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
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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
KNOWLEDGE ENHANCER
The IBS Times is an academic print and is not for any commercial sale. Reliability and Responsibility for sources of data for the articles vests with the respective authors. Please feel free to drop in your suggestions or any feedback at editor.ibstimes@gmail.com Š IBS Times – FinStreet, The Official Capital Markets Club of IBS Hyderabad. All Rights Reserved Visit us at www.finstreetibs.org
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