niveshak august 2013 - anniversary edition

THE INVESTOR VOLUME 6 ISSUE 8 August 2013

Niveshak

Celebrating

Glorious Years of

Niveshak

2 August 2013

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© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 3

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F R O M E D I T O R ’ S D E S KDear Niveshaks,

With this issue in your hands, dear readers, Niveshak completes five glo-rious years of its existence. Congratulations! When we look back from this juncture, we feel satisfaction, joy, encouragement, hope, belief, zeal and de-termination, all at the same time. We feel privileged too, for having you with us – having seen us grow from a dream to where we are today. Had it not been for your constant support and motivation, nothing would’ve been possible.

“If Winter comes, can spring be far behind?” said a famous poet once. And would we like to believe him? Oh boy, yes! More than ever, today! Rupee seems to have decided to test our limits in a manner that’s wider than anyone’s expectations, inflation is flirting with double digits, growth is plummeting, in-vestments have dried up, and our capital markets are oscillating at an unprec-edented amplitude. And it is at such times that you so desperately wish that sayings like “this too shall pass” and “every cloud has a silver lining” are, well, more than just sayings! Have you ever seen those yellow black earth-movers working their way up the mountains in the seemingly unhospitable terrain? They toil hard, they dig, they move rocks and still, they might just end up a notch below than where they were in the morning. It does not signify that that there wasn’t any progress made during the day. At Niveshak, we believe that India is at a similar phase of its history. And that is why, the theme of this an-niversary issue is ‘Scripting the Great Indian Revival’!

In the pages that follow, you’ll find the confluence of ideas from the peo-ple who run the economy today and from those who will run it tomorrow. Both have contemplated the possible ways in which we can make our economy shine again. One common idea that you will find making its way out over and over again is that the Indian story is not yet over and that much is still to be con-quered. India might have slowed but that is just to shift gears and not to come to a halt. It is all in the minds! When someone counts to you the shortcomings that our system suffers from, the legacies that drag us backward, count to them the moves that propel us forward, the opportunities that (will) make us stand in the front line amongst the nations of the world. Talk to them about the demographic dividend that, when yielded properly, would be that magic wand which will turn our nation’s fortunes like never before. And do remem-ber, “The bumblebee flies anyway!”

The issue contains a happy mix of articles, interviews, special columns and an info-graphic that have either been handpicked from the lots we re-ceived for this issue or compiled painstakingly by team Niveshak. You are sure to get a holistic picture of the Indian economy from the ramparts of this edi-tion.

In the run-up to this anniversary, we organized a slew of events under the aegis of ‘Celebratio – Celebrating 5 glorious years of Niveshak’. Thank you for making each one of them so very successful! Also, more than 100 articles were received as contenders for space in this limited page edition. It was a herculean task to zero-in on the ones that finally feature in here. It wouldn’t be fair on our part if we didn’t thank each one of you profusely enough for such huge response to our initiatives. As we traverse on the chosen road in fu-ture, we would love to keep your company along and expect that you will keep bestowing your support and contribution to your much cherished Niveshak. Together, we will take it to greater heights!And today, more than ever before, Stay Invested!

Team Niveshak

NiveshakVolume VIISSUE VIII

August 2013

Faculty ChairmanProf. P. Saravanan

Anchal Khaneja

Anushri Bansal

Gourav Sachdeva

Himanshu Arora

Ishaan Mohan

Kaushal Kumar Ghai

Kritika Nema

Neha Misra

Nirmit Mohan

All images, design and artwork are copyright of

IIM Shillong Finance Club

©Finance ClubIndian Institute of Management

Shillong

www.iims-niveshak.com

THE TEAM

4 August 2013


Located in the green environs of North Eastern part of the country, IIM Shillong in its 6th year of operation remains committed to its already established goodwill and promises to continue to bring glory to the nation. It aims to develop into a 21st century center of excellence in management education & research in the national and international arena. At the outset, I congratulate our Finance Club on completing five years of journey. During this period the club has become one of the highly active student bodies on the B-school

circuit of India and its monthly magazine Niveshak has crossed the readership base of 6000 readers. With the support and guidance from industry experts, researchers and experienced faculty, the magazine covers the entire gamut of business, finance and economics.There is no doubt that the Indian economy is going through a rough period right now. Despite a tumbling currency, India’s economy has got more stable in the past year. However, it remains important that the people of India and the government walk hand-in-hand in order to revive the growth. It is at these times that we look at leaders, present and future, to show the way forward. It, thus, gives me immense pleasure to present to you the fifth anniversary edition of Niveshak, a platform where the future business leaders of our country share their ideas about the country’s financial performance in the times to come. I wish the team good luck for its future endeavours and hope that the students of IIM Shillong continue to bring pride to the Institute and the Country.As they always say, Stay Invested.

Best Regards,Prof. Amitabha De

Director, IIM Shillong

The vision of Niveshak is to enable its readers acquire theoretical and practical knowledge by creating learning opportunities outside the classroom and at the same time maintain high quality industry interaction. In pursuit of this vision, Niveshak has successfully completed 5 years of publishing the magazine and I heartily congratulate the team for their interminable efforts.

Centered around the theme “Scripting the great Indian revival”, the anniversary edition of Niveshak is one place where different thought-provoking ideas from people of diverse backgrounds converge. Already having established a very strong readership base within the B-school arena in India, we now look to establish our presence internationally in terms of interaction with renowned professors from foreign B-schools, inviting articles from abroad and various other avenues.At this juncture, when Niveshak is coming out with its 5th Anniversary issue, I wish all the success to the Niveshak team for putting in their sincere efforts in taking Niveshak to new hieghts. My special thanks to our Director, Prof. Amitabha De and my colleague Prof. Nalini Prava Tripathi for their consistent support in all our activities. I would also like to acknowledge the invaluable support of all those who have contributed in terms of sending various articles for the anniversary edition. On behalf of the team, I also take this opportunity to invite each one of you to join us through your contribution of articles or opinions and consumption of the service provided by us, such that we as a team help each other in tallying our balance sheets in career.

Best Regards,Prof. P.Saravanan

Associate Professor, IIM Shillong

MessagesFrom the Director...

From the Faculty Chairman...



TOP FIVEfinsight

15 Dr. Michael Debabrata Patra: RBI

24 Dr. Chinmoy Ghosh: University of Connecticut

31 Mr.Gaurav Mehndiratta:KPMG

33 Mr. Raamdeo Agrawal:Motilal Oswal

41 Mr. Pramod Vaidya:IDBI Bank

Tryst With Experts

11 Sustaining Growth in Uncertain Times: Decoupling or Recoupling

18 Is Bitcoin the Currency of Future?

27 How to Attract FDI and FII to Indian Markets?

37 Are stalled infrastructure projects weakening the Indian economy?

The CHOSEN ONES

22 JoURNEY @2008-2013

06 SME Exchange

07 Foreign Direct Investment

08 Companies Bill, 2012

09 Cabinet Committee on Investments

08 Direct Cash Transfer

46 INDIAN ECONOMY AT A GLANCE

6 August 2013

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In India, MSMEs have played a crucial role in the overall growth of industrial economy. In recent years, the MSME sector has consistently registered higher growth rate compared to the overall industrial sector. MSMEs in India contribute nearly 45% to manufacturing output and about 40% to the Indian exports and also are the largest employers of workforce in India. Besides numerous set of challenges - complex and archaic regulations, tax and labor laws and infrastructure, one of the biggest challenges for all start-ups and small and medium enterprises (SME) is raising capital. Looking at this major issue, market regulator SEBI has tried to make access to capital a little easier for the SMEs. Both BSE and National Stock Exchange of India Ltd have launched their versions of a small and medium enterprise (SME) exchange last year. The BSE SME Exchange took off with the listing of BCB Finance Ltd in March 2012 and the NSE equivalent, Emerge, took off with the listing of Thejo Engineering in September 2012.But this is not for the first time that such an exchange for the SMEs is launched in India. In 1990, Over-the-counter Exchange of India (OTCEI) was launched with aim of becoming the NASDAQ of India. It introduced many concepts that were new to the Indian capital markets at that time, such as screen-based nationwide trading, sponsorship of companies, market making etc. However, the 1992 scam and the bear market that followed killed the initiative. In 2005, BSE Indonext, launched by then Finance Minister P. Chidambaram, was specially created to cater to SMEs listed on regional stock exchanges. Since regional stock exchanges were unable to attract trader attention for lack of advanced technology, BSE has tried to give them a lease of life under the new platform. The companies listed on BSE IndoNext, however, did not attract much market

participation either.SEBI said the new platform in the third attempt has been formulated after a detailed study of best practices from across the world and feedback from market participants. Only those companies with a post issue paid up equity capital of less than Rs 25 crore can list on an SME exchange. This time the concept is similar to the OTCEI, but additional safeguards such as 100 per cent underwriting of offerings, easier compliance norms such as half-yearly reporting instead of quarterly for bigger firms, minimum ticket size of INR 1 lakh and the provision to migrate to the main board have been put in place. Listing conditions such as profitability for three years, approval of prospectus by SEBI and so on has also been removed. Though SEBI has made a decent effort to make things work out this time for the SMEs, we believe there are certain gaps which still needs to be filled before this channel becomes viable for the SMEs to raise capital. The big investment banks, for example, would not be very keen in underwriting business for SMEs because they feel the money is too little for them as the issue size is less. And the smaller merchant bankers are either scared to make the three-year commitment or have to charge exorbitantly to be viable. The market maker for the first IPO is also charging big amount from the SMEs. So the heavy charge levied by small merchant bankers and market makers makes the equity expensive for the SME.If some more changes are made in the regulations so that it is a win-win situation for all the parties; SMEs, investment banks and market makers, in the long run SME exchange will become an easy and a viable route for the SMEs to raise capital.

Once in a while, comes along a disruption that changes the business landscape of a country like no other. At the helm of the affairs has often been the Government. Team Niveshak brings to you 5 such steps taken by GOI that carried within them the potential to enormously effect the businesses operating in India and elsewhere. The entries were carefully chosen and evaluated on various parameters before they could make it to the elite list. So sit back and think what went right and what didn't with each one of them for as they say, “If the world was perfect, it wouldn’t be!”.


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After constant accusations of policy paralysis, the Government of India, in 2012, undertook major FDI reforms. These include opening of Multi-Brand Retail up to 51 per cent FDI, raising FDI in single brand to 100 per cent from 51 per cent, allowing foreign airlines to hold up to 49 per cent stake in domestic airlines, bringing clarity to FDI in power trading exchanges by allowing 49 per cent foreign investments and opening up broadcasting industry to 74 per cent. The data released from the Department of Industrial Policy and Promotion (Figure 1) showed that India received 38 per cent less inflows into the country in 2012-13 as compared to the previous year. And these reforms were targeted to improve this situation.The big bang of reforms formed a part of a package of measures that are aimed at reviving the growth of the country and staving off a ratings downgrade. Looking at the positives of the reforms, these steps will help strengthen the growth process and generate employment in difficult times.The retail reforms will now allow the global firms such as Wal-Mart to hold a majority stake in the business and sell directly to the consumers. This is a major step aimed at transforming India’s $450 billion retail market and tame inflation. Previously, foreign firms were allowed to operate only as wholesale outlets. The foreign players will streamline the procurement process by removing the middlemen, offering better prices to the farmers, pumping investment into cold storage facilities and preventing the produce from rotting.But the reforms come with stiff riders. The foreign retailers are allowed to setup in cities with a population of more than one million and must source at least 30 per cent of goods from the local industries. State governments will have the freedom to decide whether to allow the supermarket and the minimum investment will be $100 million, with half

of that in rural areas.The aviation reforms will now provide a much needed lifeline to the India’s debt-laden airlines. Denial of access to foreign capital could have resulted in the collapse of a number of country’s domestic airlines, hence creating a risk for financial institutions. This would have led to a huge gap in the country’s infrastructure.The reforms in broadcasting will help boost

the on-going digitization process. This will help

consolidation in the sector and allow companies to invest in cutting-edge products and services for the consumer. It will also allow cable companies to start investing aggressively in broadband infrastructure services and help evolve a healthier ecosystem for all the stakeholders.The power sector reforms will help bridge the huge gap between the demand and supply in the Indian market. The power exchanges can now raise funds and bring in the advanced technology. This move is aimed at strengthening the power exchanges, enhancing the availability of power, improving distribution and introducing global best practices in India.While all these reforms definitely look attractive for the growth and revival of the Indian economy, much will still depend on how well they are implemented. A concerted effort from both the Central and State governments will be imperative to reap the actual benefits of the reforms.

Fig 1: FDI Inflows in India

8 August 2013

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The Companies Bill, 2012 is just a step away from becoming an Act. It has been approved by Rajya Sabha in August 2013 and will become an Act post President’s assent and notification in the Gazette of India. The new legislation promises to bring an easy and efficient way of doing business in India, betters the governance, improves levels of transparency, enhances accountability, tries inculcating self-compliance and making corporates socially responsible. The Companies Bill, 2012 (‘the Bill’) will replace more than half a century old Companies Act, 1956, with some sweeping changes including those in relation to corporate restructurings and mergers and acquisitions. Some of the key changes to look for are in merger/demerger processes, cross border mergers, fast track mergers between small companies and holding – subsidiaries, and provisions relating to minority shareholders’ protection and exit. The new Act will help in reducing shareholders’ litigation and making corporate restructuring process smooth and efficient. Concept of an independent director has been introduced by the new legislation. Every listed company should have at least one-third of the directors as independent. Every such board member should be allowed a maximum two terms of five years each. Also the independent directors should not have any monetary transaction with the company of a value equivalent to or more than 10% of the revenue.A National Financial Reporting Authority will be authorized by this new law, which will monitor compliance with accounting and auditing standards. It will also have the power to investigate auditors that are registered under section 22 of the Chartered Accountants Act, 1949.The new legislation will also allow class action suits against companies. A class action suit is basically a lawsuit in which a group of people file a claim before a court in which a specific class of defendants is being sued. This new law will also protect the interests of

minority shareholders. It will be made mandatory for an individual or a group of people acquiring more than 90% of the shares in a company to make an offer to the remaining shareholders to buy them out at an independently determined value.The new law takes into consideration transparency as well as it makes mandatory for the publication of consolidated balance sheets by companies with unlisted subsidiaries.The issue of corporate social responsibility has also been addressed by this new law by introducing ‘comply or explain’ principle. Instead of making such spending mandatory, it asks boards of companies with a net worth of more than INR 500 Crs. or turnover of more than INR 1,000 Crs. or net profit of more than INR 5 Crs., to spend at least 2% of annual net profit towards such activities. While non-compliance will not be penalized, companies will be required to disclose reasons for this.The law makes a provision to cap the tenure of a company auditor to a maximum period of 10 years. Also, the new legislation will permit inbound and outbound mergers.The Bill seems to have been welcomed by the industry as it is being considered as the government’s commitment to usher in the new era of corporate regulation.But some experts are of an opinion that the new law has fallen short of expectations as they believe that the provision of non-retiring directors should be scrapped and every board member should be a retiring director. Also, they are of an opinion that the tenure of independent directors should not be counted from the date of the passing of the Bill, but their past tenure should also be counted.Overall, the Bill provides an opportunity to catch up and make the Indian corporate regulatory framework a model for other economies with similar characteristics to emulate.

The Companies Bill, 2012


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India’s economy is big and is set to become the third largest in the world in 2050. Although we have seen near double-digit growth rates in the past few years, second only to China but still we have not grown with the potential and the plethora of opportunities which this landscape provides. Infrastructure is deemed to be the backbone of any economy but stalled infrastructure projects has proved to be a major roadblock in India’s journey of growth. Initiatives such as Public-private partnership (PPP), opening of economy have been taken in the past to woo the lagging infrastructure sector of India. Delays in getting approvals, loads of procedures, problems of land acquisition have all contributed to the current sorry state of India. In January this year, the much debated Cabinet Committee on Investment (CCI) came into existence. However, the committee had not been named National Investment Board (NIB) as proposed earlier, thanks to a majority of ministers raising objections to it. Prime minister will be the chairperson of the committee with 15 other cabinet ministers and 4 others as special invitees. CCI aims to identify projects which need to be implemented on a time-bound basis and involve investments of Rs. 1000 crores or more in sectors such as infrastructure, manufacturing, etc. It can prescribe time limits for issue of requisite approvals and clearances by the Ministries/Departments concerned in respect of projects in the identified sectors. CCI also monitors the progress and implementation of such identified projects. CCI is empowered to review the procedures followed by Ministries/Departments to grant/refuse approvals and clearances and can take decisions regarding grant/refusal of approval/clearance of specific projects that are unduly delayed, if deemed necessary.The experts are of the view that Cabinet Committee of Investment would bring transparency, efficiency, accountability and promptness in the implementation of major projects. As per the

Government data, the fate of projects entitling Rs. 2 lakh crores in road, power, coal and mining sectors is not clear owing to regulatory hurdles such as land acquisition and environmental clearances. As of today, an infrastructure project in India requires clearances from 19 ministries and on an average, 56 authorizations ranging from the environment to defense. All this process takes close to 24 months which is expected to be reduced in future with CCI coming to woo the lagging sector. CCI had faced a lot of criticism and objections from various ministries such as environment, defense to name a few. In early October, Environment Minister Jayanthi Natarajan deemed CCI as an unacceptable concept. She was of the view that CCI has no authority to check for the failure of any minister. Defense ministry was of the view that timelines are not feasible where matters of national security have to be considered. On the other hand, cabinet is of the view that the main purpose of setting up CCI is to monitor the large projects which will boost the Indian economy. Similar arrangements are already in place in countries such as Japan, Indonesia, Malaysia and Thailand. And if we see closely on how Japan has evolved over the period of time, we can say that such arrangements are bound to generate fruitful results for India. Some of the ministers thought of it as a substitute of Foreign Investment Promotion Board (FIPB) which it is not; as addressed by Mr. Chidambaram. CCI has already given clearance and issued direction for 171 projects worth Rs. 1.69 lakh crores since its inception. During late July 2013, CCI is believed to have cleared two major hydro power projects in Arunachal Pradesh, which have the highest potential in the country for the generation of hydroelectricity of over 50,000 MW. Hydro power contributes a little less than 19 percent to the overall installed generation capacity of around 225 GW. The success of CCI in such a short span of time has definitely caught many eyeballs and it is set to achieve greater heights in times to come.

Cabinet Committee on Investment

10 August 2013


DIRECT CASH

TRANSFERWidely believed to be the trump card of UPA in the Lok Sabha elections next year, the direct cash transfer scheme features prominently on this list. The apparent swiftness with which the Indian government acted on the introduction of direct cash transfers in India is perhaps unparalleled, definitely very rarely observed to say the least.Let us try to get into the whys and wherefores for the same. CAD has been the constant talk-of-the-town for quite some time now. In the fiscal year 2010-11, Government of India’s expenditure in subsidizing the retail prices of diesel, kerosene, LPG and gasoline amounted to a whopping INR 43904 crore (USD 9.6 billion) and it grew by 26.7% in the year 2011-12. Food subsidies provided by the central government increased by over 300% in a period of six years between 2006-2007 and 2011-12. The same has seen a 25-fold increase in a span of 21 years. The Union Budget 2012-13 attributed the deterioration of fiscal balance in 2011-12 to this steep increase in subsidies and pointed out that such a high level of growth in subsidies is not sustainable in the long run. Thus, the direct cash transfer scheme was driven by many factors like (a) Ballooning fiscal costs, (b) The manifold distortions resulting from the subsidies, (c) The successful examples of Cash transfer programs around the world, particularly in Latin America, as a means to address poverty and improve social welfare of the poor, and (d) Institutional and technological changes within India, particularly the on-set and rapid expansion of the Aadhar program which aims to give every Indian a biomarker-based unique identity and Swabhiman, under which every Indian is expected to have access to a bank account, bringing, for the first time, half of India’s population access to financial inclusion.Cash transfers will replace forty two different welfare schemes and cover the entire country. The

advantages of Cash transfers are quite evident. Direct Cash transfers will eliminate the long chain of intermediaries and subsequently reduce the cost of distribution to a substantial extent. This will prove beneficial for both the people as well the government. However, country requires completely different infrastructure in order to make cash transfer schemes successful in India. The ration shops that deliver subsidies by means of low priced essential goods would no longer be relevant and a cash equivalent of the subsidies will have to be distributed by a proper network of banks. The requisite banking facilities do not exist in the Indian villages, majority of beneficiaries are illiterate and, in spite of Aadhaar, may not have been properly identified.Also, if cash transfers are put in place, consumers will be on the mercy of highly competitive markets alone; who, then, will ensure that any price increase will be suitably compensated for in the new deregulated markets for all goods? And how will the government make sure that the transfers actually happen to those who are the intended beneficiaries? Another important facet of the cash transfer schemes that seems to be missing from the government’s current point of view is the sunset or the exit clause. In every case, cash transfer proposals must have a well-worked out temporal dimension. We must carefully consider possible exit options under which cash transfers might wane or cease, as beneficiaries’ status changes, program objectives are met, or critical effects urge a rethink of the direction of the strategy and its interaction with other priorities. Therefore, unless sunset clauses or incentives are built into the cash transfer programs that incentivize beneficiaries to move out of them, there will be a natural lock-in effect. Are we witnessing another reservation system in the making?

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The Asian Development Bank defines decoupling as the emergence of a business-cycle that is relatively independent of global demand trends and is driven mainly by autonomous changes in internal demand. The terms decoupling or recoupling are used to define the relationship of the economic growth and various other macro-economic parameters between the developed and the developing nations and the relationship is also known as the North-South relationship. The phenomenon of decoupling is majorly a result of change from export led economy to domestic consumption driven system. Correlation between the various economic factors pertaining to the developed and developing economies is the most widely used criterion to measure decoupling. A decreasing correlation that sustains itself for more than a couple of years exhibits decoupling, whereas a high correlation for a significant time period signals towards a coupled system.

Figure 1 shows a fair example of decoupling taking into consideration the annual growth rates of China (Developing nation) and USA & France (Developed nations). From the year 1998 to the year 2007, the developed nations experienced a dipping GDP growth rate whereas at the same time, China saw a continuously rising annual GDP growth rate.

Statistical studies have been conducted by Asian

Development Bank, JP Morgan, Wall Street Journal and independent researchers to measure the level of decoupling that various economies and the group of economies have displayed over the years. The most significant of these studies have included Asia and BRIC nations.

In order to find the answer to whether decoupling or recoupling is the answer to sustain growth in the uncertain times that we have witnessed for the last 5 years, (and continue to battle with) we will first look at a few factors that according to experts help any nation to maintain the momentum in the toughest of times and then decipher what each factor favors: decoupling, recoupling or neutrality. The various factors that we shall discuss are:

1. A Sound Financial System

2. Domestic Consumption Pattern

3. Trade between emerging economies

4. Gross Domestic Savings

5. International Reserves

6. Research & Development Infrastructure

Sound Financial System

If many of the Indians did not feel the heavy brunt of the global crisis in 2008, one of the towering reasons to thank for was the inherent strength of the Indian Banking System. Most of the economic crises start with the banks showing abnormal activity, as was exactly the case in the financial crisis of 2008. A single financial institution going bust can throw the entire economy into recession, hence it is mandatory to have a stable financial system at the heart of the economy. Strong Fundamentals in the Banking and Financial Sector shield the economy from uncertain global financial environment.

BASEL II norms required a minimum of 8% Capital adequacy Ratio (CAR) for the banks which was further incentivised by the RBI in India. The result was an average CAR of 14% for all Indian banks when the crisis hit the world market. The fact not only saved the

SUSTAINING GROWTH IN UNCERTAIN TIMES:

DECOUPLING OR RECOUPLING

FMS Delhi Pranjal Bhardwaj

Fig 1: Comparison of Annual GDP growth rates of China, France and USA

12 Anniversary issue August 2013


banking sector but led to a healthy lending scenario in the country thus keeping the ‘animal spirits’ in the markets high even at the time most of the nations were struggling to keep their economy afloat.

IMF Fiscal Monitor has created the Fiscal Vulnerability Index which measures how vulnerable the Fiscal system of a country is to any financial crunch that happens elsewhere on the globe. Countries like India, China, Indonesia and South Africa are rated much above most of the developed nations thus explaining the less influence felt by these nations during the toughest of times the world went through a few years ago.

The next question is, whether the sound financial system signals decoupling, recoupling or none. If a developing country’s financial system closely follows the turn of events in the developed nation which is highly regulated even now, a small hit in the north economies can translate into a jolt for the south economies. Thus, this all important indicator favours decoupling as a measure for sustaining growth in India.

Domestic Consumption Pattern

The secret of sustaining growth at any point in time is keeping the industries in the country running and consuming all the goods and services produced in the economy. The good and services so produced can either be consumed internally (domestic consumption) or can be exported to other countries. Though the exports from any country are always encouraged, mainly to set right the balance of payments, there is an inherent risk in overdependence on exports. If the economy that is an importer of a country’s goods goes through a tough phase, the exporting country finds itself in a big fix. Either it should find new avenues to sell its produce to or should consume it internally.

In order to set this right, the countries like India and China have, from time to time, infused reforms

to improve the domestic consumption. China’s 12th five year plan has at its core the ideology of bringing the low income families across the country into the consuming population so as to reduce its dependence on exports. According to the World Bank report, India’s global consumer spending which stood at 14% in 2011 is expected to rise to 20% by 2025 and a whopping 40% by the year 2030, substantiated by the rise of the huge middle class in India.

The Domestic Consumption indicator for all money favours decoupling as the preferred state for sustaining growth, as too much exports from a developing country to a developed nation leads to dependency and hence in times of uncertainty can become a bottleneck in the growth of the emerging economies.

Trade between Emerging Economies

When the countries like India and China first started the exports of their goods and services, the major destinations were the highly developed economies of North America and Europe, but the scenario has changed significantly over the last 2 decades. In the period from 1991 to 2011, the trade between developing economies as a share of world trade doubled from 16% to 32%. The 2008 recession forced the developing nations to find new places to sell their goods and services and as a result, the south-south trade growth accelerated to 1.5% per year as compared to an average growth of 0.8% per year before 2008. Moreover, these uncertain times have made the US an unfavorable destination for exports. The share of exports to the US from emerging economies has decreased from 25% to 15% in the last one decade.

The idea is simple. The emerging economies that have found sparkling growth in the last 10-15 years do not want to lose this advantage by putting all their eggs in one basket. Figure 2 shows the proportion of trade between the advanced and the emerging economies as a percentage of the total trade. The comparison

Fig 2: Export Import Share of Different Geographies



between the data for 2000 and 2010 indicates a drastic shift from the advanced economies to emerging economies as the preferred destination for almost all the emerging economies. This is perhaps because all these economies realize that they need to diversify their risks if they want to maintain the high levels of growth.

Again, trade between emerging economies that proves to be immensely important in maintaining growth at all times clearly states that decoupling is more sustainable.

Gross Domestic Savings

When the income levels dropped during the crisis of 2008, many Americans found themselves sleeping in the car and doing sundry jobs just to meet their daily requirements. The story does not end here. The spending rate in the country dropped to an all-time low thereby putting many companies out of business. This led to many people losing jobs or salary cuts, hence a vicious cycle. At the same time, most Indians just withdrew money from their savings account and continued living a life that was no different from the pre-crisis period. The companies kept producing, the middle class kept consuming and the economy kept thriving.

Figure 3 shows the gross domestic savings in USA, India and China. USA has a dismally low savings rate. At the same time, all the BRIC nations have considerably high gross domestic savings. It is assumed that more spending leads to more growth and is true to a certain extent, but there is absolutely no doubt about the fact that when times get tough, it is the savings that keep the economy running.

The next step is to ascertain the affiliation of savings Rate with either decoupling or recoupling. The Gross Domestic spending of the developed and the developing economies have a low correlation as can

be seen from the figure 2. The last few years, the savings in south countries have increased while the opposite has happened in the north countries. Thus a decoupled system is observed and has proved beneficial for the emerging economies. Hence, this factor again goes in favour of decoupling.

International Reserves

International Reserves include Foreign Currency Reserves and SDR’s (Special Drawing Rights). The foreign currency reserves are mostly held in dollars and a small portion in Euro, British Pound and Yen. The international reserves are useful to a country in ways more than one. For one, they allow the holding economy to repay its international debt in time and thus maintaining a good credit rating. A good credit rating results in an easy availability of credit from international organizations like the World Bank, IMF etc. The huge expansion that the Indian National Highways have witnessed in the last 6-8 years is a result of the funding that the World Bank has extended to India.

Second, the International Reserves (IR) allow the government to stabilize exchange rates to provide more favorable economic environment for the businesses in the country. Also, the International Reserves protect a country from capital crisis provoked by an attack on the currency by speculators.

China has accumulated the maximum foreign reserves in the world with the figure crossing $3.3 trillion. The only other country with reserves in excess of $1 trillion is Japan. The Indian IRs which stood at $295 million at the beginning of the year 2013 have shrunk to $278 million as on August 16, 2013. Almost all the countries with top 10 International Reserves were less hit by the recession than the countries with lower reserves.

So where does International Reserves point to? Again the answer is decoupling as once an economy

Fig 3: Gross Saving rates in China, India and USA during 2000-2011



has sufficient reserves, it can shield the external abnormalities by stabilizing the exchange rates and thus providing an insulated habitat for all its corporates.

Research and Development

India is the largest importer of arms in the world. What if any of the arm supplier companies faces a financial crunch due to low availability of credit or a bad economic scenario in its home country? We might well end up under equipped on the sensitive borders of the country. Similar is the case with oil exploration technology, aircrafts etc. Not only this, we pay huge sums of money for importing technology that ultimately depreciates our foreign reserves. So, what is the answer to this burning problem?

Building the research and development culture in the country is the only solution to overcome this dependency. One excellent example is the medical treatment in India which has attracted people from all across the globe owing to the low cost and high quality. The generic medicines produced in the country are exported to more than 100 nations.

Realizing the benefits of R&D spending, the developing countries have started investing more in building the R&D capabilities while the developed nations have decreased their R&D spend because of the financially testing times.

Figure 4 shows the change in the R&D spending by the major developed and developing countries from the year 2007 to the year 2012.

An increase in the Research and Development capacities of a country makes it self-sufficient and once again less dependent on the more developed peers. And once again this limited dependency brings about decoupling as the preferred factor over any others.

Conclusion

Decoupling, as per our discussion, has clearly emerged as a preferred alternative over recoupling. All the factors have unanimously voiced in favour of decoupling. But

then the big glaring question arises, is decoupling really an option available to the developing countries? Unfortunately, the answer is no. Most experts believe that with the level of globalization that the world has achieved today, every event in any part of the world is bound to have its influence across the continents and oceans. To sight an example, the probability that a diamond being used in any part of the world was cut in India is more than 99%. Similarly any garment being used in India has most probably been woven by a worker either in Bangladesh, Indonesia, India or China. Boeing sources its raw materials from more than 130 countries to make one Boeing 737 aircraft. With such a scenario decoupling is a distant probability.

Let us consider for a moment that even after all these difficulties we still are able to realize a decoupled system. What are the possible problems with such a scenario? The first and foremost is the loss in the gains that a country can have if the developed countries go through a purple patch. Second and equally important is the transfer of technology that will be hindered if decoupling actually takes place. Third, a large number of jobs that the developed nations have created in the developing nations through outsourcing will take a hit.

So, was the analysis above a waste? The answer again, but fortunately this time, is no. Though the factors discussed above might not decouple the system (and no country might actually want to completely decouple the economy either) they can definitely provide a very useful shield to the developing countries that can substantially mitigate the effects of crisis in different parts of the world. Working upon these factors can let the developing countries have the best of both worlds. It might eventually make the south countries an even more preferred destination for the north economies to do business in. It proved to be true in the 2008 financial crisis and can again help India script its revival which the entire world desperately wants (India has constantly underperformed than its potential) in the times to come.

Fig 4: Research & Development Costs



A TRYST WITH THE EXPERTS

For a growing country like India, in order to sustain growth in uncertain times, that we are facing today, what is the solution, decoupling or recoupling? My answer would be that decoupling is no more an alternative available to a country like India. One has to accept membership in the global economy. Having said so, there are ways in which you couple. The important thing to sustain growth is to set the terms of globalization based on your country’s position. Asian Development Bank defines decoupling as not complete independence but a very low correlation with external economies where demand is fuelled by internal consumption and a sound financial system. So, when China & India came out of recession very fast, wasn’t that an example of decoupling? Wasn’t a self-sufficiency condition displayed, wherein India and China could sustain growth even when US & Eurozone were not enjoying the best of times?In a way, yes. There are different types of recoveries for an economy. First is a V-shape recovery, the one which India took, then there are U-shapes, the one that UK is doing and there are L shape in which you never recover and that is what is being feared now. The concept of potential growth limits the boundaries. If all your resources are employed productively, you could reach a certain level of growth which we call the potential growth. In India we thought we had a potential to reach 10% but the way things are today, the global economy might go through a long U shape or L shape. Looking back at the crisis that struck in the year 2008, by the year 2009, most countries came out of the crisis before crashing, even the developed countries. If you see, for the first six months, it was a v shaped economy. India rose faster than the line but there was a v shape recovery all over which could not sustain its strength. The issue is of sustaining the recovery. Now talking about the correlation,

our exports & world exports are 0.9 correlated. Our investment & global investment is a 0.9 correlation. Only the consumption has low correlation and the good thing about us is 60% of our demand is consumption. So we have an inbuilt measure of strength in our consumption that perhaps helped us recover faster.

As you said, to sustain in diffcult times, fiscal & monetary policy are the tools to be used. So what can a fiscal policy or a monetary policy in particular do in order to help the country maintain its growth? These two policies can together manage the aggregate demand. So the first issue is to see the reality. What is the aggregate supply? What is the country producing? Manage aggregate demand to that level of supply. If you do not do that, you will get bursts of inflation. Having managed that you then do other sets of policies like reforms that improve productivity, that improve competitiveness, land acquisition, environmental clearance, things leading to supply constraints. Then raise your supply to higher levels. After that you encourage demand to grow at a faster rate, but you must keep the balance all the time. Otherwise a little growth in supply will get lost in inflation.

Talking about reforms, how much do HDI or human development reforms affect aggregate demand or the entire fiscal position of a country?Human development decides the quality of reform. There can be quality of reform as well as quantity of reform. A very good example of how reforms can change the scene is our Airline industry. Around the turn of the millennium, the airline services started deteriorating. The airports started looking like bus stands. So what we did was to launch a massive program to build better airports. Once that was done we needed airlines that provided quality services. With airlines growing today, we allowed FDI in

DR. MICHAEL DEBABRATA PATRA

Adviser-in-charge, Monetary Policy Department, RBI

16 August 2013


airlines. So the first deal that was struck, Tata tied up with Air Asia. With the foreign money coming in, the services will improve. Jet Airways & Etihad are on the border line. So the quality of service will get upgraded. Another example is of our agriculture. On the supply side policy, we were not producing enough. So we brought the green revolution. We brought in three things – Irrigation, High variety of seeds and last but not the least “Technology”. Today we are the second largest exporter of rice. If we stop exporting, rice market will go into doldrums. We are the second largest wheat producer in the world. We became self-sufficient in wheat and we don’t import it anymore.

Talking about factors like the total international reserves of a country, the sound financial system, the trade between emerging economies, the internal consumption and HDI. Do you think these factors can help in maintaining growth in uncertain times? Let’s talk about them one by one. The first and the foremost according to me is the sound financial system.

What are the measures of a sound financial system?There are technical measures like how much capital is there in the system, how much capital banks have in stock to use if it runs in to any difficulty. So we use the capital adequacy ratio. We assign risk weights to the assets. Govt. security have zero risk involved, state government security has a 25% risk weight, corporate security comes with 50% risk weight and commodity has 100% risk weight. Using these weights, we value the asset base of the banks and mandate them to have a minimum of 9% CAR in cash form and we incentivize the banks to adhere to this number. As a result today, the Indian Banking system has a capital of 14% which stood the pillar of our strength when the crisis came.

What would be the next most important factor to sustain the growth in turbulent times?Second I would go with International reserves.

So what role do international reserves have in maintaining the growth? The rupee has deteriorated a lot in the last few months, so what can RBI or Indian Government do to ensure maintaining a healthy international reserve and isn’t the falling reserve hampering the growth?There are two ways in which rupee dollar rate effect growth. When the rupee dollar rate goes from 45 to 55, the imports become costly and its exporter’s

benefit. Exporters earn more and that boosts growth. Suppose some of the inputs you can’t do without like oil have to be imported and the Indian public will not stop buying oil even if the price is high. So we run into a deficit. To that extent it also effects growth. But if we use these inputs wisely i.e. instead of importing oil, we import greater proportion of machinery and transport equipment, that can be used to produce more, then it can fuel growth in the future.

What would be the third one?I would put the Savings rate at no. 3

Savings rate in China are much higher when compared to India. US lags behind in this parameter. So how does the savings rate help us in maintaining growth? For our type of country, savings rate plays a crucial role in maintaining growth. But higher savings does not make me happy as an RBI personnel. High savings tell that there is too much wastage of capital. In US, they manage with 5% saving, they are efficient in the usage, but that can happen at an advanced stage. At this stage of our economy high savings rate is important because the less you depend upon foreign saving, the better it is, especially at times like these, when the question about decoupling or recoupling keep flashing in.

Among the seven factors, which according to you are other major factors that can actually help us in sustaining growth and not being dependent upon US or Europe for the coming five years?



First, we need to get our fiscal house in order. Because fiscal house is overspending and it is causing inflation. Then, I would classify factors into short term & medium term. In the short term, I would get balances right, fiscal balances, current account deficit balance and inflation. You see I haven’t mentioned growth at all because it doesn’t matter to me. I don’t mind going with three or four p e r c e n t growth but I want the b a l a n c e s r i g h t b e c a u s e they are the ind i ca to rs of future g r o w t h . Once that is done, I need to engage in activities that can improve the productivity of the economy.Let’s look at one more thing. In our country, when the f a r m e r p roduce s , he has to sell the produce (that very moment) because he can’t store it. If he doesn’t sell, the produce gets wasted. Cold storage facility would ensure that the farmer gets his fair share. Now the subject of middlemen. When the farmer doesn’t find any government agency to sell his produce to, he has to sell it to the middlemen who take it at a cheap price. So we need to invest in cold storages and cold supply chains, not only starting with the farmer buy also transport, store houses, warehouses in various places, maybe even in futures. He sells in futures. He has got his price already. So that’s a very important part of the entire policy. We need to engage in building knowledge. China will strive to be the shop floor of the world. We should strive to be the offshore center for the world and we are good at that.

Recently China has surpassed US in the no. of patents being filed every year. So China and India have increased their spending in Research and Development while at the same time US and Europe have decreased. How do we ensure a good growth in the Research and development front?

In a country like ours, the first initiative has to come from Public Sector. I will earmark 5% of my spending on R&D, from bottom to top. Every aspect of R&D will be covered by the g o v e r n m e n t . So when the g o v e r n m e n t does that, at the time when the Research & D e v e l o p m e n t capacity of the country is under-utilized, it will do ‘crowd in’. It will crowd in private enterprise which will spend on R&D. I will give you an example. Why the agriculture is languishing is because there is

no capital investment in agriculture. Though, GoI has a participation level of around 25% in capital formation in agriculture. But what’s there is flaw? Of this 25%, 90% is given as subsidy and 10% in investment. Investment in irrigation and storage. If you just flip this score, we will the one of the world’s top agricultural country.

18 August 2013


They say that desperate times call for desperate measures. India, as a nation, is reeling today as the Rupee is in a freefall, the global economy is down and due to the Indian love for Gold, the Current Account Deficit, or the difference between imports and exports, has burgeoned to unsustainable levels. Quantitative Easing in the US and Abenomics in Japan are the two unconventional methods which have been employed by the respective governments to revitalise the economy. Can Indian government look towards a radical new currency i.e. Bitcoins instead of the weakened Rupee to revive investor confidence and script ‘The Great Indian Revival’? But first. . .

What Are Bitcoins? Though a lot of people today might not have heard about this currency; still it is increasingly being seen as the dollar of the future. Now, what is Bitcoin and why is it such a big deal?

Bitcoin is a decentralized digital currency that enables instant payments to anyone, anywhere in the world. Interestingly, unlike fiat currencies which derive their value from government regulation or law, Bitcoin derives value from computer processing power. Simply put, if user A can calculate complex puzzles using his computer faster than user B, user A gets 50

SCMhRD S Abhishek

bitcoins whereas user B gets nothing. Bitcoin, the brainchild of Japanese IT whiz Satoshi Nakamoto, is generated by the following ‘process’ – Complex cryptographic puzzles are randomly generated by a pre-defined computer program at a fixed rate, and transmitted to a network of volunteer bitcoin ‘miners’. Using open-source software freely available and insanely high speed processors, miners crunch data to solve these puzzles. Naturally, the first miner to solve it gets 50 Bitcoins. The program has been preset to generate puzzles till 2140, when it will stop after having generated 21 million Bitcoins. The number of new Bitcoins generated is halved every four years until 2140 when this number would be rounded off to zero. At that time, no more bitcoins will be added and to accommodate the limit, each bitcoin is subdivided down to eight decimal places, forming smaller units called Satoshis which will number 100 million per bitcoin. Since the puzzles are insanely complex and require ultrafast processors, mining is the sole purview of IT professionals and the rich who mine bitcoins and then trade them online.

Why Bitcoins?Each bitcoin buyer gets a digital wallet to which only he retains an encrypted private key. Each

Is Bitcoin the

currency of future ?



user transaction can only be initiated by the user using his digital key for authentication. As of 17th August 2013, 1 bitcoin equals a whopping 98.53 Dollars! Pricing, as stated by general economics, is always driven by demand which has been steadily rising for bitcoin due to the following factors:

1. General perception that the world economic system is inherently unstable and headed for collapse leaving all paper money, well, just that- paper!

2. Users who want to remain anonymous since the digital domain offers secrecy – Illegal arms traders, drug dealers and the likes.

3. Speculators and millennial who feel the Internet will soon take over the real world.

4. Advantages of Bitcoin since there are no financial institutions to mediate between buyers and sellers and also the absence of regulation by banks and governments, whose ‘bad’ financial sense is being seen as the main factor for the collapse of world markets.

5. Since the currency is electronically encrypted, they are more difficult to counterfeit as compared to fiat currencies.

6. Bitcoins can be easily sent through the internet, without needing to trust any third party.

7. Bitcoins can be transferred extremely fast (as in instantly) with almost zero time lag!

Bitcoin solves many problems which have plagued paper money since centuries. They can’tbe created by banks, individuals (counterfeiting) or governments (printing). They are a form of ‘virtual gold’, made for the internet era.

Bitcoins Around The WorldBitcoin is quickly gaining acceptance across the world as more and more online retailers start accepting digital money. WikiLeaks and other major organisations across the US and Europe have started accepting Bitcoin as payment and certain companies in the US have also started paying their employees a certain percentage of the salaries in Bitcoins. As online commerce increases exponentially and the world shifts online, Bitcoins are truly going to become the most common and preferred choice of currency.

Though introduced only in late 2009, Bitcoin have quickly gained traction and the Bitcoin economy is now worth more than 1.1 billion dollars. There are around 11.5 million Bitcoins

in circulation worldwide and more than 70,000 trades happening daily. It is estimated that investors trading in Bitcoins generate an average daily profit of around $681,000 which is increasing steadily.

The growing clout of Bitcoins can be seen through some of the recent developments around the world. Argentina, where inflation has been rising at highly unsustainable levels, making life increasingly tough for the middle class. Argentinian, has seen a 30-40% surge in the value of Bitcoins. The growth of Bitcoins in Argentina has zoomed with Bitcoin downloads rising exponentially. In an economy where the people are slowly but surely losing faith in government economic measures, Bitcoin is being dangled as a safe haven. A similar effect can also be seen in neighbouring Uruguay where again inflation is on the rise and paper money can be seen as losing its value.

Another example is Kenya, where already mobile SIM card powered M-Pesa (digital currency) is popular. But for the huge number of Kenyans who work abroad, remitting money back home is an onerous, time-consuming and costly affair. Bitcoin, with little to no extra charge and extremely fast transfer, is again the saviour here with more Kenyans looking to take advantage of it.

Icelandic currency expert Sveinn Valfells has a radical suggestion for the Icelandic government – Iceland should adopt Bitcoins as the national currency so that people can weather the brutal economic climate destroying Europe. Iceland is facing double-digit inflation. The past examples have shown that an alternative form of currency can help the country emerge stronger from a recession as Iceland itself has seen. In the 1970s, Valfells Senior introduced vouchers as an alternative form of currency in Iceland which eventually the Icelandic government accepted as payment for taxes and helped Iceland survive the tough economic climate then.

When the Cyprus banking system collapsed earlier this year, people who had invested in Bitcoins became instant millionaires as the value of bitcoins surged to $265! Bitcoin is even being seen as a threat to Gold, which until now didn’t have a proper competitor as an alternative to paper money! Bitcoin mimics Gold in the sense that it has limited supply but while more gold may yet be found, Bitcoins has a predefined limit, hence enhancing its value

20 August 2013


over the long term. Also Bitcoins are hard to steal and don’t require armed men or vaults to guard them, unlike Gold. Last but not the least, digital currency is least likely to be manipulated by the government and financial institutions since Bitcoins don’t have any central authority controlling them. Gold is expected to face a strong threat from Bitcoins in the near to distant future since other than as an alternative form of money, gold is nothing more than a decorative metal.

Why Bitcoins In India?Now why would bitcoin be relevant to India? Primarily seen, four reasons are plain obvious:

1. After petroleum, gold is India’s biggest weakness which led to an unhealthy Current Account Deficit currently. India imports massive amounts of Gold leading to a monstrous gap between imports and exports.

2. The Rupee which depends heavily on global factors is on a freefall and requires intervention by the Government of India and the Reserve bank of India. The central Bank had raised interest rates several times in the past and the government’s borrowing costs have also gone up whilst defending the Rupee. The defence of the Rupee has also tied up the government’s hands in implementing key economic reforms aimed at kick-starting India’s growth back to where it belongs.

3. India is home to more programmers/ IT professionals than majority of rest of the world.

4. A vast majority of the country has no access to Banking services but mobile services are more deeply penetrated.

Free-thinking optimists believe that Bitcoins may just be best thing to happen to the unpredictable world of modern day finance and those who gain the first-mover advantage now will stand to make millions hereafter. These supporters which include IT professionals, web developers, venture capitalists, and investment bankers have joined in to market-standardise and promote Bitcoin in India and their tribe is growing furiously!

What makes Bitcoin so interesting and alluring is the fact that the entire Bitcoin economy is based on principles of liberalisation, democracy, transparency and absolute simplicity! Money may instantly be transferred from any point on the planet to another instantly and at little to no cost. Such a currency is the absolute need of the hour: Money whose value cannot

be manipulated by governments and financial institutions, who work for their own selfish interests since at the end; Bitcoin is just a piece of code!

At the moment there are around 3000 traders trading in Bitcoins in India and with average gains of around 300%, Bitcoins are booming. Also, since Bitcoins are non-taxable and do not attract VAT, it is a paradise for Bitcoin investors.

What India Should Do?India must first introduce a slew of comprehensive measures including:

• Payment through Bitcoins: India should start accepting payments through Bitcoins for tax payments, fees, custom duties and the like.

• Incentivize Bitcoin-based businesses so that new companies start accepting payments in Bitcoins and use Bitcoins to pay salaries to employees and in other transactions.

• The Government can invest money saved in national pension schemes in the Bitcoin market, start setting up digital financial institutions which promote, scale and standardise Bitcoins and which may convert ordinary cash into Bitcoins. Also, Bitcoin-based bonds may be issued by the government.

• Introduce digital finance courses across the various educational institutions in the country so as to position India as the digital financial hub of the future. It can also offer expertise to other countries which may want to follow India into the future of finance when they realise their present economic model is unstable and unviable. India can thus accelerate its ascension as a world superpower.

What India Stands To Gain?• The smartphone market is exploding in India and Bitcoin banking may be offered to more than 40% of India’s population which don’t have an access to the banking system.

• India is the world’s leading receiver of remittances, receiving more than 15% of the world’s total remittances. Bitcoins offer an extremely quick and cheap way to send remittances back to India, enabling easy flow of money to India and increasing growth of India’s GDP.

• The internet industry, which research has found to constitute around 20% of the GDP in developing countries would enjoy unprecedented growth once Bitcoins are standardised and introduced.



• While Gold is just a ‘refuge’ from the ever rotting world financial system, bitcoins offer a real ‘solution’.. Once Indians realise that Bitcoins are more valuable than gold, they would start investing more in bitcoins since gold is just an alternative to paper money at the end of the day.

• Over the past 4 years, the value of fiat currencies around the world has fallen relative to gold but the biggest surprise has been the fact that bitcoins have absolutely crushed gold in terms of value! If you paid a gram of gold to buy bitcoins 3 years back, today you will receive 4 grams of gold in return for those bitcoins.

• Bitcoins eliminate dependency on ‘too big to fail’ banks and are the precursor to a new era of digital finance.

• PayPal, which is the leading player in the world of online, digital payments has blocked access to its features in more than 60 countries due to security issues, including India. Bitcoin, having no central authority, cannot be blocked and would allow transactions to take place between businesses around the world in the digital domain allowing growth of business in today’s internet era. Bitcoin ushers in a new age of digital economy, offering everyone equal access and opportunity, truly flattening out and ironing out the world economy’s inherent problems in a very literal sense.

• In this age of cost-cutting, small businesses and start-ups, which are the engines of growth in any developing economy, can save huge amounts of money by accepting Bitcoins since they drastically cut down transactional costs which account for nearly 10-12% of the total costs in any business.

• Bitcoins would reduce India’s dependency on Rupee and would free up the Reserve bank of India and the government to focus on other vital areas to speed up the growth of the Indian economy.

• Taxing the Bitcoin trade in India would open up a new revenue stream for the Indian government.

Bitcoin does have its shortcomings, among which is its price volatility, inspired by

its limited supply and investor speculation. But in an increasingly

uncertain world, where fiat currencies are increasingly

becoming volatile and the governments and premier financial institutions can no longer be trusted to do the ‘right’ thing, Bitcoins are becoming an increasingly attractive option.

Decades of research has shown that the strength of an economy lies in the trust that exists in its currency. If Bitcoin can become a trusted

form of economic transaction, then

there’s no stopping it from becoming a safe

haven for those living in volatile economies: which

funnily enough, is a broad enough definition covering the

entire world going through turbulent times today. Old just may not be gold anymore!

History has shown that the pioneers who embrace change wholeheartedly and before anyone else, stand to reap untold benefits and riches. The future ahead is clear since Bitcoins are going to take over the world of finance sooner rather than later but the million dollar question or should I now say: The million Bitcoin question remains: Is India ready to say ‘Goodbye gold, silver and paper money; Hello Bitcoin!’

22 August 2013


April 2008: IPL Season 1

October 2008: Indo-US Nuclear Deal

February 2012: 2G Scam VersionDecember 2012: Launch of MCX

August 2013: Food Security Bill



January 2009: Satyam Scam January 2009: Eurozone Crisis

March 2009: Launch of Tata Nano

July 2010: Terminal 3, Delhi Airport

October 2010: Commonwealth Games

April 2011: Beginning of Lokpal Movement

24 August 2013


DR. CHINMOY GHOSHProfessor and Head of the Department of Finance,

School of Business, University of Connecticut

2008 saw US and the Euro area being hit by the financial crisis. Today, 5 years down the line, U.S is showing healthy signs of recovery and the Eurozone is also seeing some spark with an improving PMI, whereas India and China are showing signs of slowdown. Are we looking at two different blocks of developed and developing economies which are performing opposite to each other?The first thing we need to acknowledge is that both India and China are highly dependent upon the U.S. economy. To give you an illustration, the probability that the shirt I am wearing was made in the U.S is close to zero. Almost all of the garments today are being made in one of the 5 developing countries: India, Bangladesh, Malaysia, Indonesia or China. The second thing that is important to note is that it takes some time for the demand in the U.S to go down after a crisis. Hence it is no wonder that when the turmoil hits a country like the U.S, the effect of the same reaches the country that are supplying material to them with a lag and it is exactly what we are witnessing in the case of India and China. The demand in the U.S started falling only after 6 to 8 months the crisis hit the country, but I will agree with you that the lag is much longer than we all expected.

So, is the slowdown that we are seeing today in India a spill over from the 2008 financial crisis that hit the U.S market?Actually, it is a combination of a number of factors one of which is definitely the financial crisis of 2008. There is some political aspect to it as well, in the sense that there is a strong sentiment in the U.S that the economy is very

heavily dependent on countries like China and India and some of the jobs need to be brought back to the U.S. There is huge pressure on the Obama government to bring some of the jobs back to the people in the U.S, especially in the manufacturing sector. Though, this might never happen, but just the fact that the U.S government is thinking in this direction is ought to have a negative effect on India and China. And to add to it, I think that this decision by the U.S will affect India more in the short run than China because China has diversified well by setting up operations in many other parts of the world like South America and European countries whereas India is still very heavily dependent upon the orders from the U.S. But in the long run, the situation might as well reverse because India is much more free society than China is.

China over the years has become a very important player in the global markets and to the extent that any event in the Chinese Economy influences the sentiment of the people in the most distant economies of the world. Considering this, how worrisome is the current slowdown in the Chinese market for the global economy?Not very worrisome really. First, the U.S economy is very resilient. It has strongly emerged out of the recession. The stock market is doing even better than before the crisis. The housing market is back on track. The job market though not yet back to its pre-crisis levels, but is doing much better now. So, very soon the U.S will share the dais with China as the sentiment maker of the investors. Second, as I said, China has strategically diversified its operations across




sectors and geographies unlike India which has focussed mostly on the IT jobs and only in a few geographies and hence, I expect China to be back to its high growth trajectory very soon. So, the current slowdown is only a matter of time and we shall see good growth in the near future.

With the U.S markets coming back to its pre-crisis levels in the near future, will we again see a brain drain from India?I don’t think so. People’s needs and wants are very simple. They want good education, and then they want to get married, have children, have a home and a car, travel once in a while and go to a good restaurant at times. When they retire, they want to have sufficient resources to take care of themselves. That is all a person wants. This model is far more within reach now for an Indian than it was when I left the country. So, whatever the U.S has to offer to the Indians in terms of the material and monetary benefits is now available in our country itself. On the other hand, a lot of Chinese are still attracted towards the U.S mainly because of the restrictions that are put on them in China and also because the educational infrastructure in the U.S is much better than in their home country.

What does the present downslide in the Indian Economy mean for the global markets and India as a country?I don’t think it means a whole lot. The fact that India is among the top 7 economies in the world at present does make the other countries take note of the slowdown in the Indian Economy but I do not think that the slowdown is permanent. The middle class in India is very big and their aspirations have changed over time. The negativity about the economy doing badly is just a matter of time. Also, the negativism in the country about the economy is coinciding with the political instability. There is a lot of dissatisfaction among the people for what the politicians have been involved in and they are right. This political problem is perhaps the biggest problem that India is currently facing. If we set it right, I think most things will get back to where they should be. If we take the case of Sweden and

Finland, when they went into recession, the measures they took to come out of it saw the domestic lending going down but the government lending went up. Eventually, the GDP started growing and we saw a recovery. So can we do something on similar lines in India?The Indian economy is a little different. The economies that you talk about are much smaller than our economy and hence they can do many things that are not practically possible in India. The income disparity is much larger in India than in any of the western economy. Most of the government policies only benefit around 5-10% of the total population and that is the major problem here. How do you actually do something that benefits not only the middle class but also the poor people of the country? The distribution system is just not there to reach out to the destitute and hence we are not able to bring those people up. What will work for us is the large middle class. The huge demand from the middle class will keep the economy afloat as long as the political stability remains in the country.

The rupee has seen a free fall in the last one month. It stands at its all-time low today. What can the government do to stem this fall?The one major action that the government needs to take is to invite investments from abroad. Remember this; one thing that excites Americans is dollars. They will go wherever there is business without caring whether it is India or China. America knows that the development in India is for real, the middle class is highly educated, very talented and they are not going to give up on this opportunity. Just sending out positive signals is all it needs to invite business in a highly lucrative market like India.

Recently, a lot of FDI norms have been relaxed in India. How do you see these factors affecting the overall economic situation in India?Definitely these factors will bring in more money into the Indian markets which is for obvious reasons a healthy sign. But the thing to note is that this money comes at a cost in the sense

26 August 2013


that the Americans will be more influential in the Indian market. The managers will be put under tremendous pressure and the work ethics in India will have to change. It is a kind of pressure cooker situation in the U.S that means that you have to work in order to survive and the same will have to be replicated here. There is another school of thought that says that the Indians are self-sufficient in running the show and it opposes giving a large amount of control over the Indian Economy to the outsiders which it says may not be prudent.

Most of the FDI inflowing into India until a couple years ago is today headed towards Indonesia, Malaysia and Thailand. What can be done to bring this FDI back into India?There is no need to do anything because it’s natural. There is always a time horizon beyond which the rate of return from an investment starts dropping. India has come to that stage where the labour charges are much higher than in the countries in question. So it’s very natural that the money will move out.

So where do you see India headed from here?I think India should be headed in the direction where it is not highly dependent on the investments from the U.S. And the Finance Minister is trying to do just that by pumping in more money and trying to keep the interest rates low.

Any message that you would like to give to the readers of our magazine?I travel all over the world and interact with a lot of young people. One thing that I observe is that Indians are placed really well, mostly because of a strong educational infrastructure and a great command over English.

What is your mantra of success in life?Hard Work. There is no substitute for hard work. Another important measure is that one needs to take calculated risks in life. Some of them will work, the others won’t. When I went to the U.S, I was barely 21.I didn’t have to go, but I

did and that was a calculated risk. Most of my batch mates are today at very high corporate positions all over the country. But I am very happy with what I have done and that is another important thing. You have to be happy doing what you are doing otherwise don’t do it. People often complain that they don’t like the job. That’s a wrong attitude; you have to find ways of liking your job. The job is not going to change according to you. The people who are happy with their work is not because they were lucky, it’s because they think every day is an opportunity for them to prove themselves.



How to attract FII and FDI to the

Indian markets?

iiM luCknow

Deepak Sharma & Rohit Sonawane

Foreign Direct Investment (FDI) and Foreign Institutional Investors (FII) are getting widely known, primarily because of the consequent win-win situation. FDI inflows benefit at least two stakeholders. First, the farmers, who get better facilities for selling their products without any wastages. Second, the consumers, who enjoy low cost products because of efficient processes. FIIs, on the other hand, are focused primarily on strengthening the economy. FIIs are short term investments helping India in bridging its Current Account Deficit (CAD). Budget deficit in India can be justified as it is a developing country. Also, India, as a country, is a net importer, thereby, giving rise to CAD. But is CAD bad? Well, not exactly. If India is able to get capital inflows to balance the CAD, then there is no problem. But if there are not sufficient inflows to fulfill the CAD gap, then the major problem begins. It leads to weakening of

the currency. In fact, a significant amount of rupee depreciation in recent times is partly attributed to CAD not getting bridged. This is where FDIs and FIIs come into play. These two are meant to bring in capital inflows. Countries are seeking FDIs and FIIs not only to strengthen their economy but also to develop their society as a whole. Everyone in the country is concerned with our stands with regards to capital inflows, be it politicians or economists. The rationale, therefore, suggests that FDI and FII inflows should plot an upward trend with time. But things aren’t that predictable, are they?

FDI and FII inflows to India have seen huge variance over years. This has been attributed to global trends, but only to a certain extent. In the year 2012-13, FDI to India witnessed a slump, as is shown in Table 1. India saw a fall in FDI inflows by 21% from $46.5 billion in 2011-12 to $36.8 billion in 2012-13. Global FDI flows also went down but only by a couple of



percentages. In fact, not all countries faced such devastating results as India did. Our neighboring country, China, managed to curb the fall in its FDI inflow to just 3.7%. But the same was not the case with FIIs. FII inflows increased significantly in 2012, as is given in Table 2.

The CAD widened by more than 12% for the year 2012-13 as compared to previous year, as per the Table 2 above. This rise in CAD required more capital inflows to fulfill the requirements but unfortunately this couldn’t happen. Consequently, rupee is seeing a hit since the last one year. India cannot attribute the weakening currency and FDI drop to external factors only. It is high time we look into the internal weaknesses so as to better manage them. If other countries could manage to control their FDI and capital inflows, then what is going wrong with India?

FDI

Talking in terms of marketing, Indian government has to make the country highly sellable as an FDI destination. India as a country has to understand the needs of these companies so as to provide what they look for. Broadly speaking, every company has two major concerns in everything they do.

• How to increase revenues?

• How to reduce expenses?

Corporate houses strive hard to achieve both of these in order to attain and sustain competitive advantage. The first concern on increasing revenues is related to the market size. The second concern to reduce cost is about efficiency in the system. Both of these factors are highly exogenous for the company. The company cannot totally control these two factors on their own. The role that Indian government plays highly influences the outcome with regards to these two factors. Revenues for a company can be increased by a larger market size

which can be achieved if the government can make people earn higher income. Costs incurred in the processes by these companies can be brought down if the government provides better facilities to these companies. But these reasons are given at very higher levels. It is needed to dig deeper in order to better understand the shortcomings. The government of India is certainly missing many aspects which need to be taken care of. Some of them have been captured below.

1.Taxation norms:

Retrospective tax policy is something which came up recently. This is for the immediate gains sought after by the government. India came up with the decision to tax Vodafone for a transaction of over INR 11,000 crore it carried out in the past. This move was highly criticized by companies as well as other countries. This posed a question of reliability on the part of our government. In order to attract more FDI, India has to position itself as a reliable country, not as one with frequently changing tax norms.

2. Government Policies:

The government has started coming up with other retrospective policies and norms. For one, Punjab and Haryana High Court came out with a judgment which requires Maruti Suzuki to pay an additional amount of INR 1200 crore as enhanced land acquisition cost. The land was acquired in 2002 whereas the order came almost 10 years later. If the government will keep on changing the norms retrospectively, then foreign companies would start feeling insecure for even those transactions that occurred in the past. This might lead to withdrawal of FDI which would cause monetary loss as well as loss to society in terms of increased unemployment etc.

3. Better Infrastructure:

2011-2012(in USD billion)

2012-2013(in USD billion) % Decline

India 46.5 36.8 21.0

China 116 111.7 3.7

Table 1: Annual FDI Inflows in 2012-13 as compared to previous year for India & China

2011-2012(in USD billion)

2012-2013(in USD billion) % Increase

FII 8.5 25.5 200

CAD 78.2 87.8 12.3

Table 2: Annual FII Inflows and CAD in 2012-13 as compared to previous year



Our neighboring country China is next to USA in terms of FDI inflows. China became independent after India but still managed to surge to top because of its proper infrastructure development policies and processes. In India, the government is not giving adequate importance to this critical factor. There are development projects in this regard but most of them are either delayed or have exceeded the budget. A radical change in working is needed. Foreign companies require facilities to establish their business. The country has to take a much more responsible role in setting up proper infrastructure & facilities. Not only will this be beneficial for foreign corporates, but for internal business houses as well.

4.Increasing Power Supply:

Power form the backbone of any business in the world today. India is a power deficit country where demand surpasses supply by a significant margin. The government needs to increase the power generation as the current supply is hardly sufficient to even meet the demand of residential sector. With the scarce power availability, companies cannot perform to their fullest because of which they might refrain themselves from coming to India. Thus, it is highly essential to setup power plant projects so as to meet the power demands in the country. In fact, India has already taken up projects for new cleaner form of energy generation, like nuclear, hydro etc. What is needed is to keep on moving on the same path. Also, scale of investments is to be increased along with accountability for time.

5. Urban Planning:

The urban sector in India is not properly planned. Cities have emerged out of nowhere. It is only very recently that government has started thinking about SEZs etc. But even now, perhaps the government is not doing enough. People have to travel a lot for their work and business. This gives rise to a lot of unproductivity. Such waste is to be eradicated by setting up committees to come up with urban

planning. This would benefit both foreign as well as Indian companies. Also, the disposable income of Indian employees would go up because of decrease in spending.

6. Lowering the heavy regulatory burden:

It has been mentioned by World Bank in one of their reports on India that there are far too many norms and regulations to be followed by a business in India. At times, the norms even start to conflict each other which leads to unnecessary delays in the business operations. Though proper regulations are a mandate, but an excess of them can hinder the smooth functioning of any business. A balance needs to be maintained so that any kind of hindrance in business work can be avoided.

7. Entry and Exit Barrier:

Undoubtedly, the barriers to operate in India are high. The entry procedure is way too lengthy because of all the paper work and long government formal processes. Similarly, the exit process requires the companies to fulfill many obligations. In fact, the liabilities for a company are being increased by raising these barriers. This is a major cause for apprehensions in the minds of foreign businesses to enter our country. There should be a separate body to take care of foreign investors so that they don’t have to go through lengthy processes which would improve the image of our country as a favorable FDI destination. Though the Foreign Investment Promotion Board and Cabinet Committee on Investments have been formed but we still have a long way to go before we can actually call our processes business friendly.

8. Implementing Proper Laws:

There was a time when some companies invested in India only because of lack of laws in the country. Union Carbide was one such company which took advantage of the fact, thereby, evading a lot of monetary liability to India post the Bhopal Gas Tragedy. Today, this is perceived negatively. Companies are getting increasingly concerned about

Fig 1: 2013 FDI Confidence Index



ethics. If a country doesn’t have strict laws, then there would be some illegal or unethical activities like child labor which are highly criticized.

FII

FIIs are known to be highly influenced by FDIs. In fact, as the country becomes more favorable as an FDI destination, the FII inflows also tend to increase. FIIs are younger than FDIs in many aspects. FIIs are short term investments. Therefore, as a country, India, or any other country for that matter, prefers FDIs as they not only bring money but also contribute to growth and development. Another reason is the high level of volatility in FIIs inflows. For example, there was an increase of 200% in FIIs in 2012-13 (Table 2). Thus, a country cannot solely rely on FIIs for its long term economic growth. Though, FDIs are more favorable, FIIs have also been gaining importance in the recent past. This is attributed to two major reasons:

• To bridge the widening CAD

• To somehow reduce the volatility (variance) in stock market

FIIs are the investments, mostly in the stock market. This is mostly governed by SEBI (Securities and Exchange Board of India). Apart from SEBI, FIIs are more to do with the monetary policies rather than the fiscal ones. Most of the measures stated earlier to increase FDI inflows also stand valid for increasing FIIs. In addition to those, there are certain other improvements specific to FIIs which can be sought after to increase capital inflow. Let us have a look at some of them:

1. SEBI Regulations:

These regulations govern as to what is there for the institutional investors in the stock market. Stringent measures sometimes leads to aversion from the investors. In order to better attract FIIs, SEBI has to play a key role. It needs to lay down specific guidelines keeping in mind the perspective of foreign investors.

2. RBI Monetary Policies:

Changes in interest rates and other relevant monetary

measures not only affect domestic investment but foreign investment as well. The policies should be such that a balance between liquidity and overall return on investment (ROI) is maintained.

3. FDI Caps:

As India has liberalized by raising FDI caps in the past, FIIs have flown in. It is suggested by many economists that India should further raise the cap in sectors like multiple brand retail, defense etc.

India already is a favorable FDI and FII destination for countries across the globe. As per the global consulting firm A. T. Kearney, India is ranked fifth in terms of FDI Confidence Index (Figure 1). India is well ahead of all the European countries as per this Confidence Index. This signifies that the market does consider India as a safe place to put its

money into. But India certainly has the capability to attain much more.

If with all its shortcomings, India can still manage fifth place, then imagine its position once these problems are eradicated. India has the potential to do much better, provided the government implements means to eradicate the aforementioned problems. FDIs and FIIs have become very important parts of India because they help in shortening the current account deficit gap. India, being a trade deficit as well as a developing country, cannot directly curb the deficit in its current account. It is, therefore, highly desirable to have inflows in the form of FDI and FII. But it is not just the economic gain for which these capital inflows are sought after. Most importantly, FDI helps in the development of the whole country in terms of more jobs, better products, less wastage, higher standards of living etc. On the other hand, FIIs can be taken to stabilize the stock markets. The benefits are too numerous to be counted. It is time we move our focus to strive for becoming the best destination for foreign investment, be it FDI or FII. The economic goal should be to tap as much capital inflows as possible so as to become a stronger country. The overall goal needs to be able to achieve economic goal keeping in mind social and environmental aspects as well.




MR. GAURAV MEHNDIRATTAPartner - Tax and Regulatory Services, KPMG India

Can you highlight some of the factors that in your view can fuel the Great Indian Revival?The answer might sound a bit philosophical, but it has been observed in the past that whenever our backs have been turned towards the wall, we try and do something about it, which we are doing now. The most visible changes in the last couple of months have been the regulations in the foreign investment domain. The investor sentiments were really hit after the Vodafone controversy and the other scams (including reversal of 2G licences). Reviving the investor sentiments holds the key to the great Indian Revival. We also need to understand that our economy is not decoupled and is deeply affected by the changes in the global economy. Another important factor will be coming down hard on corruption. Our neighbour China, with a new premiere coming in has sent very strong signals to the outside world that they are not going to tolerate any more corruption in the country. We need to showcase something similar.

Taking the point of decoupling further, we see that the U.S and the European economy are now showing signs of recovery with an improving PMI, whereas India and China are showing signs of slowdown. Are we looking at two different blocks of developed and developing economies which are performing opposite to each other?I personally don’t think that Europe is showing signs of a healthy recovery. The U.S., yes, is starting to move from the red towards the zero line and hopefully into the green very soon. On the other hand, China and India have slowed down but that is more because it’s not easy for any country to sustain a 9%-10% growth rate forever. Thus, I don’t see it as two different blocks moving opposite of each other. In fact, India’s large chunk of IT business that comes from the US might see a new spirit with the U.S economy doing well. In my view, settling of

the U.S and the Europe crisis will be a big boost for both the Indian and the Chinese economy. We just have to make sure that we have the right policies in place and ensure that the implementation on the ground is as per the schedule.

Talking more about the policies, six months back we had the Cabinet committee on Investment (CCI) being set up by the Govt. In the last 6 months, it has cleared 9 issues relating to power and mining. How effective do you think the committee will prove to be?I do not have much to say about it as I have not followed it very closely. But, the committee is formed to approve projects above a certain limit i.e. 1000 crs, so the investments to be cleared by the committee are limited by that clause. Most of the investments coming are not to that tune, so this committee is not impacting the approval process. The FIPB sits very regularly and takes frequent decisions and most of the foreign investment now follows a direct route. The work of the CCI is limited to only a few sectors like defence etc. So CCI role will only be a small part in the entire picture.

Another bill that has recently been passed is the Real Estate Regulatory & Development Bill. The general public seems to be pleased with the bill whereas the industry has vehemently opposed it. So, is it good to have such a bill?The bill is a push and pull between the public and the developers. In the short term there will be issues where developers will not be willing to accept such strict governance and might even refuse to come up with new projects as some of the points are not practically possible for the developers to follow. The government will have to do a little tweaking in the bill but in the long term, I personally think that this bill will be good for the investment community and the entire industry as a whole. A practical change in the bill can be that the developers could move

32 August 2013


not more than 15-20% of the funds collected for one project to some other project, but nothing more than that. This bill will play an important role in preventing the economy to fall into a trap that we have seen elsewhere globally.

Another major flaw of the bill is that it is applicable only for the residential projects. Should not the scope of the bill be expanded to cover the commercial and other kinds of constructions as well?The commercial properties are generally developed and kept by the developers who then lease it out or are constructed by the end users themselves. The Government’s major focus through the bill is to provide protection to the people in the lower end who are investing to the tune of 30-50 lacs for a house for themselves. The biggies in the commercial construction can fight it out among themselves legally.

The limit for the FDI in the telecom sector has been now increased to 100%. What change will this bring about in the struggling telecom sector in the country?What I think is that the move is an exit route for the Indian promoters in the telecom industry. What we are going to see now is a consolidation in the market through mergers and acquisitions and that is how the prices will finally rise. The prices in India have gone so low that the industry cannot survive long with the current structure. The foreign players that are currently in the Indian market will now get full control over the operations by increasing their stake from the current 74% to 100%. Then they can make their own policies and compete on their own terms.

The overall limits for the FDI in India are being increased across sectors. What role will it play in reviving the Indian Economy?We are definitely sending out positive signals to the global investor community by increasing the limits, but you ask any investor, he will say that he wants to wait till the general elections in 2014. Everyone wants to be sure about things. India as a country was going well but then it messed it up somewhere in between with all the scams and the Vodafone case. So investors are now wary, but they also know that the Indian story is there to stay. No one has written India off. The returns in the country are real and people want to invest here, it’s just the political stability that they are looking for and based on the conversations that I have had with my clients, I am very positive that things will move in the right direction after the elections.

If you were the Finance Minister of India at this point in time, what would you do to revive the Indian Economy for the current roadblock?As the Finance Minister of the country, I would kick start with following activities:• Meet CEO’s of the large corporations’ and encourage them to invest in the country. I will assure government’s support to them. Going by the experience, when a Finance Minister says that, the corporates should believe him• Take aggressive steps to fix the rupee depreciation. I would levy duties on the import of gold and take other measures to get the rupee back on track. The foreign investors first look at the macroeconomic parameters before investing. Rupee slide and widened fiscal deficit demotivates investment. • I would suggest looking into the issues that pervade the Infrastructure Sector. Going deep in these issues because each project matters and one large project can bring so much development for the community around the project site. Getting the post-mortem done of these issues is imperative to ensure that it doesn’t happen again, is very important for the economy.• Lastly, privatisation of sick PSUs.

So, do you think Indians lack at the Project Management skills?To be honest, yes. We are one of the brightest people in the world. But the fundamental mistake which we always commit is that, as soon as a project comes on the table, we start executing it while most of the people in other countries first spend a significant time in planning. It can be attributed to the cultural issues that we just want to kill the problem as soon as possible, but we forget to look at the various other aspects related to the problem.

What would be your message to the readers of the magazine?The message is that the Indian story remains positive and we are living in the best of times that we could have been. It’s just a blip and I personally feel that very soon the economy will be back on the right track. 8% or 9% may not be achievable in the near future but 6% is really good.

So, how many years before you see the Revived Indian Economy?3 years




MR. RAAMDEO AGRAWALJoint Managing Director, Motilal Oswal Financial

Services

Private sector accounts for 3/4th of the GDP of our country. Therefore, we feel it is the main party responsible for scripting the great Indian revival. But for that we obviously need enough impetus from the public sector. So what do you think the public sector can do right now in order to encourage private sector investments and participation to lead the way forward?One of the things is that the public sector companies, say Coal India or Power Grid Corporation, are positioned in a very unique kind of business. An economy is a map of all the businesses. If you look at the Power sector, government has a very huge role to play in the entire value chain of Power. And any government in a time span of three to five years can achieve one or two objectives properly. For example if you have Forex crisis, you can tackle this Forex crisis in four-five years. You cannot tackle multiple objectives simultaneously. Right now the sector which has become a big

drag for the Indian economy is the Power sector. Availability of high quality power, 24 X 7, throughout the country, be it rural or urban, is the need of the hour. What initially has happened is that we did not have much capacity and power plants so there was huge shortage of power. Later, from 2003 to 2008, we built enough power plants but the government couldn’t reform the distribution policy. India has witnessed a stark difference between the growth of Generation Capacities and Transmission Capacities. The last mile was always the distribution firms, i.e. the state distribution companies, and the distribution network and

distribution quality was very bad. They used to distribute free powers politically to farmers and poor people. So what has happened is that half of the country is still in dark (in terms of connectivity as well as power cuts) and all the banks are suffering because the distribution companies have a huge non-performing assets with the banks. But the good thing is that we are blessed with the world’s 3rd largest coal reserves, and have

Figure 1: Growth of Transmission Sector (Central Sector and State Sector) in different Five year plans

34 August 2013


all the power producing capabilities, in terms of CAPEX. What has happened is that when the entire power sector was decontrolled in 2003, the payment was being made from distribution firms to power producing companies. Now we are stuck in a situation where there is enough power production capacity but not proper consumption due to last mile connectivity issues. One of the biggest reforms which the country requires, which is very tough politically, is to bring the power sector reforms in the entire value chain, starting from production, distribution, transmission and also the last mile, collection. 80-90 % of this entire value chain which comes around 3 to 4 lakh crore, is with the public sector. So if they come on top of this problem that will be a very encouraging thing and will give push to a lot of private sector companies, businesses, and will be a new era for India.

Talking about the issues with power sector, even government has come up with a number of reforms. They introduced tariff based competitive bidding (in form of UMPPs and National Solar Mission) to increase private sector participation in Generation, Power Exchanges for Short Term contracts, distribution licensee and franchise system in distribution sector. While encouraging this, they also realized that these projects are getting delayed due to regulatory clearances. So they came up with Cabinet Committee on Investments to fast track implementation of projects over INR 1000 crore. They have been doing so much on the reform front, what else do you think that the government should do?I think that the government is not doing even 2 percent of what it is supposed to do in Power sector. Take a case of a village which is not getting enough power. It has indirectly disabled all the people who are living there. The guys who could work are unable to utilize their resources since power is not available. Durables such as fans, refrigerators, or any industrial product is not being used extensively in rural India because the quality of power available is not good. There are so many states where there are power cuts for up to twelve to eighteen hours a day. All this has a direct bearing on the economy. These problems have to be sorted out before we try to move on. I

don’t think we can go ahead unless we reform our power sector.

Sir, if you look at the manufacturing sector of India, 90% of the entire sector consists of MSMEs, which produce more than 40 % of the output of the manufacturing sector. You talked about power, but one major problem which these MSMEs are facing is the diffIculty in raising capital? How is Motilal Oswal seeing the potential of such small players and helping them in raising capital ? And if you are helping, then what kind of risks do you foresee?In financing these players, there are a lot of options available. These include equipment financing, non-equipment financing and financing for kick starting the business. Through our private equity arm, we are funding NBFCs which take care of these financing options. We are funding the institutions that lend to small three-wheeler and four-wheeler players in places like rural Rajasthan. We are funding the guys who are buying houses and properties in rural and semi-rural India. Through this, we are trying to build up a network that goes beyond that of the bank branches. Banks can only reach up to the branch level. Beyond that, the last mile reach to smaller farmers and small businesses has to be taken care by NBFCs - whether it is for vehicles, properties, or businesses. And these NBFCs are being funded by our private equity companies. That’s how our role becomes relevant in the entire scheme of things in terms of providing funds to smaller businesses.

So, for your company, will it be a good business opportunity to invest in these smaller companies today and reaping greater gains in the future?Yes, we are taking this initiative through private equity because we are ultimately a broking company. We understand that stock markets and financing are two different things. Stock Market is an investing business and financing is a balance sheet business. Balance sheet business requires an altogether different mind-set. And this kind of business can only be done if you have a separate organisation dedicated for the same. So what we are saying is that “we are investing guys, we invest into the companies which you can approach” and that’s how we can connect with the masses.

Talking about stock exchanges, both



BSE and NSE have come up with an SME exchange. This is the 3rd attempt of coming up with SME exchanges. In the previous two cases, these attempts have failed. But many specialists comment that the regulations are such that they do not encourage SMEs to enter these exchanges and it is diffIcult for them to raise money through these exchanges. What are your views on the same? Will this concept be as successful as in the West or will it be another failure? I wish them all the success as I also want to see them working out so that smaller players can raise money easily. But I have my own apprehensions, because the earlier two attempts failed. I wouldn’t say that they took off; rather they were just off the ground. They tried very hard for three long years; a lot of companies were even listed on them. But you need a size potential in an exchange. Very small companies are not good for exchanges. They can make use of private equity to grow from size x to 10x and from there they must go to the National exchanges. That’s how it works worldwide. So I think the same should be followed in India too. Given the current state of development of the Indian markets and Indian corporate culture, I would say this move is a little too over-ambitious. India would still need some more time before it can launch such things on a larger platform.

Moving on to some macroeconomic issues; If we look at the current scenario we see that the rupee is depreciating to a great extent and RBI is doing a lot of interventions to control the same. But still we don’t see any major improvements. What according to you can be the reasons for the same? How far do you think these interventions are justified?This problem is a global problem and not India-specific. These are capital flow issues. The developed world has excess of capital and the emerging countries look up to the developed nations for capital flows. A point is reached when the flow of capital from developed to the emerging world becomes so large that you actually become highly dependent on them and it’s like a feast. And as you become dependent they try to withdraw back their money and this causes a famine, which is exactly the situation right now. So how do you handle this situation? Say, if I give one lakh salary

for one month and the next month I tell you that I can pay you only 10000 bucks. In that case, how will you handle your household expenditure? This is exactly the problem that India and other emerging countries are facing right now.And I believe that we will find some solution. Maybe we will say that we don’t want to run a CAD of 3% and you can take your capital. In the Indian context; on a $2 trillion economy, you are talking about a gap of $60-70 billion. Right now, we say that we can accept that much amount of savings from the US markets and deploy that here in our country. That’s how we design. But it doesn’t work this smoothly and I think we would need to be completely independent of the capital flows. I think some kind of capital controls should come into picture. Some kind of rethinking has to happen at the global level. This cannot work any longer. We have moved from Rs.55 to Rs.65 against dollar in just 6 months. This will destabilize everything - export competitiveness, import competitiveness, and the decision to produce or buy. At 55 you should be buying from outside but at 65 you should be actually exporting from here. So how do you actually decide? So I think this is a new problem, a problem of capital flows and I think the finance ministers of the world should find some solutions for the same.

Thank You Sir. We will now wrap up with the one last question. What is your success mantra in life? Any recommendations for the B-School students?I would say that firstly, you should have huge ambitions; disproportionate ambitions from where you currently are. These ambitions should be very clear and value-based. And rest is journey. You can achieve the same thing by two ways: crooked means or by honest means. You should get committed to achieving your mission by honest means and the rest is a journey.

36 August 2013


Figure 1 shows the critical importance of investment for economic growth. It shows the relationship between investment in physical infrastructure and economic growth since the start of the Great Recession for the top 30 countries leading the global economic recovery. When combined, these countries comprised 88 percent of total world GDP growth in 2010. The positive sloping line shows a clear positive relationship and a message that either we can invest more to compete and lead economically, or we can fail to invest and face risk falling behind in competition with other economies.

In order to put India’s growth back on its earlier trajectory, there is an urgent need to enhance

progress in infrastructure projects through both structural as well as policy reforms. Infrastructure investments not only create jobs in the short term but also lower the cost of carrying out business in

the country, leading to sustainable economic growth.

Historically, infrastructure projects have not been the main focus areas. In the reforms of the early 1990s, the major focus was on ensuring macro-economic stability, introducing measures aimed at increasing efficiency by deregulation of the Indian economy and liberalizing policies for foreign investments. In 1990s since there was scope of meeting the demands through better utilization of existing capacity, infrastructure was not considered to be a

iiM luCknow

Gagan Deep Singh & Mohit Pandey

Are stAlled infrAstructure

projectsweakening

the indiAn economy?

Fig 1: GDP Growth vs. Infrastructure Investments - % share of GDP



major constraint for growth.

Also, infrastructural development was considered to be reliant mainly on public sector participation with minor role for the private sector because of the colossal nature of funding involved. Privatization was slowly made possible through the availability of funds because of capital market growth, increasing willingness of the public to pay more for better services thus attracting private participation among others.

A recent FICCI report says that India’s performance, as far as achievement of its planned investment targets in infrastructure for the Eleventh five year plan period is concerned, was impressive. But an analysis shows that though the overall investment targets have been achieved, the achievement hasn’t been uniform across all sectors. The performance in Telecom and oil and gas sectors has been strong and has contributed significantly to the target achievement. But the point of concern is that the important sectors of roads, railways and ports have all under-achieved their investment targets by 22% in the aforementioned plan period (Figure 2).

This is an area of serious concern, as the picture that we see through investment numbers is already inflated on account of cost escalations due to delays. Thus the real picture is actually worse than what is seen in the statistics. During the last two plan periods, most infrastructure projects suffered from time and cost escalations. To quantify, approximately 42 % of the total number of 564 infrastructure projects in India, with a cost of INR 1.5 billion or more were delayed and 31 % were sanctioned without any fixed

date of commissioning (Figure 3). This has led to an average cost escalation of 16.9 %. Considering the delays that have plagued the previous execution of projects, achievement of the targets set in the twelfth plan along with clearance of the backlog seems to be challenging,

On the cyclical front, we have problems like declining consumer confidence, falling industrial output, poor monsoons, and weak rupee. Protests over seized land have caused many projects to stall. And analysts say that getting these projects back on track and bringing new projects in the pipeline will be the key to driving growth.

Moreover, Global Competitiveness Report by the World Economic Forum for 2012-2013 ranked India 70th out of 144 countries for infrastructure. As per the WEF’s Opinion Survey, infrastructure inadequacy, corruption, and inefficient bureaucracy were cited as the three most problematic factors for doing business in India (Figure 4). Infrastructure spending will lead to many desirable outcomes as outlined in Figure 5.

Infrastructural spending faces several institutional constraints. Ranging from corruption, clearances and funding to lack of project management capability and capacity, the challenges are multiple in nature. But once undertaken successfully, it provides significant returns. The returns are of both an immediate short-term and lagged nature. In terms of its major short term impacts, it opens up land for development purposes, enhances mobility of factors of production, creates employment opportunities etc. In terms of positive impacts that are felt long after

“Concerns about governance and slow project approvals by the government have weakened business sentiment, which in turn has adversely affected investment, along with cyclical factors such as global uncertainty and policy tightening....”— IMF Regional Economic Outlook (April 2012)

Fig 2: Investment shortfall in road, rail and port sector

38 August 2013


the investment, not only does it create a platform for variety of product and service oriented industries to flourish, it also acts as a critical attraction for foreign investments. Clearly, it has a multiplier effect on the economic growth of the nation both over the short and long term horizon.

Major Hindrances In Enhancing Infrastructure Corruption: Delay in clearances on account of fear of corruption charges is a major hindrance to speedy project executions. In recent times, a number of corruption scandals have rocked the nation.

For example, consider the mining sector. It exemplifies the kind of corruption that the nation will have to tackle in order to attract investment, execute projects and fasten growth.

The Coalgate scandal, which shocked the nation, arose from a Comptroller and Auditor General (CAG) report that accused that the UPA government didn’t follow proper competitive bidding practices in allocation of coal fields. It mentioned that top industrialists received undue benefits from this

practice. According to CAG, the revenue loss to the government ran into billions of dollars because of this.

There have been a number of other corruption scandals that have tarnished the nation’s image. Telecom scam, Commonwealth games scam and the recent Indian Premium League scam are some of the more recent ones.

With a rank of 94 on Transparency International’s 2012 Corruption Perceptions Index, India stands below 3 of the BRICS nations, namely Brazil, China and South Africa. Not only does corruption make bureaucrats sit over files and delay decision making, it also deters foreign investors from investing in the Indian growth story

Delay in Land Acquisition: Land acquisition is another major factor leading to project delays. This can occur on account of multiple reasons, including compensation and rehabilitation for the displaced. The government has proposed a Land acquisition and rehabilitation and resettlement bill (LARR), though there are certain ambiguities which still need

Fig 3: Projects Stalled vs. New Project Announcements (₹ billion)

Fig 4: Infrastructural challenges: a huge deterrent

Fig 5:Benefits of Infrastructure Spending Fig 6: Share of Road and Rail transport in passenger movement



to be ironed before the bill finally becomes a law.

Regulatory Concerns: The requirement of multiple regulatory approvals and clearances is another major hurdle. Furthermore, environmental regulations are ever-evolving and the need to adhere to the same often applies to not only new projects but also to those under construction, leading to further time consumption.

Furthermore, there are challenges concerned with the structuring of the project by the sponsoring parties. Often, in the haste of announcing new projects, milestones are hastily set during the tendering phase and the consequences are felt later on during execution.

Capacity of players: Challenges are also emerging regarding the capacity of private players to execute projects. Many large Indian players are already stretched with regards to quality project management talent and financial resources. Financing is a challenge as the gestation periods of these projects are very large and often get extended beyond predictions. Firms typically use debt for raising finance for infrastructural projects. The challenge here arises from the fact that most large developers are already over-leveraged and can’t raise new debt because of their current cash flows. On the lending side, most financing institutions have reached their limits for exposure to infrastructure funding.

Now we will have a look at the Investment conditions in key specific sectors:

Specific Sector Details

Railways: Even though India has the world’s fourth-largest rail network in the world, not much has been added to the network in recent times. In the past sixty-two years, the Indian railways has been able to add only 10,000 km to its tracks. The sector is plagued by major issues including quality, capacity

and safety. Figure 6 shows the declining share of railways in passenger traffic over the decades. Even the new initiatives of the railways are besotted with challenges. The dedicated freight corridor, one of the latest projects, has been facing challenges in terms of funding sources, modifications in design, land acquisitions and construction contract re-tendering.

The Indian railways, in its effort to enhance its performance, has identified infrastructural improvements as a stepping stone to enhanced service quality. In its Vision 2020, the railway has stated the improvements required and the ambitious targets it wishes to achieve by 2020. But considering the past track record and performance, these targets appear to be over ambitious.

The railways has been unable to tap private sector funding. Currently, PPP contributes to an abysmal 4 % of the total investments. This figure is much poorer in comparison to private participation in other infrastructure sectors. Railways needs to take concerted action and make provisions much more attractive for the private sector. It can achieve its Vision 2020 targets through a combination of short-term actions in the spaces of land acquisitions, clearances, faster decision-making and long-term actions in the spaces of policy level reforms, organizational reforms etc.

Port Sector: The port sector, one of the critical trade enablers, handles ninety-five percent of Indian external trade by volume and seventy percent by value. Thirteen major ports and sixty non-major ports handle the sea-based trade. Figure 7 shows the trade volumes at the ports for past five years.

There are several challenges that the Indian ports face currently. These include cargo handling, containerization level, procedures related to customs, inadequate connectivity to inland industrial

Fig 7: Traffic utilization at Indian ports

40 August 2013


areas etc. These have had a negative impact on the evacuation times at ports, leading to lower level of operational performance.

A mega program, NMDP, has been launched by the Indian government to boost port infrastructure. This will enhance capacity, improve port operational efficiency and enhance private investment. But, this program is also getting delayed because of challenges such as environmental clearance delay, ministry approvals and contract tendering procedures.

Private investments can be accelerated by bringing about tariff reforms. Considering that returns aren’t majorly re-invested, cost-plus-based tariff fixing doesn’t incentivize berth productivity increase. Furthermore, connectivity to the hinterlands needs enhancement. This would include betterment of highways, coastal shipping etc. for facilitation of cargo evacuation and port productivity enhancement.

Private sector investment would flourish only under an environment that is inviting for them. The government has recently taken certain steps in this direction. Captive Port Policy and the Land Policy for major ports are some of these. The government further needs to carry out reforms such as the Ports Regulatory Authority Bill 2011 and simplify approval procedures.

Roads and Highways sector: Sixty percent of India’s freight and eighty-five percent of passenger traffic is transported through highways. Though the Indian road network ranks amongst the top ones as far as network length is concerned, it severely lags behind in the space of quality. In comparison to 100 % in the UK and 67 % in the USA, only 50 % of the Indian roads are paved. If urgent steps aren’t taken for road infrastructure up gradation, it poses threat of becoming one of the major hindrances in achievement of Indian growth targets.

To strengthen the road network, National Highway Development Program (NHDP) is being undertaken. Under this program, 54,000 km of the Indian National Highways are being upgraded in several phases through a massive investment of INR 3,000 billion.

This sector is also facing several challenges leading to delays in execution. The two most prominent projects under NHDP – a) the Golden Quadrilateral and b) THE NSEW corridor – exemplify delay challenges. Even though the above two were on top priority for completion under the tenth plan, their targets were not achieved and have now been delayed even beyond the eleventh plan.

Considering the plethora of challenges being faced, achievement of twenty km a day road construction target seems over ambitious. Major challenges being faced include funding, execution, and policy

changes. Land acquisition and getting various departmental and ministry clearances are the other major challenges that has come up time and again and lead to delay in execution.

Recommendations• Change of Approach

There is a need to change the way infrastructural development is approached across the stages of planning, bidding and execution.

As far as land acquisitions is concerned, the government’s introduction of LARR is a step in the right direction. But this would come along with a higher capital outlay for acquisition. Measures such as project allotment only when 90% of the land has already been acquired will make sure that bidders are much more rigorous during their due diligence and planning.

Furthermore, including the criteria of technical capability during bidding stage along with the cost criteria, would enhance the quality of project execution. Technical capability could include an evaluation of experience and proven skills of the bidders.

• Dispute Resolution Mechanism

Secondly, improvements in dispute-resolution mechanisms are necessary. The government might consider setting up a body with statutory powers to settle all disputes between private players and the authorities.

• Increase reach to Financing

Thirdly, to enhance funding availability for the private players, Infrastructural debt funds and reduction in Withholding tax would be beneficial. Raising capital at friendly rates is challenging because the risks associated with projects have increased because of various reasons such as land disputes. Policy reforms in the infrastructural sector would go a long way in ensuring a favorable environment for investors to invest in.

• Work on Capability Development

Enhancement of project management capabilities would come through significant investments in training capability, leading to generation of a talent pipeline. In this regard, China is an example to learn from. The country, which had 4 institutes offering project management courses 10 years ago has more than 106 institutes offering the same courses today. Also, ensuring that parties that are awarded projects are made to satisfy the pre-condition of having a certain number of qualified project managers would help speedier execution.




Starting with the Banking sector which is essentially your forte! We have quite often heard and talked about Structured financing. We see that Structured financing is currently not very popular in India though it is showing an uptrend. What can be done going forward to change the perception of Indian bankers towards Structured financing or to be precise, Structured Commodity financing?For a very long time when the banks were truly commercial banks, they specialized in structured financing because most of the financing was done for trading. Subsequently, after nationalization, lot of social objectives were put on the back of Banks and thus, they went into different kinds of financing. They were more into venture capital financing without being called venture capitalists! Let us take the case of agriculture financing. Being the nationalized banks, they were asked to give 18% of the total assets to the agriculture financing. A lot of this went for crop financing but banks never really looked for supply chain financing which is an essential requirement for making your crop financing, or land development financing successful. Individual farmers were given finance but they still had to depend on the vagaries of marketing forces for finally selling their produce. So even in case of cash crops, unless you had proper supply chain arrangements in terms of cold storage chains, warehouses, marketing committees, marketing yards etc. farmers weren’t getting true remuneration for their crops which has been their biggest lament even after 67 years of Independence. I believe that banks have not really looked at agriculture/other priority sector financing as a commercial venture. They have been doing this purely as a matter of regulatory compliance and I don’t think that any business can really thrive that way. In fact, my personal feeling has always been

that several directions given by RBI to banks can be viewed as a method of developing new businesses. Fresh approach which is required for developing sound business practices has not really come from Public Sector Banks so far. Structured financing, which could have played a huge role in making agricultural financing more successful, has not been done and even today, there is a huge potential for doing this in Indian market.Similarly, the second priority sector to which banks were asked to lend money was the SME sector. Everybody agrees that this sector has a huge role to play in the Indian economy but once again, the cluster approach for this sector which is required to take care of the Supply Chain financing concept, and structured finance in general, has been introduced only in late 1990s while banks have been lending to small scale industries since their inception. So, the principles of structured financing which essentially look at the entire chain through which the products move have not really been followed.

Extending on the same question, what can the government do to change the perception of banks about taking directives just for the sake of compliance? For example, should the banks be allowed to trade in commodity derivatives which will help them to hedge against the credit risk against such lending to agriculture and other priority sectors?I have a slightly different view there. Each institution needs to specialize in certain business areas and then outsource the rest of the functions. Commodity derivatives are not really the banks’ cup of tea. In addition, any kind of trading activity requires lot more skills than what is currently available with banks. So, first decision has to be whether this should be the prime focus of the banks. If not, is it required that they have do this in-house or whether they can utilize the market mechanisms for doing

MR. PRAMOD VAIDYARisk Management Consultant, deRisk

Former Corporate Head (Risk Management), IDBI Bank

42 August 2013


this – somebody else who has far better expertise in this can do it and those products can be used by banks rather than banks again being asked to create a new market for this.

But most of the bankers are of the view that the reason behind them not having the skills is that they were initially not allowed to trade in commodities in the first place. If we look at foreign banks today, they have the expertise in trading and in commodity derivatives. So, they can hedge their commodity risk. Its a kind of a vicious circle. What are your views on this?I have been in banks from 1974 onwards which is practically just after nationalization and one approach that the Regulator in India has followed has been progressively liberalizing the regulatory regime to match the maturity of the banking as a sector. And while this has, to some extent, stifled innovation, it has also lent stability to financial regime. I believe that for a growing country like India, stability of financial regime is far more important than innovation and the American experience of recent times show us that all innovations are not necessarily good!! I feel that current approach of RBI has been paying good dividends to us and has kept the system stable. Otherwise, we would have seen several more bank failures. Some price always has to be paid. So, not having innovations is possibly a price paid for the stability.

During the last 7-8 years, we saw steep rise in number of NBFCs and MFIs which were aimed at financial inclusion. Now with New banking licenses, it actually wants more commercial banks in rural areas. Do the existing institutions need any change in their strategy with this new development?Competition in banking will definitely go up because the numbers will go up. But I don’t know whether this is the best model to go for inclusive banking. The whole commercial banking structure that is built today is a high cost structure which possibly is not suited to banking in rural areas. If you look at our neighbor, Bangladesh, the micro credit there is not handled by public sector banks. It is very successfully run by people like Dr. Yunus there. In India also, the micro credit tried to emulate the Grameen bank model but they brought in private equity too quickly into that. That model is actually an amalgamation of an NGO and capitalism. It cannot be a 100% capitalist model; some amount of messianic approach has to be there if you really want to get into these areas. But a high cost, top heavy model which is currently

used for banking will not work for these sectors. So, you need to find a different business models for them with possibly completely new institutional set-ups. Local area banks, which RBI thought would be an answer to this problem, never really came up. If you really want the new business models to come up, you must give freedom. You cannot tell banks to do this and at this rate. Then you control everything and it becomes very stifling.

But NBFCs are far more independent than banks…True and therefore, these areas can be better served by NBFCs rather than by banks.

That becomes conflicting, right? We already had many NBFCs performing in rural sector but they weren’t very successful. We had a micro finance crisis and then RBI came up with certain restrictions to control interest rates for NBFCs…I will still say that it is not the right approach. If you again take a learning from Grameen bank illustration, they never really tried to control interest rates. They said that their interest rates will be on the basis of perceived risk. But the credit availability will be on time, in the measure that customer requires and with reduced paper work. In fact, I have worked in rural areas. We have recently done some work in Parbhani area in Maharashtra. And we found that farmers wanted credit on time. They are not so much worried about if the interest rate is 4% or 8% since they were already borrowing money from local lenders at 25-30%. Hence, 15% interest rate for farmers will be perfectly all-right provide you make the credit available to them with least bother. In fact, similar approach has been tried by other banks for smaller itinerant traders. More importantly, such people require credit for meeting emergencies like illness or marriages. They do not require credit for meeting their day to day requirements or their business requirements. They have enough resources for that. If somebody takes care of such requirements at reasonable interest rates, that will do the job. In fact, that is where Sahukaars make their money! They require better insurance products and some amount of finance to tide over emergencies.

On a different note, we heard Mr. Prateep Chaudhuri (Chairman, SBI) saying, “There is a need to change the norms related to NPAs. We should not see a ghost in everything” last August. He claimed that NPA rules of RBI are overplayed. What are your views on this? Are they really overplayed or do we really



need to be so conservative?One thing that should be very clear is that global norms may not necessarily be sensitive to your local requirements. It’s not about 90 days or 120 days. At some point of time, you have to recognize that you are not able to recover your credit. That is what a norm really is. You can make exceptions in loans such as when a crop season fails but you cannot say generally that these norms are bad. These norms force some discipline on the Banks. In spite of having such regulations, Public Sector banks have not been declaring NPAs. And for very large value NPAs, RBI itself has been giving them freedom to bend norms. Re-structuring is nothing but that. So, the regulator has also been helping banks to make sure that the banking system as a whole doesn’t come immediately under stress. Even Prateep Choudhary, when he joined, decided to recognize losses which were on the balance sheet. Unfortunately, his hope that things will improve from there on did not materialize because overall situation went down further.

It was also said that CRR should be phased out because it increases the cost of funds for banks and prevents them from reducing interest rates, thereby hindering growth of the nation. Any opinions?The CRR is just one of the monetary policy measures used by RBI and just like RBI discarded the bank rate as a measure few years ago, it can easily discard CRR tomorrow. SLR is, anyways, not a monetary measure, it’s a measure for giving government a first right to take money from banks. Because what’s invested in SLR gets back into the economy anyway. CRR is the only thing that freezes bank’s money and there is no interest on it. But possibly, and I go with Mr. Chaudhari’s view there, if CRR is going to be there, banks should be paid some interest on it.

And do you think that the insurance companies and the mutual funds should be brought under the ambit of CRR to ensure a level playing field?Not necessarily, they are two different businesses. A perfect level playing field is not really possible but equitable conditions may be provided. For that too, CRR is not the only measure. RBI has been using open market operations more frequently in the past and changes in ‘Repo’ and Reverse Repo’ rates have been used for controlling liquidity and giving direction to short term/long term interest rates.Over a period of time, I don’t see any reason why CRR cannot be phased out. Ultimately, if RBI wants to have monetary policy, it can find different ways of

doing it and if CRR is coming in the way, RBI can always change it. But some other regulation will come in its place.

Moving a bit out of the banking sector and closer towards our theme of revival of Indian economy, which sector do you think will be the driver of that revival?I have been reading a book by Daniel Kahneman, it’s titled ‘Thinking, fast and slow’. After reading that book, I will consider it very foolish to make any prophecy on these lines! Nobody can really estimate what is going to be our next messiah. In fact, this is in our psyche to believe that parmeshwar will take an avatar to save us. I don’t see that happening really.

But most of the reports see infrastructure as that new avatar. But a lot of stalled projects take all the sheen away from this sector. However, a lot of actions from the policy makers’ side like formation of CCI, new land regulation bill etc. are trying hard to change situation. Any takes?We have been trying to go that way for last several years. But to be successful, our fiscal policies will really need a massive change. Government has been into too many things. If you see the recent debate between Jagdish Bhagwati and Amartya Sen, Sen says that you need to be in education sector and build a very strong education base and make the general life of people better so that better labor force will be available. But Bhagwati advises us to let the development take care of everything. Now, our problems are so big that any single approach is not going to work. But a better course for government would be to focus on some of these sectors like education where private interest is not going to be fruitful since we have already seen the bad effects of private initiatives in education or health care where you really need to provide better quality at lower costs. Public resources need to go into these sectors. But at the same time Government doesn’t need to be into airlines. That’s perfectly a job for private sector. So, possibly some of our fiscal imperatives will change if government sticks to only policing, providing better education and better infrastructure.Any message for the readers of Niveshak. Your mantra of success in life?Don’t fear to innovate but don’t innovate for the sake of innovation. Innovation must lead to something positive for the society.

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1st Prize (INR 5000) S Abhishek

SCMHRD

2nd Prize (INR 4000) Pranjal Bhardwaj

FMS Delhi

3rd Prize (INR 3000) Deepak Sharma & Rohit Sonawane

IIM Lucknow

WINNERS OF 5TH ANNIVERSARY ISSUE

Round 1- Quiz1st Prize (INR 1000): Team Day Traders

(Gurpreet Singh, Gautam Singhania and Ankur) IMI Delhi

2nd Prize (INR 500): Team Maati ke Laal (Uday Shankar, Sajal Goel, Siddharth Gupta)

IIM Shillong Round 2 – Epsilon

1st Prize (INR 1000): Team ABCD ( Aritra Samajpati, Easwaramurthi P, Karan Shah)

IMT Ghaziabad 2nd Prize (INR 500): Team Alchoholica

(Ankit Pathak, Kinjal Patel, Sourav Bhattacharya)IMT Ghaziabad

Round 3 –Picture Quiz1st Prize (INR 1000): Team Maati ke Laal

(Uday Shankar, Sajal Goel, Siddharth Gupta)IIM Shillong

2nd Prize (INR 300 each) : Team Khublei (Kshitij Ghumaria, Shruthi Kulkarni and Vikash Ranjan)

IIM Shillong &

Team Asquared(Ankur Pant, Ankush Chutani and Dixant Malik)

NITIE Mumbai

CELEBRATIO WINNERS

Series Winner (INR 2000)Team Maati ke Laal

(Uday Shankar, Sajal Goel, Siddharth Gupta), IIM Shillong



ALL ARE INVITEDTeam Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever nec-essary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1000/- along with a certificate.

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