Arthneeti June 2011 SIMSREE by Zigu MBA

Sydenham Institute of Management Studies Research & Entrepreneurship Education

Arthneeti A SIMSREE Finance Forum Initiative | June 2011

Special Feature: Mr. Bharat Sampat, CFO & EVP, DCB Meeting Infrastructure Needs of Indian Economy

Interview with Mr. Sujan Hajra, Chief Economist, Anandrathi

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eDITOR’S vIEW The world economic outlook has been shadowed by rising debt problems in Euro region with the contagion expected to affect the other European economies. There are also concerns about United States’ unsustainable fiscal deficits, which is one of the greatest challenges it faces. US’ problems have been further aggravated with the unresolved debate on debt-ceiling creating an impression of US’ default on public debt. The Indian economy grew by 8.5 percent in FY2011, which is lower than expected but better than the global growth standards. In the backdrop of higher inflationary pressures in the system RBI continued its monetary tightening measures because of the high domestic inflation which is much above the comfort zone. It increased repo rate & reverse repo for the tenth time by 25 bps to 7.5% & 6.5% respectively. Monsoons are expected to be good which would taper down the food prices and moderate the inflation within RBI limit. Other emerging economies such as China and Brazil have also been battling inflation for the past one year. The issue brings to you some interesting articles on Infrastructure development in India, analysis on the much happening Pharma Sector and the economic analysis of Brazil. We have also covered Interviews of prominent personalities from the world of Banking & Finance. We do look forward to views and suggestion from the readers to help us improvise the content of the Newsletter and make it more relevant and informative. Hope you enjoy reading.

Gopidalai Muralidhar Rao (Editor-Arthneeti)

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CONTENTS Special Feature An Interview with Mr. Bharat Sampat CFO & EVP Development Credit Bank (DCB)

Expert Talk An Interview with Mr. Sujan Hajra Chief Economist & Co-Head-Research Anandrathi Financial Services

The SIMSREE Street

Economy Analysis 17 - Brazil Meeting the Infrastructure Needs of Indian Economy 20 Sectoral View: Pharmaceuticals Macr-O-nomics

Lessons On Finance

Personality To Emulate 31 Finance-Q ? 32 3

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Mr. Bharat Sampat CFO & EVP Development Credit Bank (DCB)

A Chartered Accountant and Cost Accountant along with a Post Graduate Degree in Law. Mr. Sampat has over 25 years of experience in senior positions with reputed organizations such as ABN Amro Bank, ANZ Grindlays Bank, Standard Chartered Bank, Hoechst India and Larsen & Toubro.

Q: RBI for the tenth time has raised repo rates. To what extent would this affect the liquidity in the banking system? A: The rate hike has increased the cost of funds but liquidity continues to remain available. In other words, sufficient liquidity is available in the system but at a higher cost. Q: There has been much debate over deregulation of Savings Account rate by RBI. How would such deregulation affect the margins of Banks? A: Over a short period, Savings Account interest rate has increased from 3.2% p.a. (effective rate when 3.5% p.a. interest was paid on minimum balances between 10th and last day of the month) to 3.5% p.a. (when paid on daily balances) and further to 4.0% p.a. Banks have passed on some of the cost increase through base rate increases. However, net interest margins are expected to compress in current quarter. If deregulation is implemented, the pace and manner of implementation will have transitory impact. Over the long run, this will provide greater room for product innovation and will help customers obtain products which suit their specific requirements. Q: RBI has proposed to grant new licenses to new players. What is your view on it? A: In the past, new licenses have brought fresh players with different approaches who have infused new technology, deepened markets and created fresh business segments. Over the long run it has had a positive impact on banks in particular and economy in general. The new round of licenses will have similar impact on the industry

and Indiaâ&#x20AC;&#x2122;s economy. Having said that, the existing banks will face number of challenges in terms of retaining good talent and customers. Newer banks will seek to hire industry experienced staff from existing banks, especially in customer and regulator facing roles. They will also seek to cherry pick from existing customer base of the banks. Q: Whom do you think would be preferred to grant licenses - NBFCs or well established Corporates? A: RBI would take the final call, but if you see in the past they have given licenses to Developmental Finance Institutions (DFIs) like ICICI, Cooperative Banks that is how DCB was issued license to operate as a commercial bank and NBFCs thatâ&#x20AC;&#x2122;s how Kotak was converted into bank. So, I donâ&#x20AC;&#x2122;t think there is any bias towards any sort of player coming in. I think RBI will be looking at corporate governance standards and ability to support the bank in the long run. Q: When there is so much demand for capital from telecommunication, infrastructure, power, why there is need for them to go abroad and borrow? Is the Indian Banking system not capable of providing the money at same cost? A: Indian banking sector is well equipped to support capital demand from these sectors. Cost of domestic funds is high due to prevailing high interest rates. However, in long run, this cost is free of currency and sovereign risk. Lower policy change risk and better management of execution risks can result in better credit rating for firms in these sectors and lower costs. Q: What do you think about the possible consolidation in the banking industry to firm balance sheet size and increase size of assets? A: Given the RBI requirement of dispersed shareholding and limited voting rights, takeovers are not easy unless a very compelling premium is offered over existing market price. This makes consolidation a difficult proposition. Regulator could force consolidation of banks which have serious governance issues or have burnt away their capital through losses. Another possible trigger is a minimum capital requirement which is presently at Rs. 300 crores. As

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things now stand, most of the existing banks could meet any reasonable increase in this hurdle without a stretch. Q: There are quite a large number of Public Sector banks (PSBs) with presence across India. Do you think there is a need for consolidation in PSBs? A: Firstly, each PSB has its own flavor and within State Bank of India (SBI) group, subsidiaries have their own flavor and focus areas. For example, Canara Bank is different from SBI, which is again different from Punjab National Bank (PNB). They have different targets and they operate in different areas. They may be present across the country but they have their own focus, but I do see a need to consolidate in that sense. Government has significant ownership but not complete ownership. Hence, it is not like merging two wholly owned subsidiaries into one company. Whether it would bring in economies of scale, I think pursuit of balance sheet size is not something absolutely a must. In fact banks which have become the biggest banks have gone through stresses and strains. If you look at Royal Bank of Scotland (RBS) or Citibank, both had their own share of stresses and strains. In late 90s, some Japanese banks were used to be in top ten banks in terms of size around the world, but today they don’t exist on that list anymore. Now, China is reaching that place, but where are Japanese banks now. So, it is not only size which gives you advantage. Larger deals can be run by Indian banks on a syndication basis with the exposure shared. I don’t think mergers are necessary for that purpose. Q: Aftermath the financial crisis, risk management has been a priority. Basel Committee on Banking & Supervision (BCBS) has recently proposed the new Basel III norms. How would this affect the Indian banks? A: In India the Capital Adequacy Rate (CAR) stands at a strong 13.4%+ levels. There are also other risks which are not measured by the balance sheet by Basel II norms. So, Basel III norms would pave way for better risk management. Banks, in general should be able to make the transition given that our CAR stands well above the requirement by Basel Committee. Capitalisation levels are strong in Indian banking industry. We would have to eventually move to Basel III, which is inevitable and I don’t see any problem to it. You can’t play in an international market unless you are also streamlined with

the regulatory regime over there. If you declare your capital adequacy as per Basel II and if the world has moved onto Basel III standards, then how will they value your credit worthiness? So, yes Basel III will come in and RBI has already been taking steps on that front. Q: How can Banks play an active role in strengthening the Bond market? A: I think there has been intermediation of routing wholesale bonds through mutual funds for example. That route has been to some extent restricted and curtailed by RBI. Traditionally banks have offered good fixed deposit rates and vis-a-vis the riskiness of the bonds there was to some extent an aversion to bonds in retail investor community. However if you see recently, L&T Finance as of this week and Sundaram Finance came out with some Rs. 1000 crores bond issue. Sundaram issue has been oversubscribed 8 times in the first day. There is a significant appetite decent corporate bond. Price differentiation will also then start emerging and yield curve could be more effectively embedded into the banking system if we have a deep corporate bond market. So yes, it is required but it would take time before it develops. For an emerging economy which aspires to be a developed economy needs to have a deep corporate bond market in place. Q: What has been the significant change in the global banking system post the financial crisis? A: “Bigger Is Better” no more holds good. There is less emphasis on pursuit of higher market share and bigger balance sheet size. Bigger banks face continuous scrutiny from regulators on their liquidity, capitalisation levels and corporate governance practices. Proposed Basel III implementation will further strengthen the bank balance sheets. Emerging markets have become the new growth engines of the world economy and this provides a unique opportunity for banks of these countries to grow rapidly. Q: How much would the depressed US economy & Euro crisis affect the Indian growth story? A: Muted US economy and Euro crisis would result in greater capital flows into high growth emerging markets like India – in terms of FIIs and FDIs. Economies of skill and scale offered by Indian economy make India attractive as a quality low cost production destination for many

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sectors. Emerging middle class drives increasing demand for goods and services in sectors like FMCG, Twowheelers, Consumer durables, etc. Similarly, expected infrastructure spend would drive demand for commodities and industrial goods. This makes India, an attractive destination as manufacturing hub for all industries. Lastly, this also results in reverse bran drain or at least diminished outflow of talent from India. This provides a ready talent pool for domestic and international investors. Q: DCB has been present in some states and other major cities in India. So, is this a strategic decision to expand in selected regions across India? A: As far as DCB is considered, we are majorly present across 56 branches of the total branches in Gujarat, Maharashtra & Andhra Pradesh. On the other hand we are present in major cities such as Delhi (7 branches), Kolkata (3 branches), Chennai (2 branches) and Bangalore (4). As far as providing services to customers and reaching our customers, we have tied up with couple of banks to enable our customers get access to our services. For example we have tied up with other institutions across 500 locations for payment services. So, as far as services to customers are concerned, those are equivalent to any bank with national presence. As far as geographic presence is concerned, we would prefer to work in clusters, deepen our relations with customers in existing clusters and then reach out to newer areas. Recently, we have received fresh licenses in cities where we aren’t present. We got licenses in Noida, Ludhiana, Lucknow, Jaipur, Vijayawada and Kochi and also received four more licenses for operations in the developmental areas (2 licenses in MP, 2 licenses in Orissa), which is for financial inclusion purpose. We are looking at expanding our presence across the country. Q: Nowadays, we find large Universal Banks offering all types of financial services. So, are there any plans for DCB to expand its financial services offerings in near future? A: I think universal banking position is possible at a point wherein you have achieved a critical size. At this size, DCB would not be looking to offering those services as we do not want to get into this area now and in future, we don’t know. But what I would also like to say that, it is not necessary that each bank has to be universal. One of the most successful finance companies (HDFC) in India is not a universal bank. It has its focus on housing mortgage.

Even Sriram Transport Finance Co. has emerged successful by focusing on one segment. Each has its own space and one has to play according to its strengths and weaknesses. Q: What are DCB’s growth strategies in the years ahead? A: DCB’s focus is on building low cost deposit franchise with strong capital position. We have a strong focus on retail CASA (Current & Savings Accounts) balances and retail Term Deposits. On the asset side, we want a balanced growth in advances which are secured and repriceable. Our chosen areas of growth are Retail Mortgages, Micro SME (businesses with turnover up to Rs. 10 crores) and SME (businesses with turnover up to Rs. 100 crores). We have a significant presence in MidCorporate space. Agri & Inclusive Banking (AIB) helps us achieve priority sector targets and promotes inclusive banking. Q: Is DCB looking forward to expansions through M&As in India? A: In near future, inorganic growth is not being pursued by us. Q: Do you think the Indian government is going slow on financial reforms, critical to sustainability of India’s growth? A: I think a lot of work continues to happen at the government’s end. It is just that these structural reforms needs lot of doing before the reforms becomes visible. I am sure at the government level; huge amount of work is going on. We would see the results coming out in future sooner or later. Q: RBI & Indian government have been targeting to reach out to the unbanked population across India. How according to you can Banks play a more active role in financial inclusion? A: Banks have a vital role to play to achieve the financial inclusion objective in the country. Through expansion of rural network, extension of no frills banking, micro-credit, extension of banking facility through business correspondent (BCs) model etc, we can achieve further development of banking services in the untapped regions.

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Q: There has been a lot of interest being shown by Banks & Telecom companies to enter into Mobile Banking (SBI & Airtel JV, ICICI Bank & Vodafone JV). Is DCB also looking into offering similar kind of services through this platform? A: Mobile banking has huge potential in India. We are exploring that market and we have got some start towards it and I think all banks will eventually enter into this space, which is the future market for all banks. We already have a product in Mobile Banking, but on a very small scale. Q: Business Correspondents (BCs) Model is being explored by various Banks. How do you view the scope of such Model in bridging the gap between banks and unbanked population? A: We have seen several banks have launched it. People have made a start and are offering the services. We also had a look at some, but what we want is to work through the entire model before we enter into it. But, this can be an effective model to spread banking into the masses. Q: Where is the next phase of growth expected for the Indian banking sector? A: Presently the economic growth is weighed down by inflation and high interest rates. Both are expected to ease up towards the end of this year with inflation falling to 6.5% p.a. Even 6.5% is a very high number in itself. Going forward, key growth drivers would be economic reforms and infrastructure. There is no alternative option to reforms as this would remove obstacles. On supply side, development of infrastructure is only way the friction in mobility of goods, services and factors of production can be reduced which in turn would help impact inflation in long run. This should help return Indian economy to higher growth trajectory. As a thumb rule, banking sector expands at a rate three times the GDP growth rate. Q: How do you view the present global economic scenario with negative cues coming from US, Japan and European economies? A: US have been under stress for quite some time. Euro region has been facing serious challenges due to what is happening in Greece. Yes, Japan is facing a problem because of the natural calamity. The global growth would be slow for the next few years. But globally, capital is still

intact and it would seek returns and if these economies are not prospering then it would seek returns where there is growth. This is where emerging markets like India would win. We should be ready to attract it. An economy would never go on a linear path, it experiences Ups & Downs, but what you got to look is the secular trend. Q: How should students prepare to make a career in the field of Banking & Finance? What according to you are the attributes required to be a successful banker? A: It is essential to have a strong grounding in Financial Management and Economics. Financial management for taking micro decisions, where the decisions come to your table and Economics to understand strategically where things are moving towards - macro picture. The interplay of the markets can be understood only when you understand economics, which is very important. Financial management helps you to assess what is working for you and what isn’t working for you in the micro sense. It is also very important to keep up with the events happening in financial services world. Reading of books like Liar’s Poker by Michael Lewis; Too Big to Fail by Andrew Ross Sorkin; Barbarians at the Gate by Bryan Burrough & John Helyar; One Up on Wall Street’s by Peter Lynch; The Money Guide by Paul Erdman, etc gives a good practical insight into the world of Banking & Finance. The books which have been mentioned have their own significance, because it gives you an all-round view of the financial industry. Usually what you study is theory but in practice various important aspects needs to be considered. Liar’s Poker, very famous book- gives you deep insights into the practical working of the debt markets, Too Big to Fail would help you understand what has changed post the Lehmann brothers (crisis), Barbarians at the Gate would give you some insights about how do the Mergers & Acquisitions market work, Leveraged Buyouts (LBOs), Management Buyouts (MBOs) and consolidation issues; One Upon Wall Street would help you understand how does the mutual fund industry works and the fifth book – The Money Guide which is a non friction book helps you understand the linkages between the markets - financial markets which exists. I feel if you put all these as a sort of curriculum, you would come up with more practical insights that would help you develop an all round abilities in financial field. By Gopidalai Muralidhar Rao, MMS 2010-2012

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Arthneeti 2011 Mr. Sujan Hajra Chief Economist & Co-Head--Research Anandrathi Financial Services

Q: Economies especially emerging economies have been facing Inflationary pressures. Is the there any global perspective or is it something fundamentally wrong with inflation in India? A: I think, it is a bit of this and bit of that. If you see inflation dynamics in India, Wholesale Price Index (WPI) is taken as the headline inflation which include includes 4 major components. One is the food component, which is predominantly domestic because India doesn’t either export or import any major quantity. So, there the kind of food inflation which we are expecting is basically influenced by the domestic factors. The second component is Non-Food Food Primary, which basically includes cotton, jute, oil seeds etc. Here, the international component exists. For example, if you look at the cotton prices in India, today inflation is almost 100 %. So there is an international component to that. The third segment is Fuel, Electricity & all. The fuel prices, of course, a significant amount has international linkage. All the petroleum products are affected by the international trends. Since, 1/3rd of the petroleum products are decontrolled controlled in India this directly passes through to end users. Other things which are controlled in particular Diesel, LPG and Kerosene there is some amount of lag passthrough. So there the international impact is pretty significant. The biggest segment with th significant international impact comes from the manufacturing product prices. Almost 65% of India’s WPI weightage is for manufacturing products especially the engineering products and all. Manufacturing products are highly internationally traded. The part rt of high inflation which is taking place in India now is a domestic phenomenon. The lack of investment in agriculture, high dependence on rains is the major factors leading to the current inflationary pressures. On the other hand, internationally transmi transmitted component particularly fuel and manufacturing have also a significant effect on prices and commodities are also being affected from international prices.

Q: To what extent would RBI raise rates and what is the comfort zone for RBI? A: RBI in the medium edium term would expect to see inflation at a range of 4 to 5 % and in the long term below 4 %. That doesn’t necessarily mean that RBI would keep on raising rates until inflation settles at the targeted levels. RBI as you know is doing the tightening for more m than 12 months and the major impact of policy tightening and inflation happens with a lag of almost 18 months. RBI would now start expecting the impact of its past tightening measures on the overall inflation situation. So my sense is that, RBI is pretty ty close to the end of policy tightening cycle, though we would expect inflation to correct in the second half of the current year.

Q: According to you, what measures can RBI take to control inflation? A: RBI’s control is only on monetary policy and to some extent on foreign exchange policies. RBI at this moment has nothing more than monetary policy tools to control inflation.

Q: How to manage the growth versus Inflation scenario in India? A: In the short term, there is always a trade-off trade between growth th and inflation. Basically, you need to understand how the monetary policy tightening impacts inflation. Monetary tightening, if it is transmitted, increases the market interest rate. If market interest rate increases, that affects the interest sensitive part of the spending which basically includes investments and leveraged consumption. So, to bring down inflation through monetary policy, you necessarily have to do demand compression which means lower growth. But the fact of the matter is that over a longer er period of time, high inflation is amicable to growth. In the short term, there may be tradeoff between inflation and growth but in the long term moderate and stable inflationary environment actually promotes higher growth.

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So, in the long term there is no trade off, but in the short term there is tradeoff. And there is a literature on sacrifice ratio-how much change or reduction in inflation rate results in how much loss of growth. So basically in short term you have to satisfy growth to controlling inflation, but it is likely to be inducing long term higher growth.

Q: Our Finance Minister has projected that fiscal deficit would come down to 4.6% in FY12. Do you think this is achievable given the government finances going haywire? A: The funds available to the government last fiscal from 3G & BWA was close to 1.05 lakh crores, but a significant part of the amount has been carried forward to this fiscal year i.e..approx 30,000 crores. So actually there is a positive externality in that way. We are talking about fiscal deficit as a percentage of GDP and you basically need to understand that the denominator is also increasing. So, if your real growth assumed is 8 % and inflation is at about 8 % so roughly speaking, you are talking about 16 % growth in the denominator. So, that in itself brings down fiscal deficit. If you look at the indicators as of now such as Tax commission and everything, they are ahead of the budget target. From that aspect, I don’t see any significant slippage from the fiscal deficit perspective. Even if there is a slippage, it won’t be significant. It would be well below 5%, may be something around 4.8% if there is any slippage.

Q: The FY11 4th quarter GDP has declined to 7.8% and there are also signs of Industrial slowdown by recent data. Do you see slowdown in Indian economy? A: To the contrary, I believe that from November 2010, there has been significant buoyancy in the industrial production. We need to understand the relation of FY11’s data particularly IIP & GDP against the previous financial year i.e...FY10 was an abnormal year. In the first half of the financial year FY10, there was a subdued growth and in the second half there has been significant buoyancy. The base for last year (FY11) is FY10. So when you started in the year FY11, your industrial production was in high teens and in course of the year growth started faltering mostly because of the asymmetrical base effect. What happens is that actually, if you look at the IIP, the index shows a no change between the periods April 2010 to

November 2010. It remained flat, while the growth rate fluctuated between high teens and low single digit numbers simply because of the asynchronized base. But internationally you look at growth more as a seasonally adjusted 3 months over 3 months moving average. If we take this method, we see that after November, there has been significant pick up in industrial growth from a (-) 8%, the growth has become to (+) 8%, so there is a delta of 16% points. So, in that sense I don’t subscribe to the view that there is any serious slowdown in industrial production in the second half. Similarly, one can also look at the GDP numbers. In the (1st Half) FY12, you would see subdued numbers because of the high base of the (1st Half) FY11. Similarly, in the (2nd Half) FY12 we would see a significant pickup in growth. It is more of a base effect rather than any slowdown or pickup.

Q: Standard & Poor (S&P) has recently warned US about downgrading its economy ratings. Do you think there are chances of US defaulting? A: US technically can’t default because it has unlimited power to print money. It’s like India has internal debt and government can’t default on internal debt because at the end of the day they have recourse to the printing press. But yes, fiscal issue is a major problem not only in US, but also in Europe particularly in PIIGS economies. So, this is something that would dominate the economic developments for the times to come. There is already a school of thought which is predicting that the next crisis would happen in government debt. This is a serious issue and the international community has been looking at it, otherwise this can result in a prolong period of low growth.

Q: US have reached its debt ceiling. The president and congress are at loggerheads to raise the limit. So, how do you see these developments? A: As far as the fiscal reforms are considered, the congress and president are at loggerheads. This in actually could be a blessing in disguise because US economy has not completely recovered from the global financial crisis, which now you are calling as the great recession of 2008. It may be too early for the government to take up further fiscal reforms because the quantitative easing (QE2) has just ended and if the government starts doing fiscal

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consolidation than it could be negative for the economy. Because of this reason, I don’t think any serious consolidation will go through in the near future.

Q: There has been a decline in capital flows (FIIs & FDIs) for the past one year. How will this affect the investments in the country? A: Firstly, we must understand that 94% of the investment in India is domestically funded and the role of foreign capital in funding investments in India is limited. Secondly, when you are looking at foreign capital, you have to take a holistic view rather than considering only equity capital. FIIs are basically portfolio investments are mostly equity capital. But if you look within FIIs, there is a component Portfolio Debt Inflow. Portfolio debt inflows have been significantly increasing, because there is a significant interest differential between India and the rest of the world. Other forms of debt inflows-External Commercial Borrowings (ECBs), Banking Capital and NRI Deposits are also pretty robust. But having said that, deceleration in FDI inflows is something to be looked at. See, it is more to do with the procedural delays in India. If you look at the last RBI’s monetary policy document i.e...Macro document which is issued before the monetary policy, you would notice that RBI has been extremely critical of the impact of procedural delays on the investment climate. So, this is a serious issue which needs to be looked upon.

Q: Euro zone especially the PIIGS economies has been facing serious challenges to sustain. What according to you is the major reason of crisis in Euro zone? A: The problem with Europe is that different nations are at different phases of the economic cycle. The economies are not synchronized. For example, if you are at the upper part of the business cycle, you need higher interest rates, exchange rate appreciation and things like that. But if you are at the bottom of the business cycle, you need the other way round. That’s what we are calling it as Two-Track development in Euro region. Germany and France obviously are going pretty well, while the PIIGS economies are facing problems. If Greece could devalue its currency, a major part of the problems could get resolved. Obviously Greece can’t devalue its currency because it doesn’t have its own currency as euro is the common currency. So, there is a clear threat to the integrity of euro

as a currency. It is quite possible that some of the weaker nations might leave the union. Some people like Mr. Soros are talking about it to happen as early as January 2012. I don’t have a definite view on whether European Union (EU) will disintegrate, but yes it is increasingly under pressure. Its members are at different stages of development, so they need different kind of macro policies.

Q: How do you view the role of IMF in handling the crisis like situation? A: IMF obviously doesn’t have adequate resources to address the debt problems faced by developed nations and from that perspective IMF’s role is pretty constrained. Whenever, IMF comes with an adjustment program, they generally address more domestic adjustments basically because the debtors generally have less muscles than the creditors. This is a clear criticism of IMF. Most of the developing economies including India feel that IMF must restructure itself hence providing more active role to the emerging nations. India is a very good campaigner of such reforms in IMF’s structure.

Q: An IMF Chief from an emerging economy would be a positive development for the emerging nations in international affairs. What’s your view on this issue? A: Not necessarily. Historically, if you see the World Bank chief has been from United States and IMF chief from European region. Obviously this cannot be a happy situation and developing nations need much bigger voice. But, I don’t think it really matters who is the chief of IMF. What is more important is the issue of disproportionate quota that exists between the developed and developing nations. So, I think the reform of the basic structure of IMF is far more important rather than who is heading IMF.

Q: Do you think the current account deficit in India is a worrying issue? A: First and foremost, the nature of the current account deficit in India is grossly misunderstood. One of the reasons why India’s deficit is high is because India is the biggest importer of gold. If you knock off gold from the reported data and calculate the deficit, you will find that

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each year between 2000 and 2008 India had a current account surplus. Now, gold from where I see is an asset rather than a good. So it should ideally be a capital account entry rather than current account entry. But internationally gold is not taken as an asset for balance of payments calculation. It doesn’t impact other countries much because the amount isn’t very large, but India being a major importer it has a large impact. From this perspective, I think the nature of CAD in India is grossly misunderstood. Secondly, if you look at the funding of India’s current account deficit, more often than not the role of portfolio flows which is pretty volatile is not more than 30% on an average. Other kind of flows which India receives includes FDIs, ECBs, Banking capital, NRI deposits and external assistance. All those aspects also play an important role. So, I don’t think from the sustainability of current account position, it is really an issue. Economic theory suggests that if a country is in a growth phase, that country should actually maintain a current account deficit. Basically, at the end of the day return on capital in that country is much higher than the rest of the world. So, economic theory suggests India should have current account deficit.

Q: Will the problems in Japan further increase after the natural calamity and nuclear disaster? Do you feel any positive signs from Japan’s perspective? A: Japan obviously, what we have seen is the “Lost Decade” in the 90s for certain policy mistakes. Over and above that what we have seen in Japan is that Japan is the most negatively impacted nation by population ageing and issues associated with that. Japan is technically into recession. As per US definition, 2 quarters of negative growth is recession and Japan obviously is under recession. But, the immediate positive effect would be reconstruction because of the destruction by a series of natural calamities and nuclear disasters. This should actually push Japanese economy upwards, but at any case the potential growth for Japan is not high and Japan has to deal with public debt problem. But since, most of the public debt in Japan is domestically held; they have some amount of comfort factor. But definitely Japan is withstanding problems since 90s and that is still persisting. Beyond the reconstruction Japan has serious issues which have to be addressed.

Q: Indian government has been slow on reforms. Do you think this would stifle growth in near future? A: If you look at corporate debt market, government has actually increased the limit from USD 10 billion to USD 20 billion and now to USD 40 billion. Government is actually bending backwards to attract fund flow particularly for infrastructure funding. I think that’s one area where government has done a lot. The issue here is more of regulatory delays which are happening whether to start a mine and land acquisition has become a serious issue. All these challenges we have to address. Otherwise we would stifle growth very significantly.

Q: What are the key Lessons learnt from the financial crisis? A: What you have seen in the last crisis, the central reasons of the crisis has been the mispricing of risk. That has happened because there wasn’t appropriate mechanism regulatory or supervisory mechanism. There was some kind of regulatory arbitrage which has allowed this kind of event to happen. We have seen that by nationalising the private debt, we have come out of the crisis. So actually the public sector has taken the burden on its balance sheet. Every time we have seen that the resolution of one crisis has actually set in the seeds for the next crisis starting from the investment crisis in US or the dotcom bubble. All these things increasingly have set up the seeds for the next crisis. Public finance particularly in the developed nations is a major risk area going forward. So in that sense there is obviously large level of regulatory forbearance which has led to the current crisis. Even now, we are mispricing risk and aren’t properly pricing the sovereign risk, which is an issue. We have of course learnt the price paid for allowing an institution to be too big to fail. Bank for International Settlements (BIS) recent initiative says that the systemically important financial institutions must have a better capital adequacy ratio. Those are the kind of steps taken to safeguard as there is nothing called a full proof system and mostly it is learning by doing. Prior to the crisis, many of them knew that the housing sector in US had problems and issues, but not much concern was raised then. So long you are making money as a financial institution; you have to go with the model. So, that’s the problem of capitalistic system under which we work.

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Q: What are the key challenges that India need to address to achieve the double-digit growth?

Q: What are the key takeaways for a student from the crisis?

A: India has always grown at a high pace and the growth in investment has been high. For India to achieve double digit growth, the investment rate should be significantly high. If you take the incremental capital output ratio of something around 3.5 to achieve 10% growth, you need a 30% investment, for a capital output ratio of 4, u need a 40% investment. From that perspective, high investment requires high domestic savings. Otherwise you would be overly dependent upon foreign capital. Basically investment in infrastructure is critical for India to grow going forward. For that we need lot of reforms across various sectors. For example, the land acquisition reforms, issues related to mining sector and procedural delays have to be addressed. Apart from that for funding infrastructure, you need a vibrant debt market. So the reforms in the debt market are very important. In 1990s when the government has initiated reforms, the assumption was that the government should withdraw from the productive activities and private sector would play a major part instead of government. This has happened in the manufacturing sector to some extent and to some extent in infrastructure but this didn’t happen in the context of agriculture. Now, it is clearly accepted that private and public can be substitutes in industry and to some extent in infrastructure, but they are complementary in agriculture. If and only if government invests in a large irrigation project, private investments would flow to support the project. So my sense is that investment in agriculture and improving productivity in agriculture is very important. Otherwise you would face high food inflation and thereby wage inflation. That’s another issue government needs to address. Thirdly, government has to take care of the financial position. We have to reduce the fiscal deficit. Basically, today if we look at government expenditure, 70% is committed expenditure. It either goes for paying the salaries of the government servants, or it goes into debt servicing or it goes into politically sensitive subsisidies. So, if 70% expenditure is committed expenditure then how much discretionary spending amount is left with the government for vital investments? This issue also needs to be addressed. So, these I would say are the 3 major challenges for India – Sustaining high investment growth in infrastructure including agriculture, increasing agricultural productivity and reforms in public finances.

A: It is very important to understand the business cycle and phase of business cycle where you are. You are now experiencing the crisis period as a student. You should understand the logic of business cycle and you should not interpret everything linearly. So if inflation is 5 % yesterday, 6% the next day, 7 % the other day, then you shouldn’t necessarily draw a line that it would go to 9%. One needs to understand that it is also cyclical. You should also understand that there is a non-linearity in it. It would top up and it would go down. So understanding business cycles is very important for you as students. One needs to be aware of the events happening around and needs to assess why things are changing. You shouldn’t try to be conformist. Just because people are telling you that FY12 growth would be lower than FY11, you shouldn’t believe that. At the end of the day you would be paid for your logic no matter in which profession you are. So long you have logic, it would be fine and logically you should try to understand rather than following anybody. Economics and finance are very innovative subjects; you try to understand for yourselves.

“It is very important to understand the business cycle and phase of business cycle where you are. Understanding the business cycle is very important for you as a student”

By Gopidalai Muralidhar Rao, MMS 2010-2012 & Sangeet Srichandan, PGDBM 2010-2012

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Vodafone & Essar To End Their Partnership Vodafone, the world’s biggest mobile phone company by revenues and India’s No. 3 mobile operator, agreed to end its partnership with Essar. It has offered $5 billion for buying 33% stake of Ruias in the company. The exit transaction will be in two part i.e... 22% Put or Sell Option for Essar worth $3.8 billion and 11% Call or Buy option for Vodafone worth $1.2 billion. The transaction is assumed to be completed by November. After this transaction Vodafone may launch its IPO.

India’s Largest Debt Raised By Hindalco Hindalco raised Rs 7875 crore in debt for a greenfield smelter plant at Mahan, Madhya Pradesh. This is India’s largest debt raising exercise till now. Hindalco has raised the loan from a syndicate of 31 banks on a floating rate basis for a tenor of 12.75 years. The Mahan project will have an annual capacity of 3,59,000 tonnes of aluminium smelter and also includes a 900 MW captive thermal power plant.

Relief For The Banks Banks will be exempted from paying service tax on foreign exchange transactions entered into with other lenders. The transaction with the customer will be charged a nominal sum of 0.-0.5 % of the transaction amount.

lagged in the previous quarter as compared to its competitors because of wrong anticipation of recovery in US and Europe. Wipro has done lot of changes in management to bring back the growth in its favor.

Exports Cross $200 Billion Mark In the first 11 months of 2010-11 backed on the demands from US and other markets, India’s export was $208.2 billion. The imports for the same 11 months grew 18% to $305.3 billion over the year ago for the same period.

Rabobank Gets The Banking License RBI gives its green signal to Rabobank, a bank based in Netherland, for the full-fledged banking operations in India. Rabobank was a promoter in Yes bank but it had sold its 11% stake 9 months ago. According to Indian banking regulations, foreign bank holding more than 5% equity in any Indian bank can not apply to open branches in India. The bank also runs non-banking financial company under the name of Rabo India Finance Ltd which lends to food and agricultural businesses and renewable energy companies.

Pratip Chaudhuri appointed SBI’s New Chairman Wipro Buys SAIC Unit In US Wipro technologies, India’s third largest exporter of software services has acquired the oil and gas IT practice of US headquartered Science Applications International Corp. (SAIC) for $150 million. The acquisition is mainly done to bring back the growth on track. Wipro 13

State Bank of India, the country’s biggest lender, got a new chairman. Pratip Chaudhuri will take place of O P Bhatt who retired on 31st March after a five year stint with SBI.

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Unilever & P&G Fined By European Commission

K V Kamath To Be New Chairman Of Infosys

Unilever and Procter & Gamble have to pay a fine of $457 million to European commission as they were indulged in illegal practice. Unilever, P&G and Henkel were charged for fixing up the prices of detergents in 8 countries over a period of 3 years. The price-fixing is illegal as it kills the competition and considered as anti-competitive strategy. Henkel was not fined because it was the first company to provide evidence to regulators.

Infosys appointed K V Kamath as the new chairman in place of its founder N R Narayna Murthy. The job of new chairman is to draw a succession plan for the exit of all founders and appointment of young professionals to run the company. K V Kamath has the expertise to perform this job as he did the similar thing when he was the chairman of India’s largest private bank ICICI. A lot of restructuring at top management level is expected in the tenure of new chairman.

Aditya Birla Group Acquires Domsjo Fabriker Aditya Birla Group, a Mumbai based conglomerate acquired Sweden based pulp maker Domsjo Fabriker for $340 million. This acquisition shows the intent of Birla group to grow the fibre business globally.

Airtel To Raise $1 Billion Bharti Airtel is all set to raise $1 billion through a global bond issue. The raised money will be utilized to repay the debts which were taken during the acquisition of Zain telecom. The issue will be in the form of debentures and will

Muthoot Finance IPO Oversubscribed Muthoot Finance, India’s largest gold loan company, has seen its 900 crore IPO drew bids for at least 25 times the share on offer. The offer was oversubscribed because of investors expectation which they saw during Manappuram, rival of Muthoot financé, IPO launch. Manappuram share price has doubled in few months.

Johnson & Johnson To Acquire Synthes

have tenure of 10 years.

RBI Raises Repo Rates By 50 Basis Points RBI increased the repo rate by 50 basis points to 7.25% in an aggressive move to tame inflation. The move indicates RBI’s priority to control inflation to comfortable levels.

Johnson & Johnson, a US based health group, is all set to buy Swiss medical device maker Synthes Inc for $21.6 billion. This deal will be the largest buy ever by Johnson & Johnson. The acquisition is done to boost its orthopaedic business. The acquisition process is expected to be over in the first half of 2012.

Apple Inc maker of iPhone, iPad and iMac overtook search engine giant Google as world’s most valuable brand. Apple is valued at $153.3 billion whereas Google is valued at $111.5 billion. IBM, McDonanld’s Corp and Microsoft come at 3rd, 4th and 5th most valued brands in the world.

US Credit Rating Downgraded By Standard & Poor

Adani Group Buys Coal Port In Australia

Standard & Poor’s downgraded the outlook for the United States’s AAA credit rating to negative because it believes there are risk U.S. policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.

Adani Enterprises, a group that runs the country’s biggest private port, acquires the Abbot Point Coal terminal in Australia for $2 billion. This acquisition is group’s 3rd overseas acquisition in last 9 months. With this deal Adani Enterprise has become the largest Indian investor in Australia.

Apple Topples Google As Most Valued Brand

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FDI Dips By 9% In January To April

Aditya Birla Group Acquires Columbian Chemicals

According to the industry ministry data, Foreign Direct Investment (FDI) has declined by 9% to $6.51 billion during January-April 2011 over the same period last year. In JanuaryApril 2010 country received $7.14 billion as FDI.

Aditya Birla Group acquired Columbian Chemicals Company for $875 million. This acquisition has placed the Indian group at the top in the list of carbon black producers. Kumar Mangalam Birla has been appointed the chairman of the newly constituted board of directors of Columbian Chemicals.

Microsoft To Acquire Skype For $8.5 Billion Microsoft to buy Internet phone services Skype for $8.5 billion in cash. Microsoft buys Skype has 663 million user accounts, of which 9 million are paid users. It gives Microsoft a boost in the enterprise collaboration market, especially when competing with Cisco and Google. Skype will become a new business division within Microsoft and Skype chief executive Tony Bates will assume the title of president of Microsoft Skype division.

Industry Grows At 7.3% In March Indiaâ&#x20AC;&#x2122;s industrial output registered a sharp rise in March. Factory output, as measured by the Index of Industrial Production (IIP), rose 7.3% in March from a year earlier, almost double the revised 3.7% expansion in February. The expansion was driven by a 7.9% rise in manufacturing output. Manufacturing contributes about 80% to the overall output.

Renault Makes A Re-Entry To Indian Market French car maker re-enters Indian market after ending its partnership with Mahindra and Mahindra Ltd. Renault will launch at least seven models, including two Indian specific small cars, in three to four years. The re-entry of Renault indicates the potential Indian market which has sustainable growth over few years.

RBI Hikes Repo Rates By 25 Basis Points RBI raised key interest rates for the 10th time in the last fifteen months to tame inflation. The central bank raised key lending (repo rate) and borrowing (reverse repo rate) by 25 basis points each reflecting its stance of choosing price stability in the growth-inflation trade off. Repo and reverse repo rate after this increase stand at 7.5% and 6.5% respectively.

L&T Finance To Raise Rs. 1,750 Crore Through IPO L&T Finance Holdings, an arm of engineering and construction company Larsen & Toubro, will launch its Rs 1,750 crore initial public offer (IPO) in June. The issue consists of Rs 50 crore worth of equity shares reserved for employees and Rs 125 crore for L&T shareholders. The Company intends to use issue proceeds for repayment of inter-corporate deposit issued by promoter to company (worth Rs 345 crore); and augmenting the capital base of L&T Finance (by infusing Rs 570 crore) and L&T Infra (by investing Rs 535 crore), to meet the capital adequacy requirements to support the future growth in their business. JM Financial Consultants Private Limited, Citigroup Global Markets India Private Limited, HSBC Securities and Capital Markets (India) Private Limited, Barclays Securities (India) Private Limited and Credit Suisse Securities (India) Private Limited are the book running lead managers to the issue. Equirus Capital Private Limited is the co-book running lead manager.

BSE Sensex Excludes R-Infra & Rcom The Bombay Stock Exchange (BSE) excluded the two Anil Dhirubhai Ambani Group stocks-Reliance Infrastructure (R-Infra) and Reliance Communications (RCOM) from the elite Sensex Index. The index maintenance committee has decided to replace the RInfra and RCOM with Coal India and Sun Pharma, with effect from August 8. Both the shares of the ADAG Group were lost around 50 per cent of their value in last one year. The second most valued company in India, Coal India has market capitalization of Rs. 2.5 lakh crore and one of the most valued PSUs in India. It had issued IPO in last November. Now, the coal India is listed into the BSE Sensex.

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Sun Pharma has market capitalization of 50 thousand crore rupees and one of the reputed pharmacy armacy companies in India.

NSE Found Guilty Of Unfair Trade Practice In its biggest verdict so far, the Competition Commission of India (CCI) has held the National Stock Exchange guilty of indulging in unfair market practices, which were detrimental to competition. The country's largest stock exchange faces a penalty of Rs 55.5 crore – which is 5% of its average turnover during the last three years. Additionally, NSE may also have to pay damages to MCX Stock Exchange, its rival in the currency futures business usiness which had gone to CCI, if the Jignesh Shah Shahpromoted entity makes a claim. NSE is expected to challenge the CCI order in either the Competition Appellate Tribunal or the High Court over the next few days.

SEBI Allows Bourses To Offer Sops To Broke Brokers For Raising Volumes In Illiquid Derivatives SEBI has allowed stock exchanges to offer incentives to brokers for generating volumes in illiquid securities in equity derivatives segment. Exchanges can reward brokers dealing in derivatives of scrips where average trading volume for the past 60 trading days is less than 0.1% of market capitalisation of the underlying stock. The regulator has asked exchanges to keep liquidity enhancement schemes (LES) transparent and measurable.

IL&FS Fin to Raise $5 B to Fund Infra Projects IL&FS Financial Services (IFIN) is planning to raise $5 billion through debt and equity in the next one year to fund infrastructure projects. The investment banking subsidiary of Infrastructure Leasing & Financial Services will raise around $1 billion from overseas market and the rest locally, according to MD & CEO, Ramesh C Bawa. IFIN, one of the largest infrastructure development and finance firms in India, will use the money to finance infrastructure projects such as power plants, roads, and ports.

Fitch affirms 'BBB' rating for India Brushing aside apprehensions of slowdown, global rating agency Fitch retained India's sovereign rating at investment 16

grade, stating it has "robust growth prospect" and solid external financial condition. The agency affirmed long term 'BBB-'' rating for the country with stable outlook. 'BBB' denotes a moderate default risk relative to other nations for investors. However, it cautions that changes in circumstances or economic conditions are re likely to affect the capacity for timely repayment than in the case of higher rated category. The foreign exchange reserves of the country stood at USD 313.5 billion at May-end. Besides, Fitch said that the current account deficit estimated at 2.6 per cent c of GDP in 2010-11 is not a significant risk in the current stage of economic development. Indian economy witnessed a growth of 8.5 per cent during the last fiscal. In addition, India's authorities look to be tackling the challenges of a continuously large fiscal deficit and rising inflation pressure with greater vigor, according to Fitch Asia Sovereign Ratings Director Art Woo. Although the central government fiscal deficit target of 4.6 per cent of GDP for 2011-12 2011 may not be met due to the rising cost cos of subsidies, the potential slippage is unlikely to be significant. The new fiscal consolidation strategy is vital if the government want to ensure that the sovereign's public debt dynamics stay on a more sustainable path and are brought into line with other o 'BBB'-range range rated sovereigns, it said. On the GDP growth, Fitch said, the economy is expected to expand at 7.7 per cent during the current fiscal.

China Will Become Global Banking King By ’23: PWC China could leapfrog the United States to become the world’s largest banking economy by 2023, 20 years earlier than expected, raising pressure on western banks to brush off the effects of the credit crisis and head east. According to a report published by consultants PricewaterhouseCoopers (PwC) on Friday, India is expected to leapfrog Japan to rank three in terms of domestic banking by 2035 and could pass China as its population rapidly ages. By Alok Kumar,, MMS 2010-2012 2010

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Brazilian Economy Analysis

Onn a mundane Sunday morning, I could hear a raging debate about Brazil on TV across the floor. I could not have possibly missed it considering that the 5 time world champions have some of the most scintillating footballers. What I ended up watching was a debate about Brazil as an economy. Brazil has truly undergone a dramatic change in its image, from being a football crazy nation, known for its samba dance, to now being reckoned by many as the next big thing. I thought of answering, what this sudden fascination with Brazilis; hence this article. To analyze any country one needs to question certain aspects, popularly opularly known as the economic indicators of a country. It would be no different in this case. The economic indicators can be listed as follows:

side effect on the GDP of the nation.(IMF has reduced the GDP forecast of Brazil for 2011 to 4.1%). At the same time with lower external debt metrics Brazil is considered to be solvent by many economists. Having missed the primary surplus target in 2010, Brazil has seen an unprecedented growth in the primary surplus of the country in the first quarter of 2011. The primary surplus figure rose by 67.7% from the same period last year to reach 57.3 billion Reais, nearing the halfway mark towards its targeted rgeted 117.9 billion Reais. Many believed this rise in surplus was due to an increase in the net tax revenues rather than pure spending cuts. The economic outlook of the country looks good, If only the government could moderate the inflation figures which stood at 6.55% in May.

Fiscal Policy The objective of fiscal policy of any government is to strike a balance between its expenditures and the be benefits out of it both tangible and intangible. At a per capita GDP of $10816, the seventh largest economy in the world, Brazil is considered to be one of the worst examples of wealth distribution and social exclusion, despite the huge social spending by successive ccessive governments. Between 2001 and 2009 the income inequality measured by the Gini index fell from .59 to .54, however the country is still marred with widespread inequality and many believe that a Gini index of .54 is still quite high for a middle inc income country. In 2010 the Brazilian government reported a budget deficit of 14.4 billion Reais, well above the forecasts of certain economists. The net debt to GDP ratio stood at 40.3% and the nominal deficit at 2.3%. In 2010 Brazil struggled to achieve its budgeted targets. Even though the Brazilian government did not have much option in cutting the spending ahead of the 2014 World Cup and 2016 Olympics, the Dilma government, in an attempt towards fiscal consolidation, has gone for a reduction in its social spending by as much as 50 billion Reais in its current budget and would also cut loans it provides to the Brazilian Development Bank. The move is supposed to help the country reduce inflationary pressures and avoid hard landing even though it might have a down

Political & Socio Scenario In many ways the political stage of Brazil is a mirror image of that of India, fractious to say the least. Together with several smaller parties, four political parties stand out: Workers' Party (PT), Brazilian Social Democracy Democrac Party (PSDB), Brazilian Democratic Movement Party (PMDB), and Democrats (DEM). Collation government is what drives the political scenes of Brazil and as expected in any collation government, changing party lines is too common. So much so that the Supreme Court in 2007 had barred party hopping to encourage party loyalty. Brazil has a fairly strong legal set up whose commitment towards eliminating corruption is well known. There are enough antianti corruption initiatives but what lacks is political support

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and effective implementation. The wide social inequalities in Brazil have prompted the crime rate to move northwards while land reforms policies are still to be implemented. The newly elected government under the presidency of Dilma Rousseff will have a tough time in meeting the aspirations and demands of an overheated economy, specially doing that with a ten party collation government will be a tough task. The priorities of the current leadership should be in bringing fiscal consolidation and improving the social fabric of the economy with introduction of pro-poor policies on the lines of its existing bolsa familia program and national biodiesel program. It would be interesting to see how the government reacts to the challenges, considering that both the objectives are contrary to each other.

Investment Outlook

“It’s quite unlikely that if you had told me 10 years ago that I would buy the Brazilian Real, I would have thought you were crazy. In the last five years -the Brazilian currency –in terms of the American currency, has doubled”. This is what Warren Buffet had said, when he was questioned about Brazil as an investment destination. The South American power house was widely believed to be the first country to come out of the economic downturn. It was in 2008 that Fitch and S&P upgraded the Brazilian economy from speculative to investment grade. According to Baker and McKenzie Brazil will continue to enjoy a steady FDI inflow, however, the government needs to reconsider its taxation policy on FDIs and FIIs. In 2009 Brazil became oil self-sufficient and it does not need a huge chunk of the oil it has (world’s largest oceanic oil fields is in Brazil), the government can attract loads of foreign currency by exporting this oil. With the world cup and Olympics not far away the Brazilian government is expected to invest nearly USD 93 billion. This investment will certainly give a boost to the economy in terms of employment and infrastructure development. PWC, in its report on emerging economies, has predicted that Brazil by 2050 would be as large an economy as Japan. Having a look at the different sectors of the economy gives us an idea as to why people expect Brazil to be the next big thing. The major ongoing steel projects and the new mining code and the government’s plan of investing USD 40billion to reduce the housing deficit, would certainly foster the economy. In 2010 itself Brazil saw a spike of 23% in assets under management, the private-equity firms controlled had business worth $36 billion, the primary

reason behind these developments is a maturing capital market, several IPOs and the support of the government. Despite all these in 2010 the World Bank’s “Doing Business Survey” had stated that it took 120 days to start a business in Brazil, far above the regional average of 45.5 days. The challenge for the newly elected government would be to curb the rising inflation without adversely affecting the investment scenario of the country.

Monetary Policy Drafting an effective monetary policy is the tricky answer to most critical question for developing economies, how to maintain a sustainable growth keeping inflation under control? Current ICPA inflation index of 6.77% (May 2011) has crossed the upper limit of the target range (4.5% +/-2%) estimated by the Brazilian Central Bank (BCB) for H2 2011.

Year

Inflation & Unemployment Rate Inflation Unemployment 2003 10.4% 12.3% 2004 6.2% 11.5% 2005 5.1% 9.8% 2006 4.2% 9.3% 2007 3.6% 8.7% 2008 5.7% 7.9% 2009 4.3% 8.1% 2010 5.9% 7.4% 2011 *5.7% *7.2%

So far in current fiscal year policy makers have raised benchmark interest rates twice but the lagged effect of this is expected in third and fourth quarters. Current lending rate (Selic) of 12.25% (as revised on June 8, 2011) vis-à-vis 10.75 % (January, 2011) shows the urgency of the issue. This has got clear response from the market as Bovespa (Sao Paulo exchange) has dropped by 12% since January, 2011.The confliction and dilemma of fiscal and monetary policies will keep Banco Central Do Brazil (Brazil’s central bank) and government under continuous watch. Though, announcement of a 50 billion Reais ($30 billion) cut in spending and increase in interest rate, similar steps are expected in near terms. Finally the pressing question for Brazil is; how long can it restrict spending when large international events like the FIFA World cup (2014) and the Summer Olympic Games (2016) are around the corner?

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Infrastructure “Not again!!!” shouted a passenger in anger since he couldn’t manage to get inside the train. The situation at Se metro subway station in downtown Sao Paulo is getting worse day by day. Brazil’s infrastructure is already buckled under pressure due to handling of over capacity. The situation is no different at the international air terminals. If INFRAERO (Brazil’s state run airport administrator) report is believed, air passengers in Brazil have grown by 118% since 2003 but infrastructure has not improved over time.

According to the scale of global competitiveness index of infrastructure developed by World Economic Forum, Brazil ranked at 74th Position out of 133 countries which is slightly better than India but far behind compared to Chile (30), South Africa (45) and China (46). With focus on ports and transportation as the priority sectors, improvement in these segments can boost Brazil’s GDP growth to around 6-7% in coming years. Brazil must double its infrastructure investment rate to live up to the expectations for a BRIC member. Overall investment-toGDP ratio averaged 17% in the past 5 years, vs. China’s 44%, India’s 38%, and Russia’s 24%. To grow at 5% per year in the next decade, infrastructure investment must double from the 2.1% of GDP average in recent years. There are four key known drivers of higher infrastructure spending in the near future: the 2014 World Cup, the 2016 Olympics, the development of the pre-salt oil reserves, and the government-sponsored Growth Acceleration Program (PAC).

to come. More structured and long term investment plan should be drafted to cater to the increasing domestic demand with increased market confidence and more foreign investments. Currently, inflation is the major issue and needs to be addressed with utmost priority. This will ensure a favourable environment for the sustainable long term growth and this would be possible only when the government will have a perfect blend of fiscal and monetary policy in place. Brazil is amongst the leading exporter of commodities like coffee, orange juice, sugar, beef and soy. Other positive factor is the increasing trade between BRIC nations which has opened up new fronts for trading. In addition to these events, the FIFA World Cup and the Olympics will provide a perfect foundation for the anticipated growth in coming years. All that Brazil needs to do is, to capitalize on these opportunities of international events to direct the incremental investments in the primary sectors which will form the base of future growth. The world is keeping a close look at Brazil as an emerging economy. It’s just a matter of time to see when Brazil is going to score winning goal? Till that we bid adios and keep watching… Economy Scorecard: Brazil GDP

7.5%(2010) 4.1%(Q1 2011)

GDP (sector wise) Agriculture Industry Services

6% 26.40% 67.60%

Budget Balance

-2.30%

Inflation Unemployment

6.77%(May,2011) 7.4%(2010)

Exports

USD 201.9 BILLION

Imports

USD 187.7 billion(2010)

Gross External Debt

USD 310.8 billion(2010)

S&P Credit Ratings

BBB+(Domestic) BBB-(Foreign)

Foreign Reserves

USD328 billion

Outlook Although too many restrictions and barriers are imposing challenges to Brazil, in a medium term perspective the Brazilian economy is expected to remain positive. Sustaining the growth by means of maintaining the control over the above mentioned factors will prove critical in time

Public Debt

Investment Grade

By Sangeet Srichandan, PGDBM 2010-12 & Vishal Bhanushali, MMS 2010-2012

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Meeting Indian Infrastructure Ne Needs Despite bright economic prospects, most emerging Asian countries such as China, India, Indonesia and other Association of Southeast ast Asian Nations (ASEAN) continue to suffer from underdeveloped infrastructure. Increased emphasis mphasis is being laid on infrastructure investment and development to stabilize a shaky platform of growth. Of these countries, the two that are projected to domina dominate this sector are China and India. Indian economy has undergone fundamental changes over the last decade. Growth in investor interest is driven by strong economic growth, low interest rates, rising foreign exchange reserves, quality and cost competitiveness and encouraging Government policy-making. The strong levels of economic growth achieved in India in recent years have led to an expansion of industry, commerce and per--capita income. This in turn has fuelled demand for infrastructure and utilities including energy, transportation, telecom, water supply and other urban infrastructure. In comparison to emerging markets, Indiaâ&#x20AC;&#x2122;s investment expenditure in infrastructure over the next ext decade will account for 28% of the total planned investment expenditure xpenditure by emerging markets. So, this makes India, the second biggest destination after China for infrastructure spend in the emerging markets, making it an attractive venue for private sector investments.

Infrastructure Spending In Emerging Markets (2008-2017)

real GDP in 2009-10. The investment in infrastructure in India has increased from 4.9% of the gross domestic product (GDP) in 2002-03 03 to 7.18% in 2008-09. 2008 It is expected to increase to 8.37% in the final year of the 11th Plan and likely to touch 10% of GDP in the 12th Five Year Plan (2012-2017). 2017). With the increasing investment, the share of private sector ector in the total investment on infrastructure has increased rapidly. The contribution of private sector in total infrastructure investment in each of the first two years of 11th Plan (2007-2012) (2007 was around 34%. This is higher than the 11th Plan target of 30%, and 25% achieved in 10th Plan period. It is expected to rise to 36% by end of 11th Plan and 50% during the 12th Plan (2012-2017). A comparison between India and China shows that the Gross Capital Formation as a percentage of GDP is only 32 percent in the case of India compared to 42 percent for china, with a greater part of the differential arising in the infrastructure and real estate sector. Further, total funds available for the 12th Plan are expected to be approximately 31 percent short of the INR 4,100,000 Crore targets, translating into a funding gap of almost INR 1, 273,000 Crores for the Plan period. The gap in infrastructure is costing India between 1.5-2 1.5 per cent of GDP growth every year. This shows the tremendous opportunity that India ndia provides in terms of Infrastructure for both domestic as well as International financiers.

Infrastructure Plan for XIth & XIIth Plan 100 Percent=INR 220 Lakh Crores

China India Russia Mexico Brazil Indonesia Other

2% 2% 2%

10%

49%

28%

(Source: Mckinsey)

The Planning Commissionn estimates investments in infrastructure projects in India will be more than $1100 billion over 2010-11 to 2016-17, 17, an amount higher than its 20

Source: Planning Commission [1: Anticipated Spend, 2: Projected Spend]

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Public-Private Partnerships (PPPs) PPPs is the way forward and government is increasingly looking at using the public private partnership (PPP) model to fund infrastructure projects. PPPs are essentially win-win solutions that seek to draw on the strengths of both sectors. Thus, the efficiencies of the private sector can ensure better deliveries of public infrastructure like roads, bridges, water supply and sewerage projects, ports and airports, etc. The presence of the public sector ensures certain concessions, and mitigation of some of the risks. Thus, the combined capital and intellectual resources of the public and private sectors can result in better, more efficient services, without raising taxes for the public.

Indian government to facilitate the flow of investments towards this direction. The government should consider a series of policy measures to remove these barriers and steer more capital into India’s infrastructure sector by ensuring flows from existing sources of capital and allow new investor groups to enter infrastructure sector.

Fostering Infrastructure Development Develop Robust Debt Market The presence of a strong debt market leads to development of an alternative source of funding and reduces the pressure on banking sector for credit growth. Developing a robust bond market will help channel more funds

Indian Government’s Approach Indian Government has taken several steps to spur growth in the infrastructure sector following the economic reforms. A specialized financial intermediary for infrastructure was incorporated in 1997 called IDFC (Infrastructure Development Financial Corporation). Following the conversion of the erstwhile development financial institutions (DFIs) into commercial banks – namely, IDBI Bank and ICICI Bank – infrastructure projects faced the problem of securing long term debt. In order to mitigate this problem of long term borrowings, the Indian government has set up Indian Infrastructure Finance Corporation Ltd (IIFCL), to secure long term debt for infrastructure projects. IIFCL has the ability to borrow up to $2.32 billion that will be guaranteed by the government. The Union Budget 2010 has allowed tax deduction on investment in Infrastructure bonds till Rs, 20,000 for individual investors. This move had increased the attractiveness of infrastructure bonds for individuals and would help raise debt capital required for infrastructure investments. Over the past few years various investment funds have committed themselves towards the infrastructure sector in India, but still there is a huge gap of funding which can be met by proper and timely implementation of policies by the 21

into infrastructure. From examples seen in the United States with Municipal bonds and Malaysia with infrastructure bonds, bond markets have played an important role in channeling capital into infrastructure. Unfortunately, the bond market penetration in India is currently only 2 percent of the GDP significantly lower than other developing countries like China (8 percent) and Malaysia (15 percent). The government should make continued efforts to grant further access to the bond market for FIIs on an ongoing basis. The present limit of $10 billion for government securities, $15 billion for corporate bonds and $25 billion for long-term corporate bonds (for infrastructure) should be enhanced in order to ensure adequate liquidity is available in the debt markets. Efforts should be made allow institutions (including banks) to offer credit enhancement/ guarantees to bond issuances in the onshore market by companies engaged in infrastructure projects/ infrastructure finance companies. Interest rate futures markets should be developed. Poor and lengthy enforcement laws relating to default proceedings, and limited participation by domestic institutional investors should be removed. Besides, the regulations regarding securitization also need to be changed to make it more attractive to the players. Therefore, it’s high time the appropriate measures to provide thrust to the debt market, which would be a significant step to boost infrastructure investments in future.

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Liberalise Investment Guidelines for Domestic Institutional Investors (DIIs) International experience suggests that domestic institutional investors play a key role in making the markets more resilient, while participation by foreign players makes the market more liquid. In several Latin American countries- Chile and Mexico, the growth of domestic pension funds and insurance companies played an important role. There is a need to liberalise investment guidelines for insurance companies and provident and pension funds, as well as the sectoral, single party and group exposure limits of banks and insurance companies so they can invest in or lend to high quality infrastructure Special Purpose Vehicles (SPVs). The New Pension System (NPS), which was expanded to include unorganized sector workers in 2009 has enormous potential to mobilize long-term savings, but is still in its infancy. The proposed Insurance Bill amendment, which proposes raising foreign ownership limit in insurance companies from 26 to 49 per cent, should help attract large foreign players into the market. Also further flexibility in investment norms could help in enlargement of the support base for equity and bond market. While the Government has recognized the importance of the issue, the pace of reforms and establishment of an institutional framework has been slow in comparison to what has been achieved by competing economies. Indiaâ&#x20AC;&#x2122;s savings rate stands at around 36 percent and in order to meet huge magnum of investments, efficient channelizing of the relatively high domestic savings would be required.

ECB Source of Financing Apart from institutional funds, infrastructure projects today also use external commercial borrowings (ECBs) to raise resources. But there is a cap on the amount of ECBs that can be raised currently. In a recent move, the government of India (GoI) has raised the cumulative ECB cap by $ 10 billion to $ 30 billion. With demand for funds far exceeding supply, there needs to be further hike in the limits of borrowing. Hybrid funding instruments such as Convertible

Debentures, FCCBs, warrants etc, have recently witnessed a number of regulatory changes. There is a need to widen the net further and look for more creative solutions for funding.

Infrastructure Focus Bonds Government should encourage Banks and specialised Infrastructure NBFCs to raise long-term infrastructure bonds free of Statutory Liquidity ratio (SLR) and Cash Reserve Ratio (CRR) requirements for a longer term period (10 to 20 years), specifically for infrastructure.

Simplifying Project Clearance Mechanism Although it will be important to resolve financial issues, there is a need to attend to non-financial concerns as well, in order to encourage timely and long-term investments in infrastructure. The most pressing non-financial concerns include - simplifying project clearance mechanisms, implementing projects on time, and strengthening the contractual framework. Allaying these concerns will reduce the risk and increase the comfort level of financers.

Regulator for Infrastructure Sector With a $ 1 trillion investments expected over the XIIth Plan period, there is a need for a Regulator. The government could establish a distinct regulator to address the concerns of the infrastructure industry.

Conclusion India has a long way to go given the lack of adequate infrastructure across cities, towns and rural areas. The potential solutions would help enhance timely flow of funds to support the debt requirements of infrastructure projects. Lot of opportunities exists for both domestic and international players to tap. The policy actions taken by the government towards infrastructure sector would determine the fate of Indiaâ&#x20AC;&#x2122;s growth over the next few decades. By Smruti Ashar, MMS 2010-2012

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Macr - O - nomics Lending / Deposit Rates Category/ Index

Base Rate (9.25% - 10%)

Open

High

Low

Current Value

Previous Close

Savings Bank Rate (4%)

Broad

Deposit Rate (8.25% - 9.10%)

SENSEX

18,694.19

18,936.43

18,513.22

18,561.92

18,618.20

MIDCAP

7,014.77

7,053.88

6,995.45

7,006.75

7,014.58

SMLCAP

8,359.93

8,403.04

8,354.11

8,363.22

8,356.39

BSE-100

9,803.17

9,877.10

9,718.41

9,740.64

9,767.42

BSE-200

2,318.19

2,336.40

2,302.55

2,307.37

2,313.23

BSE-500

7,303.53

7,345.21

7,247.69

7,261.52

7,277.46

5,867.22

5,924.55

5,837.91

5,856.64

5,835.19

POWER

2,599.58

2,616.37

2,586.33

2,597.20

2,596.17

TECk

3,587.93

3,615.64

3,563.33

3,570.90

3,570.11

13,778.50

13,843.26

13,674.49

13,739.69

13,738.37

OIL&GAS

9,211.39

9,097.19

9,121.12

9,130.46

6,550.79

6,566.20

6,503.56

6,518.25

6,532.54

6,902.34

6,946.38

6,869.35

6,886.48

6,902.34

12,910.58

13,465.21

12,699.61

12,846.94

12,879.34

FMCG

4,068.40

4,079.99

4,034.79

4,039.31

4,056.41

PSU

8,644.81

8,658.03

8,530.51

8,541.96

8,587.43

REALTY

2,208.93

2,239.44

2,174.64

2,186.65

2,198.46

AUTO

9,034.39

9,064.82

8,949.56

8,993.51

9,047.06

METAL

14,733.00

14,885.81

14,574.29

14,610.04

14,735.26

Policy Rates Bank Rate (6%) Repo Rate (7.50%) Reverse Repo Rate (6.50%)

Currency

Sectoral

Commodities

BANKEX

(Source: Reuters & ET as on 17th July 2011)

US Markets

European Markets

Asian Markets

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External Balances Indicators (1991-2011)

Growth Rate

30 20

Export Growth

Import Growth

0 -10 -20 -30

Index of Industrial Production (IIP) (2004-2011)

14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Growth (%)

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

10.30

9.70

12.20

9.70

4.40

8.00

8.10

GDP Calculations on Purchasing Power Parity Basis International Monetary Fund (IMF) (In USD Billions)

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Sectoral View Indian Pharma Sector Overview The global pharmaceutical market is undergoing rapid transformation. As blockbuster drugs come off patent, there are fewer new products in the pipeline to replace them. This is due too declining R&D productivity and rising regulatory costs. Global Pharma multinational corporations are looking at new growth drivers such as the Indian domestic market to capitalise on the growing opportunity. Emerging markets will be the next major growth drivers for the global Pharma industry, with more than 40% of incremental growth in the industry coming from emerging economies in the next decade. Indiaâ&#x20AC;&#x2122;s domestic Pharma market valued at approximately US$12 billion in 2010 showed a strong growth of 21. 21.3% for the twelve months ending September 2010. The domestic market is estimated to touch US$20 20 billion by 2015, making India an attractive destination for clinical trials for global giants.

Top 15 Pharmaceuticals Markets, 2015 (US$ Billions)

(Source: McKinsey)

One of the reasons behind this expected growth rate is that Indiaâ&#x20AC;&#x2122;s pharmaceutical industry has a favorable macro environment. The Indian economy has rebounded from the global economic downturn, with real gross domestic product (GDP) growth reaching 9.66% in 2010. The Indian middlee class is also expanding rapidly, with affordability of medicines increasing, and an increased percentage of disposable income being spent on healthcare. The government has made public healthcare one of its top priorities by launching policies es and programmes that are aimed at making healthcare more affordable and accessible, especially in rural markets. The industry is witnessing trends such as acquisitions, increased investments, deeper penetration into tier I to tier VI and rural markets, growth rowth in insurance coverage and innovation in healthcare delivery. Taken together, these trends are leading to increased affordability of services to patients and access to quality medical care.

Indian Pharma Sectorâ&#x20AC;&#x2122;s SWOT Analysis

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Indian Pharma Market Segmentation At the moment, approximately 90% of India’s pharmaceutical market is made up of branded generics. This segment will grow at a CAGR of 15% - 20% for the next five years. Generic generics’ and patented products’ contributions to the market as a whole is currently very low. By 2020 though, patented drug sales are expected to increase, owing to an improvement in the implementation of patent laws and spread of health insurance. The OTC segment is expected to be a strong growth driver for the industry. The Indian Pharma market is largely dominated by branded generics. This segment contributes around 90% of total sales, and represents one of the key strengths of the market, encompassing the OTC segment as well. Only about 10% of the market constitutes commodity generics sold through institutional sales and innovator products. The branded generics segment is expected to grow at a CAGR of 15% 20% for the next decade.

Branded Generics “The prescription products that are either novel dosage forms of off-patent products produced by a manufacturer that is not the originator of the molecule or a molecule copy of an offpatent product with a trade name” .In India, any nonpatented molecule with a brand name other than the innovator’s name is termed as a branded generic. In the global context, substitution – when an innovator product goes off-patent - is the key driver for generics. In India, it’s about driving a difference using the core equity of a brand, over a competitor’s product.

Generic Generics A generic drug is the bio-equivalent version of a brand name drug. Currently, the market share of generic generics is very low. The reasons being: 1. Lack of generic generics regulations and guidelines for the establishment of bio-equivalence, for example the Abbreviated New Drug Application (ANDA) guidelines that exist in the U.S. 26

2. Doctor comfort derived from prescribing medications on the basis of brand name. Generic programme in India is the government run ‘Jan Aushadi’. This programme provides no-name generic drugs at subsidized prices in 24-hour pharmacies that are located all over the country.

Over The Counter (OTC) Products ‘OTC Drugs’ means drugs legally allowed to be sold ‘Over the Counter’ by pharmacists, i.e. without the prescription of a Registered Medical Practitioner. Although the phrase ‘OTC’ has no legal recognition in India, all the drugs not included in the list of ‘prescription-only drugs’ are considered to be nonprescription drugs (or OTC drugs). The OTC segment has been identified as one of the potential growth drivers for the Indian Pharma industry, as the sale of OTC drugs in India has been increasing over the years.

Key Growth Drivers For OTC Segment Wider Distribution Channel: Companies can sell their products outside of pharmacies, for example in post-offices and department stores. Direct To Customer Advertisements: The government allows public advertising of these products, giving drug makers greater freedom to use more creative methods while marketing their products. Increased Consumer Awareness: There is an increased reliance on self-medication as public awareness of common ailments goes up. Low Price Controls: Other than acetylsalicylic acid and ephedrine and its salts, very few of the OTC active ingredients fall under the current DPCO price controls.

Patented Products The market size for patented drugs as of today is very small. Only about 1-2% of the market is made up of patented drugs, which are being sold by multinational innovators. There are multiple Indian companies that have drugs in the pipeline, with a greater focus on R&D, but estimates suggest that it would be at least 7 to 10 years before these begin to have a serious impact on the industry. Industry experts believe that the current size of the patented drug market is estimated at US$120-130 million. Due to weak patent laws in the past, and multiple, cheap generic versions of drugs present in the market, multinational players were hesitant to introduce their patented products. In the future, with growing affordability,

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Business Models The global pharmaceutical industry is changing. The pharmaceutical business model is witnessing a paradigm shift from a fully integrated company structure towards a future where companies use a wide range of outsourcing, partnership initiatives and other contractual and relationship arrangements to create networks of collaboration and discovery. This evolution in Pharma business models has enormous repercussions for the Indian pharmaceutical sector, and related sectors like biotechnology. Indian companies now have an unprecedented opportunity to partner with global players across a wide range of activities, from contract manufacturing and licensing arrangements, to franchising and Joint venture opportunities. Export-oriented business CRAMS: Outsourcing has been the traditional method of doing business with Indian companies. Historically, the focus for the pharmaceutical industry has been on lower value adds manufacturing activities such as APIs and generics, and India continues to play an important role in these segments. In recent years, Indiaâ&#x20AC;&#x2122;s Pharma companies have also begun to move up the value chain. Foreign companies are now increasingly tapping Indiaâ&#x20AC;&#x2122;s growing research skills in addition to its manufacturing skills. Licensing: Multinationals are also striking licensing agreements to get a share of the Indian pie. Most developmental costs are borne by the licensor in licensing arrangements, resulting in the licensee paying a high unit cost and having little control over manufacture. However, licensing can be effectively used to establish a common platform in order to gain rapid in-market acceptance and create a complete therapy range through arrangements such as cross-licensing. 27

Franchising: Indiaâ&#x20AC;&#x2122;s retailing industry also offers huge opportunities for foreign companies to either set up their own retail franchisee or enter into collaboration with existing players. Franchising arrangements can leverage on purchasing power from the franchisor buying in large quantities and passing down savings to franchisees. Continued business support from the franchisor such as technology, products, training and marketing is an added advantage. Joint Ventures: Joint ventures (JVs) are becoming a more prevalent option for companies looking to capitalise on the opportunities presented in India. Foreign companies are increasingly looking at local partners to work with in order to increase their presence in India. Domestic partners bring together extensive local expertise due to their familiarity with the business environment, knowledge support and the networked capabilities of other local pharmaceutical companies. These advantages, along with low production costs, skilled labor and faster drug development can be productively utilised by western pharmaceutical companies coming into India. Partially or Wholly owned subsidiaries: Some multinational companies have also increased their stake in their Indian subsidiaries to take advantage of the India opportunity. Unlike in some other sectors, fully owned subsidiaries in the pharmaceutical industry offer little risk in terms of sharing critical data and competitive advantage, as most are subject to strong control by the parent company. Pharmaceutical companies willing to have wholly owned operations in India can gain value from being present across the value chain, from drug discovery to clinical trials through to manufacturing. Other benefits may include tax advantages.

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Policy & Regulatory Framework The Central Drug Standard Control Organisation (CDSCO), which falls under the purview of the Ministry of Health and Family Welfare, is the primary regulatory body in India. The Drug Controller General of India (DCGI) presides over the CDSCO and is in charge of the approval of licenses for drugs at both the central and state levels. In January 2005, India introduced the product patent regime in accordance with the TRIPS agreement with an amendment to the Indian Patents Act. Further, in 2008, the introduction of the Drugs and Cosmetics (Amendment) Act 2008 put forth stringent penalties and imprisonment Intellectual Property Rights (IPR), patented product launches should increase 2008, the introduction of the Drugs and Cosmetics (Amendment) Act 2008 put forth stringent penalties and imprisonment. FDI of up to 100 per cent in drugs and pharmaceuticals is permitted through the automatic route. For licensable drugs and pharmaceuticals manufactured by recombinant DNA technology and specific cell/tissue-targeted formulations, FDI requires prior government approval. The GoI plans to set up a pharmacopeia commission to support ayurveda, yoga and naturopathy, unani, siddhaand homoeopathy (AYUSH) through guidelines laid down in the review of the Eleventh Plan. As stated on the National Pharmaceutical Pricing Authority (NPPA) website, the NPPA is responsible for fixing and controlling the prices of 76 bulk drugs under the Essential Commodities Act. The Department of Pharmaceuticals was formed on July 2, 2008, under the Ministry of Chemicals and Fertilisers with the objective of focusing on the development of the pharmaceutical sector in the country and to regulate various activities related to the pricing and availability of medicines at affordable prices, R&D, the protection of intellectual property (IP) rights and international commitments related to the pharmaceutical sector. The GoI has been actively supporting the industry with various measures. It is embarking on a major multi-billion dollar initiative, with 50 per cent public funding through a PPP model, to harness Indiaâ&#x20AC;&#x2122;s innovation capability.

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Key Players In Indian Market

Increased Competition

With the new patent regulations the industry expects to see a major structural shift with the entry of foreign pharmaceutical manufacturers. There is a high level of market fragmentation. As per ORG IMS Rankings, the top 4 companies Cipla, GSK Pharma, Abbott Healthcare (erstwhile division of Piramal Healthcare) and Sun Pharma have maintained their respective positions over the last four years. Unlisted players like Mankind Pharma and Alkem have consolidated their last year's positions at No 5 and No. 6, respectively. Lupin, which is at No. 7 for the second consecutive year, was earlier at 6th and 5th positions in 2008 and 2009, respectively. Abbott and Zydus Cadila are again shuttling between 8th and 9th positions. Ahmedabad-based Intas, another unlisted company, has made its entry into the league of top ten companies. Rank Company Year Rank Company Year ended ended May May 2011 2011 1 Cipla 11.3 6 Alkem 17.6 2 GSK 10 7 Lupin 12.5 Pharma 3 Abbott 7.4 8 Abbott 24.6 Healthcare 4 Sun 15.5 9 Zydus 15.3 Pharma Cadila 5 Mankind 27.2 10 Intas 30.2

Strategic Issues Facing The Industry

The industry has seen a legion of new market entrants, increased competition among key players and industry consolidation. Competitive advantage within the industry is being constantly redefined and to maintain their presence, key industry players are being forced to revamp their organisational structure, overcome huge barriers in R&D and clinical trials.

Changing Consumer Profile Consumers are now better informed and there are expectations on the industry to show that their products deliver better health and greater economic value. In the past decades governments were either the sole or major purchasers but the current trend shows that healthcare industry is now driven by insurance companies and individuals. The increasing price sensitivity of the consumer and financial muscle of health insurance companies is forcing firms in the industry to cut product prices thereby reducing margins.

Ageing Populations Due to ageing global populations there has been a rise in the demand for medicines all over the world and because of increased investment in research and development cure for diseases which were considered non curable earlier have been invented. This, in addition to the market requirement for the industry to improve current medicines and lower product cost

Changing Geo-political Environment

Industry Consolidation Merger activity has been intense within the industry in the last decade. Analysts believe that three firms; GlaxoSmithKline, Bristol-Myers Squibb and Merck are likely candidates to be directly involved in the next round of industry consolidation.

The pharmaceutical industry is facing increasing political pressure to reduce prices and control costs, particularly in developing economies, government are increasing pressure on pharmaceutical firms to act on social interest and this is likely to intensify in the future.

Science and Innovation

Decreasing Consumer Influence

Over the last decade the knowledge base of the pharmaceutical sciences has changed dramatically and continues to change rapidly. As new technologies and bodies of scientific knowledge emerge, whole new set of opportunities and threats are being introduced. Over the last decade, we have seen this happen as companies that were not very effective in research and new product development were acquired.

Medical doctors, general practitioners and pharmacists usually act as agents of the final consumer and they are largely responsible for the consumerâ&#x20AC;&#x2122;s purchasing decisions. As a result of this pharmaceutical companiesâ&#x20AC;&#x2122; direct a sizeable proportion of their marketing efforts at these agents. But with the advent of internet consumers have easier access to medical information and treatments, which is changing the scenario for Branded drugs.

Rahul Mahajan, PGDBM 2010-2012 Pratik Mittal, PGDBM 2010-2012 29

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Lessons On Finance Solvency Margin

is the extra capital that an insurance company is required to hold. It is the minimum excess on an insurer’s assets over its liabilities. Like capital adequacy ratio in banks, solvency margin is a part of the prudential norms and indicates how solvent the company is.

Major Purpose Reduce the risk that an insurer would be unable to meet claims & reduce the losses suffered by policyholders in the event that a firm is unable to meet all claims fully and promote confidence in the financial stability of the insurance sector

Solvency I Solvency margin requirements have been in place since the 1970s and it was acknowledged in the third generation Insurance Directives adopted in the 1990s. The Directives required the Commission to conduct a review of the solvency requirements and following this review, a limited reform was agreed by the European Parliament and the Council in 2002. This reform is known as Solvency I.

Solvency II For better regulation and reporting, Solvency II was proposed. The proposed Solvency II framework has 3 main pillars.

Solvency Norms

insurers of the inherent business risks in the industry and the allocation of sufficient capital to cover them. Globally “Solvency II” is replacing the minimum requirement, which is similar to the Basel II capital adequacy requirements for banks. It is often called shareholders’ funds [in the UK] or policyholders’ surplus [in the USA].

Solvency Ratios A parameter called the “Solvency Ratios” means the ratio of the amount of Available Solvency Margin to the amount of Required Solvency Margin. Available Solvency Margin: Denotes the items such as capital/funds, various reserves (Includes price fluctuation reserves and catastrophe reserves) and a portion of unrealized profits obtained from real estate and stocks. Required Solvency Margin: Refers to the risks like Underwriting Risks (Risk of miscalculating premiums and miscalculate technical provisions), Risks on the expected interest rates (It is considered to be an important factor contributing to the insolvency of an insurance company) and Risks related to asset management (Growth risk arising out of exercise growth not matched by sufficient resources or due to wrong selections or wrong pricing of products).

Solvency Norms & India Pillar 1 consists of the quantitative requirements (for example, the amount of capital an insurer should hold).

Pillar 2 sets out requirements for the governance and risk management of insurers, as well as for the effective supervision of insurers.

Pillar 3 focuses on disclosure and transparency requirements. Solvency II is the new regime for all insurers and reinsurers in the European Union. It will come into effect from December 31, 2012. Solvency II aims to implement solvency requirements that they feel will better reflect all kinds of risks that companies face. It aims to ensure understanding by 30

Indian insurers are following solvency I norms. As per Insurance Regulatory and Development Authority (IRDA) norms, both Life and Non-Life insurance companies are required to maintain 150% solvency margin. The IRDA is not too keen on introducing solvency II norms for covering companies in India although insurers the world over are moving over to the new regime. One of the major reasons cited is the absence of required statistical database to adopt solvency II norms that have been devised by the European community. Every insurer shall determine the required solvency margin, the available solvency margin, and the solvency ratio in Form K as specified under Insurance Regulatory and Development Authority (Actuarial Report and Abstract), Regulations, 2000.

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Mr. Kundapur Vaman Kamath

National

One of the most successful & admired bankers in India. He is the Non-Executive Chairman of ICICI Bank, the largest private bank in India.

Confederation of Indian Industry (CII).

Council

He is an independent Director on the Board of Directors of Infosys Technologies Limited, Lupin Limited, The Great

Eastern

Shipping

Company

Limited

and

Schlumberger Limited. He has been a co-chair of the Mr. Kamath has a degree in mechanical engineering and did his management studies at the Indian Institute of Management, Ahmedabad. Mr. Kamath started his career with ICICI (Industrial Credit and Investment Corporation of India). He has generally

been

credited

with

expanding

ICICI's

businesses to evolve it into a technology-enabled financial organisation catering to the financial needs of corporate and retail customers.

World Economic Forum's Annual Meeting in Davos and is a member of the Board of the Institute of International Finance. Mr. Kamath was announced as the next Chairman of Infosys Limited from 21st August 2011 onwards.

Award & Accolades Most e-savvy CEO amongst Asian banks - The Asian Banker Journal of Singapore

In 1988, he moved to the Asian Development Bank and spent several years in South-East Asia. He was the ADB

Finance Man of the Year award - The Mumbai

representative on the Boards of several companies.

Management Association

In May 1996, Kamath joined ICICI as its Managing

Best CEO for Innovative HR practices - World HRD

Director and Chief Executive Officer. Mr. Kamath initiated a process of a series of acquisitions of non-banking finance companies in 1996-98, and led the way to the formation of ICICI Bank. Under his leadership, the ICICI Group transformed itself

Congress Asian Business Leader of the Year - Asian Business Leader Award 2001 (CNBC Asia)

into a diversified, technology-driven financial services

Outstanding Business Leader of the Year - CNBC-TV18,

group that has leadership positions across banking,

2006

insurance and asset management in India, and an international presence. He retired as Managing Director

Businessman of the Year - Business India, 2005

& CEO in April 2009, and since then has been the Non-

Business Leader Award of the Year - The Economic

Executive Chairman.

Times, 2007

Mr. Kamath is a Member of the Governing Board on various educational institutions including the Indian

Businessman of the Year - Forbes Asia

Institute of Management Ahmedabad & Indian School

Padma Bhushan award from the Indian government -

of Business. Mr. Kamath is also a Member of the

2008

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Finance - Q ?

Who is a Dellionaire? Which company is he associated with?

Who coined the word blue chip and where does the word originate from? What is underwear indicator and name the person associated with it? Connect the following:

Connect the following personalities:

Which is the only state which has three stock exchanges? The Companyâ&#x20AC;&#x2122;s stock exchange ticker symbol is PKX and it has signed a pact with an Indian state, which makes the deal the single largest FDI in India. Name the state and the company and its origin? What are Max Keiser and Michael Burns known for? (Think about Hollywood)

Identify the person and the company he is associated with?

Connect the following:

Mail answers @ simsreefinanceforum@gmail.com & Win attractive prizes worth Rs. 1000 32

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aBOUT uS

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SIMSREE Sydenham Institute of Management Studies research & Entrepreneurship Education (SIMSREE) was founded in the year 1983 by Government of Maharashtra. Since then, SIMSREE has been continuously ranked as one of the Premier Institutes of our country, and it attracts the finest management minds from India. SIMSREE has been consistently being ranked among Top 20 Business Schools in India. CRISIL has recently rated SIMSREE with A*** at state level (Maharashtra) and A** at National level.

SIMSREE Finance Forum (SFF) SFF is a student body that strives to assist the students in the development of financial acumen through collective effort. The Forum aims to bridge the gap between students and corporate leaders through various Interactive Sessions on a regular basis. Various Programs & Events form part of our Forums initiatives to provide the students with a multitude of opportunities.

Our Team 1. 2. 3. 4. 5. 6.

Muralidhar Rao Gopidalai Rahul Mahajan Sangeet Srichandan Vishal Bhanushali Alok Kumar Pratik Mittal Sources: McKinsey Quarterly, McKinsey Report (Infrastructure), Ernst & Young Reports, PWC Report (Indian Pharma Sector), RBI, FICCI, The Economic Times, Reuters & Wikipedia