Niveshak March16

FROM EDITOR’S DESK Niveshak Volume IX ISSUE III MARCH 2016 Faculty Chairman

Prof. P. Saravanan

THE TEAM Aaron Keith Rego Abhishek Bansal Abhishek Jaiswal Aditya Kumar Jain Anisha Khurana Ankur Kumar Ankit Singhal Anoop Prakash Bhawana Saraf Devansh Sheth Maha Singh Gulati Palash Jain Prakhar Nagori Rahul Bajaj Ramesh Jaiswal Sandeep Sharma Shreyans Jain Vishal Khare All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong

Dear Niveshaks, We welcome you to our last issue for this fiscal year. The month had a lot of buzz after Finance Minister Arun Jaitley presented the Budget on the last day of the previous month. After trading downward in the month of February, Sensex showed an upward trend in March, buoyed by strict fiscal consolidation measures announced by Mr. Jaitley in the budget. The month also saw some big moves on the policy front such as the statutory backing of Aadhar Bill and stern actions by lenders to recover dues from loan-defaulters. Moreover, the statistics ministry is contemplating on including online purchase in CPI calculation, which is a very pragmatic move and shows proactiveness on the part of the government. On the global front, the Federal Reserve clarified that they would not go as per the pre-set plan of the rate hike and would only raise the rate two times in a year. Our Article of the Month article identifies that it is the perfect time for India to catapult its growth engine given the slowdown in the Chinese economy. The author discusses as to why the Chinese Slowdown is “India’s Big Break”. The cover story analyses the Budget and focuses on the specific sectors through which Mr Jaitley plans to transform India. The author concludes that only time will tell whether the government is able to fulfil all its proposals in the Budget or not. For FinGyaan, the article identifies the issue on non-performing assets which is plaguing the Indian Banking industry and also suggests some measures which can be used to improve the situation. Our FinRewind section brings to you the story behind Black Monday of 1987. Here, the author outlines the incident, its reasons and the new regulations that were put in place after the massive crash of the stock market. FinSight deliberates on financial inclusion and the author acknowledges that though financial inclusion is the next big thing in India, there are many roadblocks. This time we have an interview with Mr. Manish Dugar, Chief Financial Officer at InMobi. He talks about the advantages of having a company being operated from different nations, valuation of a start-up and how a start-up can best raise funds. Classroom explains the concept of Carry Trade, a strategy whereby an investor borrows money at a cheap rate and invests in some security or asset that is likely to provide a higher rate of return. Finally, we would like to thank our readers for their immense support and encouragement. You remain our prime motivation factor that keeps our spirits high and gives us the vigour and vitality to keep working hard. We hope you had a great financial year and wish you the best for the new one.

CONTENTS Cover Story Niveshak Times

04 The Month That Was

Article of the month

10 CHINESE SLOWDOWN: INDIA’S

16 UNION BUDGET 2016

BIG BREAK

FinGyaan 20 Non Performing Assets – The tip of the Iceberg!

Finsight

28 FINTECH: THE HARBINGER OF FINANCIAL INCLUSION IN INDIA

FinRewind

24 Black Monday, 1987

FINVIEW

32 MANISH DUGAR InMobi - Chief Financial Officer

CLASSROOM Stay invested!

34 Carry Trade Team Niveshak

www.iims-niveshak.com Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

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The Niveshak Times

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The Niveshak Times

Team NIVESHAK Easier Capital Norms for Banks Soon after the government’s allocating INR 25,000 crore of capital for state-run, RBI Governor Raghuram Rajan provided some relief to the banking industry reeling under the pressure of non-performing assets. Mr Rajan allowed more flexibility in revaluation of real estate, eased capital recognition norms, allowed banks to recognise some of their foreign currency reserves from overseas operations and provided more flexibility in the treatment of deferred tax liabilities and assets. Aadhar gets Statutory Backing Earlier this month, the Aadhar Bill was introduced by the government in the Parliament as a money bill . Questioned by the opposition as to why this was introduced as a money bill, Finance Minister Arun Jaitley said that any bill which facilitates the payment or withdrawal of money from the Contingency Fund of India could be categorized as a Money Bill. For a money bill, the Upper House of the Parliament could only recommend changes and it is left to the Lower House to accept or reject any of these recommendations. Soon after the Lok Sabha passed the bill, President Shri Pranab Mukherjee also gave his assent. However, it will take around two months before the law could be implemented fully as detailed guidelines are yet to be chalked out. Mr Jaitley said that an Aadhar number will be provided to every person who has stayed in India for at least 182 days in the year preceding the date of the application. Also, the card will not be an identity proof.

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It allows manufacturers to sell their products through wholesale, retail and e-commerce channels. The addition of e-commerce is new as earlier, existing entities could not sell their products directly through e-commerce. The move seems to fructify. Two big German sports brands, Adidas and Puma, have sought clarification from the government on the issue and have showed their interest in opening up an online retail channel.

Possible Roll Back of EPF Withdrawal Tax In its 2016 budget, Finance Minister Arun Jaitley had proposed that withdrawals in excess of 40% of the accumulated corpus of EPF would be taxed. The move was aimed to encourage people to buy lifelong annuities and aims to create a social-security net for the society instead of focussing on generating revenue. Also, the ministry clarified that tax would be levied only on the people earning more than INR 15,000 a month, leaving most of the workers left out of the provision. Lastly, the measures will not be on a retrospective basis. The move did not go well with the salaried class and chances are that the government will possibly roll back the measures.

Banks Becoming Stern on Defaulters: Vijay Mallya Will Have to Abide Diageo unit United Spirits (USL ) announced that it will pay $75 million to Vijay Mallya to walk away from the unit, over the next five years, starting with $40 million in the first year, under a deal announced on February 25 this year. However, it would be difficult for him to pocket that money and walk away as a group of creditors led by State Bank Single-Brand Rules Reform Paying Off of India approached the Debt Recovery In November 2015, the government relaxed Tribunal (DRT) claiming that they had a “first the rules for single-brand retail in the country. right” to the money. The tribunal ruled in

MARCH 2016

favour of the lenders saying Mr Mallya could not take that money without paying the INR 7,000 crore debt he owes to the lenders. Another blow came from the Service Tax Department which approached the Bombay High Court to impound his passport, fearing he might leave country and which will make it difficult to recover the dues. Mr Mallya owes around INR 370 crore to this department. Without naming anyone, RBI Governor Mr Raghuram Rajan recently asked banks to take strict actions on businessmen who owe large amounts to banks and concurrently hold “massive birthday bashes”. RBI has been the front-runner of vast cleanup of bad loans from the banks’ books. IMF Managing Director Christine Lagarde praised Mr Rajan for his effort on cleaning up the banks’ balance sheet. She said since the country’s bank balance sheet seems to be well capitalised, this effort to clean up the system is well taken. Steel Woes Continue China steel output fell by 5.7% in the first two months of this calendar year compared to the same period last year. This move is amid by the government to transform the economy from one based on manufacturing for the world to one led by domestic demand. Over-capacity in steel and fall in global demand is forcing companies to cut down their production. China, which produces around half of the world’s steel, is exporting cheap steel in the world steel market. This has put severe pressure on the bottom line of companies in other nations. India’s steel export fell by 31.9% in the first 11 months of FY16 compared to the same period last fiscal. In February, it slumped

by 25.6% compared to the corresponding month of the last year. CPI May Include E-Commerce Purchase Recognising the impact of e-commerce purchases by the Indian consumer, the statistics ministry is planning to include e-commerce purchases in the CPI calculations, a key measure for the RBI ratecut policy measure. Remoulding with the time, the ministry feels that urban consumers buys significantly through online channels. Thus, it becomes necessary to account for these transactions as otherwise they would be ignoring a growing market where price determination is mainly led by competition and heavydiscount. Federal Reserve Will be Dovish The central bank of USA stated that they would be raising rates only two times this year and will not go as previously estimated. The move came after the rate-hike created turmoil in the world equity and commodity market, though not entirely led by the hike itself. Further, the central bank did not remove the possibility of a recession. Shifting its stance and calibrating it to the changing market scenario the Fed wants to cut the odds of such a situation from arising. The financial market had already discounted that the rate-hike will not be on pre-set ground, but the announcement was well received by the market: the dollar fell, twoyear bond yields dropped, the stock market rose and the prices of oil jumped.

The Month That Was

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Article ofSnapshot the Month Market Cover Story

Market Snapshot BSE Index

BSE

DII

4,000

FII

3,000

25000

2,000 24500

BSE

1,000 0

24000

-1,000 23500

28-03-2016

23-03-2016

22-03-2016

21-03-2016

18-03-2016

17-03-2016

16-03-2016

15-03-2016

14-03-2016

11-03-2016

10-03-2016

09-03-2016

08-03-2016

04-03-2016

03-03-2016

02-03-2016

01-03-2016

23000

-2,000 -3,000

FII, DII Net turnover (in Rs. Crores)

25500

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

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

92,89,440 Source: www.bseindia.com

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

66.47 74.62 58.62 95.53 48.96

LENDING / DEPOSIT RATES Base rate Deposit rate

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

9.30%-9.70% 7.00% - 7.90%

% change

Open

8.25% 11.83% 12.75% 11.59% 0.78% 5.75% -2.97% 9.46% 9.08% 10.07% 8.60% 12.27% 9.19% 7.89% 8.20% 8.74%

23002 15852 15815 11239 11054 7114 15208 10229 6759 8214 1582 1051 5514 9548 9575 5526

24900 17728 17832 12542 11140 7523 14756 11197 7373 9041 1718 1180 6021 10301 10360 6009

% CHANGE

RESERVE RATIOS CRR

4.00%

SLR

21.50%

TECK, 9.19% Smallcap, 7.89% REALTY, 12.27% PSU, 8.74% POWER, 8.60% OIL&GAS, 10.07% MIDCAP, 8.20% METAL, 9.08% IT, 9.46%

CURRENCY MOVEMENTS 1.00%

INR/1 USD

0.50% 0.00% -0.50%

Euro/1 USD

GBP/1 USD

JPY/1 USD

SGD/1 USD

POLICY RATES Bank Rate Repo rate Reverse Repo rate

7.75% 6.75% 5.75%

1 Healthcare, -2.97%

FMCG, 5.75% CD, 0.78% CG, 11.59% BANKEX, 12.75% AUTO, 11.83%

-1.00% -1.50%

Sensex, 8.25%

-2.00% -2.50%

Source: www.bseindia.com 1st March 2016 to 29th March 2016

-3.00% -3.50%

Data as on 29th March 2016

-4.00%

MARCH 2016

Article Market of Snapshot the Month Cover Story

Market Snapshot

NIVESHAK

Performance Evaluation

Niveshak Investment Fund

Done on 30/6/14

Information Technology(13.45%)

Bank (6.82%)

HCL Tech.

HDFC Bank Wg: 6.82% Gain: 15.51%

TCS

Wg: 4.56% Gain : 9.72%

Wg: 4.46% Gain: 48.57%

Wg: 4.43% Gain : 0.98%

FMCG(21.85%) Colgate HUL

Britannia

Wg: 5.49% Gain : 7.28%

Wg: 6.57% Gain: 161.84%

Wg: 4.91% Gain: 22.49%

Tata Motors Wg: 4.43% Gain: -13.28%

Amara Raja Wg: 4.75% Gain: 23.86%

Godrej Consm. Wg: 7.89% Gain: 58.04%

Dr Reddyâ&#x20AC;&#x2122;s Labs Wg: 4.29% Gain: 4.34%

Lupin Wg: 6.82% Gain : 27.72%

Midcap Stocks (11.72%) Bharat Forge Wg: 4.43% Gain: -3.57%

Kalpataru Power Wg: 3.74% Gain: -19.52%

Natco Pharma Wg: 3.55% Gain: -22.58%

106

155

Scaled NIF

104

145

175

108

135

ITC

Wg: 4.88% Gain: -4.93%

Titan Company Wg: 4.21% Gain: -9.81%

Chemicals (8.15%)

Pharmaceuticals (11.11%)

165

Performance of Niveshak Investment Fund since Inception Scaled SENSEX

102

Misc. (12.10%)

Auto (9.18%)

March Performance of Nivehshak Investment Fund

Asian Paints Wg: 8.15% Gain: 40.17%

Textile (5.63%) Page Indus. Wg: 5.63% Gain : 7.71%

125 115

100

105

98 96

95 1/3

4/3

7/3

10/3 13/3 16/3 19/3 22/3 25/3 28/3 Scaled Sensex

Scaled NIF

30-Jan-14 07-Mar-14 15-Apr-14 26-May-14 03-Jul-14 08-08-2014 16-09-2014 23-10-2014 12-02-2014 07-01-2015 12-02-2015 20-03-2015 29-04-2015 04-06-2015 09-07-2015 13-08-2015 18-09-2015 28-10-2015 04-Dec-15 11-Jan-16 16-Feb-16 23-Mar-16

Infosys

As on 30th March 2016

Value Scaled to 100

Opening Portfolio Value : 10,00,000 Current Portfolio Value : 14,63,682 Change in Portfolio Value : 46.3% Change in Sensex : 23.6%

Risk Measures: Standard Deviation : 18.94 (Sensex 10.44) Sharpe Ratio : 2.24 (Sensex : 1.88) Cash Remaining: 58,000

Comments on NIFâ&#x20AC;&#x2122;s Performance & Way Ahead: This month saw the Indian equity markets continue on roller coaster of a journey, which saw sharp rises and falls. The main triggers for this month were the comments by the Fed, which were dovish in nature, implying a delay in a rate hike. The budget which was presented at the end of last month also gave impetus to the rally at the beginning of the month. In the coming month we can expect further volatility as the market braces for the annual reports of companies. Individual stocks will be in focus as investors look at the earnings quality of these companies. The NIF saw most of the stocks rising in value during the last one month with Bharat Forge and Kalpatru Power being the highest gainers whereas Lupin was the biggest loser due to a warning issued by the US FDA.

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CHINESE SLOWDOWN: INDIA’S BIG BREAK

brokerage CLSA, India can add at least 3%, that is, $60 billion to the GDP if the oil prices stay at current levels as crude constitutes 79% of India’s imports. Goldman Sachs is betting that the prices will plunge to $20 per barrel so India has every reason to be optimistic. India has the potential to gallop amid global economic turmoil.

AmoghSathye Introduction “India has a happy story to tell” believes Paul Krugman. The ‘Year of the Monkey’, regarded to be the unluckiest in Chinese astrology is unlikely to affect India as the country is currently in a different league in terms of macroeconomic stability. People are optimistic as the global finance guru Mohd El Erian reckons that the 7.5% GDP growth can become a trend in the next 5 years and describes India as an “Elephant turning into a roaring tiger”. THE TIGER PUSHING THE THROTTLE According to the Keynesian theory of economics, GDP=C+I+G+Xn C = consumption, I = investment, G = government spending and Xn = net exports. An increase in any of these gets further magnified due to the multiplier effect. Currently

MARCH 2016

NMIMS, Mumbai

firing on all four cylinders, India is already the fastest growing economy. It is tipped to grow at 7.5% in 2016 by the World Bank. India is a services and consumption-based economy. Private consumption expenditure is expected to rise to $2.4 trillion in 2018-19 from $1 trillion in 2013-14. The IIP (Index of Industrial Production) boomed from 3% to 9.8% from April to November in 2015. The overall composite PMI (Purchasing Managers’ Index) attaining its 11 month high at 53.3 indicates expansion. On the expenditure front, both the investment and consumption have boomed. At the India Investment Summit, Finance Minister Jaitley pleased the optimists by announcing that the government has eased processes.

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A skilled English speaking workforce has led to India’s emergence as a global outsourcing hub. The IT sector earning $146 billion during FY2015, clocking a growth rate of 23.72%, is a clear comparative advantage. Jack Welch (CEO, GE) rightly observed that India’s real treasure is its intellectual capital. An expanding talent pool can boost innovation and R&D. The talent pool has grown at a CAGR of 9.4% from 2008-2015 and India’s advantage in the hightech sector is sustainable. China, on the other hand, has always been accused of resorting to reverse engineering or being ineffective in enforcing intellectual property rights. In fact, one leukemia drug costing $9000 in US sells for $70 in India, which must be ascribed to the latter’s patent law. Actually, many Indian drugs cost a modest fraction of that of US drugs. Thus, not only is the economy healthy, but even maintaining health is economical in

India. India’s consumption is propelled by its impressive purchasing power parity in which it ranks third in the world. Its market for medium and heavy commercial vehicles, a barometer of economic activity, increased by 36% in 2015 while sales of passenger cars rose by 11.4%. Having already trounced Europe in production and retail sales of automobiles, India is set to overtake Japan in entry level car production in 4 years. Hardcore frugal engineering is the name of the game here. The Renault Kwid topped the charts owing to affordability. India is expected to emerge as the third largest automobile market by 2020. The highly underserved subcompact SUV segment is another gold mine. India surpassed the US as world’s second largest smartphone market. Apple’s sales in India expanded by 76% in the last quarter of 2015 making them turn their focus to India from China. As staunch advocates of equality, Indians aim to serve all markets alike. Besides aggressively acquiring gigantic firms in US, they are also eyeing Japan’s expanding market as the age and vulnerability of the Japanese population grows. While the global pharmaceuticals sector will grow at 5%, the Indian sector

The decrease in net exports Xn paints a positive picture. China had been the driver of oil markets for many years. Its appetite for crude has reduced owing to slowdown. According to © FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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promises an incredible CAGR of 15.92%. The Indian pharmaceuticals market, already third in the world in terms of volume, is set to reach $100 billion by 2025. The sector is blessed by backing from the government which has launched a $150 million venture capital fund to aid startups. It aims to reduce the reliance on imports of active pharmaceutical ingredients, 85% of which come from China. Medical tourism, a budding sector, is expected to boom to $8 billion by FY2020 from a decent $3 billion in FY2015. India has an array of worldclass doctors making it the favorite against nemesis Thailand and other counterparts like Singapore and Malaysia. OVERTAKING THE DRAGON Employing economies of scale worked wonders for China. External economies of

MARCH 2016

scale resulted in cost reduction as particular areas manufactured similar products. For instance, most of the world’s cigarette lighters are produced in a single town in China. This led to the development of specialized skills along with a dense network of suppliers. Thus, Chinese were approaching productive efficiency. Indian cities are following suit as Gurgaon and Chennai continue to chase the ‘Detroit of India’-Pune where Tata Motors is the largest automotive company followed by Bajaj Auto, Force Motors, Mahindra Two-Wheelers, Mercedes-Benz, GM, JCB construction equipment, Volkswagen, M&M, Premier Motors and Fiat. In the IT industry, Bangalore and Pune are the cities exhibiting external economies of scale. There were 202 operational SEZs in India on 31/03/2015. Indian government understands that SEZs

are a means of promoting industrialization and economic growth through sustainable development. Thus, the commerce ministry has supported the measures that boost SEZs. China’s success story was based on mammoth public infrastructural investments. The Indian tiger has its task cut out. The National Infrastructure Investment Fund, which has an initial corpus of Rs 40,000 crores, shall be a highly active investor in infrastructure in 2016. India’s railway budget mentioned that 917 road bridges (both over-bridges and underbridges) are to be constructed for replacing 3438 railway crossings. Prime Minister Modi has launched multiple projects —Atal Mission for Rejuvenation and Urban Transformation (Amrut), Smart Cities Mission, and ‘Housing for All’ Mission in Urban Areas. China has consistently invested in its port facilities to enhance its geographic advantages. Indian Transport minister Gadkari plans to do precisely the same thing- develop the ports, through the Sagarmala project. India certainly wants to leave no stone unturned in infrastructural development. Besides, building low-cost airports, rebuilding of roadways is underway for domestic commuters. Also, the government aims to award projects worth Rs 300,000 crores through hybrid projects or public private partnerships. India being a capitalist economy, the private sector has jumped into the contest. A Credit Suisse report

claimed that Reliance alone has built 28,00030,000 towers comprising a mix of ground based towers and poles for 4G. *1 crore = 100 Lakh = 10,000 thousand Incidentally, the year of the monkey marks the commencement of the ‘metal cycle’ according to Chinese astrology and has turned the tide in India’s favor as metals are available abundantly. Prime Minister Modi’s belief “India’s progress is our destiny” seems plausible. China is the biggest consumer of copper and aluminum and among the largest for most other commodities. Barring coal, China is below the world’s per capita average in all critical resources. The purchase of resources was funded by their substantial export earnings till now. China’s exports dropped by 6.8% and imports declined by 8.7% in November 2015. This had negative multiplier effects on the economy. The investments in infrastructure have become even more lucrative as commodity prices will thus continue to plummet. An overcapacity of 550 million tonnes of steel globally meant that the prices slumped to a 12 year low. They have plunged from the 2008-09 high of $744 to below $300 in 2015. China has a vast excess capacity of 250-300 million tonnes. India, being the only nation among the 10 major steel consumers to have posted growth in 2015, is the destination to park inventories. Actually, India is in a highly

Article of the Month Cover Story

India’s infrastructure deficit amounts to $1 trillion. Thus, the National Infrastructure Investment Fund (NIIF) intends to leverage Rs 20,000 crores to Rs 400,000 crores (20 times). They realize that the Indian infrastructure sector warrants an increase in equity investments. The government needs to provide some flexibility in the pricing of infrastructure projects. Those proposing the theory that this would lead to a monopoly thus increasing the prices of many other commodities and thus inflation are perhaps being a tad naive. Regulating monopoly is second nature to us democratic Indians. China’s aces were labor, productivity and capital. After peaking in 2012, age became a deterrent as the one child policy woefully backfired. Also, the rising wages mean that India is likely to displace China in terms of wage competitiveness. The rise in productivity has become sluggish. Capital investment peaked in 2012 and the investment overshooting thereafter has led to the decline. The fact that these investments were funded through unregulated finance from shadow banks worsened matters. With wizard Raghuram Rajan cleaning up the NPAs currently and introducing gold monetization schemes to curtail the imports of gold, India’s banking sector looks incredible in comparison. The RBI kept the Indian ship steady when most economies drowned during the 2008 crisis. A key advantage is the descending debt to GDP ratio of India, when the same is on the rise in China. No wonder Krugman says

MARCH 2016

that India shows greater resilience than China and that China “scares” him. Household debt accounts for a towering 65% of China’s GDP. Excess capacity and low demand has resulted in the bursting of the real estate bubble. Meanwhile, Indian construction sector grew by 4% in the first half of 2015. The housing sector will reach the $1.2 trillion mark by 2020. It is certainly lucrative as investments and acquisitions suggest. Birla acquired RInfra Cement recently. CRUISING AHEAD Democracy is India’s biggest asset. Social unrest has increased in China due to rising expectations of citizens. China’s budget for maintaining domestic peace rivals its military budget. Meanwhile, socially sensitive India proactively ordained that 2% of corporate profits be allocated to CSR projects. Moreover, the entire world wants to be in India’s clout as India is redefining foreign relations. India entering into strategic partnerships with US, Russia and Germany at the same time reiterates this fact. India increased their bonhomie with oil partners such as Iran and UAE, while civil nuclear cooperation agreements with Australia and Japan elevated India’s profile. Initiatives like Make in India and Digital India will enrich India by generating enormous employment and breaking even domestically itself. With an aim to increase the contribution of manufacturing to the GDP from 16% to 25%, Make in India is also poised to generate 100 million jobs by 2022. The government receiving proposals worth Rs 110,000 crores from a range of sectors reaffirm that the initiative is a sensation. After Huawei and Xiaomi, IPad and IPhone manufacturer Foxconn will open manufacturing units in India. Meanwhile, Digital India’s share in India’s GDP will reach $1 trillion in 2025. It is expected to provide jobs to 17 million by 2025. An overwhelming response was on the cards given that India is world’s second largest internet market. Microsoft will provide low cost technology to 500,000 Indian villages while Google has agreed to provide free Wi-Fi at 500 railway stations.

A $1.5 billion fund has been launched to aid startups. They have also been exempted from tax on profit for the first 3 years. As many as 114 startups filed series A rounds in 2015 with an aggregate funding of $542 million. The surge in the number of startups in India should be ascribed to the business friendly climate and role models like Flipkart ($15 billion) and Snapdeal ($6.5 billion). Thus, the factor of production ‘Entrepreneurial ability’ is increasing in India. India’s average age will be 29 years by 2020. US and China will be distant seconds with 37. An increase by a million every year will make India’s workforce peak at 653 million in 2031. IMF observes that by harnessing this demographic advantage, India can increment their per capita GDP by 2% till 2033. Meanwhile, India is set to have the largest student population by 2025 according to British Council Research. China’s resource endowment comprises a huge population of unskilled and semiskilled labor with a relative paucity of engineering talent. No wonder, their products are more standardized than sophisticated. Among China’s top 10 exports to US, 6 are simple goods. The dragon reaped the benefit of scales till now.

REFERENCES • http://www.ibef.org/industry • http://www.dnaindia.com/money/ • http://data.worldbank.org/indicator/ • http://www.theguardian.com/ business/2015/

Article of the Month Cover Story

enviable position currently as it continues to literally dictate the terms of trade. For circumventing the free trade agreements with Korea and Japan, a safeguard duty of 20% was imposed on the steel products imported from Korea, Japan and China for 200 days. Proposing a minimum import price for steel after imposing the above mentioned 20% import duty in order to protect the domestic industry was bureaucratic genius.

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• http://articles.economictimes. indiatimes.com • http://www.hindustantimes.com/ business/ • http://www.thehindu.com/business/ Economy/ • http://www.rediff.com/business/ • http://oilprice.com/Energy/Crude-Oil/ • http://gadgets.ndtv.com/apps/features/ • http://www.thepharmaletter.com/listing/ mergers-acquisitions/ • https://www.timeshighereducation.com/ news/ • http://www.sezindia.nic.in/ • Magazines: Frontline, Business Today, Forbes • ‘International Economics’ Sixth Edition by James Gerber

With green companies such as Enel Green Power investing in India, its growth will be sustainable. India aims to develop 175 GW of renewable energy by 2022 to reduce its dependence on coal besides protecting the environment. CONCLUSION Angus Maddison in his book ‘The World Economy: A Millennial Perspective’, remarked that the polities of India constituted the biggest economy in the world from ca. 1 CE to 1000 CE. During the period when China was the leading economy in the world, India donned the second position. In‘The Tempest’by William Shakespeare, Act II, scene I, the character of Antonio utters the phrase “what’s past is prologue”. With the dragon slowing down, the tiger would exclaim “Very apt Antonio!” © FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

NIVESHAK

UNION BUDGET 2016

AdityaKumarJain

IIM Shillong Arun Jaitley, the finance minister of India, announced this year’s Union Budget on Feb 29, 2016 while affirming the public that the Indian economy is on the right track, with inflation being under control at 5.4%.

for agriculture and farmers’ welfare. Pradhan Mantri Krishi Sichai Yojana to be implemented in mission mode. 28.5 lakh hectares of land will be brought under irrigation with 89 irrigation projects being implemented under AIBP.

Framed in the backdrop of sluggish domestic demand, intensifying global headwinds, rising rural distress, and weak investment environment, the union budget 2016-17 makes a strong effort to address both growth and inclusivity. It plans to double allocation to agriculture and farmers’ welfare and infrastructure, and through this, it aims to kick up the GDP growth rate.

A dedicated long term irrigation fund to be created in NABARD with INR 20,000 crore as the initial corpus fund. Organic farming to be promoted through Parmparagat Krishi Vikas Yojana and Organic Value Chain Development in North East Region.

Pradhan Mantri Gram Sadak Yojana will connect remaining 65,000 habitations by the year 2019 and has been allocated INR 19,000 The government is trying to outline a crores. A provision of INR 15,000 crore has been rebalancing approach to enable people from made in BE 2016-17 for subvention of interest. backward and rural areas to be a part of India’s 2. Rural Sector: growth story and participate in the growth INR 87,765 crore has been allocated for process for years to come. the rural sector. INR 2.87 lakh crore will Mr Jaitley talked about the government’s be awarded as Grant in Aid to Gram objective of transforming India and spoke Panchayats and Municipalities according to about the following nine pillars on which he the recommendations of the 14th Finance hopes to enhance India’s economic growth. He Commission. Under the Deen Dayal Antyodaya expects to transform India on these pillars. Mission, every block under draught and rural 1. Agriculture distress will be given the importance as an Mr Jaitley plans to double farmers’income in the intensive Block. A sum of INR 38,500 crore has coming five years with a positive view towards been allocated for MGNREGS. 100% of the farmer welfare. INR 35,984 crore allocated villages will be electrified by the 1st of May,

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2018. Centrally Sponsored Schemes will be allocated on a priority basis to reward villages that have become free from open defecation. A new Digital Literacy Mission Scheme will cover around 6 crore additional households in the coming 3 years. INR 655 crore allocated to Rashtriya Gram Swaraj Abhiyan. 3.

Social Sector including Health Care

Total funds allocated sum up to INR 1,51,581 crore. INR 2,000 crore allocated as initial cost for providing LPG connections to families below poverty line. New health protection scheme provides health cover up to an amount of INR 1 lakh per family. An additional top up package of INR 30,000 for senior citizens to be provided. “Stand Up India Scheme” will facilitate at least 2 projects per bank branch. This is going to benefit at least 2.5 lakh entrepreneurs. 3,000 stores will be opened under Jan Aushadhi Yojana during 2016-17. INR 100 crore allocated each for celebrating the Birth Centenary of Pandit Deen Dayal Upadhyay and the 350th Birth Anniversary of Guru Gobind Singh. National Scheduled Caste and Scheduled Tribe hub will be set up in partnership with industry associations. 4.

Education and Job Creation

62 new Navodaya Vidyalayas to be opened. Quality of education will be the primary focus of Sarva Shiksha Abhiyan. Initial capital of INR 100 crores for higher education financing

agency. There will be a digital depository set up for school leaving certificates, college degrees, academic awards, and mark sheets. INR 1804 crore has been allocated for skill development. 1500 multi skill training institutes will be set up. A national board will be setup for skill development certification in partnership with the industry and the academia. Massive open online course will be available for providing entrepreneurship training and education. 5.

Infrastructure and Investment

Total outlay for infrastructure is INR 2,21,246 crores. Amendments will be made in Motor Vehicles Act in order to open up road transport sector in the passenger segment. Action plan will be drawn for reviving of underserved and unserved airports in partnership with the state governments. Callibrated marketing freedom will be provided in order to incentivise gas production from deep-water, ultra deep-water and high pressure-high temperature areas. A comprehensive plan which will span over the next 15-20 years to augment the investment in nuclear power generation will be drawn up. Reforms in FDI policy will be introduced in the areas of asset reconstruction companies, stock exchanges, insurance and pension. 100 % FDI will be allowed in maketing of food products produced and manufactured within India through FIPB route. A new policy for

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management of government. A new policy has been approved for managing government investment in public sector enterprises, included strategic sale and disinvestment INR 55,000 crore will the budgetary allocation for road development and INR 15,000 crore will be raised through government bonds for the same purpose totalling up to INR 70,000 crore. Further adding the allocation of Gram Sadak Yojana, the total becomes INR 97,000 crores 6.

Financial Sector Reforms:

Statutory basis for a monetary policy framework will be established along with a monetary policy committee through the Finance Bill 2016. A financial data management centre will also be set up. RBI will facilitate retail participation in government securities. SEBI will develop new derivative products in the commodity derivatives market. Government owned General Insurance Companies will be listed in the stock exchanges.

In order to rationalize human resources in various ministries, a task force has been constituted. There will be comprehensive review and rationalization of autonomous bodies. Amendments will be introduced in the Companies Act to improve enabling environment for start-ups. Automation facilities will be provided in 3 lakh fair price shops by March 2017.

In order to link states and districts in an annual programme to connect people through exchanges in areas of language, trade, culture, travel and tourism, “Ek Bharat Shreshtha Bharat” programme to be launched. 8.

Fiscal Discipline

Niti Ayog will identify the PSU bank assests for sale. There will be a code for having a special mechanism for dealing with bankruptcy situation in banks and financial institutions. The total outlay for bank recapitalisation will be INR 25,000 crore. Plans are also being made for drawing roadmap for merging PSU banks 7.

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Tax exemption will be provided for pension withdrawal of up to 40% of the corpus amount at the time of retirement under the National Pension Scheme. In case of recognized

Price stabilization fund will be established with a corpus fund of INR 900 crore in order to maintain the prices of pulses.

Total expenditure is projected at INR 19.78 lakh crore. Planned expenditure increased by 15.3% YoY. Special emphasis to be given to sectors such as irrigation, agriculture, social sector, minorities, infrastructure. Every new scheme sanctioned will have a sunset date and outcome review. More than 1500 central plan schemes will be restructured and rationalized into about 300 central sector and 30 centrally sponsored schemes.

Governance and Ease of Doing Business

Ceiling of tax rebate under section 87A has been raised from INR 2000 to INR 5000 to lessen tax burden on individuals with income up to INR 5 lakhs.

Tax Reforms

provident funds, the same norm will apply which would mean that withdrawals which were earlier total tax-free will now be partially taxed. Salaried people across various income levels are angry at the proposal to tax 60% of EPF corpus created after 1st April 2016. They are of the opinion that the government shouldn’t be dictating how they should use their retirement

corpus. The newly working people will be the worst affected by this proposal. The tax exemption for house rent allowance has been raised to INR 60,000 from the earlier INR 24,000 level. People who do not get any house rent allowance from their employer can avail this deduction in accordance with the rules specified. Some conditions for this are that the assesse or his spouse or minor child should not own any residence where the assesse is employed, he should not be receiving HRA from his employer and should not have such residential premises which has been self occupied at any other place. Cars would become more expensive now with an additional 1% tax on luxury cars priced above INR 10 lakh. An additional infrastructure cess of 2.5% on diesel cars and 1% on small petrol cars has also been imposed. The budget has been very carefully planned and the government has taken care to include all sections of the society and spread benefits to all strata of the society. The theme ‘transforming India’ is apt for the budget as all the sectors of the economy are being addressed. People have high hopes from this year’s budget and the government. How this will play out, only time will tell.

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Non Performing Assets – The tip of the Iceberg! FinGyaan

Priti Patil,NupurSolanki SIMSREE, MUMBAI

Introduction The Banking and Financial Sectors have suffered and fought many storms ever since the Financial Crisis of 2008-09 which led to the global slowdown. Now that the Business Economy was slowly moving positively upwards in India, the recent news of ‘Non Performing Assets’ encircling the banks has brought about risks in the finance sector. Prime Minister Indira Gandhi covered Bank Nationalisation in her era; we guess Modi Government has to take up the task of cleaning up Non Performing Assets to keep the economy booming. India started off with promoting credit in view to increase the circulation of money and subsequently increase the activity in the country which has now come to a time where a bank has to clean up its balance sheets to sway from the risks of credit. What are Non Performing Assets?

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Non Performing Assets can be divided into three major sectors, namely: 1. Sub-standard 2. Doubtful 3. Loss When a borrower doesn’t pay interest for 90 days after the end of the quarter, the asset turns into an NPA and is called as ‘Special Mention Account’. If there are no repayments for more than 12 months after the SMA, the asset becomes Sub-standard. For this, the bank has to make provisions on a yearly basis which are different for secured and unsecured loans. After 3 years if this account doesn’t repay its instalments, the account then becomes ‘loss’ if both the external and internal auditors approve of it. The disappointing outcome: Banks can’t credit income or debit loss unless the instalment is recovered or it is termed as loss. The banks could not completely follow these

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guidelines in true spirit and hence these NPAs have been increasing. When loans aren’t repaid in time, banks would issue a heftier loan for a longer duration to the defaulting company. This would write off the bad loan from the books of the bank and would give the borrower time to repay the loan. These loans are called as restructured loans. When these stressed assets couldn’t perform either, they would slip into ‘Non Performing Assets’ (NPA). Restructured loans gave banks the upside of not reporting NPAs; which made the banks look good and healthy. Also, the borrowers were happy. The Modi Government and Raghuram Rajan, Governor of RBI are looking at the tip of the Iceberg of the NPAs. Nobody knows what lies down in the depth of this ocean at the end of this berg and Raghuram Rajan is optimistic of clearing this iceberg from its roots. The motive is to start the economy back with a clean slate; even if that means that it would create some trouble in the early years. But he believes this is the pre-requisite of a healthy and sustainable economy. It is shocking and disappointing to have 11% as stressed assets which clearly proves that banks do not have enough capital to take the loss if their debts fail. (Live Mint, 2016) To add on to the pile, there are certain banks who haven’t declared their NPAs yet. The proof of this is that there are companies with profits so low that they cannot pay their interests to banks. So, there are banks still giving out loans to such companies. Wilful Defaulters!

Reserve Bank of India states that a tag of wilful defaulter has to be given to the borrower who hasn’t repaid the loan despite having the capacity to do that. Also, they are the ones who move their collateral without the knowledge of the lender. For example, Bank of Baroda had an NPA in 1983, but was declared as wilful defaulter in 2010. (Financial Express, 2016) These cases have been seen for the past three decades. The best example is of Kingfisher Airlines, wherein the firm has defaulted in loans of crores of rupees but then bought a cricket team in Caribbean premier League, which made Punjab National Bank term them as wilful defaulters. (Dailyo, 2016) These cases differ from company to company. This shows that there are many loopholes in the system which can be taken advantage of. Mukesh Ambani’s Company, Reliance Group Transportation Infrastructure Ltd. (RGTIL) had a loan to be repaid by 2019, but the period has been extended to 2031 given the fact that the company is working under losses. This is one example of crony capitalism, where PSU Banks function under the heads of top management firms. (Business Standard, 2015) Is the functioning of PSU responsible? Twenty Seven Public Sector banks wrote off a sum of Rs. 1 lakh crore as bad loans in the three year period from FY 2012-15. Public Sector Banks have bad loans 3 times that of the Private sector banks. The hike in bad loans is 17% for PSU Banks and 6% for Private sector Banks. (DNA India, 2016) The amount written off by top 10 banks in India are as follows:

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The Public Sector Banks are affected by this issue because of the following reasons: 1. Loans are not evaluated properly and this scrutiny process differs from bank to bank. 2. The technical expertise in PSU Banks is lower because of the low salaries that are offered to them which don’t attract highly qualified employees. 3. The value of the collateral is amplified which is later known to be of a much less value. 4. Corruption amongst PSU banks is higher. Loans of crores of rupees are not investigated because of pressure from higher authorities, bribery and corruption. Also, some loans can be avoided to become NPAs. Under the ‘Indradhanush’ project of the Modi Government Rs. 70,000 crore in a period of four

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years has been infused in the Public Sector Banks to sustain them against these bad loans. These banks would still require around 1 lakh crore of funds to meet their requirements. Amongst BRICS countries, India is expected to surpass the highest NPA Nation, Russia by this yearend. (DNA India, 2016) These 27 Public Sector Banks have written off an amount of $1 Billion as Bad Loans in a period of 10 years. According to Raghuram Rajan, 1.5 Million children from poor regions could have completed their degree in that amount. If only this wasn’t too much, Around 50,000 Crore is still to be written off by FY 2016. People agree that banking sectors can incur losses even after they have debts on their heads. But, one has to also consider the fact that there’s taxpayers’ money that is involved.

Deepak Parekh, chairman of HDFC Bank says that recognizing the presence of NPAs in the Banking sector was of utmost importance to clean up the Balance Sheets. But he also says that Raghuram Rajan’s idea of this clean up can either boost the economy or push the Banking sector behind again and repeat what happened in the third quarter of 2015 with surging NPAs. (Indian Express, 2016) SBI chairman, Arundhati Bhattacharya explicitly mentions that with the economy growing and a slo wer pace than expected, this clean up may take time. (Economic Times, 2016) What is the way to get out of all this? One can either wait till the time all these loans get cleared once the economy gains momentum or take the steering wheel in their own hand and start cleaning up Balance Sheets. Mr. Uday Kotak, Vice Chairman of Kotak Mahindra Banks says, “Our option, when we look at stressed loans, is either carry them as a zombie, pretend and lend, or accept surgery. If we have a structural solution of capacity creation then the second is better. Otherwise, we are down the path of first.” (Economic Times, 2016) There are certain methods to solve NPAs: 1. Asset Reconstruction Companies: The Banks can sell their loans to ARCs and these ARCs then convert these debts to securities, selling them to HNIs. Banks aren’t experts at handling NPAs, ARCs prove to be of great use for this purpose. 2. Corporate debt restructuring: The Banks converts these NPAs to securities themselves without taking the help of ARCs 3. Strategic Debt Restructuring: Banks can convert their debt into equity in the Company and either change the management into the ones they trust or take charge themselves. 4. Bad Bank: This is the solution chosen currently by the Government to solve this issue. It is the establishment of a National Debt Management Institution which will take the pressure off the hook of the Banks and can be cleaned up by this Bank. Raghuram Rajan currently doesn’t support the idea of a Bad Bank. In his view, this would only give the banks a leeway and write off bad loans. Instead, a bank could have a vertical to Manage Asset like the Assent Management Vertical of ICICI Bank setup in 2005. Looking at the International experience it can

be seen that when the recognitions of bad loans are postponed, banks lose their ability to fund an economic revival. It happened after the 1989 crash in Japan with ‘zombies’. Japanese and Europeans tackled the situation of NPAs through central bank funding. Where FX reserves were used by the Chinese to manage NPAs; American used rail road bonds on the other hand. Conclusion This is the moment where India is at a stage of restructuring for sustainable growth. What happens with the current NPAs is what we’re waiting to see. With Raghuram Rajan’s ways of solving this crisis, will the iceberg collapse or will it take a complete new form of a bigger problem? We are yet to see the end.

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References: 1. http://www.livemint.com/Opinion/ gv6VBaAKp7d6K2yVdyIQSN/The-price-of-ahaircut.html 2. http://economictimes.indiatimes.com/ topic/NPA 3. http://www.allbankingsolutions.com/ Banking-Tutor/NPA-overview.htm 4. http://www.arcil.co.in/newsroom/ banking-npa-news/4/ 5. http://indianexpress.com/ar ticle/ business/business-others/the-npa-roll-calltoo-big-to-name/ 6. http://profit.ndtv.com/topic/grossnpas 7. http://www.firstpost.com/business/ good-news-in-bad-loans-from-sbi-to-pnbbanks-are-aggresively-revealing-their-npasand-credit-goes-to-rajan-2621956.html 8. http://www.anirudhsethireport.com/ tag/non-performing-assets/ 9. http://www.ey.com/IN/en/Services/ Assurance/Fraud-Investigation---DisputeServices/ey-unmasking-indias-npa-issuescan-the-banking-sector-overcome-this-phase 10. http://www.thehindu.com/business/ Industry/bank-chiefs-stressed-as-rajan-firmon-npas/article8121063.ece 11. h t t p s : / / w w w. r b i . o r g . i n / S c r i p t s / NotificationUser.aspx?Id=9713&Mode=0

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The hot investment saw maximum growth during this time were options, especially those trading on the index. Advancements in technology created by the CBOE created a market for derivatives and hedging that was being used by bankers in trade. Derivatives are financial instruments requiring lesser investments but carry a similar return to that of its underlying security and thus, these investments mirrored margin trading. The financial system had witnessed its peak development during this decade and leading analysts knew that they had oversold the market and that the system was due for a correction.

AnoopPrakash

IIM Shillong “The bigger they are, they harder they fall”, a statement that can truly be attributed to the prices in the stock markets. An over-positive outlook in the market that exceeds the true worth of an investment will always precede a correction and the larger this gap is, the harder is the downfall. Stock market correction that took place on Monday, October 19, 2015 was a defining moment in the 1980’s and was popularly called “Black Monday”. On that day, the Dow Jones Industrial Average broke a record of falling 508 points to 1738.74 points, approximately a 22.61% decline in a single day. To this day, it stands as the largest daily percentage loss for the stock index, with the nearest being a loss of 12.82% which took place on October 28, 1929 popularly known as “Black Tuesday”. The boomof the bubble In late 1985 and early 1986, the United States economy saw a significant expansion which resulted in a very positive outlook for investors. Filled with optimism, the stock market advanced significantly, with the Dow peaking in August 1987 at 2,722 points, or 44% over the previous year’s closing of 1,895 points. The market was a raging bull with participants going all in with the expectation

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of rising prices and with the availability of margin trading, a lot of money invested was made on borrowed capital. The 1980’s also witnessed advancement in technology used in the field of trading and investment banking. The Chicago Board Options Exchange (CBOE) in 1985 introduced the Retail Automatic Execution System (RAES) to facilitate electronic execution of small customer orders, in 1986 introduced an Auto Quote system to facilitate firm quotes in less active series and in 1987 introduced Electronic Book to provide more timely order execution and fill reports for limit orders. These advancements helped traders and bankers to create automated programming that would trigger buy or sell decisions based on price movements. By mid 1980’s program trading was the principal technique used on the floor. Arbitrageurs could run programs to make the most of price differences as quick calculations helped them make riskless profits reducing market discrepancy. Trading was now available to a larger investor base and many new entrants were enticed by the increasing numbers that they never analysed its true worth. It was like the tulip mania all over again.

The run-up to the fall Participants could increase the index by trading on large numbers but in the long run, the market is always bigger than the participants. On August 25, 1987, the Dow Jones Industrial Average (DJIA) hit a record high of 2722.42 points. However, world events such as Iran’s attach on American ships and market crashes in Hong Kong and west of Europe triggered the downslide of the DJIA. The week before Black Monday, the DJIA crashed over 235 points and on Friday, October 16, 1987, less than two months from the index’s record high, the DJIA plummets 108 points creating the largest sell-off in US history. Investors believed that the bottom of the market had been hit but they were mistaken. The weekend was crazy for analysts and traders who were talking about an implosion and were starting to receive sell orders for the opening of Monday. Black Monday, October 19, 1987 Fifteen minutes into the opening bell of the New York Stock Exchange (NYSE) is bombarded with sell orders and $500 million worth of stocks were sold instantaneously. Majority of stocks opened nearly 10% lower than Friday’s close. Computer programs were designed to automatically trigger the sale orders for billions of dollars of stock. Brokers never cared how wide the deals and how

low the prices for sale were but all they were ordered to do was make a market for the dumping of investments. Due to the number and value of orders received, computers could not hold up and arbitrageurs were virtually out of business on a lot of stocks. The NYSE stalled repeatedly and other exchanges which were based on the NYSE could not operate effectively. More than a hundred billion shares were lost in the system and traders were running from desk to desk with stacks of paper containing sell orders. Everything took place in a disorganized fashion that day and the market was in a crisis. Panicked investors flooded the gates of the NYSE as everyone wanted to know where all the money was going. By mid-day 12 30 AM EST, the DJIA had fallen by over 250 points and there was still no sign of a slowdown. There was never any let up and there was a constant barrage of selling and brokers would sell anything. Traders were seen walking out in tears having lost not just their client’s money but also their own. Some traders were reported to have been taken out due to exhaustion. By the closing bell, the DJIA plummeted 508 points setting off a new record, more than four times the old record which occurred only a couple of days ago. The market lost 22.6%of its value and was nearly double the previous highest single day loss. Brokers were still not done; they were still answering calls to their traders and bankers on the status of the orders making the market, they wanted to own nothing. The aftermath The close of the bloodbath vanishes a large amount of capital and talks were on for another great depression. Physical cash was drained out of the banks. Retail investors wanted to even liquidate any bank deposits they had made as nobody trusted the market anymore. It was doomsday and everyone wanted to get back all that they had lent out to the markets but unfortunately, the market was not as liquid as it was perceived to be.

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The next day, brokers were called in to meet their margin payments as the value of the stock eroded their initial deposits. Bankers were asked by the Federal Reserve to facilitate maximum lending so as to increase the liquidity in the market and allow buyers to enter the trade. Liquidity helped traders to close their positions and ensured solvency in the market. Before the market opened, 7% of the stocks were closed for trading and specialists failed to maintain orderly markets. 10 stocks which accounted for more than half the weight of the DJIA were not open for trading on a precautionary decision by the stock exchange. Brokers were finding it hard to keep their clients calm as they were unable to sell off these stocks. By mid-day, options trading is halted at the CBOE and prices of futures fall to an all-time low. Stocks were still not open for trading and some investors decided to pump in some investments and go long on the all-time low priced futures. With this purchase in the NYSE Arca Major Market Index, the MMI index a saw a turnaround into the greens. This influx of capita opened some stocks on the DJIA were opened

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for trading. Slowly purchases were made on the trading floor with announcements being made by corporates that their stocks were highly under-priced. In the few hours left for trading, the market gained back its daily losses and saw an upward turnaround ending the day 102 points up ending the market crash. During the financial turmoil, the Federal Reserve encouraged banks to continue to lend to one another on their usual terms. The banks did this at a loss, but it preserved the system as a whole. Some experts argue the Fed’s response to Black Monday ushered in a new era of investor confidence in the central bank’s ability to calm severe market downturns. The only victory for the brokers, traders and bankers was that the financial world didn’t end that day as many expected it to. Despite shedding its gains, the market stabilized and wide fluctuations are stopped. New Regulation After Black Monday, regulators overhauled trade-clearing protocols to bring uniformity to all prominent market products. They also developed new rules, known as “circuit

breakers”, allowing exchanges to temporarily halt trading in instances of exceptionally large price declines in some indexes; for instance, the DJIA. Circuit breaker, also known as a trading halt, occurred at a point when the stock market would stop trading for a period of time in response to substantial drops in value. There is no circuit breaker mechanism on the upside which would prevent speculative gains, but would prevent significant downslides which occurred back in 1987. These limits put in place in order to reduce market volatility and massive panic sell-offs, giving traders time to reconsider their transactions and is one of the reasons why the percentage drop experienced in 1987 has and will never be experienced again. As of today, the NYSE sets three circuit breaker levels at levels of 7% (Level 1), 13% (Level 2), and 20% (Level 3) of the average closing price of the S&P 500 for the month preceding the start of the quarter, rounded to the nearest 50-point interval. Recent trends and Key Takeaways The law of gravity pulling down overpriced indices and stock prices has remained through time. We in India have experienced a market

correction when over-optimism over the newly formed government in 2014 and prime rate changes led the SENSEX to an all-time high of more 30,000 points. Analysts from across the world predicted a 10% correction but other global cues have brought the SENSEX to around 26,000 points today. Not too far away, the Chinese stock markets had also experienced a correction in recent past. Sharp drops in the country’s equities after a debt-fuelled rise earlier in the year had spooked domestic and international investors forcing Beijing to launch a raft of policies aimed at stemming further losses. Chinese stock markets are down more than 30 per cent from their June peak. It is therefore important for every prudent investor to understand the macro-economic conditions and judge the true value of the stock market accordingly. Such cycles are not unique to a particular time but has been repetitive after high cycles of boom. Investors can hedge their portfolios by investing in those investments whose prices are inversely related to the stock index. Needless to say, a reduction in risk leads to a reduction in return.

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FINTECH: THE HARBINGER OF FINANCIAL INCLUSION IN INDIA

AyushKumar,ShashankJain

IIFT KOLKATA

If the last century was about invention, this one is all about innovation. Boundaries once considered rigid are being pushed back. Even finance has evolved over the years. “Disruptive innovation” has crossed over into the world of finance. Adding to the euphoria are a set of niche, technological breakthroughs catering to financial needs. It is the era of Fintech, certainly in India as firms like Paytm are getting ready to impact the lives of hundreds of millions of Indians, providing easy one-stop solutions to their daily money-transaction related needs. At a time like this, it becomes all the more essential to ensure that everyone benefits. That no part of the population is left behind. Pradhan Mantri Jan Dhan Yojna, Aadhar cards, Digital India, MUDRA bank. What do these latest set of initiatives by the Indian Government, which have had heavyweights from all over the world jumping aboard the great Indian economic lift-off, have in common? The answer lies in the main target of these schemes, the so called “bottom of the pyramid”. Even the RBI acknowledges this. With the issue of a new set of licenses for payment banks and small banks, the central bank realizes the importance of bringing the so far financially isolated part of

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India under the banking umbrella. To digress a little, finance and poetry may seem a distant match. But on 24 July 1991, as a crippling Indian economy stood on the cusp of its most significant reform, the then finance minister Dr. Manmohan Singh, who is not really popular for his oratory, quoted Victor Hugo in his Budget speech. “No force on this earth can stop an idea whose time has come”, proclaimed an ecstatic Singh, as he threw open the gates of the Indian economy to the world. Times have changed and the Indian economy has shed the “Hindu rate of growth”. It has roared back into life and despite certain reservations, looks all set to become the new engine of world growth. However, a careful evaluation of India’s progress shows, as Montek Singh Ahluwalia, one of the most respected men involved in the thick of things before, during and after the Indian economy’s transition, himself commented,” We should have achieved what we have in half the time”. He proudly admits that nonetheless, India deserves due credit for its accomplishments given the huge size of the nation and all its diversity, but most importantly, given the numerous bottlenecks in its progress, which

come in all sorts of “shapes and sizes”. One such aspect is the unequal distribution of wealth amongst the Indian population where one individual “wilfully defaults” on a Rs. 900 crore loan, while another hardly earns Rs. 900 in an entire month. Even in the mightiest of Indian cities, the so-called “mega-cities”, you see frequent signs of this financial divide. The variation is huge. India is the 9th largest economy in the world by GDP. Throw in the GDP per capita numbers and the situation no longer seems rosy. A world rank of 125 (in terms of purchasing power parity) hardly substantiates India’s growth story. In fact, it suggests that opulence in India is heavily skewed. The welfare has not percolated down. This undependable and wasteful way of improving the living standards of the poor, which economists Jean Dreze and Amartya Sen have termed as “Unaimed Opulence” is a result of such skewed growth. The poor became poorer and the rich, richer. Reasons? An inefficient implementation of schemes and policies. Another reason for the widening of this financial gap is the lack of a robust government service delivery system, which can in turn be associated with lack of data. And why is that? Because even today, a vast majority of rural Indians are either unbanked or depend on the man of the house to avail these services. Financial Inclusion is the new buzzword in the

corridors of Indian Finance. It is surely the next step in the direction of India’s holistic progress, a country which has a substantial share of the unbanked population of the world. 400 million out of the global 2 billion unbanked population lives in India. Table 1 below shows the position of Indian households availing banking services and how it has evolved between the last two censuses. The numbers though not very high, are positive and promising. The path to financial inclusion has various roadblocks like little or no bank accessibility in distant rural areas, poor documentation, low financial and overall literacy levels and little acceptance for the banking system. To reach out to these secluded regions banks need to incur high expenses, but the profit is low because of poor income levels in these areas. So opening new branches or sending representatives, though necessary, seem infeasible to be implemented all over these regions in one go. Considering this along with a growing stockpile of NPAs (non-performing assets), the ability of the overburdened banks in India to fuel the inclusion mission is questionable. The numbers in Figure 1 below project that despite having 63% of the total population, the rural population subgroup in India is serviced by less than 40% of the total bank branches. The need for scaling up the number of branches in rural areas is evident.

Table 1: Position of households availing banking services

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Figure 1: Number of functioning branches (bank and population group wise) as on 31 March, 2015

A fresh breeze in the form of RBI’s issue of licenses to 11 new payment banks and 10 small banks last year, could not have come at a better time. The payments industry is set to witness the entry of 300-400 million new customers in the next 2-3 years. Indians are lucky to have an intelligent and far sighted banker in Dr. Raghuram Rajan at the helm of RBI presently. These licenses have been granted to entities that collectively can have a pan-India reach and impact, even in isolated regions, to reign in the excluded population. Firms like Airtel, Tech Mahindra, Vodafone m-pesa, Reliance and Aditya Birla Group and individuals Vijay Shekhar Sharma of Paytm and Sun Pharmaceuticals’ Dilip Sanghvi are the influential ones. They can combine the banking services with their distribution expertise and digital services like mobile wallets, online transactions for all sorts of bill payments and other day to day transactions which can be availed on mobile devices. By laying down a mandate on the structure of services to be provided, RBI is trying to direct them towards the unbanked and the not so financially competent population. The new Fintech firms have the potential to leverage technology and provide these services to the rightful beneficiaries, achieving financial inclusion on an unprecedented but required scale. A visit to the website of Jan Dhan Yojna, and you can see that the government is trying to make India financially

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literate via financial literacy videos and other such material in regional languages. Even comic videos are available. So the next step is to ensure this content reaches the right audience. Here’s where the bigger picture fits in perfectly. The technology part of it: Digital India, mobile wallets, expanding the internet and smartphone user-base, which already is growing quite fast, all these are key supporting pillars of the bridge to financial inclusion. A month ago we surpassed US to become the world’s second largest smartphone market. Adding the fact that India is set to become one of the fastest countries to skip the plastic money phase and move to electronic and mobile money, the prospects seem huge. It is surely the link that had been missing thus far, a transformation that we as a nation need to undergo. A boost in the internet connectivity and digital competence in the rural areas, combined with the Fintech services can work wonders for our country. As we can deduce from the figure 2 below, Indians are becoming more comfortable with plastic and electronic money transactions. The latest trend is the growing popularity of mobile wallets over the last three years, as debit cards continue to be the most used mode of transaction. The government realizes this, and is working in this direction. 942 million Indians have been enrolled under the Aadhar system so far, which also includes a substantial amount of rural population. According to the Ministry

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Figure 2: Growing acceptability of electronic and plastic money in India

of Finance, as of January 2016, 206.3 million bank accounts had been opened under Jan Dhan Yojna. The Indian government even holds the Guinness World Record for the most number of bank accounts opened in one week, 18,096,130 accounts from 23 to 29 August 2014! The flipside, 30% of these have a zero balance. Globally, the major reason for being unbanked is lack of money. However, what it has done is that there is no longer a deficit of data now. The government can better plan and target their schemes to gradually drag these people out of their misery. It can even allow them to digitize the payment system, which in turn will bring a large number of adults under the banking system for the first time. This will also increase the efficiency and transparency in the transfer of government payments and services by making the process “leakage-proof”, unlike the various subsidy schemes which seldom reach their targets, resulting in a lose-lose situation for both as it not only deprives the needy, but also wastes the nation’s resources. Figure 3 below shows ranks of countries based on their performance in four dimensions of financial inclusion: commitment, mobile capacity, regulatory environment and adoption, as per the 2015 FDIP report. However, it’s easier said than done. It involves challenges like investing in setting up the adequate infrastructure in a country like India, on a scale that

is as large as it gets. Can the government do this on its own? Certainly not. The ambitious Digital India program alone carries a cost of Rs. 1 lakh crore, recently approved by the Modi cabinet. It needs a careful structuring of strategic public-private partnerships to come through at a time when the government looks to restrict its fiscal deficit. Fortunately, India Inc. have responded with enthusiasm and are backing the government initiatives. Financially educating rural people, making them comfortable with this digital experience and ensuring security and reliability are essential to nurture the formation of the required financial environment. That there have been problems, has always been known. Solutions are now being developed and they look promising. Today we are gradually seeing all pieces of the puzzle fall in place. Problems are being encountered with the right set of policies and initiatives. In this regards, financial inclusion is therefore a necessary precursor to the increase in the welfare of a nation. With due credits to Robert Frost, as a nation we still have “miles to go before we sleep”, before the Utopian dream of a “cashless and connected” credit economy is realized.

NIVESHAK

valuation.

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InMobi - Chief Financial Officer

We believe Inmobi is an Indian startup but it purposes, we are as global as it gets. We have also has offices and listings in Singapore? a decent team size in China, US, UK, France, That is technically not the right statement. Germany and the Middle East and they are all Inmobi is a company with its holding and very local teams. So, it is all about the demandparent company registered in Singapore. supply fit. Inmobi has its operations across several What according to you would be the right way countries with offices in 24 places and most or right approach of valuing startups? What of those companies are either wholly owned are the areas that investors should focus on subsidiaries of the Singapore entity or its given the current situation of startups in India branches. where companies like Tiny Owl and Zomato Could you brief us about how Inmobi works are facing certain valuation problems? and how the structure of Inmobi is? As in what Many a times, the answer to the right or the are the advantages of having multinational wrong way is defined in hindsight. When an offices as compared to focusing from one investment happens in a company, it doesn’t centralized location? always bear fruit. First, at the time of an I don’t think we are focusing and operating investment, the investors have a perspective, from one place. Ownership will eventually be they see value and then they quantify the value. with one entity. Inmobi is one organization Second, I think, it is not just about startups, and hence everything has to be legally owned it’s true for any business for that matter that by a single ownership, which is the Singapore generates or creates wealth in the future. So, entity but that does not mean that we operate purely, you need to do an assessment. The with a central structure of command and questions to be answered are: what is the market size, what is the opportunity, what is control either from Singapore or from India. From a legal entity perspective, I think we the team that can achieve the goal, what is have a large team which sits in India, occupied the kind of competitive differentiation, the largely with building the product, and doing passion of the team, as all this is going to the engineering work. However, 90% of the decide whether the company is right or not. revenues of Inmobi are from outside India. The There are several other factors at different largest countries from revenue perspective stages of growth funding and at each stage, are US, Europe, UK and China in that order. the criteria for evaluation changes. At an angel From a business perspective, hence, we have stage you are looking at the passion and the large teams, which operate from each of novelty of the idea, as you move towards series these countries, managing the businesses. A, B, C , you check whether the commercial Given the technical competencies and the feasibility exists, post that it is all about scaling availability of technical resources in India, it the profitability and not just the passion and is well in alignment with our requirement of the idea. Which stage you are in, what kind of engineering resources. Even though the fact business you start, what’s the passion, what’s that our founder has an Indian origin and it the competitive differentiation, the product sounds like an Indian company, for all practical market fit, etc. – all contribute towards the MARCH 2016

Another thing is that, “beauty lies in the eyes of the beholder”. If you are a strategic investor, your willingness to pay for a valuation for a company would be much higher than a financial investor. For instance, if I have already invested in an e-commerce company, I may find the value of any other e-commerce company not that significant, as I have already taken a bet on this industry. Many people think that valuation is math and perfect science, but in reality it is largely an art with so many subjective factors going into the evaluation. What according to you are the various avenues that a start-up can look at while it wants to raise funds and how do you go about raising funds from these avenues? Investor category is dependent on computing. For example, say you are a startup in the idea stage. You typically go to friends and family, you collect basic money to kick start the idea. That is also probably the stage where structured investors in the form of angel investing come in. There are some VCs who invest in series A, some in series B and some in a growth investment. Then, there are companies who invest in your company. Microsoft runs incubator and Google keeps looking at companies with ideas worth providing the seed capital or getting investors who can provide funding. Then there is the other category of investors who are strategic. For instance, I have figured out a small company which is working on an idea which is trying to solve a related problem but they are in need of funds. I might like to fund them and then takeover a large portion of the stakes. In the process, I would also create an ability to solve my problem eventually. A category exists which wants to invest in a defense mechanism. For example, a new product is being developed which is useful for say, Telco. As Telco, I would like to buy a significant stake of that company and when the intellectual property comes into production and establishes competitive differentiation, my competition becomes an offensive or defensive strategy depending on my market position.

What would be your advice for budding entrepreneurs and people interested in starting their own venture? The advice is mostly my thoughts based on what I have experienced. First, many a times you may end up confusing a tech startup with a startup which uses technology. Somewhere there is a belief that tech has to be at the core of the idea, whether the business is solving a problem or not. I think every entrepreneur should ask these questions to himself: How best am I solving the problem? Why am I the best suited? Do I have the competitive differentiation to solve it? Eventually, your revenue and customers are based purely on your ability to solve the problem. Second, there has to be passion and belief in the idea and the problem that it is going to solve. It should not be that one is seeking the problem after coming up with an idea. Third, and a very critical thing is to have not just the right team but the right passionate team on board. Most of the times, especially when you are starting something new, the investment happens based on the credentials of the team and the passion they display. Getting the right people is critical to the right idea and the problem that you are trying to solve. Fourth, be responsible. The thought that one has the right to use money leads to unnecessary cash burning. It always pays off to be financially responsible and running a side shop which kind of minimizes the expenses and optimizes the resources.. Finally, entrepreneurship is all about doing something for the first time, learning from others, leveraging from others, knowing what to do and when to do it. Many get stuck with high valuation requirements and later on, they find it difficult to establish cash streams. Hanging on to it till the last moment and knowing when to take the call clearly distinguishes the winners from the also rans.

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MANISH DUGAR

So money could come from typical VCs, angel investors, or it could come from investors with varied vested interests.

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NIVESHAK

CLASSROOM FinFunda of the Month

Carry Trade Aaron Keith Rego IIM Shillong

By 1998, the borrowing in Yen was so large that it caused the Yen to weaken, falling to nearly 146 What is carry trade? against the dollar. This was a fall of nearly 80% since its peak of 80.43 nearly 3 years ago. Since 2008, the Carry trade is an investment strategy in carry trade shifted to the US as the Fed kept the which a trader sells the currency in a country with interest rates extremely low under their quantitative a relatively low yield (usually a developed country) easing program. and uses those funds to then purchase the currency of a country which provides a higher yield (usually a How does the carry trade unwind? developing country). Another significance of carry trade is that By using this investment strategy, the trader basically it unwinds extremely fast and impacts aims to benefit from the arbitrage opportunity nearly all the major financial markets. An arising out of the difference between the prevailing interest rates. This benefit can be substantial unwinding of the carry trade can often lead to a dramatic appreciation of the borrowed currency depending on the amount of leverage used. and a corresponding depreciation in the currency Eg. A trader borrows 1,000,000 Euros and pays an invested in. For example, in Aug-Oct 2008 when the interest of 0.25%. He then converts the Euros to Yen carry trade unwound, in just 3 months it caused Indian Rupees and invests at a rate of 8%. Hence, an appreciation of nearly 25% in the Japanese Yen. the trader stands to make a profit of nearly 7.75% A similar thing happened when the carry trade in provided the exchange rate between the two the US Dollar unwound around 2013 where there countries remains the same. was a dramatic depreciation of the Indian Rupee. How did the concept of carry trade first come about? Historically speaking, carry trade first started around 1995 in Japan and lasted till 1998. The phase of Yen carry trade again resurfaced around the 2000-01 and 2004-07. The primary reason for the start of the carry trade in Yen was that the interest rates in Japan had slowly started inching down since 1991 and fell below 1%. Taking this opportunity, the traders started using the Yen as a currency to fund their investments in various forms, in countries across the globe. Japan was the first country to indulge in aggressive monetary easing and hence set the trend for carry trade in the Yen.

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What are the risks of carry trade? The biggest risk of indulging in carry trade is the uncertainty in exchange rates. Using the example mentioned earlier. If the value of the Rupee relative to the Euro were to fall. Then the trader would run the risk of losing money. Additionally, since these trades are usually done with a lot of leverage, a small change in the currency rates can have a magnifying effect on the profitability.