financialbulletin_mmc_ibs_sept_2012
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This is the monthly Inter Bschool Magazine Published by Money Matters Club, the official finance club of IBS-HYD.TRANSCRIPT
From the Editors desk:
Dear readers,
This newsletter brings to you a ray of hope especially at the time when economy seems gloomy and regulators are head on heels to infuse confidence in investors. Here our writers contribute their ideas and possible solutions .
Plato rightly said: "Nothing in the affairs of men is worth of great anxiety"
and so is our aim to invoke you to think beyond the realms of finance and see the horizon way before others.
Happy reading!!!
Dated: 30th September ,2012 TH
E FI
NANC
IAL
BULL
ETIN
Introduction of credit default swaps in India
3
Indian forex reserve: Glorious asset or future liability?
5
Retrospective taxation-
Implications for India’s Growth
10
All is NOT well-An Asian
Perspective 14
Inclusive Growth– An Challenging opportunity
18
India 2012– Is India Headed towards another 1991
22
Economic Impact of Global Warming
31
Hedge Funds– A much needed stimulant
28
Winner for the Article of the month
35
Inside this Issue
Issue 1,Volume 16
This Newsletter is for internal use at IBS,Hyderabad only and not for sale
The Team:
Advisor:
Dr. V. NARENDRA
Faculty Coordinator:
Dr. S. VIJAYLAKSHMI
Student Coordinator:
ROSHNI NAIR
Editor & designer:
VIKAS SINGH
Contributors:
1. Neeraj Bharti
2. Mayank Jain
3. Nitin Bhat
4. Aditi Vidyarthi
5. Lakkshay Bussi
6. Ashish Jain
7. Shovik Kar
8. Jatin Kumar
9. Gurucharan
"Coming together is a beginning, staying together is progress, and working together is success."
by Henry Ford
Page 2 THE FINAN CIAL BULLETIN
This Newsletter is for internal use at IBS,Hyderabad only and not for sale
“Learn from yesterday, live for today, hope for tomorrow.” – Albert Einstein
Page 3 I ssue 1,V olume 16
After reviewing the final guidelines issued by RBI, it has been found that the regulatory
framework under which the CDS will operate in India is quite different from the one
followed globally. RBI has kept its main objective of developing the corporate bond
market through introduction of Credit Default Swaps in the market keeping in
consideration its role in 2008 financial crisis. We can see that RBI has only introduced CDS
among the various Credit Derivatives. This is purposed to avoid complexity at infancy
stage of the product. Following are the observations from the guidelines.
Firstly, the protection can be bought by only those who actually hold the bonds (except
for market makers). Naked CDS by users have been banned to avoid speculation in the
markets. Transfer of CDS by the buyer to a third party has also been kept under strict
view so as to ensure no possibility of naked CDS. Ensuring all that through strict audit
discipline (submission of auditor’s certificate) would be time consuming and lengthy that
can be a discouraging factor. I think at this nascent stage speculation is required not only
from market makers but also from users so as to make market more liquid and have
better pricing, as users are more updated about the financial health of the underlying
entity.
RBI has confined CDS to corporate bonds as underlying. It is a good measure initially to
provide thrust to the corporate bond market, which later on can be broadened to loans/
CPs/CDs etc. CDS on Obligations such as asset-backed securities/mortgage-backed
securities, convertible bonds and bonds with call/put options have not been permitted.
To make the CDS/corporate bond market more deep and vibrant such underlying must
also be introduced.
Unlisted but rated bonds or Unlisted/unrated bonds by SPVs of Infra Companies are
eligible for underlying obligation. It would help these companies to easily raise funds from
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“Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.” – Tyler Durden
Page 4 I ssue 1,V olume 16
the bond markets. Barring other unrated or unlisted bonds also defeats the purpose as
the bonds that are low rated and have high risk need to be promoted and sold in the
markets. These are the bonds that lack market. Not allowing CDS on that would hamper
their development and the entire development of the market.
The list of credit events is extensive and broadly covers the necessary triggers like
Bankruptcy, Failure to pay, Repudiation/moratorium, Obligation default, Restructuring
approved under BIFR and CDR mechanism. Standardization of the CDS contracts in terms
of coupon, coupon payment dates etc. has been asked for. Though this would ensure
liquidity in the market, but may lead to inflexibility for the protection buyers who may not
get a hedge as per their investment structure.
Settlement methodology mandated for users is physical where as for market makers it
can be cash or physical. This is good as it would avoid building of exposures higher than
the total bonds outstanding. RBI has specified risk capital charges for banks’/PDs’ bought
and sold CDS positions as per underlying bonds. The capital charges are rationally
assigned keeping into consideration asset and maturity mismatches. RBI has asked all
market makers to report their CDS trades in corporate bonds to CCIL trade repository CCIL
Online Reporting Engine. It is a good measure to avoid building of any huge gross
counterparty exposures among the participants.
So it is expected that currently the Indian CDS market will operate in a stricter
environment within a limited framework.
CONTRIBUTED BY:
NEERAJ BHARTI
MANAGER (MMGS-II), BANK OF INDIA
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“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” – William Arthur Ward
Page 5 I ssue 1,V olume 16
Today India’s Foreign Exchange Reserve worth around 290B$. It includes dollar, euro,
sterling and yen currency asset deposits, gold, special drawing rights and international
monetary fund reserve positions. These are the assets under RBI and are primarily used to
stabilize the fluctuations in Indian currency (Rupee) vs. dollar exchange rates and for
foreign payment obligations in order to maintain the country’s credit worthiness.
http://www.rbi.org.in/scripts/PublicationsView.aspx?id=14350
In past the major debate has been about the most appropriate amount a country needs
to hold in its forex reserve which is sufficient enough to fulfil country’s near term
payment obligations and simultaneously it incurs the least possible opportunity cost. In
1996 Dr. Rangrajan committee emphasized that emphasis should be on payment
obligations along with level of imports.
But we also need to consider the sources of this huge build up in Forex till date. It relates
to foreign currency accumulation in India and the major components of foreign currency
in India have been net FIIs, NRI deposits, remittances, net FDI and ECB while it is
decreased due to continuous current account deficits.
Foreign Institutional investors have been the major source of forex till date. High growth
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“Everyone thinks of changing the world, but no one thinks of changing himself.” – Leo Tolstoy
Page 6 I ssue 1,V olume 16
rate of Indian economy over developed economies and favourable policies by Indian
government to attract foreign capital in order to take care of rising current deficits has
prompted the foreign investors to invest a huge amount in the last decade. This
continuous source of investment helped India to take care of its current account deficit in
terms of foreign currency requirement and resulted in rupee appreciation and reserve
accumulation in the period of 2004-08.
Similarly FDI also contributed to forex reserve but its amount has been very less in
comparison to FII. After global recession although FII maintained a positive trend whereas
due to policy issues in India there has been a continuous negative trend in net FDI
investment.
http://country-stats.marketline.com/ViewResults.aspx http://country-stats.marketline.com/ViewResults.aspx
It is clearly visible through investors’ behavior that their motive to bring forex in India has
been to earn superior positive returns. FII’s motive has been short term return where as
FDI is possible only if investors will get a superior return for their investment in future.
Thus as already witnessed this source will bring substantial dollars in glorious periods but
in future if situation worsens it would result in possible capital flight. Even then FDI is
suitable for India’s growth perspective but there the major constraint has been poor
infrastructure and ambiguous policies.
India’s current account takes care of two major items, net of export and import and
remittances. India has been one of the largest remittance recipients from the workers
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“A journey of a thousand miles begins with a single step.” – Lao-tzu
Page 7 I ssue 1,V olume 16
primarily in Arab countries and USA. India received about 66B$ in remittances in year
2011. This amount has been continuously rising after 2000 and even was a major source
of foreign earnings for India at the time of recession. But it is very alarming that even
after a very sharp rise in remittances the total current account deficit is increasing at fast
pace.
http://country-stats.marketline.com/ViewResults.aspx http://country-stats.marketline.com/ViewResults.aspx
India’s share in global trade is continuously increasing. After 1991 crisis Indian policy was
to boost export in order to build forex reserve. India’s immediate response was several
policy measures such as exports promotion zones like SEZ, tax incentives and export
promotional schemes. India also allowed the import of heavy machinery and technology
in order to boost productivity of Indian organizations and to make them able to compete
with foreign players. But in the present scenario India’s major export commodities
include engineering goods, petroleum products, pharmaceuticals, gems and jewellery,
textiles, agricultural products, iron ore and other minerals. Out of these commodities
substantial portion is of raw materials and low value products which are converted into
valuable products in foreign countries. Even today India imports advanced technology
materials like electronic goods, etc whereas China exports substantial amount of
electronic goods. India’s other import commodities include crude oil and related
products, machinery, gold and silver.
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“Both optimists and pessimists contribute to our society. The optimist invents the airplane and the pessimist the parachute.” – Gil Stern
Page 8 I ssue 1,V olume 16
http://country-stats.marketline.com/ViewResults.aspx http://country-stats.marketline.com/ViewResults.aspx
Today although Indian exports worth around 300B$ but it is still less than imports of
about 450B$ and thus results in huge trade deficit. Another concern is that Indians
investment in gold, a non productive asset is continuously increasing due to continuous
slow-down. It is also expected that consumption of electronic goods (a major import
item) will be ten times in 2020 in comparison to that in 2010.
Finally we can consider India’s external debt. It is the part of the total debt that is owed to
creditors outside of India. It includes debt to government, corporations and households
by foreign creditors like ECB and NRI deposits. It is continuously increasing at a fast pace.
International investment position is a suitable indicator that reveals the value and the
composition of financial assets of residents of an economy and liabilities of residents of
an economy to non-residents. The difference between an economy's external financial
assets and liabilities is its net IIP.
Although ECBs offer attractive rates to Indian firms in comparison to lending by Indian
banks but the effective utilization of that is susceptible to macroeconomic factors. A
possible slow down and exchange rate risk can expose corporations’ inefficiencies in their
payments which in turn can deteriorate India’s creditworthiness. Similarly although
government offers attractive interest rates for NRI deposits but it earns very low interest
on forex reserves.
We can conclude that although India holds a substantial forex reserves as an asset but its
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“Learn all you can from the mistakes of others. You won’t have time to make them all yourself.” – Alfred Sheinwold
Page 9 I ssue 1,V olume 16
foundation is based on liabilities. To build a healthy reserve asset India needs to invest
the same through a separate fund to access advanced foreign technology to build
excellent infrastructure. It will attract more FDI and superior technology to promote
manufacturing for enhancing premium products export. This phenomenon will control
imports, increase Indian manufacturers’ competitiveness, reduce government
dependence on FII and NRI deposits and will enhance the healthy forex reserve.
CONTRIBUTED BY:
MAYANK JAIN
PGDM
MDI GURGAON
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“Derivatives are financial weapons of mass destruction.” -Warren Buffett
Page 10 I ssue 1,V olume 16
The audacious move on the part of the Finance Ministry to amend the Income Tax act,
with retrospective effect sent ripples not only through the Indian markets, but ended
up creating a sense of apprehension in foreign markets too, particularly the developed
ones. Their fear is not unwarranted, since the retrospective amendment could lead to
taxation of offshore transactions involving capital gains, from 1962 onwards! Almost
all these are cases in which financial transactions were routed to India through some
tax havens. Fresh in memory is the Vodafone case where the latter was asked to cough
up a massive US$2.2 billion in taxes for the capital gains made by acquiring the Indian
operations of Hutch. It’s not unknown that this decision was later turned down by the
Supreme Court, giving the much needed relief to Vodafone.
Apart from Vodafone, several other companies are caught in the crosshairs of the
Indian govt., namely SAB Miller, GE, Cadbury and Sanofi. All these companies are being
targeted for routing transactions through tax havens for tax saving purposes. From
Netherlands and Seychelles to the Bahamas and Mauritius, tax havens are preferred
because they levy low to nil tax on such financial transactions. Such havens are
generally preferred by Western investors to enter emerging markets like India, since
they do not have to pay taxes on capital gains. It is to be noted that this is a perfectly
legitimate method of investment and tends to benefit the investor as well as the
country where the money is being invested, in this case, India. Under the Double
Taxation Avoidance Agreement signed between India and Mauritius, investors routing
their transactions through Mauritius have to pay taxes on capital gains in their country
of domicile. All that is needed for domicile is an address and a Tax residency Certificate
from Mauritius. Since there is no tax in Mauritius, the gains escape tax altogether.
(PARIKH, 2012)
Post 1991, when the financial reforms opened up the Indian economy, Institutional
investors poured billions into the Indian markets by routing transactions through Tax
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The cynic says, “One man can’t do anything”. I say, “Only one man can do anything.” - John W. Gardner
Page 11 I ssue 1,V olume 16
Havens. Funds flowed, the economy flourished, no questions were raised then. Why
now? According to our erstwhile Finance Minister, the Vodafone case brought about a
realization, being that the Indian Income tax framework could be flexed to a point
where in a company like Vodafone could make millions in capital gains and escape
without having to pay as much as a single rupee as tax. Such transactions, as estimated
by the Finance Ministry, could have cost the exchequer a colossal INR 40,000 crore in
the form of taxes. By adding the retrospective element, the Finance ministry is of the
opinion that they can plug such routes of transactions and recover the taxes, which
could go a long way in bridging the widening fiscal deficit. (5.1% of GDP, 2011-12)
(PARIKH, 2012)
The retrospective law is coming as part of a bigger package, well known by the name
of General Anti Avoidance Rules. Going by these rules, companies can no longer save
taxes by routing funds through Tax Havens. These provisions would give unrestrained
powers to tax officials, allowing them to question any tax saving deal. (ET news
Bureau, 2012) Foreign institutional investors in particular were worried that their
investments routed through Mauritius could be denied tax benefits enjoyed by them
under the Indo-Mauritius tax treaty.
Should these laws be a cause of worry for the economy? Yes indeed, since our
economic wellbeing is dependent on the continuous and long term flow of FIIs. Ever
since the financial reforms, FIIs to the tune of $140 billion have found their way into
our economy. (Ref: Chart 1) A quick look at some financial facts tell us that 9 out of 10
FIIs investing in India come through Tax havens and about half of them come through
Mauritius. (PARIKH, 2012) With GAAR and the retrospective amendments being
proposed, it won’t be long before the streams of foreign funds begin to dry up. After
the announcements about the retrospective amendments were made during the
budget, FIIs clearly gave thumbs down to India. This was reflected in the fact that the
month of April saw a net FII inflow of mere $0.4 billion, while the month of May
experienced a net outflow of $ 8 billion. (CARE Ratings, 2012) Moreover, due to the
amendment in the IT act, India risks facing a bad international publicity it certainly can
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“Sometimes when you innovate, you make mistakes. It is best to admit them quickly and get on with improving your other innovations.” – Steve Jobs
Page 12 I ssue 1,V olume 16
do without right now. A messy arbitration invoked by Vodafone to protect its Indian
investments could send across the wrong message about India’s hostile behavior
towards foreign investors. (PARIKH, 2012)
With our GDP forecast hovering over 5.5-6%, fiscal deficit at 5.1% of GDP (biggest
among emerging markets), Current Account Deficit (CAD), again at record high levels
of 4.5%, GAAR and its retrospective implications can have an adverse effect on the
foreign capital inflows. (PARIKH, 2012) To add to our woes, Fitch Ratings and Standard
& Poor’s may strip India of its investment-grade credit rating, citing risks ranging from
the fiscal gap to the current-account deficit. Over the last 4 years, we have seen the
GDP slump by over 800 basis points, which reinforce the need for capital inflows to
sustain the growth momentum in our economy. The disinvestment plan was an utter
failure and there seem to be liquidity issues at the moment. With our economy not in
its best phase, it is better not to upset the already jittery foreign investors by creating
road blocks which impedes their investments. A sudden outflow of foreign funds in the
form of dollars would cause our markets to go into a tailspin and cause the rupee to
nose-dive further, making our imports costlier and worsening the CAD.
As of now, the proposal has been delayed by a year. But who is to say that once it
comes into effect, it will not discourage foreign investment? Typically, an intelligent
move now would be to seek the opinion of major stakeholders and financial
think-tanks, both national and international, to arrive at a consensus rather than blind
bureaucratic implementation of policies.
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“The desire of knowledge, like the thirst for riches, increases ever with the acquisition of it”. – Laurence Stern
Page 13 I ssue 1,V olume 16
Chart 1
Source: SEBI
CONTRIBUTED BY:
ADITI VIDYARTHI
SENIOR ASSOCIATE CONSULTANTS
INFOSYS
&
NITIN BHAT
SENIOR ASSOCIATE CONSULTANTS
INFOSYS
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“The competitor to be feared is one who never bothers about you at all, but goes on making his own business better all the time.” – Henry Ford
Page 14 I ssue 1,V olume 16
With Hongkong decreasing its forecasts of economic growth to 1-2% from 1-3% recently
and so the situation in China, Japan (0.3%) and India, the Asian tigers have started feeling
the effects of Global turmoil. Economies around the globe are going through some
turbulent times. A majority are facing unemployment problems, debt crisis, rising costs,
declining productivity, volatile markets and currencies and some are facing issues such as
rising average age of its citizens. Problems are never-ending and to add to it, rating
agencies around the globe add spark to fire. We talk of a globalized, rather a glocalized
world now-a-days. In such a situation, every economy gets connected to each other so
much so that it starts depending on others for its growth and development. The problem
is not being connected in an intricate network, but what exit strategies do our planners
have to prevent a catastrophic situation, is the need of the hour. USA and EU form the
two largest economies of the World and their problems are intertwined in nature. A
major blow from these regions, which are growing at a pace of snail, could severely blow
the financial and trade circuits of developing nations, which boldly recovered themselves
from the 2008 global crisis. According to a recent report by OECD, US along with Japan,
economies show a sign of fading growth and others such as India, China, Russia and Brazil
show a slowdown signal.
Fig. Growth slowing across Asia (Danske Bank) Fig. China slows down, but still stronger than others
(Reuters Ecowin)
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“Success is often achieved by those who don’t know that failure is inevitable.” – Coco Chanel
Page 15 I ssue 1,V olume 16
What if the major resilient economy such as China meets a contracting economy
situation? China’s central bank has cut key interest rates twice since June and reserve
ratio requirement 3 times in recent months to boost lending. Clearly such monetary
policy actions show how much pressure China is under.
Fig. Exports numbers (Danske Bank, Reuters)
The recent slump in exports from China, which is primarily due to weak demand signals
generated from the debt-laden economies and US austerity measures, has pinched the
World. Although China has built a huge middle-class consumer base that generates
enough demand for its products, but the recent inability of this section of consumers to
consume the finished goods has been seen as one of the reasons for a reduced growth
forecast. Other main reason was the stagnant spending on Infrastructure projects.
Infrastructure contributes around 12% towards China’s GDP and drives demand for
construction material, but the recent slump in sales of houses has affected the country as
a whole. China, world’s second largest economy, is probably the World’s largest
consumer of metals and thus creates a positive demand for raw materials and so the
developing and emerging markets depend upon it. Its main trading countries are the US,
EU, Australia, SE Asia, Africa, and Japan, from where it mainly imports metals,
construction materials, food etc. Indonesia and African countries will be hit if the
infrastructure doesn’t pick up in China since these countries are major exporter of metals
to China. China is one of the biggest customers of South Africa for coal, but if spending on
Infrastructure projects is not addressed at the earliest and if the consumer situation
doesn’t change, then even South Africa could be hit to a certain extent. China recently
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“our most unhappy customers are your greatest source of learning.” – Bill Gates
Page 16 I ssue 1,V olume 16
projected that its economy would be growing at around 7.5% in the coming FY13, which is
a setback from the double-digit growth that it enjoyed in the past. Though such a growth
is really impressive during current times when economies are on the brink of contraction
rather than expansion. It will be very interesting from here to see how the exports catch
up in the mid of fiscal and monetary policies.
Fig. Japan’s growth forecast (Source : Reuters EcoWin, Danske Bank)
Even the situation in east is not welcoming as North Korea asks China for economic help
as China is the main benefactor of North Korea, not to forget to mention here that N.K.’s
89% foreign trade is dependent upon China. In the land of rising sun, Japan, the positive
impact of reconstruction after the earthquake-Tsunami has waned and the problem of
fiscal consolidation still persists. As the govt. has still not taken any key fiscal decisions to
tighten the fiscal policies and address public debt issues, growth is all set to be in the
region of 1 % only in the coming quarters. BoJ (Bank of Japan) recently cut its production
assessments and said "The pick-up in exports has moderated, while production has been
relatively weak”. So with India already feeling the macroeconomic pressure and other
Asian biggies such as China, Japan, North Korea and SE Asia already hurt in this global
turmoil due to this highly inter-connected world, all one can do is to wait for highly
effective fiscal, monetary and trade policy decisions that would return the world order.
Now what about our very own India? As Morgan Stanley projects Indian economy to be
growing at around 5% in the coming FY citing low private investment and poor
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“You only have to do a very few things right in your life so long as you don’t do too many things wrong.” – Warren Buffett
Page 17 I ssue 1,V olume 16
government finances, “all is not well” here as well. With internal issues of Scams, political
weakness, policy delays etc coupled with a persistent inflation, high fiscal deficit, low
Forex reserves and weak Rupee, India is not looking in a good shape.
A major challenge for developing and emerging economies would be to design
macroeconomic policies along with ensuring a reduced risk to improve investor
confidence while balancing inflation, market volatility, energy prices, credit growth etc.
Governments must be cautious while subsidizing its companies so much so that the
subsidies should only be given to the most critical ones. Fiscal policy must consider the
damage due to subsidizing activities. Monetary policies must ensure that rising oil prices
don’t become an inflationary pressure. The need of the hour is to understand and
address fundamental problems through effective policy actions. Austerity measures alone
can’t solve these big economic issues.
CONTRIBUTED BY:
LAKKSHAY BUSSI
SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES
PUNE
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“The only way around is through.” – Robert Frost
Page 18 I ssue 1,V olume 16
“If those who are better off do not act in a more socially responsible manner, our
growth process may be at risk, our polity may become anarchic and our society may get
further divided. We cannot afford these luxuries.”
-PM Manmohan Singh
The Indian subcontinent, as an economy is one of contrasts. Growth has diverged across
regions, leaving behind the large populous states of North, Central and North East India.
Growth has not been creating enough good jobs that can provide stable earnings for
households to climb and stay out of poverty. In the agriculture sector, which employs
more than half of India’s workers, growth has been an anemic 2.5% in the year 2011-12.
Government reports for the past few years suggest how growth has left behind a certain
section of the population -- females, the 90 million tribal population, some SC groups,
religious minorities, etc.—which are lagging behind in job opportunities, earnings, and
human development. Underlying the above is the fact that our Public Services fail the
poor each time and are the weakest in the poorer states like Bihar and Orissa and then
there is a certain Kerela, a state that ranks No. 1 in almost all growth indicators like
Governance, health & education, infrastructure development, et al. The contrast is indeed
very stark.
The 11th Five Year Plan of India (2007-2012) and the recent World Economic Forum
(Davos, Switzerland, 2011) along with the above quote by Manmohan Singh are proof
enough to emphasize how India has been focusing on the agenda of Inclusive Growth for
quite some time now, but statistics remain unfavorable. The current Five Year Plan
focuses inclusive growth in social services, agriculture, industry, services and physical
infrastructure, but amidst the volley of high profile scams hitting our economy every now
and then (the recent one being Coalgate), and the labeling of our ministers as
‘underachiever’ by the international media (TIME magazine and the Washington post),
the issues of inclusion have taken a backseat currently at the risk of paying a huge cost in
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“You must be the change you wish to see in the world.” – Mahatma Gandhi
Page 19 I ssue 1,V olume 16
future.
It is crucial to mention the 5 elements/drivers of inclusive growth, namely, Poverty
Reduction and increase in quantity/quality of employment, Agricultural Development,
Social Sector Development, Reduction in regional disparities and Environment protection.
Each of these is discussed below.
The World Bank estimates show that 42% of Indian population is still below the $1.25
poverty line and 80% of the poor are from rural areas. Poverty is concentrated in few
states (Bihar, Uttar Pradesh and Madhya Pradesh and Orissa, Chattisgarh and Jharkhand)
and is concentrated among agricultural labourers, casual workers, Scheduled Castes and
Scheduled Tribes. The Arjun Sengupta Report shows more staggering results in this
context. The two-pronged approach of Growth and providing safety nets has made a
difference over the years but certain challenges remain. Say, for example, the Public
Distribution System (PDS) of providing subsidized food to BPL households needs more
transparency in terms of supply-chain management. Even the NREGA scheme needs to
deal with the issue of quality of employment and also social security in the unorganized
sector.
The agricultural sector has seen its fair share of deficits, namely, land and water
management deficit, investment, credit and Infrastructure deficit, research and extension
(technology) deficit, market deficit, institutions deficit and the education/skill deficit.
Here, education/skills are the main constraints. The government needs to promote the
rural non-farm sector of fruits and vegetables learning from China, Philippines and
Malaysia. Also, India leap-frogged from agriculture to services with less focus on
manufacturing while the late industrializing economies of Singapore, Hong Kong, S.Korea
and Taiwan (East Asian Miracle) vouched by their industrial growth and are today in the
league of developed economies, unlike India, even though we all started with our growth
process at the same point in time.
Amartya Sen in his book ‘Inequality Re-examined’ emphasizes the importance of social
sector as a driver of inclusive growth and states how Health and Education are the most
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“Far and away the best prize that life offers is the chance to work hard at work worth doing.” – Theodore Roosevelt
Page 20 I ssue 1,V olume 16
important factors to deal with in this respect. The slow progress can be attributed to
significant regional, social and gender disparities, low level and slow growth in public
expenditures, poor quality delivery systems and privatization of Health and Education
coupled with the ever deteriorating quality of Govt. provisioning. Some areas in India are
better provided in terms of health care vis-à-vis others. Say for example, even though
Kerela is not richer than any other state of India (infact it is slightly poor on the average),
it still has a very wide health care which should be a lesson for all the other states. Also,
the African-American population of USA even though many times richer than Kerela has
lower chances of survival to mature-ages. If Kerela can do it, so can the other states. Also
when it comes to health provision, the incentives have to be provided by public
discussion and criticism (as seen in case of the western success stories).
Accordingly, the banks and other financial institutions in the economy have a major role
to play in facilitating ‘Financial Inclusion’ which arguably is one of the most important
drivers of Inclusive growth. Savings, by their very nature should be channelized into
productive investments and this has not been happening in rural India. According to the
Rural Finance Access survey, 87% of the poorest households (marginal farmers) do not
have access to credit, around 47% don’t even have a bank account, the rich pay a
relatively low rate (33%), the poor pay rates of 104% and get only 8% of the credit.
Microfinance is a great step towards achieving this goal but over the years many corrupt
practices have seeped into these institutions and there is a need to place a regulator in
the microfinance space by the Central Government. Also the IT infrastructure can be
employed through the use of UID cards facilitating credit transfers (cash or otherwise)
into the BPL accounts.
At the risk of sounding philosophical, social exclusion is a challenge since the change in
the ideologies (super-structure theory of Karl Marx) of the excluded section of the society
might generate a ‘class struggle’ on their part and the conflict between Productive
Forces, Relations of Productive and the Super Structure might lead to the overthrow of
the reigning class. This Marxian concept though dates back to the era of Feudalism still
bears relevance in the Indian context, otherwise, how else will one describe the
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“Whether you think you can or whether you think you can’t, you’re right! “– Henry Ford
Page 21 I ssue 1,V olume 16
Anna Hazare revolution? Therefore, the political argument is that no government in a
democracy can afford to ignore the large sections of working and non-working
population.
All said and done, awareness needs to be generated among the masses regarding their
rights and duties towards one another and towards India as a nation. In this context, the
Media industry and the NGOs can play a significant role in bringing about this change by
striking a fine balance between business and journalism to support Inclusive Growth.
CONTRIBUTED BY:
ASHISH JAIN
WELINGKAR INSTITUTE OF MANAGEMENT,
MUMBAI
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“The new source of power is not money in the hands of a few, but information in the hands of many.” – John Naisbitt
Page 22 I ssue 1,V olume 16
India, world’s 8th largest & one of the fastest growing economies in the world, is in an
economic crisis. Affected by the slowdown in the US, potential financial meltdown in
the Eurozone and internal policy paralysis, India’s growth engine has hit a major
roadblock. The current economic crisis in India is very reminiscent of the 1991 crisis in
India which eventually led to the end of the license raj and beginning of economic
liberalization. While some argue that the current economic crisis is a repeat of the
1991 crisis, others put the counter argument that the today’s economy is very
structurally different from 1991.
The points of resemblance in relation to the macroeconomic indicators are
unmistakable.
1. The government borrowings for 1991 increased by 12 % annually while the
government borrowings have increased by 32 % in the last 5 years (Source: FICCI
Report).
2. Average increase in non-plan expenditure from 1981-90 was 20% while the
non-plan expenditure is rising by 30% at present (Source: FICCI Report).
3 Fiscal deficit shows a similar trend. The tax revenue as a percentage of GDP when
compared between 1990 and present is very comparable (Fig.1 and Fig.3).
Fig 1. Gross Fiscal, Gross Primary & Revenue Deficit as % of GDP
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“Inflation is taxation without legislation.” -Milton Friedman
Page 23 I ssue 1,V olume 16
(Source: RBI Database)
Fig 2. Current Account Deficit (% of GDP) Fig 3. Tax Revenue (% of GDP)
(Source: www.tradingeconomics.com)
4. The INR depreciation shows a remarkably familiar trend - just before the 1991
crisis and in the present situation. The data below shows the INR depreciation versus
the USD. From Jan 2011 to Jul 2012 the INR has depreciated by 21.7 % while the
INR , from Jan 1989 to Jul 1991, had depreciated by 23.5 % against USD
Fig 4. The USD-INR Exchange Rate for the two periods under consideration
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“As sure as the spring will follow the winter, prosperity and economic growth will follow recession.”
-Bo Bennett
Page 24 I ssue 1,V olume 16
Source: www.tradingeconomics.com) (
5. Even today India continues to battle high inflation. The inflation has been
consistently high over the last two decades as seen from the data below. The data below
shows the annual change in CPI which is hovering around the double-digit mark.
Fig 5. India Inflation Rate since 1989 – 2011 (based on CPI)
(Source: www.tradingeconomics.com)
The Other Side
Although there are stark similarities in the macroeconomic indicators, the Indian
economy has undergone many structural changes.
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“Our incomes are like our shoes; if too small, they gall and pinch us; but if too large, they cause us to stumble and to trip”.
-John Locke
Page 25 I ssue 1,V olume 16
6. The share of the service sector in the GDP has increased from 43.7 % in 1990-91 to
57 % in 2011-12. The variability of the service sector is far less than the agriculture and
the industry. The services sector boosts the exports and also the trade balance.
Agriculture tends to be dependent on rainfall, and deviation in the monsoons, as we
have seen this fiscal, has caused havoc with the agriculture-productivity.
7. Foreign exchange reserves are much larger in the present day versus the forex
reserves just before the 1991 crisis. High forex reserves serves two purposes –
The forex reserves are also stated in terms of months of import that it can fund. In
1990, Indian forex reserves were worth 1.8 months of imports while in the present
day scenario it is worth 8.7 months of imports.
High forex reserves serves as a protection against speculative attacks against a
currency.
Fig 6. Indian Forex Reserves from 1985-6 to 2010-11
(Source: RBI Database)
8. The exchange rate is now market determined unlike in 1990-91. Thus the INR which
was overvalued in 1990-91 is an unlikely scenario in present day as the market
determines the exchange rate.
9. The external vulnerability indicators of the economy are better than those the 1991
crisis period. Debt/GDP ratio, Debt service ratio, short-term debt and concessional
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Whether it’s Google or Apple or free software, we’ve got some fantastic competitors and it keeps us on our toes. – Bill Gates
Page 26 I ssue 1,V olume 16
debt as a percentage of GDP are used to track external sector vulnerability. Foreign
inflow of funds is also a measure of estimating the external sector vulnerability. This
includes both FIIs and FDI.
Fig 7. External Sector Position since 1990 to 2011
(Source: RBI Database)
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I wasn’t satisfied just to earn a good living. I was looking to make a statement. – Donald Trump
Page 27 I ssue 1,V olume 16
Conclusion
Even though the structural aspects of the economy may have changed, the challenges
for the policymakers have not subsided. The current economy poses major challenges
w.r.t managing fiscal deficit, taming inflation and boosting infrastructure spending and
corporate investment to sustain high growth. If fiscal deficit is not controlled,
government borrowing in international debt markets will get very costly. Owing to the
ballooning fiscal deficit, credit rating agencies had decided to downgrade India to junk
status and IMF showed severe concerns about India’s rising fiscal deficit. The recent
approval of FDI in multi-brand retail and aviation is a much needed reform. The hike of
diesel prices and cap on subsidized LPG will help rein in the growing fiscal deficit. This
portrayal of normalcy returning to the fiscal deficit to the rest of the world and will
help the govt. in borrowing at lesser rates. Also the government needs to stress on oil
& gas projects and infrastructure projects for sustaining growth. Unless the
infrastructure shows signs of improvement (indices like HSBC PMI and IIP) there is
hardly any scope for a substantial rate cut by RBI as it will fuel inflation (already stoked
by increased diesel prices).
CONTRIBUTED BY:
SHOVIK KAR
MDI, GURGAON
PGPM 2011-13
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Why did I want to win? Because I didn’t want to lose! – Max Schmelling
Page 28 I ssue 1,V olume 16
Hedge funds have always been a hot topic for debate amongst financial regulators
worldwide due to their highly risky and speculative nature. Even the country of its Origin
i.e. US is not able to give a precise definition of hedge funds; they have remained
undefined, unregulated and unregistered as per the federal laws. Amongst the various
kinds of funds catering to different strata of the society, hedge funds are specifically
designed to cater to HNI’s or institutional clients.
Hedge funds use a wide range of investment strategies to maximize their financial gains.
These funds use a plethora of investment strategies ranging from equity, fixed income,
commodity trading advisors, so on, depending upon the way they trade, risk management
and their involvement in the portfolio. These funds aim at achieving high returns
regardless of the underlying trends in the financial markets
Till just a few years ago, hedge funds were in their nascent stage in India in terms of an
efficient regulatory mechanism as well as market participation. Being a tightly regulated
market, it has failed to catch the attention of large investors and as a result, the entire
Indian hedge fund industry has been reserved at around 50-60 major funds. Lack of liquid
long/short hedge funds, nonflexible regulations for shorting stocks are just a few reasons
to be blamed for the repulsive nature of the investors. On the regulatory front, the
protectionist view of SEBI has limited the hedge funds’ leveraging power. Imposed
restrictions on the redemptions would not only masquerade a liquidity risk for a given
stock and the market, but it might adversely affect the investment climate. Conservative
norms such as mandatory registration and licensing regime goes to show an interim
approach where SEBI is more focused on tactical regulation in order to address imminent
issues. The need of the hour is of regulations which are holistic, proactive and account for
underlying investor’s incentives so that it can provide reasonable boundaries without
constricting creativity. Further, SEBI needs to develop a local expertise to regulate
complex or more systemic issues. These few loopholes in the structure are not doing any
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“Winners take time to relish their work, knowing that scaling the mountain is what makes the view from the top so exhilarating.“– Denis Waitley
Page 29 I ssue 1,V olume 16
good in molding a congenial environment for the wider range of investors.
On the encouraging side, gradual developments have started to offer the kind of
strategies that can attract big fishes in this industry. The Industry structure has undergone
a large scale metamorphosis where there is a greater diversity of strategic mandates as
compared to earlier times being dominated by equity-based funds. Changes such as the
evolution of short-selling laws over the last few years have helped to make India an
attractive region for hedge funds. Recent steps taken by SEBI of giving consent to seven
alternative investment funds to conduct business in the country has infused a sense of
optimism in Indian Markets.
No other hedge fund region in the world has undergone such a transition as India over
the last few years. Before 2004, there were only a handful of hedge funds investing in
India, and then the ‘Big Bang’ happened. Hedges started their mad rush for Indian gold.
Between 2005 and 2007 the industry grew at a break-neck pace with more than 100
percent increase in assets year-on-year.
But markets were badly hit by the financial crisis; strong inflows suddenly turned into
massive outflows and hefty profits became steep losses. In 2008 the assets under
management in Indian hedge funds saw a dip by more than 70 percent - with murky
returns of minus 50 percent.
Tackling the turmoil, Indian hedge funds came out with stronger fundamentals and today
they form as one of the most promising sectors of the global hedge funds industry.
In 2009, India was one of the best performing regions in the hedge fund world, delivering
excellent returns of 53.61 percent and in 2011 India continued to be in the healthy state
in terms of year-to-date returns. Currently, hedge funds manage around $4 billion
(around Rs. 20,600 crore) in India.
The Indian hedge fund industry continues to appeal, and as India’s economic fairy-tale
unfurls, the investors would certainly find Indian hedge funds providing diverse
investment options and excellent growth prospects. Moreover, few recent progressive
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“Workshops and seminars are basically financial speed dating for clueless people.” -Doug Coupland
Page 30 I ssue 1,V olume 16
events such as the launch of more nimble India-based hedge funds – predominantly from
Asia as opposed to the West – provide a positive outlook to the global investors.
On a whole, hedge funds are here to stay in India. Holding falsified notions against hedge
funds won’t do any good .The current scenario where India-focused hedge funds have
outperformed other emerging markets in Q1’2012. The biggest gains in EM hedge funds
were from funds investing in India, with the HFRX India Index gaining +18.8 percent
during the quarter, outperforming Indian equity markets by 600 bps. These astonishing
figures accentuate the fact that the hedge funds offers the best way to capitalize on the
exceptional growth opportunities that India has to offer.
No doubt there have been positive amendments offered in type of money coming in,
instruments traded and fund domiciles which offer the vital ingredients for hedging to
become a blooming yet sustainable story. But still it’s too early to say whether all these
changes are for the better.
Although this industry is still in its mushrooming stage, it has gone through a baptism of
fire and has already set some incredible trends which promise an out of the ordinary
perspective, and much more.
CONTRIBUTED BY:
JATIN KUMAR,
BATCH OF 2011-13,
DMS, IIT DELHI
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“If you work just for money, you’ll never make it, but if you love what you’re doing and you always put the customer first, success will be yours. “– Ray Kroc
Page 31 I ssue 1,V olume 16
An intrinsic calamity called Global warming is increasingly becoming viral across the world
through multiple means. This natural global peril has been supposedly expected to end up
in a severe glooming to the earth in the offing. No much solid preventive measures are
taken against this serious phenomenon anywhere. The prevalence of this geographical
climatic variance also menaces the variance in the economic climate of the globe to a
greater extent. This clearly depicts the direct relationship between these two
contemporary consequences.
The awareness of this issue is debile across the borders since people are still skeptic in
understanding the grievous factoid behind. They hardly empathize that terrible increase
in the average temperature of the earth’s surface from the recent past would end up in
extraordinary economic disorder in the near future. Also, no large scale studies have been
unleashed to emphasize the importance of this realization among the countries and the
common inhabitants. Some scary statistics have been emerging by certain scientists in the
recent years from various countries and many global scientific brains are still working in
determining the actual consequences hidden behind this deathly earthly happening.
Though the economic life of the world is relying upon multiple concerns of the sphere,
the substantial neurons for survival are generated by agriculture which is indeed the
anchor of economic ramification. The global warming has indirect harms to the
agriculture by gradually depreciating the arable lands and thereby overall food
productivity rate would end up in belittling throughout in the offing. Due to uneven
extreme climatic changes, the food production would be the severe victim throughout.
There will be a direct impact on timber and other value added wooden production due to
slowdown in the growth of the trees. The sequent consequence is obviously the fall in the
global exporting and importing of related market.
Scientists also keep stating that further increase in the global temperature would cause
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“The behavior of any bureaucratic organization can best be understood by assuming that it is controlled by a secret cabal of its enemies.” ― Robert Conquest
Page 32 I ssue 1,V olume 16
the excessive melting of ice blocks in the Polar Regions which would result in the terrible
increase of earth’s water level. Consequently, the coastal regions would undergo
complete diminution and catastrophe of people over there would likely to happen. Also,
marine lives would be descending to a greater extent which would end up in the decline
of fishing economy. On the other hand, certain other regions of the world would become
completely dry and water scarcity would reach its peak. Again, this would terribly affect
the livelihood of the people with severe aftermaths. Similar other effects in almost all
possible means to engender abysmal impacts on all businesses and investments across
the globe in all fields. These economic impacts would reverberate throughout the world.
Economists are getting into serious contemplations on this issue and landing up in
foreseeing jeopardizing effects to occur in the offing. They believe that this drastic change
in the global temperature will push the global GDP to fall down. They would indirectly
cause harm in the growth of global infrastructures. Energy and retail sectors would
happen to fall in vain. There are also possibilities of lack in the potential of human
resources across the world owing to their poor health and unexpected catastrophes.
Similar related disasters in all means will circuitously affect the global banking and
financial flow in heaps of sectors. All these effects would result in huge joblessness
globally. In fact, developing countries are more vulnerable to these imminent extreme
conditions than their developed counterparts due to serial trickling in their growth rate.
Preemptive measures are mandatorily needed to stay safer from the upcoming global
disorder.
This threatening global situation could even have the possibility to devastate future
economy and the entire forthcoming generation as well. So, people should never ever
consider it as a partisan issue by imbibing politics in it. With the help of United Nations, all
countries should work together in formulating the plans and strategies so as to minimize
these impacts of climatic disorders in affecting the economic clouds. Certain efficacious
initiatives like SEZ, insanitary restrictive industries in infrastructural arena should be
excessively encouraged globally to minimize the cosmic effects.
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If you did not look after today’s business then you might as well forget about tomorrow. – Isaac Mophatlane
Page 33 I ssue 1,V olume 16
Need of the hour is to reframe the economy holistically by sticking to the principles of the
ecology. All humans on earth are now supposedly cornered to agonize the effects of this
environmental perturbation over financial conglomerate. If no call is admitted even in
this high time, serious economic hitherto would buttress to its superlative shape. Also, it
is a potential fuss across the continents which should again be treated like any other
deathly dire epidemic disease of earth and collective contribution should be alarmed to
forgo the imminent historical economic recession.
Go Green in ecology and Get Sanity in Economy!
CONTRIBUTED BY:
GURUCHARAN RAGHUNATHAN
PGPM (1 YEAR)
VANGAURD BUSINESS SCHOOL, BANGALORE
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To win without risk is to triumph without glory. – Pierre Corneille
Page 34 I ssue 1,V olume 16
WINNER OF THE BEST ARTICLE FOR THE FINANCIAL BULLETIN -SEP2012
NEERAJ BHARTI
MANAGER (MMGS-II), BANK OF INDIA
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“You can change only what people know, not what they do.” ― Scott Adams
Page 35 I ssue 1,V olume 16
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"The pen is mightier than the sword" - by Glancey Jonathan
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MONEY MATTERS CLUB (The official finance club of IBS, Hyderabad) is inviting articles for its newsletter “THE FINANCIAL BULLETIN” for the OCTOBER issue, 2012.
“THE FINANCIAL BULLETIN” has been one of the proactive newsletters of IBS, Hyderabad and has climbed the ladder of national platform by making an Illustrious mark. We Appreciate Creativity and Skill of delivering the knowledge of finance in one’s own words as we are coming up with an open platform for all keen writers to come with their talent .
Submission Guidelines:
The articles will include contemporary topics in the world of finance and economics.
The articles have to be submitted by 15th of the month to the following email-id : [email protected]
The articles should not exceed 1000 words. The name of the file should be: your name,college/organization with
post_topic name The article should be in ‘Times new Roman’ with a font size of 12 and spacing of
1.5pts between the lines. The articles should be justified with 0.1pts indent on both the sides and sent as
word document only Relevant pictures and graphs that the writer requires has to be included in the
article Please mention the references where ever necessary
Rules:
There is a strict plagiarism check and the articles which are not adhering to the prescribed standards are not published in the newsletter.
Article can be written by one person or jointly but not more than 2 on a single article
A passport size picture of the writer/ writers should be attached with the article along with their name. We welcome your efforts and hope you would make the best use of the open platform.
Prizes:-THE BEST ARTICLE WILL BE AWARDED BY THE COLLEGE.
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