The IBS Times- March 2015

AUCTIONING OF COAL: THE EVER CONTINUING CONTROVERSY BY PRIYANKA MALIK

The IBS times March 2015, Issue No. 178

BUDGET SUMMARISATION 2015-16

BY RIPU TANDON & APOORVA ANUSHA

1|MARCH2015

FinStreet, IBS Hyderabad

ISSUE NO. 178, March 2015

What’s Inside

2|MARCH2015

INTELLIGENCE BEYOND SUCCESS

LETTER FROM THE EDITOR TEAM IBS TIMES Dear Readers,

KAUSHIK CHANDELL (EDITOR-IN-CHIEF) AVIK CHAKRABARTY (MANAGING EDITOR)

ALISHA SINGH APOORVA ANUSHA KOLISETTY AISHWARYA MANJARI SHARMA NAVJOTH SAHU PRIYANKA MALIK RAHUL MISHRA

RIPU TANDON SACHI KHESKANI SAMEENA USMAN

Greetings from Team FinStreet!

“For men may come and men may go, but I go on forever.”

We would like to thank you for your immense support and for your overwhelming response because of which The IBS Times made its way into the “one of the most read” college magazine for the year 2014-2015.

As we all know nothing is static. With the end of one of the most successful year 2014, Team FinStreet with a heavy heart had to bid adieu to the ones, behind this glory. Though it’s the rule of nature that nothing is constant but still for our readers we promise to continue with the momentum created by our incomparable seniors, take the legacy forward to a whole new dimension and we promise to deliver beyond your expectations in every issue.

Knowledge is Wealth. With the intent of sharing and gaining knowledge and not just only to present our view but also inviting readers to share the opinion we bring you the 178th issue The IBS Times.

This issue shares the insight on the recent goings with Asian Infrastructure Investment Bank (AIIB).

With the crisis going on in Russia, we have put in our thoughts in that as well. We also have shed some light on IPOs being offered by the growing giants like CCD and Adlabs present in India. Also in this issue we have discuss about Greece’ next action and how it’ll affect the global market. This issue also covers a summarization of Budget 2015 in brief. From the investment point of view, this issue also brings to you an exhaustive report on TATA Motors by Team Vriddhi Research.

Hope you have an enriching experience reading The IBS Times. Your feedbacks and opinions will help us make it better.

SRISHTI KARMAKAR Kaushik Chandell

-NARENDRA DAMODARDAS MODI HONORABLE PRIME MISNISTER OF INDIA

3|MARCH2015

ECONOMIC SURVEY

INDIA HEADED FOR 8% PLUS GROWTH

-Avik Chakrabarty

India is headed for 8%-plus growth next year and on

should meet its target of containing fiscal deficit at

course for 10% expansion in the near future, said an

4.1% of GDP in FY15 and stick to the path of fiscal

upbeat Economic Survey penned by Chief Economic

consolidation in the years ahead. This would mean

Advisor Arvind Subramanian. Markets cheered the

compressing expenditure quite a bit, and stepping up

survey's growth confidence and optimism.But, equally

capital expenditure by cutting down on consumption

significantly, the survey argued against over-emphasis

expenditure. Transiting to a goods & services tax

on "big-bang" reforms, saying the most effective

with a single, globally competitive rate and few

policies are often those that provide many small

exemptions would not just reform the indirect tax

solutions. In this, Subramanian seemed to speak the

structure but also remove the negative protection

economist's version of Prime Minister Narendra Modi's

imposed on Indian manufacturing by the present

political-economy argument. The PM reiterated his

policy of exempting some imports from several

faith in making many systemic improvements and

kinds of tax. The challenge is for the government to

finding micro solutions. Apart from surveying the

bring about comparable reform of direct taxes:

present state of the economy and suggesting some

predictability, low rates, procedural simplicity and a

policy measures, as all surveys do, the latest one

minimum of exemptions.

challenges readers to ideate afresh on solutions to the country's myriad problems. Its brash cover, a chart tracking the growth rates of India and China, shows India's growth snaking its way over and above China's in 2015.

Growth Prospects Better

The external sector is benign when it comes to energy and commodity prices but challenging on export growth and the possibility of creating jobs via export-led growth, and on account of India's potential to draw in more capital flows than it really has sound use for: financial inflow in 2014-15 is put at $55 billion, with the trend projected to continue.

Growth prospects have improved, the survey says, putting aside questions about the reliability of the new GDP numbers with the base year of 2011-12.

India's current account deficit has already shrunk to some 1.3% of GDP and could well narrow further to 1% of GDP next fiscal, meaning that capital inflows

New political authority, reforms, low inflation thanks to

would be more than that needed to finance the

a global commodity price slump leading to low interest

current account deficit, adding to reserves, putting

rates, and the prospect of a good monsoon are together

upward pressure on the rupee and on interest rates,

likely to accelerate India's growth rate to 8.5%. The

when RBI buys dollars to stem appreciation and then

government has some room for fiscal activism but

sells bonds to sterilize the rupees injected in this

should meet its target of containing fiscal deficit at

fashion.

4.1% of and stick to the path of fiscal 4 |GDP M A RinC HFY15 2015

Government Can Step Up Investment

consolidation in the years ahead. This would mean

has gone on record saying RBI would like Parliament

Government Can Step Up Investment

to set the inflation target for it, this has not seen any In the long term, growth should be driven by the private

follow up in terms of any institutional arrangement.

sector. But in the short run, there is scope for the government to lead the growth process by stepping up

Let rupee dip when possible for India's long-term

investment. The Railways is ideally suited to lead such

economic wellbeing

public investment-led growth. The private sector is hugely in debt. Indian companies have a high debtequity ratio when compared with international levels, greater than Singapore, Malaysia, Russia, South Korea, China, the US and Japan. Stalled projects are as much as 7% of GDP, even though many are getting moving again. Out of stalled projects pegged at about Rs 8.8 lakh crore, the private sector accounts for Rs 7 lakh crore. And the bulk of the lending to stalled projects, ending up as bad debt, has been carried out by public sector banks. Resolving these calls for structural changes, easy bankruptcy and liquidation norms and a new authority to renegotiate failed public-private partnership projects. Banks have multiple problems.

The rupee could well be too robust for India's longterm economic wellbeing, Chief Economic Adviser Arvind Subramanian suggested, drawing a direct correlation between a strong currency and weakness in exports, the latter being a vital link in the government's

economic

revival

strategy.

He

acknowledged there were sections that advocated a stronger currency. Part of the community out there wants a strong exchange rate, but that would be very detrimental to exports. No country in history has grown at 8-10% for exports. No country in history has grown at 8-10% for 30-35 years without roaring exports. And a flat exports to GDP ratio also reflects the fact that the external environment is actually less

They face two kinds of financial repression: On the

favorable to absorbing exports than it used to be.

asset side, they have to invest in low-yield government

However, the nuanced manner in which strong

bonds, thanks to SLR norms, and meet priority sector

currency flows need to be managed is linked to the

lending

lending

need for higher reserves, which in turn would mean

opportunities. On the liability side, banks have been

a strong currency. One of the lessons from China is

getting, till recently, negative real rates of interest,

that foreign exchange reserves have been a

thanks to high inflation.

big source of (power) — $4 trillion. It's allowed

targets,

again

forgoing

better

For banks, the survey recommends a 4D solution — deregulation,

differentiation,

diversification

China to behave like the World Bank and the IMF put together.

and

disinterring, meaning improving exit mechanisms.

The way you accumulate reserves is by actually

Interestingly, the survey moots instituting a mechanism

having a very competitive exchange rate. When

for the government to jointly set the monetary policy

capital is coming in, the challenge is going to be to

goal along with RBI. While Governor Raghuram Rajan

prevent it (rupee) from going up. India have to be

has gone 5 | on M Arecord R C H 2saying 0 1 5 RBI would like Parliament to set the inflation target for it, this has not seen any

opportunistic, when there is a chance to allow it to drift down, maybe a little bit it drifts down but when

opportunistic, when there is a chance to allow it to drift down, maybe a little bit it drifts down but when a lot of capital is coming in, intervene to keep it stable. So India has to be very pragmatic in their approach to the exchange rate. The survey also warned about money flooding into India from overseas. Surfeit rather than scarcity of capital can be the problem going forward. It is seen that in 2014 the rupee has become uncompetitive by about 9%, 6.5% of that is because of capital inflows.

Prime Minister Narendra Modi wants to

drive up

investment, put growth on the fast track, turn the country into a global manufacturing hub with the 'Make in India' initiative and generate jobs as he looks to lift millions out of poverty.

Government needs to work to rein in fiscal deficit at macroeconomic pressures have significantly abated.

3% of GDP in the medium term

The government is looking to reduce fiscal deficit to India needs to keep a tight leash on its expenditure and

4.1% of GDP in the current financial year, a target

direct it towards public investment to achieve future.

that the survey asserted will be achieved.

The survey has made a case for some fiscal room in the coming year while underlining that the country "rapid, sustainable and all-encompassing" growth, even as the country can slightly loosen the purse strings in the

The survey sees improvement in government's finances going forward after the introduction of goods and services tax, revenue buoyancy and reduction in some expenditure that could help the

immediate future.

government meet the stiff target of containing fiscal The survey has made a case for some fiscal room in the

deficit at 3% of GDP in 2016-17 without deviating

coming year while underlining that the country cannot

from the FRBM (Fiscal Responsibility and Budget

afford to be complacent and needs to work to rein

Management) Act.

in fiscal deficit at 3% of GDP in the medium term. The survey also made it clear that the gains on account of reduction in subsidy outgo and higher divestment proceeds should be directed towards public investment.

In the upcoming year, the pressures for accelerated fiscal

consolidation

have

lessened

because

macroeconomic 6 | M A R Cpressures H 2 0 1 5 have significantly abated.

BUDGET 2015

RAILWAY BUDGET 2015-16

-Apoorva Anusha segment of the society. Suresh Prabhu said that it will

“Don’t travel with travel’s sake. The great affair is

be in there priority list to improve capacity on the

to move.”

existing high-density networks. As such there will be

This quote has become a new definition for travelling and Indian railway carry a heavy burden of expectation

no major land acquisition so improving capacity on existing network will be cheaper.

because it’s the most common and cheap mode of

To transform the Indian railway, government has

travelling to far away distances. And so was the most

fixed four goals for themselves. First is to deliver a

awaited rail budget 2015 under the new government.

sustained and measurable improvement in customer

Suresh Prabhu announced railway budget on 26

th

experience. Second is to make rail a safer means of

February 2015. He started his speech by saying that the

transport. Third is to expand Bhartiya rail’s capacity

railway map of India is a network of veins that pump

substantially and to modernize infrastructure and

life giving blood into the heart of India’s economy.

finally to make Bhartiya rail financially self-

Further he continues saying that citizens demand better

sustainable. This means to generate large surplus

railway service but they are not aware of the constraints

from the operations not only to service the debt

that the railway operate under. There are 492 trains

needed to fund the capacity expansion but also to

which are running at a capacity of more than 100% and

invest on an on-going basis to replace our

around 228 trains are running at a capacity of 80% to

depreciating assets.

100%.

Railway budget has estimated a capital expenditure Moreover from last few decades railway has not much

of 23.6 crore to replace ticket counters by ticket

improved.

the

machines. Southern Railway is planning to push for

underinvestment in railways which has led to

more automatic ticket vending machines as railway

congestion and over-utilization. As a consequence,

minister Suresh Prabhu has talked about Operation

capacity augmentation suffers, safety is challenged and

Five Minutes aimed at helping travelers buy

the quality of service delivery declines, leading to poor

unreserved tickets quicker. The zone received Rs

morale, reduced efficiency, sub-optimal freight and

10crore for automatic ticket vending machines

passenger traffic, and fever financial resources. This

against the allotment of Rs 9crore in the previous

again starts the same vicious cycle of understatement.

budget. The machines are aimed at minimizing the

So in this budget rail minister has tried to put an end to

number of counters and reducing the cost of issuing

this cycle and came up with better service and improved

tickets at stations. The machines are being tried out

connectivity for all citizens including the poorer

at suburban stations in Chennai. Operation Five

The

main

reason

for

this

is

segment Prabhu said that it will 7 |of Mthe A R society.

C H 2 0 1 Suresh 5 be in there priority list to improve capacity on the

Minutes being proposed for unreserved passengers’ shows the thrust given by railways to move towards

minutes being proposed for unreserved passengers’

Rs 868.25 crore in 2013-14. The state's demand for

shows the thrust given by railways to move towards

railway connectivity to the tribal dominated and

ticket vending machines. The number of people who

Maoist infested districts were overlooked by the

use the vending machines on the suburban line has gone

Centre. There was no budgetary allocation for

up to 50,000. This shows that such machines will grow

Jeypore-Malkangiri,

popular in the future. No new trains were given to

Gunupur-Theruvbali-Rayagada projects. According

Karnataka but still it has something to cheer about. The

to Odisha Congress President Prasad Harichandan

two gifts which Karnataka got in this new rail budget

railway budget has disappointed people of the state

are that the sanction for the development of a third

as the allocation was reduced in major heads. The

coach terminal at Byappanahalli at a cost of Rs 120

emphasis of Railway Budget 2015 is on promoting

crore and doubling the 130 km Yelahanka-Penukonda

research in railways. Research Designs and

single line at Rs 870 crore. The upgrading of

Standards Organization (RDSO) has been asked to

Byappanahalli station will help to decongest the

develop systems to prevent fire in coaches and

overburdened city and Yeshawanthpur railway stations

prevent coaches from climbing over each other

which have reached peak capacity with trains literally

during accidents. As of now, there is no technology

jostling for space during peak hours. The authorities

with the railways to deal with on-board fire. For the

had recommended doubling of this line as it is not only

Railways it would imply higher capacity, greater

a high revenue yielding line in the state but also the

energy savings and increased throughput. It is

shortest route connecting the state with north and west

expected that the first set of these trains would be

India destinations like Mumbai, New Delhi, Jaipur.

running on system within the next two years. Based

Z

Jeypore-Nabarangapur

and

on the experience, train sets will be considered for Odisha has also got bonanza or Rs 2514 crore in this budget. The Narendra Modi-led NDA government

manufacture in India. It is our endeavor to expand jobs for Indians at every level.

made the highest-ever allocation for the state in the railway budget presented by Union railway minister

While the budgetary support has been increased

Suresh Prabhu on Thursday. For 2015-16, the state

progressively over the years, it has not been adequate

received Rs 2,514 crore against its demand of Rs 3,200

to realistically fund the large shelf of projects. Many

crore for construction of new tracks, gauge conversion,

of the projects relate to decongestion in heavy traffic

doubling, boosting of passenger amenities, improving

sections and are, therefore, remunerative.

traffic

facilities,

safety

and

electrification.

The allocation is 77% more than the previous allocation as the state received Rs 1,420.98 crore in 2014-15 and Rs 868.25 crore in 2013-14. The state's demand for railway connectivity to the tribal dominated and Maoist | M A R Cwere H 2 0overlooked 15 infested8 districts by the Centre. There

was no budgetary allocation for Jeypore-Malkangiri,

CONTROVERSY

AUCTIONING OF COAL: the ever continuing controversy

-Priyanka Malik

India is headed for 8%-plus growth next year and on

beneficiaries because of coal auction. Lakhs of

course for 10% expansion in the near future, said an

crores of additional revenue earned because of this

upbeat Economic Survey penned by Chief Economic

auction would help the states to wipe out their fiscal

Advisor Arvind Subraman Coal auctioning has been in

deficits.

controversy since the government of Man Mohan Singh

beneficiary with projected revenue for 30 years of Rs

was in power. Coalgate scam is till date one of the worst

47,552 crore followed by MP at Rs 35,588 crore and

and largest scams the country has witnessed. This time,

Jharkhand at Rs 12,622 crore. 11 blocks have been

134 bids out of 176 got qualified for the initial round of

allotted to the private companies as end-use in the

coal auction. 21 blocks are put for auction by the

first and third round of auctioning. Another 42

government in the initial stages. Jindal Steel and Power

blocks have been allotted to government firms. Since

Ltd (JSPL), Reliance Cement Company Ltd, Ambuja

there was no bidding in the allotment of these blocks

Cement, Essar Power MP Ltd, Bharat Aluminum Co

there would be no tariff cuts in the power sector.

Ltd (BALCO), Hindustan Zinc, Sesa Sterlite, JSW Energy, GVK Power, GMR Chhattisgarh Energy Ltd, Hindalco, Adani Power and Reliance Geothermal Power are some of the major companies whose bids have been found technically qualified. 204 coal blocks were cancelled by the Supreme Court during the scam, which were being allotted in the time period of 19932010. The total valuation given by the Comptroller and Auditor General (CAG) was Rs 1.86 lakh crore. The blocks have been allotted in different states to 25 companies. The ongoing spectrum and coal auctions have proved that former Comptroller Auditor General

Chhattisgarh

would

be

the

biggest

The impact of these allocations is very mixed in nature on the power and related company. Where shares of some firms are experiencing surge, shares of other firms are soaring. This sort of mixed reaction is based on the bid price of the company. Jindal Steel and Power has surged nearly 30% as it is seen as the prime beneficiary amidst the resolution of the issue of natural resources. Apart from Jindal Steel, other company in effect is CESC whose share prices crashed by 13% due to its aggressive bid policy even though the company seems confident of the fact that there are no significant risks to its profits.

Vinod Rai gave wrong predictions as the government has raised around 3 lakh already against 1.86 lakh

One of the major advantages that this auctioning is

predicted. Out of the 204 blocks auction of 32 blocks

witnessing is transparency which was the root cause

alone has garnered Rs 2 lakh.

of the scams earlier and led to the cancellation of allocation of 204 blocks. E-auctioning system

Coal producing states Odisha, Chhattisgarh, Madhya Pradesh

and

Jharkhand

would

be

the

major

beneficiaries because of coal auction. Lakhs of crores of additional 9|MAR revenue C H 2 0 1earned 5 because of this auction would help the states to wipe out their fiscal deficits.

deserves the credit for making the process relatively easier and transparent. The participants have to struggle with the relevant choices irrespective of their sectors (regulated or un-regulated) as these choices have a long lasting impact and become the

major chunk of dividends from these blocks.

Therefore, these avoided imports were still a benefit to the balance of payments. The industries using steel, cement and power as the inputs see an impact indirectly because of these auctions and allocations.

These auctions if done properly without the intentions of a scam might become a boon as it ends the state monopoly and might make the energy in different prices available at economic prices. struggle with the relevant choices irrespective of their sectors (regulated or un-regulated) as these choices have a long lasting impact and become the deciding factor for their cost structures and profitability. For too high a price, the operating margins will be impacted and would be diminishing in nature. For the firms who don’t succeed in obtaining the coal blocks the profitability will surely be dented.

Apart from the private interests, the coal auction also has far reaching impacts on the country’s economy.

According to the CAG’s (Vinod Rai) analysis the difference between the selling price of the coal and the mining price of a tonne of coal was not presented to the exchequer. This was the unfair advantage to the owner of these captive mines. Since, Coal India failed to meet the demands of the nation therefore, the coal block auctions and allocations are of immense importance as if the coal requirements are not fulfilled by these private players, the country would be in a dire need to import an equal amount of coal which would again increase the nation’s deficits or the country would have to forgo the economic output. Whereas, if the Coal India was selfsufficient in doing the mining and meeting the requirements the government could have earned a major chunk of dividends from these blocks. Therefore, 10 | M Aimports R C H 2 were 0 1 5 still a benefit to the balance these avoided

of payments. The industries using steel, cement and

BUDGET 2015

UNION BUDGET 2015-16

-Ripu Daman Tandon

The long awaited budget was finally revealed by the

would have to shell out an additional Rs. 5800 per

honorable Finance Minister Mr. Arun Jaitley, though

month. An increase in the service tax rate from

marking as the second budget presented by the current

12.36% to 14% has definitely disappointed the

Government, this marked the pathway and the vision

middle class specially. This in fact due to the factor,

the NDA led government has for a long term. As the

for all the consumption of any services would

budget was a mixed bag for tax payers and filled with

become expensive. The consumer industry grew

mixed emotions, Budget 2015 started as breaking the

about 7% in the 2014 calendar and has been the

norms of changing the tax slabs or other benefits

lowest in a decade; however, it is expected to rise to

provided by the government. With quite a few changes

a rate of 10% in the current year. With an increase

proposed by the Finance Minister in respect to the tax

in the service tax rate, a definite reduction in the

structure, the budget definitely met most of the

consumption trend is likely to get hit. “People are

expectations of the analysts, if not all.

not feeling rich — which is key to fuel growth in a consumption-led economy like ours”, Varun Berry,

One of the key aspects that can be perceived with the given budget is, to simply the tax regime in the country.

As per Mr. Vishal Sikka, CEO and Managing Director, Infosys, “Budget 2015 isn't just about fixing problems; it also changes the context to find solutions”. The budget supports new initiatives which encompass incubation facilities for the start-ups, a step that can be

Managing Director, Britannia Ltd.

He also

mentioned, “While there's a clear articulation of future intent, action on the ground will dictate how it translates into fuelling growth of the economy”. Not everybody in the consumer industry is concerned about the increase in the service taxes. As per Mr. D Shiva Kumar, Chairman & Chief Executive Officer

seen as the government putting itself in the shoes of an

at PepsiCo India, “Consumption picks up in periods

Angel investor. Also, the message is strong from the

of certainty, optimism and hope — that's the sweet

government this time and that is to bring financial discipline in the economy.

Small and Mid-income

earners stand to gain an additional deduction introduction under Section 80CCD. The super-rich as mentioned in the budget, any individual with an income of more than Rs. 1 Crore a year would have to shell out more tax. This is so with an increase in the surcharge payable by these individual at a rate of 2%. Therefore, mathematically, an individual earning Rs. 10 Lakh per month would have to shell out an additional Rs. 5800 per month.

11 | M A R C H 2 0 1 5

spot in India right now. More money in the hands of consumers and the current low levels of inflation will help consumption”. One of the key areas where the government measures would be making a difference is the increase in job levels. This would eventually increase in the consumption levels in the rural areas.

As stated by Mr. Vivek Gambhir, Managing Director at Godrej Consumer Products said the budget will boost rural consumption, "Rural consumption was a worry and the budget proposals will surely improve consumption due to higher job creation

Services that be expensive due to increase in the service tax - Eating out at restaurants - Travelling - Buying products through e-commerce - Financial Services - Entertainment facilities - Grocery Shopping - Mineral Water, Aerated drinks & Condensed Milk

maximum governance with minimum government, wealth tax has been abolished.

For the fourth continuous time, there has been an increase in the excise duty on tobacco consumption.

This decision would hamper stocks like ITC limited which has already seen a fall by 13% in two trading sessions following the budget. This has been the sharpest decline that ITC has witnessed over the past two decades. The excise duty on cigarettes has been

worry and the budget proposals will surely improve

increase by at least 15%. Also, the government is

consumption due to higher job creation making a

focusing on cutting down consumption of cigarettes,

difference is the increase in job levels. This would

even if it means a reduction in the tax revenue, due

eventually increase in the consumption levels in the

to the decrease in the consumption of cigarette

rural areas.

As stated by Mr. Vivek Gambhir,

volumes.It was for the first time in the budget speech

Managing Director at Godrej Consumer Products said

where the excise duty changes were shown under the

the budget will boost rural consumption, "Rural

subtitle on promotion of public health.

consumption was a worry and the budget proposals will

showcased the intention of the government for the

surely improve consumption due to higher job creation

promotion of public health.

This

and various other schemes.”

Encouraged by the success of the key project of the Another key announcement that was made during the

Prime

budget was the decrease of Corporate Tax to 25% over

DhanYojna, the Finance Minister (F.M.) proposed in

the next 4 years. However, there is a possibility of

creation of a universal social security system for all

increasing the tax rate by 0.6%, having an impact to the

Indians, especially for the poor and the under-

EPS of a company.

privileged.

At the same time certain

Minister

Mr.

Narendra

Modi’s

Jan

He announced the Pradhan Mantri

exemptions would be removed, which were provided at

Suraksha BimaYojna to be launched soon; this

the earlier stage in order to simplify the corporate tax

would cover accidental death risk of Rs. 2 Lakh for

structure. Along with the decrease in the corporate tax

a premium amount of just Rs. 12 per year. On the

a relief was provided to the investors keen in investing

same lines, the Atal Pension Yojna would be soon

in India with the deferral of GAAR (General Anti-

launched to provide a defined pension, depending

Avoidance Rule). This is due to the ambiguities

upon the contribution and its period. In order to

surrounding the controversial indirect taxes and the

encourage people in investing in the scheme, the

implementation of GAAR made investors apprehensive

government would be contributing 50% of the

about investing in India.

Also, concentrating on

beneficiary’s premium limited to a sum of Rs. 1,000

maximum governance minimum government, 12 | M A R C H 2 0 1with 5

each year for a time period of 5 years for the accounts

wealth tax has been abolished.

that are to be opened before December 31, 2015.

beneficiary’s premium limited to a sum of Rs. 1,000 each year for a time period of 5 years for the accounts that are to be opened before December 31, 2015.

Another one to be announced was the Pradhan Mantri Jeevan Jyoti Bima Yojna, a Social Security Scheme covering both accidental death risk and natural risk of Rs. 2 lakh. The premium for the same would Rs. 330 per year for the age group of 15-50.

The fiscal deficit is to be seen at 3.9% of the GDP for

The budget sets out to build the balance sheet of

2015/16 and meeting the fiscal target of 4.1% of the

India. A strong message of the fiscal responsibility

GDP. GDP growth is seen at between 8 to 8.5% on year

has been conveyed by both the F.M. and the Railway

to year basis. Also, the revenue deficit is seen at 2.8%

Minister. Though facing quite criticism from the

of the GDP, where the non-tax revenue seen at Rs. 2.21

opposition for the budget not being customer

trillion and net receipts under market stabilization

friendly and adding burden to the pockets of the

scheme is estimated at Rs. 200 billion. Within the

Middle Class, the budget lays down a strong message

Financial Markets, welcome changes have been

on maintaining fiscal policy, growing investments,

proposed by the F.M. such as to merge commodities

and generating new jobs.

regular with SEBI, bringing a complete new bankruptcy

obvious on the policy of maximum governance with

code, moving to amend the RBI Act this year and to

minimum government and policies relating to

provide for a monetary policy committee, setting up of

taxation have been welcomed by the industry overall.

public debt management agency. He also announced to

Alongside the corporate world, analysts have also

establish an autonomous bank board bureau in order to

supported the steps taken by the F.M.

improve management of public sector banks. One of the

changing the norms to change in taxation policies

biggest announcements made by the F.M. was to

and various aspects, the budget definitely delivers

propose a gold monetization scheme, a way to reduce

the pitch that the government looks to carry for the

the demand for overseas gold. He proposed an Indian

years to come with a long-term view.

gold coin to help in recycling of local gold and cutting the overseas gold demand.

In terms of the government subsidies, the food subsidy would be seen at Rs. 1.24 trillion, on fertilizers at Rs. 729.69 billion, fuel at Rs. 300 billion. subsidies are estimated at Rs. 2.27 trillion.

13 | M A R C H 2 0 1 5

The major

The F.M. making it

From

STOCK WATCH

CLOCK YOUR STOCK

-Kolisetty Sai Aishwarya

The markets are a never ending rollercoaster ride; the

Close CNX NIFTY

thrill encourages as well as scares everybody. The

investors and their sentiments have been seen in the graphs accurately. Needless to say that the people are

9100 9000 8900 8800 8700 8600 8500

the best judge of their own will, but as far as the markets are concerned, they are here to make the people always

close

27th Feb… 2nd…

3rd…

4th…

5th…

9th…

10th…

11th…

12th…

movement in the markets has been watched by the

be on their toes to get them going on their tunes. The month of March started of the biggest unveiling of the

Close Sensex

financial management of the country and the fate of the several feisty owners of the green notes tied up in the capital markets. The announcement of the railway budget and the union budget was the most awaited

30000 29500 29000 28500 28000

close

event for the financial enthusiasts and it has finally imprinted the markets with their reactions.

The major reforms of the budgets brought in has pin pointed the fact that the current government aims at a major factor that the budget is clearly growth driven and not right now majorly focusing on the reduction of the fiscal deficit of the country. The decision was clearly supported by the RBI which was reflected when the RBI decided to cut down on the SLR rate by .25 per cent according to its recent announcements. This would lead to an increase in the free flow of the funds in the

29,361.50 while the 50-share nifty ended 0.65% or 57.35 points higher at 8901.85. The markets trend downward in the past few days disappointing the investors. The movement is reflected from after the budget was announced. The fluctuations on the budget days showed positive movements in the stock market when the corporate taxes were lowered but could not withstand the pressure after the day of the declaration.

market. The markets showed a drastic gain after the announcement of the railway budget with NIFTY crossing a 100 point increase and the equity doing very impressively. On the day the union budget spread its presence in the market, the 30 shares BSE benchmark Sensex closed 0.48% or 141.38 points higher at 29,361.50 while the 50-share nifty ended 0.65% or 57.35 points 14 | Mhigher A R C Hat2 08901.85.

15

Stocks performance: Axis Bank was one of the top gaining stocks after the budget and the markets actually looked like it favored the banking sector. Soon after the markets took a downward movement the stock performance

declined to a great deal placing the stock at a price of

MCX (Multi commodity exchange of India

570 as of March 13th. The volatility of the other banks

Limited)

also seemed alarming which included HDFC bank (1042.65rs) and PNB (166.05rs). The pharmaceutical industry seems promising and the stocks like Sun Pharma (1022rs) have been showing good results. And some volatile stocks in the sector are Cipla (690rs.) and Dr. Reddys Labs (3375rs). The pharmaceutical sector is a good investment option looking at the market.

However Larson and Tubro (1676rs) have been falling from the last two weeks disappointing its investors. The budget declaring a hike in the excise duty of tobacco hit hard on ITC (fell by 8.09% to 361.95) share prices

The budget showed a hike in the commodity exchange markets as the news of merging SEBI and FMC brought smile on the faces of commodity investors. The merging of the two bodies will now enable the commodity markets to function in a more independent manner and give them autonomy for the transactions. Although the price rise went on to be a victim of the downward moving markets which is seen in the prices the past few days.

Currency markets:

throwing it down the ladder as one of the top losers after The performance of rupee the Indian currency is

the budget

positioned better than the other currencies in Asia Top performing stocks of NSE and BSE (24th march): Sr. Nifty no 1. Lupin 2.

BPCL

3.

4.

5.

Bhati Airtel NTPC GAIL

price

Sensex

price

and is expected to withstand external shocks of the economies. The live FOREX rates are as following: The government has estimated GDP growth for 2014

2025.00 Bharti Airtel 744.50 Dr. Reddys 396.50 NTPC 153.40 GAIL 391.50 Sesa Sterlite

397 3524.90

pretty temporary and not a long run downfall as these markets look optimistic to grow as the budget focuses on growth. One of the main focuses being the development of infrastructure, the real estate sector looks pretty fancy in the coming days. Moreover the banking sector also looks positive with the RBI rate cut

15 | M A R C H 2 0 1 5

expectations of the people towards the budget seemed

153.25 391.35 195.30

The movements of the stocks in a downward trend seem

and the boost of growth in the market.

-15 at 7.4% and expects 8-8.5% for 2015-16. The

partially

announcement.

fulfilled

Moreover

by the

the

budget

disappointing

performances of the markets have led to people losing money in the intraday trading. The investments however are believed to give good returns in the long term. For now the markets pose a good opportunity for the buyers as the prices seem to favor the purchases.

SPECIFIC

INTRODUCTION OF GOLD MONETIZATION SCHEME

-Rahul Mishra

“The desire for gold is the most universal and deeply

as a bank account. Like in bank account people

rooted commercial instinct of the human race.”

deposit money in their accounts and receive interest

-Gerald M. Loeb

from banks. This money is used by banks to lend money to others and receive higher interest from

And monetization of gold proposed by the Finance Minister Arun Jaitley in the 2015 Budget can be considered as an innovative step that can help in improving the economy of the nation, with a Gold Council estimate of 22,000 tonnes of gold in the household and with the gold monetization scheme an approximately 200-300 tonnes can be utilized by the jewelry manufacturers which would help in lowering

them and the difference in the interest paid is the bank’s income. Likewise the jewelers and household will keep their gold in the metal deposit with the bank. The banks are going to pay interest on it and like deposited currency this gold will be used for lending to jewelers who otherwise import gold for their use and again the banks are going to receive interest and the difference being bank’s income.

the imports. Monetization of gold means converting the gold holdings into cash so as to increase the process of

Benefits: The benefits associated to it are, firstly, it

investment and spending thereby lowering the imports

is going to reduce the amount of gold imported in the

of gold.

country and India being the largest consumer of gold has a huge demand, which is fulfilled by importing

The major schemes proposed in the Budget

800-1000tonnes of gold annually. By doing so a

Gold Monetization Scheme, which would help the

huge amount of the Forex reserve is drained out

households and jewelers to open metal deposits and

resulting in the fall of rupee value. With about

keep their gold holdings with banks. These can also be

20,000 tons of gold stagnating in the lockers this

used to borrow money. The other one is Sovereign Gold

scheme would help circulating this reserve from the

Bond, which would help investors to trade in gold

household to the market where it can be used by the

without actually purchasing it. There is also a proposal

needful thereby saving billions of dollars annually.

of Indian Gold Coin, which would be made in India

Secondly the wealth represented by precious metals

with Ashoka Chakra on it, to further reduce the import

may be king-size but is more or less notional as it

of gold coins and minting outside.

doesn’t contribute to the growth neither can it be spent nor invested, though the scheme can attract

Impact, benefits and challenges of the policies Gold deposit scheme: Although there is no detailed information in the Budget, the scheme is likely to work 16 | M A R C H 2 0 1 5

as a bank account. Like in bank account people deposit money in their accounts and receive interest from

huge amounts in the form of interest making gold owners wealthy in the real sense and giving banks the opportunity to lend which might further increase the GDP.

Challenges: The challenges faced under this policy

would be tough. Next is the tenure of the bond

would be for banks to check the purity of gold as they

because longer duration might not give results and

lack verification centers. Another problem for banks

people may avoid it. Lastly the most important factor

would be that they would require know your customer

is the rising price of gold because if that happens

needs before the account gets opened and gold without

banks might get the burden huge repayments and this

bills would be a problem. Storage and transportation is

may require hedging or insurance cover.

another problem associated to it as it may require high security. In India gold has a different value and people all over have a special bonding with the metal therefore keeping it in bank might not be possible for some.

Well these are the schemes from the budget but what will be their impact as customer protection is also important because another major issue is of choice of gold fix as their needs to be a proper benchmark.

Sovereign Gold Bond: These bonds will work like a

Another major issue is of choice of gold fix as their

usual coupon bearing bond which is issued by the

needs to be a proper benchmark as the age old

government. The government receives money from the

London fix would be replaced by International

investors and pays interest as per coupon rate which is

Exchange Benchmark Administration with an

fixed and on maturity returns back the amount taken

electronic benchmark while China is planning to

from investors. In the same way gold bond investors or

launch its own benchmark. So, with these issues

the households, will lend money to government through

monetization of gold is no doubt a good step but it

bonds whose price will be fixed according to some

depends on how well it is designed. The scheme

quantity of gold and later these bond holder will get an

should instill confidence in the public. Transaction

equivalent amount (as on that date) on maturity of the

should be in the form of gold bars and coins as

bond which they would have received by selling the

jewellery has an emotional connect, role played by

gold.

RBI would also be very important like how gold is used to maintain the CRR as a similar scheme is used

Benefits: Again the need to import gold for investment will decline. This would reduce the current account deficit as the outflow of the Forex will be reduced and no more gold will be imported from outside, lending’s in other currency would lessen and the transaction within the country would be in cash form.

Challenges: This would be again difficult as most people prefer to buy physical gold instead buying paper gold would be a tough task rather to generate that belief would be tough. Next is the tenure of the bond because longer duration might not give results and people may 17 | M A R C H 2 0 1 5

avoid it. Lastly the most important factor is the rising

in Turkey which is a good example of the gold monetization scheme, the most important aspect for the popularity of such schemes is trust and designing and implementation will play a major role for its success.

CRISIS

INVESTMENT IN RUSSIA: A WAGER?

-Sachi Kheskani

Russian Economic crisis cannot be explained without

International Monetary Fund (IMF) report, the

mentioning statistics for International Trade provided

Russian economy was already in recession from

by World Trade Organization (WTO), who confirmed

early 2014 mainly as a result of the 2014 Crimean

a reduction in its forecast for 2014 from 4.6% to 3.1%

crisis. But this turned out to be false and the IMF

and for 2015 from 5.3% to 4%. Russia has been in news

revised its rhetoric to close to being in recession and

lately for its falling oil prices, depreciating currency,

a forecast of 0.2% growth in 2014 and 1.0% through

tumbling stock markets, recession, economic pain

2015. Up till March 2015, GDP is 0.04% as per the

caused due to Ukraine and Putin's commandment of

latest statistics.

10% fall in salary for all government officials. Before coming, to the crux of it, let us understand the foundation of Russian economy and its history, though this article is a successor of my previous article"Russian Economy in Doldrums ?", it is a good practice to refresh memory.

US, Japan, France, Germany, Italy, the United Kingdom, Canada (G8-Russia) have imposed various sanctions on Russia and suspended talks on military, space, investment, and visa requirements.

Increased geopolitical risks and the new environment of policy uncertainty and sanctions had an additional

Russia stands the largest country on earth in terms of

negative impact on economic activities in the first

surface area. Earlier Russia was a communist which

half of 2014. It hit the economy through three

converted to a mixed economy with state ownership in

channels: (1) Increased volatility on the exchange

strategic areas of the economy. Much of Russian

rate market and a significant depreciation of the

industry and agriculture, with notable exceptions in the

national

energy and defense-related sectors were privatized in

international financial markets for banks and non-

1990's. Russia emerged victorious from a decade of

financial corporations, and (3) Declining business

post-Soviet economic and political turmoil to reassert

and consumer confidence about future growth

itself as a "World power." It withstood Economic

prospects.

currency;

(2)

Restricted

access

to

collapse of 1998 as it generated income from its vast natural resources. These vast natural resources included oil, natural gas and precious metals and they form a major chunk of Russian Exports. Russia stands second only to US when it comes to manufacturing of sophisticated arms including combat aircraft, air defense systems, ships and submarines. As per International Monetary Fund (IMF) report, the Russian economy 18 |was M A Ralready C H 2 0 1in5 recession from early 2014 mainly as a result of the 2014 Crimean crisis. But this

Russia's situation is getting the most attention these days as it is hugely dependent on oil and gas production, with oil revenues making up 45 percent of the government budget; and the sharp fall on prices has been ruinous. Economists now estimate that Russia's GDP will shrink at least 4.5 percent in 2015, if oil says below $60 per barrel. The plunging price of oil has also caused the depreciation in their currency which has lead to panic in Russia and a rise in inflation, as imports become drastically more

price of oil has also caused the depreciation in their

in Russia it is still possible to generate returns. The

currency which has led to panic in Russia and a rise in

trick for investors is to understand Russia's

inflation,

more

opportunities and its risks. The benefits of investing

expensive. Many Russians, worried that their savings

in Russia include: Rich in Natural Resources, Strong

may vanish, have been rushing out to buy cars and

Emerging Industries and Growing Middle Class. The

washing machines; anything that has more lasting value

risks of investing in Russia include: Lack of

than currency.

Regulation. Russia does not have many safeguards in

as

imports

become

drastically

place to protect investors, especially compared to the In forthcoming months Russia will need an oil price of about $105 a barrel to balance its budget. It is currently

U.S. or free market orientated economy, it still faces a higher level of instability and risk than the U.S.

trading below $ 60. Weak demand from China and healthy supply from America help explain the drop. So

As goes the logic, higher risk leads to high returns,

far, Russia's central bank has been struggling to deal

so if you have a high risk appetite and are prepared

with this crisis. On January 15, 2014, the interest rates

for the worst, probably Russia is the place for you to

were 15 % with a 2% decrease. The high rates were 15

consider for investment purposes.

% with a 2% decrease. The high interest rates were an attempt to stop people from selling off rubles. Such a high rate is likely to slow the country's economy down

Reasons are simple: Cyclical business cycle

even further as it won't act as an incentive for producers to invest. Before planning to invest in any country following point should be well kept in mind: Natural Resources,

Corporate

governance,

Politics

and

economic performance. Coming to the crux of this article: Whether investing in Russia is a good idea or not? Here goes the debate. Russia has never been the easiest country to understand. Winston Churchill described the country as a "riddle, wrapped in a mystery inside an enigma" and today a lot of investors

For investors, Russia has ample economic and market growth opportunities. Since devaluation of the ruble and Russia's financial crisis in 1998, growth in Russia has increased steadily to keep relatively on par with other dominant emerging markets such as Brazil, India and China. Equity markets in the country have soared. Between 2005 and 2010, the Russian stock exchange has delivered steady doubledigit returns to investors, and the country's performance is expected to continue showing sign of

would share his viewpoint.

improvement. Currently the stock markets are It's still hard for many investors to change their

tanking, but from long term perspective it might

memories of the Soviet era. Blame it on the heavy-

prove fruitful to buy shares.

handed government and crony capitalism. Nonetheless, for

investors

is

to

understand

Russia's

opportunities and its risks.

19 | M A R C H 2 0 1 5

The benefits of investing in Russia include: Rich in

explanation except for the fact that it’s worst in Russia in comparison to Pakistan, Libya and Iran.

While Russia offers high returns, it is dominated by energy companies, the state of regulations.

Natural Resources: Oil and gas play a major part in the Russian economy in terms of production for internal purposes and exports. In 2010 the country had nearly 80 billion barrels of proven oil reserves and tops the world's rankings for natural gas. Russia also has exposure to the energy industry through a number of key joint ventures throughout Africa and other energy producing nations.

Apart from oil and natural gas, the mining and production of precious and non-precious metals is an enormous industry in the country, with great scope.

Russia's heavy dependence on resources represents a risk. When you invest in Russia, you have to keep in mind the direction of commodity prices for where ever oil prices go, Russian economy goes.

Politics, Corruption and Lack of Governance is a characteristic of an emerging economy and needs no explanation except for the fact that it’s worst in Russia in comparison Libya and Iran. While 20 | M A Rto C HPakistan, 2015 Russia offers high returns, it is dominated by energy

COVER STORY

RISE OF A SUPERPOWER

-Alisha Singh

To the list of various powerful banks of the world, yet

capital of the bank from $50 billion to $100 billion.

adds another one known as the AIIB (Asian

India has joined the initiative to set up the Bank

Infrastructure Investment Bank), it is an international

floated last year by China to step financing of

financial institution proposed by China. The purpose of

infrastructure projects in the region. On October 24,

the multilateral development bank is to provide finance

2014, a signing ceremony was held in Beijing, which

to infrastructure projects in the Asia-Pacific region.

formally recognized the establishment of the bank.

Some also consider AIIB as a cut throat competitor of

21 countries signed the bill, which included: China,

IMF, the World Bank and the Asian Development Bank

India,

(ADB), which have been regarded to be dominated by

Philippines, Pakistan, Oman, Bangladesh, Brunei,

powerful and developed nations like the United States.

Cambodia, Kazakhstan, Kuwait, Laos, Myanmar,

Thailand,

Malaysia,

Singapore,

the

Mongolia, Nepal, Qatar, Sri Lanka, Uzbekistan, and How it all started?

Vietnam, According to sources, U.S. pressure

The history of AIIB dates back to October 2013,

allegedly kept Australia and South Korea at bay from

wherein the Chinese government was dissatisfied with

signing up as founding members, despite the fact that

the way things worked in the economy such as slow

they had formerly expressed an interest in it. The

pace of reforms and governance, also its (China) desire

bank to be headquartered in Beijing is expected to be

to have greater share in the globalized institutions like

operational this year. The authorized capital of AIIB

the IMF, World Bank and Asian Development Bank

is $ 100 billion and the initial subscribed capital is

which it claimed to be dominated by that of American,

expected to be around $ 50 billion. The paid-in ratio

European and Japanese interests. In the meanwhile, the

will be 20 per cent, according to the MOU.

Asian Development Bank (ADB) published a report in

Major Reason for Establishing AIIB:

2010 stating that the region (China) requires $8 trillion to be invested from 2010 to 2020 in infrastructure for

As the name suggests, AIIB would lend money to

its continued economic development. AIIB seized this

build roads, mobile phone towers and other forms of

opportunity and instantaneously offered help by

infrastructure in poorer parts of Asia thereby

offering capital to finance this project and allow it to

improving the infrastructure of countries coming

play a greater role in the economic development of the

under the banner of developing and under-developed

region commensurate with its growing economic and

countries. Also according to China; Asia has a

political clout.

massive infrastructure funding gap. The ADB has pegged the hole at some $8 trillion between 2010 and

In June 2014 China proposed doubling the registered capital of the bank from $50 billion to $100 billion.

India has 21 joined | M A Rthe C Hinitiative 2 0 1 5 to set up the Bank floated last year by China to step financing of infrastructure

2020. Existing institutions cannot hope to fill it; the ADB has a capital base (money both paid-in and pledged by member nations) of just over $160 billion and the World Bank has $223 billion. The AIIB

ADB has a capital base (money both paid-in and

countries to persuade them to sign up. At the bank’s

pledged by member nations) of just over $160 billion

inauguration ceremony, Australia, Indonesia and

and the World Bank has $223 billion. The AIIB would

South Korea were conspicuously absent. In public,

start with $50 billion in capital—hardly enough for

the concern cited by America and some of the hold-

what is needed but still a helpful boost. Moreover, while

outs has been a lack of clarity about AIIB’s

ADB and World Bank loans support numerous causes

governance. Critics warn that the China-led bank

from environmental protection to gender equality, the

may fail to live up to the environmental, labor and

AIIB would wholly concentrate its firepower on

procurement standards that are essential to the

infrastructure. Officially at least, ADB and World Bank

mission of development lenders. However, China

officials have extended a cautious welcome to the new

has insisted that AIIB will be rigorous in adopting

China-led bank, stating that there is a greater scope for

the best practices of institutions such as the World

collaboration.

Bank.

Will China’s Asian Infrastructure Investment Bank

Some countries are of the opinion that China might

succeed?

use the new bank to expand its influence at the expense of America and Japan, Asia's established

The establishment of AIIB has become a hot topic of discussion and debate. What makes this fledgling institution so interesting is the political support it is receiving within China. The announcement was made by no less than China’s leader Xi Jinping at the annual meeting of the Asia-Pacific Economic Co-operation (APEC) forum in Bali last year. Since then, there has been a great deal of speculation as to who will be joining, who was invited to join and who was not invited to join. At the same time, there has been considerable discussion about the true intent of the AIIB, with much speculation that the true purpose of the new bank to challenge Japan’s primacy with the Asian Development Bank in Manila.

powers. China’s decision to fund a new multilateral bank rather than give more too existing ones reflects its exasperation with the glacial pace of global economic governance reform. The same motivation lies behind the New Development Bank established by the BRICS (Brazil, Russia, India, China and South Africa). Although China is the biggest economy in Asia, the ADB is dominated by Japan; Japan’s voting share is more than twice China’s.

Reforms to give China a little more say at the International Monetary Fund have been delayed for China’s. Reforms to give China a little more say at the International Monetary Fund have been delayed for years, and even if they go through, America will

Behind the scenes, though, the Chinese initiative has set

still retain far more power. If China can bring itself

off a heated diplomatic battle. America has lobbied

to stress governance as an essential requirement of

allies not to join the AIIB, while Jin Liqun, the Chinese

development, the AIIB will have the ability to be a

official who will head the bank, has shuttled between

success. They say they are committed to doing so.

countries to persuade them to sign up. At the bank’s

And who knows, maybe some of this will rub off on

inauguration ceremony, Australia, Indonesia and South

China’s own administration. But if not, the AIIB will

22 | M A R C H 2 0 1 5

Conclusion In order to match up to the powers of ADB, IMF and other powerful institutions, AIIB has to go beyond national infrastructure projects, there is also a need to further develop and finance cross-border regional connectivity infrastructure projects. These projects are even more important with the rise of trade in value-added and production networks in the region.

Figure: AIIB signing ceremony

These production networks have contributed to the

And who knows, maybe some of this will rub off on

industrial upgrading and competitiveness for many

China’s own administration. But if not, the AIIB will

countries. However, for countries to meaningfully

become merely an embarrassing shill for China’s own

participation

commercial interests. Hence, for AIIB to be successful,

network of cross-border infrastructure, including

China has to follow all the norms and regulations laid

road systems,

down by the international community which would help

backbone, should be present.

AIIB to reach greater heights.

23 | M A R C H 2 0 1 5

production

ports,

networks,

a

reliable

and telecommunications

EURO HAPPENING

CRISIS IN GREECE

-Srishti Karmakar

Greece crisis started in 2009 with the announcement of

dimensions of tax evasion. In this case we did see a

their budget deficit of 12.9% of GDP, four times the

plan of training tourist to become tax spy to keep a

limit of European Union’s limit. And a vicious cycle

watch on the local shop. Thankfully the plan was

kicked off. Investors were warned about this by

ridiculed. The plan is to reduce civil services

lowering the credit rating of Greece. Higher cost of

spending on things other than salary and pension and

future loan made it unlikely for Greece to find funds to

not to renege on privatization that is already in

repay the debt. In 2010, an austerity package was

progress. But they plan to slow down any future

announced to lower the budget deficit to 3% of GDP by

privatization. The reform passed will give the

2012.

government vital four months of extension on its

The EU and IMF have provided for a total of €240 billion (€110 billion for the 1st bailout in the year 2010 and €130 billion for the 2nd bailout in 2012) in the emergency funding in return of the austerity measure.

The funding only gave Greece enough money to pay

debt payment. The problems keep mounting for the New Greek leader, Alexis Tsipras. Access to sufficient short-term funding is not guaranteed. Mr. Tsipras has started to face opposition from within his own party and speculation is building about a third bailout for Greece.

interest on its debt and keep bank capitalized and running. Austerity measure did not help Greece to come

Finance Minister Varoufakis has admitted Athens’

out of the high budget deficit balance. It further slowed

debt is unserviceable. In the very earliest days of this

the Greece economy, reducing the tax revenue required

government, he identified the error in past

to pay the debt. When voters elected anti-bailout party

approaches to Greece’s persistent cash flow

Syriza on 25th January 2015 as their new government,

problems: resolving liquidity gaps at any cost when

they were hoping for the mission that they had

solvency was the real issue. Extending the bailout

promised: loosening austerity. They had promised to

deadline will enable the European Central Bank

slash the country’s debt while maintaining the funding

(ECB) to continue providing liquidity to Greek

from Europe that would allow Greece to stay in the

banks on favorable terms. This will be crucial at a

Eurozone. They came up with an austerity-for-reform

time of high political uncertainty, which risks

model. In exchange for the reforms, Greece's EU

perpetuating the steady flow of deposit withdrawals

partners will keep the country's government solvent for

from the banking system that built up in the pre-

the foreseeable future. The key reform promised related

election period. Greece does not want new loans. It

to tax code and tax administration. The new

wants to restructure its debt over a very long term

government also promises to crack down several

repayment schedule. This is the only inevitable next

dimensions of tax evasion. In this case we did see a plan

step for Greece. Over the past five years, Greece has

of training 24 | tourist M A R CtoH become 2 0 1 5 tax spy to keep a watch on

received €145 billion in new loans from EFSF, €100

the local shop. Thankfully the plan was ridiculed. The

billion of credit from ECB and more cash from the

committee. The euro-zone governments themselves will have no standing in this matter, as they are not creditors.

The

Maastricht

Treaty

forbids

governments in the euro zone from lending money to each other. If nothing else of quality comes out of forming a creditor committee, the de-politicization of the conversation and the substitution of financial professionals for elected leaders would be a big step toward eventually reaching a sensible solution. An outside arbitrator, ideally a non-European, to steer the talks would also advance the conversations faster. The only thing to see now is if this next stage inevitable next step for Greece. Over the past five years,

is entered in an orderly or a chaotic manner. To get

Greece has received €145 billion in new loans from

to these substantive talks, though, either Greece has

EFSF, €100 billion of credit from ECB and more cash

to default outright or the euro-zone governments

from the IMF. Greece has been fixed by increasing its

have to choose a path that leads toward the

debt burden as a share of its income by half. Default is

negotiating table within a window defined by the

an easy course for Greece now. It has no access to

length of a bridge loan.

capital markets. Its banks are already largely excluded from international commerce. A default would be tougher on creditors if not others. The next step in this process has to be the formation of a creditor committee.

This is to negotiate a resolution of Greece’s debts. What the governments are negotiating right now is a bridge financing arrangement that will buy a few extra months for a creditor committee to come up with a good resolution. A creditor committee is the next step because Greece will default in due course and move because Greece will default in due course and move into creditor talks if bridge financing is not provided.

The two biggest stakeholders in the debt resolution, EFSF and ECB would be a part of the creditors committee. The euro-zone governments themselves will have no standing in this matter, as they are not 25 |The M AMaastricht R C H 2 0 1 5Treaty forbids governments creditors.

in the euro zone from lending money to each other. If

Greece did not follow the rules of responsible spending and borrowing and the result was catastrophic debt that the country is unable to pay for more than a decade, potentially leading to financial crises in the countries loaned money to Greece. To get to these substantive talks, though, either Greece has to default outright or the euro-zone governments have to choose a path that leads toward the negotiating table within a window defined by the length of a bridge loan. In any case, the clock is ticking. Greece probably has less than a month’s worth of cash on hand, and the ECB could pull the plug on banking system support at any moment.

QUICK BITE

PLANS TO TRUNCATE THE ROLE OF RBI

-Kaushik Chandell

This year’s budget came out to be full of surprises. One

RBI as a merchant banker would always seek to keep

of the biggest surprise in the Budget 2015 was the

the yields low in Government Sectors. The inclusion

proposal to take away the regulatory power of the

of several of these in the list is a clear indication that

Reserve Bank of India over secondary trade and to pass

the government has taken a hassle decision on

it on to the Securities and Exchange Board of India

financial regulations for the session 2015-16.

(SEBI) under amendments to the Reserve Bank of India (RBI) Act. Concluding the fact that this proposal will truncate the RBI’s role as government’s merchant banker by creating a Public Debt Management Agency.

RBI governor, however, sought to downplay the issue in a conference call with the market analysts. RBI’s power in the financial market has been defined under the Clause 45U and Clause 45W under the Reserve

"On the shifting of regulatory powers from RBI, there are indeed some clauses in the Finance Bill but the finance minister's speech did not contain any reference to this and FM's speech generally flags important acts of the government and I am not worried that this will happen," said the RBI governor Mr. Raghuram Rajan.

Bank of India Act blended in the Financial Bill. The

On the proposal to divest, Mr. Rajan added “The

ground will shrink for the RBI if the measures and

notion is that the PDMA will be independent and

proposals such as amendment to the Foreign Exchange

won't suffer from conflict of interest. I have said that

Management Act to shift regulation-making power on

these conflicts of interests are probably not the most

equity related capital flows to the government, moving

important thing now. My sense is when it finally

government debt management agency to a public debt

emerges, it will have a lot of RBI presence and

management agency and the move to implement

support to avoid reinventing the wheel".

recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) headed by Justice Srikrishna.

Confidence shown by the governor himself gives RBI a window of scope that RBI will continue its role in regulating the capital flows although Finance

Budget for a long time, has always been controversial

Minister, Mr. Arun Jaitely said it was a policy issue

and a subject of debate. For instances, suggestions by

and hence comes under the domain of the

past committees such as SEBI controlling the secondary

government.

market trading in government bonds as it was the financial regulator. The shift of management of public debt to the government was made by RBI itself long ago on the grounds that there was a conflict of interest as RBI as a merchant banker would always seek to keep the yields Government Sectors. The inclusion of 26 |low M AinR C H2015 several of these in the list is a clear indication that the

VRIDDHI’s RESEARCH CORNER

COMPANY IN FOCUS: TATA MOTORS

Economic Overview

-Amit Mody and corporate earnings, quantitative easing of the European Central Bank and Bank of Japan and the

The Indian economy is on an uptick and the India story is finally gathering some steam. After years of slow

never satiating hunger of the investors make Indian equities the asset class to watch out for.

growth and high inflation, the economy looks to have Industry Overview

bottomed out. With a new government at the centre and some key reforms in pipeline India is perhaps the only bright spot in the otherwise gloomy global horizon.

Two macroeconomic factors- Inflation and CAD, that were spiraling India into darkness are now under

The automobile industry is a highly cyclical industry.

The automobile sector contributes 7% to the Indian GDP and 22% to the manufacturing sector. The sector can be broadly classified into four segments

control. The period of high inflation and high interest rates is well behind. The latest CPI number stands at

I.

5.37% and WPI at -2.06%. This gave the Reserve Bank

II.

of India enough confidence to cut the benchmark rates

III.

Two wheelers

which now quote 7.5%. As per the latest GDP numbers

IV.

Three wheelers

counted with the new method and a revised base year of 2011-12, India grew at an impressive 7.50% YoY. With crude oil hovering sub US$50, India’s CAD also seems very much under control. This has in particularly brought down the fuel prices in the country, thus taming inflation and leaving consumers with more money to spend. All these factors paint a rosy picture for the Indian economy in the coming days. No wonder Indian equities were the second best performing in the world delivering a 30% returns.

Passenger vehicles Commercial vehicles

The market size of the auto sector was USD 58 Billion in 2011 and is slated to be of the size of USD 145 Billion by 2017. With inflation cooling off and interest rates smoothing the demand in the auto is anticipated to grow. The February month car sales data only strengthens the case that the worst is well behind and the growth having picked up.

Company Overview Tata Motors Limited is India’s largest automobile

The future looks equally good in the short to medium

company, with consolidated revenues of INR 2,

term unless the US Federal Reserve hints at raising the

32,834 crores (USD 38.9 billion) in 2013-14. It is the

interest rates.

leader in commercial vehicles in each segment, and

Backed by strong fundamentals, macroeconomic indicators on the right side, a slowing Chinese economy and corporate earnings, quantitative easing of the

among the top in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments.

27 | Central M A R C HBank 2 0 1 5and Bank of Japan and the European

With a presence across 175 countries, Tata cars,

never satiating hunger of the investors make Indian

buses and trucks are marketed in several countries in

With a presence across 175 countries, Tata cars, buses and trucks are marketed in several countries in Europe, Africa, the Middle East, South Asia, South East Asia, South America, CIS and Russia. The Company’s manufacturing base in India is spread across Jamshedpur

(Jharkhand),

Pune

(Maharashtra),

Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand), Sanand (Gujarat) and Dharwad (Karnataka). The Company’s dealership, sales, services and spare parts network comprises over 6,600 touch points. Through subsidiaries and associate companies, Tata Motors has operations in the UK, South Korea, Thailand, South Africa and Indonesia. Among them is Jaguar Land Rover, acquired in 2008.

Analyst’s Recommendation TATA Motors is a high beta (1.61) and highly cyclical stock with a long term potential. The company has 82.2% of its revenue coming from JLR. This makes the company highly dependent on the performance of JLR. With a slowing Eurozone and China, two major markets for JLR, TATA Motors top line may see some pressure unless the domestic market doesn’t do well. Many investors may not like heavy proportion of cash on balance sheet. The investors are would like the cash to be invested as capex. On the ratios the stock is very sound with strong interest cover, asset turnover. The stock is trading at 9x its one forward EPS.

Product Mix

Technically, one can enter the stock at 550-555

Over the years the dependence on Commercial vehicle

levels as stock is likely to move sideways and remain

segment has been on a rise. This was well reflected in

range bound in 555-590. The stock sees a strong

the price movement when the economy was subdued.

resistance at Rs 604.

With economy now picking up this mixture will work in favour of TATA Motors as it is the market leader of the commercial vehicle segment.

P RODUCT M IX CO NTRIBUTION CV

PV

39

37

29

26

61

63

71

74

2011

2012

2013

2014

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Call: Buy with target of 590 in medium term and 620 for 1 year term.

SWOT Analysis

Strengths Strong Domestic Player Brand Image is robust Extensive distribution network Strong parent company

Weaknesses Inability to penetrate into international markets Employee management- Strikes and unrests.

Quality issues

SWOT Analysis Opportunities Growing automobile manufacturing industry Strong rural demand Launch of LPG variants Share of the segments in % 14

Threats Intense competition from global brands Environmental regulations Fuel prices Shareholding Pattern

33 29 80

34

11 26

Two Wheeler

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Passenger Vehicles

Promotor

FII

DII

Others

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