T H E MO N T H LY FI N A N C E MA G A Z I N E OF II F T
M A R C H 20 1 2
BANKING - SHOULD PSUs BE PRIVATIZED? corporate bond
rupee depreciation
marke t in india
and its impac ts
An a l ys i s - Th e i s s u e o f F D I i n M u l t i B ra n d R e t a i l i n g
INFINEETI | MARCH 2012
2
Te am I n F IN eeti
E D I TO R - I N - C H I E F S oumya J yoti S en E ditorial board R ohi t K hatta r Pi y us h M a r wah a R i te s h G u pta S ourav Datta
Fro m th e Edito r s D es k
H
E llO Fr i e nd s , Welcome to the March edition of InFINeeti . It has been a while , but we are back , and
have s o m e g r e at ar ti c le s i n s to r e as we h e a d i n t o an important year for the world economy at large . We at I nFI N e e ti h ave d e c i d e d to c o nc e ntr a t e o n
the f i nanc i al mar k e ts i n I nd i a , h e nc e th e a r t i cles o n th e c o r p o r ate bo nd mar k e ts and M FIs i n India will surely be a great read . We also present
the bu r ni ng i s s u e o f FD I i n r e tai l , th e p o l i t i c s behind it, and its economic implications, for design
good o r f o r wo r s e .
Team I nFIN e et i The Indian stock markets and the currency feedback / q ueries i nfi ne e ti @i i f t. ac. in i nfi ne e ti @gmail. co m
ma r ke t s h a v e s e e n t u rb u l e n t s w i n g s , e s p e c i a l l y the latter, and we delve into this aspect and observe what effects is it going to have for the Indian economy. The highlight of this issue is the
comparative analysis of India and China , under-
Published monthly by students of Indian I nstitute of Foreign Tr a d e , N e w D e l h i a n d Kolk ata
taken by o u r e s te e me d p r o f e s s o r s wh i c h t a c k l e s
t h e b u r n i n g i s s u e : Wi l l I n d i a , w h i c h i s s o f a r behind C h i na i n th e ti m i ng o f r e f o r m s an d r a t e of gro wth , e ve r c atc h u p wi th th e “ D r ag o n ” ?
The issue also features our regular columns ALL R IG H TS RESER VED
“ M o n t h l y C h r o n i c l e ”, h i g h l i g h t i n g i m p o r t a n t
bus in e s s e ve nts o f th e las t mo nth and “ FUN w i t h FI N”, wi th ano th e r i nte r e s ti ng q u i z.
We a l s o t a k e e x t r e m e p r i d e a n d p l e a s u r e i n annou nc i ng th at I I F T h as be e n able to c o m pl e t e
its placement procedure successfully, with an increas e i n th e ave r ag e p ac k ag e s o f f e r e d t o t he s tud e nts .
Wish you all a great read and a pleasant interns hip s e as o n ah e ad !!!
Re ga r ds ,
Te am I nFIN e e t i
INFINEETI | MARCH 2012
CO NTE NTS
3
»» p.5
»» p.11
4 BANKING
»» p.13
14 corporate talk
An a n a l ys is o f th e p ub l ic
M r.
Kapil
sec tor banks in I ndia and
co-founder and Executive
a study to see whether
Chairman K apital Global,
they should be privatized
s p ea k s a b o ut th e s co p e
o r n o t?
and
R EGU L A R S
Arora,
challenges
23 M O NTHLY C H R O N IC L E S 25 FUN W ITH F IN
in
b a n k in g s ec to r
7 BOND MARKETS The
corporate
16 ECONOMY
21 iNVESTMENT
bond
With more than 72%
With
markets are one of the
of population living in
presenting varied views,
most impor tant financial
villages, we look at the
we analy ze the impac t FD I
ma r k ets. B ut th is ma r k et
role the Microfinance
in multi b rand retail could
h a s n’ t f u l l y d e v e l o p e d
Institutions can play in
h ave m a a d e o n t h e I n d i a n
in India. The authors
t h e d e ve l o p m e n t o f t h e
economy and analyze what
present a view of the
p o o r.
we h ave m i s s e d by l e t t i n g
Indian markets and the f uture a h ea d.
11 CURRENcY WATCH
many
experts
this go.
18 Economy
23 regulars
With growing debate
A jist of the recent financial
Being one of the most
on the growth of BRIC
news and corporate news
unpredictable
and
n atio n s, we b r in g to yo u
dur ing the las t month.
volatile currencies this
a comparison between
yea r we a n a l yze th e c a s e
t h e t wo f a s te s t grow i n g
of rupee depreciation
economies India and
Test your finance knowledge
and its impact on the
C h in a
with an intriguing set of
I n dia n eco n o my.
25 fun with fin ques tions.
INFINEETI | MARCH 2012
4
BA NK ING
Should PSU banks be privatized B y N eha J a in a nd S o ura bh S a h u ( The a u t ho r s a re s tudents o f IIM I n do re)
A
lthough ideological considerations - exem-
Of these, the first objective, the need to
p li fi e d by s tate ment s like, “gover n ment s have
promote efficienc y in running the commercial
n o b u s i n e s s t o b e i n b u s i n e s s” - h a v e o f t e n
organizations, has arguably been the dominant
been paramount indriving privatisation in
m o tivatio n. There is a s ens e that pub l i c ow n -
va r i o u s par ts of th e wo r ld, it is also t rue that
er s hip s o m ehow l eads to l ower l eve l s o f e f f i -
privatisation has brought a radical change
c ienc y than is po s s ibl e u nder pr ivate ow n e r-
in the functioning of various organisations.
ship. But, the basic issue here is the basis of the
I n t h e b a n k i n g s e c to r a l s o, t h e p a r t i a l d i s i n -
argument about the efficienc y levels. There are
vestment of government in the PSUs done
no param eter s that m eas u re and co mp a re t h e
d u r i n g 1 9 9 0 s h e l p e d t o i n c r e a s e e f f i c i e n c y,
efficienc y of the PSU and private sec tor banks.
a n d fo s t e r h e a l t hy c o m p e t i t i o n . I n t h e l i g h t
I t is s o, bec au s e bo th thes e s etu ps a re b a s e d
o f t he re ce nt de velo pment s, lik e gover n m ent
on different motives and business models. And
planning to amend the banking regulations
h e n c e t h e y c o u l d n o t b e c o m p a r e d d i r e c t l y.
act and the various bank union strikes, the matter of fur ther privatisation of banks is back
S e c o n d l y, i t i s s a i d t h a t p r i v a t i s a t i o n h e l p s
i n d i sc u s s i on. I n t h is back gro un d, t h is ar tic l e
in earning high revenues and hence bridg-
fo c u s e s o n t h e fe a s i b i l i t y o f p r i v a t i s a t i o n o f
i n g f i s c a l d e f i c i t. Co n s i d e r i n g t h at I n d i a s t i l l
I n d i a n PSU ba nks an d t h e ef fec t s it will have.
has a co ns iderabl e po pu l atio n u nde r p ove r t y l i n e, o n l y co n s i d e r i n g p ro f i t s i n s e r v i ce s l i k e
Objectives For Privatisation– Analysis In To d a y ’s Scenario
banking might hamper the growth of the nation. T h i r d l y, p r i v a t i s a t i o n i s s u p p o s e d t o r e d u c e
The advocates of pr ivatisation have sought to
government inter ferences. Though it is a
justify privatisation with the following objectives
characteristic of privatisation, this might not be a ver y good thing for India today because the mass participation of banks in n o t s o p r o f i t a b l e a s i s a c h i e ve d b y t h e g o vernment regulations and inter ferences. Fu r t h e r, t h e d e v e l o p m e n t o f c a p i t a l m a r k e t is s o m ething that in this c as e wo u l d b e d o n e b y d i l u t i n g g o v e r n m e n t ’s s t a k e . T h i s w o u l d
INFINEETI | MARCH 2012
BANK ING
5
a l s o m a k e t h e b a n k m o r e r i s k y. T h e d e v e l -
b a n k s co ul d n o t rea c h the le ve l of ru ra l pe n-
opment in the capital market is thus hap-
etratio n w h ic h th e I n dia n pu blic se c tor ba nk s
pening at the cost of the shareholders.
h a v e b e e n a b l e t o. T h i s h a s h e l p e d i n r u r a l d e v e l o p m e n t a n d h e n c e, c o n t r i b u t e d t o t h e
Lastly, pr ivatisation helps in fostering healthy
co untr y ’s devel o p m ent. Bu t, while me a su r i ng
co m p etitio n . I n th e c ur rent s cen a r io, th ere is
th e p er fo r m a n ce o f th e P SU ba nk s a nd whi le
a fine balance in this segment. In case pri-
comparing them to private entities, these
vatisation is done, SBI which is the largest
a c h i e ve m e n t s a re n o t f a c t o re d i n . H e n c e, t o
b a n k w o u l d h a v e h u g e p o w e r. G o i n g w i t h
be able to compare the PSU banks and pr ivate
t h i s a p p ro a c h wo u l d h e n ce l e a d to m o n o p o -
banks we need to have some metrics which
l i s e d m a r k e t s, g o i n g a g a i n s t o u r o b j e c t i ve s.
c o n s i d e r t h e d i f fe r e n c e i n t h e o b j e c t i v e s o f the two different kinds of establishments.
H en ce we s ee th at a l mo s t n o n e o f th e o b j ec tives fit with the present scenario. The
2.Stricter Regulations for public banks
problem cannot be addressed by privatisation. While foreign banks are permitted to open
Th e Iss u e
1 2 b ra n c h es p er yea r, by insta lling hu nd re d s o f AT M s t h ro u g h o u t I n d i a a n d t h ro u g h t h e i r
The major problem is not the lower effi-
financial subsidiaries, significant retail and
ciency of the PSU banks, as is pointed out
consumer banking business are transacted.
by the advocates of privatisation. This
For example, Citibank alone besides branches,
section gives some of the issues which we
now has more than 150 outlets under the
feel are most impor tant in this scenario.
g u i s e o f C i t i f i n a n c i a l c o m p a n y. A s a g a i n s t this, the applications for licence to open a
1.M ea s u r i n g t h e p er fo r ma n ce o f b a n ks
b r a n c h i n N e w Yo r k m a d e b y S B I , I C I C I B a n k a re p e n d i n g fo r o ve r t wo ye a r s. T h i s c re a t e s
T h e a c h i e ve m e n t o f t h e p u b l i c s e c t o r b a n k s
a bottleneck for the growth of PSU banks.
in India in the last 36 years, is par ticularly in reaching out to the masses in the hither to neglected villages. Even in China, the
3 . Le s s fo r m a l i t i e s a n d c h e c k s o n p r i v a t e b a nks
INFINEETI | MARCH 2012
6
BA NK ING seekers as compared to public banks.
banks, sapping their income and profits.
But, due to this they need recover y teams etc. There have been incidents when
Potent ial Effec t s O f Pr ivat isat ion
the private banks have been accused to h a ra s s i n g t h e c u s to m e r s fo r re cove r y.
If Implemented, privatisation would go a g a i n s t t h e g ove r n m e nt ’s p o l i c y o f Fi n a n c i a l
4 .D i f fe re nt re g u l ati o n s fo r pr i vate pl ayer s
I n c l u s i o n . O n o n e h a n d, w h e n g ove r n m e n t i s taking all necessary steps to bring banking i n r e a c h o f e v e r y p e r s o n i n I n d i a , g o i n g fo r privatisation of banks is not feasible. The pr ivate bank s, w ith pro f it as their a i m wo ul d no t o pen branc hes in areas w here t h e y d o n’t expect profits. Also their interest rates are h i g h e r, w h i c h w o u l d m a k e c r e d i t u n a v a i l a b l e f o r p e o p l e f r o m l o w e r i n c o m e g r o u p. Also, in the current scenario when many economies are in recession, having some c o n t ro l o n o u r b a n k i n g s y s t e m i s g o o d. T h i s guards us from the global recession to a ce r t a i n d e gre e. E s p e c i a l l y a f te r h av i n g w i t h stood the global economic crisis of 2008, the PSU banks have proved their mettle.
Conc lusion The current state of the public banks is a complex result of many factors. The key to Fo r e i g n b a n k s a r e p e r m i t t e d t o o p e n t h e i r
improve their per formance lies in under-
financial subsidiaries to indulge in trading and
standing the core difference between the
s e r v i ce s to i nc re ase t h eir in co me an d pro f its.
t wo t y pes o f f inanc ial ins titu tio ns. Fro m a n a l -
This allows the private banks to generate huge
ys is, it l o o k s l ik e that the dif ference b e t we e n
profits, which does not happen in public banks.
the wo r k ing o f pr ivate s ec to r banks a n d P S U banks emerge from the policies and regu-
5.Exemption banks from
for social
private banking
l a t i o n s a n d n o t t h e i r e f f i c i e n c y. T h e s o l u tion to the stagnation of banks is standardising the regulations and minimising
T h e p r i v a t e b a n k s a re e xe m p t e d f ro m s o c i a l banking and agricultural credit. These burdens are put solely on the public sector
bu reau c ratic co ntro l, no t has t y pr ivat i s at i o n .
INFINEETI | MARCH 2012
IND IAN MAR K E T
7
corporate bond market in india B y Adi t ya G a dda m a nd R oy Pa ul M at t hew ( Th e a u t h o r s a re st udent s of SJMSOM, IIT-B ombay )
Need fo r the bo nd m a r k et
I
Per formance of corporate bond m a r k et:
ndian economy has witnessed an accelerated growth over the past decade.
Co r p o rate b o n d m a r ke t in I nd ia is c ha ra c te r-
Notwithstanding the financial crisis of 2008
ized by low volumes and high illiquidit y. Many
and the current global economic slowdown
of the struc tural reforms brought in by RBI and
it h a s s us ta in ed a grow th rate o f over 5 % . Fo r
S E B I ove r t h e p a s t t wo d e c a d e s w h i c h t ra n s -
this growth stor y to continue India needs huge
fo r m ed th e eq uit y s ec u r itie s a nd G ove r nme nt
capital investment in manufac turing and infra-
securities market have bypassed the corporate
s tr uc ture s ec to r s w h ic h a re th e ma j o r dr iver s
d e b t m a r k e t . Fo r i n s t a n ce t h e e q u i t y m a r k e t
o f th e eco n o my. P l a n n in g co mmis s io n env is -
cap as a % of GDP has grown from 32.6% in
a g es a $ 1 tr il l io n inves tment in in f ra s truc ture
1 9 9 6 to 1 3 0 % in 2 0 1 1 whe re a s bond ma r k e t
in next five years. Corporate sector in India
grew to 34% from 21.3%. Out of that corporate
has traditionally been dependent on financial
bond market accounts for just 4% of GDP which
in stitutions an d commerc ial ba nk s for proj ec t
s h ows t h e d o m i n a n ce o f g ove r n m e nt s e c u r i -
funding. But given the long gestation periods
t i e s i n b o n d m a r k e t . Fi g 1 s h o w s t h e c o u n t r y
of I nfrastruc ture projec ts, and the huge quan-
w is e co m p a r is o n o f cor porate bond ma r k e t s.
tit y of funds needed, banks will not be willing
Even in co r p o rate b o n d ma r k e t pr ivate pla ce -
to l en d p ro j ec ts w h ic h wo ul d a dvers el y a f fec t
ments constitute 92% of the total volume. The
their asset liabilit y matur it y balance. Also any
co r p o rate b o n d m a r k e t ha s be e n ta ppe d i n a
p ro b l e m i n t h e b a n k i n g s e c to r c a n l e a d to a
low level equilibrium with both issuers and
dec rea s e in l en din g to th e co r p o rates. H en ce
inves to r s avo idin g it.
t h e re i s a n e e d fo r a v i b ra nt co r p o rate b o n d m a r k et w h ic h s er ves a n a l ter n ative s o urce o f f un ds a n d ef fec tivel y c h a n n el izes th e p r ivate savings into long term capital needs of the i n d u s t r y. A s t r o n g c o r p o r a t e b o n d m a r k e t would also have implications on the mone ta r y p o l ic y o f th e co untr y a s th ey p rovide rel e va nt i n fo r m at i o n re g a rd i n g r i s k s a n d p r i ce s in a n eco n o my.
INFINEETI | MARCH 2012
8
IN D IA N MA R K E T b o n d s b e fo re i s s u a n ce i r re s p e c t i ve o f p u b l i c o r pr ivate pl acem ent. I n I ndia there i s p ra c t i cally no value placed on sub -investment grade bo nds. This is bec au s e o f the hig h re g ul ato r y restrictions placed on pension funds and insura n ce f u n d s m a r k e t w i t h re s p e c t to i nve s t i n g in l ow rated bo nds. Even in inves tme nt gra d e b o n d s t h e re i s h a rd l y a ny d e m a n d fo r p a p e r b e l ow A A o r i t s e q u i va l e nt by rat i n g co m p a n i e s. Th i s s h ow s a l a c k o f m a t u r i t y i n I n d i a n The issues that have been inhibiting the
m ar k et in ter m s o f u nder s tanding r i s k- re wa rd
growth of cor porate bo n d mar ket fo r so l o ng
m atr ix. Fig. 2 s hows the s hare o f to p 5 rate d
c a n b e s e gre g ate d i nto s u p p l y s i d e, d e m a n d
bo nds in m ar k et.
s i d e a nd m ar ke t st ruc t ure issues.
Is s ue s - Su p p l y S ide Preference for Private placement: Many issuers today prefer private placement because of i t s o p e ra t i o n a l e a s e. Th e r i g o ro u s d i s c l o s u re req u i re m e nt for l ist in g, len gt hy t ime -lin e and t h e h i g h c o s t i nvo l ve d i n p u b l i c i s s u a n c e o f bonds makes private placement more econom-
Is s ues -D em a n d S ide
i c a l for the i s s u e rs. Th ere is a gen eral dem and that the listing guidelines be completely
R eg u l ato r y res tr ic tio ns o n I nves to r s:
r e v i e w e d a n d a ny s u p e r f l u i t y t h a t e x i s t s b e d o ne away wi th.
•Pension funds and insurance companies are among the largest participants in the
Fragmentation: Since the cost of going public
bond market. In India Insurance companies
is high, the cor porates planning to raise large
and pension funds have stipulations on the
amounts make multiple issues to enjoy the
m axim u m percentag e o f their po r tfo l i o s t h at
dual advantage of both low cost of private
can be invested in low-rated corporate bonds.
placement (less disclosures) and also over-
In addition they also required to hold the
come the cap on number of investors to whom
bonds until maturity once acquired causing
i t c a n be offe re d. Th is k in d o f f ragment atio n
l ow l iq u idit y in the m ar k et.
i s i ni mi c al to bot h liquidit y an d dep t h in the s e co n d ar y m ar ket.
•With respect to commercial banks there is regulator y asymmetr y in the way they treat loans
Ab s e n ce of Sub - I nvest ment Grade secur ities :
a n d b o n d s t o d a y. B a n k s a r e n o t a l l o w e d t o
Ever y corporate has to get credit rating for the
invest in bonds that are not investment grade.
INFINEETI | MARCH 2012
IND IAN MAR K E T While banks provide loans with var ying credit
9
is s uer s.
quality they cannot invest in commercial paper w ith l ow ratin g.
T D S : T D S ( ta x deduc tion at sou rce ) is a ma jor issue in bond market. Problem with regard
•Banks also have a tendency to hold the
to T D S is ta x o n intere st income from cor po -
bonds till maturity because of the mark-to-
rate b o n d s i s n o t u n i fo r m l y a p p l i c a b l e to a l l
m a r k et treatment a p p l ied to tra da b l e s ec ur i-
investors. Insurance companies and Mutual
ties. Because of the low liquidit y in the market
f un ds a re exem p t f ro m ta xe s whe re a s ba nk s
b a n k s fea r th e ero s io n o f c a p ita l due to l ower
and individuals come under non- exempt cate -
valuation of the bonds. Mark-to -market is also
gor y. This inhibits an efficient trading system.
a reason for majority of debt funds to play safe by i nve s t i n g i n g ove r n m e nt s e c u r i t i e s w h i c h
R ecent D evelo pm ent s:
h ave h ig h er l iq uidit y in ma r k et. I n 2005 I ndian gover nment had set up a “H igh M i s s i n g r e t a i l p a r t i c i p a t i o n : R e t a i l i nv e s t o r
level exper t committee on corporate and secu-
h a s s h ow n l i t t l e i n te re s t i n c o r p o r a te b o n d s
r i t i z a t i o n” t o l o o k i n t o t h e l e g a l , r e g u l a t o r y
despite India having one of the highest savings
and market related issues. It came up with
r a te a s p e rc e n t a g e o f G D P. Th e l ow l i q u i d i t y
numerous recommendations which resulted
in secondar y market along with high inter-
in changes in regulations and market infra-
e s t r a te s o f fe re d i n f i xe d d e p o s i t s a n d s m a l l
s t r u c t u re re l a t e d t o c o r p o r a t e b o n d m a r k e t .
s av i n g s s c h e m e s h a s b e e n a d i s i n ce n t i ve fo r
On e s uc h m ove is s etting u p of tra d i ng plat-
inves tin g in co r p o rate b o n ds
forms for corporate bonds on BSE and NSE. S o m e m o re recent deve lopme nts a re.
I s s ues -M a r k et Str uc ture & Ta xes Simplification of listing norms: In 2009 SEBI C l ea r in g a n d S ettl ement mec h a n is m & M a r k et
p ut in p l a ce th e “s im p lifie d listing a gre e me nt
makers: At present unlike in equity market
for debt securities” after issuing an initial draft
there is no struc tured clearing and settlement
and receiving public comments over it. As per
mechanism in corporate bond market. The set-
n e w r u l e s i s s u e r s w i t h l i s te d e q u i t y w h o a re
tl em ent is direc t b et ween th e p a r ties exp o s -
already subjec t to detailed disclosure require -
in g b uyer s to def a ul t r is k . Al s o, a c tive p a r tic -
ments, now have to make minimal disclosures.
ipation by primar y dealers which led to the
There are a lot more relaxations which reduced
success of government securities market is
th e un n eces s a r y b urde n on pu blic issu e rs.
m is s in g in co r p o rate b o n d ma r k et. R ep o : R B I h a s a l l owed re po in cor porate bond S t a m p D u t y : H i g h s t a m p d u t y a n d i nte r s t ate
m a r k e t f ro m M a rc h , 2 0 1 0 fo r s e c u r i t i e s w i t h
dif ferentia l s in th e s ta mp dut y exis tin g to day
rating AA or above. The minimum hair-cut
are major barriers to securitization market.
h a s b e e n re d u ce d to 1 0 - 1 5 % a f te r t h e i n i t i a l
Stamp dut y increases the cost of issuance and
2 5 % i n D e c e m b e r, 2 0 1 0 . R e p o i s w e l c o m e
m a k e s t h e p u b l i c i s s u a n ce u n e co n o m i c a l fo r
s tep to in c rea s e th e mu c h ne e d e d liqu i d i t y i n
INFINEETI | MARCH 2012
10
IN D IA N MA R K E T co r p o rate bond mar k et. o f I ndian co r po rate bo nd m ar k et. CDS: Credit Default Swaps (CDS) have been introduced in I ndia ver y recently. A CDS offers
R eferen ces :
insurance to the bond holder against default in i ntere s t or pr i nc i pal rep ayment. CDS wil l l ead
Repor t of H igh level Exper t committee on cor-
to a gradual deepening of the cor porate bond
po rate bo nds & S ec u r itizatio n, 2 00 5
m a r k e t as C D S c an en h an ce t h e bo n d m ar k et investors' appetite for lower rated issuers,
Publication of draft consultative paper on
beyond their traditional favor ites in the high-
S ec u r ities and E xc hang e B o ard o f I n d i a ( I s s ue
s a fe t y c ate gor y.
and Listing Debt Securities) Regulations, 2008
FIIs in bond market: To increase the demand for
Paper by Anu pam M itra “ Why Co r po rate b o n d
t h e co r p o rate b o n d s I n d i a n G ove r n m e n t h a s
m a r k e t s i n I n d i a a r e t a p p e d i n N e l s o n’s l o w
i n c re a s e d t h e l i m i t o f F I I i nve s t m e nt i n d e b t
l evel eq u il ibr iu m�- 20 09
instruments over the years. Most recently gove r n m ent ha s i nc reased t h e limit o f FI I inves t-
Data Sources- RBI, SEBI,BSE, NSE,
m e nt i n cor porate b o n d mar ket to $20 b il l io n
S earc h par tner s
a nd to $25 bi lli on in co r p o rate in f rast ruc tu re b o nd s.
R oad ah e ad : Fr o m t h e I n d i a n e x p e r i e n c e w i t h c o r p o r a t e b o nd m ar ke ts i t n eeds a b ig push rat h er than small tweaks in regulations and infrastruc ture. Th ere s hould be refo r ms b o t h in pr imar y and s e c o n d a r y m a r k e t s. I n t ro d u c t i o n o f c l e a r i n g a n d s e t t l e m e n t a g e n c i e s, c re a t i o n o f m a r k e t makers (primary dealers- which led to the s u cce s s o f g ove r n m e n t b o n d m a r k e t ) i n co rporate bond market, activating the interest rate futures and Credit default swap market to e n h a n ce the de pt h o f t h e mar ket, rat io n al izat i o n of s tamp dut y an d o t h er t axes, allow ing re p o i n low rate d bo n ds, relax in g t h e inves tment mandate for insurance and pension funds, credit enhancements in the form of b a n k gu ara nte e s are so me o f t h e steps w hic h s h o u l d b e t a k e n i n o rd e r to c h a n g e t h e f a ce
Ve n a t o r
INFINEETI | MARCH 2012
CUR R E NC Y WATCH
11
Rupee depreciation and its impact on indian economy B y Ru mjh u m Sh u k l a ( Th e a u t h o r i s a st udent of IIFT )
T
he exchange rate of a currency is determined by it s supply and demand. The price rat e at w hich t he demand of t he currency equals the supply is the exchange rate of that currency. Before the current recovery, the rupee depreciated by over 10 % in the past six mont hs.
account and capit al ac c ount pl ay a ro l e i n determining the movement of the currency: •Current A ccount S urpl us /Def i c i t Current account surplus means exports are more than imports. In economics we assume prices to be in equilibrium and hence to balance the surplus, t he currency should appreciate. Likewise for current account deficit countries, the currency should depreciat e. •Capit al A ccount f lo ws
R upee depreciat ion in t he recent t imes can be attributed to the following factors w hich are t he major f act ors t hat det ermine t he exchange rat e of rupee. •B alance of P ayment s A record of the factors affecting the supply and demand of t he currency is t he balance of payment . Mat hemat ically, it is t he sum of t he current account and capit al account of a count ry and is an ext ernal account of a country with other countries. Both current
As currency adjustments do not happen immediat ely t o adjust c urrent ac c o u n t s u rpluses and deficits, capital flows play a role. Deficit countries need capital flows and surplus countries generate capital outflows. On a global level we assume that deficits will be cancelled by surpluses generat ed in ot her count ri es . I n t h e o ry w e assume current account deficits will be equal to capital inflows but in real world we could easily have a s i t uat i on o f e x c e s sive flows. So, some countries can have current account deficits and also a balance of payment s surplus as c api t al i nf l o w s a re higher than current account deficits. In this case, the currency does not depreciate but actually appreciates as in the case of India.
INFINEETI | MARCH 2012
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CUR R ENC Y WATC H Inflation has remained around 9-10% for al mos t two y ears now. Ev en i nfl a t io n a f t e r Dec-11 is expected to ease mainly because of base-effect. Qualitatively speaking, i nfl ati on s ti l l remai ns hi gh wi th co re in f la tion itself around 8% levels. It is important to rec al l that the epi s ode of 20 0 7 - 0 8 when despite high inflation and high interest rates , c api tal i nfl ows were abund a n t . Th is was because markets believed this inflation is temporary. Even this time, investors felt the same as capital inflows resumed qui c k l y as Indi a rec ov ered from t h e g lo b a l crisis. However, as inflation remained persistent and became a more structural issue investors reversed their expectations on Indi an ec onomy .
As we can see, current account deficits is likely to be higher but capital inflows especially FII inflows are going to be much lower. Compared to EAC projections, current account deficit is likely to be higher a n d c a p i t a l a ccount lower leading to e i ther a n e g l i g i b l e Bo P sur plus or B oP defic i t. Apart from difficulty in capital inflows, Indian economy prospects have declined s ha rp l y. Ju st a t the beginning of the y ear, forecasts for India’s growth for 2011-12 were around 8-8.5% and have been revised downwards to around 6.5%-7%. It has been a s ho cki n g t u r n a r ound of events for Indi an economy. Both foreign and domestic inves tors have become jittery in the last few m o n t h s b e ca u se of following r easons : • P e rsi st e n t i n f l a tion
•Pers i s tent fi s c al defi c i ts The fiscal deficits continue to remain high. The government projected a fiscal deficit target of 4.6% for 2011-12 but is likely to be much higher on account of higher subsidy pressure. Persistent fiscal deficits will reduce the foreign investment in the c ountry . •Lac k of reforms There have been very few meaningful reforms in the last few years in Indian economy. The government wanted to announce FDI i n retai l but had to hol d bac k am id st h u g e furore from both opposition and allies. This has f urt her made i nv es t ors nega t i v e o v e r the Indi an ec onomy . •Conti nued G l obal unc ertai nty :
INFINEETI | MARCH 2012
CUR R E NC Y WATCH
13
FI I f low s
count ries
R upee depreciat ion is a huge risk f or FI I s who are planning to invest in India. If an FII invest $ 10 0 0 0 , it can buy st ock wort h Rs 500000 @ current market price. Consider a scenario where after 1 year, the stock of FII made no loss, no profit and rupee depreciat ed t o 5 5 against dollar. On st ock sale the FII would get Rs 500000, but while converting to dollars, it ends up in loss. A depreciating rupee will therefore lead t o w it hdraw al of FI I which will f urt her w orsen t he sit uat ion.
E xpat riat es living ou t s i de I ndi a i n U S a n d A rab count ries gain by rupee depre c i a t i o n . Since rupee depreciated from 43 to 50 against dollars, remittance of $1000 now is Rs 7000 more for an Indian residing in US.
E xport ers W hen a currency depreciat es, t he export ers make more profit because they get more of the local currency for every unit of f oreign currency t hough t he quant it y of t rade remains unchanged. The depreciat ing rupee w ill be posit ive f or t he I ndian I T sector that generate more than 85 per cent of t heir $ 7 0 billion revenue f rom t he overseas market s and t his kind of appreciat ion in foreign currency will enhance their actual realisat ion of revenue in dollar t erms. Indian Expatriates from US and Arab
I ndian I mport ers I ndia import indust ry wi l l al s o hav e t o p a y more in rupee terms for procuring their raw mat erials, despit e drop i n gl obal c o m m o d it y prices, only becaus e of a depre c i a t i n g rupee against dollar. Corporat e I n d i a i s a net borrower of dollar and to that extent a depreciating rupee impacts its balance sheet adversely. Companies with foreign debt on their books are badly impacted. With the rupee depreciating against the dollar, these companies will need more rupees t o repay t heir l oans i n dol l a r. Th i s will increase t heir debt burden an d l o w e r their profits. Obviously, investors would do better to stay away from companies with high f oreign debt . I ndian st udent s and t rav el l ers abro a d Individually, travelling abroad becomes more expensive as t rav el c os t c a n g o u p by around 10 per cent compared to last July f igures. S t udent s st udy i ng abroad t o o w i l l be hit as more rupees wi l l go ou t t o p a y f or t he courses, st ay and ot her ex p e n s e s .
INFINEETI | MARCH 2012
14
CO R P O R AT E TAL K
M r. K api l Aro ra Co Fo u nder a nd E xec utive c h a ir m a n K a pita l G l o bal
Mr. Kapil Arora is the CoFounder and Executive chairman of Kapital Global.He has an experience of over 13 years in the banking sector.Prior to starting his own venture he was serving as the Assistant Vice President of HDFC bank Ltd. He has also worked as a manager at Standard Chartered Bank and as a Relationship Manager at Citibank India.
I n th e p r e se n ce of expanding banking and
non banking financing corporations in India, w ha t a r e t h e g r owth pr ospects of fina nc i al consulting firms and what are the key financial domains where Kapital Global sees op p o r t u n i t i e s? There is immense opportunity in SME s e g m e n t a n d r e tail.S ME of today ar e c orporates of tomorrow.However too much dependence on corporates for banks and N B FC w i t h o u t wor king on r etail and Hi gh Networth indiviuals would be a risky affair. W h i l e Ka p i t a l p rovides solution for coporat e s a n d I n ve st ment P r opmotion A genc i es it also works in the field of developing new products for retail and High Networth space as margins come under pressures banks an d N B F C w i l l b e for ced to look at a l ternate sources of fee income . There is a huge market within India – that`s why it is a consumption story.Our portfolio of services include Investment and Trade Promotion services,Overseas Investments, Market en t ry st r a t e g i e s .F und r aising ser vices.O ur s t ra t e g i c t i e u p s with best in the bus i nes s gl oa b a l l y g i ve s us the edge .
With the boom-bust cycle getting short leading to global economic uncertainty ,Do y ou thi nk c us tomers ’ c onfi denc e in f in a n c i al enti ti es i s erodi ng? In fact the customer is becoming more educ ated and i nv ol v ed . Cus tomer th e se d a ys evaluates whether the financial entity is worth thei r bus i nes s or no. It i s g o o d f o r the financial industry that customers are educated . There are financial entities that hav e brough di s -repute to the i nd u st ry b u t there are many serious players too who hav e adequate c hec k s and bal anc e s . In India many private financial organizati ons want to open/ ex pand retai l b a n kin g operati ons as they s ee tremendou s g ro w t h opportunities in this area, but with RBI hav i ng s tri ngent l i c ens e pol i c y do yo u se e growth opportuni ti es i n thi s rega rd in t h e nex t 2-5 y ears ? RBI has been taking cautious steps and one must give credit to RBI for taking steps with c auti ous opti mi s m . It i s due to R B I p o li c i es that Indi a was abl e to wea t h e r p o st
INFINEETI | MARCH 2012
CO R P O R ATE TAL K 20 0 8 crisis. The bench mark is if a econnomy grows at 10% banking,financial services and related industry grow at 15%.The pie is large enough f or players t hat have a compet ency t o of f er qualit y solut ions The rural underbanked customer value unlocking has yet t o see it s t rue pot ent ial In the current slump and uncertain environment of financial sector, what are the areas where you see hiring growth? What is your overall outlook on hiring, growth opportunities in financial sector, what would be your advice t o management st udent s? Any sector that deal with consumption is a saf e bet . W hile t here is t urmoil in E uro Zone , U . S t he sect ors t hat are int egrat ed with global markerts is likely to be affected more than the sectors /industries that surive on home grown demand Please note India`s GDP is primarily driven by domestic demand ,consumer spending account s t o almsot 6 0 percent of GDP A s a prof essional who has worked in t he f inancial sect or and t hen gone o 1 n t o st art your own venture, what advice can you give to students aspiring for a similar career pat h? There is nothing like being a entrepreneur. I f one f eels t o st art his / her own vent ure one must give a shot at it . However one Interview taken by Rattin Duggal, student at IIFTD
15 should acquire relavent still sets and be focused on what he or she would really want to do . New Age businesses are where value is but there is a lot of competition our t here .W hile ideas are amaz i ng i m p l e ment aion is a key chal l enge. There s h o u l d be back up palns . Once implemented , the entrepreneur needs to be patient it may be challenging at t im es but one m u c t s t a y f ocused . It requires a lot of hard work at initial st ages t ill t he model bec omes s us t a i n a b l e and reaches a critical mass. Its feel great to create a sucessful business model however t his creat ion is on goi ng i t nev er s t o p s .
INFINEETI | MARCH 2012
ECO NO M Y
16
relevance of microfinance in india
B y S ha sha nk M a l h o tra ( The a u tho r is a s tudent o f IIF T )
I
n India, just one -tenth of the population
MFI operating within the state to apply for reg-
p a r t i c i p a t e s i n f o r m a l e c o n o m y. O f t h e s e ,
is tratio n w ith the regis ter ing au thor i t y o f t h e
o n l y a b o u t 3 5 m i l l i o n p a y t a xe s . T h a t ' s l e s s
d i s t r i c t w i t h i n 3 0 d ays o f i s s u e o f o rd i n a n ce
t h a n 3 % . T h e re i s a n e e d fo r f i n a n c i a l i n c l u -
thereby giving details like the purpose of oper -
s i o n of the poor an d subsequent ly creatio n o f
ating, the interest rate charged, system of con -
we a l t h. L ac k of access to fo r mal b an k in g s er-
du c ting du e dil ig ence and ef fec ting re cove r y
vices leaves a huge void in the economy which
and the l is t o f per s o ns au tho r ized fo r l e n d i n g
a c t s as an i mpe diment in t h e develo p ment o f
o r r e c o v e r y o f m o n e y. M i c r o f i n a n c e i n s t i t u -
t h e p o o r. T h i s i s t h e g a p w h i c h t h e m i c r o f i -
t i o n s we re b a r re d f ro m g r a n t i n g o r re c o ve r -
na nce i nte nd s to f ill.
ing loans without obtaining registration under this ordinance. The ordinance directed that
Un ders t an d i ng M ic ro - f ina nce
M F Is s hal l no t depl oy ag ents fo r recove r y n o r s h a l l u s e a ny c o e r c i v e a c t i o n fo r r e c o v e r i n g
Microfinance refers to all types of financial ser -
m o ney f ro m the bo r rower s. I t em powe re d t h e
vices provided to low-income households and
registering authority to suspend or cancel
enterprises. It essentially means lending to
the license of MFIs found engaged in coer-
t he p o or wi th a p ersp ec t ive o f t h eir devel o p -
c ive m etho ds.
ment rather than earning interest. I t is encouraged so that poor people can generate income
The o rdinance af fec ted the M F Is ad ve r s e l y a s
a n d l i ve l i h o o d t h ro u g h t h e l o a n . D u r i n g t h e
l o an repay m ents dr ied u p. M F Is w hic h a re n o t
1970s,the microenterprise movement led to
s tr u c tu red as co o peratives, have s e e n re p ay-
t he e me rge nce of NGOs t h at p rovided s m al l
m ents co l l aps e f ro m 9 8% to 3 -5% . Th e s e MF I s
lo a n s for the poo r. I n t h e 1990s, a n umber o f
are pro hibited f ro m even v is iting th e b o r row-
these institutions transformed themselves into
ers let alone collec ting repayments from them.
fo r m a l f i n a n c i a l i n s t i t u t i o n s t h u s e n h a n c i n g
I n c o n t r a s t , M F I s s t r u c t u re d a s c o o p e r a t i ve s
t he i r outre ac h.
are still seeing repayment rates of at least 75%, w ith over 9 5% in r u ral areas.
Th e Pre s e nt S itu at io n M any M F Is have s l ipped into the da n g e r zo n e I n Dec, 2010, The Andhra Pradesh government
af ter this ordinance as they have to write - offs
passed an ordinance to regulate the MFIs af ter
o f t h e i r b a d d e b t s. T h e m o s t a f fe c t e d i s S K S
around 30 people had committed suicide alleg-
m i c r o f i n a n c e, I n d i a’s l a r g e s t a n d o n l y l i s t e d
e d l y du e to hara ssment by t h e MFI s fo r repay-
M i c r o f i n a n c e, w h i c h h a d t o m a k e h u g e p r o -
ment. The ordinance made it mandator y for the
v is io ns fo r bad l o ans. S K S repo r ted a n e t l o s s
INFINEETI | MARCH 2012
E CO NO MY
17
of Rs 427 crore for October-December 2011
Microfinance Bill in the budget session. It
p er io d -- th e h ig h es t qua r ter l y l o s s s in ce th e
requires MFIs which have minimum net owned
co m p a ny we nt p u b l i c. Th i s h a s l e d to a s l ow
f u n d s o f R s. 5 l a k h to b e re gi s te re d w i t h t h e
transformation of these institutions. They have
RBI. The bill envisages a greater role by the RBI
star ted to diversify their por tfolio by inno -
in reg ul atin g th e MF I s.
v a t i ve m e a s u re s l i k e S o n a t a M i c ro f i n a n c e i n U.P h ave tied up w ith H ero Cyc l es a n d b eg a n
Th e i nve s to r c o n f i d e n c e i s l ow a n d t h e M F I s
selling cycles to people in 10,000 villages,
are finding it difficult to obtain loans from the
accepting payments in instalments. These ben-
b a n k s. No b el Pea ce pr ize winne r M u ha mma d
ef ic ia r ies a re c a s ua l l a b o urers, p ett y reta il er s,
Yun us s ays th at th e MF I s have d e v iate d from
milk men, etc. This might lead to situation
th eir b a s ic p r in c ip l e, w hic h is to give loa ns to
w h e re i n t h e M F I s m ay c a l l t h e m s e l ve s r u r a l -
th e p o o r fo r devel o p me nt. For re stor i ng t he i r
focused organisations that are into diversified
i m a g e t h e M F I s h ave to re t u r n to b a s i c s a n d
a c tivities a n d b us in es s es a c ro s s g eo gra p h ies.
fo c us o n th eir m is s io n .
The Pro blem
Co nc lu si o n
I n th e l a s t t wo yea rs, mic ro f in a n ce h a s fo un d
M i c r o f i n a n c e i s n o s i l v e r b u l l e t fo r p o v e r t y,
i t s r e p u t a t i o n u n d e r a t t a c k fo r a n u m b e r o f
b ut it do es h ave th in g s to offe r. The st re ng t h
perceived reasons: its growing commercial-
of the movement is not in reducing pover t y or
i s m , a s e v i d e n c e d by a n i n c re a s i n g fo c u s o n
em p ower in g wo m en , bu t in bu ild ing d yna mi c
s ize a n d p ro f ita b il it y, a dec l in e in s ta n da rds,
institutions that deliver inherently useful ser -
par ticularly in the area of lending, and a sense
vices in c l udin g b a n k a ccou nt, insu ra nce, a nd
that the industr y may be drifting away from its
loans for millions of poor people. The microfi-
o r igin a l “do ub l e b o tto m l in e� p ur p o s e.
nance movement is about building businesses for the poor -- not just microcredit, but micro -
I t is b ein g fel t th at MFI a re a imin g fo r l a rg er
savings, micro-insurance, and micro money
p ro f i t s. Th i s h a s r u i n e d t h e i d e a o f d e ve l o p -
tra n s fer s to.
m ent. Th e MFI s s o metimes c h a rg e h ug e interes ts o n th eir l o a n s a n d h ave divers if ied f ro m
Is microfinance primarily about financial inclu-
th eir ma in c us to mers, wo men . Now MFI s l o o k
sion or pover ty alleviation? Is microfinance
to m a k e q uic k p ro f its & l en d to a ny c us to m er
primarily a business oppor tunity or a develop-
w ith o ut even c h ec k in g th eir a b il it y to rep ay.
m e nt i nte r ve nt i o n ? D o e s m i c ro f i n a n ce re a l l y
Wh en th es e c us to mers def a ul t, th en th ey a re
meet both financial and social return expec ta-
coerced by the repayment agencies leading
tions? Whatever might be the answer but MFIs
to s uic ides.
need to grow more responsibly and remember th at th eir m is s io n is to e mpowe r pe ople.
The Way Fo r wa rd The government intends to bring the new
INFINEETI | MARCH 2012
18
ECO NO M Y
comparing india and china
By Dr. Ranajoy Bhattacharya, Dr. T.P. Ghosh and Dr.Debottam Chakraborty (The authors are Faculty at IIFT)
H
igh growth rates in China and India during
and a regim e s hif t toward a m o re ex p o r t o r i -
t h e pa s t fe w decades h ave led to a f l o o d
ented growth policy? In the context of this
of literature on the t wo economies. Two major
paper this is an im po r tant q u es tio n to a s k , a s
conclusions have emerged from this literature.
it is o f ten al l eg ed that the bel atedn e s s i s o n e
Fi r s t , w h i l e C h i n a h a s a c h i e v e d t h i s g r o w t h
o f the co re reas o ns fo r I ndia’s l ac k lus te r p e r-
mainly by riding on external demand, India
fo r m ance o n the eco no m ic f ro nt co m p a re d to
has achieved its own growth mostly by the
C hina in the 1 99 0s.
strength of its domestic demand. Second, while t h e g row t h o f m a n u f a c t u r i n g s e c t o r e x p o r t s
China embarked upon its policy of liberal-
h a s b ee n the ke y f ac to r in Ch in a’s growth, the
izatio n and expo r t o r ientatio n f ro m t h e e a r l y
main external driver for India has been the ser-
1 9 8 0 s ( re fo r m p ro g r a m m e a c t u a l l y l a u n c h e d
vices sec tor. I n spite of their similar it y in eco -
in 1978) and India launched her economic
n o m i c s i ze, fac to r ab un dan ce, an d t h eir prox-
refo r m s pro gram m e in 1 99 1. The res ul t a nt l a g
i m i t y to e ac h oth er it ap pears t h erefo re that
o f l ittl e m o re than a dec ade has l ed to f un d a -
t h e cou ntr i e s have t ak en quite diverse ro u tes
mental differences in the struc tures of the two
i n t he i r pu r s ui t o f eco n o mic growt h .
eco no m ies. B y the tim e I ndia to o k t h e p l un g e t o w a r d s o u t w a r d o r i e n t a t i o n C h i n a’s m a n u -
T h i s , h o w e v e r, d o e s n o t m e a n t h a t I n d i a i s
f a c t u r i n g s e c to r wa s a l re a d y f a r a d va n ce d i n
closed to the idea of fuelling economic growth
res o u rce u s ag e and o r iented toward s p ro d uc -
thorough the expor t of manufactured goods. In
i n g g o o d s fo r t h e g l o b a l m a r k e t . Th i s m e a n t
fac t, enhancing the manufac turing expor t per -
that India had either to take an alternative
formance is one of the core strategies of India’s
route towards growth or it had to rapidly
liberalization program since the 1990s. Before
shore up production capabilities to be able
t h at, I ndi a had tradit io n ally fo llowed a s trat-
to co m pete w ith C hina in the g l o ba l m a r k e t.
egy of import substitution. Though this did
But are there areas where India still hangs
n o t n e ce s s ar i ly mean t h at t h ere was a strate -
o n and s til l po s s es s eno u g h advant a g e to b e
gic aversion to expor ts, ac tive effor ts towards
a b l e t o o u t - c o m p e t e C h i n a ? We c a n a t t e m p t
ex p o r t p ro m o t i o n d i d n o t s t a r t u nt i l t h e l i b -
to ans wer this q u es tio n.
era l i zati on re gi me o f t h e 1990s mater ial ized. An important question that has sometimes
I t is wel l k now n that C hina has econ o m i c a l l y
b e e n ra i s e d b u t ra re l y a n a l y ze d i n s u f f i c i e n t
outper formed I ndia and is currently in a supe -
d et a i l s i n the contex t o f I n dia’s develo pm ent
r ior position in almost ever y economic aspec t
st rategy s i nce the 1990s is: was 1991 al ready
t h at o n e m ay i m a gi n e. Th e o bv i o u s q u e s t i o n
l ate to ve nture i nto a regime o f glo baliz atio n
to ask therefore is, why? The literature has
INFINEETI | MARCH 2012
E CO NO MY debated this question at length. Difference
19
refo r m s were due to t he re for ms.
in c ul ture is o n e o f th e is s ues. A t yp ic a l s tate m ent in th is reg a rd is : “its is o l atio n f ro m th e
Another plausible explanation sometimes cited
great wars and revolutions of the 20th centur y
in th e l iterature is th e “ late r sta r t a nd slowe r
m ea nt th at muc h o f th e th in k in g th at o s s if ied
p a ce o f I n dia n refo r m s”. The first pie ce of e v i -
I n dia n s o c iet y in ea r l ier centur ies exis ts even
den ce th at th e exp l a nation mig ht tu r n ou t to
in th is o n e. I n dia k n ows w h at it h a s to do ; b ut
be compelling comes from histor y. I ndia’s and
not k now how to overcome the age - old obsta-
C h in a’s p er c a p ita in come we re a lmost i d e nt i -
c l e s t o d o i t .” ( J e h a n g i r S . Po c h a , q u o t e d i n
c a l in US do l l a r ter m s a s late a s 1975 (158 a nd
The Financial Express, 16th August, 2003). Pre
176) and their growth rates throughout the
reform emphasis on education and health care
1950s, 1960s and up to late seventies were
and post refor m emphasis on fiscal decentral-
comparable: 3.9 % for China and 3.5 % for
ization, higher historical savings rates, less
I ndia. The growth rates only star ted to diverge
re g u l a t e d l a b o u r m a r k e t , s u p e r i o r i n d u s t r i a l
after China started to implement economic
p o l ic ies a n d emerg en ce o f h ig h grow th c l us -
refo r m s s in ce 1 9 7 8 . B y the time I nd ia took i t s
ter s in ma n uf a c tur in g, greater f l ow o f fo reign
first tentative steps towards reforms in the
c a p i t a l a n d u n d e r va l u e d exc h a n g e rate h ave
mid 1980s, China’s reform process was already
a l l b een co n s idered a n d a ccep ted a s at l ea s t
rel ativel y a dva n ced. Ta k ing 1985 a s t he poi nt
p a r tia l l y res p o n s ib l e fo r c reatin g th e g a p.
o f dep a r ture fo r I n dia a nd 1978 for C hi na , t he Chinese lead was therefore about seven years.
On e o f th e f un da menta l dif feren ces b et ween India and China that has direct bearing on
O n a n ave r a g e I n d i a n e e d e d a b o u t 9 . 2 e x t r a
their relative economic per formance is in their
years to arrive at economic milestones. The two
political systems. These political systems were
ex tra yea r s n eeded by I nd ia (ove r a nd a bove
fo r m e d i n b o t h co u nt r i e s i n t h e e a r l y 1 9 5 0 s.
th e g a p in im p l em ent ing the re for m proce ss)
Economic refor ms on the other hand were ini-
is mainly due to the indicators of development
tiated in C h in a in th e l ate 1 9 7 0 s a n d in I n dia
in th e s o c ia l s ec to r t wo of whic h (a d u lt li te r-
in th e mid 1 9 8 0 s. Th e a n a l ys is in th is s ec tio n
a c y a n d in f a nt m o r ta l it y). Howe ve r C hi na wa s
p ro c e e d s by u s i n g t h e s e d a te s a s w a te r s h e d
a h ea d in b o th o f th em from ve r y e a r ly t i me s.
points. Since the effect of reforms is ruled
C h in a’s a dul t l itera c y rate (pe rce nta g e of li t-
o u t i n c a s e o f a ny d i ve r g e n c e t h a t o c c u r re d
erate p er s o n s a b ove t he a g e of 15) wa s 66 i n
before its implementation, we assume that
1982 compared to 41 for India in 1981. The cor-
these divergences are due to reasons other
responding figures for infant mor talit y (death
than reforms. However since many of these
per 1000 live bir ths under the age of 1) in 1980
factors including the difference in political
were 46 for China and 113 for I ndia. The differ -
systems continued even af ter the implementa-
ence in the development in the social sec tor is
tion of the refor ms, subsequent changes were
therefore a pre -reform phenomenon. Excluding
the outcome of a mix of the two processes.
t h e s e va r i a b l e s t h e ave ra g e e x t ra n u m b e r o f
To keep the categor ization shar p however, we
ye a r s n e e d e d by I n d i a co m e s d ow n to a b o u t
a s s um e th at a ny c h a n g es o cc ur r in g a f ter th e
seven years – or the exact number of years that
INFINEETI | MARCH 2012
20
ECO NO M Y C h i n a g o t b e fo r e I n d i a u n d e r t o o k e c o n o m i c
Whatever be the reasons the fac t remains that
re fo r m s as we ll. Th e ex ac t match b et ween the
there are some early evidences of growth rates
beginnings of the reform implementation pro -
co nverging fo r the t wo co u ntr ies.
gra m s a nd the ti me t h at I n dia, o n an averag e to o k , to re ac h milesto n es set by Ch in a is no t
Two f acets o f the co m parative eco n o m i c s ce -
i m p o r ta nt for ou r an alysis – in deed it is a co r-
nar io thu s s tand o u t f ro m the above a n a l ys i s :
o l l a r y of the ar bi t rar in ess wit h wh ich we have
First that on an average the I ndian economy is
c h o s e n the ye ar s 1978 an d 1985, as t h e year s
abo u t a dec ade behind the C hines e e co n o my.
fro m whi c h re for ms were in it iated in t h e t wo
And s ince C hina al s o beg an their re fo r m p ro -
co u ntr i e s ( m any w ill argue t h at I n dia’s refo r m
grams about a decade earlier, there is a reason
programs did not star t until at least 1991).
to believe that belated economic openness
N o ne t he le s s the result s are in st ruc t ive. There
i n I n d i a h a s c o n t r i b u t e d t o t h e c u r re n t e c o -
i s no dou bt that I n dia to o k app rox imate l y the
nomic divide. Secondly, the growth rates (both
s a m e n u m b e r o f e x t ra ye a r s to a c h i e ve a r b i -
G DP and per c apita G DP ) o f the t wo co unt r i e s
trar y economic benchmarks set by China as
appear to be headed towards convergence,
t h e n u m b e r o f ye a r s by w h i c h i t l a g s b e h i n d
and that is mostly because of faster growth
i n ter ms of i m plement at io n o f refo r ms.
rates in I ndia rather than f al l ing grow t h rate s in C hina.
If we normalize the seven year gap into a decade and provides comparisons for the growth rate s for t h e same set o f var iab l es fo r China and India,concentrating on the GDP a n d i t s p e r c a p i t a ve r s i o n , t h e f i r s t p o i n t t o no te is that I ndi a h as n ever grown at a f as ter pace than China in the post reform period. H owe ve r compar in g t h e growt h rates for the first decade after reforms with the second d e ca de i t c an be seen t h at t h e gap in grow th r a t e s h ave g e n e r a l l y f a l l e n a s I n d i a n grow t h rates have pi c ke d up in t h e seco n d deca de o f its reforms. This may par tly be due to the ‘converg e nce’ or ‘c atch in g up’ hyp o t h esis (inco m e and its growth rate are inversely propor tional) resulting from limits to cost innovation in China and shif ts to newer steady states arising fro m c ha nge s i n po licies an d in st it ut io n s and t he a bs e nce of s uch limit s in I n dia due to the belatedness of star t time. However it may also be due to the fact that it took considerably m o re ti me to i m plement t h e refo r ms in I ndia.
INFINEETI | MARCH 2012
INVE S TME NT
21
FDI IN MULTI BRAND RETAIL By Manish Jain ( The author is a student of IIFT)
O
n e mo re g o o d eco n o mic p o l ic y h a s b een
reasons for this forecast. The expansion in
a s s a s s i n a t e d b y s o - c a l l e d “ j a n t a k e s e v a k ”,
m iddl e a n d up p er- c l a ss consu me r ba se, hi g h
our politicians . A democratic government
disposable income, the greater availabil-
once again has failed to prove its influence
i t y o f p e r s o n a l c re d i t a n d a g row i n g ve h i c l e
among its allies and has showed its lack of
population have provided increased mobil-
d e c i s i o n m a k i n g a b i l i t y. G o v e r n m e n t h a s
i t y. Lo w s h a re o f o r g a n i z e d re t a i l i n g, f a l l i n g
f i n a l l y a n n o u n ce d s u s p e n s i o n o f i t s d e c i s i o n
real estate prices and customers’ aspira-
t o a l l o w Fo re i g n D i re c t I nve s t m e n t i n re t a i l.
tional increase in expenditure for luxur y item s a ug ur s wel l fo r F DI in the re ta i l se c tor.
FDI in retail is the one thing that is g o i n g t o h a p p e n o n e o r t h e o t h e r d ay.
Shopping malls have changed the entire
For how many days will the politicians
concept of shopping in India. A congenial
delay this in an era of globalization?
atmosphere, a wor ld class environment, inter n a t i o n a l b r a n d s , b a s i c a m e n i t i e s a n d e xo t i c
T h o u g h d e f i n i t e l y y e s , fo r e i g n i nv e s t o r s a r e
cuisines, is what shoppers look for ward to
n o t co min g h ere fo r c h a r it y, th ey a re co m in g
r e c e i v i n g u n d e r o n e r o o f. A n o t h e r c r e d i b l e
h e re fo r m a k i n g m o n e y. B u t o p e n i n g u p t h e r e t a i l i n d u s t r y t o F D I w i l l b r i n g fo r t h b e n e f its in ter ms o f mo re emp l oyment, o rg a n ized re t a i l s to re s a n d ava i l a b i l i t y o f q u a l i t y p ro d ucts at better and cheaper prices. FDI will ensure better operations in the production c ycle and distr ibution. FDI enables transfer of sk ills and technology from overseas and develops the infrastruc ture of the domestic countr y. In India where more than 90 per cent of its business is being carried out by unorgan-
factor in the prospects of the retail sector
i s e d re t a i l i n g, t h i s p rov i d e s i m m e n s e o p p o r-
in I n dia is th e in c rea s e in the you ng wor k i ng
tun it y fo r l a rg e s c a l e reta il ers to s et-up th eir
p o p u l a t i o n , h e f t y p a y - p a c k e t s, n u c l e a r f a m -
operations. With growing market demand,
ilies in urban areas, along with increas-
the retail industr y in India is expected to
ing working-women population and emerg-
grow at a p a ce o f 2 5 -3 0 % a n n ua l l y. Th ere a re
i n g o p p o r t u n i t i e s i n t h e s e r v i c e s s e c t o r.
INFINEETI | MARCH 2012
22
IN V EST M ENT If we analyse the overall economic impact o f F D I i n re t a i l w h i c h w i l l b e ro l l e d o u t o n l y to cities with a population of more than 1 million people (there are 53 such cities out o f a to t a l o f 7 9 3 5 c i t i e s ) a n d w h e re 7 0 - 7 2 % of the population lives in villages , we get a d i f f e r e n t p i c t u r e a l t o g e t h e r.
Wa l m a r t
a n d C a r r e fo u r w i l l n o t o p e n s t o r e s i n e v e r y corner of these cities as the average size o f o n e s t o r e i s a l m o s t 1 . 1 l a k h s q u a re fe e t . Whi l e the Ce ntre h as p er mit ted FDI in retail,
since this par t has significant affluence within
it is up to the states to grant trade licences
the political circle, our politicians are not
u n d e r t h e i r re s p e c t i ve a n d e s t a b l i s h e d Ac t s.
showing the courage to take a step against them.
The present problem with India ‘s position is the
I ndia is no t the f ir s t o ne to do this, a n d w h at
la c k o f q u ali t y i nf rast ruc t ure fo r po st h a r ves t
it has do ne is no t u niq u e either. M a ny d e ve l -
produc t which results in a loss of almost 35-40
o ping co u ntr ies have m u c h m o re l ib e ra l p o l i -
% of the agr icultural produc t. FDI in retail will
cies than I ndia. These countries include China,
ensure procurement; at least of fruits and veg-
B r a z i l , M e x i c o, T h a i l a n d , R u s s i a , S i n g a p o r e ,
e t a b l e s d i r e c t l y f r o m f a r m e r s o f fe r i n g t h e m
Argentina and Indonesia among others.
hi g he r i ncome. Th e n eed o f t h e h o ur is to pu t in place the requisite infrastructure to improve
I t is al s o per tinent to no te here that i t c a n b e
o u r ma nufac tur i ng sec to r fo r b et ter p ro du c -
safely contended that with the possible advent
t i vi t y, proc u re m ent, sto rage, dist r ibut ion and
of unrestrained FDI flows in retail market,
d e l i ve r y c h a n n e l s i n t h e s u p p l y c h a i n . Th e re
the interes ts o f the retail er s co ns tit ut i n g t h e
i s se ve re s c a rc i t y o f wareh o uses, co ld sto rag e
u no rg anized retail s ec to r w il l no t b e grave l y
systems and efficient logistics systems.
undermined, since nobody can force a consumer to visit a mega shopping complex or
Middlemen add to the woes, increasing the
a s m a l l r e t a i l e r / s a b j i m a n d i . Co n s u m e r s w i l l
p r i ce of the produc t wit h o ut any value addi-
s h o p i n a c c o r d a n c e w i t h t h e i r c o nv e n i e n c e ,
tion. Presently at ever y layer there is a middle
where ever they get the lowest price, maximum
m a n e i t h e r a s a g g r e g a t o r, m a r k e t t r a d e r ,
v a r i e t y, a n d a g o o d c o n s u m e r e x p e r i e n c e .
wholesaler , sub wholesaler or retail and at ever y stage there is an increase in the pr ice of
Retail industr y in I ndia is at the crossroads but
the produc t . Whereas due to FDI in retail there
the future of the consumer market is promising
will be only one middle man that is the aggre -
as the market is growing, government policies
g ato r thus the overall pr ice will be reduced .
are beco m ing m o re f avo u rabl e and e m e rgi n g technologies are facilitating operations in India.
The opposition is mostly from these middlemen a nd s m all trade r s wh o will b e t h e lo ser s and
INFINEETI | MARCH 2012
R E GUL AR S
23
Monthly chronicle B y R o hi t K hatta r ( The a u tho r i s a stu d ent o f IIFT )
O N G C sh are au c t i on - cove r u p j ob by L I C ?
Powe r p roj e c t s wor t h ove r Rs 3 l ak h c rore f a ce d e f a u l t r i sk C l o s e to 5 0 p ower p roje c ts, be ing d e ve lope d in th e co untr y by va r iou s pr ivate playe rs at a s t a g g e r i n g c o s t o f a b o u t R s 3 . 4 2 l a k h c r o r e, could face the risk of default if immediate s tep s a re n o t ta k en to a d d re ss issu e s li k e fu e l s h o r ta g es a n d enviro n me nta l hu rd le s.
I n d i a ’s b i g g e s t - e v e r d i v e s t m e n t n a r r o w l y escaped disaster as Life Insurance Corporation
According to the Association of Power
stepped in dramatically at the last minute and
Producers (APP), a grouping of over 20 private
res c ued th e R s 1 2 ,4 0 0 - c ro re a uc tio n o f s h a res
p o w e r c o m p a n i e s i n t h e c o u n t r y, a s l e w o f
of ONGC, which was seen as a test case for
f a c t o r s i n c l u d i n g f u e l s c a r c i t y, c o a l m i n e s
m o re s uc h dea l s.
ta n g l ed in ‘G o / No G o’ a re a s a nd hig he r pr i ce o f im p o r ted co a l a re hind e r ing the se proje c t s
Foreign investors and sovereign funds shunned
I ndia is expec ted to see a capacit y addition of
th e is s ue a s th ey were mif fed by th e g over n -
80,000 MW in the 12th Five -Year Plan (2012-17)
m ent ’s move to s el l s h a res at a p remium over
and a significant chunk would be from pr ivate
the prevailing market price, and the uncer-
p l ayer s.
ta int y over th e ex tent to w h ic h ONG C wo ul d h ave to s ub s idis e th e l o s s es o f o il ma r k etin g
Th e to p e xe c u t i ve s o f p r i v a te p owe r c o m p a -
co m p a n ies.
nies had met Pr ime M inister M anmohan Singh in Januar y to apprise him of the sec toral woes.
A p e r s o n i nvo l ve d i n t h e p ro c e s s s a i d i n s u r -
Following the meeting, the Pr ime M inister set
ance behemoth LIC bid for 40 crore of the
up a Co m m ittee o f S ec re ta r ie s (CoS), he a d e d
4 2 .7 8 c ro re s h a res o n o f fer at a p r ice o f R s 2 9 0
by h i s Pr i n c i p a l S e c re t a r y Pu l o k C h at te r j i , to
ea c h th ro ug h mul tip l e b ro k ers, ma k in g up fo r
look into the issues. Later the CoS decided
t h e c o n s p i c u o u s a b s e n c e o f o t h e r i nv e s t o r s
t h at Co a l I n d i a wo u l d s i gn f u e l s u p p l y p a c t s
s uc h a s s tate -r un b a n k s.
fo r p ower p ro j ec ts fo r a pe r iod of 20 ye a rs.
INFINEETI | MARCH 2012
24
R EG ULA R S
MCX plans post-Holi listing on BSE
in 2007, software firm Microsoft was briefly wo r th 60 0 bil l io n do l l ar s in 2 00 0. Th e m a r k e t v a l u a t i o n c a p s a r e m a r k a b l e t u r n a r o u n d fo r
After a record-break ing investor demand in
t h e i P h o n e m a k e r, w h o s e s h a r e s w e r e o n c e
t he I ni ti a l Pu bli c O f fer (I PO) o f it s sh ares, the
wo r th as l ittl e as 3 . 1 9 do l l ar s in 1 99 7 , w h e n i t
c o u n t r y ’s l a r g e s t c o m m o d i t y e xc h a n g e M C X
f aced the po s s ibil it y o f bank r u ptc y.
m ay g e t li s te d i n t h e sto ck mar k et so o n . Apple’s share price closed at 542.44 dollars on Post its listing, MCX would have lak hs of retail investors as its shareholders, unlike other pr ivate l y- he ld exc han ges wh ere majo r it y shares a re ow ne d by a few fo reign an d p r ivate entit i e s. Expe r ts be lieve t h at t h e ro bust de m and
Wednes day o n the N as daq.
Parliamentary panel for raising income tax exemption l i mi t to Rs 3 l a k h
for MCX IPO could also lead to other exchanges g e t t i ng li s te d a nd also h elp revive t h e overal l
A parliamentar y panel scrutinising the propos-
p r i m ar y m ar ke t.
a l s o f t h e n e w d i r e c t t a xe s c o d e h a s r e c o m mended a sharp increase in the tax exemption
The IPO got over-subscribed more than 54
l im it o n bas ic inco m e to 3 l ak h and o n i nve s t-
t i m es wi th bi d s wo r t h ab o ut Rs 36, 000 c ro re,
m ents to 2. 5 l ak h.
a s a g a i ns t the targeted p ro ceeds o f up to Rs 6 6 3 crore through sale o f 64. 27 lak h sh ares.
The recommendation represents a 67% increase over the current limit on basic income
The promoters FTIL currently hold 31.2 per
tax exem ptio n l im it o f 1. 8 l ak h and 6 5 % ove r
cent in MCX, which would come down to about
the 1 . 5 5 l ak h l im it fo r inves tm ents, i n c l ud i n g
2 6 p er ce nt af te r t h e I PO.
heal th ins u rance. Heal th ins u rance fo r s e n i o r
Apple market value hits $500 bl n m ark
citizen parents will be eligible for another 20 , 0 00 rebate, the s am e as the c u r re nt l i m i t. The new direc t taxes co de w hic h w i l l re p l a ce
stock
the nearly 50-year- old I ncome Tax Ac t of 1961,
market valuation
was referred to the panel headed by BJP leader
topped the 500
Ya s hw a n t S i n h a i n Au g u s t 2 0 1 0 . T h e p a n e l ’s
billion
dollars
repo r t is expec ted to be tabl ed in Pa r l i a m e nt
m a r k
o n
in the upcoming budget session. This will pave
We d n e s d a y, Fe b
the way fo r the am bitio u s rec as t o f t h e co un -
29, 2012, m ak ing
tr y ’s direc t taxes regim e.
A p p l e ’s
the tech giant the wo r l d ’s mos t va luable co mp any. While oil giant Exxon was wor th that much
INFINEETI | MARCH 2012
R E GUL AR S
25
FUN WITH FIN B y J. R AH UL ( The a u tho r i s a stu d ent o f II F T )
1 ) Thi s part i c ul ar word, whi c h has bec ome s y nony mous w i t h pl anni ng, co m e s fr o m th e F r e n ch w ord f or purs e, and has a v ery i mport ant rol e t o pl ay i n t he runni ng o f a n y e n ti ty. W h i ch w o r d are we t al k i ng about ?
2) A not her et y mol ogi c al ques t i on: W hi c h w ord, w hi c h i s us ed i n s uc h di ve r se fi e l d s a s b a n ki n g ,
real estate, law etc. as an arrangement between two transacting parties, derives from the French w ord meani ng a rol l of parc hment or s c rap of paper, s i gni f y i ng t he t i t l e d e e d ?
3 ) W hi c h c ar manuf ac t urer, a f amous brand, i s headquart ered at a p l a ce w h o se n a m e , w h e n t rans l at ed i nt o E ngl i s h, means “mare’s garden”?
4) This well known company traces its origin to a certain Friedrich Jacob ________, who estab-
lished it by purchasing a store in Darmstadt, Germany in 1668, and also to Emanuel _________, w ho t ook ov er t hat s t ore i n 1 8 1 6. I t was l at er es t abl i s hed i n t he U S i n 18 91, a n d l a te r w a s co n f i s c at ed by t he US
5 ) Thi s i ns t i t ut i on f i rs t s t art ed f unc t i oni ng at “J onat han’s c of f ee hous e ” i n 1698 , a n d i ts b u si ness reopened under a formal subscription basis in 1801. The motto of this institution is “Dictum
meum pactum”, which translates to “My word is my bond”. Which institution are we talking about? 6) Connec t t he f ol l owi ng pi c t ures t o a w el l k now n i ns t i t ut i on.
INFINEETI | MARCH 2012
26
RE G ULA R S 7 ) I d e nti fy the comp any wh ich h as t h is lo g o.
8 ) Co n ne c t O ly m pique M arseille, an d t h e fo l l ow ing pic tu res, to a wel l k now n indiv idu a l.
9 ) Co n ne c t the pic t ures to a well k n own eco no m is t.
1 0 ) Co n ne c t a proper n o un wit h an “Eagle” f ro m Au s tral ia, and the fo l l ow ing t wo pic tu re s
1
Answer’s for the quiz will ba available in the next issue. Answers to Previous Issue’s Questions: 1) Bonds 2) Alan Greenspan 3) Fiat 4) Designed Euro’s Symbol 5) Tesla Motors 7)Long Term Capital Management 8) Jerome Kerviel 8) Dabur 9)World’s oldest surviving bank 10) Barbarians At the gate
INFINEETI | MARCH 2012
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