government at times ends up procuring too much in its show of political bravado. For example, the policy mandates the FCI to create a buffer of 2 MMT of pulses but, but under political pressure it has procured much more and is now saddled with 5.5 MMT of pulses. Such over procurement creates a two-fold macroeconomic problem of both overcrowding the private procurement and in terms of implications to our current account deficit with agricultural products being an important part of the
country’s exports. Even then the execution of the recent increase in the MSP there are significant challenges to execution. The first is the government’s claim that ‘MSP would be 50 percent higher than the cost of production’. The price increase in most cereal crops over last year, with some exceptions, was about 15 to 20 percent. The MSP for cotton 23.97 percent higher while Oilseeds were up by 13.42 percent. On the other hand, castor, jowar and sugarcane had MSPs marginally lower than last year. Across the board, there increase in MSP over and above the cost of production— measured as the sum of all paid-out expenses (A2) and family labour (FL)— was above 50 percent consistently across each Kharif crop. So, while the NITI AYOG has in a sense delivered on its promise of ‘fifty percent higher than paid out costs’, the fact of the matter is
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NIVESHAK | JULY 2018
COVER STORY
that they have done this by shifting the goalpost. The National Commission on Farmers led by MS Swaminathan had recommended that the MSP be at least 50 percent more than the weighted average cost of production. This would entail inclusion of the values of owned land, cost of interest on own capital, the imputed value of family labour and the imputed value of the management function of the farmer. The current formula clearly ignores the cost of farmers own labour and the incurred opportunity cost. The NITI Aayog’s argument that interest and rental components of capital costs should not be incorporated in MSPs as was recommended by the Swaminathan commission, leaves much to be desired. Rental incomes, as it is correctly argued, are unearned
incomes. Another key avenue is the Price Fixing Rules recommend that, in accordance to the existing practice, DES apply a normative interest rate of 12.5 percent on working capital employed and 10.0 percent on gross fixed capital. However, that rate is a grossly understates the costs involved as a large segment of the farmers are forced resort to non-institutional loans from sources like moneylenders, a much higher rate of interest should be accounted for. The interest rates used should be a better estimate of the real interest rates incurred by the farmers. While the case for including actual interest costs seems quite clear, it
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COVER STORY
NIVESHAK | JULY 2018
seems quite unlikely that there will be policy coordination between agricultural price policy and tariff policies to protect. Another interesting criticism of the MSP is the notion that is goes against the free market economy and that the artificially high prices will prove detrimental in the long run. The problem of low farmer income is one of exploitation and information asymmetry. In a fully efficient economy, there is enough margin for the farmers to get substantially more income. The problem here is the margins taken up by the middlemanmiddlemen in most cases. It is definitely in governments prerogative to support the MSP which will iron out these inefficiencies. By making markets more efficient, there is another added benefit in getting the excess number of middlemen who are essentially not contributing to the economy out of this sector into other sectors.
Getting large players like Future group to directly buy the farm produce hence becomes important to organically support the MSP. This effort is however, substantially impeded by influential trader lobby which has in many places actively used underhand means to prevent the implementation of the MSP. One way to circumvent the impact of these traders From licence raj to 2018, we have come a long way. From years of a tradedominated regime we need to finally face the challenge of the rational transition away from it. The ghost of the Alagh Committee, which developed the ideas discussed here, will keep on haunting us and will be exorcised only when we become competitive in our agriculture. It has already surfaced with the Bharat Krishak Samaj making this an election issue, as also the Consortium of Farmers Organizations taking it up. But we are now going beyond the economics of MSP into areas beyond our competence.
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FinGyaan
NIVESHAK | JULY 2018
IS THE FASTEST MAJOR ECONOMY ....FAST ENOUGH ? SARANSH YADAV MBA 2017-19 Indian Institute of Foreign Trade The Indian economy has evolved from a largely agricultural & trading society during the Indus Valley civilization to a mix of manufacturing & services. It has also witnessed times of being the world leader, along with Ming China, in manufacturing by generating onefourth of the industrial output during the Mughal era to contributing just 2% to the world’s manufacturing output under the British rule. The economic drain theory supports the fact that the British East India company imposed high taxes on the weaker Indian economy and depleted food & money
stocks which led to famine in 1770s. The British also left us with another economic strain of partition. This refugee settlement led to division of India into complementary economic zones. As a result of which India inherited some economic problems at the time of independence after missing the early train of industrialization. The repercussions proved to be catastrophic as growth in India remained at around 3.5% from 1950s to 1980s, whereas, South Korea grew by 10% and Taiwan at 12% during the same period. Indian growth has grabbed some pace after economic liberalization in 1991. Recently, the World Bank has put India ahead of France in terms of GDP being just $25 billion short of the United Kingdom. As China’s economic growth has slowed down, people are looking for the next big driver of growth and India seems to
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FinGyaan
NIVESHAK | JULY 2018
fit the bill. Under the Narendra Modi regime, India continues to be the beacon of growth in the South Asian region. This is the main reason that many multi-national companies are excited about India, dreaming of selling fast food, smartphones and fast fashion to a rapidly growing middle class. And companies like Walmart are paying top dollar for business deals in India. While most of the Asian nations
environment, improving India’s rank in its ease of doing business from 130 to 100. According to the IMF economic outlook, India is expected to grow at 7.4% in 2018-19. Our country has also done exceptionally well in gaining political freedom. The maturity that our democracy has achieved can be beheld in people who have confidently chosen to vote out the governments who lost touch with the people’s needs
are ageing, India has a median age of only 27.3 years, compared to China’s 37.6 years & Japan’s 47.1 years. India is on a track to reap its handsome demographic dividend. The “Make in India” campaign is eventually proving its firepower as India has attracted record foreign direct investments. The World Bank has given its nod to Prime minister’s efforts and his strong reform agenda to improve India’s business
& desires during the last 5 years. This is a big achievement in itself for a democracy as huge as India. India
has
ascended in the list of world economies. But what does this mean for Indians looking from within? Not much, if one juxtaposes the per capita statistics graphs of India and other top economies of the world. The ground realities can only be discovered if we
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FinGyaan
NIVESHAK | JULY 2018 link the size of an economy with its geography, population and workforce. And purchasing power parity is an appropriate metric to look at in India’s scenario. According to the World Bank figures, India has an estimated per capita income at purchasing power parity of $7060 while France has $43,720, around six times more than that of India. And India stands 6th in terms of GDP but is at the 123rd position in terms of per capita income at PPP while France smiles at the 25th spot. Thus, we would find an average Indian far poorer than an average Frenchman if we use per capita yardsticks for measurement. India has a population of approximately 134 million as compared to 67 million French people. One could cite India’s large population as a major reason for its lower per capita figures if China hasn’t had 2.5 times per capita income than that of India (whereas, Chinese’s per capita income was almost comparable to that of Indians in 1960). Also, the difference in GDP per capita between China & India swelled from 9% in 1960 to 80% in 2016. South Korea is a perfect example to attain a realization of how India performed in comparison to a nation that has gone from being a developing to a developed one given it historically suffered extensive poverty and has hostile neighbours like that of India. India’s GDP per capita in 1960 was 49% lower than South Korea. Today India’s GDP per capita is 94% lower than that of South Korea. The not-sosatisfactory employment scenario in the country substantiates the
importance of per capita figures at PPP of the nation. India has about a million population entering the labour force every month, we need significantly more growth to get them good jobs as it’s a big number that has to be absorbed. Recently, 90,000 railway jobs found applicants more than the number of people residing in Australia. Decent stable & salaried jobs for most of the employable youth is still a major challenge for the economy. Almost 80% of Indians depend on the informal sector to make their living. Agriculture contribution has sunk from 50% at the time of independence to just 15% at present but still employs majority of the Indian population. India anticipated a manufacturing revolution in 2014 but still the service sector is carrying a huge share of India’s GDP on its back. Within our country, domestic investment has fallen as businesses have been hesitant to invest. The Goods & Services tax is also baffling some businesses for taxing some products. India’s exports have dropped despite incentivising the exporters further in mid-term review of India’s foreign trade policy 2015-20. On observing the rising oil prices trend and India being the 3rd largest oil consumer after United States & China, Moody’s & Goldman Sachs have cut their growth projections for India. Oil prices were very low in 2014 at around $40 per barrel. Then, the government was easily able to impose taxes on diesel and petrol with minimal rise in inflation. And now, the government has become strongly dependent on these taxes which made up 17% of India’s total revenue last year.
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FinGyaan
NIVESHAK | JULY 2018
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FinGyaan
NIVESHAK | JULY 2018 Unfortunately, the Indian rupee has been the worst performing currency in Asia this year & is expected to weaken further. India is under double hammer attack of a weakening currency and rising oil prices. The spurt in Indian economy was mainly driven by consumer & government spending after a slow down blame due to demonetisation & chaotic implementation of the GST. India’s GDP has doubled in the last decade & is expected to power ahead as an important economic engine in Asia. But it will take at least a decade for India to reach the level of prosperity enjoyed by the Chinese although growth in China has slowed down. The demographics of the two nations are almost comparable but the GDP stands at 1/5th of that of China. India should be able to generate at least 50% of the Chinese GDP in the next 45 years to make the macroeconomic figures start translating into common man’s livings & his per capita. We are amongst the most unequal countries in the world and are still way under our true potential. We are the world’s fastest major economy at the moment but our country needs some structural changes to boost the growth path especially in the current scenario where protectionism & trade war is escalating as unlike United States which is an isolated economy, we are more export-oriented and international trade dependent. Despite its challenges, India continues to grow quickly. Our current growth reflects the hard work of the government & its
people, but we need to repeat this continuously for at least next 20 years to give every Indian a decent livelihood. Our outperformance is spotlighted because the world’s growth is weak, but our growth is under sufficient to satiate hunger of every Indian. Most of the major statistics have shown India as the fastest growing economy in the world. These macroeconomic parameters’ horse races and their numbers do matter and work to shape world opinion, and more importantly we hope, influence investment decisions. And these numbers have certainly lifted India’s image on the world’s pedestal but is the pace of India’s growth fast enough for its people? remains a question in the eyes of 1.3 billion people. The visualization of facts implicitly states that our nation is either walking fast or running slowly.
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FINVIEW
NIVESHAK | JULY 2018
M r. Debasish Mallick was appointed by the Government of India as Deputy Managing Director of Export-Import Bank of India in 2014. Prior to this appointment, Mr. Mallick was the Managing Director and CEO of IDBI Asset Management Company Ltd.
Q-1) Exports to china is one issue that is coming up continuously with PM’s commitment to reduce trade deficit between India and China. With trade tariffs with US in place, where do you see the opportunity for agri-commodity export in Chinese markets? Ans.) China is completely a different ball game. China is one nation which has virtually all the natural resources and has the ability to utilise them in the most efficient way. Except for high end technology solutions, there is no other area wherein there can be a competition to China in terms of price and quality. Substitutability is a major concern especially for commodities like cotton, therefore, one needs to see where we are placed
in terms of quality and how much is the need for imported cotton in China once imports from China stops. “Exports are based on conformity with certain standards which include, product design, regulatory and others”. It will be crucial to see whether our commodities are compliant to Chinese standards or not and it will take some time for us to build capacity for that. There is definitely tremendous scope for agri-exports to China but before we plunge into filling the space vacated by US exports, India will have to focus a lot on raising the quality standards and logistical support needed for same. Q-2) There has been a lot of discussion about the credit lines being offered by India to other nations, their inefficient utilisation and lack of reciprocity in trade. With EXIM bank closely working on building India’s ties for international trade, what do you think about this issue? Ans) Reciprocity is an inherent part of Lines of Credit, unless and until the government makes a conscious effort to fabricate the agreement differently. The Scheme itself entails for 75% of imports from India and the rest can be from own production and internal capacity building. Let us understand the reciprocity from two angles: As the inherent agreement with other nations is to have 75% of Indian exports for the total amount of credit provided, India itself can plan and
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NIVESHAK | JULY 2018
FINVIEW
price its exports leveraging strong inhouse potential in synchronisation with local players and hence we get to play by our advantage. The scope of business widens significantly. Since major investment is in infrastructure, there is a good scope for follow up trade in terms of maintenance contracts, supply of spares and technicians etc. Hence, the overall benefit is much higher, and the relationship will be much stronger. The main issue is the aggressive nature of Chinese agreements as against the India policy. In such cases, China annexes the mineral resources from those economies in case of default which eventually makes them resource surplus and hence, gives them access to practically inexhaustible pool of resources. As against this, the Indian stance has been more of co-operation and coordination wherein we rely purely on government guarantee and do not rely on mineral resources as collateral. This eventually makes our approach more sustainable and effective. Q-3) The depreciating rupee is a major concern in the past few months. Though our exports get benefits of this, there is always the escalation of cost while we repay our import debt and hence that builds up pressure on the CAD. Where do you see the Rupee going from here? Ans.) The Rupee has been mainly governed by market driven forces except for a few particular occasions wherein the govt. or RBI has
intervened. Historically, rupee has seen a trend wherein there have been spells of sudden bursts and then the exchange rate settles down at a certain point after a series of rallies. If we look at the trade wars there is tremendous uncertainty in predicting as to where it will go, how much will be the extent of this war and what will be the impact. My hunch is that it will go upto 72-73 at the max and will eventually settle down around the 71 levels, after fluctuating in the range of 68-73. Other uncertainties like the stance of European banks and US fed will also impact the movement of rupee. With the RBI’s declared objective being to contain inflation and not intervene in currency policy, the chances of any un-natural correction are less. Also, with a weak dollar, RBI usually goes on a dollar buying spree and shore up its coffers. Thus, this becomes a natural floor for the rupeedollar exchange. The RBI also might not intervene owing to the notices given by the US government and placing India on the watch list for generating artificial conditions of keeping the dollar low. In wake of all these events I see dollar staying in the range of 68-72. Q-4) The balance of trade with neighbouring countries and ASEAN nations has been favouring them owing to cheap exports and declining high technology exports from India. What is your assessment of the situation? Ans.) This is actually a very sad state of affairs. There has definitely been a
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FINVIEW
NIVESHAK | JULY 2018
lot of dumping of commoditised items into India. Most of these countries especially Bangladesh take in primary products from India and dump in low cost manufactured products. Items like cement and textiles are flooded into India markets owing to this. An ideal expanse is of limestone being imported by Bangladesh and low-cost cement being dumped back into India. The primary reasons are: FTA’s rule are giving zero duty market access to them. As their cost of production and efficiency of production are better that India, they are getting flooded in the Indian markets. With them having advantage of zero tariffs and we becoming an expensive manufacturing sector, there is higher flooding of Indian markets by them. With Vietnam and others being in the category of Heavily Indebted Poor Countries list, they have a better access to global markets than us and hence, eventually owing to lack of preferential access, we get beaten. India needs to leverage its place in services, project exports and engineering exports. Once, we move towards that end, lower end products will move towards these countries and with passage of time, they will move out from there as well. The cyclicality of ship building industry is a classic case-in point in this matter. We now need to move from price leadership to quality leadership.
Q-5) We would like to know your opinion on yuan becoming the global trade currency. Ans) This is actually a premature question given the emergence of trade wars and the uncertainty in global trade balances. Every currency has a buy side order and a sell side order. If you are present on both sides, you can start dictating terms. A currency becomes a global currency, once the global trade starts settling in it, except for certain specific bilateral agreements. In the promissory note nature of currency, it is crucial to have faith in the central bank issuing it and with huge trade volumes its presence in global market has to be very high. The US dollar has perfect traits to execute this trade requirements. With Chinese trade expanding massively and their banking system becoming very robust, they could lend in yuan heavily. Their trade volumes eventually allowed them to net off trades in Yuan and not in dollar. With these volumes increasing and increased spending in Yuan by nations to whom they have lend has helped Chinese currency craft out a place for itself in the route to becoming global currency. Also, Zimbabwe’s adoption of Yuan is a classic case-in point on this issue. There is good chance that it may become a global currency over a period of time, if it sustains its trade volumes & debt extension at this rate.
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NIVESHAK | JULY 2018
JUXTAPOSE
FRM stands for Financial Risk Manager. It is offered by the Global Association of Risk Professionals (GARP). Its main focus is managing exposure to operational, credit, market, foreign exchange, volatility, liquidity, inflation, business, legal, reputational, and sector risk. FRM is much more specialized. It specializes in analysing risk and figuring out ways to minimize it within a company or portfolio. The FRM program is divided into two parts. Exam for both the parts is scheduled for 4 hours. 1st part has 100 MCQs whereas 2nd part has 80 MCQs.
CFA stands for Chartered Financial Analyst. It is the professional credential offered internationally by CFA Institute. The CFA charter requires knowledge and expertise in a much broader range of financial analysis topics, such as portfolio management, economics, reporting, quantitative analysis, and more. CFAs typically have more career opportunities than FRMs because their studies and skills are broad in scope. Typically CFA Level 1 Exam consists of 240 MCQ and is divided into two 3 hours sessions, with 120 questions asked in each of them.
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CLASSROOM
NIVESHAK | JULY 2018
CLASSROOM SMART BETA A set of investment strategies where priority is given to the use of alternative index construction rules in contrast to traditional market capitalization-based indices is referred to as Smart Beta. Smart beta focuses on capturing investment factors in a rule-based and transparent way. Smart beta investing is the combination of benefits from the efficient-market hypothesis and value investing. It is sometimes also known as advanced beta. In other words, smart beta is the return that can be created from illiquid markets (example:- infrastructure and real estate) that gives attractive risk-return trade-offs and can provide the diversification advantage which is required when added to a conventional portfolio of equities and bonds. The objective of smart beta is to get the alpha value, bring down the risk or increase diversification at a cost which is lower than the traditional active management and marginally higher than straight index investing.
ALTERNATIVE BETA Alternative Beta refers to a type of investment strategy. It is the concept of
managing volatile "alternative investments", often using hedge funds is known as Alternative Beta. The investors trying to benefit from the alternative beta investing reveal themselves to risk in various markets than those using traditional beta strategies. An alternative investment is not like the typical investment types, like cash, stocks, and bonds. These investments consist of hedge funds, real estate, managed futures, private equity, derivatives contracts, and commodities. Mostly, the institutional investors or officially recognized high-net-worth individuals are the ones who hold alternative investment assets due to the complex nature and limited regulations of the investments. As compared to mutual funds and exchange-traded funds (ETFs), alternative investments have high minimum investments and fee structures. Investors might face difficulty while valuing alternative investments due to the transactions being unique. Alternative investments tend to have a low correlation with those of the standard asset classes that make them suitable for the portfolio diversification. Alternative investments which are held over a long period of time may provide tax benefits, as investments that are held for more than 12 months are subject to a lower capital gains tax compared to shorterterm investments.
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ANNOUNCEMENTS ALL ARE INVITED Team Niveshak invites articles from participants from all B-Schools across India. We are looking for original articles related to finance and economics. Participants can also contribute puzzles and jokes related to finance and economics. References should be cited wherever necessary. The best article will be featured as ”Article Of The Month” and would be awarded cash prize of Rs. 1500/- along with a certificate. Instructions: • Please send in your articles before 24th August , 2018 to niveshak.iims@gmail.com • The subject line of the mail must be ”Article For Niveshak_<Title>” • Do mention your name, your batch and institute name along with the article • Please ensure that the article has a word count between 1500—2000 • Format: Microsoft Word; Font: Times New Roman; Size: 12; Line Spacing: 1.5 • Please DO NOT send PDF Files and stick to the format • Number of authors is limited to 2 for each article • Mention your E-Mail ID/Blog if you want readers to contact you for further discussion • Also certain entries which could not make the cut to the magazine will get featured on our website.
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