Featuring articles on Commodity Futures, Unemployment, REITs and much more
Citius, Altius, Fortius
Dear Niveshaks,
We hope you had an excellent festive season. We did. Diwali is meant to a season where we do away with the old and usher in the new. The season for make way, to clear the unwanted and preserve the ones worth keeping. You need to prune a plant to make sure the plant stays healthy. With that very
spirit, we decided to take a look at long and hard ourselves and change for the better. We aspire to be the best of the best and will leave no stone unturned. We decided to completely revamp the entire finance club and as a part the magazine.
to make it more reader friendly and improve on the core content. We start with the cover page and have designed a more aesthetically pleasing cover page. A book is, after all, far too often judged by its cover. The way each story is presented has been We have completely revamped and we have revamped the magazine started to include more
intuitive and better designed graphics. The content has changed to take on more analytical outlook than remain as a mere journalistic exercise. The key content of each story has been separated for easy readership. We aren’t done yet. The design of various individual pieces would be improved over the coming months. The NIF portfolio, for example, will be redesigned to have more pertinent and insightful graphics coinciding with the fund itself going live. On the larger picture, we have also redesigned the club logo to represent more of what we are and what we do. The simple dual tone nature fits in more with our personality, and the line chart our ambitions. Always looking up and ahead we promise you, our readers, to always give you our best. You may hold us to it. This month’s issue has the increasing relevant NBFC as the cover story, and looks at how they could uplift millions of poor Indians. The article of the month is an insightful article about the commodities market. The new and revamped classroom section looks at the potential how RIETs could alter the now beleaguered Indian real estate sector. We hope you like our new magazine. We have tried many things this time around which you will, hopefully, like. Do let us know what you think of the new look of Niveshak, and help is in our endeavor for achieving the best, always. Stay invested, Team Niveshak
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 Aayushi Garg Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta Samprit Shah Sheshav Dosi Sriya Gupta
All images, design and artwork are copyright of IIM Shillong Finance Club
©
Finance Club Indian Institute of Management Shillong Disclaimer: The views presented are the opinion/ work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.
Contents NIVESHAK: OCTOBER 2017
5
7
The Month That Was
Niveshak Investment Fund
13
18
Cover Story: NBFC - Lifeline of Economy
FinGyaan: Indian Unemplyement Scenario
23
24
Juxtapose: How Deflation Was Dealt in Two countires
Clasroom: REITs
9
Article of The Month: Commodities Futures Market
22
FinView: Mr. Ninad Karpe
THE MONTH THAT WAS
THE MONTH THAT WAS RBI does not change key interest rates; SLR reduced by 50 bps The Monetary Policy Committee (MPC) maintained the status quo of the repo rate at 6% and the reverse repo rate at 5.75% after the fourth bi-monthly monetary policy meeting. The MPC stood on the side of inflation control in the trade-off between growth and inflation. They projected the inflation to be at 4.2-4.6% in the second half of the current year. The decision to keep the rates unchanged shows an inclination towards near-term outlook. The Niveshak team feels that the effects of demonetisation and GST implementation are reducing at a faster rate. The growth rate currently is near its bottom, and we could see a recovery in the economy going ahead. The decision to recapitalize the banks is a welcome to move in this direction. The borrowings from the market should increase in the coming quarter with the other economic reforms coming into play. Additionally, the MPC decided to cut Statutory Liquidity Ratio (SLR) by 50 basis points to 19.5% which came into effect on October 14th. This is a step towards transitioning from SLR regime to Liquidity Coverage Ratio (LCR). Rs. 2.11 trillion PSU bank recapitalisation plan announced by govt The finance ministry, Arun Jaitley announced a Rs. 2.11 trillion recapitalisation plan for PSU banks who are weighed down by bad loans and are seeking to stimulate the credit flow to spur private investment. Out of the total commitment announced, Rs. 1.35 trillion will be brought in from the sale of recapitalisation bonds and the remaining Rs. 76,000 crores will come through an allocation in the budgetary and raising funds 6 NIVESHAK | OCT 2017
from the markets. The recapitalisation plan marks a sharp increase from the current fiscal allocation. Through the Indradhanush plan, the government had announced to allocate Rs. 20,000 crores towards recapitalisation of banks over the current and next fiscal years. We feel that this is a welcome move towards reviving the banking system of the country and recovering the economy that grew at just 5.7 percent in the quarter ending June which is the slowest pace in three years. The bank recapitalisation plan would ensure that good borrower get adequate funding and defaults done by others would not affect them. Economic Advisory Council held its first meeting, identified ten agendas The ambitious Prime Minister's Economic Advisory Council (PMEAC) held its first meeting this month and took up ten issues that the council will initially work upon. The areas that are chosen include economic growth, job creation, informal sector and integration, fiscal framework, monetary policy, public expenditure, institutions of economic governance, agriculture and animal husbandry, patterns of consumption and production, and social sector. Additionally, the PMEAC will also focus on the budget preparation in the next few months. Bibek Debroy, Chairperson, PMEAC said, "Whatever we do will be in collaboration and consultation with existing bodies." The council is a technical body and not a political body. We believe that as the economy is undergoing significant transformation and the council, being an autonomous body, will be able to give independent, technical advice to the government like concrete policy issues which would help in prove significant in both short and long-term. Basic excise duty on diesel, petrol slashed by Rs. 2 per litre The government slashed the excise duty on diesel and petrol by Rs. 2 per litre. The new rates came into effect from midnight of 3rd October. The move comes when the retail price of petrol has crossed Rs. 70 in most states and the price of diesel is close to Rs. 60. We welcome this decision, and the oil prices are continuously increasing
THE MONTH THAT WAS in the country even though the prices in the international market have slumped in the past few years and the recent increase in prices in the international market would further create problems in the country. "Revenue loss on account of these reductions in excise duty is about Rs. 26,000 crores in full year and Rs. 13,000 crores in remaining part of Current FY. This decision has also been taken by the Government of India to protect the interest of common man," the finance ministry said. Communist Party approves the second term for Chinese President Xi Jinping Sixty-four-year-old Jinping Xi’s second term was endorsed by the communist party at the end of its once-in-a-five-year week-long Conference. There was no surprise by the decision and was on expected lines. The conference was attended by over 2,350 delegates at the Great Hall of the People, the seat of power of the China’s Communist leadership. The party has also elevated Xi's status by inserting his name and dogma into the constitution of the party alongside the past leaders - Mao Zedong and Deng Xiaoping, strengthening his status amongst the most powerful men who had headed the TH country. "In this new context, we must get a new look and more importantly, make new accomplishments," he said while introducing the new seven-strong Politburo Standing Committee, five of whose members are newly appointed. Xi reiterates two of the nation’s long-standing objectives. First, China is in the last stage of elevating the nation to a “moderately prosperous society” by 2020. Second, Xi reaffirmed China’s commitment to becoming a strong, modern socialist country by the 100th anniversary of the establishment of the People’s Republic of China in 2049.
1 billion, the cab-aggregator spokesperson said in a statement. The company will utilize the money for making strategic investments in technology and supply. The company also plans to invest profoundly in artificial intelligence and machine learning capabilities. It also has plans to double down on the penetration level, intending to go much deeper into the Indian market. Ola is present currently in 110 cities in India with over 14 categories such as auto-rickshaws and bikes, and vehicles equipped with connected car platform for ridesharing, Ola Play. The company also runs solutions such as Ola Share and Multimodal Electric Vehicles on its platform. Investors’ interest in the company has increased at a time when its rival company, Uber, is facing internal challenges. We believe that such large-scale funding boosts the sentiments of the young entrepreneurs towards working on creating unique business solutions and would help in growing indigenous talent. HyperCity acquired by Future Retail Kishore Biyani-led Future Retail Limited announced the Rs. 655 crore acquisition of HyperCity Retail India Limited owned by K Raheja Corp. The stockand-cash acquisition will be completed in the next three to five months. Future Retail owns store brands such as Big Bazaar, Easyday, Nilgiris and Heritage and online furniture store Fabfurnish.com. On the other hand, HyperCity Retail, a subsidiary of Shoppers Stop Limited, operates HyperCity as large format stores. As of 31st March 2017, HyperCity Retail chain had a net worth of Rs. 11.45 crores and annual sales of Rs. 1,191 crores. The data from the company’s annual report show that the retail chain made losses worth Rs. 84.73 crores and had debt worth nearly Rs. 400 crores on its book. Future Retail has a much more significant presence in India in the retail business than Shoppers Stop. With this acquisition, they should be able to get higher efficiencies of scale and turn the loss-making company profitable.
INDIA RANKED 100 IN EASE OF DOING BUSINESS
Ola raises $1.1bn from Tencent, Softbank Indian cab aggregator Ola raised USD 1.1 billion in a funding round led by Tencent with participation from the Japanese firm Softbank and new US-based undisclosed investors. The series was however not closed, and the company is expected to raise additional USD
IIM Shillong | 7
NIF PERFORMACE EVALUATION October Month's Performance of NIF
As onAs Octoberber 27,2017 2017 on 31th July
215
Performance of Niveshak Investment Fund since Inception
205
106
195
105
185
104
175
103 102
165
101
155
100
145
99
135
98
125
97
115 105 95 Scaled Sensex
Scaled Portfolio Sensex Scaled values
Total Investment Value : 10,00,000 Current Portfolio Value : 20,13,298 Change in Portfolio Value : 100.13% Change in Sensex : 61.75%
Portfolio Scaled Values Value Scaled to 100
Risk Measures: Standard Deviation NIF: 23.30 Standard Deviation Sensex: 12.48 Sharpe Ratio : 4.18 (Sensex : 4.63) Cash Remaining: 96,190
Comments on NIF’s Performance & Way Ahead: The S&P BSE benchmark index had a good rally in the month of October, where it created new record highs. With the Sensex gaining more than 5%, the NIF also saw rise of more than 4% and for the first time the overall returns exceeded 100%. For NIF, the maximum gain was contributed by chemical sector stocks which returned more than 20% for this month. This rally in chemical sector can be attributed to macroeconomic factors as well as the weather forecast of the upcoming year. For NIF, there were no major losses considering the rally in the benchmark indices. The major boost for the market was provided by the governments decision to infuse Rs.2.11Lakh crore into the PSU banks. This decision resulted in more than 4% increase in the Banking Index on a single day and PNB recorded rise of whopping 46% in a single session. With governments decision to increase its spending with the announcement of 7 Lakh crore worth of highways and 9 lakh crore worth of railway projects, the long term macro factors are in the favor of robust growth. For market positions, NIF team recommends a hold position. Considering the current rally we expect a correction so buying in this region could be risky, but going into the month of November, we expect market to hold current levels.
NIVESHAK INVESTMENT FUND INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE
NIF Sectoral Weights
Monthly Performance Portfolio Weight
10.16%
5.39%
15.17%
3.78%
7.05% 9.72%
5.89%
28.00%
12.99%
1.85%
Auto
Infrastructure
Chemical
Media
Financial Services
FMCG
Pharma
Telecommunication
Misc
Services
TOP GAINERS FOR THE MONTH • Gujarat Fluorochemicals (+28.15%) • NOCIL (+27.49%) • Thirumalai Chemicals (+23.16%) TOP LOSERS FOR THE MONTH • NELCO(-4.10%) • Godrej Consumers(-3.45%) • ADF Foods(-2.76%)
ARTICLE OF THE MONTH
COMMODITIES FUTURES MARKET
Speculation or Financialisation? -Shreyans Jain, IIM Lucknow INTRODUCTION
The government, during 1960s, envisaged the Agricultural Produce Marketing (Regulation) Act (APMRA) in various states for the development of agricultural marketing in the country. The primary objective then, was to facilitate efficient storage and movement of agricultural commodities by removing systemic bottlenecks and establish a sound framework to reduce uncertainty of the markets. Later, to enhance institutional lending to the agricultural marketing sector and to improve price-risk management, the prohibition on futures trading in agricultural commodities was removed. The National Agricultural Policy announced in the year 2000 recognised “the role of the futures markets as one that would contribute to price discovery and would help in risk management by reducing volatility in the prices.” The use of technology enabled trading platforms as opposed to the open outcry method led to an unprecedented inflow of investment capital and institutional funds in the country . This not only provided buoyancy to the volume of commodities traded on exchanges but also enhanced liquidity in the market. However, the recent price movements of agricultural commodities in the futures markets indicate the emergence of a paradoxical trading situation where excessive speculation leads to more price uncertainty. The objective of this article is to analyse the effect of real supply and demand vis-à-vis financialisation and presence of speculators on price determination.
THEORETICAL UNDERPINNING OF FINANCIALISATION
The indicators used to understand the buying and selling pressure underlying a commodity and hence the associated financialisation 10 NIVESHAK | OCT 2017
trends are – future prices, volume and open interest. They serve as a secondary confirmation of price action resulting from the interaction between buyers and sellers on the floor. Open interest is a measure of liquidity in the futures market and may be defined as the total number of outstanding contracts that are held by market participants at the end of each day. For instance, open interest will increase by one contract if a new buyer and a new seller initiate a new position. It will decline by one contract if an old buyer and an old seller are closing an existing contract. Open interest remains unchanged if an old trader passes off his position to a new trader. Volume is a measure of the intensity behind the price trend and, in reference to futures market, may be defined as the total trading activity or contracts changing hands in in the commodity market on a single trading day. The knowledge of open interest is essential for anticipating market movements. Increasing open interest indicates the flow of new money into the marketplace that sustains the present trend. Declining open interest means that the market is undergoing liquidation, which implies an end
RECENT PRICE MOVEMENTS INDICATE PARADOXICAL TRADING of the prevailing price trend . The following for combinations of price-volume-open interest relationship can, therefore, be used to identify the bullish or bearish trend of the market. In the first scenario, if all three indicators follow an upward trajectory, the market exhibits bullish sentiments with traders buying at higher prices. In the second case, a fall in prices but increase in volume and open interest indicates a bearish market where the market is driven lower by higher prices. In the third situation, rising prices accompanied by falling volume and minority interest indicate
ARTICLE OF THE MONTH a weakening market. Lastly, a declining trend in all three indicators indicates a possible bottoming out with traders selling at lower prices. It is, however, difficult to differentiate speculation from financialisation merely on the basis of price, volume and open interest as the correlation between open interest and spot prices do not necessarily amount to causation . The future price of a commodity also depends on the marginal benefit of holding the commodity in reserve that accrues directly to its owner.
INDIA HAS TODAY BECOME THE 2ND LARGEST WHEAT PRODUCING COUNTRY IN THE WORLD This may also be termed as convenience yield or “the flow of services that accrues to an owner of the physical commodity but not to an owner of a contract for future delivery of the commodity. The advantage of holding physical stocks is on account of tight supply or future profit expectations due to growing demand”. Mathematically, future prices would be higher than the spot prices if carrying interest and storage costs together exceed the convenience yield. The reverse is true if the inventory levels are low. The former is also referred to as “contango” and a premium equal to the difference between the cost of storage and convenience yield has to be advanced to the speculators for bearing the risk. The other condition is called “backwardation” and speculators are compensated with the risk-bearing services in the form of discount. In other words, the difference between spot and future prices reflect risk premium in case of financialisation while speculation impacts the level of spot prices.
EMPIRICAL EVIDENCE
To investigate financialisation trends in agricultural commodities in Indian futures markets, data has been collected for Wheat from the National Commodity and Derivatives Exchange. The daily spot and future prices, volumes traded and open interest have been aggregated for the duration of one year (June 01, 2016 to June 30, 2017). Wheat is traded in both the spot market and the futures market. Since it is a rabi crop , it is sown around midNovember, after the monsoon rains are over, and harvesting begins in the month of AprilMay. Through cross-pollination of expertise and innovations and thereafter synergy during implementation of the programs conceived under the Green Revolution, Indian has today become the second largest wheat producing country in the world. Exhibit 1 provides the annual data for domestic wheat production, annual wheat imports, exports and area under cultivation for four consecutive years in India. The table shows that domestic wheat production declined sharply by about 9.72 per cent from 2013-14 to 2014-15 and the annual exports nearly halved. However, the production increased by 6.66 per cent to 92.29 million metric tonnes in 2015-16 and further to 98.38 million metric tonnes in 2016-17. The decline in exports and corresponding increase in imports can be attributed partially to the implementation of the National Food Security Act which aims to provide subsidised food grains to approximately 2/3rd of India’s population . As can be seen from the Exhibit, the volume traded increased significantly in the first half of the financial year as the harvested crop arrived in market for sale. A similar trend can be observed in the months of October-December 2016 as the government scrapped the 10 per cent duty on wheat amid rising domestic prices and concerns of a dip in buffer stocks following two consecutive drought years. Traders anticipated a pickup in imports of wheat and
IIM Shillong | 11
ARTICLE OF THE MONTH global prices to rise by 3-5 per cent. As shown above, the imports increased to 3.03 million metric tonnes from 0.51 million metric tonnes a year before. The increase in volume of trade in April-June 2017 quarter was again due to the fresh arrival of wheat in the market and injecting of liquidity into the market post-demonetisation. From Exhibit 3, it can be observed that the future price of wheat constantly remained below its spot price for most part of the year. This represents “backwardation”. In the month of July 2016, the future price exceeded the spot price leading to “contango”. This can
be attributed to the increasing global wheat prices which prompted market participants who wished to store wheat to bet high on future price and low on the spot price. In September 2016, SEBI proposed allowing options contracts in commodity trading and strengthened warehousing norms by stipulating base case networth criteria for warehouse service providers and mandating stiff penalties for bad delivery. This was in addition to the risk management norms like waterfall mechanism
12 NIVESHAK | OCT 2017
in exchanges to guard against risk of settlement default introduced in the year 2015 at the time of merger of Forwards Market Commission with SEBI. All these factors added to storage cost and pronounced the risk element associated with the commodity stored, leading to drop in future price of wheat. The spot prices increased sharply from November 2016 to January 2017 because it was felt that farmers were unable to arrange sufficient cash for cultivation operations, following the demonetisation of Rs 500 and Rs 1,000 currency notes. Exhibit 4 provides an analysis for the fluctuation in open interest and depicts the declining flow of fresh funds into the wheat futures beyond the month of July 2016 up till March 2017. Beyond this point, a linear increase in liquidity or outflow of funds can be observed with both future and spot price of wheat nearly converging in the month of April. The declining open interest over a prolonged period of time is a clear indication of backwardation and vindicates financialisation. Exhibit 4: Open Interest for Wheat in India from June 2016 to June 2017
CONCLUSION In the above mentioned analysis, backwardation observed in case of wheat confirms the fact that prices of certain agricultural commodities in futures market are not necessarily affected by the fundamentals of demand and supply but also because of financialisation. The declining open interest clearly indicates that the market is undergoing liquidation, which implies an end of the prevailing price trend.
IIM Shillong | 13
COVER STORY
NBFC
THE LIFELINE OF ECONOMY
Kofi Anan in his famous quote said “Microfinance backed by NBFC is an idea whose time has come” & as Victor Hugo says “There is no force more powerful than the one whose time has come”. Then, who are we to question the question the meteoric rise of NBFCs.
14 NIVESHAK | OCT 2017
COVER STORY
Definitely,
accessibility to credit is a necessity of a developing economy like India & if at all we get a scenario when banks fall back on their promise of credit to all; they will be the NBFCs who will have to come to fore & ensure that none is deprived of the resources to help themselves grow. NBFC entrench deep into the Indian society, they reach to the remotest corners of the country & through superior understanding of credit position of their clients they are able to service them well using their diverse offerings. The sector has diverse offerings like personal loans, housing loans, gold loans, insurance, vehicle loans & farm equipment loans. The idea of backing up their domain knowledge with carefully crafted data analytic techniques have played a pivotal role in catapulting their growth. In this story, let us try to decipher as to what led to credit underpinning in India & how the NBFCs are becoming the major agents of growth. Credit Underpinning in Indian Economy (Reasons & Effects):
The
US financial crisis of 2008 marked a new era of financial regulation across the world. The so called “resilience” of global financial systems was exposed. To prevent such a debacle from occurring again, major financial corporations organized themselves to
release a slew of new reforms. The measures included reinforcement & designing of new financial stress tests & drafting the latest edition of BASEL norms; the BASEL III. The basis of the financial stress test emerges from the idea of preparing a strong warchest to ensure a robust economy. The financial stress tests are a measure of how much shock the monetary institutions of the economy can withstand. Ideally, a shock of 2 to 3 Std. Deviation of historical values is given to test the resilience of the sector. The Reserve bank of India in it’s annual stability report analyses the performance of banks based on certain parameters & than issues guidelines on the Capital adequacy ratios (Tier I capital requirements) & liquidity ratios to be maintained by banks to withstand systemic risk of 3 Std. deviation. But the question remains that as we prepare for a brutal pyrrhic war are we under-utilizing the current resources of banks? If we explore the results of stress tests a severe shock of 3 SD will force only 1 bank to fall short of it’s CRAR targets of 5.5%, rest all the banks will have a minimum CRAR of 7.5%. Why is than RBI so hawkish & pushing for maintaining a high CRAR by banks.
If we examine the BASEL III norms the total
Capital a bank has to maintain as a percentage
IIM Shillong | 15
COVER STORY of it’s RWA’s turns out to be 11.5%. Along, with this there is the requirement of Cash Reserve Ratio (CRR) & a towering 20% SLR (statutory Liquid Ratio) requirements. This leads to severe under-utilization of funds by a bank. Out of a deposit corpus of Rs.100 only Rs.71 can be disbursed by the bank in terms of loan liabilities. This has an impact on net interest income of banks. Eventually, a bank invests a part of Rs.71 in other securities to generate higher returns rather lending to private corporates. The effect can be reflected in high Other Operating Income(OOI) of the banks. A binding SLR removes all substitutability between bank assets, forcing the banks to lend to private sector & invest in government bonds in fixed proportions & that can reduce the transmission of reduction in interest rates to the customers effectively. The resolution of the twin balance sheet issue using legal recourse has made bank officials more cautious about the loans they sanction, eventually forcing them to become more & more risk averse. “However, nothing can replace credit discipline and appreciation of the sanctity of commercial contracts in order to ensure a robust financial system. Thus additional focus has to be on strengthening the internal governance framework of financial entities and observance of market discipline. This will have a salubrious impact on financial intermediation whereby assumption and sharing of risks is based on risk capacity and not on herd instinct or accounting and regulatory dispensations” N. S. Vishwanathan, Deputy Governor RBI. A stance like this is likely to make bankers more hawkish than doves. This ultimately transfers the risk to NBFC’s.
16 NIVESHAK | OCT 2017
Rise of NBFC’s & economic boom:
Non
Banking Financial Corporations have become the major credit drivers in the last financial year. They have increased their total lending, registered an improved NPA percentage & increased their funding from banks. If we observe the data for the flow of credit to commercial sector the contribution of bank declined significantly over the previous year. The flow which was around 50 percent in 2015-16 declined to 38 percent in 201617. Thanks to the NBFCs & the mutual funds that overall funding to the commercial sector did not see a major dip. The share of above two entities in funding corporate debt rose to 24.3 percent in 2016-17.
The aggregate balance sheet size of NBFC
sector expanded by 14.5 % during 2016-17 as compared to 15.5 % during 2015-16. Loans advances increased by 16.4 percent. At the same time there has been significant decrease in the gross NPA’s of NBFC’s from 4.9 percent to 4.4 percent. The CRAR also registered a decline from 23.1 percent to 22.0 percent, but still their NPA’s declined due to higher Interest Income from loan advances. If we observe their balance sheet in stark opposition to banks their investments in securities declined from 11.9 percent to 10.8 percent which reflected in a lower Other Operating Income(OOI). The success of the strategy adopted by NBFCs for capital appropriation in terms of loans can be reflected in the higher Net Interest Incomes of NBFCs & their declining pile of NPA’s.
COVER STORY from the rural area to enliven the PM’s vision of affordable housing. The overall loan assets grew by 19% & in the housing finance retail segment grew by 18% & stood at 12,649 crores.
If
To understand the impact of NBFC on Indian
economy we will scrutinize their impact in Real Estate sector & automobile segment. The gross non-performing advances for housing finance assets stood at 1.2 percent in March’17 as against 1.5 percent in March’16. The lending to retail housing segment, especially the affordable housing segment increased during this period. This majorly stemmed from increased lending by the NBFCs. They acted as the driving force of growth in rural housing segments. The performance of firms like Muthoot finance & HDFC housing finance is an example of those. 4125 Crores was the amount of loan disbursed by GRUH finance as against 3857 crore the previous year. The customer base spread to over 42,525 families across the spectrum of Indian economy. Out of these over 50% came
we explore the performance, in the automobile segment segment Mahindra & Mahindra finance has been the lead financer for M&M tractors, it financed over 1,00,000 vehicles for Maruti India & served as the leading financer for Renault & Nissan in the rural sector. The analysis of growth of Maruti sales as compared to it’s competitors in rural India is a clear indication how NBFC’s are fuelling the rural growth in vehicle markets.
GRUH received fresh sanctions from banks
amounting to 1800 crores of which GRUH availed loans to the tune of 1423 Crore. Over 50% of the funding came from banks. The outstanding loans to banks as on March’17 stood at 4320 crores. One must realize here that banks are systematically transferring their risks to NBFC’s. From the data one can see that out of the total funding received by NBFC’s around 2500 billion INR was infused by Scheduled Commercial Banks. Also, the funding has largely been of short term in nature, which reflects a general sentiment of making “Quick Bucks” at low risks of the banks.
The bottom line remains that there are vast segments of Indian economy that are in dire need of capital & NBFCs & microfinance institutions are bridging this gap. Yes, this might induce some systemic risk in financially difficult times, but this is one of the most effective means to lift the nation out of poverty & ensure manifold growth fuelled by all sections of the economy. In the end, we will leave you with a quote by Muhammad Yunus “Poverty is an outcome of the system we have built, the laws we have created & the policies we have made; from such a system if we want the people to one day wake up & say I am not a job seeker but a job creator; we will have to strengthen our microfinance agencies”. IIM Shillong | 17
COVER STORY
18 NIVESHAK | OCT 2017
FinGyaan
THE PERPLEXED STATE OF INDIAN UNEMPLOYMENT SCENARIO…. OR IS IT REQUIRED?
BY NAVEEN KUMAR IIM Shillong | 19 IIM ROHTAK
FinGyaan
“UNEMPLOYMENT IS AN INTEGRAL PART OF THE NORMAL CAPITALIST SYSTEM”
-MICHAEL KALECKI
The title throws out a hitherto controversial statement that
would spell havoc to the common public. But, let us analyze this significant burden in detail. To know more about this we have to go through the macro-principle called “NAIRU” which exists in India and holds relevance right to the present times. NAIRU or “non-accelerating inflation rate of unemployment” is an indicator which motivates the government to keep the unemployment high. Now why that is suppose; well let us analyze in detail.
quoted “I am perplexed at the Inflation rate across the economy. It should be rising but it is going down. Maybe, our long-held fundamental underlying of Inflation Indicators have to be changed” Such a statement from the World’s most Prominent banker screams us to take notice and look where we are going wrong and how it affects us back home in India. Because the two country’s unemployment scenario are more related than one might think although given the geo-political and economic difference between the two. A look at the above data shows a contradiction and a puzzle.
“
There is a clear relationship between unemployment rate and GDP as described by Okun’s law. As a larger section of the population of the country is employed, more is the GDP of the country. But building on the work done by economist, A.W. Phillips, as more people have work, GDP increases causing the income level to increase, which will subsequently cause the consumer to spend more on goods and services. This culminates in the increase of rise of goods and services due to increased demand. Thus, this directly establishes an inverse relationship between unemployment and inflation. The two main objectives of the Indian Reserve bank is to keep these two factors low, but how does it achieve it, when lowering one increases the other? Where in lies the trade-off?” Before we go on about answering the above questions,.it is imperative that we understand the puzzling phenomenon GDP INCREASES CAUSING in the world that has THE INCOME LEVEL TO perplexed the INCREASE, WHICH WILL World’ Central B a n k e r s SUBSEQUENTLY CAUSE i n c l u d i n g US Federal THE CONSUMER TO Chairman SPEND MORE ON GOODS Janet Yellen who has AND SERVICES 20 NIVESHAK | OCT 2017
A need arises to change the fundamental way at which we understand inflationary measures. The catch here is that after the 2008 Global financial crisis, the US Fed resorted to Quantitative easing coupled with low interest rate in order to ease the high levels of unemployment. With the slow recovery observed in World markets, 10 years after the crisis, the Fed is still dependent on the QE to boost economic growth. The increase in interest rate is a very precarious method as the inflation could swing into deflation which is not prudential for the economy. Hence, an increased spotlight has to be shed on the Labour market. When there is a renewed importance given to labour market, we
FinGyaan
have
to
insure
NAIRU
is
adhered
to.
Now, bringing back the focus to India, according to the Annual report published by the Ministry of Labour and Employment reported that India’s unemployment rate was 5.79% [FY2016] which has created volatility in the stock markets and instilled turbulence in the minds of the investors as a sign of weak economic policy. But as per NAIRU, India must be doing well then in terms of keeping the Underemployment under 6% as mandated by the equilibrium levels. But if this was the scenario, won’t the Government of India resort to increased Keynesian measures to ensure that the unemployment is pushed even low in the country to enjoy the political mandate. Well, therein lies the Zero-sum game which is in the essence of market correction.
Government of India causes an accelerated increase of jobs, then it will lead to a higher rate of inflation, and the fall in unemployment would turn out to be temporary. The Stagnant Last Three years Indian employment growth drastically decreased the last three years after enjoying a marginal increase in the 2010-12 period. A reduction in the employment growth rate coupled with the growing workforce entering
Changing times of Employment Structure The present Indian Scenario of Inflation and the labour market has been the single most Unemployment is at a stable rate, and if significant influential factor If there is an sustained increase for Unemployment rise. “I am perplexed at the in the levels of inflation in hopes that it would bring down Inflation rate across The below data stands to the unemployment, this would the economy. It should show that the employment eventually pass onto the firms & industries and they would be rising but it is going rate has continued to decrease all the sectors lower the future forecast for down. Maybe, our starting from January 2016. growth due to rise in inflation. This would subsequently alter long-held fundamental With the rate going slowing their employment decisions. underlying of Inflation down significantly to less than 6% during the OctoberHence, monetary policy would Indicators have to be December 2016 into the not ensure that high inflation to cause low employment changed”-Janet Yellen early part of 2017, it can be safe to assume that in under all policy regimes. reality it is going to slow down even further, mainly stemming from the organized sector.
IIM Shillong | 21
FinGyaan “Low Road/High Road Conundrum” Now that we understand that inflation and unemployment are inextricably linked, let us try to address the question posted at the beginning of the article as to how the Central bank should go about with regards to balancing the two in terms of NAIRU. The fundamental idea here is that the firms could go for a higher road regarding increased wage and taxation but would require deliverables on productivity and supply of skills or the Low road where they would go for “low wage | low productivity” but with increased number of employees. The trade-off reached between the two would be the deciding factor on how the Central Bank tries to balance out Inflation and Unemployment. It is depended on the active industrial policies which are in place, long-term finance opportunities for the firms to operate profitably. A state-led economic growth which will induce investment in skills and forms of social insurance would ensure that the scales are tilted in the former’s favor but also at the same time ensuring
22 NIVESHAK | OCT 2017
that Unemployment rate is catered to even. Conclusion – No winner nor loser The entire cycle of unemployment & inflation is not a vicious nor a virtuous cycle. It is dynamic and a takeaway would be that it is a set of repetitive crests and troughs, which repeats over a temporal scale. But the economy as a whole continues to grow to propel the country forward. Although some of these trends, such as the decline in employment growth, have their roots in structural transformation of the economy, it’s in the loss of growth dynamism of highly employment elastic sectors, such as construction & finance, business services that have aggravated the stagnation in employment creation. While laudable efforts like “Make in India” programme aimed at augmenting manufacturing growth in India may have confidently affected manufacturing, its conventionally low labour-absorbing capacity seems to have not reaped benefits for the working class. Hence, a need arises where the inflation takes a backfoot and robust fiscal measure is the need of the hour.
FinView 1) There has been a lot of talk about the blockage of working due to delay in payment of Input Tax credit by the government of India. What do you think has been the actual impact of GST on the MSME sector & the export industry? Do you think the slew of current reforms proposed by the government will bring some relief to the industry ?
Everyone
agrees that GST is good for business and the Indian economy. A common tax across all States in India is something which every businessperson has always wanted; as it will lead to ease of doing business and faster flow of goods and products across the States. The implementation of GST has resulted in some short term snafus. MSME sector is particularly impacted due to the higher level of compliances and delays in input credit. I am confident this will get sorted out within the next 3-4 months and we will see the positive impact of GST on everyone, including the MSME sector. 2) RBI in it's latest Monetary Policy review declined to reduce the interest rates. CII proposed a reduction of 100 basis points in the interest rates. Also, the credit growth of the nation is at an all time low & the NPA problem is piling up. Do you think this kind of an hawkish stance on inflation targeting as monetary policy will help us ? What does CII think of the entire issue ?
If
Indian businessmen have to compete on the global stage, they need access to capital which is cost competitive. Hopefully, this should happen soon.
3)The FRBMA prescribes a fiscal deficit target target of 3% but the current fiscal deficit stands at 3.5 % of the GDP. Also, the current RBI governor strongly proposes fiscal prudence. In such a scenario do you think the government should push it's fiscal deficit target & increase the government spending to boost rural spending & assist the Indian economy?
For
the Indian economy to grow upwards of 8 per cent, it is imperative that there is spending by the government and the private sector. At this point of time, it is imperative that the government spending remains on an accelerated trajectory. 4)What is CII's outlook for the growth of North Eastern India? CII also plans to restart the talks on Indo-Bangladesh joint initiative on Tequila Corridor. The government in past has worked closely with Bangladesh government to resolve a number of issues. What do you think the government do to resolve this issue & how much of an impact on Indian trade can it have?
Mr. Ninad Karpe
has an illustrious career spanning over three decades. He has been a part of prestigious institutions like SAARC & CA India. He is currently serving on the board of Aptech group as a CEO. He is also the chairman for the western region at Confederation of Indian Industries(CII). In the past, he was a consulting specialist for companies seeking to invest in India. He has also authored several books on strategy, taxation and foreign investment in India and contributes regularly to newspapers, magazines and journals.
Stability and progress
of the North East is critical to the Indian economy and every Indian would want to see that. In that context, a focussed approach by the government to resolve issues and promote trade are always welcome.
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JUXTAPOSE: HOW DEFLATION WAS DEALT IN TWO COUNTRIES: WHEN
the economy stagnates, and people aren’t spending money, a country’s central bank lowers interest rates to encourage spending. To incentivise borrowers and to penalise the depositors, negative interest policy is adopted Countries with ultra-low inflation or deflation, associated with weak economic growth use this policy. Consumer prices in Japan have been sliding for the most of the past 20 years. Currently, Japan has a negative interest rate of 0.1% Interesting fact: This is an unconventional monetary policy tool first deployed central bank in July 2009, when it cut its overnight deposit rate to -0.25%
by
Sweden’s
QUANTITATIVE EASING (QE) is when private securities are purchased on the open market, beyond just treasuries. Not only does this pump more money into the financial system, but it also bids up the price of financial assets, keeping them from declining further. After 2008 crisis, Fed adopted QE and this in turn increased economic activity by 3% and added close to 3 million jobs. Even ECB and Bank of England had implemented this method after the crisis. Interesting fact: Between 2008 and 2014, the Fed bought $3.7 trillion worth of bonds from the market, increasing its bond holdings eightfold during the period.
24 NIVESHAK | OCT 2017
CLASSROOM: REITs WHEN
it comes to investing their hardearned money, Indians rely heavily on real estate rather than financial assets. In fact, on an average Indians holds 84% of their wealth in real estate. With, the introduction of real estate investment trust (REIT’s), all kinds of investors, even with small budgets, will be able to invest in the Indian Property Market.
HOW WILL REIT WORK? REITs will be like mutual funds, i.e. they will
pool money from the investors and subsequently invest the same in commercial property to generate income. It will be registered via an IPO, and its units will be listed on an exchange and consequently traded as securities. An investor with a small sum of Rs. 2 lakhs will be able to buy a unit of REIT. As per the SEBI guidelines, REIT’s minimum asset size has been kept at Rs. 500 crores whereas the minimum issue size has to be less than Rs. 250 crores.
IN India, REIT’s will be of the hybrid type, i.e. they can have features of both Equity REIT and Mortgage REIT. They will be required to invest at least 80% of assets into revenue generating and completed projects. Rest 20% can be invested in under construction properties, equity shares of listed properties and mortgage-backed securities. Also,
REIT’s will be required to pay out 90% of their income from stable assets to investors.
TAXATION OF RIETS FOR properties directly owned by the REIT rental income of the trust will be exempt in the hands of trust and will be taxable in the hands of unit holders whereas the income from Capital Gain will be taxable in the hands of trust (Long Term Capital Gain @20% and Short Term Capital Gain @ MMR) and exempt in the hands of investors. In case of investment of shares and securities by the trust dividend will be exempt in hands of both investor and the trust whereas interest and capital gain will be taxable in the hands of trust and exempt in the hands of investor. TRANSFER of units of REIT by unit holder
will be termed as long term if the units are held for more than 36 months and thus will be exempt from tax whereas in case of short term capital gain it will be taxable at the rate of 15%.
THE
average yield in prime commercial real estate in India is in the range of 7% to 9% and the annual escalation or the capital growth is about 5% year-on-year. Together, the annual return expectation from the REITs can be from 12% to 14%.
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Fin.
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