FROM EDITOR’S DESK Niveshak Volume IX ISSUE X October 2016 Faculty Chairman
Prof. P. Saravanan
THE TEAM Akshay Kaushal Anand Mittal Arjun Bhargava Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Vinay Gundecha
All images, design and artwork are copyright of IIM Shillong Finance Club Finance Club Indian Institute of Management Shillong www.iims-niveshak.com
Dear Niveshaks, This month we bring to you Race for the Summit – Vod an Idea as our special coverage. The Telecom Sector of India is creating buzz after buzz in the markets of the Nation and the World of Finance. With the merger of Reliance Communications with Aircel and inception of Reliance Jio, it’s the turn of Idea and Vodafone to upsurge the thrill in the Telecom Sector of the Country with an estimated $23 billion merger between the two heavyweights of the Industry. However, even with the merger, one of their major shortcomings will be the lack of the optical-fibre reach to the customers. Hence, how does this merger unfold for the telecom giants is yet to be seen! The government recently launched a very ambitious Direct Tax Dispute Resolution Scheme in the budget 2016-17. However, the scheme failed miserably garnering just around Rs.1,200 crore as compared to around 2.6 lakh pending tax cases that have close to Rs.5.16 lakh crore locked in. None of the high-profile retrospective tax cases that involved firms like Vodafone & Cairn Energy opted to settle under this scheme. Emphasizing on infrastructure development, India is also seeking a funding amounting to around $2 billion from the NDB (New Development Bank) for its infrastructure projects and has urged the multi-national bank for a faster disbursement of loans, as per a statement released by our Finance Minister, Mr. Arun Jaitley. On the magazine front, the Article of the Month talks about the revolution of impact investing in India. Impact Investing has witnessed an unprecedented rise since 2007 and is expected to continue for the times to come. However, the responsibility to drive change for social betterment cannot be left on the shoulders of the government alone. The corporate houses need to be equally responsible if we want to make an impact at the bottom of the pyramid in the coming years. In the FinSight, the author aims to discuss one the most important question of our time, ‘Is there any alternative to the China model of growth for India?’ With the global economy going through a massive transition, the world’s eyes are set on the BRIC and MINT countries, waiting for them to emerge as the new economic superpowers. However, with China slowing down and India showing no supernormal growth as expected from it, the economists and industrialists are cogitating over and over again, as to what is in store for India after all. In the FinGyaan section, the author talks about the harmful effects of low interest rates on an economy. The author starts by asking a few simple questions; How low is low? What is low for a mature and developed economy and what is the definition of low for an emerging economy? Then he moves on to discuss the impact of low interest rates on banks, financial institutions and markets. The classroom section talks about Purchasing Power Parity (PPP) which is an indicator of the value of currency. It will help the readers in developing a perspective by explaining the concept as well as its practical application. 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 vigour and vitality to keep working hard. We hope you had a great month and wish you the best for the new one. With all your blessings Stay Invested! Team Niveshak
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 Times
04 The Month That Was
Cover Story
Equity Research
10 Infosys Ltd.
Article of the month
12
Investing for more than just money
15 Race for the Summit: Vod an Idea
FinGyaan 19 Negative Effects of low interest rates on the economy
FinFame
23 Naina Lal Kidwai: A dealmaker in India
FinView
30 Eric Leurquin, Professor at Ishec Brussels Management School
FinSight
26 Is there any alternative to the China model of Growth in India?
Classroom
31 Purchasing Power Parity
The Month That Was
4
NIVESHAK
www.iims-niveshak.com
The Niveshak Times Tax dispute scheme able to garner only Rs.1200 crore, receives a tepid response The tax dispute resolution scheme introduced by the government with an ambitious outlook failed to achieve its intended objective, with the scheme garnering just around Rs.1,200 crore. None of the high-profile retrospective tax cases that involved firms like Vodafone & Cairn Energy opted to settle under this scheme. Finance Minister Arun Jaitley had announced the Direct Tax Dispute Resolution Scheme in the budget 2016-17. The scheme was intended to not only settle disputes concerning retrospective taxes, but also bring to an end around 2.6 lakh pending tax cases that have close to Rs 5.16 lakh crore locked in. The scheme provided waiver of interest & penalties if the principal amount involved in tax cases was paid. It opened on June 1, 2016, and closed January 31, 2017 after an extension on the end date was given. None of the firms which were involved in cases pertaining to retrospective tax came forward to settle their respective disputes by paying the principal amount under the provisions of the scheme. The government through this scheme was hoping to settle the major retrospective tax cases which the Vodafone Group & Cairn Energy of UK are currently facing. The government also expected about a-third of certain other tax disputes that are currently going on to be settled under this scheme as well. The ambitious scheme introduced by the government during last year provided for waiving of interest & penalty for retrospective tax cases if the companies under question withdrew all of the appeals that they had against the government across all judicial forums. Plausible Rate cuts by banks on account of lower interest rates on small savings schemes Recently, the government announced interest rate cuts on major small saving schemes such as PPF, Kisan Vikas Patra & Sukanya
existing market rates, and may also facilitate further rate cuts by commercial banks, something which was not being seen lately due to the absence of policy rate-cuts by the RBI. Market analysts and experts expect the RBI to further hold the policy rates in its quarterly monetary policy review which is scheduled to be held on April 6th. RBI, in its last policy review in February had changed its stance from accommodative to neutral, citing persistent inflationary pressure. With this latest reduction in the interest rate, the PPF rate has come down to 7.9% whereas the interest rate for a one-year time-deposit has come down to 6.9%. The government had announced its intention to review small savings interest rates every quarter instead of doing it annually last year itself, and these reviews were said to be based on the yields of government bonds of the previous three months. This linking of the interest rates applicable on small-savings schemes to the yields of government bonds would, in all probability, act as an incentive for the commercial banks to pass on the benefits of the policy rate-cuts to the general public through lower lending rates on their loans. Banks have lately been blaming the high cost of deposits for their high short-term interest rates, and have been citing this as a reason that prohibits them from passing on the benefits of any policy rate-cuts to the borrowers. Exim Bank likely to raise $3 billion from overseas markets The Export Import Bank of India (Exim Bank) is planning to raise up to $3 billion from the overseas markets during this fiscal, as per a statement by the bank’s official. Exim Bank is known to borrow money from overseas resources, depending on the market conditions. The Bank funds the long-term projects spanning Africa, SAARC countries and
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NIVESHAK
and some countries in the far-east. Out of its total funding every year, half goes to the African nations. The bank cites Bangladesh, Sri Lanka, Nepal and Myanmar as another strong areas for funding in the Indian neighborhood. The bank has lately been trying to promote Indian investors to do business in Africa in the sectors of power, renewable energy, railways, roads and agriculture. Government planning to change the security marks of banknotes once every 3-4 years As a measure to check counterfeiting of notes, the government is planning to change certain security features of higher denomination notes (Rs 2,000 and Rs 500) once in every 3-4 years in accordance with the existing global standards. The move is certainly welcome, especiallyafter the recent recovery of a large amount of fake Indian currency notes in last four months after demonetisation. The issue was discussed at a high-level meeting that was attended by senior officials from the ministries of Finance and Home, including Union Home Secretary. Supporting the move, the Home Ministry officials said that the practice of changing security features of currency notes with this frequency is followed by most of the developed countries and hence, it is imperative for India to follow this policy as well. The new notes introduced post the demonetisation move had no additional security features and the security features that they had were very similar to those in the old Rs 1,000 and Rs 500 notes. India seeking a $2 billion funding from the New Development Bank India is seeking a funding amounting to around $2 billion from the NDB (New Development Bank) for its infrastructure projects and has urged the multi-national bank for a faster disbursement of loans, as per a
statement released by our Finance Minister, Mr. Arun Jaitley. He also stated that the NDB – an organization which was set up by the BRICS nations around two years ago -- ´must be alive to the role envisioned for it by its founders´, and that India still has a huge unmet need for infrastructure investment, which is estimated to be around Rs 43 lakh crore for the next five years. The estimated unmet demand for investment in infrastructure projects in emerging markets and developing economies is pegged at over $1 trillion a year by the World Bank. These nations need to carry out this huge investment in a sustainable manner. The already established Multilateral Development Banks are now struggling with capital constraints, and are unable to meet the financing challenge faced by the developing nations. A bank like the NDB is expected to fill that gap. The huge investment required by these nations should be carried out in a sustainable manner. DBS expects the Indian Economy to grow at 7.6% next year DBS maintains a positive outlook for India's GDP growth, expecting it to pick up again to 7.6% in the next year supported by improving consumption, better monsoon season, higher spending from the public sector, and better growth in its exports, as per a DBS report. Further, the global agency said that the ongoing reforms by the Modi Government will strengthen the growth productivity, and the country's GDP will also benefit from the favorable demographic dividend. The report also cited the example of the GST, saying that the Goods and Services Tax which is expected to be rolled out in July 2017 is a significant reform which would have long-term benefits despite a brief drag on growth right after its launch.
The Month That Was
The Niveshak Times
5
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6
29800.00
7,000
BSE
DII
FII
6,000
29600.00
5,000 29400.00
4,000 3,000
BSE
29200.00
2,000 29000.00
1,000 0
28800.00
-1,000 28600.00
-2,000
28/03/2017
27/03/2017
24/03/2017
23/03/2017
22/03/2017
21/03/2017
20/03/2017
17/03/2017
16/03/2017
15/03/2017
14/03/2017
10/03/2017
09/03/2017
08/03/2017
07/03/2017
06/03/2017
03/03/2017
02/03/2017
01/03/2017
28400.00
FII, DII Net turnover (in Rs. Crores)
Market Snapshot
Market Snapshot
-3,000
Source: www.bseindia.com www.nseindia.com
MARKET CAP (IN RS. CR) BSE Mkt. Cap
12154525.46 Source: www.bseindia.com
CURRENCY RATES INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling
0.00% -0.50% -1.00%
INR/1 USD
Euro/1 USD
GBP/1 USD
64.72 69.13 57.91 80.81
JPY/1 USD
SGD/1 USD
LENDING / DEPOSIT RATES Base rate Deposit rate
9.25%-9.65% 6.50% - 7.00%
RESERVE RATIOS CRR SLR
4.00% 20.50%
POLICY RATES Bank Rate Repo rate Reverse Repo rate
6.75% 6.25% 5.75%
-1.50% -2.00%
Source: www.bseindia.com
-2.50% -3.00% -3.50%
Date as on March 31st
7
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BSE Index
Open
Close
% change
Sensex MIDCAP Smallcap AUTO BANKEX CD CG FMCG Healthcare IT METAL OIL&GAS POWER PSU REALTY TECK
28743 13552 13691 21486 23482 13779 15333 8800 15385 10376 11893 13534 2196 8464 1495 5765
29620 14097 14434 22013 24421 15257 16446 9270 15312 10336 11804 13564 2274 8597 1600 5771
3.05 4.02 5.43 2.45 4.00 10.73 7.26 5.35 -0.47 -0.10 -0.74 0.22 3.58 1.56 7.02 0.11
% CHANGE
% Change TECK, 0.11% Smallcap, 5.43% REALTY, 7.02% PSU, 1.56% POWER, 3.58% OIL&GAS, 0.22% MIDCAP, 4.02% METAL, -0.74% 1 IT, -0.10% Healthcare, -0.47% FMCG, 5.35%
BANKEX, 4.00% AUTO, 2.45% Sensex, 3.05%
Consumer Durables, 10.73% Capital Goods, 7.26%
Market CoverSnapshot Story
Market Snapshot
Niveshak Investment Fund
Done on 30/6/14
Information Technology(10.78%) HCL Tech.
Infosys
TCS
Wg: 4.03% Gain : 16.90%
Wg: 3.14% Gain: 25.95%
Wg: 3.60% Gain : -1.32%
FMCG(22.12%) Colgate HUL
Britannia
Wg: 5.56% Gain : 30.13%
Wg: 7.01% Gain: 235.10%
Wg: 4.31% Gain: 29.46%
Amara Raja Wg: 3.95% Gain: 23.88%
Godrej Consm. Wg: 7.91% Gain: 90.70%
Lupin Wg: 5.56% Gain : 25.18%
Midcap Stocks (15.36%) Bharat Forge Wg: 4.32% Gain: 13.03%
Kalpataru Power Wg: 4.77% Gain: 23.64%
ITC
Wg: 5.23% Gain: 22.35%
Titan Company Wg: 4.78% Gain: 23.37%
Chemicals (8.25%)
Pharmaceuticals (8.68%) Dr Reddy’s Labs Wg: 3.12% Gain: -8.84%
HDFC Bank Wg: 7.69% Gain: 56.48%
Misc. (12.70%)
Auto (8.37%) Tata Motors Wg: 4.42% Gain: 3.88%
Bank (7.69%)
Natco Pharma Wg: 6.27% Gain: 65.34%
Asian Paints Wg: 8.25% Gain: 70.71%
Textile (6.07%) Page Indus. Wg: 6.07% Gain : 39.28%
Performance Evaluation
As on 31st March 2016
103
March Performance of Niveshak Investment Fund
185
Performance of Niveshak Investment Fund since Inception
175
102.5 102
165
101.5 101
155
100.5
145
100
135
99.5 99
125
98.5
115
98
Scaled Sensex
31-Mar-17
29-Mar-17
27-Mar-17
25-Mar-17
23-Mar-17
21-Mar-17
19-Mar-17
17-Mar-17
15-Mar-17
13-Mar-17
11-Mar-17
09-Mar-17
07-Mar-17
05-Mar-17
03-Mar-17
01-Mar-17
97.5
Scaled NIF
Opening Portfolio Value : 10,00,000 Current Portfolio Value : 15,42,206 Change in Portfolio Value : 37.98% Change in Sensex : 44.51%
105 95 1/30/2014
9/23/2014
5/14/2015
Sensex Scaled values
12/28/2015
8/11/2016
3/14/2017
Portfolio Scaled Values Value Scaled to 100
Risk Measures: Standard Deviation : 14.42 (Sensex 14.30) Sharpe Ratio : 1.017 (Sensex : 0.862) Cash Remaining: 58,400
Comments on NIF’s Performance & Way Ahead: Indian stock markets have generated highest return against global equities market so far in calendar 2017, thanks to wonderful performance in March, with SENSEX rising by 3.05% during the month. NIFTY 50 also crossed the landmark of 9,000 and closed at 9,135 by the end of the month. The major contribution of the upswing in the market is BJP win in Uttar Pradesh by huge margin that has led to positive sentiments and a belief that the incumbent will push for major reforms. Secondly, a more clear roadmap on GST is introduced with States and Centre agreeing on the major policies. It is still interesting to see whether the July 1 date will be met. NIF performed in similar lines with SENSEX and increased by 2.77% during the month. The major winners were FMCG stocks with Colgate-Palmolive increasing more than 10%; ITC and HUL with 7% and 5% jump respectively. Midcap stocks – Kalpataru Power and Natco Pharma also performed well with 12.76% and 5.5% increase.
Equity Research report: Infosys Ltd. Equity Research Report – Infosys Limited Date: 31st March 2017
Rating Matrix
Basic Information Buy
Ticker (BSE)
500209
Target Current Market price
Rs. 1234 Rs. 1020
Ticker (NSE)
Infy
Sector
IT
Potential Upside (1-Year)
10.5%
M- Cap
₹ 225456 Cr.
Growth Drivers
Corporate Governance
Business Description
Company Background
Rating
Infosys Limited (formerly known as Infosys Technologies Limited) is an Indian multinational corporation that provides business consulting, information technology and outsourcing services. It is headquartered in Bengaluru, India. It is the second-largest Indian IT services company by revenues and market capitalization and the largest employer of employees with H-1B visa professionals in the United States. Infosys is the first Indian Company which is listed on NASDAQ. Mr. Narayan Murthy, the co founder of the company was referred as father of Indian IT industry by TIME magazine for his contributions towards outsourcing in India. He served as CEO of the company for more than 20 years. In year 2016, Infosys acquired 142 new clients in both domestic and foreign market including Paytm, Deutsche Bank which helped company in posting revenues over $ 10 billion mark Infosys Limited is engaged in consulting, technology, outsourcing and next-generation services. The Company, along with its subsidiaries, provides business information technology services comprising application development and maintenance, independent validation, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; consulting and systems integration services comprising consulting, enterprise solutions, systems integration and advanced technologies; products, business platforms and solutions to accelerate intellectual property-led innovation, including Finacle, its banking solution, and offerings in the areas of Analytics, Cloud and Digital Transformation. Its segments are Financial Services and Insurance (FSI), Manufacturing and Hi-tech (MFG & Hi-TECH), Energy & utilities, Communication and Services (ECS), Retail, Consumer packaged goods and Logistics (RCL), and Life Sciences and Healthcare (LSH). As per latest filing with BSE, Infosys board consist of 10 members , Shareholding Pattern (%) (As per BSE) two of whom are executive director while the remaining eight are independent directors, constituting 80% of board’s strength- more Dec - 16’ Sep – 16’ Mar – 16’ than what is required by companies act, 2013 and listing regulation of SEBI. Two out of ten board members or 20% of the board Promoter 12.75 12.75 12.75 members are women. In Infosys, every independent director is nominated as chairperson of each of the boards committees, Public 86.76 86.76 86.76 namely, Audit Committee, Nomination & Remuneration Committee, Others 0.49 0.49 0.49 finance and investment and Corporate Social Responsibility (‘CSR’) Committee, risk and strategy committee, Stakeholders’ Relationship Total 100.00 100.00 100.00 Committee. Infosys enjoys a strong reputation and brand in the market as financle hold almost 60% of the market share. It also rides on long standing relationship with large organisations and strong client retention as market saw 96% of repeat business in year 2016 for Infosys. However, their success largely depend on their management team and talent pool they acquire. Infosys attracts highly qualified tech professionals from top colleges of India which have deep industry knowledge and expertise in technology. Further, software computing technology are transforming business fundamental of every industry around the world in a very profound manner. Innovations in various services and products over the last few years have helped Infosys increase traction in the economy. The continuous reduction in hardware cost, the explosion of network bandwidth, advance technologies and technology enabled services are fuelling rapid digitisation of business information and processes. Government of India push toward Digital India, automation and smart cities has created opportunities in domestic market. Further, hardware business is showing remarkable growth. It has immense potential to build business around mobile software. However, The recent internal management tussles have brought the company to the limelight indicating a cold war between the founders of the company the now CEO, Vishal Sikka over some pay related issues which could damages profitability of the firm. Adverse regulatory developments around current H-1B visa regime can further hit future prospect of the company.
Equity Research Report – Bharti Airtel Limited Date: 31st March 60.0%
Industry Rivalry – High Infosys faces fierce competition from competitors for client acquisition and retention also to deliver cost effective services
ROE- Peer Comparison
40.0%
0.0%
2016
2015
2014
2013
2012
ROA-Peer Comparison 40.0%
20.0%
0.0%
2016
Technical Analysis
Rating Def.
Comparable Valuation
TCS HCL Tech
2015
2014 Infosys Tech Mahindra
2013
2012 Wipro
We have calculated the stock’s intrinsic value based on a weighted average of DCF, Forward PE and Relative valuation. Starting FY17, growth in revenues have been estimated at an average of 16%, which is consistent with previous years growth rate. However, if proposed H-1B Visa norms are implemented, then it will adversely affect revenues of the company in the North American region. Though IT industry is very dynamic in nature but Infosys limited has a low Beta of .69, with a WACC of 10.3%. The fundamental value stands at INR 1234 and given a CMP of INR 1020 as on 31st March 2017, the stock is undervalued.
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
The stock is technically very weak and is testing long term support levels. It has given weekly closing below first support level of 960. This can make the stock reset to its next support level of 935. If it also gives a decisive closing below 935 then stock will fall further to 909. Stock is trading below all important moving averages which further adds to the weakness in the stock. RSI is at 40 and is showing a downward journey ahead. MACD also shows a downward journey ahead.
Industry Competition
Industry Figure
20.0%
Buyer power – High Due to high competition in the IT sector, buyer enjoys superior bargaining position and exercises pressure. Threat of Substitutes – High Since the technology environment is very dynamic and uncertain, threat of substitutes product remains high. Threat of New Entry – Medium Off-shore presence and low cost locations of the incumbent firm is likely to intensify competition in the market. Supplier Power – Low Infosys being a service industry is not dependent on peculiarity of any products for its end to end solutions. Hence, supplier’s power is low.
Valuation Summary Method
Value/Share Weight
Discounted Cash Flows
1550
0.33
Relative Valuation Forward PE Valuation
960
0.33
1193
0.33
Fair Value
1234
12
Article of the Month Cover Story
NIVESHAK
Investing For More Than Just Money AnoopPrakash Global warming, economic inequality, corruption, women safety and food insecurity are just some of the globally known causes that has sparked a change in the way we live and think. Advertisements are globally moving to spreading messages and changing perspectives as a way to sell their product and ideas, something that catches more eyeballs from publicity rather than paid airtime. And similarly so, investors apart from targeting a financial return are also keen to see their money make an “impact� as they see themselves as socially responsive millennials making a difference to society as they seek to
MARCH 2017
IIM Shillong
build return. Considering the two aspects of their investment, viz. making a difference and generating a return, are both never a given. How much return you make will depend on the conditions of the market and the comparative performance of your investment vehicle; however, the part of making a societal impact is less dependent on market circumstances and is more rooted in the fundamental principles, ethos, vision, and mission of a company one desires to commit their money into, making it something that can be expected with more certainty than estimating financial return.
NIVESHAK
at an average of nearly ten years, much higher than venture capital and private equity funds. The Indian Revolution A high number of individuals and families in India reside in rural areas, with lack of adequacy towards financial support. Farmers and small businessmen in these areas are troubled with heavy costs of borrowing from local money lenders as they have no support from the formal banking system and have no security to offer. While cost of borrowing range anywhere
cost to avoid creating it in the first place, the burden of which falls on every taxpayer. It was the same fundamentals that led to the advent of corporate social responsibility, now at an earlier stage in the monetary flow. Investors believe that businesses run on sustainable pillars strengthen the triple bottom as a stronger foundation in a VUCA world. The Audience Impact Investing has witnessed an unprecedented rise since 2007 and is expected to continue for the times to come. The investor regime has trickled down from big institutional investors and venture capitalists through to mutual funds and which has now entered the retail investment space. The biggest impact has come about for those seeking capital. Millennials aiming to be future entrepreneurs and businessmen are forced to assign increasing weights to the change their ideas carry in addition to the financial return that they could sell their investors upon. The investment horizon targeted is one the longest
between 36%-60% a year, the average Indian investor finds it hard to find opportunities to invest with double digit returns. The solution, social investing start-ups which connect the two imbalanced sides. Popularly called “Impact Partners”, social investment sites are setup to allow investors to help the needy by pooling small amounts (as low as INR 100) from a wide base of investors. With collective investing and technology, these organizations are helping the needy have access to reasonable costs of borrowing while meeting the social expectations of investors. Remember, these are investments and not donations, a welcome change in money transfer. As per the Impact Investors Council, an industry body that has been established to strengthen the significance of impact investing in India, there are 30+ active impact investors in India that have invested a cumulative $1.6 billion in approximately 300+ enterprises and funds across a range of industries such as financial inclusion, agribusiness, healthcare, education,
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
Article Equity ofResearch the Month Cover Story
The Growth of Impact Investing The responsibility to drive change for social betterment cannot be left on the shoulders of the government alone. It is impractical to have a system where corporate houses are left to drive a double-digit growth in sales and profits while leaving the government to clean up the mess left behind by way of pollution, poverty and negative influence created as a by-product of achieving numerical gains. The cost to clean the mess left behind far outperforms the
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Article of the Month Cover Story
NIVESHAK
clean energy etc. The total invested amount positions India as one of the largest impact investment destinations in the world. Some examples include: • D.Light - design and sell high-quality, affordable, and innovative solar-powered consumer products for families without access to reliable electricity
Mandala Apparels - strives to promote environment-friendly and fair trading practices by ethical sourcing from local organic cotton farmers The Future It is widely accepted that how the world chooses to invest for the next decade will determine how the world will look for the next century. It is therefore, more important
• Drishti - quality, affordable eye care services covering primary and secondary eye care in underserved markets • Equitas - a successful Microfinance Institution that makes finance available to its clients at a reasonable cost in a transparent manner • Hippocampus Learning Centre education centres which offer kindergarten and afterschool primary education programs for children in rural India • Mahila Housing Trust - works to increase household-level access to water and sanitation in urban slums
than over, to give global issues and societal change its due weightage in determining one’s portfolio of investments. Investments on social issues are not targeted at the cost of making profits on one’s investment, it is meant to look beyond quantitative data and analyse the impact of where the money is headed. Remember, the cost of prevention is far lesser than that involved to cure the problem. The problem of climate change is irreversible and no number can be derived to bear this cost. Analyse completely before you employ your savings!
MARCH 2017
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NIVESHAK
Cover Story
Race for the Summit – Vod an Idea ArjunBhargava The Telecom Sector of India is creating buzz after buzz in the markets of the Nation and the World of Finance. With the merger of Reliance Communications with Aircel and inception of Reliance Jio, it’s the turn of Idea and Vodafone to upsurge the thrill in the Telecom Sector of the Country with an estimated $23 billion merger between the two heavyweights of the Industry. The Vodafone-Idea merger will mandate the emergence of a Telecom giant which will have varied implications on the industry, competition, price wars, services, staff, and most importantly on the customers.
IIM Shillong
One would witness more consolidations by stalwarts of the industry in the form of acquisitions and mergers in future. Synergy Effect Post the merger, Vodafone and Idea initially ranked second and third, are placed at the summit toppling Bharti Airtel from the apex to the second position in the Telecom Sector. The merged entity would account for a subscriber base of approximately 39 crores significantly higher than the Airtel’s 27 and Jio’s present number of 7.2 crores. The revenue market share of the merged
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
Cover Story
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NIVESHAK
entity is expected to be close to 40 percent in comparison to Airtel’s 32 percent.
Further benefits include the increase in the EBITDA margins as opposed to the earlier figure of 30 percent for both the companies, far lesser than Airtel Limited’s and Reliance Jio Infocomm Limited’s targeted margin of 40 percent and 50 percent respectively, benefits to the tune of Rs. 13,400 crore and annual savings (including operating costs and capital expenditure) worth Rs. 14,000 crore by the fourth year. The net present value of the entire savings amounts to Rs. 70,000 crore ($10.5 billion). The success will largely attribute to the synergy effect brought about by the merger between Idea Cellular Limited and Vodafone India Limited as a result of combining their operations. The merger has in turn brought about windfall gains for both companies and establishing a strong foothold for them in the Telecom Industry.
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Short Term and Long Term Effects Reliance Jio entered the market with a strategy that not only brought about dissatisfaction amongst the bigger players but also gave rise to price wars. Jio offered free calling services to its customers for a total period of six months with 4G Internet speed at minimal rates. The Vodafone-Idea merger is expected to take the price wars to a battle which shall be fought threeway amongst the merged entity, Airtel and Reliance Jio. The Reliance Communication which itself is in talks of a merger with Tata Teleservices and Aircel might add to the kitty soon; the competition from Reliance Communication is expected to be shortlived, though. With the companies consolidating, increasing numbers of mergers and acquisitions in the industry, price wars will be short-lived phenomena. Eventually, the prices are bound to increase with fewer companies in the market. The technology shall improve, customer experience would be enhanced, and better services will prevail. Eventually, the customer will be the king either way. Industry Analysis post the Vodafone-Idea merger The consolidation of companies in the Telecom sector is expected to do wonders for the firms as the debt-ridden industry would advance towards better financial records, bringing about stability in businesses and thereby begetting sustainability of the companies. The merger is expected to result in the duplication of resources at various levels of the company. The salubrious update is that both the CEO of Vodafone, Vittorio Colao and the Chairman of Aditya Birla Group, KM Birla, have denied talks of the
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The merger of Idea and Vodafone would significantly reduce the burden of the financial issues faced by either company in the past. It is expected to engender heavy cash flows for the merged institution, ameliorate the quality of services, enhance customer experience and satisfaction while pleasing the shareholders as well.
Effect of Merger on the Industry A lot of Industry experts have a keen eye on the Vodafone-Idea merger since the valuation post the merger of the two stalwarts would set the benchmark of the Industry. All other telecom companies would henceforth be valued on the same basis thus bringing unanimity and parity to the field of Telecom Valuations. Also, the merger would benefit Airtel to stay competitive in turbulent markets and be
superiorly positioned to retain its market share. As per Altamount Capital Management market expert on equity Prakash Diwan, “If the merger talks materialize, it would now be extremely difficult for Reliance Jio to fight Bharti Airtel. Reliance Jio will weaken.” The announcement of the news affected the stocks of Bharti Airtel as they soared 14.39 per cent to Rs 370 on BSE and ended at Rs 347.65 on BSE, up 7.48 percent. The shares of Bharti Infratel wilted 7.07 percent
to Rs 328.75. “Shares of Bharti Infratel fell because the overlapping tenancy of Vodafone and Idea will come to an end due to synergy. They both were using Bharti Infratel towers,” Diwan said. The Idea Cellular shares peaked as high as 11% but settled at Rs97.60 on the BSE, crashing 9.55%, while the Sensex declined 0.44%. The depression in the share value of Idea took place due to unconfirmed reports
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layoff of employees since they believe the expanding opportunities shall ensure the existence of work and jobs of employees to stay at all levels in the business.
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which claimed that the share prices of Idea year, the shares of Vodafone will dilute, and post-merger would descend in comparison both Idea and Vodafone will have equal to their present price. power and rights on the voting platform within the company. Vodafone and Idea’s Holdings within the One of the major shortcomings of the Vodafone-Idea merger will be the lack of Merged Entity The merger is deemed to complete the optical-fibre reach to the customers. within a period of 24 months, subject to With the surge in bandwidth capacity after consent from shareholders, creditors, stock the merger and ever increasing speed of exchanges, SEBI, Competition Commission internet facilities within the country, the of India and the Telecom Department. As lack of an optical-fibre network is bound advocated by Mr. Colao and Mr. Kumar to hurt the service facility provided by the Mangalam Birla, a ‘partnership of equals.’ Vodafone will be the leading partner with a 45.1% stake initially after transferring 4.9% to the Aditya Birla Group for Rs. 3,874 crore. The Aditya Birla group will be the owner of a 26% stake and has the right to acquire 9.5% stake from Vodafone post the merger to abide by the philosophy, ‘partnership of equals.’ It is agreed upon in the merger that Idea will have an equal shareholding as Vodafone on the number of shares held by both the parties. If the equal distribution of shares does not transpire by the end of the fourth
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Negative Effects of low Interest Rates on an Economy ArnabSurai “It is not because of the benevolence of the baker that we eat fresh bread every morning but because of his desire to make money”. – Dr Raghuram Rajan. How true are these words from the James Bond of the banking sector. In the greed to increase credit growth, banks and financial institutions tend to lower rates of interest. Government also steps in, often pressurised by the deadly nexus of political and heavyweight corporate lobbying. The global economy, post the Financial Crisis (2008-09), has witnessed a tepid growth. This phenomenon can be attributed to myriad factors: lack of productivity, repercussions of Brexit, slowdown in
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population (in many of the advanced & emerging economies) - to enlist a few. Governments across nations are facing a seemingly insurmountable challenge of stimulating economic growth, fuelling demand and increasing consumption levels. These governments, along with their central banks, have attempted to resolve this problem by adapting several measures. One of them has been the lowering of interest rates in order to increase credit availability and hence infuse growth in their respective economies. This measure has been incorporated by several nations with some of them – Denmark, Sweden, Switzerland and Japan, taking the interest
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proach of lowering interest rates to stimulate growth has been partially successful in some cases, unsuccessful though, in most. The naïve thinks that low interest rates are very good, as growth would increase, stalled projects would start rolling and unemployment would reduce. In order to focus on quick short term growth, long term growth sustainability is lost. Let us see how that happens by asking a few questions which would be answered as we proceed. How low is low? What is low for a mature and developed economy and what is the definition of low for an emerging economy? An emerging economy will have a higher demand for goods and services, a higher return on investments than a mature economy, so demand for funds are also high in such a scenario. This leads to a higher cost of capital, also known as interest rates. In contrast, interest rates tend to be lower for a mature economy, which just needs to maintain a certain sustainable rate of economic activity and growth. So an interest rate of 4.5% might be low for an emerging economy like India and Brazil, but for US, a rate of 3.5% may be called high rate of interest. Earlier, when the global economy was not too much interlinked and effect of globalization not much pronounced, rippling effects of economic data were not found across countries and continents, and were limited to domestic economy. However, with high speed and real time information flow, the effects of global economic data are felt worldwide and almost instantly. Effect on banks and financial institutions The biggest casualties of the fall in interest rates are banks. Falling rates squeeze banks income because they make money on the spread between the interest charged for loans and payments made to customers on deposits. When people can't earn attractive interest income on their money in savings accounts and term deposits, they either use their money to pay off debt or invest in assets like real estate, gold and stocks. This means banks lose deposits. When interest rates are abnormally low, banks don't have a high deposit base, so they only loan to borrowers with the highest credit ratings and substantial assets to collateralize those loans, losing out other opportunities. Credit growth falls. Small players find it difficult to raise debt capital via loans, hamper-
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ic growth. Interest rates and default risk High interest rates mean high opportunity cost of money (both for banks and borrowers), so banks and financial institutions evaluate borrowers’ credentials strictly & properly before lending, also firms with low commercial viability of a project are wary of investing, so default risk is less. Low interest rates encourage banks and corporates to take more risks due to high liquidity and chances of default increases. It also encourages individual consumers to make high value purchases like apartments and real estates, even when they are not capable of doing so, increasing the likelihood of default. Interest rates and incentive to invest vs. consume The adverse long-term impact of very low interest rates is on the incentive for individuals to save. Keeping the interest rates low has pushed the returns on normal savings and deposit accounts close to zero after adjustment for inflation. High interest rates encourage consumers to save and invest more, as consumers tend to earn a high return on investments. Low interest rates lead to consumption driven economy. This sends a very wrong signal to the younger generation which needs to save more for retirement, as they are likely to live longer than their previous generations. Low saving could also constrain productive investments. The government – quite rightly – believes we need to invest more in infrastructure and other wealth-creating capital projects. But this programme of investment and infrastructure development cannot be financed sustainably unless there is a flow of savings to fund it. Low interest rate and funds crunch in developed economies A differential of interest rates between developed (low interest rates) and developing economies (high interest rates) lead to fund inflow into emerging economies (as investments) in order to earn more return on corporate and government bonds, bank term deposits, leading to weak economic activities in a matured economy. This leads to job losses and unemployment, contrary to popular belief that low interest rates leads to enhanced economic activities. Real vs. nominal rates and inflation Low interest rates leads to high liquidity and availability of more funds in an economy. While
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Effect on central banks It is true that central banks set interest rates, but a much of it is guided by general macro- economic conditions prevailing in domestic and world economy. When the economy is in a bad shape and is gasping for breath (funds), a classical approach popular among central banks is to lower rate of interest. But if interest rates are already low, it leaves very less room for central banks to further lower rates and provide the much needed stimulus for growth. So low interest rates lead to less power for central banks to take corrective actions in case of downturn by further lowering of rates. Market volatility Borrowing costs tend to rise in a healthy economy, reflecting growing demand for money among consumers and businesses and bolstering the profits of banks and other financial firms. Low interest rates signal the opposite. Any stock-market selloff can be taken as a signal that most of the gains of low rates have been harvested, and time is right for rate hikes. In a situation of sustained long period of low interest rates, it is difficult to distinguish between risky and non-risky asset classes and projects, and this results in market volatility. Low interest rates affecting pension and insurance funds Low rates are a bane to pension funds and insurers, which hold long-term assets to pay future claims, by making those claims larger in presentvalue terms than they were when so-called discount rates were higher. So insurance premiums and pension deductions rise, leading to
elsewhere. Such rates punish long term investors saving for retirement alike, by generating very low or negative real rates of return in the long run, who tend to invest in government bonds, pension schemes etc. Effect on currency markets Low interest rates have an adverse effect on currency markets, leading to low inflow or potential net outflow of dollars (from FIIs), leading to currency devaluation, trade deficit. Also, tendency to save in the country of low interest rate is low, as it generates low return. This makes outflow of funds, devaluating the currency and making imports costlier. Just the opposite effect happen in case of exports, exports become more attractive and rewarding. The net effect of both these phenomena tries to balance out each other, and quantity of exports/imports determine best suit for the economy. Liquidity trap A liquidity trap happens when interest rates are so low that they don't serve the normal function of spurring the economy to growth. People do not get the incentives to invest in regular financial instruments like banks, bonds and other fixed income securities, and instead the fund goes to assets like real estate, gold, stock markets and paying off already taken debts. This is done in anticipation of higher returns and to hedge against low interest rates. It leads to unusually high asset prices, stock market boom and a potential bubble. This means money doesn't flow through the economic system. When that happens, funds are not put to their proper use, what they are supposedly for and productivity falls, unemployment rises. When this bubble bursts, there is a huge loss of investments which is detrimental to the economy. With more money chasing fixed amount of resources, prices tend to rise in medium term, leading to abnormally high inflation for a sustained period of time later. Low innovation Low interest rates might make a firm postpone investment decisions to increase productivity to retire current debt, if cost of current debt is higher than cost of raising fresh investments to increase productivity. The cost of production mainly comes from two major areas, cost of funds and the technology of production used. If cost of funds is less, total cost
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er amount of funds keep chasing limited assets, leading to demand supply mismatch and artificially pushing up prices resulting in high inflation. (1+nominal interest rate) = (1+real interest rates) (1+inflation) as nominal rates fall, inflation rises leading to further lowering of real interest rates, causing real rates to hover around zero or even negative real interest rates in extreme cases. This also creates a case for preponing future consumption to present date, in items like cars electronic goods and other objects fuelling consumption, hampering investments.
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centive to improve their technology and invest in R&D, which has a huge opportunity cost and negative implication to the economy as a whole in the long run. However, if interest rates are high, firms and manufacturing units are under pressure to innovate and switch to improved technology that leads to lower production cost and enhanced productivity, reduced unemployment and higher standard of living. Conclusion Low and negative interest rates are decidedly poor choices compared to the plethora of other growth-inducing measures. For every decision there is a cost of opportunity to be paid and an opportunity cost to be forgone. Policy decisions should not be based on mere myopic views, but should ensure that present generation does well without compromising the opportunities of future generations. It remains to be seen how negative interest rates will affect the global economy and for how long will they continue to exist and create headlines. Some factors like low oil prices have provided a cushion period before the major economies of the world are pushed into a disinflationary or worse, deflationary trend. If and when that happens, it would only be a matter of time before the developing economies, which are highly linked to the developed world, are caught in the storm as well. It will be a vicious spiral down the hill from there. It is imperative to note that freedom of spending needs to be backed by adequate laws which ensure that desire for making profits does not transform into greed for making profits – at any cost. An excess of anything is undesirable, and needs to be checked before it gets out of hand. There is no magic wand that can solve the problem of sluggish growth. It has to come from the governments, central banks, banks, the industry and the public working together. And really, there is either working together or working against each other.
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Naina Lal Kidwai: A dealmaker in India Pratibha Sapra
IIM Shillong Long before the expression‘deal maker’became ordinary in India, Naina Lal Kidwai, retired country head of HSBC, was one of the biggest deal makers in the country. She was also one of the first women to enter the formerly male dominated field of investment banking. In the book titled ‘30 Women in Power’, the chapter on her is titled “The first Lady”. Rightly so, as she has many firsts to her name. “When I embarked on this journey, I didn’t think women would be where we are today. It is very gratifying,” she says. Early Life and Career Naina was born to a homemaker mother and a father who was the chief executive of a leading insurance company, and had
decided to join the corporate sector early in life. As a student, she used to be the class topper and was also the class captain, house captain and head girl. Since her passion lied in Mathematics and Accountancy, she pursued Bachelor’s degree in Economics at the Lady Shri Ram College, Delhi University and was also in the leadership position as the president of the student union of the college. She also studied chartered accountancy was among the first three women to be chosen as articled clerk by Price Waterhouse Cooper in 1977. She went on to pursue Strategy and Finance from Harvard Business School and in 1982, became the first Indian woman to be an alumnus of the university. The years at Harvard, Kidwai says, altered her world view and greatly influenced her leadership style.
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Naina was offered a position with ANZ Grindlays Bank after finishing MBA. Within a span of few years, she rose to the position of Head of the Western Region. In 1989, Naina had become the Country Head for Foreign Investment Banking, being the youngest person to hold this position ever. Under her leadership, the NRI investments with ANZ Grindlays tripled. In 1991, she moved on to Retail Banking to explore new avenues.
Women at Work In a recent statement, Naina said. “I believe that challenging periods in society usually shift the spotlight to women. During World War II, women stepped out of their homes to keep the factories humming and the economy running. This has been the case every time, and the latest economic challenge has been no different. No economy can thrive or even survive by ignoring the contributions of women”. She is strongly in favor of inspiring women to participate in the “Lean In” movement, started by Facebook COO, Sheryl Sandberg. She requests women to follow their ambitions rather than surrendering to self-doubt as well as the pressure from society to restrict themselves to household. A mother herself, she empathizes with those who are told that they will not be able to balance between home and office, and says that it can be achieved with time management. She fought her own arguments with her mother, who had insisted that she give up on her career while she was pregnant, “if I had stepped away, it would have reflected on all women. My whole experience was to show how to do it”. In all her senior positions, her first objectives involved assuring equal pay, equal respect, and the same quality of amenities and benefits for female employees as enjoyed by male colleagues.
Challenges faced The ‘first lady’ also had to face many challenges to reach these heights in her career. She was the first woman in her family to work. She says, “I come from a very conventional north Indian family. But my parents had aspirations for their children, and because I didn’t have a brother those aspirations were transferred to me and my sister.” Despite that, she often faced great pressure to give up. Her mother often asked her to quit. As said by Naina, “You constantly have people telling you managing a home and a career is really difficult, are you sure you want to do this? People tell me this all the time.” After having her first child, she had even planned to give up her professional career for family commitments. However, her father encouraged her to continue. Three decades of responsibilities in her high profile jobs required her to travel across the globe, causing her to miss various important family occasions. With support from everyone around, Naina was able to strike a balance between her professional and Awards and Accolades personal life. The many ‘firsts’ achieved by Naina in her life
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in making poor women self-sufficient. At 54, she says she feels as inspired as when she started. “I thought 54 was an age when you get old, dull and retire. But I am nowhere near
Way Forward after HSBC At the end of 2015, Naina concluded her 13year long stint with HSBC India. She is looking forward to working for herself, and splitting her time between commitments in the financial sector and social causes. She continues to serve certain other board positions like non-executive director on the board of Nestle. She is also the President of FICCI, for which she was the first woman to reach this position. There are three initiatives that she is closely involved with and wants to work on post retirement: Women’s empowerment, sanitation and water. She recently worked on a book aimed at women in the corporate sector. In FICCI, she started a Water Mission for which she has got support from the government. In the case of sanitation, she is working with NGOs like the Gates Foundation, Water.org among others, and also with several Indian NGOs who are engaged in the sector, besides other players. Apart from the above, she plans to spend more time with family, nature and books. She loves music and has also taken the Trinity College of Music exams till seventh grade. Naina’s journey is proof that hard work is never overlooked and its fruits are sweet. She is married and has two children, and is a perfect example of a successful Indian business woman who is able to balance both work and family. She works closely with her husband, who is also the founder of an NGO called Grassroot Trading Network for Women, which is involved
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have been nothing less than an achievement. To add to it, she has been awarded with various prestigious awards. For her praiseworthy work and her noteworthy contribution to India’s banking and finance sector, she was awarded Padma Shri in 2007. She also received the ASSOCHAM Ladies League’s Delhi Women of the Decade Achievers Award 2013 for Excellence in Banking. Apart from the above, the repeated rankings in the top 50 businesswomen all over the globe by various agencies such as Fortune Global and Wall Street Journal talk of her inordinate capabilities.
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Is There Any Alternative To The China Model Of Growth For India? Sukriti & Sneha
IIM Ahmedabad With the global economy going through a massive transition, the world's eyes are set on the BRIC and MINT countries, waiting for them to emerge as the new economic superpowers. While China showed a period of double-digit growth, with its GDP growing an average of 10.3% per year over the decade ending 2010, India, with its figure standing at 7.4%, frustrated economists and industries alike, showing no signs of the supernormal growth expected from it. Today, with China's growth having slowed to 6.9% in 2015, the question arises as to what is in store for India. (World Bank, 2015)
and China are often pitted against one another. Both countries, in spite of having their fair share of problems, have large populations ready to produce and consume, leading to rapid growth. More relevant, though, is the protectionist nature of both the economies that gave way to liberalization. The reform started earlier in China where trade opened up, but growth was fuelled through a tightly controlled public sector. India, on the other hand, had a slower approach opening up trade while developing a strong private sector. (Grinin, 2013)
There are a number of reasons why India
China's growth model, given the moniker
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"Beijing Consensus", emerged as the alternative growth model and was touted as the blueprint for emerging economies. The model had a strong export orientation and invested heavily in manufacturing and logistical infrastructure. It also, through regulations and policies, created an environment conducive to doing business, thus encouraging foreign investment. All this was brought about through a stronghold of the authoritarian government on economic development. (Ramo, 2004) The issue with the Chinese model, however, is, that at this point it does not look sustainable. Under heavy influence of the Communist party of China, massive investment spending was channeled to local governments and state-owned industries. This has been wasted on projects with negative real returns. The trouble is, the credit growth necessary to continue this investment boom, and these investments has reached levels almost twice the levels reached in developed nations, US, Japan, Korea and the UK before their meltdowns. This has forced China to now rethink its strategy. (Gamble, 2014) In this light, the question arises; does India really want to follow the path China has taken? Probably not. The Indian economy is different, being far more open and having a convertible currency. Even China, with its highly protected financial system does not have complete monopoly on it. India never did. Having said that, India does have a lot to learn from the Chinese model, particularly in improving ease of doing business and developing trade-related infrastructure. However, the Indian model of growth needs to deviate from the Chinese model in two key aspects- inclusion and innovation. The Chinese model, through its focus on exports, has driven economic growth, but at the expense of domestic inclusion. In spite of overall growth in GDP, there is significant inequality within the Chinese population among individuals, sectors, and regions.
This has led to lower domestic consumption, currently 50% of GDP, (UNCTAD, 2015) and a high dependence on exports, 22% of GDP (World Bank, 2015), thus leaving the economy vulnerable to global economic trends and protectionist policies. India, with its demographic and economic environments, would benefit from an alternative model of growth. With over 440 million Millennials and 390 million Gen Z-ers, India's young, growing population provides an opportunity not only for a major labor market but also significant domestic consumption over the next 20 years. Unlike China's consuming population that largely falls into the Urban Middle (156 million) and Wealthy (1.5 million) categories, India's consuming population falls into the Urban Mass category (129 million). This is the category that, over the next 5-10 years, will drive domestic consumption. (Goldman Sachs, 2016) Thus it is imperative to drive growth in income through the creation of jobs and investment in infrastructure while simultaneously growing capacity to meet the imminent demand. If growth in India continues as per current projections, household incomes are likely to triple, making India the fifth largest consumer market in the world by 2025, thus making it a desirable market for consumerfacing businesses. (Zainulbhai, 2007) The sectors likely to face a significant increase in consumption include fresh and packaged food and ground transportation. India’s domestic consumption currently stands at 70% of GDP (UNCTAD, 2015). While this is not as high as that of developed economies, it is significantly higher than that of developing economies such as China. Thus balancing out domestic consumption with exports can be a significant driver for growth as well as a buffer against a volatile export environment. The second area where India can deviate from the Chinese model is innovation. The Chinese model, through its focus on exports, is driven by imitation rather than
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innovation. Chinese enterprises have been successful largely in adopting foreign technologies or service models albeit churning them out more efficiently. While looking at China’s contribution to information technology, for example, over 85% of its exports are a result of either joint ventures or multinational firms. (Kennedy, 2010) There is little indigenous innovation or contribution. This once again can prove disastrous in case of a drop in international trade. Such an outlook also prevents the economy from developing solutions to local problems, thus hindering inclusion.
innovation. Chinese enterprises have been successful largely in adopting foreign technologies or service models albeit churning them out more efficiently. While looking at China’s contribution to information technology, for example, over 85% of its exports are a result of either joint ventures or multinational firms. (Kennedy, 2010) There is little indigenous innovation or contribution. This once again can prove disastrous in case of a drop in international trade. Such an outlook also prevents the economy from developing solutions to local problems, thus hindering inclusion.
Globally, a focus on innovation has driven economic growth and improved standards of living. Innovation can be a major driver of growth by leveraging and meeting the needs of India’s unique demography. Estimates suggest that an increased R&D spend of 2.4% of GDP by 2034 and a focus on innovation can help India attain the spike in growth that is needed to make it a 10 trillion USD economy by 2034. India’s focus on entrepreneurship and the start-up boom is already heralding this change but the innovation mindset needs to be expanded across industries. Indian corporates need to make innovation central to their strategy, understand local needs, invest in R&D and seek new business models and solutions suited to the Indian economic environment. (India, ASSOCHAM, 2015)
Globally, a focus on innovation has driven economic growth and improved standards of living. Innovation can be a major driver of growth by leveraging and meeting the needs of India’s unique demography. Estimates suggest that an increased R&D spend of 2.4% of GDP by 2034 and a focus on innovation can help India attain the spike in growth that is needed to make it a 10 trillion USD economy by 2034. India’s focus on entrepreneurship and the start-up boom is already heralding this change but the innovation mindset needs to be expanded across industries. Indian corporates need to make innovation central to their strategy, understand local needs, invest in R&D and seek new business models and solutions suited to the Indian economic environment. (India, ASSOCHAM, 2015)
This is going to be a huge differentiator in the Indian growth model, one, which can protect the Indian model against the many fault lines that China is facing today. India needs to adopt a two-pronged strategy in order to drive down its current trade deficit. On one hand, it must expand its exports, on the other increase domestic consumption. Innovation is the key to both of them. While India might not be able to compete with China on cost when it comes to exports, it can gain competitive advantage in the export of superior quality products developed through innovation. Simultaneously, innovation can stimulate domestic consumption through goods and services developed specifically to meet the needs of
This is going to be a huge differentiator in the Indian growth model, one, which can protect the Indian model against the many fault lines that China is facing today. India needs to adopt a two-pronged strategy in order to drive down its current trade deficit. On one hand, it must expand its exports, on the other increase domestic consumption. Innovation is the key to both of them. While India might not be able to compete with China on cost when it comes to exports, it can gain competitive advantage in the export of superior quality products developed through innovation. Simultaneously, innovation can stimulate domestic consumption through goods and services developed specifically to meet the needs of
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A positive step in this direction can already be seen in India's start-up culture. This sector is already benefiting from a wave of innovation with India ranking third in tech-innovation related start-ups globally. These start-ups are attempting to provide solutions in problematic sectors such as infrastructure, healthcare, financial inclusion, education, and employment, while also improving standard of living across the board. A culture of innovation can also mobilize India's vast indigenous knowledge and competencies and bring them to a wider market. This way, start-ups have the potential to enable inclusion through innovation. The launch of 'The Start-up India, Stand up India’ mission reflect that for the first time in modern Indian history, the Indian government has understood the criticality of startups for employment and economic growth.
Mass and drive up incomes thus paving the way for substantial domestic consumption, creating a cycle of sustainable growth.
In order to successfully grow through innovation and inclusion, it is imperative to create more jobs. Start-ups show promising trends in their ability to generate the required jobs. At the present rate of growth, they are projected to generate 250,000 jobs by 2020. This is the primary benefit, but by no means is it the only incentive to promote start-ups. The added advantages offered include increase in FDI, growth of ancillary industries to the tune of $600 million in advertising and marketing and $1900 million in logistics, and support to small and medium businesses. (NASSCOM ZINNOV , 2015) A unique feature of this alternative growth model for India is that it can be self-sustaining in the long run. The private sector, including both large corporates and entrepreneurial startups, possess the flexibility and know how to drive innovation across industries. These innovations will create new opportunities and generate the 12 million jobs needed each year to provide employment to the growing working population. (India, ASSOCHAM, 2015) The burgeoning workforce will grow the Urban Š FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
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ERIC LEURQUIN Professor at Ichec Brussels Management School
1. European Union celebrates its 60th anniversary, and has been a very successful integration plan thus far. What do see in store for European Union in the coming years? Ans: The EU will further enlarge, mostly to the countries in the Balkans, and also maybe to Scotland. The EU will further deepen the cooperation among these 30+ countries. 2. With the formal exit of Britain, announced to take place from March 29th, what effect would it have on the European Stock Markets? Ans: No short term effect, of course. As a reminder, these (efficient) stock markets have known about Brexit for a while now, so the all that has to be incorporated has been incorporated into the markets. A long term effect could come later if the outcome of the BREXIT negotiations is negative for the UK, you would see a drop at the London stock exchange in that case. Another possible outcome is a win-win scenario, which would be positive for both UK share and other EU stocks. 3. How do you see the Euro faring in the currency markets when BREXIT is formally initiated on March 29th? Ans: The fate of the Euro is quite independent of the BREXIT and the fate of the Pound. 4. What burden will Germany and France have to share in the European Union due to BREXIT? Ans: All remaining countries will have to pay a bit more to the EU budget, including Germany and France. In terms of leadership, the BREXIT will make it easier for Germany and France to try to lead the EU. but as usual, they will have to enlist the support of others, including Poland,
MARCH 2017
which is currently Eurosceptic and thus a difficult case. 5. As a European Union member, what role do you think EU should play to counter the effect of Trump? Ans: The EU remains an ally of the US, whosoever may hold the President’s office. 6. How do you think the Refugee Crises has affected European Countries, in retrospect, could it be handled any better? Ans: In my own, humble opinion, we should have forced Assad to leave, in order to avoid the current Syrian war. But we all know that he has a powerful ally, which is not interested in promoting democracy in Syria. That is how I feel we could have done towards mitigating the crisis which looms that nation now.
CLASSROOM
Purchasing Power Parity
FinFunda of the Month
Mr. Fin! Recently I read about Purchasing Power Parity. Could you please explain what does it mean? Hey, Sam! Purchasing Power Parity, better known as PPP is an indicator of the value of currency. It is used to measure productivity and living standards in respective countries. PPP compares various country’s currencies through a concept called ‘Basket of Goods.’ ‘Basket of goods’ include a fixed set of commodities. It consists vast array of goods that affect the daily life of ordinary man.
Sweet! How was PPP introduced and how does it impact us now? PPP idea originated in the 16th century, and a current concept was developed in 1918 by Gustav Cassel. This approach was based upon ‘law of one price’ which says that in
Vinay
IIM Shillong
absence of any transaction cost all goods should have the same price in any country. This also means that if inflation affects prices in one nation then exchange rate for that country will also be affected. Any comparison between 2 countries must be adjusted for parity. GDP and other indicators are often represented in PPP-adjusted terms. Most widely used parity adjustment is Geary-Khamis dollar (also known as the international dollar). Insightful! Can we simplify this measure? Calculating entire basket of goods seems a challenging task! Indeed! The Economist simplified this index by introducing Big Mac index. This index test law of one price using prices of MacDonald’s Big Mac burger across 2 countries. This index uses standardized good to compare. All other products in the basket can have different varieties like different varieties of grains across the globe. Hence Big Mac index is a standardized and simplified form of PPP measurement.
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