august 2014

1 THE FINANCIAL BULLETIN | AUGUST 2014 | moneymattersclub.weebly.com


The Financial Bulletin

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FROM THE EDITOR

Dear Readers,

It gives me the immense pleasure to come up with the August 2014 issue successfully. We are happy to announce the winner of “Article of the Month” award , Mayank Mehre from IIM Kozhikode for his outstanding write up on “Canvassing the Picture of New India”

This issue reflects the ideologies of New India

and the effects of Middle East problems on it.

The sudden ups and downs of share markets and

the people’s behavior towards it. The Buyback of

shares by INFOSYS and the effect of GST on

business and economy.

Brics issue still moves on with the India’s position

in it and the effect on global economy.

Happy reading!!!

Swarnendu Chakravartty

Editor

mailto:[email protected]

http://moneymattersclub.weebly.com/


Canvassing the Picture of New India

By Mayank Mehre, IIM Kozhikode A painting is a canvas endorsed by combination of great

colours conflated in perfect harmony but the secret of any

great painting is the touch of Artist. India for a long time

has been blessed with all the right “colours” in its

pallet - diverse demography, huge base of natural

resources, sprawling economy, democratic parliamentary

system. But still India is not able to rocket itself out of

restricting orbit of economic stagnation. In the last

decade had a homerun of near double digit growth rate.

But as its old masters became incompetent to drive

growth, nation felt the need of new artist to canvas the

new India growth story. This finally convoluted to

emergence of Modi-fied India on 16th May 2014.

The new government has promised to take all the

measures to bring India on right tracks, but important

questions linger: Can the new

Modi-fied India breakout of its

economic shackles? How should

we re-emerge has as “shining”

example to world?

Propelling Indian

economic scenario:

The top priority for the new government is to get India

back on its near double digit growth rate. For that on a

short term perspective India needs to yoke off all the

roadblocks on its way to achieve this growth rate. India

also needs to learn to engineer this growth rate for next

couple of decades. India has to learn from its other Asian

rivals who aggressively pushed their economy through

rapid industrialization and rise of manufacturing and

maintained a steady growth over the last decades

To promote growth India needs to push manufacturing.

According to planning commissioning report over the

next decade India needs to create job for 15 million

young Indian every year. India should adopt model of

creating industry clusters similar to China. Such

clusters become engines of self-sustaining growth. The

NMIZ (National Investment and manufacturing zone)

program should be agenda of prime importance.

Emphasis should be to distribute growth over the newer

urban centres and move people from farmlands to the

jobs with higher social security. This would not only

push the growth of complementary infrastructure like

new roads, educational institutes across the country but

also would lead to rise of exports and foreign exchange

reserve for the economy.

Encouraging

entrepreneurship:

Government alone cannot create jobs for

entire country when demand is so high. The

planning commission report states that

many large businesses, public sector

companies have failed to create job

opportunities. Given entrepreneurial nature of Indians,

positive business environment in terms of ease of doing

business, regulatory measures, capital flows will help to

solve employment problem of nation.

Today very few Indian companies have been able to

compete like Flipkart against global giants like

Amazon. Flipkart is example of how if incubation done

right, Indian companies can compete against global

giants. Technology oriented businesses today require

small initial capital requirement as compared to

traditional companies.

FB

Fig1: China’s industry cluster (Mckinsey)


One such example is Kochi start-up village which was

launched with funding of 2 million USD (10 crores INR)

has till now supported than more than 650 companies. If

similar entrepreneurship initiatives are taken these

ecosystem will become bedrock of technological revolu-

tion in India and we would hopefully see many more

Infosys, Flipkarts making a dent in global space.

Reducing corruption and Red tape:

Corruption is one of the major factor that has plagued the

‘shining’ image of the economy. Ideally corruption

should reduce as countries progress but India’s rank fell

to 94 from 72 in terms of transparency ratings in 2012.

Also India’s rating also fell to 132 in terms of ease of

doing business. The rising number of Indian companies

like Tatas, Birlas have attributed the shift in focus to

foreign markets instead of capturing the value of

domestic markets because of the same reason.

Government needs to take steps to clear up major

investment projects, make bureaucratic systems more

transparent with use of technology, speed up the

clearance procedures for the businesses.

Addressing Indian poverty:

According to Mckinsey study, there are currently more

than 500 million people in India who live life of

desperation and are deprived of modest necessities for

living. Every year government spends major chunk of its

budget to make life better for this section of population

by providing subsidies in food, fuel and basic amenities.

But according to research conducted by World Bank

economists, only 20% these subsidies actually reach

poor. To solve this problem, for the first time in 2009

government initiated Aadhar program, to provide identity

to this permanently neglected population. Though

currently this scheme has many inconsistencies, they

need to yoked off and efforts should be made for

nationwide coverage of this initiative.

Brazil has demonstrated the benefits of how direct

cash transfer has helped to addressed the needs of poor

and also provide facilities like health and education to

them. Such technology based initiatives are the only

solution to our sickened distribution system.

Government has to make efforts to make Aadhar its

priority over the next few years, to reduce systemic

leakages and for efficient utilization of government

resources.

The Leadership crisis in India:

India has great ideas but the main challenge is to make

all these proposed initiatives work in harmony. Polio

eradication program, Delhi metro program, Aadhar

scheme are some of the most efficiently run and

effective mega scale projects carried out in this country.

The major reasons behind the success of these

programs is single minded focus and efficient

leadership. The managers like E Sreedharan, Nandan

Nilekani should be nominated to lead projects of prime

importance. If there are 20-30 people to carry out

important projects for Government many of the

hampered projects will see light of day very soon.

India does not lack resources to solve its problem but

only hindrance lies in governance and execution. The

ideas proposed would push India’s growth momentum

and bring it on right track. After all there are more than

one billion reasons for India to do better.

FB


Is BRICS still the growth driver of the world?

By Mufaddal Dahodwala, JBIMS BRICS - Brazil, Russia, India, China and South Africa

has been amongst the fastest growing economies since

last 15 years. But, recent economic crisis and various

internal issues have marred the growth in these emerging

nations. Emerging markets account for more than half of

global GDP growth as the BRICS economies didn’t

succumb on the growth parameters and have shown dou-

ble digit progress. But this year the growth regime of

BRICS countries is seen a bit jittery due to global

downturn that has left world economy in lurch. The high

volatility in markets and investor sentiments along with

the flat commodity prices has shown the other way.

In terms of net foreign exchange outflows from India's

debt and equity markets, an important concern is the

extent to which US growth recovers and the Federal

Reserve's purchases of longer-term Treasuries and

mortgage securities start "tapering" down. The UK

economy and the euro zone has started to do better and

the unemployment rate is decreasing. To sum up, there is

little that India can immediately do to reduce oil or gold

imports, or to directly address risks arising from the G7

economies that are continuing to recover.

Emerging economies have a higher growth rate than the

developed ones but recently this trend is getting re-

versed. According to IMF estimates, China is estimated

to grow at just 7.8% while India at 5.6% and Brazil at

2.5%.

Now, whether the developing countries have this poor

performance for a temporary period or it will continue

haunting most of the Indian companies is a matter of

time. Many are confident about the sustainable growth

in emerging markets as the fundamental forces are

strong here. China and India’s demographic dividend

unlike most developed countries like US and Japan is

still young which enhances the availability of skilled

workforce and increased levels of domestic

consumption. There was a time when success of Asian

countries like Singapore and South Korea was seen as

an aberration however today’s times have changed and

we can see that their combined GDP is more as

compared to UK also.

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BRICS has a vital role to play in developing the economy

together and improving the overall dampening condition

in terms of economic as well as environment concerns.

The intellectual property rights issue has also to be dealt

in a way that all the concerns regarding social and

political stability are maintained. The interests of the

people should be legislated in a proper way by enforcing

reasonably good law.

BRICS countries is moving to BIITS as China and Russia

are replaced by Indonesia, Turkey, Mexico, etc. and India

has to now also tackle with funds from international

banks and institutions

It has been reported that India will invest about $4.5

billion in International Bank for Reconstruction and

Development bonds to be able to borrow exactly the

same amount from the IBRD, since we have reached the

country risk limit for borrowings from that

institution. IBRD bonds are issued at yields of about

six-month dollar Libor, or London interbank offered rate,

minus 20 basis points; and IBRD loans carry interest

rates of around six-month dollar Libor plus 80 basis

points.

If the information that India will invest in IBRD bonds is

correct, it is surprising that we are prepared to bear an

additional interest cost of one per cent to borrow an

equivalent amount from IBRD along with delays related

to project clearances. Economic cycles work according to

what is hot in one decade and what is not and so the shift

in BRICS economies is taking place. But this phase

can have drastic effects considering the

unprecedented scope of expansion. By 2007-08,

more than 100 economies had growth rates of 5%

and more which was a global boom and brought

these spectacular results.

China has heavily invested in infrastructure

projects which will serve them good in long term.

India too has seen recent reforms in economic policies

and new prudent RBI governor along with the entire

finance ministry which has led to the radical tax

system to get more robust and help to solve most

bank’s issues.

Specifically for India, it is the individual state

performance that matters and proper coordination with

the centre will ensure drive the economy. The

agricultural output remains robust with a strong pickup

in rabi sowing. Trade deficit of India has narrowed and

CAD falling to 2.5% in year 2014 from 4.8% last year

also boosts investor’s confidence and we can see that

foreign exchange reserves have grown since August.

For many countries around the world, China has

become an important trade partner. Even as China is

among the world's leading recipient of foreign direct

investment, Chinese companies make significant

overseas investments as they expand into newer

markets.

With the growing prominence of China in global trade

and investment, will the Chinese Renminbi replace the

US dollar as the primary reserve currency of the world?

The Chinese Government has identified urbanization to

play a key part in China's future development and

growth plans. The household registration or 'Hukou'

practice is a key constraint in policy makers

achieving and ensuring holistic percolation of the

benefits from increased urbanisation. What are the steps

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that there is bullishness on the prospects for

emerging markets compared to those of mature

economies over the coming decades. I am definitely

optimistic for Brazil’s economic future. It’s easy to forget

that Brazil, with a population of slightly under 200

million, is Latin America’s largest economy, and will

continue to be the engine of the region’s growth. For

investors, structural changes in Brazil’s economy are a

necessity. The country’s economy needs to change from

one dependent on exports and infrastructure spending, to

an increased consumer economy.

Many Brazilian small and medium sized enterprises are

being challenged by the country’s low growth rate,

inflation, and the difficulty in obtaining equity or debt

financing from within the country. It’s increasingly clear

to many long-term investors that Brazil and many other

emerging markets will outperform most mature

economies over the coming decades. But, it continues to

be a challenge to convince management of Brazil’s

smaller companies that now there is global equity capital

available from global investors with a long-

term investment horizon. Future outflows from the debt

market by foreign institutional investors (FIIs) would be

limited since residual foreign investment in government

debt stands at about $20 billion. FII equity outflows too

should have an upper bound. If there are net equity

outflows of, say, $15 billion, this would cause market

levels and the rupee to plunge and it would be

counterproductive for FIIs to sell more. However, if

India's credit rating is downgraded, as per FII investment

norms, they would have to reduce exposure to India.

Another source of risk is that the last four years of

extremely low interest rates in the larger G7 economies

have created several asset bubbles. As US interest rates

inevitably rise, bond market bubbles would be among the

first to be pricked. Further, although real interest rates are

low in India, investment decisions are based on nominal

rates. We did have examples of the Asian crisis in 1990’s

which wreaked the economies of South Korea,

Malaysia, Indonesia, etc. but since then the perception

has changed and the emerging market led global growth

in history.

Although the economies of India and Brazil have

squandered the opportunity by not going in for the

second generation of reforms and as a result having to

do with lesser growth rates than one may have

imagined. Also commodities prices have fallen due to

increase in supply and decreased demand from

developed economies. The rich countries are not in the

mood to import more and more which has led to

disastrous performance of BRICS exports. They are

instead trying to improve the employment rate ad

competitiveness amongst their own resources

BRICS position in climate changes:-

The BRICS’ position traditionally has been that global

climate change mitigation must be addressed

principally by wealthy industrial nations, which have

not only the wealth and technology to provide

solutions, but also the moral responsibility to do so

because they have produced perhaps as much as 80% of

the GHG emissions to date. However, some developing

countries seem to be accepting they have to contribute

to climate change mitigation, e.g., China. Other BRICS

are also making efforts. The more vulnerable they are

to climate change, the greater incentive there is for the

BRICS to accept binding GHG emissions cuts. If the

Kyoto commitment is not enough to solve the problem,

developed countries should do more about GHG

emissions reductions before they ask developing

nations for commitment. Large developing countries

such as China, India, and Brazil will not commit

internationally to material reductions in their GHG

emissions in the absence of some comparable

commitment by, say, the US. Conversely, the US has

not participated in the Kyoto Protocol, and will not

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agree to mandatory GHG emissions reductions targets

due to concerns about a loss of competitive advantage,

relative to developing countries that are not subject to the

same obligations. Rich countries generally favour the

idea of placing more responsibility on key developing

country emitters such as China and India, whereas

developing countries continue to favour an approach that

would implement a second phase of the Kyoto Protocol,

which allows them to opt out of GHG emissions

reductions if these pose a threat to development. In fact,

authorities from the BRICS have emphasized that the key

to success in climate negotiations lies in commitments

by rich countries to slash GHG emissions and boost

funding to .

policy makers must adopt to reform the Hukou system

while ensuring that any such steps are financially and

socially sustainable? Even in the context of the impact of

the Federal Reserve’s tapering of quantitative easing on

all emerging markets. Recent economic news from Brazil

has been disappointing. It was glad to see good news

from Brazil with the Brazilian Institute of Geography

and Statistics announcement that unemployment in six of

the country’s largest metropolitan areas decreased to

an average of 5.4 percent last year, from 5.5 percent

in.2012. When viewed in the context of unemployment

in the U.S. or the euro zone, this is a very low

unemployment rate. But short-term growth in Brazil is

another matter. The country likely finished 2013 with

growth around 2.1 percent, the third consecutive year of

growth below 3 percent. Inflation in Brazil is also an is-

sue. Inflation likely ran close to 6 percent last year, high-

er than the government had targeted. It wasn’t sup-

posed to be this way. At the beginning of last year,

Brazil’s government optimistically projected 2013

growth of 4.5 percent, citing an expectation for an overall

improvement in the global economy. It doesn’t look like

there will be a turnaround in Brazil’s economy anytime

soon. Growth for this year is likely to be around 2 ,

Percent and will be impacted by Brazil’s central bank’s

indication that it will raise rates to try to rein in

above-targeted inflation. Developing countries in the

form of aid and the promotion of clean technology .

Conclusion:-

In spite of having diverse histories, the BRIC

economies are receiving roughly similar treatment from

the wealthiest nations. Either through coercion or

negotiation, the BRICs are being pressured to adopt a

Western concept of intellectual property protection.

That means formal titling of inventive works,

enforcement through statutory regimes, and the

inevitable demand for even greater protection as the

diffusion of technology enables cheaper and more

effective methods of pirating products.

The average dip in growth rates of emerging economies

is about 4% which means except China, it is 2.5%.The

dominant BRICS economies have bore the brunt of this

slowdown the most and with China’s debt burden

becoming more than 200% of its GDP. According to

IMF data, only 35 out of 185 countries can be termed as

“developed” as no other country can sustain the growth

for more than a decade. Only 6 countries have managed

a growth rate of more than 5% over a period of four

decades. The average income gap of advanced and

emerging economies has not changed over half a

century and people in emerging economies are bound

for a dismal quality of living. The global economy is

going through rough and turbulent times and lower

sales and investments in emerging markets is a big

worry. The recent splurge in innovation and new ideas

that are patented in BRICS countries can be washed

away if the global economy is under threat. The

performance of emerging markets matters a lot to the

developed economies and the future impact to the

recovery of markets cannot be ruled out.

FB


INFOSYS and its share buyback demand.

By Kishorekumar, IBS Hyderabad The Management Change in the company is inevitable

but its lack of consistency raised concerns in stakeholders

minds. The "abrupt nature" of management change at

Infosys had initially raised "serious concerns, not only in

our minds but among many stakeholders". In an analysis

made from April to July 2011 BSE IT index gave 47.9%

returns out of which TCS share price rose to 119.2% but

Infosys shares grow only by 4%. In general Infosys

holds cash and cash equivalents of around 30,000 crore

and generates operating cash flow 12,000 crore a year but

there is no clear strategy on effective use of cash. The

Infosys Return on capital em-

ployed has fallen to 36% from

41% in two years due to which

Company has not made any big

acquisition for many years. As of

now Infosys is perhaps the most

overcapitalised company in Indian

corporate history.

The former executives V.Balakrishnan,

T.P. Mohandas Pai and former senior vice-president

Prahlad want Infosys to Immediately go for a share buy-

back of Rs 11,200 crore, roughly 40% of the existing

cash and cash equivalents. Pai was Infosys' CFO before

becoming its executive director responsible for human

resources, administration and training. Balakrishnan, who

quit the company last year, had long been the CFO and a

board member at the company. Prahlad was among the

first few employees of the company. Interestingly,

neither Pai nor Balakrishnan had favoured shareholders'

demands for share buybacks during their respective stints

as CFO. This buyback should be at the 52-week-high

price of Rs 3,850 a share. The Company should announce

an ongoing buyback programme to the extent of 40% of

the previous year's net profit on a consistent basis. They

believe the company must do so because there is a

"dramatic valuation disconnect" between the shares

of Infosys and its peers, and this needs correction.

The Infosys board and the management receives

requests on a variety of subjects from shareholders and

investors, on an ongoing basis. These are addressed by

the board and the management in due course."

Now, with the management exuding confidence and the

Infosys' share price still depressed, there is a need for

the Board to announce a large and consistent buyback

programme to show confidence in the management and

the business model, going forward.

The demand comes at a time when Infosys is in the

middle of biggest leadership transistion in its history.

On 1st August, former SAP AG

executive Vishal Sikka took

charge as the first non-founder

CEO at the company, while all

founders led by N. R .Narayana

Murthy either retired or took up

non-executive roles with the

board. After a series of top level

exits, Infosys top management has undergone a change

recently, with Vishal Sikka assuming charge of its CEO

and MD replacing S D Shibulal who retired. Sikka is

the first non-founder to head the company. The Infosys

first non-founder chief executive Vishal Sikka has

already started experiencing the first signs of pressure -

from some minority shareholders who were once key

executives of the information technology services

firm.

Infosys shares have consistently under-performed those

of its peers in the past few years as growth slowed

down at the company once vaunted as the Indian IT.

During the same time, rival TCS increased the gulf

between the two companies valuation (Now, TCS is

valued at Rs 4.85 lakh crore compared to Rs 2 lakh

crore for Infosys) on account of superior sales and

profit growth. But in the Financial column, the former

top executives dismissed analyst concerns that

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http://www.business-standard.com/search?type=news&q=Vishal+Sikka

http://www.business-standard.com/search?type=news&q=Shareholders


buybacks will not do the company any good – that

such measures are merely temporary props and stock

price movement is ultimately decided by actual financial

performance – and cited the examples of Accenture and

Apple who executed buybacks in order to boost

shareholder wealth. “Accenture, a company in the same

business, has single-digit growth rates and has doubled

its market cap using buybacks”. “Tragedy forced a

change of leadership at Apple. The incoming CEO was

reminded of cash reserves by shareholders and they start-

ed a buyback and dividend programme which has met

with shareholder approval. Nothing bad has happened

to Apple either except becoming the most valued

company.” The executives also added that even if Infosys

were to buy back shares worth about Rs 11,000 crore,

acquisition is a flawed argument.

purchase a large-scale company. “Big acquisitions

are very risky at best. (HP and Autonomy is a good

recent example). Assuming that Infosys will not bet all of

its cash pile on the big ones,

there is adequate money for

small ones and hence this

‘hoarding’ for an acquisi-

tion is a flawed argument.

Besides, one can always use

stock instead of cash”.

Finally, the trio added that the reason they did not want

to “vote with our feet” – a term used to describe exiting a

stock - if they were unhappy with the company’s

performance was because, having worked for the firm,

they were “emotionally attached” to Infosys. “It is indeed

painful to see Infosys lose it position of eminence and

play catch up.”

On August 20, 2014, Infosys closed at Rs 3552.50, up

Rs 1.40, or 0.04 percent. The 52-week high of the share

was Rs 3847.20 and the 52-week low was Rs 2894.00.

The company's trailing 12-month (TTM) EPS was at

Rs 185.71 per share as per the quarter ended June 2014.

The stock's price-to-earnings (P/E) ratio was 19.13. The

latest book value of the company is Rs 733.03 per

share. At current value, the price-to-book value of the

company is 4.85.

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Is the rise of Sensex justified…?? By Avishek Somani and Mr. Daga, IMT Ghaziabad

One of the funny things about the stock market is that

every time one person buys, another sells, and both

think they are astute…

In the first half of 2014, the BSE-Sensex gained close to

5,000 points. Rallying over 24 per cent so far in the year,

the Indian stock markets are now taking a relief and

setting new standards. The indices rose sharply after

hitting their lifetime high on 25th July, 2014. The BSE

Sensex hit a fresh lifetime high of 26,300.17 and the

Nifty rose to a record high of 7840.95 in trade.

In the past the Indian markets has been crumpled with

slowdown and sluggish growth in the market decision

making by the coalition government of Congress having

been the key worry for investors including FIIs. Now

with the present Government of BJP having a clear focus

on economic turnaround and

taking pro-business proposals in

a faster and more transparent

approval processes, it is no

surprise that the markets have

reflected the sentiments of the

people.

The overseas investor is betting

big on the government's reforms

agenda. They have poured in

more than $5 billion in the

Indian market in the month of

July 2014 taking the total inflow

to over $25 billion since the

beginning of this year. The

investment has been in the debt market for $3 billion (Rs

17,829 crore) and $2.2 billion (Rs 13,166 crore) in the

equity market.

If we recall, before the Budget there were concerns that

FIIs would switch from purchasing equity to

purchasing debt, but that has clearly not been the case,

with FIIs investing in equity as well. Even for the FIIs,

from a rational perspective, India makes sense to pump

their funds into. Out of the BRIC nations, India's

indices have performed the best year to date (12.56% in

Brazil -7% in Russia, 24.3% in India (Sensex), and -4%

in China).

Apart from this, as per the budget the Cabinet has given

go-ahead to hiking the foreign direct investment (FDI)

cap in insurance to 49 per cent, which will pave the

way for inflow of as much as Rs. 25,000 Crore foreign

funds thus boosting the sector. There has also been

discussion in the government where they may soon take

a decision on easing FDI in railways and defence

sectors. Besides, the FII

limit for investment in

government securities

has been hiked by $5

billion, within the total

cap of $30 billion.

Government of India is

also in talks with rating

agency to improve their

rating but the agencies

are going for wait and

watch policy.

According to most ana-

lysts, the hope-based

rally is largely over and the markets are likely to

consolidate in the near term, but the broader

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trend for the market largely remains on the upside. The

rise in volatility was expected in the last week of July as

many traders would be closing on their position on

account of F&O expiry. They would also be looking at

the numbers for Consumer Price Index (CPI) for

industrial workers which wasn’t very impressive either.

What stocks to look for??

Investors should look at Large Cap companies which is

offering dividend yield in the range of 3-4%, so that they

can clear junk in the stock market. Dividend payout is

also an important factor that investors should not be

ignoring. In FY2013-14, these payout rose to 30.8% of

net profits from 23.2% of net profits in a span of five

years.

Some of the most common stocks to look

out for according to big players like

Goldman Sachs, Bank of America,

Deutsche Bank, etc includes ICICI Bank,

Power Grid, L&T, Maruti Suzuki. The

reason for the same accrues to the fact

that there has been an increase in

economic activity which is clearly evident

from the recent release of IIP numbers, where there has

been a better performance in manufacturing sector

growth and passenger vehicles sales, adding to that there

has also been increase in cement and power production.

The Cabinet Committee on Investments (CCI), with the

push of the Project Monitoring Group, has been clearing

a lot of stuck capex projects -- 159 projects, out of the

446 accepted for consideration, have been cleared.

Future Outlook –Some of the analyst believes that the

Sensex has the

potential to reach 31,000 but to reach that number the

price to earnings ratio has to be 20 times and the earn-

ings of the corporate has to grow by around 18-20%

which doesn’t seem that difficult. The problem lies

with the fact that Sensex also comprises of commodi-

ties companies and for them to grow the GDP growth

also has to take off. So if GDP growth fails to take off,

chances of higher Sensex won’t be justified.

So a better approach for the investors would be to

follow a bottom up approach in picking the stocks.

Bottom up approach is a concept which focuses on the

company’s individual stock rather than focusing on the

overall market or industry.

The bottom line is that the markets in

India are looking bullish and rising

but awareness towards corrections

and minor pits and loop holes have to

be watched and accordingly the

investors of all kinds from intraday

players to long term investors; from

local biggies to FII; all have a lot to

regain from the markets after a

sluggish market of 2013 and take their

money back from the market by reinvesting it in the

potentially right areas as mentioned above.

So all in all I would like to just say the famous quote of

Warren Buffet:

Rule No.1: Never lose money.

Rule No.2: Never forget rule No.1.

Happy Investing…!!

FB


Is India’s stand on the food security at WTO justified? YES!

By Rahul Gogawat, SIMSR Introduction (What is the buzz about?):

The WTO meeting held at Bali to discuss the

long pending issue of trade facilitation, agriculture and

interests of the least developed countries (LDCs)

concluded successfully on 7th December 2013. This was

seen as a big step forward for improvement of world

economy and shed the image WTO had for not being

able to come at a consensus and finalise agreements.

There was an uphill task for the WTO secretary Roberto

Azvevedo to again smoothly conclude the next general

meeting. The second round of meeting which recently

concluded at Geneva could not meet the same fate, as

India vetoed that the Bali package should be sealed on

31st December, 2014, citing reasons that agricultural

subsidy should be modified in the

interests of developing nations. This

was not extolled by most of the

nations and regarded India as

impervious to trade facilitation.

India’s stand:

The meeting concluded at Bali was

based on the three pillars of discussion, which were:

A) Trade facilitation agreement: which allowed

developing nations to open their markets for developed

nations, cut red tape and provide quick customs

clearance. B) Agriculture. C) Interests of Least developed

countries. After the Bali meeting, there were 20 more

meetings conducted out of which only 2 were earmarked

for agriculture. This shows that the entire Bali package is

contorted in the interests of the developed nations and if

only the Trade Facilitation Agreement (TFA) is taken

forward, there is a high probability that the developed

nations will not be interested in coming back to the table

to talk about other clauses.

According to the provisions of WTO, the agricultural

subsidy provided by a developing country cannot

exceed 10% of the total agricultural output. If a country

violates the clauses of WTO, other nations have the

right to challenge them in the international disputes

court of WTO, which will call for penalty and

restrictions on future trade. The agricultural output is

calculated based on the international price of 1986-88

(known as “External Reference Prices ERP). This

causes the subsidy to further dilute to a very low level

which is tough to maintain with increasing inflation.

India wants this clause to be modified and that subsidy

prices be calculated on a more recent year or should be

indexed to inflation. This proposal was only supported

by Bolivia, Venezuela and Cuba while the other BRICS

nation were opposed to this and

wanted TFA to be sealed as soon

as possible.

The US Secretary of

State, John Kerry said, “India’s

stand on TFA does not send

good signal to the world about

India’s view”. USA should be

the last nation to lecture about protectionist policy and

low subsidy for agriculture in developing countries

like India. United States itself adopted the protectionist

policy in its developing phase. John Kennedy described

the cause of Great depression as the prevalent

protectionism adopted by the last government. Both

Europe and United States criticised India for

proposing lower tariffs and high subsidy for its

agricultural produce, while they themselves have

protected their farm sector composed of high prices and

non-tariff barriers by subsidizing it heavily. This clearly

illustrates that the farm sector is highly skewed in the

interests of the developed nations which have

reclassified these subsidies as green-box subsidy.

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This mechanism of subsidy calculation is quite

discriminatory.

The USA is backing the idea of open markets, improved

customs regulations and protection of Intellectual

property rights (IPR). The IPR issue has been giving

sleepless nights for US pharmaceutical industry as the

Indian law only provides patent on the process of

manufacturing drugs rather than on the life saving drug

itself. On the other hand in the 1980s, America itself

imposed restrictions on exports from the rapidly growing

Japan. Today, due to the increasing dominance of China

in world trade, USA is entering into two huge trade

treaties with other nations, namely The Trans Pacific

Partnership and Trans-Atlantic Trade, which do not

include any of the BRICS nation. These pacts will be

governed by its own trade agreements and will garner a

large share of world trade. This is in sharp contrast to the

FTA stand of America, if it wants WTO to succeed why

is it entering in other trade agreements?

Knowing the fact that The Trade Facilitation

agreement will induce a fresh $1trillion of GDP in the

world economy and provide 21 million new jobs, India

cannot ignore its 50% population which depends on

agricultural produce and more than 300 million of its

population which is below the poverty line. Taking a

stand to protect the interests of its masses is the least a

State can do and that’s what India has done. It should not

be bullied to sacrifice its own self-interest against that of

the developed nations.

Conclusion:

India is not of the view of opposing trade facilitation

between nations but to clear the entire Bali package

along with the food security issue critical for

developing nations in one shot. As the developed

nations would not be interested in it after the TFA has

been signed. India is open to discuss the issue in the

next meeting of WTO to be held in September, 2014

and if other economies are willing to negotiate about

the curbs on Indian farm sector then it can pave the way

for a smooth conclusion of the entire package. It is a

challenge to bring all 160 nations to the deal’s table

again but it should not be concluded that WTO has

collapsed as there is still time till 31st July, 2015 before

which, constructive discussions can clear the Trade

Facilitation Agreement for betterment of the world

economy.

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Finance and Economy.

By Mukul Sinha, IBS Hyderabad The Indian economy is the ninth largest economy of the

world and also one of the fastest growing world

economies. This growth is attributed to various Indian

industries which have grown tremendously post

independence to increase national income, to generate

employment and to generate foreign earnings. India was

initially an agriculture based economy but after

liberalization norms of 1991 particularly, the services

sector has taken a lead contributing the most to the gross

domestic product. Presently the agricultural,

manufacturing and service sector account for 16, 27, 57

percent of GDP respectively.

DIFFERENT SECTORS CONTRIB-

UTING IN INDIA’S ECONOMY

1. Banking and Insurance

2. Real Estate

3.It and ites

4.Manufacturing sector

1. BANKING AND INSURANCE

Banking industry has contributed in Indian economy.

Insurance sector is the main cause of growth in

industrial sector. There are four different sectors in

a public sector bank.

1. Public sector bank

2. Private sector bank

3. Cooperative sector bank

Over the years, the reach of banking has widened

significantly to include relatively under-banked

regions, particularly in rural areas. Commercial bank

credit as per cent of GDP picked up steadily from 5.8

per cent in 1951 to 56.5 per cent by 2012. Post

nationalization

several NBFC and the nationalized banks are opened in

the rural region. Many new reforms have been

established by the RBI for the upliftment of rural

women. RBI has introduced a new scheme of provid-

ing business loan of 3 lakhs to the rural woman at 7%

interest. This is promote the rural business in India.

The three game changers to India economy are

1.Goods and services tax(GST)

2.The insurance laws amendments bill

3.Uniform financial code recommended by FSLRC

GOODS AND SERVICE TAX:

1. GST is a comprehensive tax

applicable on

manufacture, sale and consumption of

goods and services at national level.

2. It brings down all the taxes at a

common level platform by breaking

tax barriers between states.

3. It will boost the economy in each

and every sale and purchase of goods

in supply chain.

4. It is estimated that India will gain $15 billion a year

by implementing the Goods and Services Tax as it

would promote exports, raise employment and boost

growth.

The insurance laws amendments bill

1. The capital required for a health insurance

company is now reduced to 50 cr instead of

100 cr because of encouraging health insurance

schemes in India.

2. This will also attract foreign companies in India

to invest in health insurance sector.

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3. Introduction of FDI upto 49% in insurance sector

will also be considered a boom for the

country’s economy.

4. It will result in better product design and

management, better risk management, and

higher investment.

Uniform financial code recommended by

FSLRC

FSLRC was headed by Justice BN

Shrikrishna. It helped the consumer in

several ways like protection of the consumer

from fraud in financial market.

It also helps to keep the financial market in

future.

It and Ites:

1. IT industry contributes a huge

share in Indian GDP.

2. The IT and IT enabled services

industry in India has

recorded a growth rate of

22.4% in the last fiscal year.

The total revenue from this

sector was valued at 2.46

trillion Indian rupees in the fiscal year 2007.

3.Most of the outsourcing for the giant MNCs happens

from India which again generates revenue in the

market.

4. Several Indian IT firms are involved in both

outsourcing and development and production which

contributes a major chunk to the economy of India.

Real Estate:

1. The contribution of the real estate sector to

India's GDP has been estimated at 6.3 per cent in

2013, and the segment is expected to generate 7.6

million jobs in the same period, according to a

report.

2. Due to large population size real estate firms share

has increased a lot in the past few years.

3. Migration of the people from rural areas to urban

areas (inter- state migration) has boost the industry

in a large area.

4. Migration of NRIs to some cities (Mumbai, Delhi,

etc) in India is also contributing a lot in the rise of

Real Estate sector in the near future.

Manufacturing industry :

1. Manufacturing industry has

the slowest growth in recent

past.

2. In order to increase the

economic growth of the country

manufacturing industry can play

a key role.

3. In recent future manufacturing

industry can increase the employment of many poor

farmers and rural people.

FB

http://economictimes.indiatimes.com/topic/real%20estate

http://economictimes.indiatimes.com/topic/GDP


Inflation protected securities

By Aditya Singh, IIM Ranchi

As students of finance have often been introduced to

many different financial instruments being used in today`s

market. These instruments cater to the needs of different

investors mitigating some form of risk and ensuring

returns. In December 2013, RBI introduced Inflation

Indexed National Savings Securities to protect investors

from inflation risk. These are inflation-linked bonds a.k.a

Inflation protected securities, where the government

ensures an interest of 1.5% per year above the rate of

inflation as measured by the Consumer Price Index (CPI).

What are Inflation Protected Securities & Why use them?

Before the introduction of Inflation-indexed bonds,

investors in conventional fixed income securities had

constantly faced the risks associated with the nominal

interest rate. The risk of a decline in fixed income

portfolios caused by a rise in nominal interest rate has

been a major concern for most investors. Inflation risk is

the risk that returns which are earned across the investor’s

time horizon fall short of actual inflation i.e. when actual

inflation exceeds the “expected rate” of inflation that was

built into market interest rates at the time the investor

purchased the bond. This results in decline in the bond

portfolio’s “real” (inflation-adjusted) value. However,

with the advent of IPS and similar securities, which

provide for inflation-adjusted increases in both principal

value and interest payments. This helps investors manage

the extent to which their fixed income portfolios are

subject to inflation risk.

.How do they work?

Consider a hypothetical IPS bond which pays 9%

coupon for 5 years.

The below table gives a pretty easy depiction of how an

Inflation protected security (IPS) works. As we can see,

that unlike a conventional bond which pays a fixed

interest every period. An IPS pays interest over and

above the standard coupon and accounts for the

additional interest, which is derived from the CPI.

Comparing TIPS and Conventional Treasury Bonds:

To compare the two, we must understand the

differences arising in their respective yields.

Treasury Nominal Yield = Real yield + Expected

Inflation rate + Inflation Risk Premium

TIPS Nominal Yield = Real yield + lagged actual

inflation rate

From the above, we can clearly see that the differences

between expected inflation and lagged actual inflation

and Inflation risk premium give rise to the difference in

yields of the securities.

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Year

Coupon

(%)

Inflation

(CPI) Principal($)

Adjusted Princi-

pal

Standard Cou-

pon

Inflation por-

tion

Total Pay-

ment

Yr1 9 0 1000 0 90 0 90

Yr 2 9 3 1030 30 90 2.7 92.7

Yr 3 9 5 1081.5 51.5 90 4.635 94.635

Yr 4 9 6 1146.39 64.89 90 5.8401 95.8401

Yr 5 9 8 1238.1012 91.7112 90 8.254008 98.254008


Monetary Policy and Inflation:

When actual inflation is greater than expected inflation

hurt conventional Treasuries and benefit TIPS, causing

TIPS to perform better and reducing correlations of

returns for the two types of bonds. This often prompts the

Central Bank (RBI) to tighten the money supply by

substantially raising short-term real rates.

In periods, when actual inflation is lower than expected

inflation (deflation). The inflation risk premium that had

been priced into the conventional bond turns out to be

excessive. The prices of conventional bonds rise as

inflation expectations decline and result in lower nominal

rates. Deflation likely would reduce real

interest rates as well, this effect would probably be more

than offset by the downward inflation adjustment to IPS

principal. The result could be a fall in the market price of

IPS. This often prompts the Central Bank (RBI) to loosen

the money supply by lowering short-term real interest

rates.

Whereas, when in periods when actual inflation is close

to inflation expectations, the total returns of IPS and

conventional Treasuries will be closely correlated.

The performance of both types of bonds will be driven by

changes in real interest rates. RBI is not likely to take any

action in such a case.

Who should invest in IPS?

In India, IPS might not be as attractive as they sound for

the Higher-income investors (those who have an annual

income of more than one million rupees per year) and

have sufficient capital to invest in the long-term. These

investors should be buying tax-free bonds issued by

infrastructure companies such as Power Finance

Corporation Ltd and IDFC Ltd. Since the interest on

these bonds is not subject to tax.

Financial advisers are of the opinion that the inflation

protected securities make are a viable option for the

lower-income investors (having an annual income of less

than 500,000 rupees) and have a lower tax rate. These bonds

are suitable for savings that is not needed for many years.

Market Growth of Inflation-linked government

bonds:

As of April 2012, the global market value of

inflation-linked government bonds was approximately

$2.0 trillion. The United States is the largest issuer with

$866 billion, followed by the United Kingdom with

$549 billion, France with $235 billion.

Inflation-Indexed Bonds across the globe:

By the data given below we can compare

inflation-linked bonds offered by governments around

the globe and see that there are different methods used

for measuring these bonds. These methods are

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categorized by the Inflation- index used and whether the government provides floor protection to the investors or not.

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NDB - alternative to the World Bank and IMF?

By Sourav Roy Choudhury, IIFT Delhi

Proponents of the new BRICS bank hope that it

will be a strong alternative to the World Bank

and IMF

BRICS was a term coined by an investment banking

analyst, Jim O’Neill, comprising of 5 emerging countries

with approximately 40% of the world’s population and

20% of the world’s gross domestic product (GDP) Brazil,

Russia, India, China and South Africa. It became a reality

when 4 out of the 5 countries’ leaders first met in

New York in 2006. Further down the timeline, they

constituted a formal group at a summit of 4 of the current

5 members in Yekaterinburg in 2009 and later joined by

South Africa. BRICS now has a National Development

Bank with authorized capital of $100 billion and equity

share capital of $50 billion and has been welcomed by

the World Bank. NDB is being purported as a challenge

to the global financial order created by the currently

dominant economies in the Organization for Economic

Co-operation and Development (OECD) after World War

Two, which revolved around the International Monetary

Fund and the World Bank. India gets the first chair of a

rotating president ship, China gets to host the bank’s

headquarters in Shanghai, South Africa gets to host the

first regional office, the first chair of the board of

governors is from Russia and the first chair of the board

of directors from Brazil.

The establishment of the New Development Bank is a

significant development which could have some impact

on multilateral lending for infrastructure in the

developing and the underdeveloped countries. It is

estimated that in around 20 years, the NDB could reach a

stock of loans of up to US$350 billion exceeding World

Bank finance. Though, there are large development

banks, which focus on long term financing, and

provide credit to more capital-intensive projects,

especially of an infrastructural kind, unlike their

conventional counterparts, in some of the BRICS

countries such as the China Development Bank and

Brazil’s Brazilian Development Bank (BNDES) and

they have been expanding their international lending

operations, especially in other developing countries,

in recent years. But, the case of NDB is different from

the financial architecture point of view. NDB relatively

has a large authorized capital base of $100 billion and

the paid-up capital commitment of $50 billion which is

more or less along the lines of the capital base of the

International Bank for Reconstruction and

Development (IBRD) (the core lending arm of the

World Bank) - $190 billion of which only $36.7 billion

is available as actual equity and the rest is the capital

that countries have committed to provide when called

upon to do. But, the NDB should serve better the

interests of capitalist development in the underdevel-

oped and developing countries than would multilateral

banks that are dominated by and serve as instruments of

the developed countries.

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Today in the modern world, there are enhanced

possibilities of mobilization of private resources in debt

and equity markets but the developing and the least

developed countries are discriminated against and are

kept out of such markets and hence very little capital

infusion in those countries. Since the NDB is owned and

backed by governments of emerging economies, it is

more likely to mobilize substantial resources at

reasonable cost from private markets and channel them to

those countries. The NDB’s lending is to be focused on

large infrastructural projects. Both cash-strapped

developing country governments and the private sector

are unable or unwilling to fully fund those large projects,

making the role of development financing institutions

like NDB crucial to development. The NDB is also more

likely to respect the sovereignty of the borrowing

countries by framing appropriate lending rules. However,

being a bank, though a development one, it as to ensure

its own commercial viability. Thereby, the bank must not

undertake any form of socially concerned lending that

does not yield a return adequate to cover costs.

Nevertheless, the NDB poses some political and policy

challenges. If we go back to the past, in 2009 there were

over 550 development banks worldwide, of which 32

were in the nature of international, regional or sub

regional (as opposed to national) development banks.

Also, NDB reminds of Banco Del Sur which resulted

from the similar efforts by the regime of South

American countries that eventually was a failure.

While the common opinion is of keeping NDB different

to west controlled IMF and World Bank, the NDB has a

policy flaw quite contrary to what is expected. Coming

to the parties to the NDB, China runs surpluses with all

its BRICS partners and is a manufacturing superpower

amongst the 5 countries. Russia and Brazil are

commodity- and energy-rich exporters and South

Africa is mineral- rich exporter. But India lacks in

natural resources as well as manufacturing depth. It has

manufacturing-gross domestic product ratio among

emerging economies at 16 per cent which is abysmal as

compared to other countries in BRICS. In addition to

that, India’s financial and structural health is not so

strong.

Another factor is foreign policy of the member

countries of BRICS. China has never come out in the

open on friendship with Pakistan while agreeing to

signing projects worth Rs.3,400 crore in Pakistan

occupied Kashmir. This policy towards Pakistan

worries India. For Russia and China, their foreign

policy interest is seen to as anti-Americanism. NDB

standing opposite to US and other western giants means

India taking an anti-American policy. Russia and China

are authoritarian regimes with economic and political

might to stand up to the US. India has neither. Also,

after the MH-17 incident the Indian government took a

stand against Russia.

What needs to be observed that how the BRICS

countries stay united and gain synergy by going against

the west in the aspect of operating the NDB and wheth-

er it stands as an alternative to IMF and World Bank.

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IMPACT OF REGULATION AND POLITICS ON INDIAN FINANCIAL MARKETS

By BhargavPadullaparthi ,Sovit, Wellingkar Institute, Mumbai

The financial market always increases or decreases due

to some information. At present, financial markets have

been showing extremely unpredictable movement,

which is only due to new pieces of information, and

news or events. The economy of any country is

evaluated by the on factors such as, politics, inflation,

interest rate, exchange rate, GDP, GNP, changes in

ruling parties, elections, etc. Now, what are the factors

that ultimately lead to market fluctuations is a big

question? Thus, questions arise that whether the market

movements are affected due to politics? Due to

inflation? Due to interest rate? Due to exchange rate?

Due to GDP? or Due to GNP?

A key reason why India’s economic growth has halved

from 9% to 4.5% per year is that, in search of inclusive

growth, the courts and legislatures have increasingly

made legitimate business difficult. Indian economy is

described as a economy which is tenth largest in world

by nominal GDP and third largest in terms of

purchasing power parity. This economy was growing at

a fast pace in recent past has been plagued by such a

slowdown that our currency

is on a freefall and it is not able to ascertain its lower

limit.

Economy of a country depends on number of factors

which are divided in three general categories like

Primary, Secondary and tertiary. Independence-era

Indian economy till 1991 was based on a mixed

economy which combines the features of capitalism

and socialism resulting in interventionist policies and

import substituting economy. This economy has

always given much emphasis on agriculture which is

called as backbone of the nation as the percentage of

people dependent on it is approximately 60% of the

total population. But the misery is that its contribution

in total GDP of the nation is less than 10%.

Looking on the various sectors that contribute to make

the Indian economy like agriculture, trade, services

etc. In context of Indian economy, the most important

one is the trade aspect that consists of import,

export and various business processes. Trade aspect

alternately tells us about the industrial growth of a

nation and its dependence on other nation. Recent

slowdown of economy is attributed to the fact that

import has exceeded the level of export that lead to

heavy deficit of balance of trade.

The most important factor in the slowdown of Indian

economy is the poor infrastructure, low growth in

agriculture production and industrial activities. After

the independence there were many changes that have

taken place in almost all sectors of the Indian

economy, especially in the liberalized period of the

Indian economy.

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With the liberalization in the licensing policy many of

the Indian firms entered into business with individual

or with joint ventures to do export and imports

business. Many of the foreign countries which were

members of the trading blocks like SAARC, WTO

entered into India to do export and imports

business. Our country is rich in number of metallic and

non-metallic minerals which has given a strong base for

the rapid industrialization. But there are few types of

natural resources which are present in scarce amount

like petroleum, natural gas, gold, silver etc. So to fulfil

the gap created by this scarcity India has to buy a heavy

amount of this resource from foreign players who are

also in the arena of global power fight. Also the global

currency is now provided with the base of gold reserves

of a country. These factors have made the India, a

nation heavily dependent on import from different

countries. This heavy import always exceeds the margin

created by our exports which are mainly concentrated in

the field of raw material. So to have a control on the

issue of petroleum, it has to explore alternatives like

LNG and other alternatives. Economic condition of a

country is also decided by the physiographical, social

and political condition existing in that nation. Looking

from the perspective of India one can easily ascertain

the upheaval condition existing due to its distorted

relation with its neighbours, dangerous internal

condition due to rampant corruption, narrow minded

politics involving communal forces etc.

Politicians involved in making the framework for Indian

economy are not ready to understand the seriousness of

the situation due to their vote bank politics.

Still the various policies in this economy are formed

on the influence of certain groups which have political

ground. Throughout India, if we consider the scenario,

failure to keep a check on the NPAs resulted in the

results as follows: Bad loans have currently increased

to Rs 33,486 crore in 2014 which when compared to

Rs 19,832 crore in 2013 and Rs 17,272 crore in

2012.Excerpt from “The Statesmen”

India, a nation with vast manpower, sufficient amount

of natural resources, suitable natural location for

global trade has good amount of potential which can

make it a superpower. But to achieve the top slot, it

has to look at various loopholes present in its planning

section as well as implementation section. But if a

nation has to exist and maintain itself as a leader in

economies, it has to keep his pace with global

standards.

There are certain other aspects that it can adopt to

reduce its dependence on global economy such as

increasing its R&D share, establishing good relations

with its neighbours so that it can reduce its heavy

expenditure on defence sectors, planning

economic- centric schemes which try to maximize the

capital part along with social responsibility.

Politicians have to understand the fact that time has

come when they have to realize the importance of the

moment and resolve their differences on economic

issue and bring out a plan that can boost the factors

responsible for growth of domestic industries. These

policies must be freed from the local influences and

have a global outlook.

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http://economictimes.indiatimes.com/topic/bad%20loans


Domestic Systematically Important Banks (D-SIBs) : An analysis of long term benefits

By Anshu Kumar, XIME Bangalore

Taking lessons from global credit meltdown, Reserve

Bank of India came up with “Frame work for dealing

with Domestic Systemically Important Banks (D-SIBs)”

and soon it became a common topic of discussion among

Indian Bankers.

D-SIBs are banks of national economic importance

whose failure can severely strain the entire banking

system. These banks would be subjected to differentiated

supervisory requirements and higher intensity of

supervision based on the risks they pose to financial

system.

These measures are

part of Basel III

norms on Risk Su-

pervision, to be im-

plemented in phases,

during 2016-2019.

The ultimate aim of

this categorization is

to minimize the

possibility of financial crisis and instill financial

discipline among top Indian banks. In 2008 crisis, it was

observed that a handful of large, highly interconnected

banks, when subjected to financial distress, end up

with system wide collapse and may need public money to

rescue the financial system.

The main sources of funds for any bank are equity and

deposits. As a bank expands and grows, its deposits also

grow, but share capital remains the same, resulting in

abnormal equity to deposit ratio. Banks also see it as

inflow of cheap credit as equity is costlier due to risks

associated with it. So, depositors start playing a dual role

of fund supplier as well as risk taker, though

unknowingly. But, in case of any loss of confidence, it

may lead to a situation of Bank Run, and the bank is

unable to cope up with the demands made by depositors

as advances made to customers can’t be reclaimed in

such a small time. These series of events lead to busting

of the bank and engulfing the whole economy, if it is

large and interconnected with financial system of that

country.

The present frame work asks for additional common

equity tier (CET 1) requirement ranging from 0.2% to

0.8% of risk weighted assets (RWA). Selection of such

banks would be done in a 2 stage screening process.

Firstly, Indian and foreign banks having assets beyond

2% of Indian GDP would be taken as sample.

Secondly, based on following parameters and

associated weightage, their systematic importance shall

be calculated:-

1.Size-40%,

2.Interconnectedness- 20%,

3.Availability of Substitute -20%,

4.Complexity- 20%

Accordingly, a level 1 to 4, systematically lower to

higher systematic importance will be created

and applicable norms will be implemented.

Apart from capital adequacy, norms like li-

quidity surcharges, tighter large exposure re-

strictions, will also be incorporated in the

frame work.

The first list of such banks is expected to be

declared by RBI in August, 2015 and the frame

work will be implemented and monitored in a

phased manner, starting in April, 2016. It would be

an annual calculation exercise, done on basis of

annual financial statements of selected banks.

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From recent banking developments, we know, In-

dian public sector banks are sound in terms of capi-

talization, but need capital injection from govern-

ment to meet additional capital requirement.

But, they are poorly capitalised, when compared to banks

of other emerging economies. Analysts believe 9%

would be comfortable level for any Indian bank. But,

India’ largest lender SBI and 2nd largest public lender

Bank of Baroda, just touch this magical numbers, with

9.5% and 10.1% respectively. On the other hand private

banks enjoy a better position, as their range is 12-14%.

Merits

The main merit of following these frame works would be

- enhanced ability to withstand stress situations, a bank’s

financial fighting strengths and competitiveness.

However, it will lead to higher lending rates and lower

deposit rates. Thus, loans would be available only for

safe customers. Meeting capital requirements of public

sector banks, which would be in tune of Rs. 2.4-2.8

trillion, will be a huge challenge for banking industry and

government. However, private banks will benefit as they

enjoy better current capitalization and internal accruals.

The prime motto of this move is to reduce the frequency

and severity of banking crisis.

Analysts and bank experts are in opinion that following

banks would make it into the final list- State Bank of

India, Punjab National Bank, Citi Bank, Standard

Chartered Bank, ICICI Bank, HDFC Bank and Bank of

Baroda.

These guidelines should not prove to be a problem for

banks profitability, as most of Indian banks have capital

which is well above the proposed regulatory level.

Banks would be in a better position to absorb severe

losses, with more equity, thus ensuring financial stabil-

ity in economy. Also, these measures will act as a buff-

er for government as banks will not depend on it to mit-

igate losses and would discourage banks to take irra-

tional risks.

Higher capital requirements are an essential instrument

in strengthening the financial stability of the banking

sector. They ensure that banks are in a better position to

absorb risks and compel banks to improve their risk

control, as they bear the costs of those risks themselves.

The result will be that banks will reduce their risks and

will control them more effectively. This will strengthen

the banking sector. Banks with a healthy business

model will be able to keep up their lending and remain

competitive.

The Financial Stability Board has studied how banks

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practically respond to increased capital requirements in reality. And, it has found two key things. Firstly, they reduce

their risk-adjusted balance sheets (lending less risky business) and secondly by raising equity. Both these measures

make a bank, more efficient and safe in functioning.

Testimony of the benefits of increased capital adequacy is the two papers released by the Financial Stability Board and

the Basel Committee on Banking Supervision. Both papers conclude that stronger capital and liquidity require-

ments bring significant benefits for banks- and doesn’t affect much adversely, as perceived. These researches emphasize

that such measures will help to insulate efficient banks from problems faced by weaker ones. These measures would

result in reduced frequency, severity, and public costs of financial crises.

So, the decision of Reserve Bank of India (RBI) to categorise important banks as Domestic Systematically Important

Banks (DSIBs) would help Indian banking industry in a long run and ensure a robust financial system for longer times.

It is a justified reform made to make Indian banks more competitive and safe.

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Behavioral Finance

By Utkarsh Bisen, TAPMI

In finance the first thing which we hear is that people are

rational “wealth maximizer” who seek to increase their

own well being. According to conventional economics

emotion has no part to play in the financial decision a

person makes. But reality is not so simple. Humans as we

know are the most irrational animal. I can say this

because from purely logical point of view the odds of

winning a lottery is very slim for a ticket holder

approximately 1 in 146 million. But still we thousands of

people buying tickets. These anomalies prompted

academics to look to cognitive psychology to account for

the irrational illogical behavior which the modern finance

has failed to explain.

Behavioral scientists in finance combine economic

theory and psychology to find why people make

decisions which they do and what

makes them deviate from the

rational thinking as stated in

books. They specifically look

into the investment decisions of

people and mark out the various

biases which prevent them to

follow the capital market theory.

In practical terms, people should

keep aside their emotions and instincts while investing.

Here we will talk of few behavioral traps that plague the

investors. They are: Choosing by not choosing, Looking

at trees and ignoring the forest and Focusing on the

familiar.

Choosing by not choosing

One of the main challenges for investors is choice

overload. Large numbers of choices have two main ef-

fects on the investment decision making. First, people

tend to rely more on default option.

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too many choices lead to decision paralysis.

Behavioral Solution: The design of a default option is

critical for overcoming decision paralysis. Many studies

show that the low participation rates in company pension

plans in USA can be increased by changing the default

option. Normally, employees in USA have to make an

active and conscious choice to join a pension plan: They

have to tick a box if they wish to join unlike in India

where it is a default option. This makes people to join as

not joining will require conscious effort from their side.

As a result the same can be implemented in USA as well.

Focusing on trees and ignoring the forest

According to economic theory, investors should not worry

about the single securities in their portfolio but should

look at the whole portfolio performance. However, in the

real world, that is not how stock

investors usually handle their

investments. What happens in the

investor’s mind is something called

mental accounting. By doing mental

accounting investor tends to measure

the success of each investment

against the initial price of each

investment. So while selling a good

performing stock, they feel happiness, selling

underperforming ones bring them mental suffering. As a

result investors cling on to a single stock and create strong

psychological barriers to losses. Thus in order to recover

their initial investment they tend to hold on to loss making

stocks way too long. In other words, they do not consider

the future earnings of their investments, compare them

with other investment options in their portfolio, and buy

and sell accordingly. Instead, they keep holding on to the

stocks hoping for a miraculous change in their fortunes.


Behavioural Solution: An effective way to get around this investment trap is to make a conscious and dis-

ciplined effort to shift the perspective away from mental accounting. In other words, avoid caring about individual

securities, and look at the portfolio as a whole. In short risk measures and return expectations should be at portfolio

level.

Sticking with the Familiar

People have a habit of focusing on what they know, and they tend to rely on information that is available or remem-

bered easily. The same tendency affects international investing. While the conventional wisdom of capital mar-

ket is to diversify your portfolio as much as you can, investors largely invest in their known or familiar sectors. As

per IMF, the share of domestic equities in US portfolios in 2005 was 87 percent; for German portfolios, 72 percent.

This points to the fact that they are under-diversified, implying that they are over exposed to risk for a given level of

returns, or they are letting go of higher returns by investing in perceived lower risk known sector.

Behavioural solution: From the point of view of investment, the familiar ity bias can be countered by making

conscious efforts to diversify one’s portfolio as widely as possible in terms of countries, asset class etc. Another way is

to educate and make oneself aware of all the various aspects of investing rather than focusing only on few known infor-

mation. Since this is difficult for private investors, financial advisers and the mutual fund industry emerged to deliver

decision support and easy-to-use tools.

The rise of behavioural finance demonstrates that taking into consideration cognitive biases into account one can help

investors improve the performance of their investments, and may be help remove the irrationality in the market.

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Financial Sector Legislative Reforms Commission

By Pratik Mishra, IIFT

Introduction

In the aftermath of the 2008 economic crisis, coun-

tries all over the world were faced with the challenge of

understanding what went wrong. Even with scores of

regulating institutions overseeing every aspect of the fi-

nancial system, the combined wealth of the world was

cut down by $15trillion. How this could happen was the

central question that grappled countries. The Financial

Crisis Inquiry Commission was constituted in America

and the Financial Policy Committee in the UK with the

mandate to examine the causes of the crisis and suggest

measures to correct them. Among the key recommen-

dations was the overhaul of the financial regulatory

framework in these countries. And thus came into being

the Financial Policy Committee in UK and major

overhaul of the financial system in America. Also most

of the acts and regulations governing the financial sector

in India are archaic and date back to the Stone Age. For

example- Indian monetary policy’s pillars rest on the

Reserve bank of India Act, 1934. Similarly, the Insurance

Act of 1938 governs the Insurance sector in India

It was in this backdrop that the Financial Sector Legis-

lative Reforms Commission (FSLRC) was constituted

under the Chairmanship of Supreme Court Justice BN

Srikrishna in March 2011 with the mandate to review

the existing financial-legal system and suggest

measures to correct weaknesses in the current scheme

of regulation

KEY RECOMMENDATIONS AND IMPACT ON

FINANCIAL SECTOR

UFRA

The FSLRC submitted its report in October 2012 and

recommended a complete overhaul of the regulations

governing the Indian Financial sector. Among its key

recommendations was the creation of a draft “Indian

Financial Code” which will eliminate more than 20 of

the current 60 odd laws governing financial markets

in India and will merge some of the most powerful

Indian Financial Regulatory bodies into one “Unified

Financial Regulatory Agency” body.

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In effect, UFRA would subsume the functions of

Insurance Regulatory and Development Authority

(IRDA), Securities and Exchange Board of India

(SEBI), Forward Markets Commission (FMC) and

Pension Fund Regulatory and Development Authority

(PFRDA). In addition, there would be 6 other agencies

including three new ones which the FSLRC has

proposed.

UFRA and RBI would have to present a cost-benefit

analysis for any proposed regulation. Once

implemented, the regulation would have to undergo

performance reviews every three years by an external

agency and a call would be made on the efficacy of

the regulation.

ROLE OF RBI

The monetary policy of India is under the exclusive

control of the Governor of RBI. The Deputy

Governors provide their inputs but it is up to the

Governor to either reject or accept their views. An

example of this is when the RBI sets interest rates

bimonthly. These rates are released by the Governor

after taking the ‘unbinding’ advice of the deputy

governors. The FSLRC proposes that formulation of

monetary policy be moved from the top-down

approach currently followed to a board-driven

approach where a Monetary Policy Committee (MPC)

would be responsible for making decisions. This

Committee, however, would comprise of members

nominated by the Government. Simply put, this would

give the Government a say in the formulation of

monetary policy. The underlying principle here is that

of accountability. Since the Government alone is

responsible to the Parliament, it should have a greater

say, on what the monetary policy encompasses.

However, it should be pointed out that the FSLRC

does leave room for the Governor in the form of a

veto against any decision of the MPC.

CONSUMER PROTECTION

Consumer interest protection is one of the key

concerns of the Committee. India’s current laws do

not provide for compensation to buyers of financial

products even if they have been fraudulently enticed

into buying these products. The FSLRC

recommends the disgorgement of proceeds from

such misleading sellers and recommends the

creation of the Financial Redressal Agency (FRA)

to attend to consumer complaints in the financial

sector (except the banking sector) across the nation.

All financial service providers are required to set up

internal mechanisms for consumer grievance

redressal and to educate the consumer of their right

to seek redressal. If the consumer is unsatisfied with

the appropriate handling of their issues by the firm,

they can approach the FRA and will be eligible for

compensation in case the seller of a financial

product has adopted unethical means and violated

regulation

CHALLENGES

Justice Srikrishna points out that transition from

multiple agencies to a unified authority would re-

quire induction of talent on a large scale. He further

adds that streamlining would be the next issue.

There would be regulators who are opposed to the

existence of a unified agency. Bringing them on

board would be a challenge.

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Market Market Size(in $ billions) Regulator

Securities Market 1068 SEBI

Insurance 66.4 IRDA

Pension 33 PFRDA

Forwards Market 264* FMC


While it may be too soon to tell whether all recommendations of the FSLRC will see the light of day, one thing is

certain. The FSLRC has highlighted some noteworthy issues about the current financial institutional structure.

However, whether the Government is successful in bringing all stakeholders on-board and execute reforms is some-

thing only time will tell.

ANALYSIS & CONCLUSION

.In trying to amalgamate various regulators into one body, it has tried creating the much-needed synergy in regula-

tion. By proposing to make RBI and other regulators responsible to the parliament, it has tried to make them answer-

able to the people of this country. In increasing the weight of the government in formulating India’s monetary poli-

cy, it has tried to bridge the gap between the country’s monetary and fiscal policies and has made the government

further answerable to the people of India. In the words of Dr. Raghuram Rajan, though he himself is one of the

biggest critic of the committee’s recommendations, “FSLRC report is one of the most important, well researched as

well as well-publicized re-ports in Indian Financial History. The report’s influence will be felt for many years to

come”. Enough said and done.

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Middle East Crisis Threatening India's Growth Story

By Sainath Zunjurwad, SIMSREE

Once upon a time the Middle East was the channel

through which the knowledge of Asia flowed into

Europe. The Arabs had a flourishing culture and they

had built an empire that stretched from the Indus in

the east to the Mediterranean Sea in the West. They

were well versed in Warcraft, arts, and science. They

had almost every element needed to brew the cauldron

into a great culture. But somewhere along the lines,

the Arabs faltered. The promise that they had

dissipated into internal strife, extremism and

dissipation of scientific thought. Thus, the Arab world

plunged into the blackness that has been its hallmark

for the past several centuries. And this people would

have been forgotten and become a mere footnote in

history books, but for the miraculous discovery of that

potent liquid-Oil, which Arabia had in abundance.

With the discovery of this oil,

the world’s interest in the af-

fairs of this land was reinvigor-

ated. Americans and Europeans

set up gigantic companies that

came about to dwarf nations in

terms of their monetary and

economic power. The Americans needed oil in

plentifuls to grow their economy. The Americans

came in and propped up tin pot dictators, and made

sure they had tight control over the oil fields. Where

troublemaking rulers came to power, they had them

deposed or assassinated. Where the locals rebelled,

they were put down with cruelty. There have been

popular uprisings. The Middle East continues to be a

hot cauldron with many unknowns, and treacher-

ous paths. It is a very unstable region, to put it mildly.

Like the Middle Eastern peoples, another nation had

risen from the ashes of colonialism. India. But unlike

the Middle East, it chose the path of democracy,

secularism, and development. For many years, it grew

at snail’s pace, derisively called the ‘Hindu rate of

growth’. However the nineties ushered in reforms

and liberalization, and our economy took off. And

with it, the country’s thirst for oil increased

multifold. It has a ravenous appetite now and it is

increasing at a greater rate than its GDP.

It has come to be accepted that the fate of this nation

is tied to that of the Middle East. Something

happens in far off Iraq, and its tremors are felt in

Mumbai’s Dalal Street. The Indian economy’s

engine is run on the fuel of oil supplied by the

Middle East. The government has to consider all the

permutations and combinations before taking a

decision that can have a bearing on the political

situation in the Middle East. It has had a passive

strategy, but needs to actively

pursue its foreign policy in

the deserts of Arabia, if for

nothing else than to safeguard

its interests.

At the heart of the matter is

India’s need for a stable

source of oil. It has achieved

much in the past 20 years, since the economic

reforms. Its economic growth took off in the previ-

ous decade, the middle class expanded and so did its

income levels and living standard. The country had

been able to bring a lot of people out of poverty on

the back of these structural reforms, which trickled

down to the poorest of the poor. Our economy is

booming. Defense, IT, retail all sectors are in the

fast paced growth phase. Our financial systems,

capital markets, regulators are becoming more and

more efficient. In terms of purchasing power parity

our economy is the third largest and would become

the second largest by 2030. The world believes that

we might well be the next superpower.

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The common man is just learning to dare to dream,

we have a multitude of opportunities. India can

become the growth driver for the world. We are on

the way to prosperity.

However, all this could come crashing down because

of a single linchpin-petrol. Our nation has not yet

stabilized to the extent that the European countries

have. We haven’t yet developed the buffers

necessary to protect us from the external shocks. With

the recent turbulences seen in Iraq, the tussle between

Iran and the USA, unending clashes among the

Israelis and the various broken splinter groups, and

Palestine factions. With a single flare up, the whole

region will go up in flames.

Our oil supply will be hit. Oil

prices will go sky high. Its

demand will far outstrip its

supply. The railways, aero

planes, buses trucks would shut

down. Common commodities

like food items, vegetables,

toothpaste would become scarc-

er. India will enter into a hyperinflationary

period. Riots would start all over the country. With

decreasing petrol supply, VALUABLE petrol would

have to be used by the security forces to quell civilian

PROTESTS. The nation might become vulnerable to

external attacks.

This is indeed a nightmarish situation. One

linchpin-petrol. We ensure its steady supply and we

are safe. This has been the ‘guiding principle’ behind

the West’s active interference in the Middle East

affairs. They simply could not leave it to the nomads

to ensure smooth supply. They colluded with the

sheikhs and sultans, paid hefty bribes and

systematically looted those countries. That’s what is

behind the anger felt in Arabia against America. Not

only did they take over those oil fields, they also

dictated the prices.

China is going the same way as the west. It is

cautiously exploring in the region for its own

constant supply. India, if it is to survive in these

turbulent times, must get its act together. Find its

own constant supply, make deals with ‘sober’

nations, and actively promote its interests. It needs

to take a hawkish stand when it comes to its energy

requirements. It need not go down the same path as

the west, it can enter into a fruitful relationship with

one of the stable players. Rather than being

antagonistic, it could be collaborative. Be it any

way, by hook or crook, by negotiation or

coercion, it must get its supply lines in place.

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august 2014

Documents

growth india

decade india

picture of new india

ideologies of new india

new india growth story

new modified india breakout

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short term perspective