infineeti summer edition 2016

From the Editor’s Desk

InFINeeti | Summer Edition June 2016

Dear Readers,

Greetings from Team InFINeeti!

Just less than a decade ago, the business world witnessed the biggest hit by an unexpected form of

crisis which paralyzed the world's economic balance. Some economies were trembling before the

crisis and some are still finding it difficult to stand up. But we still fail to believe that we live in a

financial ecosystem, where the plans of an Asian giant can attack the stability in the American

continent.

Keeping track of the events around the world, InFINeeti brings you the summer edition of the

magazine dedicated to the theme “THE VOLATILE WORLD”. From the crisis in Brazil to the

imbalance in the economies of the Asian giants China and Japan and the transformation in US

banking system, we present you the strata of the reeling economies and their plans to put their foot

back. The opportunities in the African continent proves to be the motivating factor for the

economies to pull themselves out of the crisis. From a different perspective, we have dedicated

special focus on the financial technology around us which is acting as the facilitator of stability and

justice, hats off to the John Does of the Panama Papers, who revealed us the snakes in our farm.

We thank all the contributors, who have made our job challenging by presenting us with articles,

giving us a through understanding and analysis of the topics they contributed to. With the motive of

making every issue better than before, we have added a new section in the magazine “Indian IPO

Ecosystem”, for all those who are still sceptic of investing in the markets despite the knowledge they

have. This issue features a diversity in expression.

Happy Reading!

Team InFINeeti

Contents


US Banking System

Transformation After Crisis

Page 1

Panama Papers

Leak of the Century

7

Chronic Deflation in

Japan

Page 53

Brazil The Crisis Prolonged

Page 47

FinTech The Disruptor of Life

Page 11

Brexit The Global Aftereffects

Page 27

Indian

IPO Ecosystem

Page 23

Union Budget 16-17

9 Pillars of Progress

Page 13

Africa The Land of Opportunities

Page 65

Crossword

Page 12, 46

Is

India

Really

The

World’s

Growth

Engine Page 59

Dr. Mitra is an IAS Officer

of 1977 Batch from Assam

-Meghalaya cadre and a

Doctorate in Economics

from Univers ity of

Cambridge, (U.K.), fellow

of Queen Elizabeth,

University of Oxford

(International Trade) and

Hon' Professor in the

Centre for Po l ic y

R e s e a r c h ( S o u t h

Cooperation).

He has served with the

Central ministries of

commerce, industries,

petroleum, tourism, rural

d e v e l o p m e n t ,

communication, defence,

home and finance in

different capacities.

From the Director’s Desk


Indian Institute of Foreign Trade stands for academic excellence

in international trade, a legacy established over half-a-century

of outstanding performance. IIFT has always focused on India's

industrial growth by enabling industry leaders with required

skills. It gives me great pleasure to introduce the current batch

of IIFT students who are ready to take their positions of

prominence in the corporate world.

Given the paradigm shift that the corporate landscape in India

has been experiencing over the past few years, our institute has

evolved a strategy to always stay a step ahead to produce not

just participants in India's growth story, but leaders who can

shape it. Industry remains the core focus for us as we constantly

reassess and update our course and curricula to suitably

address ever changing needs of international corporate world.

In this regard, our faculty, alumni and recruiters play an

important role in determining the way forward.

The concept of industry-preparedness all over the world has

changed over the years. Keeping with the changed

requirement, we ensure our students to have adequate

exposure to the whole gamut of domains in management

education. From finance to marketing, strategy to trade, our

students are offered a vast array of subjects to build a strong

academic knowledge base. A wide range of electives helps our

students to fid their field of interest with clarity as they delve

deeper into the preferred domains.

I take this opportunity to welcome the esteemed recruiters to

visit the Institute and get a feel of this academic process. I am

very confident that you will fid the experience as extraordinary

and helpful in locating suitable industry leaders for your

organisation.

Dr. Surajit Mitra, IAS (Retd.)

Ex– Fellow, Queen Elizabeth House, University of Oxford.

Ph.D. (University of Cambridge).

P r o f . K .

Rangarajan is an

A c c r e d i t e d

M a n a g e m e n t

Teacher (AMT

conferred by

AIMA) and is a

m e m b e r o f

s e v e r a l

p r o f e s s i o n a l

bodies including

AIMM (Australia).

His expertise

includes Business

Strategy and

S t r a t e g i c

Planning.

From the Centre Head’s Desk


The Indian Institute of Foreign Trade in its more than five

decades of existence has always connected with the industry

and policy makers alike. In this endeavour, it has hosted various

dignitaries and offered a platform for enriching dialogue

through a variety of activities.

I am happy that this year too we are bringing out the summer

edition of InFINeeti entitled “The Volatile World” which is

aimed at projecting the discussing global business happenings.

The magazine has always presented the thoughts and opinions

of todays youth on todays problems in the field of business and

finance and will continue to do so. The magazine keeps

increasing its readership from its quality content and diverse

inclusion. I thank all the contributors for participating in making

this magazine better than every previous edition.

Dr. K Rangarajan

Head - Kolkata Campus,

Head - Centre for MSME Studies

“Big Six” U.S. bank

holding companies

J P Morgan Chase

Goldman Sachs

Citigroup

Bank of America

Morgan Stanley

Wells Fargo

These banks have paid

$82 billion in fines,

sanctions and legal

actions in 7 different

countries over the

past 10 years.

1


US Banking System A Fundamental Transformation towards

Stability since 2008-2009 Crisis By Anurag Sanghai

Senior Director, Credit Risk

Fidelity Investments, Boston

Since the global financial crisis in 2008-2009, a significant

number of regulatory initiatives in the US, including

introduction of Dodd-Frank Act in 2010 and ongoing stricter

higher-quality capital, liquidity and funding requirements

under Basel III, have resulted in a stronger/improved balance

sheet for the US banking system. Although the US banking

system became more concentrated with the big 6 now

accounting for more than 60% of system’s aggregate assets

of $16 trillion, continued regulatory oversight has significantly

reduced the risk taking capabilities, primarily at these large

‘Global Systemically Important Banks’ (G-SIBs), as they were

forced to optimize balance sheet.

http://www.forbes.com/companies/jp-morgan

http://www.forbes.com/companies/citigroup

http://www.forbes.com/companies/bank-of-america

http://www.forbes.com/companies/morgan-stanley

“If I had seen what was

coming, I would have

behaved differently. I

think the primary cause

was an almost universal

belief, among everybody

and I don’t ascribe

particular blame to any

part of it—whether it’s

Congress, media,

regulators, homeowners,

mortgage bankers, Wall

Street, everybody—that

house prices would go

up.”

Warren Buffet

In the Perspective

of Equity vs. Fixed

-Income/Credit

Investor


Data Source: FDIC

Enormous regulatory and compliance requirements, although

strengthening banks’ balance sheet, have resulted in a

challenging earning profile in this persistent low interest rate

environment, where most banks are struggling to achieve a

return-on-equity (ROE) above its cost-of-equity (COE).

Positive from a credit investor’s perspective, a strong balance

sheet and ongoing regulatory oversights [including annual

stress test, G-SIB capital buffer, on-site bank examiners,

monitoring of operational risk & risk-management practices]

has reduced the tail risks, while it has forced large US banks to

simplify their business model by reducing reliance on higher-

risk volatile capital markets related activities and exiting areas

not strategically important. At the same time, banks are

incentivized to focus on increasing reliance on stable fee-

based asset/wealth management as well as custody/securities

servicing type of revenues.

2

“Until recently, I wasn’t

even conscious of what

our leverage was, in the

sense of, the amount of

our gross assets versus

our equity.”

Lloyd Blankfein

CEO and Chairman,

Goldman Sachs

Earnings and Risk

3


On the other hand, an (equity) investor’ worry about both the

top line and bottom line growth, has resulted in ongoing cost

cutting measures being taken at these banks in order to gain

efficiency in such a challenging revenue environment (albeit

improving with loan growth). Activist shareholders have gone

further ahead and have now started proposing the break-up

of big banks (JPMorgan/Citi/BofA) that could boost

shareholder value. This is not likely to be accepted given the

significant synergies derived from the size and scale.

Along with the continuing low rate environment, more than

$150 billion of charges associated with the mortgage and

credit-crisis related litigations and settlements (albeit abated

recently) weighed on US bank earnings since 2011. Although

the banks have enjoyed improving asset quality during the

same time period (reserve releases amounted to $125+

billion). However, the benefits have started to subside

recently as asset quality reaches its cyclical peaks along with

growing commercial and individual loan portfolios.

Hungry for relatively higher yields in order to drive the top-

line growth, banks did start loosening lending underwriting

standards, primarily in leverage lending as well as in

commercial & auto loans. This led regulators to intensify

focus on commercial-real-estate and leverage lending

practices. A significant amount of risks continued to get

transferred to the so-called unregulated ‘Shadow Banking’

system (current estimated size ~$30 trillion), primarily

reflecting regulatory arbitrage.

2016 Outlook for

US Banking

System

“As the stock price

dropped from $10 to $3

from one Friday to the

next, the lesson for me

was that capital strength

mattered. I thought Citi

had enough capital, but in

a dysfunctional market it

wasn’t enough.”

Vikram Pandit

Former CEO, Citigroup


On the other side, the Fed and FDIC are assessing if 12 of the

largest banks have so-called credible ‘Living Will’ plan for

going through bankruptcy without any taxpayer support, one

of the most important mandates under the Dodd-Frank Act

which intends to eliminate any potential implicit government

bailout assumption. Bank without a credible plan and that

continually fails could eventually face sanctions including

higher capital requirements as well as forced divestitures.

Revenue: Significant market volatility in Jan/Feb and

macro concerns surrounding bank’s exposure to commodities

and emerging markets including China, weighed on the sector

YTD. I expect revenues to decline y/y for 2016 on lower

capital markets and lower-than-expected tailwind from net-

interest-margin improvement reflecting lesser than

anticipated Fed rate hikes

Profitability: Banks to continue to focus on achieving

positive operating leverage, while earnings could come under

pressure due to revenue headwinds, and higher loan loss

provisions reflecting loan growth and troubling energy sector

exposure

Asset Quality: Expected to deteriorate somewhat from

current cyclical peak levels, while specific areas of potential

risk include energy, commercial-real-estate , leverage

lending, auto, and EMs exposure particularly in China

Capital: Likely to remain stable to slightly higher with

expected higher capital distribution approval post more

punitive 2016 Fed CCAR stress test results in June (CCAR =

Comprehensive Capital Analysis and Review)

Funding/Liquidity: Most banks are well-positioned for rates

rise but funding mix less likely to change significantly given

limited rate hikes expectation from Fed this year

M&A in the sector: Given the rising M&A environment,

primarily in the mid-size banking sector (assets size between

$10-$50 billion), we expect to see larger number of

acquisition/merger by/with mid-large size regional banks, as

banks thrive to gain scale and efficiency in this current

regulatory and operating environment.

4

The Fintech sector

is a very broad

field,

encompassing the

technological

innovations which

impact the delivery

of financial

services

traditionally

offered by banks,

insurers or asset

managers

5


FinTech

The disruptors of the Financial System

By Pratik Dokania

IIFT Kolkata

It has been more than a decade since a finance company has

pursued anything substantial which will change the face of

the financial ecosystem. FinTech or financial technology

sector is rapidly acting as a democratizing force that contains

the potential to change the perception of the finance industry

today. The growth of this industry has so much visibility that

makes it hard to be ignored. If you think that this all about

digital payments and mobile wallets, then you are wrong. The

industry has already started venturing into micro finance and

insurance industry, and who knows, where big data and

automation will take this industry to.

It is true that till now only the digital payment companies

have been able make substantial impact on the financial

world and our lifestyle, where transactions now happen in

Worldwide, 66% of

mobile media users

carried out a

transaction via

mobile in 2014;

mobile banking was

69%


split seconds rather than standing in queues. Also,

widespread innovation and continuous support of ventures

capitalists in this domain has made any future projections

futile. The investors’ sentiments are clearly being motivated

by the impact this industry is making on the complete

financial ecosystem.

By the end of 2014, investments in the FinTech start-ups went

up to the figure of $ 14 billion, against less than $3 billion in

2012. By the end of 2015, the year’s investment stood at $18

billion, the figure which was projected for the year 2018.

Clearly the industry is moving way faster than ever imagined.

6

25% of feature

phone users named

social media apps

as the their number

one destination for

mobile commerce

14% use their

mobile device for

shopping while

engaging with other

media like TV

programmes

Payments Made

Easy


Feeling the wrath of new age competition, even bank’s

spending on future technologies have accelerated with

American banks spending close to $17 billion on these future

technologies. Banks have even started venturing into the

domain of artificial intelligence where DBS is using IBM

Watson in reshaping the way they serve their customers.

Supported by this trend, DBS has successfully launched

India’s first mobile only bank, which is based on this

technology. Even big banks like Barclays accept Artificial

Intelligence to be the future of the Finance Industry.

Now, as a reader it is more important to know how this new

age industry is revamping our lifestyle and in what forms.

Developing nations are at the top on rankings based on digital

and financial inclusions and that is something not superficial.

In Kenya more than two-thirds of the adult population use

Vodafone m-pesa and nearly 25% of the country’s GDP flows

through this platform. Today, Kenya tops the list of Digital

and Financial inclusion. Digital currency has not only made

payments easy, but also enabled transparency. This

technology generates a different set of data on consumer

spending, which the big banks never had. Now let’s see some

dramatic ways in which this technology has innovated our

lifestyle.

When I was watching the National Geographic documentary

on megacity Hong Kong, I was fascinated by the way Octopus

cards work. It is not only a subway card, but a new form of

currency. The card can be used to conduct almost any cash

transaction in the city, and that was in 2004. That was a card

then, now we have a whole digital wallet. No middlemen for

paying any insurance premium, or search for an ATM for

liquid cash.

Digital currency has redefined liquidity. Not only that, there

are international digital currencies like Bitcoin and Apple Pay,

where there is no need to pay international transfer fees by

using services of TransferWise or Western Union. These

digital platforms are almost free for users or in some cases,

7

Services

Custom Made

Globally only 8%

have used a mobile

wallet

Democratizing

Investment

Services

FinTech in the

Developed world


way cheaper than the existing financial infrastructure. They

help keep track of expenses and income, which is not only

beneficial for the consumer, but also for small businesses,

who now have a cheaper and a transparent option.

In the emerging peer to peer business economy, a new

revolution of sharing the economy is evolving. There is an

advent of a new source of service every day, independent of

what you want. Getting rid of your old merchandise is not a

burden anymore. Thanks to Quikr and Olx! That is not all. We

also have start-ups like

Capital float who offers working capital loans to small

businesses, who find it difficult to access it from the banking

system. Online insurance availability, real estate, medical

consultancy and the list goes on.

There is so much in the domain of services that this platform

can offer, other than just related to money. Easy lending and

smooth access to funds from start-ups like LendingClub or

Prosper has the life of entrepreneurs easy. With the

emergence of e-commerce in India, these easy availability of

funds make it easy for small businesses to be a part of this

revolution. Loan refinancing firms like Sofi have started a new

bank less world.

You do not have to own millions in cash to afford a money

manager or an investment advisor, thanks to platforms like

Wealthfront and Betterment. If you are unwilling to manage

your own money, then online platforms like these will be

suitable for medium level savings. Moreover, there are

advisors who can even optimize your expenditure for a fee.

Platforms like LevelMoney help do that.

Today, four major economies namely USA, UK, Germany and

China account for nearly two thirds of the global addressable

transaction value for FinTech. The FinTech world in these

countries have moved beyond mobile wallets POS payments

to the domain of business lending platforms, factoring

platforms, consumer lending platforms and automated

8


investment services. Our neighbour China is witnessing a

CAGR of 115% in the transaction value of digital payments.

In India, the FinTech environment is still dull but explosively

booming. By the end of 2015, India has more than 750

FinTech startups. E-commerce is growing beyond offers and

mobile wallets becoming popular day by day. While only 8%

of the mobile users in India have a mobile wallet account, only

6% of them conduct a monthly transaction of more than INR

1000 every month.

78% of the mobile users do not use a wallet because of the

scientism of the platform not being safe. Low penetration of

9


10

A lack of trust

remains the number

one barrier in the

way of growth.

36%, for example,

say it prevents

them from using a

mobile wallet


internet services in rural India pushes the work of payment

banks that are about to come up years behind. Diversity and

lack of synchronization in services of these wallets is a major

hurdle in accessing these services. EBay India accepts

payments from almost all wallets active in India whereas

Amazon India accepts not a single payment gateway.

User in India find it difficult to maintain wallet accounts.

Availability of multiple wallets and little to no service

differentiation make it difficult to choose one. Moreover, your

family may have a different wallet, your friend may have

another and your grocery store might have a third one.

But, John Heywood rightly said that Rome Wasn't built in a

Day, But They Were Laying Bricks Every Hour. There are

differences in ideology among the Indians and the consumer

behaviour is being so unpredictable. But FinTech promises to

erase all hurdles to access of services and may force us to be

prey to this innovation.

11


ACROSS

3 The constant spread that will make the price

of a security equal to the present value of its

cash flows when added to the yield at point on

the spot rate Treasury curve

5 Discount applied on of diversified company

7 equal footing

8 Part-by-part valuation

9 Post offer defence in which the corporation is

sold to a third party

DOWN

1 20% to 50% Investment in an entity

2 provision contained in an underwriting that

gives the underwriter the right to

sell investors more shares than originally planned

by the issuer

4 A chart showing the results of different

valuation techniques

6 An event involving promotion of an entity in a

pre-IPO stage

10 A mutual fund's price per share

12

13


Unveiling Union Budget 2016-17

9 Pillars to Transform India By Nitin Agarwal

IIFT, Kolkata

It is not easy for any country with a 125 crore population to progress at a rate of 7.5%. But

the India is doing so. The Union Budget every year unveils the government’s plans to

generate revenue and also the key areas where these will be spent.

Every aspect of the union budget directly or indirectly affect us as a minute change in the

policy make lead to difference in figures billions of rupees and compromise the government’s

plans.

Moving straight to what this years Union Budget offers, we will focus on the following nine

main areas of interest which has the centre of focus for the nation's development.

Agriculture and Farmers’ Welfare- From “Food Security” to “Income Security”

Rural sector: Transforming villages to transform lives

Social sector including healthcare

Education: Focus on quality

Infrastructure and Investment: Enhanced Quality of Life

Financial sector reforms Building Trust Improving Predictability

Governance and Ease of Doing Business: Minimum Government and Maximum Governance

Fiscal Discipline: Boosting Growth while Ensuring Fiscal Prudence

Tax Reforms: Moving Towards a Simplified Tax Regime


Agriculture and Farmers’

Welfare

From “Food Security” to “Income

Security”

Reviving the agriculture sector is one of the

major challenges the government is facing.

Agricultural output contracted 0.2% in

2014-15, from a 4.2% growth in 2013-14.In

a bid to reinstall growth in agriculture and

improve farmers’ incomes, the Union

Budget placed a renewed focus on the farm

sector by increasing funds for crop

insurance and irrigation schemes. The

focus now has changed from mere “food

security” to Sustainable Income Security

with the aim to double farmers’ income in

next 5 years.

Total Allocation for the farm sector is

increased to INR 35,984 crore. Recently

launched crop insurance scheme Pradhan

Mantri Fasal Bima Yojana (PMFBY) has

been allocated INR 5500 crore which is

more than double from INR 2,589 crores in

2015-16 (budget estimate). The other focus

area is irrigation. Finance minister

Proposed in the budget that 2.85 million

hectares will be brought under irrigation

through the Crown jewel Pradhan Mantri

Krishi Sinchayi Yojana (PMKSY) scheme in

2016-17. Also, 89 projects under the

Accelerated Irrigation Benefits Programme

(AIBP) that are drooping will be fast-

tracked than doubled. In a country like

India where over half of the farm lands are

rain-fed, the government has made

irrigation a priority only after two

consecutive monsoon failures

The budget created a special long-term

irrigation fund under NABARD (National

Bank for Agriculture and Rural

Development), with an initial corpus of

Rs.20,000 crore. As said in the budget, an

online national agriculture marketplace

would be launched to connect 585

regulated wholesale markets across the

country. This will help farmers to get

remunerative prices. Twelve states have

amended their farm produce marketing

laws already and more states are expected

to join the e-platform. To strengthen

procurement at support prices across the

country, the Centre will also add an online

procurement system, which will be

introduced by the Food Corporation of

India.

Rural Sector

Transforming Villages to Transform Lives

Keeping focus on farmers and the

vulnerable, Union Budget 2016-17 made a

clear shift in emphasis from manufacturing

-based economic growth to rural

development. Total Allocation for the

sector is INR 87,765 crores. One of the most

important budgetary initiative that can

entirely change the political economy of

the country is the allocation of nearly INR 3

trillion to gram panchayats. There are

250,000 panchayats in the country which

means each one will get almost INR 1 crore

every year. This is by far the most

important initiative for the

14


15

Allocation of Important Ministries, sectors

Ministry/Department Actual RE BE

2014-15 2015-16 2016-17

Ministry of Agriculture and Farmers Welfare 25,917 22,958 44,485

Ministry of Drinking Water and Sanitation 12,091 10,907 14,010

Ministry of Health and Family Welfare 32,154 34,957 39,533

Ministry of Housing and Urban Poverty Alleviation 2,728 1,961 5,411

Ministry of Human Resource Development 68,875 67,586 72,394

Ministry of Micro Small and Medium Enterprises 2,767 3,021 3,465

Ministry of Minority Affairs 3,089 3,736 3,827

Ministry of New and Renewable Energy 515 262 5,036

Ministry of Road Transport and Highways 33,048 47,107 57,976

Ministry of Rural Development 69,817 79,279 87,765

Ministry of Skill Development and Entrepreneurship - 1,038 1,804

Ministry of Social Justice and Empowerment 5,784 6,580 7,350

Ministry of Urban Development 13,254 18,340 24,523

Ministry of Water Resources, River Development and Ganga 5,480 7,032 6,201

Ministry of Women And Child Development 18,539 17,352 17,408

All Figures in INR crores

Sectors Actual BE BE IEBR Total for

2014-15 2015-16 2016-17 2016-17 2016-17

Agriculture and Irrigation 31,497 25,988 47,912 6,300 5,42,123

Social Sectors including Education, Health

1,36,431 1,39,619 1,51,581 - -

Rural Development and Drinking Water

81,908 90,185 1,01,775 - -

Infrastructure and Energy 1,85,139 ,80,610 ,21,246 25,000 2,46,246

Figures in INR crores


Social sector including

healthcare

National Digital Literacy Mission (NDLM)

Scheme has been drafted to impart IT

training to 52.5 lakh persons, including

Anganwadi and Accredited Social Health

Activist workers (ASHA) and authorized

ration dealers in all the States/UTs across

the country. It aims to train the non-IT

literate citizens to become IT literate so

that they can actively and effectively

participate in the democratic and

development process and also improve

upon their standard of living.

Allocation for Rashtriya Gram Swaraj

Abhiyan is INR 655 crore. This scheme will

help Panchayat Raj Institutions to deliver

Sustainable Development Goals. Under

Pradhan Mantri Grameen Sadak Yojana

INR 27,000 crore is allocated. This increase

in allocation will help better connectivity of

rural areas and better and efficient

transportation of farm produce thereby

reducing costs for the farmers.

In a noted departure from the previous two

budgets, this year’s budget speech began

with a clear commitment to improve social

spending and to list social sector

(healthcare and education) high in the key

priorities of this government. Let’s have a

quick look at the numbers: the Sarva

Shiksha Abhiyan Scheme budget increased

by 2% from previous budget while the

budget for Mid-Day Meal scheme got a

boost by 5%. The budget for National

Health Mission is increased by 2%, while

the Mahatma Gandhi National Rural

Employment Guarantee Scheme

(MGNREGA), which according to Mr. Arun

jaitley had received its highest allocation

again in this budget, enhanced by 4% from

the previous years’ budgets. Swachh Bharat

Mission (SBM), the frontrunner programme

on rural sanitation, saw one of the biggest

leaps at 38%. However, this leap is in part

due to lower revised estimates. In health,

the big jumps in allocation are in health

insurance — the old Rashtriya Swasthya

Bima Yojana (RSBY) scheme has been

renamed and has received a 152% hike

(Rs.900 crore). Although, there are

certainly some improvements in social

sector spending, but this budget is by no

means a big bonanza for the social sector,

at least in the way that the budget seems to

have expressed.

Nevertheless, some new initiatives have been

taken in the sector. 3,000 Stores is to be

opened under Prime Minister’s Jan Aushadhi

Yojana during this fiscal year. ‘National

Dialysis Services Programme’ will begin

under National Health Mission through

Public Private Partnership (PPP) mode. Each

Bank Branch has to facilitate at least two

projects under “Stand up India” Scheme. At

least 2.5 lakh entrepreneurs are expected to

be benefited by the scheme.

16


Education

Focus on Quality

It is an absolute pleasure to find education

listed amongst the “9 pillars” of this year

budget. Of course, Indian education sector

has been the central character on stage

during last few months. The government is

trying to challenge the status quo, which

was expected be seen through the union

budget holding a significance for Indian

education sector.

To tackle big challenges Indian education is

facing with respect to enrolment, excellence

and employability, the sector was expecting

declarations for structured education

reforms. However, the Finance Minister’s

budget speech sounded more like a

manifesto than budget. The budgetary

allocation doesn’t create an image of

education to be in the top list. Reduction in

education sector budget allocation during

previous year was also widely criticized by

all the segments.

In budget 2016-17, the FM announced an

allocation of INR 72,394 crore in comparison

to INR 68,963 crore for last fiscal year, a 4.9

per cent increase in the education budget. In

Previous year budget INR 42,219.5 and INR

26,855 crore was allotted for school sector

and higher education sector

correspondingly. In this budget, INR 43,554

crore (nearly 3 per cent rise) is allotted for

school education and INR 28,840 crore

(nearly 7.3% rise) is allotted for higher

education. Increase in the education budget

is a welcome step, however, if we consider

inflation and GDP growth rate, this year

allocation will come out to be lower (as %

GDP) than previous year. Even after this

increased allocation, education sector

budget remains far from desired percentage

of around 6 per cent of the GDP.

Infrastructure and

Investment

Enhanced Efficiency and Quality of Life

This year, Union Finance Minister

announced a number of impressive

measures to boost infrastructure and

investment in the country, with a focus on

roads and highways. Steps to re-vitalize

PPPs were also announced. The FM has

provided an outlay of INR 221,246 crore for

the infrastructure sector, including railways.

Of this a large pie has been provided to the

road sector. INR 97,000 crores has been

kept aside for road and highway

connectivity, including rural sadak yojana

allocation. Additional funding will also been

attempted to be achieved by issuing tax free

infrastructure bonds.

To revive certain underserved airports by

collaborating with the State Governments,

to improve regional connectivity, is also one

the agenda of the government this year. In

addition to road and air transport, the

Government announced that it will continue

to modernize Indian ports and increase their

efficiency. The Finance Minister also

declared the drawing up of an all-inclusive

17


plan for the next 15 to 20 years to raise

investment in nuclear power generation.

However, the Budget proposals fell short of

announcing innovative measures helpful in

widening and deepening the channels of

funding for infrastructure.

The three point action plan for PPP projects

was another critical announcement

1)Formulation of a dispute resolution bill

2)Renegotiation of PPP projects through

issued guidelines, and

3)Introduction of a new credit rating system.

This could also start the way to complete

derailed projects which were awaiting the

last mile funding.

The phasing out of the profit linked incentive

for specified infrastructure facility was on

expected lines. However, this is largely

compensated by providing an upfront

deduction on capital expenditure. In the

power sector, additional depreciation @20%

shall be available on plant and machinery

acquired and installed for transmission

activities as an incentive on capital

expenditure.

Removal of DDT on dividends is declared on

the underlying SPV (Special Purpose

Vehicle) to the business trust. This will clear

an additional bottleneck for sponsors to set

up and establish a business trust.

The Finance ministry has also re-established

the exemptions withdrawn for contracts

entered in previous year, for services

provided to Government by way of civil

construction contracts, and services of

original works related to an airport or port.

But, withdrawal of service tax exemption for

original works related to monorail or metro

for future contracts seems to be negative for

the sector.

Through this Budget, the Finance Minister

has further asserted the Government's pro

infrastructure pro development stance. The

Budget announcements have made it crystal

clear that the Government’s focus is on

making the infrastructure sector its key

growth driver. Overall the Budget has open

the way for increased focus on infrastructure

sector.

Financial Sector Reforms

Building Trust, Improving Predictability

The financial sector is all set to revamp in

fiscal 2017 as the government has declared

to push through amendments to key Acts

and important bills such as the bankruptcy

code and another on the insolvency of

financial firms.

The government also attempt to improve

the management of stressed assets by

modifying the rules for asset reconstruction

companies (ARCs) and ensuring that

infrastructure sector had access to cheaper

finance by corporate bond market

deepening.

FM, in his third budget, suggested legislative

amendments to the Reserve Bank of India

(RBI) Act that will give statutory backing to a

18


comprehensive policy framework. Once a

bill is passed in Parliament, the

amendments will take effect. The six-

member MPC, is to be formed to decide on

interest rates as against the current norm of

the RBI governor and his internal team

having full control over monetary policy.

The budget also proposed to increase the

number of benches and members of the

Securities Appellate Tribunal (SAT) under

the Securities and Exchange Board of India

(SEBI) Act, 1992. According to the latest

SEBI data, 520 appeals were filed before

SAT during 2014-15, 381 appeals were

pending at the end of the year while 103

were dismissed. Besides, 16 SEBI orders

were preserved with changes.

The proposal will help accelerate cases

pertaining to securities markets, and also

taking into consideration the fact that apart

from the Forward Markets Commission

merging with SEBI, SAT is now also the

apex body for appeals against decisions by

Insurance Regulatory and Development

Authority (IRDA) and Pension Fund

Regulatory and Development Authority.

Along with the proposed multiple benches,

Timely appointment of members with

relevant expertise to deal with the subject

matters will be equally important to ensure

speedy justice.

A new all-inclusive Code on Resolution of

Financial Firms during 2016-17 will aim to

resolve bankruptcy situations in banks,

financial institutions and insurance

companies. The Bankruptcy Code was

introduced in the winter session of

Parliament with intention to provide a one-

stop solution for a firm to dissolve itself.

With aim to improve the management of

existing stressed assets, there is a proposal

to allow sponsors of ARCs (Asset

Restructuring Companies) to hold up to

100% stake in these companies and also

allow non-institutional investors to invest in

securitization receipts. For proposal to come

to reality, amendments will be required to

the Securitization and Reconstruction of

Financial Assets and Enforcement of

Security Interest Act, 2002. Presently,

sponsors of any ARC, typically financial

services companies or banks, cannot hold

more than 50% stake in such a company.

Individuals need to hold the remaining

stake.

The biggest challenge in the sector right

now is availability of higher and cheaper

capital. If the amendment takes place, the

ARCs can become majority-owned

subsidiaries of their sponsor institution

which will ultimately help the companies to

take on the challenge of scare and costly

capital.

Further, the government attempts to bring

in a comprehensive legislation to handle the

menace of money pooling schemes and

illegal deposit-taking. Presently, the Another

major change the government is aiming is

to allow an individual foreign investor to

hold up to 15% in an exchange, which is

currently 5%, to improve global

competitiveness of Indian stock exchanges.

19


The proposal was first introduced by SEBI in

2012, and was turned down by the Bimal

Jalan committee set up for amendments to

regulations related to stock exchanges and

clearing corporations. SEBI once again

proposed this to the government in June

2014, reasoning that the exchange space is

now mature enough to deal with more

participation from a single foreign investor

various Ponzi schemes end up falling under

different regulators.

Also, this budget listed six measures to

deepen the corporate bond market that has

become prominent as a cheap source of

borrowing as banks’ loan rates remain on

higher side. One of them is to allow LIC (Life

Insurance Corporation) to set up a fund that

will help in credit appraisal of bonds floated

by infrastructure companies.

Governance and Ease of

Doing Business

Minimum Government and Maximum

Governance

The encompassing theme in terms of ease

of doing business is to minimize

government and maximize governance. The

government’s focus has been not only for

corporate entities but also for common

people, with efforts being made to remove

irritants in their dealings with the

government. With that focus, the

government has composed a task force for

streamlining human resources in both the

government as well as autonomous bodies.

11 new benches of the indirect tax tribunals

across India have been proposed to be

created to prompt speedy ‘dispute

resolution’, ‘ease of doing business in India’

and provide certainty in taxation. Along with

it, there is a one-time proposal to resolve

the cases pending before Commissioner

(Appeals) under Dispute Resolution

Scheme, 2016. A bill to amend the

Companies Act, 201 is also proposed. The

proposal seeks to improve the enabling

environment for start-ups by mandating the

registration of companies in a single day.

A technology driven platform will be

established by the Director General of

Supplies and Disposal (DGS&D) to facilitate

efficiency and remove opaqueness in

purchase of goods and services by different

Ministries and agencies of the Government.

To support market interventions in

procuring pulses, The Price Stabilization

Fund will be provided with an initial fund of

900 crore rupees.

To link States and Districts in an annual event

“Ek Bharat Shrestha Bharat” programme will

be introduced that will help people unite

through exchanges in areas of language,

culture, trade, travel and tourism. The

programme will start the celebration of 70th

Anniversary of independence.

To avoid leakage in disbursement of

government subsidies, following three

initiatives were announced:

20


1. The Aadhaar framework will be used

for targeted delivery of Financial and

Other Subsidies, Benefits and

Services. A bill will be introduced in

the budget session of 2016-17 for it. A

social security platform will also be

developed through Aadhaar to

accurately target beneficiaries. It will

be a transformative piece of

legislation which will benefit the poor

and the vulnerable.

2. Direct Benefit Transfer (DBT) will be

used on pilot basis to deliver fertilizer

subsidies in a few districts across the

country. It seeks to enhance the

quality of service delivery to farmers.

3. By March 2017, Automation facilities

will be provided in 3 lakh Fair Price

Shops, Out of the 5.35 lakh such

Shops in the country.

Fiscal Discipline

Boosting Growth while Ensuring Fiscal

Prudence

It is crucial to understand the FM's trade-

off: whether to get more rigid with fiscal

discipline or to increase spending on

public investment. While a case can be

built for both, Mr. Jaitley has made his

government's priority clear — that fiscal

discipline is first priority in current

scenario.

Considering the fact that this year the

government will have to take care of

increased financial burden from the 7th

Pay Commission recommendations and

the OROP (One rank one pension)

scheme, the target to bring fiscal deficit

down to the previously pledged levels of

3.5% of GDP is both brave and

commendable. This focus on fiscal

discipline and macro-stability will help

India stand out among Emerging

economies.

Keeping the fiscal deficit at 3.5% is an

important announcement, which will bring

relief for bond markets. This, along with

lower government borrowings, will be

favourable for bond, currency and equity

markets. A lower fiscal deficit, lower

government borrowings, bond yields

cooling and stable inflation over the last

few months build a strong case for a rate

cut. The basket of available investment

opportunities in the capital markets will be

further diversified. This action will make

the sector more alive and increase its

capacity for sustainable growth.

Tax Reforms

Moving Towards a Simplified Tax

Regime Over five crore subscribers who have

invested in the retirement savings scheme

are affected with the Budget proposal to

make the Employees' Provident Fund

(EPF) taxable. The proposal was that only

40% of the contributions made to EPF

after April 1 will be tax free on withdrawal.

The remaining 60% of the NPS value

21


getaway immediate taxation as it is made

compulsory to put in an annuity for a monthly

pension which is fully taxable. Employees will

be greatly benefited with the Budget proposal

of exemption for a one-time portability from

a recognized provident fund or

superannuation fund to the National Pension

System.

As of now, employees have their savings in

several different pots. This one time

allowance of portability of funds means that

employees can have all their funds in a single

scheme which turns out to the rate of return

that could then be applied to a much larger

value. The government has also proposed tax

changes that will increase revenue by way of

indirect taxes more than the direct taxes. This

continues the legacy of regressive taxation.

22

23


India’s IPO Ecosystem

By Rashi Bablani

IIFT Kolkata

Initial Public Offer (IPO), is the first sale of

shares by the privately owned company to

the public. The companies going public

raises funds through IPO's for working

capital, debt repayment, acquisitions, and

a host of other uses.

The IPO Market in India has been

developing since the liberalization of the

Indian economy. With the introduction of

the open market economy, in the 1990s,

the IPO Market went through its share of

policy changes, reforms and

restructurings. One of the most important

developments was the introduction of the

free pricing mechanism. This step helped

in developing the IPO Market in India, as

the companies were permitted to price

the issues. The free pricing mechanism

permitted the companies to raise funds

from the primary market at competitive

price.

International evidence suggests that book

-building issues expect to have lower

under-pricing than fixed-price issues. In

Indian IPO markets, book-building

mechanism since 1999 has gained

popularity particularly for relatively larger

IPOs. Traditionally, Indian IPOs used to be

fixed-price offerings, wherein prices of the

stocks on offer were determined prior to

seeking investors' bids. It appears that the

prime factor causing IPO under-pricing is

asymmetric information between the

issuer and the investment banker,

asymmetric information among investors

and asymmetric information between

issuer and investment banker.

With the plethora of IPOs in line, it is

important to understand the factors that

affect the pricing of an IPO in India.

According to a research carried on by

Pacific Business review, the factors that

affect the pricing include:

Global Macro-economic factors

including the overall performance of

the global economy: Needless to

say, in the global scenario when the

economies are linked together,

recession in one country has a

significant impact on others. More so


in case of the burgeoning MNC culture!

Indian Macro-economic factors: These

include per capita GDP, political factors,

policy rate of RBI and inflation

Size of IPO issue

Time delay between offer losing date

and listing date

Apart from the above given factors, the

image of the merchant banks associated

with the IPO has a negative correlation

with the mispricing of the issue. On an

average the Indian market takes around 6

months to accurately price the issue.

Looking at the past performance, in the

main board IPOs, Interglobe Aviation IPO

was the biggest one that generated INR

3270 crore and Shree Pushkar Chem was

the smallest that mobilized INR 70 crore in

FY 2015. Among SME IPOs Amrapali

Fincap topped the list with issue size of

INR 42.48 crore and Navigant Corp was

the smallest IPO for INR 1.19 crore. On

debt market front too we witnessed fund

mobilizations of INR 21365 crore by 18

companies including tax free bonds from

PSUs. Figures for main board, SME IPOs

and Debt offers for the CY 2014 were

respectively INR 1201 crore (5

companies.), INR 267 crore (40 companies)

and INR 24216 crore (33 companies)

respectively. Further, listing of two

pharma sector companies i.e. Alkem Labs

and Dr Lal Pathlabs towards the end of

2015 at a hefty premium to offer price

boosted the sentiment for primary market

operators.

According to an EY report, “IPOs in India

are set to hit a six-year high in 2016 as the

companies looking to go public, supported

by a growing appetite for equities and an

uptick in economic growth, are estimated

to raise more than US$5b.”

In the first quarter of 2016, India was

ranked in the top six countries in terms of

the number of deals globally and BSE was

featured in the top six exchanges in terms

of funds raised within Europe, Middle East,

India and Africa (EMEIA) region, which

amounted to $197 million (nearly INR

1,310.59 crore) from eight deals.

According to a research report by EY

divestment is expected to be another

contributing factor to IPO market with the

government looking to list the profitable

PSUs, notably the insurance majors.

Financial services, life science and

automotive are expected to be the more

active sectors.

The deal traction witnessed in the first

quarter of this year is likely to continue in

the coming months as well, largely due to

positive sentiment on growth,

government’s plans to divest stake in state

-owned enterprises and a robust pipeline

built up over the past six years.

24


According to Reuters, positive sentiment

in the primary market is also attracting

several large firms such as Vodafone India

Ltd and HDFC Standard Life Insurance Co.

Ltd to tap the IPO market. While HDFC

Standard Life has announced its intention

to complete its initial share sale by the

second half of the calendar year,

Vodafone India has already mandated

merchant banks for its planned $3 billion

IPO. The Vodafone IPO of its Indian unit, if

successful may surpass the Coal India IPO

of 2008, the so-called largest IPO of the

country according to the data collected by

Bloomberg.

Even as much has been talked about the

revival in the IPO market, investor

participation in the bourses seems to be

subdued, raising concerns among analysts

about the road ahead. While a lot of

ventures tapped the capital market with

their public issuances, it is factors like

expensive valuations and volatility in the

secondary markets that kept away

participants from the primary market.

Further, the participation of retail

investors has not increased in tandem with

the number of issues. A key reason can be

the lack of confidence of investors in

Indian stock market. Our domestic

institutional investor segment too has not

grown. Without this support our primary

market has always been in doldrums kept

alive due to purportedly oversubscribed

issues. The question is this under

confidence justified? Are the Indian

companies loyal enough to the purposes

stated in the prospectus with regards to

the usage of funds? Much remains to be

debated in this context.

25

Top 6 countries by deal volume in FY1 2016


Going forward, however, analysts believe

that India is likely to see quite a few IPOs if

the market and the sentiments continue to

be bullish. Also, what the market currently

requires is a few success stories that will

prompt people to look at the IPO market

seriously. Investors continue to believe

that there is still an upside available in the

secondary market, where risks are

comparatively lower and therefore are

putting their money there directly or

through the mutual funds. This brings us

back to the chicken-egg problem. Will the

investors look beyond their distrust or will

the corporates give an exemplary example

of their loyalty to investors’ money? Or will

the government and the regulatory

agencies step up to provide the much

needed confidence? Much needs to be

seen.

26

Background of

the UK-EU

relationship

Why Brexit now?

27


Long & Rocky - that is what best summarizes the history of

relationship between the UK and the EU. When Europe

envisaged of becoming a “United States of Europe” after

WWII, Winston Churchill emphatically supported the idea. But

in 1957, the UK’s decision to not join six founding nations of

the European Economic Community (EEC) was

incomprehensible for many. Since then, from joining EEC in

1973 to holding referendum in 1975 to signing Maastricht

treaty in 1992 (while opting out of monetary union and social

policy) to controversies over beef and chocolate bans to

signing of Lisbon treaty (giving more powers to Brussels) and

thereafter subsequent efforts by PM David Cameron to bring

back power from Brussels to London, the In-Out debate has

always made headlines in the global dailies.

In 2013, in the run-up to general elections, David Cameron

promised to hold “In-Out” referendum if his party comes to

power in 2015 which they did. PM Cameron recently

announced June 23rd as the referendum date even as he

negotiated a “New EU deal” after 30hrs of long talks.

But how (rather, why) has this debate suddenly become so

relevant and pervasive now and not before? This quick-shift

from now abated “Grexit storm” to “Brexit” was not

unforeseen. Its origin can be traced in the deep-rooted

Euroscepticism among the Britons that rose rapidly especially

after the global financial crisis of 2007-08 and subsequent

plight of various EU economies leading to political distrust and

instability. In fact, the UK’s relationship with EU was always

Brexit

The Global Aftereffects

By Chetan Dixit $ Vikram Bhardwaj

IIM Bangalore & IIFT New Delhi

Trust in EU among

various member

countries Source: European Commission


transactional in nature, evaluated on costs and benefits

instead of emotional commitment. Since joining EU in 1975,

The UK has always complained about and tried to fend off

excessive EU interference leading to resentment among

British public for EU over time. As opposed to popular notion

of only old working class being in favour of Brexit, even young

(see Figure1), more educated are fairly Eurosceptic given the

recent immigration debate, Euro woes, and migration crisis, all

of which have seriously questioned the ability of Europe to act

as a union.

Numerous In and Out campaigns have been launched from

both the sides. “Britain stronger in Europe” led by the Tories is

the main campaign ‘trying to convince voters that the UK is

better off within Europe. While for the Eurosceptic side, “Vote

Leave” – recently chosen by the Britain’s Electoral Commission

- is the flag bearing leave campaign fronted by Michael Gove

and Boris Johnson.

28


Leave

Britain can negotiate new terms

of EU relationship without

being bound by EU law. It opens

opportunities to explore trade

deals with other big markets

like China, India, and America.

Britain paid £13bn to Brussels in

2015 and received only £4.5bn.

This money could instead be

used in R&D and industrial

growth.

Can avoid unnecessary EU

interference in areas of

employment, health & safety

and other business laws

Leaving— only way to stop the

expensive system of offering

open doors to EU and blocking

non-EU immigrants (who could

actually contribute to the UK).

Little influence inside EU

currently. Can build stronger

economic and political ties with

other countries, if outside of

EU. Can fight for institutional

seats.

Remain

As a EU member, Britain

avoids trade tariffs and red

tape. More than 45% of its

exports go to EU. Better

trade terms as a member.

Britain only pays £340/

household and receives

more than £3000/

household. Would have to

pay any how to access the

single market.

Most of the EU regulations

bring 28 national standards

under one umbrella, thus

reducing red tape.

Other countries trading

with EU have higher

immigration from EU

countries than Britain. Also,

immigrant have had a net

positive effect on British.

Brexit would mean

retreating from the network

of 21st century global

powers. Greater say in

world affairs as an EU

member.

29

EU Membership groupings

(Source: HM Treasury

analysis, 2016)


Before speculating on the new form of the UK-EU relationship

in the event of Brexit, let’s first run through existing groups in

European continent through this image.

The EU is the largest trading partner for the UK. In the event of

Brexit, any alternative arrangement will definitely have an

impact on the size of the trade. Although the EU share in the

UK’s trade is going down owing to weaker growth in Europe

and shifting focus towards emerging markets, it will continue

to be the UK’s biggest trading partner in the near term.

Currently, exports to the EU accounts for 9% of GDP directly

involving 2.3 million jobs. Consequently, a Brexit will have to

be followed up by aggressive negotiations on the UK’s part to

avoid as much trade barriers as possible to reduce the impact.

30

Possible after-effects on bilateral trade relations between the UK-EU


31

UK exports,

imports and FDI in

billions of

Sterling, 2014

Source:

Blackrock Investments

report


However, most predict that emergence of tariff and non-tariff

walls between the UK and Europe is an unlikely outcome as

there are huge incentives and ample precedents for both the

sides to negotiate friendly free trade agreements.

The extent to which Brexit will affect the UK and the rest of

the world will depend upon the relationship with EU that’ll

follow. Below are few models that might emerge in the Brexit

aftermath:

32


Source: Global Council report 2015

33


The point to note here is that the most politically feasible

option will also be economically most damaging. This

conundrum is the Brexit paradox.

To understand the true impact of Brexit, we have categorized

a few most important channels through which the impact of

Brexit on the UK and the rest of the world can be assessed.

Their effects have been categorized as moderate (green),

significant (orange) and severe (red).

As it appears, it is possible for the UK to address some of the

downsides of Brexit even if some of them might take time

although at significant (arguable) economic costs. Still it is not

easy to ascertain even the trend of future growth impact of

Brexit.

A recent study by Open Europe reported that an exit without a

convincing trade deal might lead to a 2% shrinkage of the UK’s

GDP by 2030. Also, in most optimistic scenarios, it might even

lead to a slight net winner for the UK.

Source: ONS, CBIC

34

A Global outlook

on Brexit - impact

on major world

economies

Brexit

&

The US/Canada

Brexit

&

Asia

Japan, China,

India, others...


With the extent of interconnectedness that global economies

have today, it is needless to say that a Brexit would cause

jitters, both political and economic, throughout the rest of the

world as well. The recent statements of IMF listed Britain’s

23rd June referendum along with instability in Asian markets

especially in China as major risks which might lead to serious

regional and global damages.

The US has enough diplomatic clout to quickly sign renewed

trade deals and other agreements swiftly with both the UK

and the EU in the event of an exit and do business as usual.

However, it may lead to the US imposing Chinese-style tariffs

on British firms as well. But, the gigantic EU GDP -$13.5 trillion

compared to Britain’s $2.8 trillion would lead to unbalanced

economic relations of the US with the two along with trickier

EU-NATO relations. However, with the imminent turmoil in

the forex markets, it might cause a serious blow to the bottom

lines in the US as well. For Canadians, a Brexit would see a

greater strength in their effort for “free labour mobility zone”

between the UK, Canada, Australia and New Zealand.

Several Asian governments have publicly stated their interests

in Britain within the EU, including China and India. However,

there is a difference in the opinions of large corporate houses

and SMEs on Brexit. For Asian investors who base their

European investments at Britain, the fear of not being able to

offer services and products across 28-nation EU will be a big

upset. China sees integrated EU market as a possible

contender to end America’s market dominance. Indian

companies are a major FDI contributor to the UK as they look

to expand to foreign markets. Many Indian companies

consider Britain as an entry point to the European markets

and a Brexit would possibly take away this leverage of the UK

and the impending uncertainty would definitely hurt the flow

of Indian investments and personnel to across Europe. Japan

on the other hand has had a rather relaxed reaction to Brexit.

Japanese companies like Toyota and Hitachi have announced

no change in their investment plans in the UK even in the

event of Brexit.

35

Conclusion


While the outcome of upcoming referendum is still far from a

foregone conclusion, the impact of this news along with the

global economic downturn driven by slowdown in China, multi

-channel impact of ISIS-threat and increasing political and

social instability in Europe (especially in the event of ongoing

refugee crisis) might fuel the ongoing atmosphere of

uncertainty around the globe and a leadership crisis at the

international level. The gains of an independent UK are still

not obvious but the wave of Euroscepticism across Britain is

what is driving the “leave” campaign. Brexit can also prove to

be a potential catalyst of disintegration in the EU member

states some of which already have a very strained EU

relationship (remember the PIGS!!!). After Grexit and the

negative interest rates, once again, Brexit threatens to steer

the world into an unchartered territory with multi-channel

unknown global implications and complex questions to

answer.

36

What are the

Panama Papers?

2.6 Tera Bytes of data

leaked which dates back

to the 1970’s

US$230 billion

accumulated fall in stock

prices around the world

due to the news of this

colossal leak

Scrutinized by 400

journalists in 107 media

organizations in 76

countries for more than a

year now

First news report

published on April 3, 2016

“Biggest leak in the

history of data

journalism”

37


Panama Papers refer to a set of 11.5 million documents which

contain details of more than 214,000 offshore companies

associated with Mossack Fonseca, a Panamanian law firm.

The documents were leaked by an anonymous source with

alias “John Doe” to the German newspaper Süddeutsche

Zeitung (SZ), in batches beginning with the onset of 2015. SZ

made these documents available to the International

Consortium of Investigative Journalists (ICIJ) which later

shared it with the Organized Crime and Corruption Reporting

Project (OCCRP). These documents revealed the identity of

many influential personalities associated with Mossack

Fonseca, who have hidden their assets from government

scrutiny. Most of the middlemen, affiliated firms and banks

identified, are from the British Virgin Islands and Hong Kong.

Government officials and their relatives and associates from

more than forty countries came under the scanner.

Panama Papers The leak of the century!

By Gaurav Mandan IIM Indore

Mossack Fonseca

& Co.

Founder: Jürgen

Mossack, a German

lawyer

Co-founder: Ramón

Fonseca Mora, a

Panamanian award-

winning Novelist/lawyer

and advisor to Panama's

President

500+ employees

Companies managed:

300,000 and counting…

Most of the companies

come under the

jurisdictions of British

Virgin Islands, Panama,

the Bahamas, Seychelles,

Niue, and Samoa

Clients in 100+ countries

Global presence in 40

countries including Hong

Kong, Miami and Zurich


Mossack Fonseca is one of the biggest law firms (founded in

1977), dealing in offshore financial operations in the world. It

operates shell companies in friendly jurisdictions on behalf of

its customers. It facilitates them to operate behind a wall of

concealment for illegal purposes, kleptocracy, tax evasion and

dodging worldwide authorizations.

It specializes in commercial law, trust services, investor

advisory, and international business structures. It also offers

intellectual property protection and maritime law services. An

internal memorandum revealed in the Panama papers leak

noted that 95% of the company's work consists of "selling

vehicles to avoid taxes".

Other activities found in the files validate Mossack Fonseca

involved in changing and backdating documents whenever

their client is under government scrutiny. It allows customers

to hide their assets by setting up foundations in Panama that

initially list non-profit organizations such as the World Wildlife

Fund as the beneficiary but at the same time allows the

customer to change the beneficiary at will.

While labelling this leak as an illegal act of hacking, MF

claimed not having done anything illegal. They even issued a

statement emphasizing the legal and compliance regimes

38

World's fourth

biggest provider of

offshore services”

- Aljazeera

OCCRP

Since its founding its

reporting has led to— Law enforcement

froze/seized more than $2.5 billion in assets

Ta x a u th o r i t i es found $600m in hidden assets

Authorities closed more than 1,300 companies

Law enforcement investigated, indicted or arrested over 80 persons, including an ex-president

Ten go vernment officials resigned or w e r e s a c k e d , including a prime minister

G o v e r n m e n t s changed 20 laws, rules or regulations

39


that reduce the ability to use offshore havens for tax

avoidance. The law firm reaffirmed that they strictly adhere to

FATF protocols (Financial Action Task Force on Money

Laundering) which require to identify the ultimate beneficiary

of all companies to open accounts and do transactions. With

an objective to combat money laundering, the FATF was

established during the G7 Summit in Paris, 1989.

The firm has been a target for money laundering and bribery

investigation in Brazil called as “Operation Car Wash”.

OCCRP (www.occrp.org) is a network of investigative

journalists across Eastern Europe and Central Asia. It has

published on its website that the clients of MF include

individuals and companies blacklisted by the US government.

This was due to their illicit business transactions with

narcotics trafficking mafia of Mexico and terrorist groups like

Hezbollah.

The shocking revelations by OCCR on their website include

details about a heist termed as “Crime of the Century”. On

Nov 26, 1983, six robbers broke into the Brink’s-Mat

warehouse at London’s Heathrow Airport. The loot which was

never recovered included – 7000 gold bars, diamonds and

cash reaped by melting the gold and selling it. Apparently,

these Panama Papers reveal that MF and Jürgen Mossack

may have helped Gordon Perry by setting up a shell company

called Feberion Inc. Gordon Perry was a London wheeler-

dealer who laundered money for the Brink’s-Mat plotters.

Mossack Fonseca records from 1987 testify that Parry was

behind Feberion.

Tax Havens

Top 10 Tax Havens

Luxembourg

The Cayman Islands

Isle of Man

Jersey

Ireland

Mauritius

Bermuda

Monaco

Switzerland

Bahamas

Why Panama?

Panama's offshore jurisdiction offers a

wide array of financial

services, including

offshore banking and incorporation of

offshore companies,

There are no taxes

imposed on offshore companies that only

engage in business

outside of the

jurisdiction.


Offshore banking is being practiced in the world for close to a

century now. Individuals and companies have been

maintaining offshore accounts in tax havens that provide

financial and legal advantages like bank secrecy, a principle

originated with the Swiss Banking Act of 1934. Under this act,

revealing the name of the account holder is a criminal act for

the bank. The act strictly limits any information sharing with

third parties like tax authorities, foreign governments or even

the Swiss authorities.

Only concession given is in the case of severe criminal acts

like terrorist activities, when a bank is permitted to identify

the terrorist’s bank account. However owing to international

pressure, Switzerland was forced to amend the law for few

countries like Germany, UK and the US. Tax treaties with such

countries permit Swiss banks to reveal information about the

account holders.

Reason behind Panama being the oldest and among the best

known tax havens is that it does not cooperate with

international tax transparency initiatives. It doesn’t even

follow any of the OECD’s (Organization for Economic

Cooperation and Development) guidelines for international

banking cooperation. Other countries in the same league are

Vanuatu and Lebanon.

OECD has removed 18 nations, including Switzerland,

Liechtenstein and Luxembourg, from a supposed "grey list" of

countries that did not offer adequate transparency, and has

regrouped them under "white list" countries. Nations that

don't go along may confront sanctions. An outstanding

exemption is Panama, whose Panama Canal is required by

every single Western country for trade. The canal furnishes it

with an exceptional kind of safety to global pressure. Given

the growth of the canal to facilitate bigger shipping, it is

dubious that Panama would succumb to universal weight

towards transparency anytime soon.

40

The volume of data leaked

in Panama Papers (2016),

in contrast with the pre-

vious leaks of Wikileaks

Cablegate (2010), Off-

shore Leaks (2013), Lux

leaks (2014), and Swiss

Leaks (2015).

Mega Leak

Details of the

leaked documents


Very strong steps have been taken by Süddeutsche Zeitung to

ensure security of the leaked documents and the partners

investigating them. The data is stored on computers which

have never been connected to the internet. To safeguard the

PCs from stealing of their drives, the investigators made them

more tamper evident by painting their screws with nail paint.

The graph above shows the sheer volume of data leaked in

Panama Papers (2016), in contrast with the previous leaks of

Wikileaks Cablegate (2010), Offshore Leaks (2013), Lux leaks

(2014), and Swiss Leaks (2015).

41

Clients of

Mossack Fonseca

VLADIMIR PUTIN

President of Russia

LIONEL MESSI

Argentinian professional

footballer


Edward Snowden tweeted about the leaks calling it the

"biggest leak in the history of data journalism". Gerard Ryle,

director of The ICIJ mentioned that the leak was "likely to be

one of the most explosive leaks of inside information in

history in the nature of its revelations". Aljazeera has reported

Sergei Roldugin, a close acquaintance of Vladimir Putin, to be

at the centre of a scheme in which money from Russian banks

was hidden before. Another revelation is about a shell

company in Panama owned by Lionel Messi and his father. An

expert in offshore banking, Charles Intriago, was quoted

saying that this is just one case of the many probable ones.

There may be more than 60 such countries where firms like

MF are operating and are still unheard of.

The list, contains names of about 500 prominent Indians -

including megastar Amitabh Bachchan, Ajay Devgan and

Aishwarya Rais, besides politicians and businessmen. Across

the globe, heads of state from Argentina, UAE, Iceland,

Ukraine and Saudi Arabia are among those who have been

named as the clients along with the below:

Vladimir Putin, The President of Russia

Khalifa bin Zayed Al Nahyan, President of the United Arab Emirates, the Emir of Abu Dhabi and the Commander of the Union Defence Force

Petro Poroshenko, President of Ukraine

Salman bin Abdulaziz Al Saud, King of Saudi Arabia

Sigmundur Davíð Gunnlaugsson, Prime Minister of Iceland

Ahmed al-Mirghani, Sudanese President

Silvio Berlusconi, former PM of Italy

Hamad bin Khalifa Al Thani, The Emir of Qatar

Bidzina Ivanishvili, Prime Minister of Georgia

Ali Abu al-Ragheb, Former Prime Minister of Jordan

Ayad Allawi, Iraq Politician

42

https://www.occrp.org/en/panamapapers/persons/putin/

https://www.occrp.org/en/panamapapers/persons/messi/

According to Mossack

Fonseca’s brochure,

the law firm

specialises in “trust

services, investor

advisory, offshore/

onshore structures,

commercial law and

asset protection”.

Its main function is as

an incorporation

agent, licensed by

various tax havens to

register companies

there.

If a client wants to set

up an offshore firm or

trust, MF will register

it and take care of the

local paperwork – for

a fee, plus an annual

charge.

It will set up bank

accounts. It will even

provide nominee

directors to sit on the

“board” of your


Hamad bin Jassim bin Jaber Al Thani Former Prime Minister of Qatar

Ilham Aliyen, President of Azerbaijan

Pavlo Lazarenko, Former Prime Minister of Ukraine

Ion Sturza, Former Prime Minister of Moldova

The deceased father of British Prime Minister David Cameron

The brother-in-law of China's paramount leader Xi Jinping

The son of Malaysian Prime Minister Najib Razak

The children of Pakistani Prime Minister Nawaz Sharif

The children of Azerbaijani president Ilham Aliyev

Clive Khulubuse Zuma, the nephew of South African president Jacob Zuma

Nurali Aliyev, the grandson of Kazakh president Nursultan Nazarbayev

Mounir Majidi, the personal secretary of Moroccan king Mohammed VI

Kojo Annan, the son of former United Nations Secretary-General Kofi Annan

Mark Thatcher, the son of former British Prime Minister Margaret Thatcher

Eugenio Figueredo, The former president of CONMEBOL

Michel Platini, Former President of UEFA

Jérôme Valcke, Former secretary general of FIFA

Lionel Messi, Argentine player for Barcelona

Antonio Guglielmi, The head manager of Metro

Aishwarya Rai Bachchan | Amitabh Bachchan | Ajay Devgan

Jackie Chan | Emma Watson

Kushal Pal Singh,CEO DLF

Anurag Kejriwal, Former chief of the Delhi Lok Satta Party

43

https://www.occrp.org/en/panamapapers/persons/ilhamaliyev/

The Way Ahead

Corruption is at

the heart of so

many of the

world’s problems

We must

overcome it if our

efforts to end

poverty, promote

prosperity and

defeat terrorism

and extremism

are to succeed.


The trove of files leaked as Panama papers is so far the largest

leak of documents in the history of journalism and has stirred

a huge debate over the tax evasion loopholes. Stringent

investigations in tax evasion has been instilled in countries all

over the world. Major Banks in the US are also under

investigation for possible links to Mossack. New York state

Department of Financial Services has asked four banks

(including Goldman Sachs and BNP Paribas) to hand over

information on dealings with the law firm. Singapore’s

Ministry of Finance and central bank are reviewing the latest

data and have reaffirmed that any wrongdoing will be treated

with enforced action.

On May 12, London’s anti-corruption summit 2016 was

attended by leaders from tax havens and other countries. The

leaders convened to decide new measures to take on the

issue of offshore financing and shell companies. Countries like

Britain, Afghanistan, Kenya, France, Nigeria and the

Netherlands agreed to publish their lists to help authorities

identify the true owner of a company, as a strong step to curb

tax avoidance. On the other hand, smaller tax havens like the

Isle of Man, Bermuda and the Cayman Islands censured larger

countries especially the US, for asking them to sign up to

public registers of “beneficial ownership” when it held itself to

lower standards. The US state of Delaware was a specific

target in this regard along with Nevada and Wyoming. The

state has minimal taxes and more than 25% of its public

budget is raised from incorporation fees.

At the same time, protesters took part in demonstration

against tax havens in London by throwing fake money. The

protest, organized by Oxfam, ActionAid and Christian Aid,

turned part of Trafalgar Square into a ‘tropical tax haven’; to

highlight tax dodging as the international corruption summit

was hosted by David Cameron. (Source: The Independent)

44

Global

Declaration

Against

Corruption

The first ever

global declaration

against

corruption

announces

leaders' shared

ambition to tackle

corruption.

Ending Note


The sudden spotlight on tax issues has pushed other countries

to revise frameworks and close loopholes responsible for tax

avoidance. India has amended a tax treaty with Mauritius and

will start taxing capital gains on investments made via that

country in April 2017. The pact has been in place for more

than three decades to prevent double taxation. But Indian

companies have been caught making investments by way of

Mauritius to skirt taxes at home. The latest revisions will

increase transparency and cut down on tax avoidance, the

Indian government said.

Apart from the investigations, the Panama papers leak calls

for looking beyond this dire situation. It can be safely

assumed to be just a ripple in the ocean of money laundering.

There may be many more firms similar to Mossack Fonseca,

operating behind closed doors who have gotten more hawk-

eyed now. They are aware of the implications of such

potential leaks in the future and would devise new

surreptitious alleys for channelling black money. Hence the

investigating agencies need to be even more vigilant.

45


46

“God have pity

on this nation”

Eduardo Cunha

while casting his

vote in favour of

Rousseff’s

impeachment

The Background

47


The longest recession in a century, the largest bribery scandal

in history and the most unpopular president in living memory.

These are not the sort of records that Brazil was hoping to

make in 2016, the same year in which country is hosting the

Olympics – South America’s first-ever Olympic games. In 2009,

Brazil’s President Luiz Inacio Lula da Silva announces the

nation’s biggest oil discovery as its “passport to the future”. In

the same period, Rio de Janeiro was awarded 2016 Olympics

along with the famous 2014 FIFA world cup. Brazilians were on

the top and were seeing their rising international standing.

And at present, the economy of Brazil has sunk into its biggest

slump in a century. An ongoing investigation of corruption into

the state-run oil giant Petrobras, dubbed Carwash has

entrapped many political and business personalities. Lula has

been charged for hiding assets from authorities. His successor,

Dilma Rousseff is fighting to stay in the office after the lower

chamber of Congress voted to impeach her on April 17. What

went wrong with Brazil? Can Brazil shine again?

The seeds of the crisis were sown in 2003 when Lula was

elected as the president. With the aim of combating high

inflation, he opted to adopt orthodox economic policies which

were centred on balanced budgets, an independent central

bank and a free-floating currency exchange rates. However, it

was completely reversed when Government banks were

ordered to give out low-interest loans to pretty much anyone,

but especially to people with government connections.

Brazil

The Crisis Prolonged

By Mihir Morbia & Riddhi Baid

NMIMS, Mumbai

When President Luiz

Inacio Lula da Silva

left office in January

2011, Brazil was widely

regarded as Latin

America’s gold

standard for economic

development and

social progress. But

today, with his

handpicked successor,

Dilma Rousseff, facing

an impeachment trial,

the country is viewed

as an economic

failure.

Petrobras

scandal and

Political turmoil


Huge amount of public money started pouring into the real

estate market. The government implemented a policy in which

any worker with a formal job would receive a government

backed loan of at least 100 thousand reals (about US$30K at

the time). The outcome being - overnight 100 thousand reals

became the floor price of any home, in any condition in

Brazil. As a result a construction boom started, as massive

amounts of government credit flooded the real estate market.

Real estate prices sky rocketed and there was a shortage of

construction workers, which pressured wages across the

economy. Also a commodity boom provided cash to the public

who went shopping and boosted growth.

But Brazil is slowing down with China slowdown and dropping

commodity prices. The commodities bubble burst (down by

41% from its peak in 2011) has hit economies around the

world but Brazil was hit the worst because of its structural

weaknesses – high dependency on raw material export, poor

productivity and misdirected public spending. Loose monetary

and fiscal policies of Rousseff government led to high inflation

and shattered investor confidence.

Currently, Brazilian President Dilma Rousseff is facing

impeachment charges. On the surface, it is all about

allegations that Rousseff cooked the government’s books and

hid Brazil’s deficit problem during 2014 election campaign. But

there are other bigger problems also – most importantly,

Petrobras scandal.

Brazil’s largest company and one of the largest corporations in

the world, Petrobras, between 2004 and 2014 engaged in one

of the biggest corruption schemes of about US$5.3 billion.

Petrobras was handed to one of Lula’s union friends. He set

forth Petrobras’ vast financial resources to work on expensive

projects of questionable economic value like a US$17 billion

refinery in Lula’s home state. Many technical experts in

Petrobras criticized the investment, as such refinery was

imprudent in a poor and remote home state. Those critics

were silenced and the project was placed on a fast track.

48

Formed in 1953 as

Brazil’s national oil

company

Petróleo Brasileiro

is one of Latin

America’s largest

companies

The government

holds a majority

stake, but it is also

listed in São Paulo

and New York and

counts thousands of

ordinary Brazilians

among its

shareholders


Another questionable investment by Petrobras was the

construction of a massive shipyard for an acquisition of a

refinery in Texas from a Belgian company for aboutUS$900

million, which had been acquired by the company for US$42

million only 4 years prior.

Hence, the stage was set for the tragedy that would follow.

The artificial real estate boom gave Brazilian a false sense of

economic prosperity, as they believed the value of their

homes were tripling or quadrupling in just a few years.

Consequently, many of them went into deep consumer debt

believing the high value of their homes as backing.

Whereas Petrobras, as a consequence of the many new

investments, became the most indebted energy company in

the world.

So, Brazil today not only has a nearly insolvent Petrobras, its

state-owned banks are also in hundreds of billions of dollars of

bad loans. Having to rescue the banks, the government is

facing one of the largest budget deficits in modern history.

The constructions of subways, bridges, power plants, and

roads have all been put on hold having caused thousands of

construction workers to lose their jobs.

49

Economic crisis

making things

worse

In a two-year

investigation known as

Operation Carwash,

prosecutors have

uncovered what they

say is a huge kickback

and bribery scheme at

the oil giant, which has

become the biggest

corruption scandal in

the history of Brazil

Source: The Economist


This was devastating for Rousseff. There is no evidence of her

direct involvement but she was the chairwoman from 2003 to

2010 on the Petrobras board. So all this supposedly happened

under her watch and questions her judgment and

competence. Presently 32 sitting members of Congress from

her coalition are under investigation for bribery charges.

50

Way Forward


To make things worse, Brazil is also going through an

economic crisis. Country is facing a recession and its currency

the Brazilian Real is rapidly losing its value. Brazil’s economy

may be 8% smaller by the end of 2016 than it was in 2014.

GDP per person will be down by 20% since its peak in 2010.

Two rating agencies downgraded Brazilian debt to junk. It is

hard to tell the difference between inflation rate (into double

digits) and the President’s approval rating (~12%). So the

country is in a serious problem.

Pension expenditure is 11.6% (more than Japan). So by the

end of 2014, government was running a primary deficit (deficit

before interest payment) of US$13.9 billion. (See chart)

Mr. Levy, finance chief, tried to fill the fiscal gap by raising tax.

But tax receipts have been hit hard by the recession. Analysts

at Barclays, expect that Brazil’s debt will reach to 93% of GDP

by 2019. This may be seeming safer compared to 197% in

Greece and 246% in Japan. But they are richer countries than

Brazil. As a proportion of the wealth, Brazil’s debt is higher

than that of Japan and almost double that of Greece.

Facing inflationary pressure, government devalued real. The

Central Bank increased its benchmark rate by three hundred

basis points since October 2014 to 14.25%. But real continues

to depreciate. The real has fallen 31% and stock market is

down by 12.4%since 2015.Also increasing spending on serving

public debt is also raising inflation.

The impeachment battle has paralyzed the Brazilian

government at the time when country is set to host the

Olympics and facing epidemic Zika virus (birth defects in new-

borns). President Rousseff suffered a crushing defeat on April

17 as corruption tainted Congress voted to impeach her.

President facing impeachment charges in court will have

substantially weakened power to pass new legislation for

reforms. Even if she survives the corruption charges, a legal

investigation is going on to find if Rousseff’s 2014 presidential

campaign took Petrobras kickbacks. So there is a possibility

that court can rule election null and throw Rousseff’s

51

Brazil’s

economy shrank

by 3.7% last year,

and forecasts for

2016 are similarly

gloomy

Conclusion


presidency. Even though she survives both, weak governing

coalition will make it difficult for her to achieve anything

meaningful before her term end in 2018.

In case of Rousseff’s impeachment, Vice President Tamer will

take over. Business lobbies are looking for Tamer to restore

business confidence and growth of the economy. Brazil’s

stocks and currency are rising on the bet that Rousseff will be

removed from the office and the move will allow Tamer to

implement more market-friendly policies. Even though

investor’s confidence on Brazil rebounded recently, they are

near historic lows because of higher borrowing costs and

inflation.

Then Brazilian political system is in chaos. President is facing

impeachment, Tamer is also being investigated over campaign

kickbacks, leading opposition and former leaders are also

facing serious charges. So when Brazilian public is looking at

their options, they see a thoroughly corrupt and incompetent

elite. With ongoing economic crisis, this can lead to the rise of

previously weak or entirely new party in the country’s 2018

elections.

A former high-flyer among the BRICS and Latin America’s

biggest economy is facing changes such as double-digit

inflation, corruption scandals, political turmoil, unemployment

and negative growth rates. Earlier riding the wave of

commodity boom, Brazil’s economy crash-landed with weaker

demand from China. It was further deteriorated by ill-advised

monetary and fiscal policies by the first Rousseff

administration (notably surge in public spending). It led to

surge in inflation, reduced confidence from investors and

rising unemployment.

Brazil needs to reform its policies, social security and pension

system to shore up fiscal accounts. To do this that all the

Brazil’s politicians come together, act together – without

cutting and pulling down each other. And if they do not, things

will get worse for Brazil.

52

“Thus Inflation is

unjust and

Deflation is

inexpedient. Of

the two, perhaps

Deflation is . . .

the worse;

because it is

worse, in an

impoverished

world, to provoke

unemployment

than to disappoint

the rentier.”

—John Maynard

Keynes

53


In this article, we are going to examine the two decade long

deflation in Japan which was triggered by popping of the

asset bubble. When we look back at the history, the popping

of asset bubbles has nearly always been tragic. Social, political

and economic turbulences have a bad habit of following asset

bubbles, also wealth destruction is a guaranteed feature. Now

let’s consider the opinion of Keynes who spearheaded a

revolution in economic thinking and is considered as the

father of modern economics.

Keynes’s observation aptly describes the current situation of

deflation inflicted Japan. Many economist and members of

intelligentsia still quibble over the fact whether Japan is in

deep trouble due to its own opulent or spiritual way of life.

That’s the ironic part of Japan’s ultra-development saga.

The ‘Land of the rising sun’ has the world's third-largest

economy ($4.210 trillion) by nominal GDP and the world's

fourth-largest economy ($4.843 trillion) by purchasing power

parity. But startlingly, however, the Japanese economy

dramatically deteriorated in what is now called the ‘Lost

Decade’ of the 1990s. The growth rate declined to less than 1

per cent per annum on average, and it was negative in some

years. The ‘lost decade’ has extended also to the new century.

Now economists are referring it as the ‘Lost Two Decades’.

Many problems have been pointed to as contributing factors

that explain the “lost decade” in Japan. Let’s find out the key

causes which lead to the chronic deflation.

The rising sun sets into the lost decade

Chronic Deflation in Japan—Revised

By Shrirang Lichade

KJIMSRS

https://en.wikipedia.org/wiki/Keynesian_revolution

https://en.wikipedia.org/wiki/Keynesian_revolution

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29

Financial

Deregulation

Unsolved

excessive saving


Financial deregulation was an important factor which

established a conducive environment for a land price bubble,

which in turn enabled firms to borrow heavily in order to

invest in commercial real estate.

It also prompted the acquirement of differing financing

options, which lessened the corporations’ dependency on

banks for funding. In the 1980s, the Japanese banks shifted

their main target of credit supply from manufacturing to non-

traded-goods industries such as real estate, finance, and other

services that were not well disciplined by global competition

Japan is one of the excessive savings glut countries in Asia.

During 1980’s when Japan was growing at faster pace, people

of Japan were saving 15% of their after tax income. This

contradicted with Keynesian principle that when investment

exceeds saving, there will be inflation. If saving exceeds

investment there will be recession. One implication of this is

that, in the midst of an economic depression, (in this case

deflation after crash) the correct course of action should be to

encourage spending and discourage saving. Thus this was the

major problem which is still ongoing in Japan and President

Abe is urging people to go and spend money which could lead

to higher inflation rate.

54

Asset Price

Deflation

By August 1990,

the Nikkei stock

index had

plummeted to half

its peak by the time

of the fifth

monetary tightening

by the Bank of

Japan (BOJ). By late

1991, asset prices

began to fall.

Even though asset

prices had visibly

collapsed by early

1992, the economy's

decline continued

for more than a

decade.


In the first half of the 1980’s, control on capital movements

were pulled down, interest rates on deposits was close to

zero. Japanese banks lost large corporations to global capital

markets, but eventually banks found their new customers in

SME’s. These enterprises were able to borrow for risky

projects simply against real estate collateral. During this time,

people got much more money due to financial deregulation

and easy money policy. So this excess liquidity was invested in

real estate. 1987-1990 is termed as the “bubble period”, from

the viewpoint of the coexistence of three factors indicative of

a bubble economy, that is, a marked increase in asset prices,

an expansion in monetary aggregates and credit, and an

overheating economy.

Thus, in the latter half of 1980’s, central bank of Japan realized that this was not sustainable and to check the further repercussions on the economy, tried to tighten the policy by increasing the interest rates. Which in turn lead to burst of the asset prices and Nikkei stock index had plummeted to half its peak. This collapse lead to a total loss in asset values of 1000 trillion yen by the middle of the decade, or 2.4 times the country’s GDP. This was a huge loss, even compared with the United States’ capital loss of 1.9 times GDP during the Great Crisis after 1929.

55

https://en.wikipedia.org/wiki/Nikkei_225

Non-Performing

Loans

Economic issues

Just 15% of people in

Japan expected the

country’s economic

situation to improve in

the “next 12 months,”

down from 40% who

were similarly hopeful

in spring 2013, after

Prime Minister Shinzo

Abe took office.


Since the loans were disbursed against land, and land price

plummeted through 1990 to 1998, the number of loan going

bad increased drastically. Japanese banks were hard hit since

loans were given mainly to industries against land. Thus, in-

creasing bad debts for the banks. In the global circle, many

entities accused banks in Japan of cooking the books to hide

the losses from the customers and shareholders.

The list given above is non-exhaustive. Since many facets

which are still debated like muddled monetary policies, ad-

vent of ICT and liberalization. Alas, we need to consider long

lasting ramifications of deflation in terms of economic and so-

cial effects.

Labour problems: Since more than two-thirds of Japanese

workers are employed by SME’s , these business failures were

among the most important causes of the rising unemploy-

ment in the country. The unemployment rate in Japan in-

creased from about 2 % in 1990 to3.60 % in 2015. However,

the concept of unemployment in Japan is loosely defined,

thus real unemployment statistics is believe to be double the

given number to be comparable with Western economies. In

the given scenario, the unemployment rate in Japan would be

comparable with the depressed European economies. Rising

unemployment, bonus and overtime payment cuts and the

use of cheaper part-time workers have led to a significant re-

duction in household income. Unsurprisingly, domestic con-

sumption demand has been depressed since the beginning of

the 1990s.

Investment demand Stagnation: Investment demand stag-

nated over the years, given the existence of idle capacity.

Thus, the bad loans of the Japanese banks have not been

cleared up and, instead, they have fed the deflationary spiral

of the economy. The result has been a vicious circle, with

banks facing difficulties due to their bad loans and shrinking

capital base, medium and small firms running into difficulties

due to the credit crunch, and the resulting deterioration in

workers’ employment and income leading to depressed con-

sumer demand and deflating real estate and share prices.

56

Social Issues

Japan’s working-age

population (ages 15 to

64) is expected to

plummet to 55.2

million in 2050 from

81.2 million in 2010, a

32% decline,

according to UN data.

In 1970, 69% of

Japan’s population

(71.4 million) was of

working age,

compared with 64% in

2010 and just 51%

projected in 2050.

Japan’s elderly

population is expected

to grow to 39.6 million

in 2050 from 29.2

million in 2010, a 35%

increase. The

country’s median age

is expected to rise to

53 from 45.


Youth is refraining from consumption: Traditionally

Japanese people are known for content lifestyle. But

economically this is hurting the nation. Japan raised its

consumption tax rate in 1997 from 5% to 8% which lead to

reduction in consumption to this day. Government has started

declaring holidays so that populace can go and buy things and

economy can run again.

Declining birth rate: The financial burden of raising children

and obtaining education, medical services and care for elderly

parents has not been addressed by public spending, and this

burden has increased due to the deepening fiscal crisis of the

state and its imposition of neoliberal social policies. One of its

consequences is that the average birth rate of Japanese

women has declined sharply, from above two at the

beginning of the seventies to 1.29 in 2003, leading to a rapidly

ageing society. Japan is grappled with what is supposed to be

‘New world’ problems.

Popping of the bubble by central bank by tightening

monetary policy was a critical mistake: It is still a debatable

topic among the economists whether a bubble should be

deliberately popped beforehand. It is universally accepted

that asset price is closely related to general price level, thus

asset prices should remain stable in the long run. But using

monetary policy to collapse the booming asset prices was a

57

If you can’t

explain it simply,

you don’t

understand it

simply.

- Albert Einstein


The inadequate responses after the burst of the bubble:

Asset prices in Japan have been falling for the last two

decades, which is unusual for the developed economy as that

of Japan. The policy reactions were too little too late, marked

by a repetition of stop and go, without coordination of fiscal

and monetary policy, which lead to chaotic environment for

the private investors and dried up investments.

Bad loan problems: The major focus during the period was

the bad loan problem. It is still debatable about the

relationship between the bad loan and macroeconomic

performance. The banks were lending too much to inefficient

firms and industries so that they survived unduly: Zombie

lending. Even though its economic impacts were unclear, it

was no doubt that there was a series of government’s

mistakes not to deal with the bad loan problem as soon as it

appeared. The ministry of finance did not recognize the

magnitude of the problem, postponing and prolonging the

necessary measures to deal with the problem lead to severe

deflation indirectly.

58

“No society can

surely be

flourishing and

happy, of which

the far greater

part of the

members are

poor and

miserable.”

– Adam Smith

59


Is India really

The World’s growth engine?

By Anuj Mishra & Pratik Agarwal

KJSISMR

In order to conclude whether India is growth engine or not, we

first need to define the parameters on which analysis can be

done. First thing that comes to our Management mind is

Gross domestic product.

But is GDP really a measure of country’s progress and well-

being?

Does it count for country’s quality of education, our health or

the overall nation as a brand?

It does not include the soulfulness of our music or the

strength of our athletes, the intelligence of our debate or the

integrity of our public officials. It does not measure patriotism

for our nation!! In short, it measures everything, except what

makes life worth living for.

Different Economic parameters and India’s Stand

Parameters Standing

GDP 2.288 trillion USD (6102)

GNI ( Per Capita ) 6,598 USD PPP (6106)

Inflation( CPI) 5.39 % (April, 2016)

Human Development Index 130th Rank (2015)

Ease of doing business (In terms

of developing nation) 2nd Rank (2016)

“In a bid to thwart

the rupee’s rise,

RBI bought $19.7

billion worth of

rupees in the four

months to end of

February, and the

market suspects

it intervened in

March as well.

The central bank’s

persistent

intervention has

fuelled inflation

and money supply,

which are both

running above its

target levels.”

Livemint

23rd May, 2016


Looking at economic snapshot it would be fairly simple to say

that India is growing at a good rate and has been performing

well in BRICS, SAARC and in almost all the trade blocks it is

associated with. Writing on India’s growth can be fairly wide

so we will just address two concerns that are associated with

it, which are at the moment overlooked by newspaper

columns. Is depreciating currency an issue for Indian

economy? And isn’t India falling into middle income trap?

Further ahead we move on to discuss steps needed to make

India global growth engine.

How INR works?

Since we are moving towards a manufacturing based

economy which would possibly be export-oriented, it is

imperative for us to understand how INR’s rise/fall will effect

on India’s ambition of becoming growth engine of the world.

Though we see value of rupee falling with respect to dollar,

and by looking things superficially it might so seem that it will

boost our exports but sadly it won’t. Because rupee is not

depreciating it is actually appreciating. The correct way to

measure rupee appreciation or depreciation is through a

metric called Real Effective Exchange Rate – It is the weighted

average of a country's currency relative to an index or basket

of other major currencies adjusted for the effects of inflation.

The weights are determined by comparing the relative trade

balances, in terms of one country's currency, with each other

country within the index.

How rupee appreciation can hurt India?

Say that, Tata International produces shoes at INR 20 per pair

to export it to Africa. They have a competitor in Thailand who

produces shoes at 15 Baht per pair. Currently 1 Baht = 1.90

INR and thus, Thailand shoes are actually expensive for the

final customer in Africa. Tata International's export order is

accepted and thus creates more jobs for Indians.

Now, let’s assume rupee appreciates against Baht and 1 Baht

equals 1.0 INR. The cost of a pair of shoe in Thailand still

might be 15, but now they are cheaper than the one from

Tata’s.

60

Reforms needed

for India to

develop?

“It is not by

augmenting the

capital of the

country, but by

rendering a greater

part of that capital

active and

productive than

would otherwise be

so, that the most

judicious operations

of banking can

increase the

industry of the

country.”

- Adam Smith


As of Gregorian calendar month 2016, here are the most

important reforms required to be pushed by the central

government.

1. Taxation reforms: Our states operate like separate

countries once they get involved in the movement of

products. It’s onerous for corporations shipping product

across states to contend with the embarrassment of

taxation systems.

2. Bankruptcy reforms: Once someone is unable to repay

loan, it ought to be quite simple to declare him bankrupt

that might be win-win for everyone. But whenever a case

like that of Mr. Mallaya shows up, obtaining him looks

quite onerous. Developing countries don’t have a

transparent law on company bankruptcy. Provincial

insolvency Act, 1920 fails to properly outline the terms

bankruptcy, insolvency, liquidation and dissolution, and

has a lot of loopholes that are later exploited by chartered

accountants and financial consultants.

3. Land reforms: Make it unexacting to accumulate

massive property for business development.

4. Labour reforms: It’s demanding to contend with labour in

India. This has created it terribly onerous for major

producing players to setup factories in India. The

government has a bunch of old pre-1947 era laws that

control how firms operate.

Education for everybody

The reality is that nowadays, more than half of our students in

Standard-5 cannot read a Standard-2 text or solve a

straightforward subtraction problem. The socio-economic

circumstances where a toddler is born, determines the kind of

faculty/school they attend, various co-curricular opportunities

that are available to them. This also determines the

personality that they are going to exhibit which again gets

transmitted to their children and this cycle never breaks.

61

We need a lot

more additional

labour tribunals

and lot less

labour laws to

make our

business

environment

more effective


Get staff prepared

The skills required for five hundred million Indian to be work-

ready in ten years aren’t solely a matter of national urgency

but is also astounding in its scale. Thus far, the skill building

has been driven by the necessities of the market; whereas

abundant progress has been created with appreciable

facilitate from the government, it's

a travesty that small has been done to know the requirements

of the learners.

India lags way behind in transmission ability coaching as

compared to different countries. Out of the overall work force

within the country only a few receive some formal training

(2% with formal coaching and 8% with informal coaching).

Further, eightieth of the entrants into the work force don't

have the chance for skill building.

62

Current

Labour

Regulation

Framework

Make it simple to

shop for, register

or sell property.

Land records

have to be

compelled to be

clear


Make it simple for business

Workers will get paid only if there are businesses which will

hire them. Some people think about Scandinavian countries

as socialist nations. That may be a bit different from the

reality - those countries are capitalist dynamos as seen from

International Bank for Reconstruction and Development

rankings; Ease of doing business in Scandinavian country - or

the economic freedom index - Country Rankings.

Archaic: the present legislation that governs employment

regulation is that the Industrial Disputes Act (IDA) 1947, the

clauses that were planned underneath British rule

Restrictive: In 1976, changes to UN agency were created in

order that companies using 300+ people ought to get

government permission to impact lay-offs, retrenchments

and closures. This was restricted to companies with 100+ staff

in 1982, creating hiring or firing new staff extraordinarily

tough even though they're inefficient (Sharma, 2006)

Convoluted: There are regarding forty seven Unions laws

and 157 State laws that overlap, this creates a sense of

confusion for the companies with have factories in multiple

location in India (Kant, 2012)

Keep stuff moving

Modern businesses will run solely wherever stuff move

quickly. Our Lorries move at a snail's pace through the

unstable roads. If the traffic forecasts are correct, the

government is ought to increase investment within the road

network well throughout ensuing decade. This needs new

semi-permanent funding streams. Reducing the space

between people, markets, services and data – or just ‘getting

folks connected’ – could be a nice a part of what economic

process is all about.

63

Long run is a

misleading guide

to current affairs.

In the long run we

are all dead.

John Maynard

Keynes


Conclusion

Looking at economic snapshot and various trends, India is

definitely poised to become global growth engine with almost

every factor heading its way. But it also necessary to realize

that there are lot of focus area which we need to look and

improve if we truly want to become global growth engine. We

do see India becoming global growth engine in long run but in

the words of John Maynard Keynes - “Long run is a misleading

guide to current affairs. In the long run we are all dead.”

64

Africa has been

the second-

fastest-growing

region in the

world over the

past 10 years,

with average

annual growth

of 5.5% over

the past decade

65


Africa

The Land of Opportunities

By Ani Mehrotra

XLRI

In the last two decades Africa has witnessed rapid growth at

an average rate of 5.5%. The new growth has not gone

unnoticed, inspiring much optimism among journalists,

economists, business fraternity and investors over the fate of

a region which not so long ago seemed doomed to failure.

Every media report has been touting it as the next big thing.

An important feature of this boom is that it has largely been

shared by all countries in Africa, with a few exceptions due to

conflicts. Ethiopia, Chad, Congo Republic and Tanzania have

emerged as the fastest growing economies among the

African countries. However, there are concerns among many

about whether this growth in the African continent is real and

if this economic growth has really percolated down to the

general public.

Analysts are sceptical about this economic boom and

question its impact on human development and the

widespread inequality present in the African countries.

Looking into the future, certain sectors hold more promise

and better growth prospects than the others. For the African

governments, improving business climate should be the

prime focus area. Moreover, the general economic context is

now turning less favourable with growth slowing down,

especially in oil and mineral exporting countries. Looking at

the bigger picture, overall growth is expected to continue, but

at a slower pace.

Real GDP Growth

Rate (By

Countries)

By 2035, Africa's

labour force will be

bigger than that of

any individual

country in the

world, which offers

a chance to reap a

demographic

dividend

Growth Story

Today 40% of

Africans have some

secondary or

tertiary education.

By 2020, it will be

nearly half.


Source: World Economics - Global Growth Tracker (March 2015)

As can be seen in the adjoining graph, Africa has experienced

the highest real GDP growth in the last 20 years after the Asia

-pacific region. Other regions like America and Europe are

lagging far behind these two fast growing economic regions.

This has made these two regions, especially Africa, the

favourite destination of many businesses to chart their global

expansion.

Among the different regions of Africa, while West Africa

achieved high growth despite its battle with its Ebola virus,

Southern Africa struggled as the region was affected by labor

conflict and chronic electricity shortages and the key South

African economy grew just by 1.5%. North Africa has been

growing very slowly with the exception of Egypt and

Morocco, which have experienced stronger growth. Algeria is

66

Source:

African Economic

Outlook (2015)

While 33% of

Africans in the

labour force

receive secondary

education, 39% of

workers in India and

66% in China

receive education

at this level.


suffering from low oil prices. In Libya, the macroeconomic

situation is expected to worsen with a fiscal deficit of more

than 55% of GDP and a current account deficit of 70% GDP,

but the country still holds considerable foreign currency

reserves.

This vigorous economic growth has also left its mark on the

socio-economic conditions of African countries. Africa has a

fast growing middle class which accounts for much of the

economic growth through its spending. Africa’s combined

consumer spending was USD 680 billion in 2008 and is

projected to reach USD 2.2 trillion in 2030 which gives an

average compounded annual growth rate of about 5%. In this

regard, Nigeria and South Africa lead this expansion of

consumer demand. By 2030, the number of middle-class

households across the 11 fastest-growing countries in Africa

will have increased to 40 million from today’s 15 million

households.

This vigorous economic growth has also left its mark on the

socio-economic conditions of African countries. Africa has a

fast growing middle class which accounts for much of the

economic growth through its spending. Africa’s combined

consumer spending was USD 680 billion in 2008 and is

projected to reach USD 2.2 trillion in 2030 which gives an

average compounded annual growth rate of about 5%. In this

67

Source:

World Bank, IMF

Africa has about

60% of the world's

unused cropland,

providing it with a

golden opportunity

to simultaneously

develop its

agricultural sector

and reduce

unemployment.

On current trends,

African agriculture

is on course to

create 8 million

wage-paying jobs

between now and

2020.


regard, Nigeria and South Africa lead this expansion of

consumer demand. By 2030, the number of middle-class

households across the 11 fastest-growing countries in Africa

will have increased to 40 million from today’s 15 million

households.

68

Source:

African Economic

Outlook (2015)

High transportation

and input costs,

duties and

bureaucracy are

some of the

obstacles that have

hindered African

manufacturing. The

continent needs to

open itself up to

foreign investment

too


The telecommunications boom has also played a central role

in Africa’s growth story. Cellular phone penetration has been

increasing at a rapid pace in the last decade. This has aided in

giving an impetus to internet penetration in the last 5-7 years.

Increased use of mobile phones and rapid internet

penetration has spill-over effects in other economic sectors

like financial services and this has pushed Africa’s growth

further. This spurt is additionally supported by increased

activity in R&D which is evident from the decadal growth of

about 18% in patent applications since 1995. Together,

technological and scientific progress has created a favourable

cycle where these advancements lead the economic growth

further.

African countries have made significant strides in all

dimensions of human development. Although, these strides

have immense inequality within the nations. If we consider

growth of education in African youths who are between the

age of 20-24 years, East and West African countries have

experienced faster rates of improvement compared to

Central, North and South African countries.

69

Source:

World Bank, IMF

Lesotho, a country

of just 2 million

people, has 100

times South Africa's

exports of apparel

to the United States

on a per capita

basis because it

made investment

attractive to foreign

players and put the

necessary rail and

distribution

infrastructure in

place


70

Source

Statistics Department,

ITU-D (2015)

Roadblocks

Source: African

Economic Outlook

(2015)


But all is not well in this stupendous African growth story.

There is still a lot of ground to cover if Africa has to establish

itself as the new growth engine like it has been touted by the

many analysts and journalists. For starters, as mentioned

earlier African countries have significant inequality within and

between countries with regard to human development

parameters with HDI much lower than the world average.

71

Violence by Non-state

actors and public

protestors (2004-14)

Source: African Economic

Outlook (2015)


Out of 44 nations worldwide which are considered to be in

low HDI segment, 36 nations are from Africa. That paints a

worrisome picture. The underlying drivers of inequality are

significant disparities in access to health and education.

Source: African Economic Outlook (2015)

Traditional economy dependent on the informal sector,

insufficient improvements in agriculture and service sector

productivity are major reasons for the slow translation of

growth into poverty reduction. Although accounting for 12%

of the world’s population African nations produces only 1.5%

of the world’s nominal GDP and despite continued growth,

most African countries have a GDP per capita valued in PPP

lower than USD $5000.

72

In Ethiopia, Egypt,

Ghana and

Nigeria, nearly

three-quarters of

groceries are

bought in tiny

informal outlets.

If barriers to

foreign players

were removed

and action was

taken to boost the

share of modern

retail outlets, this

industry could

finally hit its

stride


In the 2000s, Africa enjoyed world’s third highest increase in

GDP per capita after South Asia and East Asia but its growth

rate was only half the rate of these two regions.

Africa’s current growth could also be derailed by non-

economic factors. A study by World Bank in 2013 which stress

-tested the resilience of Africa’s economy found that the

biggest risks are drought and conflict. Agriculture remains

fragile, given its economic importance to the country and its

exposure to climate change impacts. According to Africa’s

Pulse 2015 by World Bank, a new type of conflict is rising,

different in nature to the conventional and large scale conflict

events and civil wars of the 1990s: election-related violence,

extremism, terrorist attacks, drug-trafficking, maritime

piracy, criminality and war fought by armed insurgents (e.g.

Boko Haram in Nigeria). It puts economic progress at risk,

especially in the affected countries. High corruption levels

discourage the inflow of investments. According to World

Bank data, out of 189 countries 33 African countries are

beyond the rank of 100 in Corruption Percentage Index.

Source: African Economic Outlook (2015)

Business climate remains a weakness for Africa’s growth

prospects. In terms of the ease with which companies do

business in different countries in Africa, the continent does

not rank highly and a majority of African countries are among

73

More than 300

million Africans will

remain in

vulnerable jobs in

2020. And even if

governments are

successful at

promoting job

creation, the

number will keep

rising for at least

another 20 years

because the labour

force is expanding

so quickly.

Future Potential

Mining, oil, and gas

contribute

significantly to

Africa's GDP, but

these sectors

employ less than 1%

of the workforce


those placed at the bottom of the World Bank’s ranking for

189 countries. There are, however, a few notable exceptions.

Mauritius ranks 32nd in the world, followed by Rwanda (62nd),

Botswana (72nd), South Africa (73rd), Tunisia (74th) and

Morocco (75th). But overall the scenario is grim. Consequently,

Africa’s attractiveness, though still strong, is at its lowest

since the past 5 years.

Source: World Bank, IMF

We explore and elaborate on the growth potential of different

sectors of African economy through the graph in the next

page. Agriculture accounts for 32% for GDP and employs 65%

of Africa’s labour force. African agriculture and Agri

businesses are expected to

generate US $1trillion by

2030. Africa hosts 30% of Earth’s mineral reserves with South

Africa as the biggest player. Botswana and Mozambique are

the potential mining destinations for diamonds and coal

respectively. Africa’s proven oil reserves have grown by 130%

in the past 30 years. High quality oil in Nigeria and large

reserves in Libya make them potential destinations.

74

Businesses and

investors are

beginning to take

note of the

continent's

potential – not only

its wealth of natural

resources but its

human capital.

Africa may prove to

be one of the next

great global stories

Nigeria, Ghana, and

Angola are the

fastest urbanizing

economies driving

the real estate


Africa attracted only 6% of the world’s tourists but it is

expected to double by 2030. Fastest growing destinations are

Congo, (150%), Togo (49%) and Sierra Loene (33%). Total

ongoing infrastructure projects amount to US $378 billion

growing at 10% annually. High focus is on transport (road and

port), and energy (thermal and hydropower). Household

consumption is growing at 12% with Nigeria being the biggest

contributor. Urban population is estimated to increase to 56%

of total by 2050. Mobile phone represents more than 90% of

all telecommunications in Africa. Mobile users are growing at

5% and advanced markets have reached 100% penetration.

Retail Banking is projected to grow at a compounded rate of

15% till 2020. Contribution of financial services to GDP is

expected to grow to 19% from 11%. IT industry is expected to

contribute up to 10% of GDP by 2025. South Africa, Nigeria

and Kenya have the potential to become the future IT hubs.

Growth has been fast, but forms a low base, and consequently

Africa still has a lot to do to catch up with other regions of the

world.

75


Nitin Agarwal, Senior Editor

Mechanical Engineer from MNNIT, Allahabad

Former Executive Engineer, Honda R&D

Specialization in Finance and wants to pursue a ca-reer in Investment Banking

Loves to read non fiction

Pratik Dokania, Editor-In-Chief

Production Engineer from NIT Trichy

Former Market Analyst, Futures First Info Services

Pvt. Ltd.

Specialization in Finance

Rashi Bablani, Senior Editor

Bachelor of Commerce, Sri Ram College of Com-merce, New Delhi

Specialization in Finance and pursue a career in Investment Banking

Likes to read fiction novels

Vaibhav Agarwal, Senior Editor

Computer Science Engineer

Specialization in Finance and Marketing

Die hard fan of football and loves to spend time on

novels

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