FROM EDITOR’S DESK Dear Niveshaks,
Niveshak Volume X ISSUE V MAY 2017 Faculty Chairman
Prof. P. Saravanan
THE TEAM Akshay Kaushal Anand Mittal Arjun Bhargava Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Vinay Gundecha
This month we bring to you the most talked about Flipkart and Snapdeal merger as our cover story. The e-commerce sector in India is rapidly evolving and growing in leaps and bounds. The proliferation of many e-commerce startups from 2009 has resulted in tough competition in this sector and none of the startups have been able to witness any profits from their inception. In this light a merger has been proposed between two of major home grown e commerce players of the country – Snapdeal and Flipkart, which are funded by Soft Bank. This merger will lead to a mammoth company which can take on Amazon - a multi billionaire funded e commerce giant in India. Article of the month talks about how states are plagued with massive debts and what’s in stake for them. If the states continue to run their budgets in such huge debts, the economy will turn to an unsustainable one. Fin Gyaan throws some light on the concept of Universal Basic Income and its costs implications on the government, if implemented. FinSight throws light on how to revive the private investments in India. For FinView we got the interview of Somak Gosh, Managing Partner at Contrarian Capital on the future of startup space in India. The classroom touches on the concept of “Winner’s Curse”, which is explained at length. The TMTW section covers news on the fall of Sun Pharma stocks, Implications of GST, changes to the fiscal year for MP to align it with the international standards. Finally, we would like to thank our readers for their immense support and encouragement. You remain our prime motivating factor that keeps our spirits high and gives us the vigor and vitality to keep working hard. We hope you had a great month and wish you the best for the new one. To end this brief note, 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 give us the vigor and vitality to keep working hard. Thank you. Stay Invested! Team Niveshak
All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.
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Niveshak Times
04 The Month That Was
CONTENTS
Cover Story
Equity Research
10
Ltd.
Dr. Reddy’s Laboratories
Article of the month
12 Binge Borrowing: States on a High
FinGyaan 19
UBI: Cost Implications of the Government Guaranteed IncomeScheme
FinaFame
22
Chanda Kochhar - The Turnaround Tsarin
FinSight
25
Revival of Private Corporate Sector Investment in India
16
Flipkart checks out with Snapdeal on its cart
FinView
28 Mrs. Chanda Kochhar 30 Open Interest
Classroom
The Month That Was
4
NIVESHAK
www.iims-niveshak.com
The Niveshak Times Team NIVESHAK
IIM Shillong Sun Pharma shares fall over 4% after overseas arm Taro reports weak earnings Shares of Sun Pharmaceuticals Industries Ltd on Tuesday fell 8% to hit a near six-month low after its overseas arm Taro Pharmaceuticals Industries Ltd reported weak earnings in the March quarter. Sun Pharma stock declined in six out of the last seven trading sessions registering a fall of 8.24% in this period. So far this year, it has fallen 4.3%. The decline in Taro’s earnings was due to increasing competitive intensity and pricing pressure, according to Edelweiss Securities report. Taro reported 26% decline in its revenue from a year ago and 11% fall quarter-on-quarter (q-o-q) to $196 million. Net profit fell 28% year-on-year, while it was down 41% q-o-q.
China’s Stocks, Yuan Erase Losses Triggered by Moody’s Downgrade China’s financial markets quickly brushed off Moody’s Investors Service’s decision to cut its rating on the nation’s debt for the first time in almost three decades, with stocks, bonds and the currency little changed. The Shanghai Composite Index closed up 0.1 percent, after slumping as much as 1.3 percent to approach the key 3,000 level. The yuan was steady against the dollar, while the yield on the 10-year government debt held at 3.67 percent. The Moody’s downgrade to A1 from Aa3 comes at an awkward time for China’s authorities, who called the cut “absolutely groundless.” A campaign to reduce risk in the financial sector has caused local investors to desert the equity and bond markets, while traders have been pushing back against the central bank’s efforts to shore up the currency. 81% items to be taxed below 18% rate under GST: Government The Goods and Services Council today finalised tax rates for 1,211 items with amajority of items being kept at under 18 per cent . • Sugar, Tea, Coffee (except Instant) and edible oil to fall under 5 per cent slab, while cereals, milk to be
MAY 2017
part of exempt list under GST. • Coal to be taxed at 5 per cent against current 11.69 per cent. • Tooth paste, hair oil, soaps will be taxed at 18 per cent, it is being tax at 28 per cent, currently. • Common man items have gone into 12 per cent and 18 per cent slab. • Indians sweets or mithai in 5 per cent slab. • Council will discuss the rate slab for important goods like gold and beedi rates tomorrow. No decision has been taken on Services tax rates and rates over auto sector. For MP, the fiscal year will begin in January 2018 As Madhya Pradesh becomes the first state to opt for a new fiscal year, pressure will be on other states to fall in line, too. But will it be worth their while to make the switch? Here is a look at why it would. First, the move aims at aligning India’s financial accounting and fiscal strategy policies with a vast majority of its global peers. The standardization could ensure uniformity in collection and analysis of statistical data, in accordance with international practices. Second, from an agricultural perspective, the revised fiscal will smoothly align itself with the country’s monsoon cycle and agricultural harvests for Rabi and Kharif seasons. In case of a drought, which generally happens between June and September, an alteration in the accounting period is likely to facilitate better decision-making as far as allocation of funds towards agricultural growth is concerned. Though this may necessitate bringing forward the Union Budget presentation to November every year, the benefit of timely fund allocations to the agrarian players/farmers will be pivotal in improving the overall productivity of the sector. Third, for MNC firms in India, which currently deal with two types of financial years (one in India and the other as per the parent company’s home laws), a consistent reporting structure could ease their account management processes. Foreign subsidiaries of Indian companies would benefit in the same manner, too.
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NIVESHAK
Call rates move up, so do bond yields The Reserve Bank of India hiking reverse repo rate in its recent April policy has served its intended purpose. The overnight call rate which, until then, was hovering far below the RBI’s key policy repo rate, at 5.7 per cent levels, has moved up to 6-6.1 per cent levels over the past month. The 3-month T-bill rate too has gone up by 20-30 basis points since April. SBI customer? Now shell out more for these transactions from June 1 Now you need to shell out more from your pocket or bank account every time you do a transaction at the State Bank of India, India’s largest bank. The bank has again announced revision in its charges, which have become applicable from June 1. If you transfer fund through INB/ MB/ UPI/ USSD, then you will have to pay Rs 5 +ST for up to Rs 1 lakh, Rs 15 +ST above Rs 1 lakh and up to Rs 2 lakh, and Rs 25 +ST for fund above Rs 2 lakh and up to Rs 5 lakh. Similarly, for exchange of soiled/ imperfect notes up to 20 pieces and value up to Rs 5,000, you need not pay any charges. However, for more than 20 pieces of notes, you will have to pay Rs 2 per piece + ST. If the value of the notes is above Rs 5,000, then you will have to pay Rs 2 per piece or Rs 5 per 1000 + ST, whichever is higher, on the entire tender. The bank has also announced that BSBD (Basic Savings Bank Deposit) account holders can now make only four withdrawals in a month, including ATM withdrawals, free of charges.
AI technologies has great potential for powering social development, and the smart automobiles sector is one of the most promising, Lu Qi, Baidu vice chairman, said. Baidu launched “Apollo” in April, an open, complete and reliable software platform for the automotive and autonomous driving industry. Fresh merger structure to IRDA by Max Life-HDFC Life In the wake of Insurance Regulatory and Development Authority of India’s (IRDA) reservation about the deal structure in the proposed merger of Max Life Insurance Company with HDFC Life, a new structure is likely to be submitted soon, IRDA officials said. IRDA expressed concerns about the deal structure since the last stage of the merger was between a holding company and a life insurance company. In a complex and tier-structured demerger and merger plan, Max India will amalgamate Max Life Insurance with Max Financial Services. Subsequently, the insurance business of the merged entity is to be demerged so that it can be transferred to HDFC Standard Life Insurance Company. As per the proposed scheme, the remaining of the merged entity i.e., minus the insurance business, will be amalgamated with Max India. Max Financial Services, promoted by USD 2 billion Max Group, is the holding company for Max Life. The deal structure was designed in this manner so that HDFC Life would automatically get listed on the stock exchanges since Max Financial Services is already listed.
China’s Baidu and German firms plan to make selfdriving cars A Chinese firm specialising in artificial intelligence (AI) has partnered with two German companies to make self-driving systems and vehicles. China’s Baidu will cooperate with the two German firms -automotive suppliers Bosch and Continental AG in smart – onselfdriving systems and vehicles, smart transportation and the Internet of Vehicles. Strategic agreements were inked during Chinese Premier Li Keqiang’s visit to Germany this week. The agreements aim to leverage China’s AI technologies with German automobile expertise to upgrade the transport industry. Application of
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
The Month That Was
The Niveshak Times
5
6
www.iims-niveshak.com
NIVESHAK
31000.00
1,500
BSE
DII
FII
30800.00
1,000
30600.00 500
BSE
30400.00 30200.00
0
30000.00
-500
29800.00 -1,000
29600.00
25-05-2017
24-05-2017
23-05-2017
22-05-2017
19-05-2017
18-05-2017
17-05-2017
16-05-2017
15-05-2017
12-05-2017
11-05-2017
10-05-2017
09-05-2017
08-05-2017
05-05-2017
04-05-2017
03-05-2017
02-05-2017
29400.00
FII, DII Net turnover (in Rs. Crores)
Market Snapshot
Market Snapshot
-1,500
Source: www.bseindia.com www.nseindia.com
MARKET CAP (IN RS. CR) BSE Mkt. Cap
1,25,80,118 Source: www.bseindia.com
CURRENCY RATES INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR / 1 SGD
1.00%
INR/1 USD
0.50% 0.00% -0.50%
Euro/1 USD
GBP/1 USD
64.52 72.49 58.28 83.23 46.63
JPY/1 USD
SGD/1 USD
LENDING / DEPOSIT RATES Base rate Deposit rate
9.10%-9.60% 6.25% - 6.90%
RESERVE RATIOS CRR SLR
4.00% 20.50%
POLICY RATES Bank Rate Repo rate Reverse Repo rate
6.50% 6.25% 6.00%
-1.00% -1.50% -2.00%
Source: www.bseindia.com
-2.50% -3.00% -3.50%
MAY 2017
Date as on May 30, 2017
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NIVESHAK
BSE Index % change Open Close Sensex 4.10% 29918 31146 AUTO 6.06% 22782 24162 BANKEX 4.83% 25325 26547 Capital Goods -1.51% 17866 17596 Consumer Durables -0.48% 15475 15400 FMCG 7.37% 9412 10106 Healthcare -9.69% 15019 13564 IT 6.35% 9619 10230 METAL -0.49% 11303 11248 OIL&GAS -1.44% 14455 14247 POWER -4.69% 2330 2221 REALTY 0.37% 1924 1931 TECK 4.78% 5450 5711 Smallcap -1.90% 15373 15080 MIDCAP -1.17% 14798 14625 PSU -3.80% 9020 8677
% Change TECK, 4.78% Smallcap, -1.90% REALTY, 0.37% PSU, -3.80% POWER, -4.69% OIL&GAS, -1.44% MIDCAP, -1.17% METAL, -0.49% 1
IT, 6.35%
Healthcare, -9.69% Consumer Durables, -0.48% Capital Goods, 1.51%
FMCG, 7.37%
BANKEX, 4.83% AUTO, 6.06% Sensex, 4.10%
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
Market Snapshot
Market Snapshot
7
Niveshak Investment Fund
Done on 30/6/14
Information Technology(10.31%) HCL Tech.
Infosys
TCS
Wg: 3.83% Gain : 12.61%
Wg: 2.88% Gain: 18.22%
Wg: 3.61% Gain : -0.54%
FMCG(22.81%) Colgate HUL
Britannia
Wg: 5.39% Gain : 39.87%
Wg: 7.01% Gain: 260.04%
Wg: 4.84% Gain: 56.61%
Amara Raja Wg: 3.72% Gain: 16.85%
Godrej Consm. Wg: 8.21% Gain: 114.03%
Pharmaceuticals (7.13%) Dr Reddy’s Labs Wg: 2.85% Gain: -8.93%
Lupin Wg: 4.28% Gain : 2.19%
Midcap Stocks (16.27%) Bharat Forge Wg: 4.63% Gain: 26.38%
Kalpataru Power Wg: 5.02% Gain: 32.13%
HDFC Bank Wg: 8.33% Gain: 81.97%
ITC
Wg: 5.57% Gain: 33.39%
Misc. (12.92%)
Auto (8.04%) Tata Motors Wg: 4.32% Gain: 0.08%
Bank (8.33%)
Natco Pharma Wg: 6.62% Gain: 94.51%
Titan Company Wg: 4.71% Gain: 38.71%
Chemicals (8.49%) Asian Paints Wg: 8.49% Gain: 82.73%
Textile (5.69%) Page Indus. Wg: 5.69% Gain : 52.47%
Performance Evaluation
As on 30th April 2017
May Performance of Nivehshak Investment Fund
185
Performance of Niveshak Investment Fund since Inception
175
105
165
104
155
103
145
102 101
135
100 99
125
98
115
Scaled Sensex
30-May-17
28-May-17
26-May-17
24-May-17
22-May-17
20-May-17
18-May-17
16-May-17
14-May-17
12-May-17
10-May-17
08-May-17
06-May-17
04-May-17
02-May-17
97
Scaled NIF
Opening Portfolio Value : 10,00,000 Current Portfolio Value : 15,87,884 Change in Portfolio Value : 47.53% Change in Sensex : 51.94%
105 95 1/30/2014 8/28/2014 3/23/2015 10/12/2015 5/6/2016 11/25/2016 5/31/2017 Sensex Scaled values Portfolio Scaled Values Value Scaled to 100
Risk Measures: Standard Deviation : 14.17 (Sensex 14.09) Sharpe Ratio : 1.05 (Sensex : 0.96) Cash Remaining: 58,400
Comments on NIF’s Performance & Way Ahead: With SENSEX well over 30,000 mark it has been joyous month for the bulls. However, still many indicators suggests that good days are yet to arrive. As India's industrial output growth slipped to 3.1 per cent in April, the industry reiterated its demand for an interest rate cut by the RBI, saying it was imperative to boost growth and consumer demand. The RBI in its latest monetary policy review had left the repo rate unchanged at 6.25 per cent for the fourth straight time. On the other hand, the government has announced the new GST tax rates for the majority of items ahead of the 1 July rollout. SENSEX gained around 4% during the month. The NIF growth was about 2% during the same month. It would be interesting to know whether in the long-run a simpler tax regime is positive for the country’s business environment, the transition could see a temporary slowdown in economic activity as companies adapt to the new rules. We might be looking some turbulence in the SENSEX and thus, will keep a close watch on portfolio investments performance.
10
Equity CoverResearch Story
NIVESHAK
Equity Research report: Dr. Reddy’s Laboratories Ltd. Equity Research Report – Dr. Reddy’s Laboratories Limited Date: 31st May 2017
Rating Matrix
Basic Information Buy
Ticker (BSE)
500124
Target Current Market price
Rs. 3084 Rs. 2518
Ticker (NSE)
DRREDDY
Sector
Pharma
Potential Upside (1-Year)
22.47%
M- Cap
₹ 44378 Cr.
Corporate Governance
Established in year 1984, Dr. Reddy’s Laboratories Limited is an Indian multination pharmaceutical company headquartered in Hyderabad, Telangana with presence across 26 countries. Dr. Reddy is the first Indian company to get an exclusive marketing right (EMR) in the US market for Fluoxetine Axetil. Dr. reddy invests heavily on research and development projects and is the only Indian company to have significant R&D being undertaken overseas. In September 2005, Dr. Reddy's spun off its drug discovery and research wing into a separate company in an effort to decouple risk of drug discovery from parent company. In 2014, Dr. Reddy Laboratories was listed among 1200 of India's most trusted brands according to the Brand Trust Report 2014, a study conducted by Trust Research Advisory, a brand analytics company. Dr. Reddy’s becomes the only generic pharmaceutical company globally to be listed on the Dow Jones Sustainability Indices 2016. The company has diversified product range consisting of generic medicines over 200, 60 active pharmaceutical ingredients (APIs) for drug manufacture, critical care, diagnostic kits, and biotechnology and proprietary products. Dr. Reddy is one of largest manufacture of APIs. Company’s key expertise is in active ingredients, product development skills ( R&D), a keen understanding of regulatory norms, intellectual property rights and streamlined supply chain which makes it global leader in this segment. Dr. Reddy’s has one of the largest custom pharmaceutical services businesses in India. Company offers end to end product development and manufacturing services and solutions to innovator companies. Companies global generics segment is the highest revenue generating segment. It constitute 83% of the total revenue where as Pharmaceutical services & active ingredients segment shares 14% of the total revenue. Proprietary products and other constitute remaining 3% of total revenue. As on 31 March 2017, the Board of Dr. Reddy’s had eleven Directors, Shareholding Pattern (%) (As per BSE) comprising (i) two Executive Directors, including the Chairman, and (ii) nine Independent Directors (of whom one is a woman) as defined Mar-17’ Dec-16 Sep – 16’ under the Companies Act, 2013, the Listing Regulations and the Corporate Governance Guidelines of the NYSE Listed Company Promoter 26.79 26.79 26.38 Manual. Dr. Reddy’s has eight Board-level Committees, namely: Audit Committee Nomination, Governance and Compensation Public 73.21 73.21 73.32 Committee Science, Technology and Operations Committee Risk 0.00 0.00 0.00 Management Committee Stakeholders Relationship Committee Others Corporate Social Responsibility Committee Investment Committee Total 100.00 100.00 100.00 Management Committee
Growth Drivers
Business Description
Company Background
Rating
Dr. Reddy Laboratories limited observed fall in incremental revenue due to economic problems in Russia and the sharp devaluation of the rouble led to a decline in RDL revenues from Russia by 29% to Rs. 10.6 billion. Further, continuing economic crisis in Venezuela led to a clampdown on foreign exchange outflows due to which RDL received no approvals from the Venezuelan government to repatriate amounts beyond US$ 4 million. However, with strong cash flows to support R&D investments with 2,000 scientists globally along with a strong team of intellectual property experts supporting R&D company is confident about robust future revenues. DRL also aims to scale up its business to the next orbit in the US market on the back of a strong product pipeline (92 ANDAs are pending approval, of which, 59 are Para IVs and 20 are First to File. DRL reported a 19.0% yoy growth in FY2016. The management expects the company’s performance to rebound and targets to achieve an above industry growth rate going ahead, driven by a) field force expansion and improvement in productivity, b) new product launches (including biosimilars), and c) focus on brand building. Other factors such as Stabilisation of emerging market economies/currency, mainly Russia/CIS, Clearance of warning letters for three facilities, Launch of key products like gCopaxone, gGleevec, Differentiated APIs for key customers and internal commercialization, Investment and approvals in biologics (EMs) and Proprietary Products (US) to drive mid to long-term growth is further boosting DRL confidence in the market.
MAY 2017
11
NIVESHAK
ROE: Peer Comparison
Industry Rivalry – Medium Differentiated APIs for key customers, , intellectual property rights and internal commercialization
30.0% 20.0% 10.0% 2016
2015
Sun Pharma Cipla
2014
2013
Cadila Health Dr Reddy
2012 Lupin
ROA: Peer Comparison 40.0% 30.0% 20.0% 10.0%
Technical Analysis
Rating Def.
Comparable Valuation
0.0%
2016
2015
2014
2013
2012
We have calculated the stock’s intrinsic value based on a weighted average of DCF, Forward PE and Relative valuation. Starting FY17, growth in revenues have been estimated at an average of 12%, which is more optimistic with previous years growth rate. However, USFDA restrictions, if continued further can adversely affect revenues of the company in the North American region. Though IT industry is very dynamic in nature but Dr. Reddy’s Laboratories Limited has a low Beta of .59, with a WACC of 9%. The fundamental value stands at INR 3084 and given a CMP of INR 2518 as on 31st May 2017, the stock is undervalued.
Industry Competition
Industry Figure
0.0%
Buyer power – Low Buyers exercise low purchasing power as they are bound to purchase medicine prescribed by medical practitioner. Threat of Substitutes – Medium The effect of substitutes depends on individual drug. Patented products have no substitute but post patent period substitutes are many. Threat of New Entry – Medium Entry into pharma industry require huge capital investment especially into R&D of drugs. Hence, threat of new entry is medium Supplier Power – Low Raw Material for manufacturing drugs are chemicals which are easily available from numerous sources. Hence, suppliers power remains low.
Valuation Summary Method
Fair Value/Share Weight Value
Discounted Cash Flows
3097
0.33
Relative Valuation Forward PE Valuation
3007
0.33
3148
0.33
BUY: If stock is expected to deliver more than 10% annualized returns over holding period NEUTRAL: If stock is expected to deliver (-)10% - 10% annualized returns over holding period SELL: If stock is expected to deliver less than (-)10% annualized returns over holding period
As per MACD, stock started showing convergence at 34.10 and has been on an uptrend since then. The stock has a Relative Strenght Index of 61.15, which is near the overbought region - however the stock shows signs of further uptrend. Once Dr. Reddy’s Laboratories reaches the point of 2734, it will start making newer highs at 3173 and 3337.
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3084
Equity CoverResearch Story
Equity Research Report – Bharti Airtel Limited Date: 31st May, 2017
12
Article of the Month Cover Story
NIVESHAK
BINGE BORROWING: STATES ON A HIGH RajatShrivastava IIM Kozhikode Rs 36,359 crore, that’s the amount of loans waivered by the UP State Government, benefiting 21 million farmers of the state, including Rs 5,630 crore of NPAs of around 700,000 farmers. Just for comparison the debt on Kingfisher Airlines in of Rs 9000 crore while Air India has a debt of Rs 46,000 crores, one went bankrupt and the other is on the mercy of central government. This decision went ahead, putting CMs of three other states in a tight spot – Punjab, Haryana and Maharashtra. In case of Punjab, it was a poll promise of the Captain Amrinder Singh government while in Maharashtra the opposition is forcing the Fadnavis government to take some action. The bigger burden is on bureaucrats to how to handle the finances if their master went ahead with the farm waivers leading the state economies to a downward spiral. Punjab has
MAY 2017
a debt of Rs 1.25 lakh crore while the amount of loans to waived is in between Rs 69,000 to Rs 88,000. The neighbouring state Haryana is worse than Punjab. While Maharashtra is further right to the debt values with the amount Rs 3.5 lakh crore which is expected to go to Rs 4.15 lakh crore in next fiscal. The cherry on the top is that the centre has already said that it’s not going to share the state’s burden of farm loan waiver. So, the million-dollar question comes out that, how are the state governments having the legitimacy to make such ostentatious announcements if they are so cash strapped. First, state governments can only waive the crop loans taken from state cooperative banks and primary agricultural cooperative societies (PACS). Now in general 70% of the crop loans are al-
NIVESHAK
But are these cooperative societies healthy. In case of UP the NPA for these societies went down to 4.8% in 2015 while Punjab has NPA of 0.7% but their profitability is also low. Maharashtra comes out on the top in profitability but also in NPA with 11.7%. Now overall these institutions appear to have a at least good balance sheet, though the loan amounts to be waived is still too high to be taken care of by them. The loan waiving schemes are just one set of examples showing the kind of expenditures a state government might be ready to go for just for the sake of pleasing a vote bank or fulfilling a poll promise. But this is not it, money is being spent on flamboyant display of a cultural or regionalist pride, like the Siva Smarak to be built in the Arabian Sea close to Mumbai costing the Maharashtra exchequer an amount of Rs 3600 crore or the Statue of Unity that has price label of Rs 2063 crore. There is an appearance of utter disregard shown by the state governments in controlling their finances and worrying about putting money where the mouths are. Interesting aspect of this is to know that the states also come under the FRBM act which aims at fiscal discipline. FRBM Act: Police at the station but they don’t care For a country to have a sustainable growth fiscal prudence is an important factor. It’s essential that the government, with an aim of a high growth rate, went ahead fuelling their sprint by going on a borrowing spree, bamboozling the dewy eyed future tax payers. Our government brought in the FRBM act in place to lead the path of fiscal consolidation and save the population from getting into squander of debt. It sets a target of 3% as fiscal deficit which might appears to be a little stiff as it doesn’t face any
impact from the changing world economics and its effects on the nation’s economy. But in the past after the act was brought into shape in 2003, the government paid only a lip service to it by either tiptoeing around the target or claiming global economic situation to all together avoid it. Modi government in its last budget announced that will go for the target in the next fiscal year keeping this year’s rate at 3.2%. But all together there has consistent breach of the target and so the government decided to setup a high-level committee under former revenue secretary NK Singh to recommend changes in the act to make it more pragmatic. Now the central government still considers fiscal consolidation to be important but wishes to keep achieving it gradually with impetus from the high growth rate. But in this article the discussion is not about the actions of the centre but the states. Since their annual budgets are not fanfare event of the year like the national budget with media going gaga over it, they save themselves from the microscope of the financial analyst and policy experts except some minor editorials in newspapers which might come out if some illogical idea is thrown into the hat. This brings us to the core idea that is currently the Indian states are on a borrowing binge, trying to achieve high GSDP (Gross State Domestic Product), fulfilling some poll promises with no sound economics behind. This is leading towards increase in fiscal deficits and the astonishing aspect is that the FRBM act whole considers the sub-national governments and puts the same cap on them as the central government. But states get away from it and goes for spending spree as mentioned in introduction. The policies and schemes introduced by them are less inclined towards solving the problems the states are facing and more about creating fanfare while pleasing a vote bank. They either aim for subsidies or bail-outs with no inclination of whatsoever to how to generate funds to do it. The perfect example for this is to put out a magnesium fire with water, which might be a nice idea but will lead to an explosion. That’s where comes the main point of contention – how are they going to pay for all of this. Though name is bond State governments have started using the
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Article of the Month Cover Story
lotted by scheduled commercial banks but the state-owned entities have a minor share in it, about one-third of the total. For example, in the case of the state of Uttar Pradesh while the farm loans have a value of Rs 75000 crores, the amount disbursed by the state based financial institutions is just Rs 8000 crores. Also, in this case the issue arises that once the loans have been waived who will be the one bearing the brunt of it – the cooperative or the state exchequer .
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Article of the Month Cover Story
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NIVESHAK bond route to fund their schemes, be they may essential or not. It has turned out to be easy for them, as the state bonds are generally issued by RBI which automatically makes it implicit for the investor that it is backed by the centre, making those independent of the state’s financial health. The bond route brings in the money while removing the liability away from the states to pay back, with no worries of default by shifting responsibility to centre. The states know that the centre will bail them out anyhow. The bigger problem is this that the money generated does not go into a capital expenditure to build capacity for future revenues but mostly to provide subsidies in some form or pay back a past debt. Look at UDAY, introduced by the central government to bring out the financially distraught state owned discoms, so to improve the electricity supply in the country. These discoms had an overall debt of Rs 4.3 lakh crore. So now the debt owned by these ill- fated organizations is being sold as bonds in market. In September 2016, Bihar government issued bonds of Rs 777 crore under UDAY. But this is nothing compared to amount of bonds released by Rajasthan which is Rs 28400 crores. The money generated will float these discoms back making it possible for them to generate some sort of revenue. But here comes the whammy, discoms need to be paid back for the electricity that they are going to supply. This payment will be done by the customers which currently enjoy a lower tariff or in case of farmers who mostly pay nothing. To solve the problem state governments went ahead to raise the price of electricity. The Rajasthan Electricity Regulatory Commission had revised the power tariff in various consumer categories from September 1 last year. The increase was 25 paise per unit on metered category and Rs 35 per horsepower on unmetered category on the agriculture connection . This had created resentment among the farmers who recently threatened a mass protest during the ensuing budget session of the assembly, which led the government to backtrack on the decision and took upon itself the burden of paying for the farmers by subsidizing them. Same went in Bihar also which increased the tariffs by 66% but also increased its subsidy to Rs 2952 crore. This exorbitant subsidizing makes the discoms again dependent, for their electricity dues, on the state governments for their which are notorious for delayed payments bringing the situation to
MAY 2017
square one. This is more of a leading to transfer of cash from one pocket to another of the same shirt. If the money taken up from the market is not being used for capacity building or revenue generating activities, we might see a repetition of pre-bond issuance situation in coming 5-10 years. An important thing to note in here, SEBI has announced norms for issuing municipal bonds in 2015 so to let the municipal bodies to generate necessary funds. But introducing such ways to these bodies might lead to misuse as this will again lead the political parties involved to introduce crowd pleasing measures. For example, in recent election for Delhi Municipality in which AAP party announced to renounce housing taxes, a great example of crowd pleasing. This is a case where mason wants to build a house after cutting its hands. Also with GST these bodies will lose a major chunk revenue in the form of octroi and such hair brained schemes might lead high debts in the lower echelons of the government too. Hangover from Binging Bonds While our country is moving towards greater fiscal consolidation, sovereign bonds remain an important method for the central government to raise funds. But the bonds from the state governments are bringing in competition for them. Also, the debt levels of the states are going up causing the yields for these bonds to also go up, setting the whole system up on an explosive path. The time is close when the supply of state bonds will match that of central bonds but fundamentals behind the state bonds are going to be poor as compared to the centre. The UDAY scheme is already worsening the finances of the states and inclusion loan waiver schemes might make the whole building to crumble. The important thing in this is to remember that with recommendations from the Finance Committee a larger chunk of revenue is shifting to states shifting the financial centre of gravity. With the increasing issuance bonds will lead to a bloated economy which might not be visible to the naked eye but the body will have to carry the weight. The centre will have to become a bailout agency for the states. This whole situation also makes us to consider the deficits of the states, both fiscal and revenue and outstanding debt to observe what has been and will be the impact of these bonds over state economies.
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Fig. Outstanding Liabilities (% of GSDP) The above figure paints a dreary picture of the state economies. They are piled up with debt with total 14 states with fiscal deficit above 3%, as decreed by FRBM act. Important thing to remember is that those 14 includes all the BIMARU states (Bihar, Madhya Pradesh, Uttar Pradesh, Rajasthan). These states have a high need of funds to run the basic government services within the state leading them to have a high appetite for the bonds. Even in context of revenue deficits also some major states might slip up in future. The revenue deficit should be zero under FRBM act for subnational governments.
fault over its debts. An Indian state like Rajasthan might not have to go through such bankruptcy procedure if it defaults on its debt but it might lead the country into a very bad spur. Fiscal discipline is a must as the bonds may appear to be easy, cheap and fast but one day the piper will have to be paid.
In conclusion, the central governments need to rein down the horses and bring the states back to reality, down from their high horses. It’s essential for the states to strictly impose the FRBM act and centre should act as regulator. May be the capital outlay to states can be made conditional based on the deficits and the debts. A flexibility might be provided if the states take corrective actions within a fiscal year. RBI should also have a closer eye while issuing these bonds with regular reports about the situation and can be given a facility to stop the issuance if a certain upper cap of debt is reached by the states. Overall the need is for the states is to understand that their actions will not remain hidden because the media is not covering them but the grim reaper will come to collect its debt. There should be a sense of national responsibility in their head while taking such actions otherwise it is to be remembered that California, a state in USA had to file a bankruptcy due its debt and was not able to pay for basic government service. Even recently Puerto Rico asked a special package to prevent its deŠ FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
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Flipkart checks out with Snapdeal on its Cart Team Niveshak Background: The 1.2 Billion population, growing GDP, rising disposable income, improving infrastructure, increasing internet user base and mobile adopters were a perfect combination of factors for Investors and Venture Capitalists to look at India as highly potential and profitable country. This led to an influx of investments from all over word into many different industries and e-commerce was no exception.
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$28 billion by the year 2020, registering a significant CAGR of 45% over the next four years.1 Among the existing players, Flipkart is arguably the most preferred and trusted e-commerce brand in India and is maintaining its lead over its rivals, according to the latest E-tailing Leadership Index (ELI) figures released by RedSeer.2 As of 2015, Flipkart commanded a 44% market share of the Indian e-commerce industry, Snapdeal came a close second with a market share of 32%3 and Amazon, ShopClues along with others sharing the rest of the space, but come 2016 the share has reversed tremendously with Flipkart’s share slipping to 37%, and Amazon’s share rising to 24% while Snapdeal’s share slipping to 14%.
Over the years the e-commerce industry in India is has grown to become the fastest growing sectors, with exceedingly increasing cut-throat competition among players such as Flipkart, Amazon, Snapdeal, Ebay, PayTm & Shopclues. With an internet user base of around 465 million and increasing internet penetration fueling the market growth, the Indian e-commerce market is expected to reach around Relations between Flipkart & Snapdeal over the years have not been exactly cordial, with the pro-
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moters of both the groups taking jabs at each other on social media platforms. Not too far back in March 2016, when the Chinese e-commerce giant Ali Baba – who happen to be one of the major investors in Snapdeal - announced that they would be making a solo entry in the Indian Markets, one of Flipkart’s co-founders,
Sachin Bansal, came up with the following tweet – “Alibaba deciding to start operations directly shows how badly their Indian investments have done so far.” To which, Kunal Bahl (Snapdeal’s co-founder) responded by tweeting – “Didn’t Morgan Stanley just flush five billion worth market cap in Flipkart down the toi-
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let? Focus on your business, not commentary.”
which may take around 3-4 weeks. The nonbinding term sheet was signed on May 23, 2017, However, in business, it does not take long for and Flipkart is now critically evaluating the fiyesterday’s rivals to become tomorrow’s part- nancials of Snapdeal. According to Flipkart’s ners. promoters, they do not plan on keeping the ‘Snapdeal’ brand alive post the acquisitions, unStakeholders Involved: like Jabong & Myntra – which Flipkart is running The growing competition, the possible entry of independently even post these acquisitions. Alibaba and the rising share of new players in e-commerce space has led the soft bank to con- According to a PTI report, Nexus Venture Capital template a merger of two of the players backed could get around $100 million along with some by it, Flipkart and Snapdeal, to take on the for- stake in the new entity, while Kalaari Capital eign-backed giant Amazon along with the other could end up getting around $70-80 million for smaller players in this space. This deal has been its stake. Both the Snapdeal co-founders hold finalized in May 2017 with the final vote of the 6.5% stake each in the company and would be Nexus Venture Partners (NVP) in favor of the getting around $25-30 million each. Flipkart had appointed Goldman Sachs as its adviser for merger. the acquisition, while Snapdeal had appointed Flipkart is backed by investors such as Tiger Credit Suisse for the same. Global Management, Tencent Holdings Ltd., Steadview Capital, and investment from Micro- The Road Ahead: soft Corp in the pipeline, while Snapdeal has the Since 2010, Flipkart has been following the backing of Softbank Group (33%), Nexus India policy of aggressive expansion, acquiring comCapital (10%), Kalaari Capital Fund (8%) and panies like the social book discovery platform Alibaba Group. (EBay Inc. also has undisclosed WeRead, electronics e-retailer LetsBuy, fashion holdings in both of the companies). etailers Jabong & Myntra, and mobile payments Snapdeal currently has around 3000 employees startup PhonePe. Such a series of aggressive in its e-commerce operations. On account of expansions has got people saying that Flipkart being cash-strapped, the firm has had to trim shops more than its customers do – something its workforce over the last few months signifi- which Flipkart would want to prove wrong by cantly, and it laid off around 600 people earlier deriving some synergies out of this acquisition. in 2017. Even so, Snapdeal co-founders have However, there already exists a significant overbeen maintaining that the details of the deal lap in the customer, as well as the seller base of are being chalked out by other investors in the the two companies. company, and the well-being of the employees While this acquisition would certainly give Flipis still their top-most priority. Making sure the kart the access to a long tail of merchants which workforces from the two companies are inte- would help it in expanding its product portfolio grated efficiently, and tackling other cultural and its geographical outreach across India, there integration issues would be one problem that are some other benefits in store for Flipkart as Flipkart would have to deal with post the acqui- well. The acquisition would bring to the table a sition. new set of investors for Flipkart. The backing of some of the most vaunted global investors like Recent Developments: SoftBank, coupled with other investments that In the last funding round which concluded in are in the pipeline for Flipkart might prepare it February 2016, Snapdeal was valued at around to take on Amazon – who continues to be Flip$6.5 billion. However, the company has appar- kart’s real rival in the industry. ently been struggling lately, and the estimated valuation has shrunk since then. The potential deal with Flipkart could see Snapdeal being valued at only around $1 billion – which shouldn’t be a problem for Flipkart considering its over $2 billion cash reserves aided by its last funding which happened recently. Now with the majority of the investors onboard, the sale process has finally started. Flipkart has reportedly started the process of due diligence,
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UBI: Cost Implications of the Government Guaranteed Income Scheme ShaleenJain The concept of basic income is to provide a basic income to all men, women, and children each month to fulfill their basic needs. This income would be non-taxable while income from other sources will be tax deductible. The guaranteed income will provide the poor a protection against shocks, a safety net against health, accidents, unemployment, income and other shocks. Universal basic income is an ancient concept restored by the government to refurbish their safety nets. Finland launched a pilot project to give some 100,000 citizens nearly $1,000 a month, and four cities in the Netherlands will commence their trial programs. The CanaÂŹdian province of Ontario is arranging to run a trial with a national test under consideration. Switzerland held a referendum on giving its citizens a basic income of $2,500
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a month and was rejected with only 23 percent votes in favor. Implementing UBI in India would require disassembling of the government welfare schemes mainly the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), Public Distribution System (PDS) and the Mid-day Meal Scheme. In India, the idea is especially appealing to the deprived because of the poor implementation of prevailing welfare programs, which chiefly take the form of subsidies paid to suppliers of grain, fertilizers and other vital items. By making everyone eligible, a universal basic income it reduces the administrative burden of identifying the receiver of the income and implementing various government schemes. And by paying money directly into bank accounts, it would further decrease the vast administrative machinery currently required
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NIVESHAK to supply the deprived with subsidized wheat, rice and other goods. The exclusion error will be zero as no poor will be left out whereas the inclusion error will be high as the rich will access the scheme. The UBI will also lead to improvement in financial inclusion as it will boost usage of bankaccounts, resulting in higher profits for banking correspondents (BC) and a phenomenal improvement in financial inclusion. Low income levels will have increased access to credit with the increase in income. UBI will also reduce the psychological burden of finding a basic living on a day-to-day basis. The beginning for UBI is the existing state of affairs of the government welfare schemes. There are about 950 central sector and centrally sponsored sub-schemes in India requiring an allocation of about 5 percent of the GDP. Fifty percent of these schemes were over 25 years old and majority of the central sector schemes had been ongoing for more than 15 years. The top 11 schemes account for around 50 % of the budget allocated. Highest allocation is of the Food Subsidy followed by Urea Subsidy, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) has the third highest allocation of budget. Other schemes include the Swachh Bharat Mission (SBM), the Sarva Shiksha Abhiyaan (SSA), the Pradhan Mantri Gram Sadak Yojana (PMGSY), the Mid Day Meal (MDM) scheme, and the Pradhan Mantri Awas Yojana (PMAY).
Fig. Centrally Funded and Central Sector Subschemes by Budget Allocation: (5.2% GDP 2016-17). Source: Economic Survey 2016-2017 Around one-third of the food grain of the
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Food Subsidy did not reach the intended recipients in 2012. Payments in rural areas are regularly delayed, leaving families in the lurch. Misallocation of resources is rampant and results in lower share of government resources to the poorest than their richer counterparts. Prime Minister Narendra Modi’s government has reached out to redress the issue identifying the key loopholes, and moving toward compensating the poor people with money paid directly into their bank accounts on their procurements of basic goods Universal basic income is also facing criticism. As UBI would require dismantling of the government schemes, many of these schemes have advantages beyond immediate poverty reduction and leave deep impact in the society. Student scholarships aid individuals impacting their employment; having an inter-generational these welfare schemes have fundamental mechanisms that ensure safety against market uncertainties. The PDS’ requirement of the state’s intervention in agricultural commodity markets has factually led to more stable prices along with secure income to farmers. Such market interventions have resulted in minimum support prices and regulate the market indirectly. The Mid-day Meal Scheme has resulted in higher enrolment of students in school due to availability of nutritious meal to these children. The NREGA along with providing work for
minimum days, also helps preserve locally planned public infrastructure, provide security against seasonality of work, and helps workers in negotiating rural labor-market wage. Implementing UBI will disturb a number of
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Fig. Reduction in leakage in the PDS Source: Economic Survey 2016-2017 Another point that goes against UBI is the Conspicuous spending as there is an apprehension that certain households especially the male members might spend their income on temptation goods mainly alcohol and tobacco. With the availability of this easy money, some even opt out of the labor market and stop working A moral hazard associated with this scheme claims that this minimum income will make people lazy and reduce their productivity, thus leading to a reduction in labor supply. These instances have been seen in NREGA also. Certain people who registered for NREGA had mustered just for attendance and since there is no work to be done they go home, thus paid for no or little work. Such schemes promoted dependency and idleness among a certain section of society and destroyed the work ethics. The prevalent gender inequality might lead the men to exercise control over the basic income received by their female partners. The cost of Universal Basic Income will affect our coffers significantly and therefor estimating its cost is crucial. If we assume the basic income that will bring the underprivileged above the
poverty line at INR 29 a day or INR 893 a month, it will amount to INR 10700 a person each year. This will cost the government approximately 9% of the GDP.
Even if the basic income is given to 75% of the population, excluding the top 25% of the population comprising of the rich, the total cost to the government will be 7% of the GDP. Moreover discontinuation of the current welfare programs is not an easy solution and will not free up much of the money spent on it. Culmination of the major subsidies for the poor—on food, fertilizer and fuel—will save 2.07% of GDP. Abolishing additional subsidies for the middle class including train travel, LPG and loans—might provide an additional 1.05% of GDP. Implementing UBI in practice is difficult as the government could discourage the basic income for people who possess cars, properties or bank balances above a certain size. It could lead to these people to opt out of the program. Also the fiscal cost of exit is very high and will be difficult for the government to re-establish welfare schemes in case of failure of UBI and wind it up A few suggestions: • An immediate and intuitively appealing solution to the fiscal costs of UBI is to make it a targeted basic income scheme, attempting to guarantee a basic income to only the poor and the deserving. Prepare a list of criteria for recognizing BPL households, and define non deserving group depending on the annual income, property owned etc. • The government if provides a basic amount of INR 1000 per year to these deserving section of the society, will lead to a cost of 1% GDP. If the government targets this section with the important welfare schemes mainly NREGA, food and urea subsidy while preventing the system leakage, misallocation of resources, exclusion error etc.
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general equilibrium like discontinuing the Food Subsidy will increase market prices of cereals while ceasing the NREGA will affect the rural labor wages. The implementation of these schemes has improved over the years with each scheme yielding positive result. Between 2004 and 2011 it is estimated that leakages in the PDS have reduced as depicted in the infographic. Similarly, the MGNREGS has improved significantly in the recent past. It has improved farmers’ wages and widened their opportunities. Aadhar Bridge payment, digitalized job cards, geotagged assets have improved the accountability and the transparency of this government scheme.
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CHANDA KOCHHAR – THE TURNAROUND TSARINA Anupam Kedia IIM Shillong With a firm faith in her heart and living by her own conviction that woman in any organisation can grow just by their legitimacy and not by uncommon supports and benefits because of their sex – Chanda Kochhar has recorded herself as one of the 50 most powerful women in business in the Fortune Global 2014 analysis. This Indian woman is incredibly famous for her corporate initiative and intense basic leadership aptitudes. She is the leading example of today’s ladies and her empowerment to improve the world as a place to live in. She has been known as the ‘Turnaround Tsarina’. As the MD of ICICI Bank, the country’s biggest private area banks, Chanda Kochhar has had to confront and defeat more than her fair share of difficulties. Breaking the purported ‘glass ceiling’ in a formerly male-dominated business is the slightest of her distinguishing strengths – her record as a business pioneer is exemplary by any standards.
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At the point when Kochhar joined ICICI in 1984, it was fundamentally known as Industrial Credit and Investment Corporation of India, and ICICI Bank had not yet been framed. The enterprise gave credits to organizations and as an administration student Kochhar needed to visit manufacturing plants and evaluate the advance value of potential customers. By 1993, she was placed accountable for corporate saving money, gathering new customer connections for ICICI and setting and accomplishing aspiring focuses inside the principal quarter of her spell. Her ability at obtaining and holding key customer base saw her ascent to GM by 1999, and also being given oversight and duty over ICICI’s top 200 customers. In 2000, she took control of ICICI’s retail banking business, building it into India’s leading retail financer over the next 5 years. By 2009, Kochhar effectively explored her way through a pitched progression fight to take
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board’s endorsement for the strategy without much inconvenience. The basic decision making process was democratic, and after the strategy was finalised, it was disclosed to each employee. Kochhar’s first enormous stride as CEO worked. The bank reported a 30 percent bounce in profit for the first quarter of 2011/12, and anticipated that would keep up its net interest margin - a key measure of productivity - at 2.6 percent for the year. When most loan specialists have reported a drop in intrigue edges, Kochhar’s script has
played out on sign. Executives, who were requesting their general spending increments of 30% (in accordance with ICICI’s development rate), protested. In any case, Kochhar figured that the swelling defaults on credit cards and consumer loans would get to be far more awful, and that the time had come to save “If we increase expenses 30%, we won’t have a bank to run,” cautioned Kochhar in a quiet yet firm tone. “ There’s no purpose continuing with this meeting. Come back when you freeze your budgets at exactly the same numbers as last year, to the rupee.”. When Lehman fizzled in late September of 2008, rumours flew that ICICI was jeopardized. In southern India, where clients had been scorched by the failure of consumer finance companies, thousands of depositors arranged before ICICI branches and ATMs to withdraw cash. Kochhar and her staff took care of the
emergency with the expertise, ICICI leased for all intents and purposes all the heavily clad trucks in India to ship money to branches that ran dry. Security monitors invested evenings sitting on enormous packs of rupees. ICICI opened branches for 24 hours to ensure contributors got their cash. In the event that an ATM ran out in one a player in a city, the neighbourhood staff would transport people to a completely stacked branch or ATM adjacent. An announcement consoling
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control at ICICI, without a moment to spare to manage the bank in recouping from its most genuine downturn. In the repercussions of the 2008 financial crisis, ICICI had scored record decreases in profits for 2008-2009. Kochhar could think back on her part as a component of the centre group who had pioneered a trail in corporate banking and after that constructed one of the pioneers in India’s private banking sector, when the segment itself was an obscure ware, to attract certainty in her capacity to turn the tide. With a solid confidence in taking test head on, she framed a core group and drafted a turnaround strategy worked around 4 Cs: cost, credit, current records and sparing records or CASA and capital. This was an intense move from the current technique of fuelling ICICI’s development with incomes from retail credits, a region that had seen the most noteworthy misfortunes in the agitated financial times. Inside a couple of months of taking up the top responsibility, she figured out how to get the
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NIVESHAK depositors from the minister of finance aided extraordinarily. The vast majority of all, it was Kochhar’s approach of serenely guaranteeing clients that ICICI had the cash, and would do everything conceivable to help them get it in the event that they wished, that ended the keep running on the bank in only a couple of misleading days. Kochhar accomplished a radical reversal in the bank’s strategy by conditioning down the prior abundance (30-40 percent annual growth in credit portfolio with consumer loans making up 66% of its aggregate book before she assumed control) and solid picture (bank representatives overlooked that they must be unassuming and listen to clients). In the primary period of her stewardship, ICICI Bank turned into a wary element which didn’t sit on its sense of self. So risk was out and productivity was in, regardless of the possibility that it implied diminishment in the balance sheet estimate. As she started her second five-year term, Kochhar discussed development once more. “We are not just back to growth; we are now actually in a position to grow 2-4 per cent higher than the industry without diluting profitability or picking up wrong credit risks,” Kochhar says. Her methodology is to extend not by going out on a limb, but rather by building a base of faithful clients and evading the helter skelter promotion of credit card and individual credits to newcomers that so
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endangered the bank only five years prior. As manager of the nation’s biggest private-sector lender, Kochhar needs to fight with the present most despicable aspect of India’s banking framework: bad loans. While the bank reported a twofold digit increment in consolidated assets to $135 billion in 2015, net income didn’t ascend as much, because of huge provisions for bad debts. In January it propelled its Express Home Loan service offering mortgages online with approval in 8 hours. Mobile Banking, among Kochhar’s pet ventures, represents one-fifth of all transactions by retail clients, worth an expected $12 billion in the year finished March 2016. In an offer to hold female staff, she propelled iWork@home, which permits representatives to telecommute for a year. What’s more, officials can take youngsters less than 3 years old on business trips, with a parental figure, at the bank’s cost. So going ahead, the three supports of her system will be growth, profitability and risk management. As such, it will be trained development that has included a fifth “C” (credit growth) to the bank’s notable 4C strategy. The development, she says, will be broadened across retail, housing, car loans, new projects, working capital loans, etc. Kochhar knows she is on a sound balance when she discusses higher development than the business. Thus we need to wait and watch how she exploits her prowess into this industry.
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SiddharthJain IIM Bangalore Introduction The output of a free market economy is given by the equation; Y= C+I+G+NX Where, Y= output/GDP, C= Consumption, I= Private Investment, G= Government spending (Public Investment) and Nx= Exports – Imports In the Indian context, we are predominantly an internally demand driven economy i.e. a consumption led economy, which shielded us during the time of global slowdown. However, for a sustainable long term growth in a developing economy like India, all the determinants of GDP should contribute. Investment has been an area of concern for India since the global recession of 2008. Though public investment has shown some uptick, the private investment hasn’t shown any signs of recovery. As per the India Ratings Report, for FY15, private sector capex (Top
500 asset owning companies) has fallen to a five-year low in the range of INR 2.76 trillion to INR 2.8 trillion. In FY 16, it is expected to show marginal recovery in the range of INR 2.8 trillion to INR 3.0 trillion1. As per the recently released data on IIP, factory output has contracted for two consecutive months i.e. IIP shrank by 3.4 % and 1.3 % in November and December respectively. Capital goods production, an indicator of private investment, has also contracted by 19.7 % in December. Moreover, the target growth rate of 7.5 % in FY 15 is also based on the expectation of manufacturing output (constitutes 75 % of IIP) growth of 9.5 %. In December 2015, even manufacturing sector contracted 2.4 %. Hence, it is evident that private sector investment is not showing any signs of revival. Crowding out or crowding in According to one school of thought, if the government expenditure increases and it
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results in the government running a fiscal deficit then the government borrowing will increase. As the resources are limited, the private sector will have fewer resources to finance their investment hence, private investment will reduce. This can also be explained through the ISLM curve. When government expenditure increases, IS curve shifts right and hence the interest rate rises. As the interest rate rises, the cost of borrowing increases and hence private investment falls i.e. private investment is crowded out. According to another school of thought, public investment increases productivity and stimulates demand. As public infrastructure acts as an input for all economic sectors, any public investment resulting in development of public infrastructure will eventually result in higher return on private capital. So, in the long run, at an aggregate level, a net crowding in effect can be observed, as the marginal productivity of private capital will increase. In India, crowding in effect is observed. Barriers in the revival Private investment will be the primary engine of long term growth in India. In the short run, public investment will help in crowding in private investment. However, in the long run, given the country’s weak fiscal position, public investment will not be sufficient. Hence, private corporate sector investment will be required to sustain the recovery. Moreover,
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sustained improvement in private corporate sector investment will act as an indicator of declining risk in the country, thereby attracting foreign investors such as FDI. Barriers in the revival in private sector 1) Weak corporate balance sheet 2) Rising NPA’s of bank 3) Deficiency of existing PPP model 4) Underutilization of capacity 5) Supply side bottlenecks 6) Subdued External Demand 7) Poor ranking on Ease of doing Business 8) Falling commodity prices Rising stalled projects is a cause of grave concern. The rate of rise in stalled projects is consistent with the fall in the private capital expenditure. In December 2015, the stock of stalled projects was INR 10.7 trillion. Moreover, the propensity of private projects to get stuck is higher than the government projects. The ratio of stalled projects to those under implementation for private sector has risen from 14.52% in Sep 2013 to 19.42% in Dec 2015. The same ratio has remained almost constant for government projects (4.57% in Sep 2013 to 4.82% in Dec 2015). Together, Power and Manufacturing sector accounts for two third of the stalled projects. Recommendations Relook at PPP The growth which India is currently experiencing can be termed as a credit less recovery. To resolve the problem of NPA’s, we need to do a root cause analysis. As discussed
NIVESHAK crowding in of private investment as discussed earlier. Change in mindset In India, it is very unfortunate that due to obstructionist and opportunistic politics, the policies formulated by the government are labeled as either pro corporate or pro agriculture. We need to get out of this silo mentality and look at the picture holistically. If corporate houses benefit from a policy, it in turn generates employment opportunities, which benefits the unemployed people from rural background. On the other hand, if the policies are aimed at improving the standard of living then the rural consumption increases. This increase in consumption in turn generates demand for corporate houses to leverage. In a nutshell, a change in outlook will help us realize that there exists a symbiotic relationship between corporate houses and rural agriculture, unlike the zero-sum game which is portrayed for selfish political interest.
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earlier, stalling of projects has resulted in the rising bad debts. The reason for the rise in the stalled projects is the delay in getting clearances. The current PPP model also suffers from this problem of delay in getting the clearances. So, the government needs to have a relook at the present PPP model. One of the viable solutions could be to extend the plug and play model, used for UMPP in the power sector, to all infrastructure projects. In the plug and play model, government provides all the clearances and the essential linkages required for the setting up of the project. This model expedites the execution of the project and saves the project from getting stalled. Shift spending from public consumption to public investment Government can channelize the savings from the oil subsidy, because falling crude oil prices, towards public investment. Government should also shift its spending from public consumption to public investment. This can be done in the following ways: a) Rationalizing of subsidies b) Directing proceeds from disinvestment/ sale of government assets towards public investment. This public investment in turn will result in
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Mr. Somak Ghosh
Managing Partner Contrarian Capital India Partners
1. What is your outlook on the future of VC and PE investment in India? As far as I see it is still in its nascent stage. If you take a look at the total quantum of investments in the PE and VC funds in India, still about 80% of the investments come from Foreign investors. Hence, even though the PE and VC investments started picking up from the year 2002-03 in India, I would still call it a nascent stage. So, I expect a lot maturation in this space in the future. 2. What disruption are you expecting with digitization trend? Digitization is going to touch every sphere of our life. The way I see it, it is going to be both exciting as well scary. To quote an example, let me remind you of the French writer Jules Varne who wrote the book ‘From Earth to the Moon’ in the late 19th century, when nobody had even thought about flying, let alone talk about Rockets. So that’s the kind of disruption I am expecting with digitization. Also, when I talk about digitization, it includes development that is happening in the AI and ML space as well. The kind of disruption happening in the AIML space is unprecedented. For instance, the function of a radiologist is to analyse the medical images (x-rays, MRIs etc.) and diagnose the patience at his own discretion. But in my opinion, it is humanly impossible to match the analysis done by an AI driven machine which has been fed with 50 million of the similar images for learning. But of course, it has a downside as well. With the advancement of technology, though the standards of living will definitely increase in
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terms of good health, comfort etc. but more and more people will find it hard to get jobs. And even those who will be working will have to enhance their skills consistently to compete with machines. 3. What role do you think Govt. has to play in the startup space? In my opinion which I would say is politically incorrect, the role of the government should be to make the environment ‘Business Efficient’. I am not saying ‘Business Friendly’ because that would mean being inclined in the favour of the businesses. But it surely has to make the environment Business efficient. For example, earlier the definition of a startup used to be a business entity which was not more than three years old. In 2015, they extended the limit to five years of age to be qualified as a startup. Then again recently in 2017, they extended it further to seven years. For me, all these are just numbers. Because, the focus of the bureaucrats should not be to define and ascertain numbers. They should use their thinking to make the development and implementation of policies better and more efficient. Recently a founder of a startup got arrested in Chennai because of non-payment of dues. While saving people from a cheque bounce is a different case, it is absolutely wrong to put one of the brightest minds of the country in jail that too while he was still in trauma of failure of his startup. Because, it is well known fact that 90% of the startups fail anyway. Hence, instead of dwelling in bureaucracy, the government’s focus should be more on making the business environment efficient. It should
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4. Which sector do you think is most attractive with respect to the initiatives take by NDA government and how long do you think it’ll sustain? As far as government initiatives are concerned, what I believe is, most of the times these are false promises. But yes, the incumbent government has certainly taken up and/or built up on some good initiatives taken by the previous government. GST is one of them. The discussion on implementation of GST first started in as early as 2006. So, it really has taken good 11-12 years to come up in the shape that it is today. But still I would say, with the present 5, 12, 18 and 28 percentage slabs, the government is still utilizing only 20% of its potential. Another
important initiative taken by government is Aadhar i.e. establishing an identity of its citizens in the global economy. Linking subsidies, pension fund schemes with Aadhar will certainly help India in the long run. But if I talk about the impact of these initiatives on different sectors specifically in the startup space, again I come back to the same point i.e. Govt. should try to build an efficient business environment instead of dwelling in other space. For example, BHIM initiative taken by the Govt. is very good as a concept. However, if it works out well, it would hurt all other app based payment startups badly. I think all of it will change as more and more young thought leaders will join the bureaucracy. India will see a true transformation when youngsters of ‘Go Go 90s’ will assume the leadership roles in the bureaucracy in the place of ‘Laid Back 70s’.
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Ma’am, we have heard the term ‘Winner’s Curse’ quite a few times. Could you explain what it means and how it works in the investing world? The Winner’s curse is a concept from game theory. It states that in common value auctions, where there is incomplete information, emotions or any other number of factors regarding the item being auctioned, the winner will tend to overpay. The winning bid here exceeds the intrinsic value of the auctioned asset. The actual value is less than what is anticipated, so the bidder may have won the auction but will still be worse off in absolute terms. According to Richard Thaler’s 1988 article on winner’s curse, there are two primary factors that undermine the rational bidding process: the number of bidders and the aggressiveness of bidding. The more bidders involved in the process, the more aggressively you have to bid in order to dissuade others. Unfortunately, increasing your aggressiveness will also increase the likelihood of your winning bid exceeding the asset value. Originally, the term was coined as a result of companies bidding for offshore oil drilling rights in the Gulf of Mexico. In the investing world, the term often applies to initial public offerings. You said the phenomena applies to IPO. Could you throw some light on that as well? When a company goes for IPO and gets listed on a stock exchange, no market price for the stock is available. Thus, the investors need to estimate its market value. The uninformed investors will most likely bid more than the fair value. However, the smart investors will not subscribe at such high prices. As a result, the uninformed investors will get most of the stock, at prices much higher than the actual value of the stock.
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Winner’s Curse Pratibha Sapra IIM Shillong
That sounds like an interesting phenomena. Have we seen any popular examples of this in the past? Yes, there have been many. One of the popular ones is Microsoft’s acquisition of Yammer, a social network service for businesses. Back then, Microsoft was on a spending spree and had bought Skype for $8.5 billion in 2011. As Microsoft approached Yammer in early 2012, the target started working on maximizing its value to Microsoft, instead of passively waiting to be bought. In late Feb 2012, it added $85 million in VC financing, and in April 2012, it acquired oneDrum, a British start-up, whose applications could prove useful in Microsoft products. During its latest financial round, Yammer was appraised at a market value of $600 million. Microsoft paid twice as much. So how to avoid the winner’s curse in negotiation scenarios? What points should be kept in mind? To avoid this, the buyers must perform comprehensive due diligence and establish walk-away prices that they are willing to stick to in the heat of an auction process. When bidding, the bids should be corrected for the possibility that they may be higher than the actual value of the item. That being said, in general, bidders need not fear the winner’s curse if they expect to derive special benefits from a prized asset. To avoid the winner’s curse in negotiations, ask yourself a simple question: Would you feel particularly comfortable making a particular offer if you knew that all other bidders value the asset less than you did? If the answer is yes, proceed. If the answer is no, shade your bid downward.
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