Niveshak March15

Niveshak THE INVESTOR

VOLUME 8 ISSUE 3

March 2015

THE BUDGET & BEYOND

FROM EDITOR’S DESK Dear Niveshaks,

Niveshak Volume VIII ISSUE III March 2015 Faculty Chairman

Prof. P. Saravanan

THE TEAM Abhishek Bansal Bhawana Saraf Maha Singh Gulati Palash jain Prakhar Nagori Ramesh Jaiswal Rahul Bajaj Sandeep Sharma Vishal Khare All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com

We hope that the month of March had brought with it lots of joys and colours with the festival of Holi. The month saw RBI cutting down the repo rate by 25 basis points to 7.5 percent from 7.75 percent with immediate effect citing that the fiscal consolidation was better than what numbers show and that the combined fiscal deficit is much lower due to government transferring more funds to the states. The National Payments Corporation of India announced linking of 15 crore Aadhar cards with various bank accounts in India and is expected to reach its target of linking all 17 crore DBT accounts with Aadhaar numbers by 30th June 2015. On the global front, we saw the three nations from European Union (EU) France, Germany and Italy agreeing to join the China-backed Asian Infrastructure Investment Bank (AIIB) which seeks to provide support to infrastructure projects in Asia. India also witnessed a two-day visit of IMF chief Christine Lagarde and she supported the tight monetary stance of the RBI and said that 5 percent inflation is still high. Our cover story “Sectoral Analysis of Union Budget 2015” highlights the effect of budget on various sectors & the lucrative sectors that the investor community would be eyeing in the future. We all are aware about the “Make in India Campaign” and how the government is publicizing it with their full efforts. But can we go forward by merely copying the Chinese Model, or the change in conditions would require better policies? Our Article of the month tries to answer this question. Our other section FinGyaan would highlight how the economies of China & US are intertwined through currency & debt even when they have big political differences. The Finsight column covers the effect of falling oil prices on Asian countries. Our FinLife portion of the magazine would inform you about the advantages and disadvantages of having Bullion as a part of your portfolio. This month’s FinView hosted the interview of Vishal Khandelwal – Founder of SafalNiveshak.com who has shared with us the investment lessons & mistakes an investor should be aware of and his views about the current situation of Indian Stock Market. Also, Team Niveshak would like to extend its gratitude towards the senior team for their continuous guidance and support in taking the Finance Club of IIM Shillong to new heights and thereby increasing its reach. The senior Finance Club comprises: Akanksha, Apoorva, Gaurav, Jatin, Tarun, Mohit, Mohnish, Priyadarshi and Sarath. We hope to continue this relationship and strive to take Finance Club to newer heights with your continuous support. We would also like to thank our readers for your constant support and appreciation. Please continue to motivate us so that we can come out with more insightful reads in the issues to come. Keep pouring in your suggestions and feedback to niveshak.iims@ gmail.com and as always. 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 Cover Story Niveshak Times

04 The Month That Was

Article of the month

‘Make In India’ Are We Merely Trying to Ape the Chinese Model?

Sectorial analysis of union budget 2015

FinGyaan

Finsight

18 China & The US

Intertwined by Currency and 26 In Asia Who Benefits and Loses the Most from Falling Oil Debt Prices

FINVIEW

FinLife

29 Interview With

Bullion investment from a Vishal Khandelwal Portfolio Perspective Founder - SafalNiveshak.com

CLASSROOM

33 Fiscal Deficit

The Month That Was

NIVESHAK

www.iims-niveshak.com

The Niveshak Times Team NIVESHAK

IIM Shillong Pay More For Services As Service Tax Increased To 14% While announcing Union Budget 2015, finance minister has opted to raise service tax rate to 14% from 12% earlier. With education cess of 3%, the effective rate of service tax was at 12.36%. This move is very much expected by the tax-experts as this hike facilitates transition to GST. The move to hike service tax rates is a pre-cursor to implementation of GST in the country. The service tax is payable on services availed by individuals. It was first introduced in India in 1994 at the flat rate of 5%. Over a period of time, it was hiked to 12%. It started as a tax on selected services, however after 2012, the service tax was being charged on all services except those mentioned in ‘negative list’. Negative list captures those services government wants to offer tax shelter. For example, finance minister Arun Jaitley included ‘life insurance services provided by Varishtha Pension Bima Yojana’ in the negative list of service tax. This should benefit senior citizens. Vistara To Have Fleet Size Of 20 Aircraft By 2018 Vistara, a joint venture between Tata Sons and Singapore Airlines, Sunday said its fleet size will be increased to 20 by 2018, from five at present. Phee Teik Yeoh, Chief Executive Officer, Vistara (Tata SIA) Airlines Ltd also said that the aviation industry in India is facing challenges such as high fuel cost and a high tax regime. “By April, we will have 6 aircraft and gradually increase to 9 by the end of this calendar year. Eventually, we will grow to 20 brand new A320 by 2018,” Yeoh told reporters in a press conference. The airlines today launched its first flight from Hyderabad to New Delhi. Having started with its operations on January 9, with 68 frequencies weekly, Vistara now operates 164 flights in a week. PM At NASSCOM Meet: IT Must Help India’s Governance Process Stating that the Indian IT sector has put India on the global map, Prime Minister Narendra Modi

MARCH 2015

urged members of the industry to help evolve India’s governance more processes and stressed upon the importance of connectivity in augmenting the country’s growth. Addressing a conference in Delhi where members of the NASSCOM industry body were present, Modi cited the examples of the recent coal auction and the direct benefit transfer initiative undertaken by the government, saying they had helped the government unlock value, prevent corruption and reduce leakages. He further said going forward, cyber warfare remained a threat to countries but also served as an opportunity for companies to develop cyber security to counter it. The Indian government is trying to synchronise projects with Digital India, the PM said. Sebi Gives Lenders New Ammunition To Tackle Bad Loans Capital market regulator Securities and Exchange Board of India (Sebi) has made it easier for financial institutions to convert debt of a listed borrower into equity. The move is part of the government’s and the Reserve Bank of India’s (RBI) efforts to clamp down on the bad loans in the banking system. The stressed assets in the banking system is now more than 10% of the total outstanding loans.Converting debt into equity is one of the popular mechanisms to address the bad loan problem. However, the conversion price for such transactions works out to be very high, often making this an unviable option for lenders. This is because the price for converting debt into equity is construed as preferential allotment and has to be arrived at as per the Sebi formula. As per Sebi guidelines, the price has to be the higher of either the average weekly high and low of the closing price during six months preceding the allotment or average of weekly high or low of the closing prices during the preceding two weeks. The move could help inject life into companies with stressed balance sheets. The move, however, will enable more and more lenders to take control of companies which have defaulted on loans, thereby providing a new lease of life to the company and existing shareholders.

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FDI Via Approval Route Surges 162 Percent to $1.91 bn in Apr-Jan Foreign Direct Investment into India through the approval route shot up 162 per cent to USD 1.91 billion in the first 10 months of the current fiscal, indicating that government’s effort to improve ease of doing business and relaxation in FDI norms may be yielding results. During the full 2013-14 fiscal, India had received USD 1.18 billion FDI through the government approval route, according to the figures collated by the Department of Industrial Policy and Promotion (DIPP). Although in most of the sectors foreign investment is permitted through automatic route, FDI in few sectors including pharmaceutical, defence and retail are permitted only through the approval of Foreign Investment Promotion Board (FIPB). FIPB is an inter-ministerial body under the Finance Ministry which approves foreign investments related proposals. During the April-January period, the total foreign inflows too have increased by 36 per cent year-onyear, to USD 25.52 billion. In January, the foreign direct investment (FDI) in India more than doubled to USD 4.48 billion, the highest inflow in the last 29 months. In 2013-14, FDI stood at USD 24.29 billion compared with USD 22.42 billion a year earlier. The government has taken a series of steps to improve ease of doing business that include having a timeline for clearance of applications, de-licensing the manufacturing of many defence products and introduction of e-Biz project for single window clearance. Government Decides To Shut Seven More Terminally Ill PSUs The government has approved closure of seven terminally ill public sector units, including HMT Watches, that have incurred a total loss of around Rs 3,139 crore over a period of time. The PSUs whose closure has been approved are HMT Bearings, Tungabhadra Steel Products, Hindustan

Photo Films Manufacturing Co, HMT Watches, HMT Chinnar Watches, Hindustan Cables and Spices Trading Corporation Ltd. Bharat Opthalmic Glass and Bharat Yantra Nigam have already shut down their units. Other CPSEs whose closure has been approved are running in heavy losses. The total losses incurred by the seven PSUs were at Rs 3,139 crore over a period of time. The minister said the Board for Reconstruction of Public Sector Enterprises (BRPSE) had recommended closure of six CPSEs and revival of 58 such units. On the other hand, the public sector units that have been approved for revival through joint venture or disinvestment route include Scooters India, Tyre Corporation of India, National Textiles Corporation and Hindustan Antibiotics, among others. RBI, Sri Lankan Central Bank Ink Deal For Currency Swaps Worth USD 1.5-illion Reserve Bank of India has agreed for a USD 1.5 billion currency swap agreement with the Sri Lankan central bank to help the island nation keep its currency stable, Prime Minister Narendra Modi said. The agreement was announced after a meeting between Narendra Modi and Sri Lankan President Maithripala Sirisena “The Reserve Bank of India and the Central Bank of Sri Lanka have agreed to enter into a Currency Swap Agreement of USD 1.5 billion. This will help keep the Sri Lankan rupee stable,” said Modi, The currency swap pact assumes significance as the Sri Lankan rupee has been under pressure for quite some time. Despite attempts made by the central bank, the currency has been losing value since the beginning of this year. At the current valuation, one Indian rupee is equivalent to 2.12 Sri Lankan Rupee. It has lost almost three per cent value in comparison to the Indian rupee so far in 2015. India and Sri Lanka earlier had a swap arrangement to the tune of USD 400 million. This has now been extended to USD 1.5 billion.

The Month That Was

The Niveshak Times

www.iims-niveshak.com

Market Snapshot 35000

3,000

30000

2,500

25000

2,000

20000

1,500

15000

1,000

10000

500

BSE

FII, DII Net turnover (in Rs. Crores)

Article ofSnapshot the Month Market Cover Story

NIVESHAK

5000

0 24-03-2015

23-03-2015

20-03-2015

19-03-2015

18-03-2015

17-03-2015

16-03-2015

13-03-2015

11-03-2015

FII 12-03-2015

DII

10-03-2015

09-03-2015

05-03-2015

04-03-2015

03-03-2015

02-03-2015

28-02-2015

27-02-2015

-5000

-500

BSE

-1,000

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

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

9793766.25 Source: www.bseindia.com

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

INR/1 USD

4.50% 4.00% 3.50%

Euro/1 USD

GBP/1 USD

Base rate Deposit rate

10.00%-10.25% 8.00% - 8.75%

RESERVE RATIOS 62.517 68.0746 52.485 92.9752 45.5729

CURRENCY MOVEMENTS 5.00%

LENDING / DEPOSIT RATES

JPY/1 USD

SGD/1 USD

CRR SLR

4.00% 21.50%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

8.50% 7.50% 6.50%

3.00% 2.50% 2.00% 1.50%

Source: www.bseindia.com 24th Feb 2015 to 28th March 2015

1.00% 0.50% 0.00%

MARCH 2015

Data as on 28th March 2015

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NIVESHAK

BSE Index Sensex MIDCAP Smallcap AUTO BANKEX CD CG FMCG Healthcare IT METAL OIL&GAS POWER PSU REALTY TECK

Open

% change

29007.99 10701.11 11254.82 19632.82 21475.41 10408.62 17399.48 8654.08 15541.16 11968.21 10382.12 9469.38 2232.04 7955.22 1757.75 6415.96

27458.64 10701.11 11254.82 18844.04 20664.64 10350.03 16900.56 7627.38 16952.05 11313.95 9328.64 9123.11 2092.97 7430.65 1630.54 6167.21

-5.34% 0.00% 0.00% -4.02% -3.78% -0.56% -2.87% -11.86% 9.08% -5.47% -10.15% -3.66% -6.23% -6.59% -7.24% -3.88%

% CHANGE % Change TECK, -3.88% REALTY, -7.24% PSU, -6.59% POWER, -6.23% OIL&GAS, -3.66% METAL, -10.15% IT, -5.47% Healthcare, 9.08%

FMCG 1 -11.86%

CG, -2.87% CD, -0.56% BANKEX, -3.78% AUTO, -4.02% Smallcap, 0.00% MIDCAP, 0.00% Sensex, -5.34%

Article Market of Snapshot the Month Cover Story

Market Snapshot

Niveshak Investment Fund

Done on 30/6/14

Informa(on Technology

CONS NON DURABLE (5.53%)

HCL Tech.

GODREJ CONSUMER Wg:5.53% Gain:20.59%

(12.76%)

Infosys

Wg: 3.74% Gain : 35.67%

Wg: 4.91% Gain : 28.68%

TCS

Wg: 4.11% Gain : 2.05%

BANKING (5.97%)

FMCG (19.89%) Britannia

Colgate

HUL

ITC

Wg:4.93% Wg:6.15% Wg:4.45% Wg:4.36% Gain:113% Gain:30.73% Gain:20.88% Gain :7.61%

Auto (9.57%)

Pharmaceu(cals (12.77%)

Dr Reddy’s Labs Wg:4.46% Gain:18.72%

Lupin Wg:8.31% Gain : 69.33%

Wg: 5.97% Gain : 10.07%

Chemicals (6.61%) Amara Raja BaR Wg:3.97% Gain : 6.889%

Tata Motors Wg:5.60% Gain : 19.38%

HDFC Bank

Asian Paints Wg:6.61% Gain:23.75%

MISC. (4.49%)

MANUFACTURING

Titan Company Wg:4.49% Gain:-‐4.73%

Page Industries Wg:6.49% Gain:35.02%

(6.49%)

Performance Evaluation

As on 28th March2015

Performance of Niveshak Investment Fund since IncepEon

March Performance of Niveshak Investment Fund 103 102 101 100 99 98 97 96 95 94 93 92

145 135 125 115 105 5

-‐1

2-‐

-‐1

7-‐

-‐1

-‐ 12

-‐1

-‐ 17

Sensex

-‐1

-‐ 22

NIF

-‐1

-‐ 27

-‐1

1-‐

-‐1

r Ap

Values Scaled to 100

Opening Por+olio Value : 10,00,000 Current Por+olio Value : 15,28,256 Change in Por+olio Value : 52.28% Change in Sensex : 33.95%

95 -‐Ja 26 n-‐1 -‐F 4 e 26 b-‐1 -‐M 4 a 28 r-‐1 -‐A 4 27 pr-‐1 -‐M 4 a 25 y-‐14 -‐Ju n 23 -‐14 -‐Ju 21 l-‐1 -‐A 4 u 18 g-‐1 -‐S 4 e 17 p-‐14 -‐O 18 ct-‐1 -‐N 4 o 15 v-‐1 -‐D 4 e 12 c-‐14 -‐Ja 11 n-‐1 -‐F 5 e 16 b-‐1 -‐M 5 ar -‐1 5

155

b Fe 5-‐

165

Scaled NIF

Scaled Sensex Values Scaled to 100

Risk Measures: Standard DeviaEon : 13.58%(Sensex : 17.81%) Sharpe RaEo : 2.97(Sensex : 2.21) Cash Remaining:270866

Comments on NIF’s Performance & Way Ahead : Throughout March 2015, Sensex was seen under pressure, having fallen 6.48 per cent during this period and cancelling out all gains made in the first two months of 2015.Meanwhile, during the last week of March, the index fell 2.75 per cent and closed at 27,458.64 points On internaEonal front, the US Fed signaled that spike in interest rates could well start later this year by raising borrowing costs, even before inflaEon and wages have returned to health, however the increase can expected to be gradual considering the fragile state. The crude witnessed some spike in the last week of the month on supply concerns over the air strike in Yemen, the same could be a temporary spike. Towards the end of last month Hon’ble Finance minister presented the budget which was received wholeheartedly by the market. Some important measures included cut in corporate tax, GAAR postponed, crackdown on black money. Major takeaways included high stress on Make in India, rural development and affordable housing. The budget has been termed as a fine balance between fiscal prudence and has number of levers to enable growth by the market. The por+olio did not witness any re shuffle during this month, however we are watchful of the current fall and correcEons in the prices of overvalued stocks and therefore reshuffles in the next month would depend upon the momentum of the market .

Article of the Month Cover Story

NIVESHAK

‘Make In India’ Are We Merely Trying to Ape the Chinese Model? Chinmay Ingole

NMIMS, Mumbai On 25th September, 2014, the day after India’s Mars mission was announced Prime Minister Mr. Narendra Modi announced yet another ambitious campaign - Make in India to promote the manufacturing sector in the country. The campaign concentrates on fulfilling the promises of job creation, boosting the SME sector & national economy and to give the Indian economy global favoritism. A lot of industry leaders from India and other parts of the world have met the Prime minister in this mission to promote the manufacturing sector. The campaign highlights the goal of making India a global manufacturing hub and bringing about the economic transformation by promoting

MARCH 2015

investments; eliminating outdated laws and unnecessary regulations, making bureaucratic processes more business friendly and making government more transparent and responsive The campaign kicked off with a flashy inauguration ceremony, creation of one of the most tech-savvy government websites and catchy one liners by the elected leader. Highspirited lines like- “We want highways. We also want i-ways (information ways) for a Digital India”; “Make in India is not a slogan, not an invitation”; “India focus is not only on Look East but also on Link West” etc. catch interest of the mass and the media quickly, giving it a hype like many other initiatives by the Prime

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government has also amended some of the labor laws pertaining to the system of inspection of companies, known as Inspector Raj. Under the new system, the inspector will not be able to inspect the companies of their choice as and when they wish. Instead, their visits would be regulated by a computerized database system. An online Shram Suvidha portal has already been unveiled for employers to submit compliance report for 16 labor laws. These initiatives have been under what our PM likes to calls as Minimum Government, Maximum Governance. The industry sees it as a step towards making India more transparent and efficient. The policy changes are aimed at luring our foreign friends to invest in the country. The red carpet set out for them was more than obvious during the recent Prawasi Bhartiya Diwas to attract investments from NRIs and also during the Vibrant Gujarat summit to attract multinationals to invest in the country. The Pessimist Same medicine in new bottle This is not the first time that India has set off to boost the manufacturing arm of the country. In 2004, the government set up the National Manufacturing Competitiveness Council (NMCC) with the objective to raise the share of manufacturing in GDP from 17% to 30- 35% by 2015. According to McKinsey report by 2025, India’s manufacturing sector could generate 2530% of the GDP at its full potential. In May 2011, the government set out with a goal of increasing India’s exports from $246 billion to $500 billion in the next three years. But the manufacturing sector saw a decline of 1.4% in August 2014. The figures have not changed much but the target year has moved from 2015 to 2025. A recent FICCI report says that there are several fundamental roadblocks in India which are

Article of the Month Cover Story

Minister; the campaign itself is more than just a marketing gimmick on the national level. It is an initiative for a series of fundamental changes being triggered in the country on the context of global business forum. While China has established itself as the manufacturing center of the world, critics often get tempted to compare India’s initiatives as a blind mocking of the 1980s China. Let’s look at the three views on the manufacturing movement. The Optimist Initiatives of NaMothe charismatic business minded leader Almost four months have gone by after the big bang start of the Make in India campaign and people have started to realize that it is more than just an overblown balloon by yet another politician. KPMG and CII recently completed a report which identified some key areas to focus for making India a destination for production. They include• Streamlining investment approval • Easing the land acquisition process • Creating an appropriate labor development ecosystem • Efficient and effective legal and tax enforcement • Promoting cross-border transactions • Technology-savvy government The steps taken by the new PM have been very much on these lines. The PM aims at making India a friendly nation for new businesses. This reflects on the ease of doing business scale on which India aims to improve its rank 134th rank to a decent 50th. Single window clearance is yet another initiative for making the regulatory and bureaucratic environment conducive for the businesses. A special committee of experts would be set up to resolve the grievances of businesses within 72 hours from filing. The

Article of the Month Cover Story

NIVESHAK

stopping manufacturing to grow at the targeted rate. First deficit is the crippling shortage factors of production like power, hazardous labor laws etc. Second deficit is in the infrastructure such as surface transport and ports. The third set of issues is in the legal and tax regime which is not very future oriented and conducive to growth in addition to being rigid. Retrospective taxation in case of Vodafone is an example of this. Finally, there is the chronic and ubiquitous corruption. With single window clearance as the beginning, we need to change the mindset of the executives in the India Inc. With many of the bureaucratic hurdles still in place, getting work done in the government office is still a challenge. Efforts to improve Indiaâ&#x20AC;&#x2122;s image in terms of ease of doing business will go in vain if issues such as GST implementation, foreign currency transactions etc. are not addressed firmly. The Realist What worked for the dragon wonâ&#x20AC;&#x2122;t work for the elephant. The dragon and the elephant donâ&#x20AC;&#x2122;t do the same trick. We will be making a big mistake if we claim that India is merely mocking the 1980s China. The situation in China was very different in 1980s than that in India today. In China, the strong central government had made inviting multinationals to the country as a top priority as they were aware that the country was not able to grow on its own. The centrally planned economy had made the country fall back in terms of economic development compared to other Asian countries. In order to lure the manufacturing units to the country, it gave something more than just the low labor cost. It gave them an arena with rapidly developing infrastructure; government support in matters of land acquisition, labor issues, environmental concerns; raw material availability and a growing market. 1979-81 was called a period of readjustment which had a goal of expanding exports rapidly, overcoming deficiencies in transportation, communication and raw materials. A major shift in mindset was seen when industries were allowed to keep a major part of their profits with themselves after tax as against the previous situation where the whole chunk of profit was supposed to be

MARCH 2015

submitted to the government. Government adjusted the interest rate to promote borrowing and expanding rapidly. To promote foreign trade, which was now seen as an important source of investment, four coastal special economic zones were set up. While doing so, issues like environment, land rights could be easily manipulated as the agricultural lands were almost entirely under control of the central Maoist government. A wave of crime, corruption and as per many older people- moral deterioration hit the country in the loosened economic and political climate. Another issue was increasing tensions caused by widening income disparities between people who had started getting rich in this wonderland and those who were not. China is seen as the hub for manufacturing not only because all the factories are present there but also because all the support structure has already been developed over the decades. This includes logistics, supply chain, support operations and allied services. As a result, even if in the coming few decades China losses the crucial advantage of low cost of factors of production, companies will not immediately move out to other regions. Setting up factory is one thing but setting up allied and support industries is a complex and time consuming activity. Chinese government has taken an aggressive stance in developing support infrastructure for exports. In India, the situation is not exactly the same. The support infrastructure is almost absent for export. Secondly, we have such a huge domestic market that export may not be the most lucrative option for many of the industries. The blatant audacity with which the Chinese government could take steps to set up factories is not possible for any political leader in India. Export may not be the top priority of the country for another reason. Along with China, many of the South-East Asian countries like Philippines, Indonesia, and Malaysia etc. have started to emerge as next manufacturing destinations. India, may have already fallen behind these countries in the race of becoming the next China in the manufacturing world. A secular and all-comprising democracy such

NIVESHAK

Article of the Month Cover Story

as India cannot go on blatant industrialization like China for yet another reason. The active lobby of environmentalist, social activists and political opposition will not let the government take steps which are rash or have long term political, environmental and social impacts. The government cannot support the industries in matters such as land acquisitions, labor issues etc. and ignore the rights of all the stakeholders, including, the local population. The FDI our PM has proposed is not only Foreign Direct Investment but also First Develop India. When we are promoting manufacturing, we should keep in mind that, in India roughly 16% of the labor is still in the primary sector as compared to 6% on average in other BRIC nations. SME sector contributes to nearly 40% of the exports, 90% of industrial units and employs 60 million people, becoming second largest employer after agricultural sector. While China had promoted export oriented manufacturing as its primary agenda in 1980s, India’s top agendas are to promote SME sector, improve employment, attract foreign capital investment and then promote export. In this sense, the target which both the nations are trying to hit using the same gun of manufacturing is different. The situation which was there in 1980s when China set off on the mission of becoming manufacturing superpower is much different than the global economic scenario of today. With its own economy not so integrated with the global economy, China could take some bold steps which would look impossible in today’s world. E.g. keeping the factor cost artificially low and keeping the currency undervalued. However, if we look at the recent labor cost increases in China, it has almost come in line

with the global wages. Additionally, the costeffective manufacturing today, is not just about having cheap labor. It is having skilled labor and advanced technology like 3D printing at our disposal to create zero defect, zero effect products. The next generation consumer today wants quality and novelty products and is willing to pay a premium for it. Our manufacturing goals should be able to understand these market dynamics and recalibrate themselves instead of only mimicking the past successes. The PM is trying to create a shift in the mindset of the stakeholders- labor, bureaucrats and employers. The policies like acceptance of selfcertified documents, a 72hours clearance window on the Make in India website and other defined focus areas have certain intangible benefits in this sense. When developed economies like the US are renewing focus on reviving manufacturing, ‘Make in India’ is not an option but a national obligation that’s needed to keep pace with global growth. Transforming the vision to reality will require a solid roadmap which will support not only manufacturing of the present, but also of the future. To establish India as a global manufacturing powerhouse, the government, industry and civil society must work in tandem to restore investor and public confidence in the mission ‘Make in India’.

Cover Story

NIVESHAK

sectorial analysis of union budget 2015 Ramesh Jaiswal

IIM Shillong

Formulated and announced in the backdrop of a strong macroeconomic fundamental with strong aspirations for “Ache Din”, the Union Budget 2015 has done well to rate itself balanced on the score card. The Budget-2015 very boldly and in a persuasive manner sets for itself a target of 3.9% fiscal deficit to enable provisions for the increased outlays on the various rural initiatives, socio economic schemes, infrastructure needs and many more. It was also able to win the hearts of the investor community in terms of investor friendly budget and also got the appreciation as a “Non populist” Budget. The budget does indicate adoption of a reformatory approach by the government ,Macroeconomic reform have been the key highlight of this budget with expected GDP of 7.4% and Current Account Deficit of 1.3% of the GDP.

MARCH 2015

Prime Minister Modi led government has demonstrated seriousness about bringing back the black money on an instant basis. The introduction of a comprehensive taxation law for the money stashed outside the country and the introduction of provisions like such offenses being non compoundable and guilty are not eligible to apply for any kind of settlement is indeed commendable. Important and the much touted development happened a day after the Union budget when the RBI saluted the targets of the government and its prudence by cutting the repo rate by 0.25 percent. It looks like the balancing act by the Finance Minister has gone down well with the RBI governor in meeting his ambitious inflation target and the supply of the money in the economy.

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Auto Sector Auto sector was a badly hit sector that expected some roll back on the increased excise duty that was unchanged after the month of December, however which did not happen. Customs duty on commercial vehicle fully assembled and imported increased from 10 % to 40%, this however would not have much of an impact as most of the imports towards this front has been through disassembled components. The Budget stated that period of Concessional duty structure on electric/hybrid vehicles to be extended up to March 31, 2016, which came as a great relief that the companies like M&M expected to have for its brand Reva. The indirect impact could be through the increased disposable income of rural population and the Auto sector particularly in the tractor and the two wheeler segment, which eventually could benefit out of the proposed higher Agricultural credit of Rs 8.5 lakh crores (as against Rs 7 lakh crores in previous year) and increased allocation towards rural infrastructure. Banking Sector This Budget provides the recovery assistance to Microfinance Institutions in many ways, establishment of Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs 20,000 crores, and credit guarantee corpus of Rs 3,000 crores. Aiming majorly to provide refinancing to all Micro-Finance Institutions which are in the business of lending to such small business entities through a Pradhan Mantri Mudra Yojana. In this way some stress could be shifted from the balance sheets of major PSBs. The Microfinance agencies which saw dip in their recovery and businesses like Mahindra Microfinance now would be able to make better use of this opportunity. The long awaited need to have a centralized kind of arrangement to bring professionalism, good governance and proper succession planning at the Boards of major PSBs is also addressed in this budget especially after the case of Bhushan Steel and report by the RBI about the concentration of NPA to few industrial houses,

an autonomous Bank Board Bureau to be set up to improve the governance of public sector bank. Second important relief for microfinance agencies came after they got empowered under the SARFAESI Act 2002 as “Financial Institutions”, this is the biggest aid that has been granted to the agencies with a corpus of Rs.500 crores or more in order to allow a competitive recovery of NPAs The PSBs expected some capital assistance to comply with Basel III requirements, however Finance Minister has clearly signaled that the additional capital to be raised by going to the equity market by infusing only Rs.7940 Crores as against the expectations of Rs18000 crores. Other important announcements for the sector included, introduction of composite caps according to international standards for the calculation of FDI and FII Investments, this was primarily inspired by the HDFC banks approval for increasing the caps of Investments. Taxation This budget made very clear that the redundant legislations has to be scrapped as time passes especially on the taxation front. The Budget announced the scrapping of wealth tax and introduction of an additional Surcharge of 2 percent for individuals with taxable income of over a crore. The ministry has signaled the implementation of GST by increasing the Service tax to 14% an important development for corporates to re-strategize their Capex in warehousing and distribution. The Budget gave a relief to MSMEs and SMEs by increasing the threshold limit for the Domestic Transfer pricing limit to 20 cores from 05 crores, this could very well reduce the no. litigations that are filed before the ITATs. Major relief for the corporates in terms of reduction of corporate taxes from 30% to 25% implementable over a period of 04 years. The overhauling of the capital gains taxes to make way for the listing of REITs is a vital step towards providing the much required liquidity to the housing projects with the developers. Opportunities are also opened up with the investment proposal of Rs.700 Billion. The steps like granting of “Pass Through Status”,

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With this background we analyses the Budget completely from the Industry’s perspective highlighting both its impact and the set of unmet expectations.

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rationalization of CGT and the application of STT instead of DDT could actually translate into lower cost of capital and more project commencement in the urban infrastructure market. The â&#x20AC;&#x153;Housing for Allâ&#x20AC;? Scheme form the developers perspectives needs more clarity in terms of information to actually interpret the effects on the real estate market. The demands of the sector like reintroduction of Section 80-IB for low cost housing, interest subvention schemes for affordable housing , removal of MAT in SEZ development have still been ignored. However on positive side, the abolishment of wealth tax could actually trigger more real estate investment in the urban space as the investors need not worry about the taxation of the same, every year. The impact of other reforms such as the reduction in corporate taxation rate etc. could actually see a spur in core capital investment- both domestic and foreign in the developer companies. BUDGET 2015 MIS HITS Startups Most starts ups had issues with the section 56 of the Income Tax act where if a foreign angel is taxed. To remain out of the purview of the same most of the startups who are operating in India, get themselves incorporated abroad

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for attracting the foreign investors. It is a discriminatory situation for the domestic Angel investors and such kind of adverse taxation legislation is a reason for technology starts ups moving abroad. May be the Starts ups will have to wait for one more year to get some relief in this area. Iron And Steel The Indian steel sector is highly competitive as top six of Indian steel companies ranks amongst the top 34 world-class steel companies as per the ranking of world steel dynamics. Unfortunately off late, this competitiveness has been threatened by the unrestrained dumping of steel into India. Countries like Japan, Korea, China and Russia together constitute over 75% of their imports into India. Imports has increased by 70% this fiscal year. The Sector faced disappointment as the finance minister maintained an effective import duty on steel products unchanged in spite of enhancing the peak rate to 15%. It is believed that the hike in the peak rate will not serve any purpose, if the dumping of steel is not arrested by banning the cheap imports. The domestic steel sector is doubly hit as the input cost duty on metallurgical coke is being increased, carbon cess on coal is doubled and railway freight is increased without any relief to the steel sector.

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Gold And Gem Though the budget announced several measures to curb the black money the analyst and the market players in this sector believe that the reduction of import duty could have been a master stroke in reducing the Black Money that is embezzled out of the system for smuggled gold buying. Smuggling has plagued the industry for a quiet some time now, some newspaper reports are reporting continuous illegal trading. Finance ministers innovative ways to reduce the demand for overseas gold and control the Current Account Deficit by gold monetizing schemes is well received by the sector. The gold monetization could reduce the demand of the manufacturing sector on the imported gold as the domestic gold stock could be used at an attractive interest rates offered by the banks. The sector specialists also expected that FM could announce a turnover based taxation system and an exclusive and separate duty structure for natural and manmade Diamonds. These demands were also unmet.

15. Some reports also states that the payment under the scheme was outstanding for more than 03 quarters and therefore the provision had to be doubled to disburse the pending amount. Investment in the sector is directly affected by the reduced allocation under this head given with the increase in service tax. The sector also expected reduction in Central Excise on manmade fibers, the prices of these fibers are 23% higher than the International Process and it adds to the stagnated growth of the sector.

Textile Sector The allocation for technology upgradation fund scheme has been reduced to Rs.1520 crores from Rs. 1,864 Crore allocated in the year 2014-

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China & The US Intertwined by Currency and Debt Avinash Mehta

IMT Ghaziabad

Introduction In a globalized world, it is difficult for economies to survive without being linked with other economies. The world economies have become so inextricably intertwined in economic terms that even a small incident happened in one economy has an effect on other connected economies. One such example is that of two major economies viz. China and The US. It is indeed worthwhile to understand how they are economically connected and the underlying dynamics involved. The Exchange Rate Conundrum The Yuan is the basic unit of the Renminbi (official currency of China) , but is also used to refer to the Chinese currency generally, especially in international contexts. Let’s explain the US Dollar-Yuan exchange rate conundrum with a simple illustration. For Illustration (Figure.1) and explanation purposes, let us make the following assumptions: • The US and China are the only two countries

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trading in the world. • The exchange rate between Chinese Yuan and the US $ is 6 Yuan per $1 US. • China is only exporting one thing to the United States i.e. Microwave. At 6 Yuan/US Dollar, the Chinese manufacturer sells them in the United States for $50 each. Assume that there is a demand for 1 million microwaves . • The only export from the US to China is software and the demand for US software in China is 2 million units. The price of each unit being 60 Yuan. The Chinese manufacturer will get $50 Million in revenue and the US manufacturer will get 120 Million Yuan. Thus US has a $30 Million trade deficit. The Chinese manufacturer would now want to convert the $50 Million to Yuan (demand of 50*6 = 300 Million Yuan). The US manufacturer would want to convert the 120 Million Yuan to US Dollars (demand of (120/6) = $20 Million). As we can see, the US manufacturer is demanding

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Fig 1: US Dollar-Yuan exchange rate conundrum

$20 Million whereas the supply is of $50 Million. Also the demand of the Chinese manufacturer is 300 Million Yuan whereas the Supply is 120 Million Yuan. This clearly is an imbalance. The supply of Dollar is greater than the demand for Dollar. This means that the price of the dollar relative to the Yuan must go down i.e. Dollar weakens. This in turn means that the price of the Yuan would go up i.e. Yuan strengthens. This implies that the exchange rate would now change to something less than 6 Yuan/Dollar. The Chinese manufacturer would now have to raise his price in the US in order to cover his costs in Chinese currency. Also if he raises the price, it would lead to lower demand. The American manufacturer can now sell at fewer Yuan for the same number of dollars, leading to an increase in demand of US software in China. If it were a floating exchange rate, the demand for Chinese goods in US would go down and the demand for the US goods in China would go up and eventually the trade and currency imbalance would resolve itself. However the reality is that China does not want its goods to become expensive in the US because if that will happen, it would be harder for the China to maintain this trade imbalance. To mitigate the effect of the increase in price, the Chinese Central Bank (People’s Bank of China) can literally print 180 Million Yuan. It can go to the open markets and try to create a demand for an incremental $30 Million. So when it does this, the total demand for US Dollars is now $20 (US Manufacturer) + $30 (Chinese Central Bank). This would thus completely equal the supply of Dollars at our assumed exchange rate (6 Yuan/ Dollar) thus not causing the exchange rate to

fluctuate or the balance of trade to change. Thus the Chinese Central Bank keeps the Yuan pegged to the Dollar by buying Dollars thereby helping to maintain the trade imbalance. Although the example mentioned above is an Illustration, the actual amount is in hundreds of Billions of Dollars. China Buying US Treasury Bonds And Its Impact On The US Interest Rates In its pursuit to keep the Yuan pegged to the US Dollar, the Chinese Central Bank piles up Billions of Dollars. Thus it is worthwhile for them to collect some interest on the huge amount of cash that they have. Thus they lend it to the US Government by buying US Treasury Bonds, Treasury Bills and Treasury Notes. This phenomenon leads to creation of an incremental demand for the US Treasuries. When the demand for anything increases, the price is bound to increase. Thus the price of US Treasury Bonds, Bills, Notes goes up. This implies that the interest that the government has to pay on its debt goes down. The Cost of Debt for the US Government goes down. The US Benchmark Interest rate goes down. Thus this leads to credit becoming cheaper inside the United States. This implies that the US consumer could now borrow more at the lower interest rate and can consume more i.e. buy more Chinese goods ( Microwaves as per our illustration). Chinese Money Supply (M1) And Asset Holding From Table.1 if we consider the absolute increase in money supply M1 (composed of all the cash, coins, traveler’s checks, checking account balances) from 2009 (Q4) to 2013 (Q4), it is 11.584 Trillion Yuan i.e. $1.853

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Table 1 : Chinese Money Supply

Trillion (considering the latest US Dollar-Yuan Exchange rate i.e. 6.25 Yuan/US Dollar). Table.2 and Table.3 provide us a snapshot of the Foreign Asset holdings of the Chinese Central Bank. Assets are the best measure of what the bank is holding that is denominated in other currencies. We can see that there has been an

that the US is running a trade deficit with China. This is evident from the fact that the US imports more than it exports to China. Financial Account (Table.4) shows that the US, although it is buying more assets from China i.e. from 2006 at $5.531 Billion it increased to $10.224 Billion in 2009, there is some restriction

Table 2 : Foreign Asset Holding of Chinese Central Bank in 2010

increase in the foreign asset holdings by 8.69 Trillion Yuan i.e. $1.390 Trillion (considering the latest US Dollar-Yuan Exchange rate i.e. 6.25 Yuan/Dollar) (Q4-2009 to Q4-2013). If we compare this with the Money Supply M1 calculated above i.e.$1.853 Trillion, we can see that the Chinese Central Bank’s major expansion of its monetary base was to go out and buy foreign assets. A part of these foreign assets are also the US Treasury Bonds/Bills/Notes. This would eventually lead to keeping the Yuan devalued w.r.t. the Dollar thereby maintaining the trade imbalance. China And US Balance Of Payments It is clear from the Current Account ( which accounts for the export and import) in Table.4,

imposed by the Chinese Government on the amount of assets that can be brought. However, we can see that the Chinese holding of US assets is increasing way more. These assets could be US Treasuries, US Stocks, US Real Estate. The numbers in the ‘Net U.S. incurrence of liabilities excluding financial derivatives’, to a large degree, are offsetting the trade deficit and we can see that in 2008 the Chinese bought way more assets than even the trade deficit. In 2009, however we do not see them buying enough to make up for the trade deficit i.e. they brought $151 Billion which does not make up for the trade deficit of $262 Billion. So how did China still keep their currency pegged? The answer for this could be that they could have bought

Table 3 : Foreign Asset Holding of Chinese Central Bank in 2013

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the demand of Chinese items in US, leading to a slowdown of its economy. There is also a possibility that it would finally lead to shifting of China’s manufacturing base to other emerging markets having cheap labor and competitive industrial base at par with China. Lower exports would mean that the Chinese Central Bank now have to print lower Yuan to satisfy Yuan Demand. which affect the US $ reserves of the Chinese Central Bank. This would in turn mean that China would buy less US Treasuries/Assets. The US Interest rates would increase unless the US Federal Reserve takes some measures to prevent it. A stronger Yuan would mean weaker US $,which would make oil cheaper for China since Oil producing countries peg their currencies to the US Dollar. However for the US a weaker Dollar would mean that the oil would be costlier from the

Table 4 : US Transaction Statistics

competitiveness. Also the latest figures show that M1 money supply is 34810 Billion Yuan and China’s GDP is 9240 Billion Yuan. Thus we can see that money supply M1 is 3.5 times of the GDP. This pushes the inflation thereby mitigating the effect of currency devaluation being done by the Chinese Central Bank. Floating Exchange Rate Effect On China And The US If the Yuan is allowed to float with respect to the Dollar, it would result in stronger Yuan as compared to the Dollar (Figure.3) as the Chinese exports to the US are more than the US imports from China. This implies that the US would now import less from China because it would be more expensive for it to do so. This would decrease

American perspective. In summary, there are a lot of dynamics involved in keeping a country’s currency at a desired value. Example of China tries to maintain its currency with respect to the US Dollar provides an in depth understanding of the same. Important factors like China’s economy continuous expansion, the US Dollar-Chinese Yuan exchange rate conundrum and China’s holding of US Assets (treasuries, real estate etc.) will play a crucial role in the years to fulfill its aim of becoming a superpower

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currency from the another country ‘X’ which would put pressure on that country’s currency. This would make that country’s currency to go up in value and would hurt country X’s trade. Thus country X in turn would go and buy US assets to keep it devalued. China’s Inflation Worries Even with all the jugglery that the Chinese Central bank does in terms of money supply, there is a fear of rise in Inflation. The Chinese Central Bank prints the Yuan and gets Dollars in return with which it then purchases various assets as explained above. This additionally printed Yuan goes into the Chinese economy thereby increasing the money supply. This would lead to an increase demand in the domestic Chinese market which makes the things more expensive in Yuan terms thereby making the exports more expensive. This undermines the exporter’s price

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Bullion investment from a Portfolio Perspective Apeksha Sagar

IIM Shillong

With the forms of investment other than stocks, the quantum of returns will be determined by the soundness of one’s strategy with which one designs one’s portfolio. But, buying bullion can be opted for the diversification of risk that arises from investment in stocks, the prices of which fluctuate daily. So, let’s understand what investment in bullion includes. Bullion is a bulk quantity of precious metal like gold, silver, platinum and palladium. It is measured by weight and traded typically in the form of bars and coins. So, one buys bullion when prices are low and sells when prices are high. The problem that is faced is how to predict the movement of prices to have an upper hand on the market. Also, bullion tends to move in a direction opposite to stocks and other commodities. So, it possesses the inflation hedging ability unlike other investments that are dependent on the

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prevailing market conditions. The important thing to be considered is its cost. The dealers of gold make their money like anyone else – by selling at more than the market price, and buying for less. The difference or technically called spread can range widely depending on the factors like quantity and type of bullion you buy, who you buy it from and the current state of supply and demand in the market. One can buy bullion from different locations. However, this brings with it the cost in the form of taxes and to gain maximum we need to compare the returns from different locations. The most popular bullion investment is gold. Apart from having the benefits that it shares with other metals, gold has its own advantages that makes it stand out. Gold is known for its value and rich history. It is present since times immemorial. Its value has increased through the

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with the misconception that the American dollar is still backed by gold. But it is not. There was a time when US dollar was backed by gold but at present the US dollar is backed only by the faith and credit of the United States. A system like Gold Standard was established under the Bretton Woods Agreement after the World War II. In that system, the countries fixed their exchange rates relative to the dollar and the US established the price of gold at thirtyfive dollars an ounce. The currencies that were pegged to the U.S. dollar had a fixed value which was determined by gold. This agreement helped the U.S. dollar gain acceptance in almost every corner of the world. The dollar held value everywhere. People could exchange US dollar for its value in gold. This way, the Bretton Wood Agreement maintained the required stability among the currencies around the world following the destructive war like World War II. But the eventual imbalances in the system led

to its demise. Then, the decision of eliminating the system of fixing the price for gold was taken by President Nixon which led to the emergence of gold as a commodity like other commodities in the market. Hence, Gold also became subject to the mechanism of supply and demand forces of the market. So, gold no longer backs the US dollar. But during this entire phase gold gained the credibility of the investors which was not the same for other available commodities. Gold is still perceived as being a tangible and reliable investment for investing oneâ&#x20AC;&#x2122;s hard earned money. Gold is the only investment option that instills confidence in the minds of the people looking for investing their idle money. When the American dollar is weak, the price of gold goes up. Now, people have developed that natural tendency of buying gold whenever they fear an economic slowdown. In the times of weak market sentiments, the investors lose confidence in the stock market and they look for investing in gold with more vigor because they created a perception that gold will never lose its value and will always be considered as a safe investment. This is how the price of gold rises when the value of US dollar depreciates against other currencies. Investment in Gold outperforms investment in currencies like US dollar when their value comes down. This is the sole reason why gold becomes an important part of any portfolio, thereby diversifying the risk and keeping the downward economic scenario into consideration. Furthermore, gold has been the only commodity, the value of which increases significantly with the increase in the standard of living of people. During inflation, the price of gold also increases as it becomes the most attractive form of investment. Not only inflation but even deflation, when the prices of the commodities in the market become stagnant, has the same effect on the price of gold. Not only in the times of financial crisis, but also in the times of geopolitical crisis gold is considered to be the safe haven for the investors. This year the prices of gold have experienced some major price movements in response to the formation of the new government in the Indian context. Its price often rises the most when confidence in the government is low. The prices

ÂŠ FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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passage of time unlike other currencies. Also, people see investment in gold as a way to pass on their wealth from one generation to another. Moreover, the weakness of US Dollar had the effect on the prices of gold. When the value of US dollar decreases against other currencies, the way it did during the period 1998 to 2008, people have the tendency of buying gold for security purposes and hence the price of gold rises. To understand this phenomenon, we should look at the relationship that the two have shared over the years. The gold price goes up when the value of US Dollar is down. This phenomenon is particularly confusing to those who still live

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of stocks increased due to the entry of the Modi government which led to the fall in the price of gold. Then we have the supply constraints that affect the gold. The supply of gold in the market comes from the sales of gold bullion that comes from the vaults of global central banks. But this process of selling by global central banks slowed greatly in 2008. Not only this, but also the production of new gold from mines was declining since 2000. So, here the law of supply works for price of gold where reduction in the supply of gold increases its price. As gold is considered a commodity, it is also subject to the law of demand which says that the prices of gold will increase with the increase in its demand. Since ages, increasing wealth of

traditional form of saving, the demand for gold has been steadfast since time immemorial. Diversification of the portfolio is the way forward in times of uncertainty. The perfect way to diversify the portfolio is by having the combination of investments that are not highly correlated to one another. Gold has always had a negative correlation to stocks and other financial instruments. The history says it all when 1970s was great for gold, but terrible for stocks, when 1980s and 1990s were wonderful for stocks, but horrible for gold and last but not the least when in 2008 stocks bottomed substantially, consumers migrated to gold. Well informed class of investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.

emerging market economies boosts demand for gold. The countries that agreed to the Bretton wood agreement have gold intertwined into their respective cultures. But among all of them, India is one of the largest gold-consuming nations of the world; it has many uses for this one commodity which also includes jewelry. As such, the Indian wedding season is traditionally the time of the year that sees the highest global demand for gold whereas in China, where gold bars are a

Investors consider it as an important part of a diversified investment portfolio because its price works against the direction in which the price of paper investments such as stocks and bonds work. The price of gold is volatile in the short term but over the long term, the changes in its value shows negative correlation with other financial instruments. One of the studies conducted analyzed the determinants of the prices of gold, silver and

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financial conditions and it can never reduce to zero as they are physical assets. Also, the value of these metals grow as demand from billions of new and existing consumers increases. Today, gold prices are trading at a premium to platinum as macro insecurities have driven safe-haven investments in gold. Further, if some analysts are to be believed, gold is likely to continue its momentum and outpace its cousin as fears over the global economic outlook keeps investors on edge. Lastly, based on the results, we can suggest that the metals do possess inflation-hedging ability and proves to be the better investment option than stocks or bonds at different financial conditions in the Indian economy. Investment in Stocks provides extremely good returns corresponding to the excellent market conditions and takes a toll in worse market scenarios indicating high inflation whereas bonds are good for low constant income desirers. But in case of these metals, we can always look for more returns than on government securities and even more when there is a downturn in the economy i.e. cases of high inflation. Also, the investment in gold has now been made easier with the introduction of ETFs. This avoids the hassle of directly holding gold as a commodity. The ultimate objective of investment into gold for a retail investor is to have an avenue which acts as a hedge against inflation apart from real estate, which is not always feasible because the capital requirements are huge. This has only been taken care as of now with the use of REITs but the adaption among the retail investors will take time. When the stock and the debt market does not favor an investor, then commodity markets, especially gold comes to his rescue.

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platinum for an Indian investor. The long-term relationship between inflation, the exchange rate, USD price, value of USD, industry value added, stock returns, per capita income, GDP and the metals were analyzed. Among the three metals, platinum is usually the most valuable; and is said to be thirty times rarer than gold. White gold is perceived as a monetary asset, platinum is well known as an industrial metal but still as economic store of value for more than century now. Platinum’s industrial ties and thinly- traded market makes it more susceptible to erratic moves led by recessionary slowdowns. Platinum is also gaining its sheen amongst the jewelry consumers in India due to its relatively moderate rise in prices. Platinum market in India is still small and will take some years to rival China, the world’s biggest platinum consumer of the metal. The country’s love for gold is also hard to avoid, although the Indian government is determined to curb the buying of this precious yellow metal. That is why inflation has no significant effect on gold and platinum, however they are correlated with it. While everybody’s talking about the returns gold has delivered over the past four years, it’s the yellow metal’s poor rival that has been winning the race. Silver prices have increased significantly in the past four years thereby providing a total gain of over 300%. However, over the past few months, silver prices have dropped to an affordable level of around Rs.40k per kg. According to some analysts, “There is still some steam left in silver. Bullion is expected to go up, so silver prices too shall rise steadily in the medium to long term.” So, from the above analysis, we can conclude that silver and platinum are potential investment options whereas gold keeps on showing its evergreen growth in the price. Thus, there has never been a better time to invest in physical precious metals. Precious metals give the benefit of strong, long-term investments that remain stable and continue to grow. History reflects that precious metals provide a safe investment in times of economic and political uncertainty. The main objective to own the physical product includes stability in its value, even during difficult and challenging

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In Asia Who Benefits and Loses the Most from Falling Oil Prices Saamarth Bali

Introduction Oil is a fuel which powers the engine of growth and keeps the wheels of economy moving, it is not without reason that it is also termed as ‘black gold’. Besides coal, it is by far the only source of energy which is abundantly available and extraction, transportation and marketing is commercially viable. Due to its higher octane value and portability, it steals a march over coal as a preferred source of energy resulting in higher demand all over the world which comes along with a fat price tag. Current Scenario Over the last few months crude oil prices have fallen drastically and the slump can be attributed to three main factors, first weak demand from China and European countries due to slowing down of their economies, second spurt in US shale oil production leading to reduction of oil imports by the US and third, reluctance of major oil producing countries to curtail production. On one hand where falling oil prices have brought cheer to countries which are heavily dependent on oil imports such as India it has also brought pain to countries whose economy is primarily dependent on oil exports such as Venezuela.

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SIMS, Pune

Winners And Losers In today’s world our economies are so intertwined that there can be no winners or losers in this downward march of oil prices. To put things in perspective we will discuss as to how falling oil prices have impacted the economies of few countries in Asia and America and try to fathom whether it has brought joy or sorrow. India - Net import bill of oil and oil products by India stands at $91 billion which is approximately 5.1% of GDP, falling oil prices would certainly reduce this burden and narrow down the current account

Fig 1: INDIA-Net imports of oil and products as a % of GDP

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Fig 3: JAPAN-Net imports of oil and products as a % of GDP

Fig 4: CHINA-Net imports of oil and products as a % of GDP

was linked to oil. Net imports of oil and oil Products accounts for nearly 5.1% of its GDP . Further Japan is a major exporter of Cars and Vehicle Parts, 13% of Japan’s visible exports is of Cars, falling oil prices are likely to boost the global demand for vehicles which in turn will benefit Japanese economy. However, even Japan is not untouched from the ill effects of falling oil prices. Japanese economy is largely driven by its electronics and automobiles exports, weak demand from

energy agency. However falling oil prices do not appear to spur demand as benefit is not being passed on to the public. Further due to China’s huge investments in Nigeria and Venezuela its economy will be adversely impacted if Venezuela defaults in payment of its debt. Saudi Arabia - The largest exporter of Crude, net export of oil and oil products account for 42.9 % of its GDP1. 90% of its fiscal revenue comes

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oil producing deficit, nations is leading to likely to impact reduction its exports of subsidies and adversely and better affect its fiscal health economy. of the Further with economy. rock bottom oil On the prices Japan other hand may be staring reduction at deflation in foreign once again. Fig 2: INDIA-Current account to GDP ratio over the years exchange China - The remittance biggest importer of crude oil in the world spends from oil producing countries due to lost jobs approximately $270 billion per annum on oil by millions of Indians employed there, reduced imports, which accounts for nearly 2.8% of its exports to these countries due to weak demand GDP. and drying up of investments from Sovereign Wealth Funds (SWF’s) and pension funds, Slowing down of Chinese growth rate from mainly coming from oil rich countries like Saudi about12% to 7.3% (from 1st quarter of 2010 to Arabia, Kuwait, and Qatar will adversely affect 4th quarter of 2014) is one of the reasons for the Indian economy. fall in oil prices. Falling oil prices do, however present the Chinese government with the Japan - After the Fukushima nuclear disaster, opportunity to shore up its strategic oil reserves Japan is moving away from nuclear energy, which currently stands at 91m barrels well short which increases its dependence on oil. From the of the 540-600m barrels required to cover 90 last fiscal year to March2014, Japan had spent days of import as suggested by International $236 billion on mineral fuels out of which 90%

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from oil. A price of $89 per barrel is essential for Saudi Government to fulfill its budgetary obligations, with prices hovering around $50, Saudi Arabia will have to cut down on its social sector spending, which may lead to social unrest and eventual Arab Spring in the country. If situation persists Saudi Government could be looking at a deficit of more than 14% of their GDP. However such a situation is unlikely in the near future due to large forex reserves of nearly $740 billion with the Saudi Government. Saud i Arabia and other oil producing nations of the middle- east import everything from food grains to weapons. Reduced earnings due to falling oil prices will curtail demand and thus impact the export earning of their trading partners. Iran - Reeling under the sanctions imposed by US and European Union will be impacted the most due to falling oil prices. Net exports of Oil contribute nearly 13% of country’s GDP. Oil and Gas revenues account for 50% of Iran’s fiscal receipts and to balance its budget Iran needs the price of Crude to be around $130 per barrel, which is more than twice its current price. Since imposition of sanctions in June 2012 Iran’s economy has been shrinking, the current GDP growth rate of Iran stood at -1.1% for 1st Quarter of 2014 compared to the same quarter previous year. This would further weaken the bargaining power of Iran while striking a nuclear deal with US. However, in the long run if oil prices remain low, shale production would become unprofitable and then OPEC can restore its dominance by cutting output and increasing prices. Russia - A major oil producer outside OPEC, Russia has been badly hit due to fall in oil prices as well as sanctions imposed by US and European Union due to Ukrainian crisis. Ruble’s fall by approximately 85% against the dollar since the start of 2014 has adversely affected its economy, Russia once again may be staring at recession it faced in early nineties after the breakdown of Soviet Union. US - Shale oil revolution in US is one of the reasons for falling oil prices. US today is meeting approximately 30% of its oil requirement from domestically produced Shale Oil. This has led to job creation in US market and unemployment rate has come down to 5.6% which is the lowest in the past five years. However falling oil prices are no help to US either because a price of less than about $61 per barrel makes shale oil production commercially

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unviable and could lead to shutting down of facilities and consequent job cuts. Further US exports a large number of items to the entire world from food grains to aircraft, weak demand from importing nations would shut down its factories and slow down its economy. Venezuela - is a poor country with social moorings, revenue from oil drives its economy, and large investments have been made by countries such as China in various projects in Venezuela. Loss in earnings will impact its debt servicing and it may in fact be staring at debt default. Way Forward Falling oil prices are a cause of concern, no country can remain untouched by its repercussions. To prevent a global recession from spreading the gloom following three courses are recommended: 1) Short term - While on one hand oil producing nations should cut down their production to sustainable levels which do not lead to job cuts or closing down of facilities, on the other hand oil importing nations such as India should increase their imports to shore up their strategic oil reserves, cut oil subsidies, improve their own fiscal health, and at the same time prevent economies of oil producing nations from collapsing. 2) Medium term - Net importers and exporters should resort to bilateral trade in oil rather than trading through exchanges in international market. A similar arrangement recently arrived at between China and Russia will benefit both the countries. 3) Long term - Countries heavily dependent on oil revenues should diversify themselves, and make their economies more resilient to such shocks in the oil market. An example of such diversification is UAE, especially Dubai which has successfully transformed itself from a crude dependent economy to an attractive tourist destination. Iran also is on course correction with 50% contribution to its GDP coming from service sector and real estate. In conclusion one can say that in the long run there are no clear losers or gainers due to the downward spiral of oil prices. However in Asia India stands to gain the most and Iran stands to lose the most in the short run.

Interview With Vishal Khandelwal Founder - SafalNiveshak.com

We are aware that you are an avid blogger and some of us are regular readers of Safal Niveshak blog. If we ask you to tell our readers about the three most vital investing lessons what would they be? Thanks for reading Safal Niveshak! It’s good that you have a word limit to this interview, because the lessons I have learned as an investor over the years would have run into several pages. But if I were to list down just 3 of them, they would be – 1. Have extreme patience 2. Focus on process, and outcome will take care of itself 3. Accept that you will make (a lot of) mistakes Talking about patience, it’s important for investors to understand that ‘t’ or time is the most important variable in the compounding formula, even more important than ‘i’ or rate of return. So, the more patience you have to sit on your investments (assuming they are good investments), the greater is the amount of wealth you can create. In fact, patience – the art of sitting quiet – is the most important skill an investor can have, even more important than knowing what stocks to pick. Another lesson I’ve learned over the years is that of focusing on the process than the outcome of an investment. If you focus only on the outcome, you are less likely to achieve it. Instead, if you focus on the process, the outcome will take care of itself. So, it’s important to judge decisions – especially yours – less on results you achieve, and more on how they were made. And then, the third lesson I’ve learned is that it’s important to accept the fact that you will make many mistakes in your investment career. Knowing that you don’t know a lot of things, knowing that you will make a lot of mistakes and accepting these as part of the game that

must still be played, is what creates a successful investor. Without mistakes, investing would be boring, right? As an investor what are the most prominent mistakes that you have made in your life that you will want any investor to avoid in the future? Many! Most of my mistakes have been those of bad behaviour instead of choosing a wrong business. One big mistake I have made several times in the past is that of selling great businesses early, after having earned a 100-200% return. And interestingly, my reasons for selling early have revolved more around things outside the business than inside the business I sold. So I would sell after a stock rose sharply, or after I made a high return in lesser-thanexpected time, or when I thought the economy and markets were about to go down and I must protect my paper profits. Note that all these reasons are extrinsic to the business underlying the stock which, in fact, should be the sole reason for an investor to decide whether to hold or sell a stock from his portfolio. The lesson I’ve learned from this mistake of selling too early and then missing out on future gains because the business remained good is what Philip Fisher said several decades ago – “If the job has been correctly done when a common stock is purchased, the time to sell it is-almost never.” Another mistake I made during the earlier part of my investment career was to buy a stock without doing any or much due diligence on the business and just because someone else I respected was recommending/buying it. While cloning a sensible investor can often be a great idea, the lesson I’ve learned is that you cannot blindly clone anyone, however smart and

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successful he/she has been in the past. You need to have your own conviction while buying a stock. And conviction is something you cannot borrow from anyone else.

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A third, and the biggest mistake, I have made in the past is to repeat some of my mistakes instead of learning from them. I have taken care of this aspect by maintaining a journal of my investment mistakes, so that I have them in front of me as warning signals every time I am about to make an investment decision. It is said that Sensex is likely to touch 50,000 in the next 2-3 years. Third quarter earnings declared last month ended up disappointing the investors as annual profit growth has been the worst in last five quarters? Do you feel that the Indian stocks markets currently are overvalued? While a Nifty P/E of above 22x gives an impression of an overvalued market, I would rather be stock specific than worry about where the broader indices are and where they are going to go in the future. So if I find a good business available at reasonable valuations – and there are pockets of inefficiencies in all kinds of markets – I would invest irrespective of where the Sensex or Nifty is. So to answer your question whether the Indian stock markets are overvalued, I have no clue. But I am surely seeing initial signs of hype and excessive risk-taking, which may indicate just the start of a mania. When making money in the stock market starts to become easy, as it seems now, you know you’re in a bubble. Now, when that bubble is going to burst is anybody’s guess. Corporate governance for an investor is as important as financial statement analysis. What are the best techniques to measure corporate governance policies in any company? I believe corporate governance is more important than financial statement analysis, because when I buy a stock, I become a partner in a business and I would like to partner only with people I trust – people who govern ethically and with complete integrity. When it comes to assessing corporate

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governance, it’s difficult given that there are no clear-cut numbers to judge the same. But here are a few questions I suggest every investor must try to answer while assessing a company’s governance – • How has the company grown over the years under a given management – has the growth come on the back of excessive risk-taking (borrowing money, acquisitions etc.) or has it been steady and without must risk-taking? • How has the management treated debt – Recklessly or prudently? (I generally avoid businesses with too much debt, because borrowing excessively can lead you to indulge in a lot of fuzzy things). • How has the management’s capital allocation been? Here I look at high or rising ROE without much debt. • How much are the senior managers paid? I believe once you are already rich, you must be happier leading a business than taking out a lot of cash to pay yourself. • Does the management continuously issue guidance or prediction about the future earnings growth? If yes, I would largely avoid such a business because its managers would most likely focus on meeting short-term guidance than focusing on long-term growth and profitability. • Does the management think independently or often gets swayed by what others in their industry are doing? Look at companies that make a lot of acquisitions because they want to grow bigger, faster. Then, avoid them. • Are managers clear, honest, and consistent in their communications and actions with stakeholders? I like to read plain English in annual reports, and not fuzzy words. These are some of the questions, among others, I try to answer while assessing a company’s corporate governance. The history of the management and how they have dealt with the business and all stakeholders tell you a lot about their intentions. And if people have behaved badly in the past, there is a thin chance that they would behave any different in the future. Finally, here’s what Thomas Phelps wrote in his amazing book 100 to 1 in the Stock Market – “Remember that a man who will steal for you, will steal from you.” Some of our readers are novices to the investment world. How do you suggest

NIVESHAK

You must have seen a baby take her first steps. Slowly and carefully she gets up…walks a step… then falls down…then again she gets up…takes a step…then again falls down. The process repeats till the time she learns how to balance her body while taking her second step, and her third step. This process of learning happens in whatever we do in our lives. We first learn to take baby steps, before we cross bigger hurdles. There’s no reason the cycle should be any different when it comes to investing in stock markets. When you are just testing waters, it’s always good to start small by allocating small amount of money to the stock market – either directly or through mutual funds – and then increasing the allocation gradually. The best thing you as a new investor can do is to start, and as early as possible (remember the ‘t’ in the compounding formula). As far as opening an investment account is concerned, you may do it with a reputed broker or bank. But always remember one thing – never take their advice. :-) Do your own homework and then trust your own conviction. Who is your role model in the investment world and why? Suggest a few good books for our readers to read? I must say that finding my role models has been highly instrumental in my development toward investing sensibly and successfully in the stock market. Sensible investing is something you either pick up instantly or you don’t. So I have been lucky to get introduced to the writings of Warren Buffett, Charlie, and then to Prof. Sanjay Bakshi. I just fell in love with what they had to say and that, I believe, has made the difference. As I understand, you become the average of five people you spend the most of your time with. Three of those five people I spend most of my time with (not face-to-face, but vicariously) are Buffett, Munger, and Prof. Bakshi, and that has really helped me build a sensible process for investing. And not just investing, these people have helped me tremendously in becoming a better, more humble person, than I was a few years back.

I would like to leave you here with a brilliant quote from Guy Spier’s book The Education of a Value Investor. He writes about the criticality for a budding investor to find his role models early in life – “…there is no more important aspect of our education as investors, business people, and human beings than to find these exceptional role models who can guide us on our own journey. “Books are a priceless source of wisdom. But people are the ultimate teachers, and there may be lessons that we can only learn from observing them or being in their presence. In many cases, these lessons are never communicated verbally. Yet you feel the guiding spirit of that person when you’re with them. “Role models are highly important for us psychologically, helping to guide us through life during our development, to make important decisions that affect the outcome of our lives, and to help us find happiness in later life.” As far as books are concerned, here are three I would suggest a new, young investor to read at the very start of his/her career – • The Richest Man in Babylon by George Samuel Clason • One Up on Wall Street by Peter Lynch • Think and Grow Rich by Napoleon Hill These books have inspired me a lot when it comes to taking proper care of my money, and I am sure these will inspire anyone who is starting new today, if he/she were to read them diligently. For more advanced reader, or as the next step after reading the above three books, I would suggest – • Warren Buffett’s shareholders letters, which can be downloaded from here – http://www. berkshirehathaway.com/letters/letters.html • Howard Marks’ memos, which can be downloaded from here – http://www. oaktreecapital.com/memo.aspx • Poor Charlie’s Almanack: The Wit And Wisdom Of Charles T. Munger • Influence: The Psychology of Persuasion by Robert Cialdini You can base your entire investing career by reading just these books and resources I’ve

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they should begin investing? Is it good to have an investment account with a broker or bank is preferable?

NIVESHAK

mentioned above. But then, it’s important to never stop learning. Keep reading and keep learning. Be a learning machine. As Charlie Munger said to students in his 2007 commencement speech at USC Law School – “I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.”

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What would be your advice to the B-school graduates who would soon enter the corporate world (and start earning)? Noted Irish playwright and philosopher George Bernard Shaw opined, “Youth is wasted on the young.” What he possibly meant was that many young people have everything going for them physically; they’re in the best health they will ever be in, and their minds are sharp and clear. However, they lack patience, understanding and wisdom which results in so much wasted efforts. The energy that can be directed towards building a solid thought process and action plan for the future is spent on short-lived pleasures. Shaw’s words are especially applicable to those young adults who are starting a career and wondering if they should start saving and investing for their future, or spend the next few years living life kingsize. You see, I am not old enough to complain about the younger generation. And that’s why I believe youth is not always wasted on the young, if the young can realize that someday their bodies and time would fail them, and that they would appreciate what they have now. So as far as my advice to you – the young, aboutto-be-earner – is concerned, the first thing I would do is to encourage you to begin to save and invest starting as early as possible, and take some simple yet effective steps to kickstart your financial life. If you are young, time is one of your greatest allies in wealth accumulation and it is the one resource you will never get more of in the future. After starting out to earn your own living, if you waste the early years saving and investing nothing, they are forever lost. So that you do

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not lose out on the precious time you have on your side to start making your money work for you, here is the action plan that you must (may) follow. You are free to modify this action plan to suit your needs. It’s just that this has worked very well for me for the past 12 years, and thus I am happy to share it with you. 1. Pay yourself first i.e., save money before you spend it; 2. Create an emergency fund which may be around 6-8 months of your household expenditure; 3. But health and term insurance; 4. Use debt sparingly. As much as possible, completely avoid high-cost debt like credit cards and personal loans; 5. Hold tight to your reputation (it takes years to build good reputation and minutes to destroy it) and 6. Celebrate life, not money. Avoid trying to find happiness in spending money. In fact, in the busy-ness of earning, saving, and spending, please celebrate your life and your accomplishments. In short, I’ve learned that the real success in life is not about what you earn, own, achieve or win but who you will become along the way. So work towards ‘becoming’, not towards ‘having’. I wish you all the best! About Vishal Khandelwal Vishal Khandelwal is the founder of SafalNiveshak. com, a website dedicated to helping investors become smart, independent, and successful in their stock market investing. He has around 12 years experience as a stock market analyst and investor, and 4 years as an investing coach. Safal Niveshak, which Vishal started in 2011, is now a community of 15,000+ dedicated readers, and was recently ranked among the best value investing blogs worldwide.

NIVESHAK

FinFunda of the Month

Fiscal Deficit Rahul Bajaj IIM Shillong

growth and unemployment rate vis-a-vis if RBI plans to decrease the key rates to boost the growth, the money supply will increase in the market and will have an adverse effect on Inflation. Sir, I read a news article in which RBI said that it will be difficult to meet the initially set fiscal deficit target of 3%. I do not understand the term. Can you please explain it? The Government of any country operates under a fiscal system wherein it makes money through taxes, recovery of loans etc. and it spends money for the welfare of society for e.g. MGNREGA, Food Security bill as well on the capital assets to create more revenue. The difference between the Total revenue or Fiscal Receipts and the Total spending i.e. Fiscal Expenditure less borrowings is called Fiscal Deficit. Sir, now that I have understood the term, can you please explain me different items which form a part of fiscal deficit? Fiscal Receipts consists of revenue and capital receipts, where Revenue Receipts consists of collection from taxes (direct, indirect) and non-tax receipts (dividends from PSE’s, coupon from bond) and on the other hand capital receipts consists of Borrowings from the markets, recovery of loans etc. Similarly we have fiscal expenditure which can also be segregated into planned expenditure where money is spent to create revenue in future (E.g.: New factory), expansion of capacity and another kind of expenditure is nonplanned expenditure where money spent does not create revenue in future (for E.g. Salaries, grants to UN, pensions etc.). Now I know how fiscal deficit is calculated but why is it so important for an economy? When there is high fiscal deficit, the Government has to finance the deficit by borrowing from the money market. It means that there will be less money available for the corporates and others to invest which will increase the interest rates in turn affecting the

Sir, apart from this, is there any other major impact due to high fiscal deficit? When the Government finances huge deficits through foreign/domestic borrowings, it will affect the debt rating of the country. Global credit rating agencies view lower fiscal deficit positively, as an indication of healthy economy but if the deficit is huge it can affect the interest and coupon payments, also it has a negative effect on FII and other foreign investments in the country. Sir, when it is so important, what is our government doing to contain the deficit? The government of India passed FRBM (Fiscal Responsibility and Budget Management) Act which requires GOI to reduce fiscal deficit from 4.8% of GDP (2012-2013) to target 3%. The Government is strengthening its finances through various measures. It is planning to bring tax reforms through Goods and Services Tax. It is also scheduling to disinvest its stakes in PSE’s. Apart from these, reforms in Public distribution systems like direct cash transfer scheme and cutting subsidies will also add to revenue of the Government. Okay, Also can you please explain where India stands in terms of fiscal deficit? Finance Minister Arun Jaitley had said in the Budget that fiscal deficit would be brought down to 3.9 per cent of GDP in 2015-16. Fall in oil prices since June has helped Prime Minister Narendra Modi’s government to contain oil and fertilizer subsidies, but revenue growth still has been slow. Thank you Sir for explaining about fiscal deficit, it would definitely help me in understanding this budget more effectively.

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WINNERS Article of the Month Prize - INR 1500/Chinmay Ingole NMIMS Mumbai March FinQ Winners 1 st Prize - INR 1000/Prakash Phavade SJMSOM, IIT Bombay 2 ND Prize - INR 500/Tushar Warang Welingkar Institute of Management, Mumbai

ANNOUNCEMENTS ALL ARE INVITED Team Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1500/- along with a certificate. Instructions »» Please send your articles before 10th Apr, 2015 to niveshak.iims@gmail.com »» The subject line of the mail must be “Article for Niveshak_<Article Title>” »» Do mention your name, institute name and batch with your article »» Please ensure that the entire document has a wordcount between 1500- 2000 »» Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 »» Please do NOT send PDF files and kindly stick to the format »» Number of authors is limited to 2 at maximum »» Mention your e-mail id/ blog if you want the readers to contact you for further discussion »» Also certain entries which could not make the cut to the Niveshak will get figured on our Blog in the ‘Specials’ section

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