Niveshak Dec16

FROM EDITOR’S DESK Dear Niveshak

Niveshak Volume IX ISSUE XII December 2016 Faculty Chairman

Prof. P. Saravanan

THE TEAM Aaron Keith Rego Abhishek Jaiswal Aditya Kumar Jain Akshay Kaushal Anand Mittal Anisha Khurana Ankit Singhal Ankur Kumar Anoop Prakash Arjun Bhargava Devansh Sheth Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Shreyans Jain Vinay Gundecha

Happy New Year! The last month was mainly abuzz by the effects of demonetization seen by the Indian public. Owing to the deadline of 30th December to exchange old currency notes, the banks and ATMs across the country continued to see long queues of people. The limitations on the withdrawal from the ATMs and Bank accounts were removed post December 30. RBI also came up with its credit policy for the year and rendered most of the key rates unchanged at 6.25%, while the CRR restrictions imposed on deposits worth Rs.3.2 lakh crore were called off from December 10. The month also saw some other interesting news like the introduction of Interest Rate Option by RBI, the fall in India’s Forex reserves for quarter ending September 2016, and the jumps in Sensex and Nifty50 as 2016 came to a close. On the magazine front, we have covered Tata Motors for our Equity Research report. Our cover story talks about the economic blockade in the north-eastern states of Manipur & Nagaland. It tries to dig a bit into the history of the issues and how the ongoing unrest is having a financial impact as well. The article of the month talks about Abenomics in Japan and its success factors. The author has thrown light on the concept, while also trying to create a scorecard in terms of its success in various fields like economic development, labor market, etc. For FinGyaan, the author talks about how Payment banks are the future of Indian Financial System and the related pros and cons. In the FinSight section, the author has studied the possible impacts of the election of Donald Trump as the US president on various facets of global economy. In the FinaFame section, we have looked at Dr. Manmohan Singh, the former Prime Minister of the country, as well as a well-known economist and politican. The Classroom section explains the concept of Open Interest, which essentially means the number of contracts or commitments outstanding in futures and options trading on an official exchange at any one time. For FinView, we have brought the interview of Mr. Mitez Sheth, Global Head - Treasury & Operations at Amicorp Group and Board Member at Amicorp Community Foundation. Finally, we would like to thank our readers for their immense support and encouragement. You remain our prime motivating factor that keeps our spirits high and gives us the vigor and vitality to keep working hard. We hope you had a great month and wish you the best for the new one. Stay Invested! Team Niveshak

All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.

Niveshak Times

04 The Month That Was

CONTENTS

Cover Story

Equity Research

10 TATA Motors Ltd.

Article of the month

12 Has Abenomics Failed Japan?

FinGyaan 18 Future of Indian Financial

The Economic Blockade in Manipur & Naga-Nationalism

27 Dr. Mitez Sheth

System - Payment Banks

FinaFame

21 Dr. Manmohan Singh

FinSight

23 President Trump - Should the World Economy Tremble in Fear?

28 Open Interest

FinView Classroom

The Month That Was

NIVESHAK

www.iims-niveshak.com

The Niveshak Times Team NIVESHAK

IIM Shillong Sensex 2% higher, Nifty50 up 3% bids a Good Bye to 2016 !! The calendar year of 2016 wasn’t bad for the Sensex or the Nifty with a 1.95% increment over the previous year which saw a decrease in the Sensex by 5.03% over Calendar Year 2014. Even a 2% increase in the calendar year was a job well done since the windfall gains of the markets during the beginning of the year were neutralized in the month of September. Also, the year saw such events as the Brexit, worldwide slowdown of the markets, America’s Presidential elections, and an increase in the interest rates by the US Federal Bank. In-spite of these events across the Globe and the severe impact of Demonetization at home later in the year, the Sensex could show a positive result was a commendable effort by the Indian Economy. Top Sensex gainers include stocks like Tata Steel (up 50.68 per cent), followed by Power Grid (up 29.92 per cent), Tata Motors (up 20.47 per cent), Maruti Suzuki (up 15.3 per cent), and GAIL India (up 16.66 per cent). Top Sensex losers for the year 2016 include names like Sun Pharma (down 23.20 per cent), Lupin (down 19.27 per cent), Wipro (down 15.5 per cent), Cipla (down 12.5 per cent), and Bharti Airtel (down 10.16 per cent). RBI introduces Interest Rate Option, to be effective from the New Year With the introduction of Interest Rate Option (IRO) by the Reserve Bank of India, effective from January 31st amidst the uncertainty over rate cuts in coming months, the traders shall have more options to play with in the coming year. The banks and bond houses would be able to manage their interest rate risks better than before. Traders will also be able to gain by speculating on the interest rates. Three years back, Raghuram Rajan, former RBI governor introduced interest rate futures in the exchange traded platform, which has been able to attain some maturity over this time. Under IRO, an option buyer’s losses are limited to the extent of premium paid while an option seller’s

DECEMBER 2016

profits too are capped to the extent of premium. An option is a contract betting on future rate movement. But, there is a difference between Interest Rate Futures and IRO although both are based on rate action/expectation. “Eligible market participants are permitted to take positions in Interest Rate Options for their own balance sheet management and for market making purposes,” RBI said in a notification on Thursday. Banks and Primary Dealers (PDs) may act as market makers. Other regulated institutional entities can participate as market makers subject to the approval of their respective regulators. “This will provide another avenue to market participants to hedge and speculate on interest rate risk,” as per Naveen Singh, senior vice president at ICICI Securities. India’s end-Sept external debt at $484 bn and Forex reserves fall to $359.671 bn Though India’s external debt reduced by USD 0.8 billion from 2016 March end to USD 484 billion by September end, according to the government. The Ministry of Finance also claimed the information in a series of tweets Though the total external debt at end-September 2016 increased by USD 4,768 million from the endJune 2016 level on a sequential basis as per the Government data. As per the Ministry, 83.2 per cent of India’s total external debt accredited to the long-term external debt, while only 16.8 per cent accounted to the short-term external debt by the end of September. The maturity pattern of India’s external debt directs towards the dominance of long-term borrowings. The foreign exchange reserves of India also declined by USD 935.2 million to USD 359.671 billion by the third week of December because of the fall in foreign currency assets. In the previous week, the reserves had fallen by a margin of USD 2.380 billion to USD 360.606 billion. The Foreign Exchange reserves had touched an alltime high of USD 371.99 billion in the last week of September, 2016. Foreign currency assets (FCAs) are a major

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NIVESHAK

component of the overall reserves. They also dipped by USD 933.2 million to USD 335.970 billion in the third week of December. Gold reserves remained constant at around USD 19.982 billion. Government’s direct tax kitty swells to Rs 5.57 lakh crore The Government achieved 65% of their budget because of the direct tax kitty swelling up-to Rs 5.57 lakh crore between April and December. The indirect taxes, which comprises of the customs, excise and service taxes also saw an upward trend in April-December period leaping 26.2 per cent to Rs 7.53 lakh crore. Shattering the false fears of a slowdown in Industrial Index Production and activity post demonetisation, the indirect tax collection in November itself grew by 23.1 per cent to Rs 67,358 crore. Finance Minister Arun Jaitley also stated, “irrespective of what critics had predicted, figures revealed that till November 30, there is a significant increase in indirect taxes.” The Customs collection grew by 16.1 per cent to Rs 20,510 crore, excise by 33.7 per cent to Rs 29,664 crore, and service tax by 15.5 per cent to Rs 17,178 crore for the month of November. Tax Deducted at Source (TDS) has seen a jump of 15 per cent as compared to 11.43 per cent last year. Also, the collection from self-assessment tax has soared by 21.14 per cent, as against 6.47 per cent last fiscal, reflecting results of anti black money measures taken by the government. Between April 1 and December 19, Income tax collection has risen to Rs 2.20 lakh crore, as opposed to Rs 1.82 lakh crore in the corresponding period of previous year. On indirect tax front, revenue has jumped 26.2 per cent till November 30 with central excise showing a surge of 43.5 per cent and customs of 5.6 per cent and service tax of 25.7 per cent. Demonetization: ATM, bank withdrawal limits to be removed after December 30

maximum of Rs 24,000 per week can be withdrawn from the bank accounts. Recently, the Reserve Bank of India has increased its supply of currency notes to banks and ATMS to reduce the cash crunch. The Finance Ministry and the RBI is focusing to accelerate the flow of new 500 notes. Earlier, the government had expected the cash situation to ease by December 30th. According to the CEO of NIti Ayog, Mr. Amitabh Kant, the situation of severe cash flow would ease by mid-January as per his statements given to the media. RBI credit policy 2016: Key rates left unchanged at 6.25%; temporary CRR lifted

The RBI Governor Urjit Patel believed that there would be an ephemeral impact of the demonetization and withdrawal of the high currency notes from the markets on the Industrial Production and activity for the month of November and December. Mr. Patel believed that the banks would pare the lending rates soon and the SBI chairman Arundhati Bhattacharya aided the borrowers saying that the loan rates were sure to reduce and the ample amount of liquidity with the banks would bring the rates down. The CRR restrictions that were imposed on deposits worth Rs 3.2 lakh crore were called off from December 10. The banks are inundated with cash after receiving around Rs. 11.5 lakh crore post the demonetization announcement on November 8. The growth rates have slipped with the economy growing at a rate of 7.3%, less than the predictions and expectations but higher than the forecasted 7.1% in Q1FY17. The economists believe that the decision of the RBI to maintain the rates constant is a prudent one. The demonetization is sure to affect the short-term activity but would not have a significant impact on the mediumterm since it is deemed to result in wealth redistribution and not bring about a destruction in the wealth of the nation.

IThe limitations on the withdrawal from the ATMs and Bank accounts will be removed post December 30. Currently, a maximum amount of Rs 2,500 can be withdrawn from ATMs in a single day and a

The Month That Was

The Niveshak Times

www.iims-niveshak.com

NIVESHAK

27000

2,000

BSE

26800

DII

FII 1,500

26600

BSE

26400

1,000

26200 500 26000 25800

25600 -500

FII, DII Net turnover (in Rs. Crores)

Market CoverSnapshot Story

Market Snapshot

25400

30-12-2016

29-12-2016

28-12-2016

27-12-2016

26-12-2016

23-12-2016

22-12-2016

21-12-2016

20-12-2016

19-12-2016

16-12-2016

15-12-2016

14-12-2016

13-12-2016

12-12-2016

09-12-2016

08-12-2016

07-12-2016

06-12-2016

05-12-2016

02-12-2016

01-12-2016

25200

-1,000

Source: www.bseindia.com www.nseindia.com

MARKET CAP (IN RS. CR) BSE Mkt. Cap

1,06,23,347 Source: www.bseindia.com

CURRENCY RATES INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR / 1 SGD

2.50%

INR/1 USD

Euro/1 USD

2.00%

1.50%

GBP/1 USD

67.96 71.49 58.10 83.87 46.95

JPY/1 USD

SGD/1 USD

LENDING / DEPOSIT RATES Base rate Deposit rate

9.30%-9.65% 7.50% - 7.10%

RESERVE RATIOS CRR SLR

4.00% 20.75%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

6.75% 6.25% 5.75%

1.00%

0.50%

0.00%

-0.50%

-1.00%

DECEMBER 2016

Source: www.bseindia.com

Date as on December 31st

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NIVESHAK

BSE Index % change Open Close Sensex -0.10% 26653 26626 AUTO 0.56% 20145 20257 BANKEX -2.66% 21316 20749 Capital Goods -2.71% 14045 13665 Consumer Durables -0.37% 11279 11237 FMCG 0.74% 8071 8131 Healthcare -6.40% 15734 14728 IT 3.29% 9852 10176 METAL -5.22% 10666 10109 OIL&GAS 1.57% 11964 12152 POWER -2.03% 2029 1988 REALTY -1.39% 1282 1264 TECK 1.61% 5411 5498 Smallcap -2.30% 12330 12046 MIDCAP -3.74% 12499 12031 PSU -2.39% 7880 7691

% Change TECK, 1.61% Smallcap, -2.30% REALTY, -1.39% PSU, -2.39% POWER, -2.03% OIL&GAS, 1.57% MIDCAP, -3.74% METAL, -5.22%

IT, 3.29%

Healthcare, -6.40% Consumer Durables, -0.37% Capital Goods, 2.71% BANKEX, -2.66%

FMCG, 0.74%

AUTO, 0.56% Sensex, -0.10%

Â© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Market CoverSnapshot Story

Market Snapshot

Niveshak Investment Fund

Done on 30/6/14

Information Technology(11.76%) HCL Tech.

Infosys

TCS

Wg: 4.31% Gain : 15.88%

Wg: 3.51% Gain: 23.77%

Wg: 3.94% Gain : -3.36%

FMCG(21.89%) Colgate HUL

Britannia

Wg: 5.67% Gain : 17.44%

Wg: 6.73% Gain: 183.77%

Wg: 4.41% Gain: 17.49%

Amara Raja Wg: 4.36% Gain: 25.83%

Godrej Consm. Wg: 8.07% Gain: 73.51%

Pharmaceuticals (10.53%) Dr Reddyâ&#x20AC;&#x2122;s Labs Wg: 4.08% Gain: 7.59%

Lupin Wg: 6.45% Gain : 29.67%

Midcap Stocks (13.21%) Bharat Forge Wg: 4.23% Gain: 0.37%

Kalpataru Power Wg: 4.14% Gain: 0.69%

HDFC Bank Wg: 7.24% Gain: 29.09%

ITC

Wg: 5.08% Gain: 7.44%

Misc. (11.88%)

Auto (9.39%) Tata Motors Wg: 5.03% Gain: 11.62%

Bank (7.24%)

Natco Pharma Wg: 4.83% Gain: 15.59%

Titan Company Wg: 3.81% Gain: -4.64%

Chemicals (7.73%) Asian Paints Wg: 7.73% Gain: 44.08%

Textile (6.37%) Page Indus. Wg: 6.37% Gain : 32.56%

Performance Evaluation

As on 31 st Dec 2016

Performance of Niveshak Investment Fund since Inception

Dec Performance of Nivehshak Investment Fund 185

102

175

101

165

100

155

145

135

125

115

105

95 1/12

4/12

7/12 10/12 13/12 16/12 19/12 22/12 25/12 28/12

Sensex

NIF

Opening Portfolio Value : 10,00,000 Current Portfolio Value : 15,57,566 Change in Portfolio Value : 24.68% Change in Sensex : -4.17%

1/30/ 2014 8/1/ 2014 1/29/ 2015 7/23/ 2015 1/18/ 2016 7/14/ 2016 Sensex Scaled values Portfolio Scaled Values Value Scaled to 100

Risk Measures: Standard Deviation : 19.01 (Sensex 9.62) Sharpe Ratio : 2.72 (Sensex : 2.69) Cash Remaining: 58,400

Comments on NIFâ&#x20AC;&#x2122;s Performance & Way Ahead: Despite the wide expectations of policy rate cut, the Reserve Bank of India kept its repo rate unchanged at 6.25%. The impact of demonetization by the Government of India, has hurt the growth rate for the month of November and story continued in the December as well. The SENSEX closed flatin December with a slight dip of 0.10%. The NIF is down by 0.68% in the same month. The major gainers were the IT stocks with HCL Tech gaining 3%, Infosys gaining 4% and TCS gaining 5% month-on-month. The muted stock markets return might continue in the coming months. The impact of demonetization and with budget just round the corner, there is also prediction of high volatility in the markets. The Union budget brings in a huge expectation of reviving the struggling economy.

Equity CoverResearch Story

NIVESHAK

Equity Research report: Tata Motors Ltd. EQUITY RESEARCH REPORT – Tata Motors Ltd. Date: 31st December 2016 Rating Matrix Basic Information Rating

Buy

Target

Rs. 523

Current Market price

TATAMOTORS Auto industry

Tata Motors Limited is a Tata Group company, founded in 1945 as a manufacturer of locomotive. The company manufactures automotive ranging from cars, buses, vans, coaches, construction equipment, and military equipment. In 2008, the company introduced Tata Nano, launched under the tag of world’s cheapest car. It has acquired couple of international automotive manufacturing companies. The first one is the South Korean Truck Manufacturer Daewoo Commercial Vehicles Company in 2004 and struggling Jaguar Land Rover (JLR) from Ford in 2008. The acquisition of Jaguar Land Rover proved to be a positive bet for Tata as the Jaguar showed a strong global sales and the company was able to turnaround the company growth with good sales figure around the world. In fiscal year 2015-16, Jaguar sales were more than half a million cars in one year for the first time. Other than Jaguar, the company has shown mix results in last few quarters. Tata motors cars is a division of Tata motors, which is amongst the top 4 passenger vehicle brands in India producing products in the compact, midsize and utility vehicle segments. It has launched various cars models under its passenger and commercial vehicles. The noticeable ones are Indica, Nano, Bolt, Sumo, Safari and the latest one is Tiago. The Jaguar brand includes models namely Jaguar Land Rover Discovery Sport, Jaguar XE and XF. The JLR volume growth in Europe was around 31% and in North America around 43% year-on-year for the fiscal year 2015-16, which is being offset by decline in Chinese volumes of around 28% year-on-year. The domestic sales has declined and there is a sharp decline in M&HCV volumes since 2013. The Board of Directors of company consist of 6 Independent directors, 2 Executive directors and 2 Non-executive directors. The remuneration to be paid to the Directors & Senior Management Personnel is determined by a designated Committee and is recommended to the Board for approval, and is in accordance with the provisions under the Companies Act, 2013. Rs 20.57 crore was spent on CSR activities although the prescribed CSR expenditure required is Nil in fiscal 2016, in view company’s net profit being negative under section 198 of the act.

Growth Drivers

Company Background

₹ 168,918.12 Cr.

Business Description

Ticker (NSE) Rs. 471 Sector 11.12% M- Cap

500570

Corporate Governance

Potential Upside (Annualized)

Ticker (BSE)

Shareholding Pattern (%) (As per BSE)

Sep16’

Jun – 16’

Mar – 16’

Promoter

32.43

32.45

Public

67.57

67.55

Others Total

0.00 0.00 0.00 100.00 100.00 100.00

According to SIAM, the passenger vehicles are projected to grow at 6-8%, M&HCVs at 12-15% and intermediate CVs 7-9%, thus the industry has been poised with a strong growth. Currently, the robust GDP growth and fastest growing country in the world is the favourable factor for the company. However, the company needs to work on its domestic product portfolio as it has been facing stiff competition from many of the national and international brands in all categories of vehicles. The increase in defence spending by the government of India is also a positive sign for the company. Other than these, a full fledged implementation of Goods and service tax (GST) by April 2018 will help bring a reduction of cost for the company, thus improving operational margin. The operating cost of the company has increased substantially leading to lower profits. The management has plans to reduce operating cost by producing engines of different vehicles using same platform and building a strong relationships with suppliers. As per the company’s Annual report FY15-16: “the Company believes that the supplier rationalization programme that it is undertaking will provide economies of scale to its vendors, which would benefit the Company’s cost programmes”.

DECEMBER 2016

NIVESHAK

Industry Rivalry – High Market growth rate is high inviting large competition and high fragmentation in market

ROA: Comparison of Competitors 20% 10% 5% 0%

FY12

FY13

FY14

FY15

FY16

ROE: Comparison of Competitors 60% 40% 20% 0%

FY12

FY13

FY16

Comparable Valuation

Maruti Suzuki

We have calculated the stock’s intrinsic value based on a weighted average of DCF and Relative valuation. Starting FY17, growth in revenues have been estimated at an average of 5%, which is consistent with previous years growth rate. The auto industry is cyclical in nature and Tata Motors has a high Beta of 1.31, with a WACC of 13%. The fundamental value stands at INR 523 and given a CMP of INR 471 as on 31st December 16, the stock is undervalued. Although company’s JLR division has been able achieve increased volume growth in the past years the domestic demand is struggling. The overall sales of the company volume-wise has decreased by 0.8% in Fiscal 2016. Also, company’s profitability might be further threatened by existing and new entries of competitors. Also the ouster of Mr. Cyrus P Mistry and tussle with company’s Emeritus, Mr. Ratan N Tata will led to loss of focus and a quick resolution of the situation would be better for the future prospects of the company

Rating Def.

Eicher Motors

FY15

BUY: If stock is expected to deliver more than 10% annualized returns over holding period NEUTRAL: If stock is expected to deliver (-)10% - 10% annualized returns over holding period SELL: If stock is expected to deliver less than (-)10% annualized returns over holding period

Technical Analysis

Tata Motors

FY14

The technical analysis of TATA MOTORS reflects that the stock is currently trading above its 50, 100 & 200 day Exponential Moving Averages. Stock was in a downtrend with negative MACD but is now losing the steam and uptrend is about to start with a convergence and positive divergence, as can be seen in the MACD chart. With a RSI of 31.98, stock has made a bottom and is ready to go uptrend. The Bollinger bands interpret that 95% of the times the stock will remain in between the upper and lower bands. Whenever the stock has moved above the middle band it has shown strength and the stock is on the verge of crossing the middle bollinger and will give a breakout.

Industry Competition

Industry Figure

15%

Buyer power – High Large and diverse client base Buyers can easily switch to other brands Supplier Power – Low Contracts with plenty of suppliers and they are locally available Switching costs are moderate Threat of forward integration by them is low

Threat of New Entry – Medium Entry barriers are high . With high investment requirement in the business. - However, there are many new foreign players entering in Indian market with lots of cash muscles Threat of Substitutes – Moderate Expectation of future increase in fuel prices might lead to preference of improving public transport and car pooling

Valuation Summary Method Discounted Cash Flows

Value/Share Weight 410

Fair Value

0.5 523

Relative Valuation

637.42

0.5

Equity CoverResearch Story

EQUITY RESEARCH REPORT – Tata Motors Ltd. Date: 31st December 2016

NIVESHAK

Article of the Month Cover Story

Has Abenomics failed Japan? Srujana Sunkara IIM Lucknow “The rise of Abenomics dates back to the post-war period, when Japan witnessed a strong economic growth of an average of 10% between 1955-1970. By the end of 1980, a massive property and stock market bubble was fuelled due to abnormalities in the economic growth of Japan. The banks in the Japan started lending more with a disregard to the quality of the borrower. This inflated the property and stock market bubble. With an intention to keep the inflation and speculation in check, the Bank of Japan raised the lending rates to the banks. This led to the bursting of bubble and led to a stagnant growth in the Japan’s economy. The effect of which is felt from 1991-2000, which is called “Ushinawareta Jūnen” or The Lost Decade. The effects of the Lost Decade were felt on the next decade too and the modest growth

DECEMBER 2016

that Japan gained in this period was offset by the earthquake and tsunami of 2011. Japan, the world’s third biggest economy, currently faces three major problems– Weak growth, poor monetary situation and employment related issues. • Weak Economic Growth: In the last two decades, Japan had a near zero growth rate, stagnated consumer spending, huge government debt • Monetary Situation: Prolonged deflation and a strong currency which affected the exports • Employment: Aging and declining population, Shortage of labour in particular areas When Japan was reeling under such circumstances, Shinzo Abe, of the centre right

NIVESHAK o Tourism – With a focus to improve tourism, visa restrictions were lowered and duty- free shopping was introduced Having understood what Abenomics is, brings us to the real question: How successful was Abenomics? Scorecard of Abenomics: • Economic Development: In spite of the monetary and fiscal policy taking off well initially, no sustainable changes have been observed after two years of implementation of Abenomics. Soon after the monetary policy was announced, consumption improved, share prices increased, yen was devaluated, public investments and GDP improved. But once the consumption tax rate was increased, Japan found itself to be in temporary recession as there was a stagnation in the economy • Deflation: During the period of monetary expansion, the inflation rate has moved to a positive figure of 2.1% in 2014. But, soon due to decreasing prices of oil and other economic factors, the inflation rate fell again and currently the inflation rate is 0.10% • Labour Market: Unemployment rate fell to 3.0% by June,2016, but, there has been a change in the hiring patterns by the organizations. There has been a rise in the irregular employment, which in turn led to decrease in productivity, wages and skill development of the labour • Budget Deficit: Due to increased consumption tax rate, tax revenues have decreased which lead to an increasing budget deficit • Foreign Trade: In 2014, Japan’s trade deficit was at $108 billion, while it reached to $4.56 billion surplus in 2016. The reasons behind this improvement are, shutting down of the nuclear power plant after the Fukushima disaster led to fossil fuels being imported, export articles facing unexpected problems and devaluation of yen leading to increased exports but a substantial offset by increased imports • Structural Reforms: In spite of a series of structural reforms implemented by the Abe government, not spectacular changes were observed that spurred the economic growth of Japan. The initiatives taken so far include, creation of larger and profitable agricultural lands through liberalization of land acquisition, expansion of schooling programs,

Article of the Month Cover Story

Liberal Democratic Party, made policies for the revival of the Japanese economy as his agenda for the political campaign. He was elected the Prime Minister and his economic policies popularly came to be known as “Abenomics”. The core of Abenomics lies on three main strands. • Monetary Policy: As per Abenomics, the traditional monetary policy failed to achieve the intended inflation target rate of Japan in-spite of the already low interest rates. So, in an unconventional way, like the quantitative easing policy for instance, was implemented to fight deflation and improve lending in the economy. The main motive behind these monetary policies is to break the cycle of deflation which is leading to further deflation as result of expectations of lower prices in the future. Another aspect of it is to weaken the value of yen, thereby making Japanese products more competitive in the foreign markets, which will in turn improve the exports. • Fiscal Policy: Soon after taking charge in the office, a fiscal stimulus of 10 trillion yen was announced. This stimulus was expected to boost the Japanese economy by 2%. The arenas that this package aimed to improve areo Welfare- The aging population needs were kept in mind and hence there was a focus on welfare activities o Servicing the Debt- The government understands that it cannot spend money continuously and should look at alternate sources of income and hence raised the income tax o Infrastructure- In order to improve the GDP, the government planned to spend on building infrastructure and encourage small businesses • Structural Reforms: The structural reforms were aimed to have a long term impact. o In order to tackle the problem of aging population, the government aimed to increase the number of women in the work force. o For an inclusive environment to foreigners, fast track processing for residence for foreigners, G30 program, scholarships to Japanese students to encourage them to study abroad

Article of the Month Cover Story

NIVESHAK establishment of economic zones, promotion of foreign investments and exports, introduction of individual saving bank accounts for pension insurance While it is too early to declare the success or

the long term impact on the economy. Most of the improvements do not have a long term consequence. â&#x20AC;˘ Expectations versus Reality: Abenomics was expected to spur consumption, investments,

failure of Abenomics, inflation rate of Japan has not seen much improvement even after three years of Abenomics. In spite of the decreasing value of yen, exports have not raised considerably. The credibility of Abenomics has been decreasing rapidly and is expected to have a shelf life of two more years. The reasons behind these are, â&#x20AC;˘ Limiting value of Abenomics: Out of the three arrows of Abenomics, only monetary easing has been successful and yen value depreciated to a 40-year low. However, the cost of the monetary policy has been rising which increases the risk of economic shocks. The fiscal stimulus arrow, was effective initially, but, with an increase in the taxes, it was withdrawn. The structural reforms arrow, though had seen improvements, cannot be used to quantify

exports, inflation. But, even after three years of Abenomics, the results were rather dismal. Consumption though increased initially, with an increase in the consumption tax rate it decreased again. Investments are increasing, but the magnitude is low and exports were not as expected. Inflation though improved drastically initially, came back to the original state.

DECEMBER 2016

It is difficult to forecast how Abenomics will perform beyond 2017. With the scheduled rise in the sales tax, economy and inflation will cool down further. At that point of time, it will be clear to decide whether or not Abenomics is sustainable!

NIVESHAK

Cover Story

The Economic Blockade in Manipur & Naga-Nationalism Anand Mittal AndGirraj Goyal IIM Shillong Tussle for Power, Autonomy & Rights While the rest of the country is still reeling from the ill effects of demonetization, the mystique state of Manipur in North-Eastern India is struggling for basic amenities. With the prices of petrol rising up to around Rs.200-300 a liter, and those of gas cylinders surging to Rs.2000, the issue is taking a serious toll on the local people as they had already been suffering from the cash crunch, now coupled with this unreasonable inflation. From November 1, state of Manipur has been cut from rest of India, as two main national highways NH37

(between Assam and Manipur) and NH2 (between Manipur and Nagaland) which are considered to be lifelines of the state are blocked by activists of United Naga Council (UNC) to register their protest against state government’s move to create new districts. UNC claims that creation of new districts will bifurcate their “Ancestral Naga Areas”. The economic and social unrest which turned violent many times, has been there for more than two months now, and a concrete solution to the problems is yet to emerge. The state assembly elections in Manipur in

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2017 have only added political twists to the misery of the local people- the majority of whom happen to be of the Meiteis origin, which is an ethnic group from Manipur itself. The minority of the population in the state comprises of the Naga, Kukis, and other hill tribes. Although the dispute is more than a decade long and stems from the NagaNationalism movement, the recent turmoil started in October 2016 when Okram Ibobi Singh, the Chief Minister of Manipur from the INC decided to regroup and subdivide 4 Districts in the state in the name of administrative convenience. The Naga people opposed to the development as this new regrouping will allegedly put more control of these vicinities in the hands of the Meiteis. The Naga groups feel that the creation of these new districts would jeopardize their claim for a Greater Nagalim - a separate Nationalist Identity which includes Nagaland and the erstwhile

four hill districts of Manipur, apart from some parts of Myanmar. The Manipur government is naturally adamant at not ceding its territories to the Nagas. Connecting Dots: Synthesis of the problem If we dig a bit into the historical background of the issue, we would see that when the British arrived in India, the various Naga tribes had no common national identity.

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Each Naga village was like a sovereign state, being ruled by the tribal elders. The British took it upon themselves to capture several Naga territories and consolidated them under the Naga Hills District of Assam. During the First World War, the British Government recruited a significant number of laborers from the Naga Tribes. As part of the labour corps close to 2000 Nagas were sent to France. Alienated from the other British Indian troops, these Nagas developed a sense of unity among themselves and formed the Naga Club upon returning to India in 1918. This club provided the socio-political foundation for the Naga-Nationalist Movement. In 1929, the Club submitted a memorandum to the Simon Commission, requesting that the Nagas should be given a choice of selfdetermination after the British departure from India and that the Nagas be excluded from any constitutional framework of India. The evolution of leadership inside the club helped the Naga Movement gain momentum in the late 1940s. The Naga Club later became the Naga National Council in 1946. Disappointed by the policy frameworks of the Indian National Congress, they went underground and started engaging in guerrilla warfare against Indian Security Forces. The NNC went as far as to declare the independence of Nagaland on August 14, 1947, but this was considered unconstitutional and brought down by the Indian Government on charges of rebellion. Looking at all these events, it is evident that the Naga people have been wanting a sovereign state since long, and the protests for this movement have caused violence in the area. These protests, however, were neutralized to a great extent when the Indian Government created a separate state for Naga People â&#x20AC;&#x201C; â&#x20AC;&#x153;Nagalandâ&#x20AC;?. Still, that did not stop the

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Politics: Elections and Inactions In 2012, Indian government came up with a non-territorial resolution to one of the oldest armed ethnic conflicts in Northeastern states. According to the resolution, Naga people would not demand the unification of Naga inhibit territorial boundaries of other states namely Assam, Manipur and Arunachal Pradesh. In return, greater autonomy shall be granted through separate budget allocation for Naga inhabited areas. However, the non-territorial resolution could not be implemented as an alternative arrangement for Naga people within the state was not approved by state governments. Involvement of the political angle is only worsening the situation in the state. Even after such old and long protest state government of Manipur went ahead with their plan to bifurcate district which was exactly similar to rubbing salt to the wounds. The UNC claims that the recent carving out of the four new districts has been done by the state government (INC) to gain political mileage, as close to 53% of the population in Manipur comprises of Meiteis. Whereas in the state of Nagaland, BJP has formed a coalition government with NPF, and the party has always been seen as having close ties with the Naga Community. So the INC is accusing the Centre for causing unrest in the valley, but the BJP is also trying to keep itself away from taking any strong action in Manipur as doing anything that would jeopardize its closeness with the Naga Community may result in it losing ground for the State Elections scheduled to be held in 2017. Hence the administration seems to

be paralyzed over the issue. Financial Impact: R The ongoing unrest has had some adverse financial impact as well. The state capital Imphal is surrounded by hills from almost all the sides. The blockades at the National Highways 2 and 37 have disrupted supplies to the State from the rest of India, resulting in huge loss of revenue to the suppliers. Apart from the two National Highways, there is another 100km road from the town of Moreh, which runs along the IndiaMyanmar border. Moreh is considered as the commercial capital of Manipur and acts as India’s gateway to South-East Asia. The scale of trade between India and the Southeast Asian countries is significant, with around 13% of India’s total exports going to these countries, and around 5% of India’s total imports coming from these countries. The unrest in the region has been adversely affecting not only India’s domestic, but also the international trade. Further, protest by activist turned violent many times which caused damage to public property and also the irrecoverable loss of life. Conclusion The ethnic divide and distrust among tribes in Manipur mainly between the Meiteis and the Naga people is so immense that most of the Nagas residing in Manipur feel discriminated when it comes to power, administration and development packages by the Meitei dominated Manipur state assembly. What is misfortunate is that political parties in India are not able to see pain and misery of local people beyond their political advantage. In these circumstances, chances of any concrete solution to this decade long problem are grim.

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proponents of the Naga-nationalist movement from wanting to communalize the Naga people and demanding a sovereign state.

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Future of Indian Financial System-Payment Banks VidushiJalota Finance is the lifeblood of the monetary functioning taking place in an economy. It has been helping the humankind from time immemorial to facilitate transactions on both micro and macro levels. This financial system is as dynamic and evolving as the man. It keeps on adapting and changing to its needs. In the past, this system was as simple as the barter system, then people started to store their money in temples for safekeeping. Then evolved what we now know as the banks and other financial institutions. Merchant banks, investment banks, commercial and retail banks are some of the various types of banks existing today. What the future holds for this system is something very interesting and equally complicated to know and study about. The concept of payment banks is relatively new and unheard of in India. The term “payment banks” was coined by the Nachiket Mor committee in January 2014. It was later announced in the Union Budget (10 July 2014)— “After making suitable changes to current

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framework, a structure will be put in place for continuous authorization of universal banks in the private sector in the current financial year. RBI will create a framework for licensing small banks and other differentiated banks. Differentiated banks serving niche interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force”. A payment bank is a bank which has a license to issue and provide remittances, payment of utility bills and receive deposits but cannot carry out lending activities. That is, it can carry out certain functions which a regular bank carries out as permitted by the Banking Regulation Act of 1949. In other words, debit cards can be issued along with usage of internet-banking services, but not credit cards due to non-availability of the lending function with such banks. Customers can open current and savings banks accounts with up to Rs.1 lakh deposits and also such banks can distribute products like mutual funds and insurance. Those having salaried accounts in regular banks can

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Up till now 3 of these entities have already opted out from the system citing concerns like profitability, scope of business activity and competition. Those 3 are- Cholamandalam Distribution Services followed by owner of Sun Pharma, Mr. Dilip Sanghvi. And lastly, it was Tech Mahindra Ltd. which backed out from this system. Upon close scrutiny, it was found out that there were myriad reasons behind forfeiture of the licenses by these entities. Some of them could be• Some of them believed these payment bank licenses give them an opportunity for a fullfledged bank license. But since that isn’t the norm, it must have been a reason to opt out • Also, these banks are required to invest 75% in government securities which puts a pressure on their earnings hence profits are a challenge. Competition is compounded due to new payment solutions like UPI (Unified Payments Interface) • Since a bank isn’t required exclusively to carry out such services, specialised payment services firms can also carry out these operations through collaboration and proper operating structure, this must have pushed those few firms away. It has also been found that cost of compliance

isn’t too low as compared to a regular bank • A major drawback of this system is that even though the banks can accept higher deposits from the people but they cannot keep more than Rs.1 lakh in their accounts per depositor. So transferring the excess money during the day is a major technological challenge. One way could be the customer could maintain multiple accounts but that will compound administrative work unnecessarily Mr. Arun Jaitley, Union Finance Minister says“Payment banks will change the way people think, change the way they keep the money, where they keep their money, the way they pay,” On 11th April 2016, Dr. Raghuram Rajan, the then governor of the Reserve Bank of India launched what is known as Unique Payment Interface(UPI) Following are the factors which need to be addressed in the payment industry- Cash dependent nature of the economy - Incomplete/ partial financial inclusion - Acceptance of technology - Unorganized retail market - Systematic loopholes enabling tax evasion tax Key structural growth drivers of payment industry (focal points for any stakeholder); - Smart phone penetration - Increasing digital awareness in consumers - Growing inclination towards secured & hassle free transactions - Emergence of sub segments like wallets and payment gateways - Fading industry boundaries through partnerships between financial institutions, mPOS and mobile operators - Massive reach of telecom operators into rural areas - Government initiatives like Aadhaar, Jan Dhan etc - Multiple access modes for usage (internet, mobiles, tablets) - Increasing e-transaction volumes and trust due to rise of e-commerce Payment banks can carry out the following functions; - Enabling transfers and remittances through mobile phones - Cashless, cheque less transactions and automatic payment of bills is possible - Issue debit cards, forex cards and provide internet banking services

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also open accounts in payment banks. The upper hand of payment banks over regular banks is that such banks don’t charge very high fees also avoid stringent KYC (Know Your Customer) norms which complicate the transactions for the customers. Payment banks are more technologically intensive and as a result their costs and hence fees are lower. Also, payment banks can provide last-mile connectivity unlike regular banks as they are heavily technologically driven. Initially there were 41 applicants for getting licenses for payment banks, but on 19th August 2015, RBI gave “in-principle” (valid for 18 months within which the entities cannot engage in banking activities) licenses to the following 11 entities;

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NIVESHAK - Can transfer money directly into the bank accounts at low or no costs as they are a part of the payment gateway connecting banks - Can issue third party instruments like mutual funds EXHIBIT 1

Growth of the segment 90-200 from 75 to 120 that is 6% growth rate is the Largest Consumer Segment, also known as “The Next Billion” will be demanding affordable low cost banking services by the year 2020. Payment Banks can successfully fulfil this need of this segment of the society. Also, the growth rate of the top segment that is above 1000, is 3.5%. The rich households would be demanding quality wealth management services, so payment banks can venture into this area too. EXHIBIT 2

If the data in the above table is analysed, we observe that the penetration of the internet services in developing countries are 35.3% of the total population of those countries. The population is becoming more tech savvy; they want services on the click of a button. The payment banks, in future, can hope to leverage and ride on this fact and provide essential services like banking to the people as this number is slated to grow.

1.Increased competition for Universal Banks- More focus will be on deposit mobilisation and payment and transaction services like payment of utility

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bills, mobile recharge, ticketing etc. Such banks are heavily technologically driven. 2.Achieve financial inclusion objectives-Regulatory requirements of capital and setting up bank branches in rural areas will be looked after due to payment banks as they carry out transactions mainly through smartphones or tablets. 3.Encourage digital payments- Most of the payment banks coming with a mobile wallet and offer banking services with a licensed bank for payments of utility bills, mobile recharge etc. Now they can provide such services at lower costs. 4.Reduce Statutory Liquidity Ratio(SLR) on commercial banks- The very high limit of around 21.50% percent of funds or deposits as SLR curb the banks’ ability to lend mainly to capital or productive intensive sectors of the economy. Payment banks have to compulsorily invest in government securities. Thus, if such banks expand in the future, then G-sec requirements can be met without putting pressure on commercial banks. 5.Check on Black Money- Since India is currently a cash-heavy economy it gets difficult for government to keep a cap on the black money and catch the offenders. On the other hand, digital cash by payment banks will increase the digital footprint and help the tax authorities to check evasion. This is the first time in the history of Indian banking system that RBI is giving out licenses for activities which are specific in terms of a certain function. The aim of this move is to push financial inclusion in the country. It aims to target migrant labourers,

low-income households and small businesses and offers remittances services with low transactions costs. It is very difficult for traditional banks to penetrate into remote areas but since mobile phone coverage is huge in India, so this payment banking system can be very successful in the near future. Mobile phone banking offers low cost banking options as the infrastructural costs are eliminated. It will accelerate India’s journey towards a cashless economy. The future of financial system is the new norm of payment banks which are both cost effective and customer friendly and will pave the way for a better and an inclusive banking system in the country.

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Dr. Manmohan Singh Archit Garg IIM Shillong “If you have a rigidly controlled economy, cut off from the rest of the world by infinite protection, nobody has any incentive to increase productivity and to bring new ideas.” - Dr. Manmohan Singh served as the Prime Minister of India for two consecutive terms from 2004 to 2014. He is a renowned economist and was the first Prime Minister since Jawaharlal Nehru to be reelected for a second term in the office. Singh was the Chief Economic Adviser in the Ministry of Finance in 1972 and was the Secretary in the same Ministry in 1976. He was in the Planning Commission from 1980-1982 and then was appointed as the Governor of the Reserve Bank of India in 1982 under then Finance Minister Mr. Pranab Mukherjee until 1985. He then worked as the Deputy Chairman of the Planning Commission from 19851987. He has also served in the International

Monetary Fund. In 1991, he was appointed as the Finance Minister by then Prime Minister P.V. Narasimha Rao. It was during this period that Indian economy went under a major economic reform. It was a time when the country was going through a deep financial crisis. The fiscal deficit was close to 8.5 percent of the GDP and CAD was close to 3.5 percent of GDP. The foreign exchange reserves were barely a billion dollars and FDI was almost non-existent. In his maiden speech as finance minister, Mr. Singh quoted Victor Hugo : ‘No power on earth can stop an idea whose time has come.’ The economy was monopolized by the public sector. Then began the restructuring process of the Indian economy and it opened up to competition by private sector and foreign investment. Mr. Singh, unperturbed by the bureaucratic controls or the prevailing licenseraj, took the economy along a high growth path

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NIVESHAK of 6-7 percent during his term in the cabinet. He also devalued the currency and slashed subsidies for domestically produced goods. By 1994, the economy was well on its way to recovery; he presented the historic budget. Nearly 1 crore jobs were created and the environment of liberalization was set in motion. Along with it the foundation for an information

During 1990-91 the un-weighted tariff was around 125%. This figure gradually came down to 71% by 1993-1994. Thus a considerable increase in exports was observed due to tariff reduction and removal of other barriers. Before these reforms all imports were either subjected to licensing or prohibited altogether. All bulk items like cereals, petroleum, etc. could be

technology and telecom revolution was laid. Under Mr. Singh, the government entered into an understanding with the RBI to deny itself the right to fund its deficit thereby restricting the unlimited monetization of the fiscal deficit. He also introduced more competition, both internal and external; simplified the tax structure and also tried to create an environment conducive to the growth of businesses in the country. On the globalization front, Mr. Singh felt that free trade and Indiaâ&#x20AC;&#x2122;s labor-intensive products can find markets which will help India in eradicating poverty and creating employment. Mr. Singh gave importance to macroeconomic stabilization in the country and opening up of trade and the payment system. To implement this he put in place a macroeconomic adjustment program along with the support of IMF. This program combined the monetary, fiscal and exchange policies to reduce Indiaâ&#x20AC;&#x2122;s internal and external imbalances. IMF played a critical role in helping India during this crisis. Indiaâ&#x20AC;&#x2122;s main success was in the area of tariffs.

imported by only the government agencies. He played an instrumental role in shaping the Indian economy to what it is right now. Liberalization, Privatization and Globalization took place when he was the finance minister and the Indian economy is reaping benefits because of it till date.

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FinSight

Anuj Verma and Aditya Pandit IIM Amritsar “We will Make America Great Again”, “Americans first”, are some of the slogans used by Donald Trump during his election campaign against Hilary Clinton. Although the slogans do not give concrete evidence about his economic policies and do not specify the stance or direction U.S would take in the future global economy, it would ignorant not to take a deeper look into the views and comments of the next President of the World’s Most Powerful Country. Some of the important economic policy decisions that Donald Trump has commented about in his election campaign are regarding trade, immigration, taxes, federal reserve, jobs and growth. We will take a look at each one of them and determine the domestic and global implications of his policies. The United States has the world’s largest trade deficit since the early 1970s.

In 2015, the deficit on goods and services was $531.5 billion, higher than the $508.3 billion deficit in 2014. There is such a huge increase in deficit because exports were at about $2.230 trillion, which are about $2.2762 trillion lower than imports. Now, when an economy of such size suddenly switches to a protectionist path, under the leadership of Donald Trump, we can expect a severe downturn in global economy. Trump claimed that China’s entry into the World Trade Organisation was “a disaster”, which has led to an abandonment of about 70,000 factories and amounting to the statement which says that China has been the root of cause of many jobs shifting out of the United. Most notably, Trump has warned he will slap tariffs of up to 45 per cent on China’s exports to the US. Impact of such a move would be devastating for both countries. China’s exports to the US last year were just over US$400bn, so even if tariffs were averaged

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out at just 15 per cent, that would mean additional costs to consumers of around US$60bn.Thus domestic manufacturing of such goods and services will not only lead to a higher price, but will also need huge investments in infrastructure which does not seem viable at the time. Also, the agreements such as TransPacific Partnership (TPP), a partnership between 11 countries including United States of America is threatened by Trump’s protectionist stance. While, other new agreements that are about to take shape like the 23-economy Trade in Services Agreement (TiSA), could wither and die.

President elect-Donald Trump in his election campaign announced his campaign to deport about 2 to 3 million immigrants who are involved or have committed criminal atrocities in the United States of America. Although, this seems like a very stringent action from the president elect, it should be noted that the Obama administration has also deported more than 2 million immigrants from 2009 to 2014, which has been the highest number of deportations when compared with previous presidencies. So, this part of Donald Trump’s immigration policy was being already implemented. With proper investigation and hearing provided to each of the immigrant, it could prove to be one of the major positives of the policy. Protectionist path to impose stringent visa regulations is one of the main objectives concerning Donald Trump’s immigration policy. He aims at reducing the number of work permits given to immigrations, which in turn would, according to him, provide U.S citizens with more job opportunities. Although on a simple and micro level, this plan would seem to work. On a larger scale concerning the economy of United States of America, it would hamper all around growth especially the growth of start-ups in the Silicon Valley. Immigrants have been entrepreneurs for half of the America’s billion-dollar tech start-ups, for a total value estimated to be around $170 billion. They also created an average of 760 American

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jobs per company. Many organisations like Mu Sigma etc., have immigrants working as more than half of the workforce. Giants like Microsoft, Google, SAP employ thousands of immigrants which are contributing to the U.S economy not only by propelling these giants forward by their human intellect, but also by paying taxes and spending money in the States. Thus, a stringent Visa policy which restricts the inflow of valuable talent might hamper the overall growth of the economy and might also force the homegrown tech giants who have adapted to an environment which has a diverse workforce, to look elsewhere.

Dollar being the world’s reserve currency allows the United States to have the advantage of making changes with their current tax system and then using it as a channel of rewards and punishments. It’s the exorbitant privilege, tax version. The government infuses money into the economy through the channels of government spending and tax cuts, and takes the money back through taxation. Sometimes the government would like to control the flow of money to prevent asset bubbles and redeem the currency. Now, there are four key takeaways from Donald Trump’s tax plan: • Donald Trump’s plan is to simplify the tax structure, combining the existing seven tax brackets into three while raising the allowable tax free income level, at which workers will have to play taxes. Many married couples will see a substantial reduction, as the high-income individuals, with the highest tax rate dropping from 39.6% to 33% • Corporate taxes will be reduced from 34% to 14%. The new tax policies would allow some leeway to some entities, such as sole proprietors, to be taxed at this low rate rather than at the higher personal rate. • The cuts would add about $6-7 trillion more to the national debt relative to baseline projections. • Donald Trump’s plans would lower taxes for most of the American population

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Donald Trump’s tax plan, has huge tax cuts for business and the rich, focuses on huge growth. It would inject about $6 trillion into the economy over 10 years, mostly by means of business tax cuts. This wouldbe money supply-side of the economy, which you can do with your own currency. There are two problems with the above perspective. First, the proposed tax cuts would have to be substantial or enormous to have

any macroeconomic effect on a $16-18 trillion economy. His first plan comprises of even larger cuts, and the tax deficit hawks swooped. But consumption has fallen, and newly subsidized businesses would still need new consumers in order for investing in the business to make sense. Second, even if enhanced growth were achieved, it would not be evenly distributed. The income taxes are progressive. Consumer spending is not, so the system as a whole is not redistributive. The proposed plan will not provide lot more money to the people, with a high marginal

propensity to consume. Thus, although the plan puts provides a lot of incentive to the American population, their behaviour is hard to predict. The probable effect on the global economy would be that with more money in the hands of the American population, businesses outside the US economy will look at the population as a new market.

The Federal Reserve has been behaving as an independent entity, with almost zero accountability to any branch of the U.S. Government for many years. The Feds have the ability to manage and tweak the US economy without the fear of political

repercussions or punishment from government officials. For more than a year, the two seats on the Fed Reserve’s Board of Governors have remained empty. The dispute between the Obama administration and federal legislators kept them unfilled. But with the results of the recent elections, the Republicans, controlling of The Senate, House of Representatives as well as the White House, it is expected that these appointments to finally be made. Trump’s appointments for these two seats will most likely be significantly different

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but would raise taxes on some families having extremely high revenues and single parents because of the elimination of some exemptions. Take-home pay for the top 1% of earners could rise substantially.

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than Obama’s which potentially can change the dynamics of the Fed. The Feds have kept the costs of borrowing near zero since the economy started to falter about nine years ago, but the process of normalization of interest rates has started, as inflation gradually rises and the labour market improves. But on the other hand, Trump’s massive infrastructure-spending plan could be a stimulus to a faster jump in inflation. It’s not guaranteed, and there are questions around the promised economic growth during the pre-election campaign, and would it actually spur the economy forward. In the longer-term, higher government spending and higher tax cuts from the government – in other words looser fiscal policy – can lead to a tighter and a constricted monetary policy with a more interest rate hikes from the Fed. Hence it looks as we are poised to see some contrasting views on the future interest rates between Janet Yellen and Donald Trump. This will certainly not be a fruitful engagement as the it will surely introduce global instability when the President of the United States of America and the Chair of the Board of Governors of the Federal Reserve collide, although it is just a possibility.

Under Obama presidency, unemployment in the US has dropped below 5%. Trump wants to eradicate unemployment from its root. For each per cent change added in GDP growth, the economy adds 12 million jobs. Trump’s vision is to increase growth by 1.5 percent, which would result in 18 million job above the projected current job figures of 7 million. Hence producing a total of 25 million new jobs for the US economy. Trump is planning to focus on those areas where the recovery was slow or neglected after financial crises of 2009. In his speech, he picked the sectors like manufacturing where unemployment is high because of job outsourcing to developing countries where labour is cheap. He said that his policies will keep the jobs and wealth inside the US by giving these job opportunities to US citizens. Trump has promised to spend heavily on

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programs that would create a lot of new jobs in construction, steel, manufacturing and other sectors. He called for an infrastructure renovation program for highways, bridges, tunnels, airports, schools, hospitals which will serve as a powerful step to create new jobs and promote economic competitiveness. His plans for lower taxes, trade barriers and tighter immigration rules would lead to stronger economic growth. But the concern is that this will lead to higher labour cost, which will make US non-competitive against the world. Worsening the situation, Trump also said to raise minimum wage. This will impact their whole economy a lot. Many economists have warned that his plans might backfire and could forge things worse not better, hindering economic growth and thereby employers’ ability to create new jobs.

In short, if we take a look at the probable positives and negatives of the above topics and add it up, we find that the Trump dynamics would probably have a negative impact over the world. Although, the we find that the overall impacts have been majorly measured in a negative way because of the uncertainty brought about my Donald Trump’s behaviour during the pre-election campaign. Because of the instability caused by global events like the Brexit and the Italian Referendum, the plans announced by the Presidentelect probably might shake up the global economy from its roots, spelling further problems for developing economies like India.

Dr. Mitez Sheth

Global Head of Treasury and Strategic Initiatives CSR and Sustainability Institute, New York

Basel-III norms and other regulations impact the banking system in terms of maintaining extra liquidity. What do you think treasury departments should do to adapt to these new regulations? These norms are not new anymore. They have already impacted most Indian banks. These norms have a organization-wide impact, not only treasury. This is on top priority of each CEO / CFO. The next couple of years will be very interesting in terms of impact of BASEL norms on Indian Banks and the way they manage their capital adequacy. These days most corporate treasury groups rely on multiple ERPs for data sources and use multiple solutions (some manual) to address their company’s needs. This has lead to increased operational difficulties and risks rather than providing feasible solutions to address these challenges. How in your opinion, should companies cope up with these risks? TIn India, most banks are technologically advanced and even if there are multiple systems; they talk to each other seamlessly. Banks who rely on manual processes will be the ones impacted the most. And in my opinion, banks are moving in the right direction to remove the dependencies on people and manual processes. What are your views on sustainable finance and how does it impact the functioning of a treasury department? Sustainable finance refers to any form of financial service integrating Environmental, Social and Governance criteria into the business

or investment decisions for the lasting benefit of both clients and society at large. Sustainable finance is above the traditional ‘Treasury department’ we see in an Organisation - this directly comes on radar of the CFO / CEO. The entire organization (Including people, processes, policies, etc.. all have to be aligned to support the environmental, Social and Governance criteria. This has to be a genuine act which will be finally awarded by all the stakeholders. What are your suggestions for people interested in working in Treasury and CSR? I keep on emphasizing this to all student community. Do not look at your specialization / job function in isolation. If you are a Finance specialization or Marketing or HR, it does not mean you have to know only about your area. Example: Treasury Sales: Will this function need a marketing or a finance guru? Sales and Marketing of Financial products is a very common and a very high paying job which required a proper mix of marketing and Finance skills. Similarly: In the new wave that has just hit India, Knowledge of “Sustainability” has become inevitable in each area of specialization. Sustainable HR, Sustainable Finance, Sustainable Marketing, etc.. Hence each of us needs to study Sustainability and its implications in all Industries. The sooner we learn the better for our survival and growth. Such certification / knowledge is what will add weightage to ones resumes (Especially Students). Such varied interests in a candidate is what typically catches the eye of the HR for shortlisting the resumes / candidate.

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CLASSROOM FinFunda of the Month

Sir, price movements in the options market is a result from the decisions of millions of traders. But there are a number of useful statistics besides price movements that tell you what those other market participants are doing. What is open interest? Open interest is the total number of open or outstanding (not closed or delivered) options and/or futures/contracts that exist on a given day, delivered on a particular day. It is commonly associated with the futures and options markets, where the number of existing contracts change from day to day – unlike the stock market, where the outstanding shares of a company’s stock remain constant once a stock issue is completed. However, the term “open interest” is also sometimes used to refer to the number of buy market orders that exist before the stock market opens. Sir, what is the difference between trading volume and open interest then? Please elaborate a little more. Maybe with examples. For each seller of an options contract, there must likewise be a buyer for the contract. A seller and a buyer together make one contract. In this manner, the aggregate open interest for the market for a predetermined options market equals the aggregate number of purchasers or the aggregate number of dealers, not the aggregate of both included. Open interest of the futures and options markets is sometimes confused with trading volume, but the two terms refer to distinctly different measures. For example, on a day when one trader who already holds 10 option contracts sells those 10 option contracts to a new trader entering the market, the transfer of contracts does not create any change in the open interest figure for that particular option; no new option contracts

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Open Interest Dhruvika Chawalla IIM Shillong

have been added to the market. However, the sale of the 10 option contracts by the existing option holder to an option buyer does increase the trading volume figure for the day by 10 contracts. The open interest number only changes when a new buyer and seller enter the market, creating a new contract. Sir, so what is the importance and the advantages of open interest? NOpen interest is a measure of the flow of money into a futures or options market. Increasing open interest represents new or additional money coming into the market, while decreasing open interest indicates money flowing out of the market. An increase in open interest is typically interpreted as a bullish signal, while decreasing open interest figures are generally interpreted as a bearish signal. Open interest is also used as a momentum indicator of trend strength. Since rising open interest represents additional money coming into a market, indicating increased interest in the market by investors, it is generally interpreted to be an indication that the existing market trend is gaining momentum and is likely to continue. Conversely, decreasing open interest reflects declining interest on the part of investors and waning momentum, indicating that the existing trend may soon be exhausted, leading to a trend change.

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