The Financial January 2014, Volume no. IV, issue no. II

Cover Story

India 2014 - How will 'GLOCAL' factors play

out for India?

Senior Team

Prakash Nishtala

Vidhi Shah

Dear Readers,

Greetings from Team Finomenon!

The year gone by, managed to keep us on our toes with its flurry of capricious unfold-ing of events; be it a sudden slump in the value of Indian Rupee or the switch-hits played by RBI on hawkish and dovish stances. The story on the global front too was equally intriguing. The year started with a cliffhanger on fiscal cliff before Cyprus cri-sis could garner the attention amidst some seriously hard landing in China, the world of economics was kept confused by Abenomics and when it appeared the show would Shutdown (read US Shutdown), the game was about to begin. All these events make 2014 a much promising year that would bring even bigger surprises and thrills. At the global level, it is interesting to see how India walks through the ‘taper’ed roads of bringing hot money while at the local level it would be interesting to witness the mel-odrama of the great Indian political tussle and how India juggles to manage inflation, growth and deficits.

The Financial, through the theme for this edition, “India 2014 - How will 'GLOCAL' fac-tors play out for India?”, makes an attempt to know from the budding fin-mavericks what they think about the road ahead for India in 2014.

We have aligned our magazine, time and again, to the needs and wants of our reader base. The newly introduced sections like Grassroots received a huge appreciation from all the corners. We promise to bring, in future, even more insightful sections, articles and competitions for our beloved readers.

We are happy to bring to you, with this revamped issue, a 3600 view of the financial world. In this issue, we have delved into the viewpoints on a wide array of contempo-rary topics. The perspectives put forward by the budding managers from across the B-schools are sure to give a new dimension and importance to this issue. The process of evolution of ‘The Financial’ will see a deliberate attempt from Finomenon, to involve the readers as much as possible. The aim this time is not to have an article end with its last word in the magazine but to take it beyond through comments and discus-sions. Feel free to contact the writers of each article and discuss their views or to even dispute them! As always, I hope you enjoy this issue! Let us know how you feel about the content. Criticisms, suggestions, requests, and jokes, they are all more than wel-come.

We thank one and all for their valuable contributions to this magazine and hope you enjoy the articles. ‘The Financial’ is an interactive magazine and, beyond just a maga-zine, a two-way interactive channel. As we exchange ideas, we will evolve and grow to greater heights.

As I sign off, I’ll leave you with this beautiful quote by T. S. Eliot,

“For last year's words belong to last year's language, And next year's words await another voice. And to make an end is to make a beginning."

Wishing you a great start to this new beginning!

Regards, Prakash Nishtala Editor-in-chief, The Financial

From the Editor’s Desk

The Financial

Volume no. IV

Issue no. II

January 2014

Finomenon

NMIMS ,Mumbai

All design and artwork are

copyright work of Finomenon

NMIMS Mumbai

Creative, Design,

Content

Ajit Nayak K V

Arghyapriya B.

Bhuvanesh Kumar

Jeenoy Pandya

Sarthak Mohanty

C

ON

TE

NT

S

India 2014 - How will 'GLOCAL' factors play out for India? - Part 1

1

China unleashes new Economic Reform 5

India 2014 - How will 'GLOCAL' factors play out for India? - part 2

10

REIT’s - will they breathe life into India's coma-

tose real estate sector? 15

Are we on a path to recovery or it is the central

banks' effect across the world. Is another crisis

looming ?

19

The Rivalry That Turned Goldman Sachs ‘Golden’ 23

Facebook and Twitter going public 25

Grassroots 28

How can India’s growth be recuperated? 30

Top Newsmakers in business –2013 33

Opening the renminbi to the world– currency re-

form in china

35

During the good times of the past

decade, India was one of the most

favoured countries for deploying

capital to achieve best returns ad-

justed for risk. India along with

Brazil, Russia, China and South

Africa were termed as BRICS ow-

ing to their fast economic growth

and a

belief

that they

would

in due

time

eclipse

the de-

veloped

econo-

mies of

the

world.

The

speed of

inflow of Foreign

Direct Investment (FDI) and For-

eign Institutional Investment (FII)

during 2007-08 was unprecedented

and during the period of 2007 to

2013, India recorded its highest

growth in annual FDI inflow at

73.6% in 2008. FDI increased from

USD 25 billion in 2007 to USD

43.4 billion in 2008. India during

this period was also growing at one

of the fastest rate in the world by

consistently recording GDP growth

rates of above 9% between 2006-

08.

But like all economic cycles, this

boom also had to be followed by a

bust which came in the form of a US

subprime mortgage crisis. This re-

sulted in major risk aversion, flight

of capital to safe havens and slow-

down in the global economy. Alt-

hough, India wasn’t affected drasti-

cally and only ripples were felt by

the Indian economy in the beginning.

But ensuing

policies fol-

lowed by

the govern-

ment and

the subse-

quent Euro-

pean debt

crisis has

seen the

Indian

economy

worsen. In-

dia today is

plagued by

policy paralysis which

seems to be slowly receding, high

inflation, unsustainably high level of

fiscal deficit, negative trade balance,

contracting Index of Industrial Pro-

duction (IIP), and falling economic

growth. A toxic cocktail for any

economy.

In the period for 2008-13, the Indian

economy has been growing below its

potential and economic activity has

been stagnant. A good indicator of

economic activity in any country is

the stock markets of the country and

looking at India’s Nifty-50 and BSE-

Sensex, the markets have given flat

to negative returns during 2008-13

which is a testimony to stagnant

India 2014 - How will 'GLOCAL' factors

play out for India? - part 1

BY BHUVANESH KUMAR, NMIMS, MUMBAI

Bhuvanesh Kumar

is a first year stu-

dent of MBA at

SBM, NMIMS. He

holds a B.A. degree

in Economics from

Hansraj College,

Delhi.

Email ID:

7bhuvaneshkumar

@gmail.com

C

O

V

E

R

S

t

O

R

Y

Figure 1 GDP Growth Rate India 2002-13

1

growth.

As the global economy is showing signs of econom-

ic recovery, with US leading the charge, India needs

to get its act together to reap the benefits of this re-

covery and regain the status of one of the most at-

tractive investment country in the world. The GDP

growth for Q2 FY14 came in at 4.8 per cent and go-

ing by the consensus estimate it’s expected that In-

dia’s GDP growth for FY 14 would be between 4.5 –

5%. Considering all these factors, 2014 will be a

crucial year for India as a country and its economy

especially.

A lot of factors will determine the direction of the

Indian economy. On the global front – the quantita-

tive easing (QE) tapering by the Federal Reserve,

stability of the Euro and the policies of European

Central Bank, the growing debt concerns in the Chi-

nese economy, money priniting by Japan and the

price of commodities especially crude oil. While do-

mestically, the general elections in April-May this

year, taming inflationary expectations, reducing the

fiscal deficit, clarity on government policies, renew-

al of investment activity and the stability of the ru-

pee. Though crucial, I have purposely not stated the

role of Reserve Bank of India (RBI) in shaping the

Indian economy in 2014 because its action will be

governed by inflationary and fiscal deficit trends, the

stability of the rupee and the dwindling economic

growth. To analyze how these factors will affect In-

dia, it is important to note that some factors are im-

portant than others and will have a commensurate

effect.

Firstly, a lot of people are betting on the general

elections of 2014 to give a mandate which will see a

change at the center and the market expects that the

next government will be formed by the BJP led Na-

tional Democratic Alliance (NDA) with Narendra

Modi as the PM. Traditionally, BJP is considered to

be more pro-business than the Congress. Narendra

Modi is believed to be decisive, supports growth of

business, believes in minimum government and

maximum governance and has a clean track record.

His economic model of Gujarat has seen rise in in-

vestments, economic activity, development and well

being of citizens. This is in complete contrast to the

way Congress has ruled over the past five years,

which has seen large scale scams, delay in clearanc-

es of corporate projects, rising populism which has

led to rise in fiscal deficit and subsequently inflation,

and a weak leadership unable to take hard policy de-

cisions. If the script plays out as corporate India ex-

pects it to, the business sentiment would improve.

We could see an increase in investments giving

boost to employment and economic growth. But,

even if NDA doesn’t reclaim power from UPA but

we see a stable formation, there could be a pickup in

the economic cycle. On the other hand, if there is

weak formation cobbled up of regional parties which

may not be politically sustainable for too long, we

may see outflow of capital from the country and fur-

ther worsening of the economy.

Secondly, rising inflation and fiscal deficit need to

be checked. The last few CPI inflation readings have

not been encouraging for the market with pressure

being exerted from mainly food articles. There has

also been no respite on the WPI front with WPI in-

flation rising to 7.52 percent in November. Govern-

ment has also been running a high fiscal deficit due

to rising subsidies and populist schemes such as

NREGA and the Food Security Act. A high fiscal

deficit has meant greater borrowing by the govern-

ment thereby leading to crowding out of private in-

vestment. High consumption by the government im-

plies a rise in demand and thereby a rise in inflation.

Inflation and fiscal deficit together have ensured that

interest rates have also remained at elevated levels to

control them. In 2014, it would be important to

break the back of inflation and reduce inflationary

expectations. It is expected that the good monsoon

of the previous year will help in a gradual fall in

food prices, the major cause of inflation. In addition,

some of the measures to directly procure fruits and

vegetables from the farmer could also help reduce

inflation. A fall in inflation will have multiple bene-

fits for the economy, as it will result in a fall in inter-

est rates which could help boost economic growth,

increase investment activity, reduce existing debt

costs for most companies which has acted like an

Achilles heel on most balance sheets and help build

2

a sustainable foundation for the next growth cycle.

Thirdly, there is a

concern emanating

from the QE taper

of the Fed in the

US. Most of the

economic indica-

tors are pointing

towards recovery

with the health of

the economy im-

proving. The unemployment

rate has decreased to 6.7% as per the latest figures

published by the labour department for December

2013, in addition to the Q3 GDP growth which came

in at 4.1%. The Fed has already announced that it

will reduce bond

purchases by $10

billion starting

January 2014 and

progressively de-

cide on the taper

depending on the

US economy. This

signals the begin-

ning of the end of

bond purchases by

the Fed, which

will result in de-

creasing liquidity in the US and the global economy.

Emerging Markets (EMs) especially those running

high CADs are expected to be hit harder due to the

taper. Although India is much better off today com-

pared to the middle of last year, it will be important

to see how India reacts to the taper going forward. If

there is a pause in the taper, it could be positive for

India as it will give her more time to rectify its

CAD.

Fourthly, other global factors such as the policy de-

cision of the ECB will also affect India. ECB chief

Mario Draghi has signalled that ECB’s lending rate

will remain at 0.25% for a considerable period of

time. Also, they would want

decouple from the Fed’s

decision of tapering, instead

they may increase asset pur-

chases to counter worries of

deflation. On the other

hand, there is also growing

uneasiness with high debt

levels in China, especially

in regard to shadow bank-

ing. You hear whispers

about how Chinese banks

owned by the state are indulging in various forms of

debt financing which are not sustainable over the

long run. Renowned investor George Soros has al-

ready raised questions about the existing banking

system in China. He believes structural reforms and

economic growth cannot be

achieved simultaneously,

contrary to what is being

claimed by China. In addi-

tion, there are the easy

money policies being fol-

lowed by Japan to reinvig-

orate their economy. Bank

of Japan (BoJ) aims to in-

ject $1.4 trillion annually in

the Japanese economy

which is larger than the

QE3 program on an annual basis. Some part of this

money will also move into India and other EMs to

make swift returns and gain on the yen carry trade.

Although significant, it’s difficult to predict what

effect each of these factors will have on the Indian

economy. While the loose monetary policies of ECB

and BoJ is positive for India as it will increase li-

quidity across the globe looking for avenues of high-

er returns, the China problem could pose a great risk

to India if it were to come true. The freezing up of

the banking system China could have a severe ad-

verse effect on the global economy which is just

starting to stabilize. Fifthly, the price of commodi-

ties especially oil will be significant for the Indian

Figure 2 Headline Inflation y-o-y Courtesy: Crisil

Figure 3 Monthly US Unemployment Rate in % Courtesy: Bureau of Labour Statistics

3

economy in 2014. Currently, Brent Crude has been

consistently trading above USD 100/barrel. Given

the facts, that the social unrest problem in the Mid-

dle-East which for the moment seems to have died

down except in Syria. Iran which is the second larg-

est producer of oil in the OPEC has agreed to halt its

nuclear enrichment programme, which has in return

meant some economic sanctions have been lifted by

the West. All these factors including the moderate

outlook of global growth and the discovery of alter-

native source of energy such as Shale Gas have en-

sured that crude prices don’t move north. 2014 could

further see correction in prices if economic sanctions

are completely lifted from Iran, leading to Iran re-

storing oil production to its capacity and selling

crude to the West. This could be a major positive for

India, as it will reduce the import subsidy bill and

thereby the fiscal deficit. As petrol prices have al-

ready been deregulated and diesel partially, a fall in

crude prices could mean a fall in petrol and diesel

prices. This could reduce manufacturing, transporta-

tion and other cost, in effect also reducing inflation.

Keeping all these factors in mind and other that may

not be significant today but could shape the Indian

economy in 2014, it is important to address those

factors that are in our control. I also believe that ma-

jor thrust to the economy would come by working

on the local factors such as inflation, fiscal deficit,

clarity on governmental policy, creating an investor

friendly environment and having a stable govern-

ment at the center. While India may be bottoming

out in terms of growth, there is no room for being

complacent in anticipation of future growth. We

can’t afford to make the mistakes committed during

the past 5 years and the polity needs to realize that

economic growth and employment can’t be sacri-

ficed for populism. For India needs to regain its past

glory!

4

In a view of the government to

reach a new stage of development,

China's new President, Xi Jinping,

along with China’s other leaders

have unveiled a series of reforms

that aim at overhauling its econo-

my over the next decade. This has

signalled a commitment to liberal-

ize the existing economy.

Mr Xi’s was quoted saying Deng

Xiaoping’s warning in 1992 of a

“dead end” if the country failed to

reform and improve living stand-

ards. Mr Xi bluntly said about the

challenges that China faces: a

mode of development that is

“unbalanced, uncoordinated and

unsustaina-

ble”; an in-

crease in

“social con-

tradictions”;

and a

“severe”

struggle to

contain cor-

ruption.

These chal-

lenges were

cited as a need to lead another set

of reforms that could set China on

a continued growth trajectory.

The news of China's bold economic

reform came as the ANZ- Australia

and New Zealand Banking Group,

received the green light from the

Chinese regulator to open up a sub-

branch in the Shanghai free trade

zone. This is expected to play an

important role in the country's further

liberalisation effort.

The Shanghai free trade zone initia-

tive is considered to be an important

initiative as part of China's reform

agenda and is expected to further

open up the financial services indus-

try to private and foreign capital.

It is also believed that it will help

bolster RMB, the official currency of

the People’s Republic of China, con-

vertibility, hold up a path to interest

rate liberalisation and increase the

volume of cross-border transactions

given companies located in the zone

will be able to take advantage of both

on-

shore

and

off-

shore

mar-

kets.

China's

lead-

ers, in

hopes to stimulate growth and curb

corruption, have laid out a plan to

wrest a bigger chunk of the country's

economy from state control and turn

it over to the free market. Com-

munist Party leaders in China said

that state ownership would continue

to play a key role in the economy but

more emphasis will be en-

dorsed on private ownership. Though

state ownership would remain a pillar

China unleashes new Economic Reform

BY ASHITA GUPTA, IMI, DELHI

Ashita Gupta is cur-

rently pursuing her

MBA from IMI, Del-

hi. She has complet-

er her engineering

in CSE and is a gold

medal recipient

from the university.

She’s a sports en-

thusiast and loves

playing guitar.

Email ID:

ashita.p13

@imi.edu

Figure 1

5

of the economy. [Refer exhibit 1]

It is believed that the core issue is to straighten out

the relationship between government and the market

so that the market can be allowed to play a decisive

role in allocating resources and improving the gov-

ernment's role.

Xi Jinping is cracking down on corruption which

can determine the future of China’s economy. It can

be predicted that if Xi seriously works on anti-

corruption then China's economy will build a base

over the next few years based on consumption. This

will take China's economy to the largest in the world

by 2030.

In a meeting of China’s top leaders a 60-point re-

form plan was seen paving the way for sweeping

changes in the world's second largest economy as it

tried to steer away from investment-led growth to a

consumption-driven economy.

Major reforms were as follows:

Relaxation in one-child policy

Was introduced in 1979

Contributed to falling birth rates

Will allow couples to have two children

if one the parents is an only child

Baby-product related stocks such as

Goodbaby International soared in Hong

Kong following the easing of the one-

child policy

The reason that the China's leaders changed the one-

child policy is because China has aging popula-

tion and an aging population needed support. More-

over there has been a gender imbalance prevailing

with this policy.

Welfare-system reformed

Relaxation in the sys-

tem of household registra-

tion known as the hukou

system

Under this system mi-

grants give up the public

services they are entitled

to when they move to ur-

ban areas.

Analysts say changing

this system is a key step

towards liberalizing the

labor market that will allow the free

movement of labor and encourage urban-

ization

The urbanization policy change with the relaxation

of the hukou policy is considered to be the biggest

reform since 1958. The largest cities such as Beijing,

Shanghai, Guangzhou and Shenzhen will still have

strict rules applied to it though the changes will

mean a more mobile labor force and an increase of

workers into factories struggling with the demand

of work needed.

The government will open up rural migration to

small cities which will be a boon to the economy as

it will boost the wellbeing of migrant workers who

will now have more money to spend on goods and

services. Still the government is likely to move very

slowly on this reform as it will trigger a rush by rural

dwellers into the cities—which the cities are unlike-

ly to be able to absorb.

Greater rights for farmers

Farmers will be granted rights to possess,

use, benefit from and transfer their land

along with the right to use their land

ownership as collateral or a guarantee

Figure 2

6

Presently all land in China is

owned by the government with farmers

only permitted the right to work the soil

in their area

It has become important to encourage

urbanization and shift China's economy

to a consumer-driven one since it could

enable farmers to cash in on the value of

their land while investing in new ven-

tures and move to the cities

If farmers are given the right to actually sell their

land instead of having it appropriated by the local

government then there will be a situation where the

right kind of housing development will happen. This

“Land reform” is going to be part of a major push

towards the right kind of housing in China.

Stepping up financial reforms

Setting up a deposit insurance system by

early 2014 that will give the qualified

private investors the go ahead to set up

banks, loosen controls on the pricing of

water, electricity and natural resources

and revamp the system for Initial Public

Offerings (IPOs)

It is believed that the insurance scheme would pro-

tect depositors as China is worried that some smaller

lenders are at risk of going under as banks compete

for deposits in a more open regime. China's central

bank had removed controls on lending rates.

State-Owned Enterprises (SOEs):

SOEs will be required to pay larger divi-

dends to the government by way of 30

percent of earnings from "state capital" to

be paid back to the state and used for so-

cial security by 2020

Private firms will be encouraged to play a

greater role in the economy

According to a report, China's 113 large SOEs under

direct government control typically pay 5 to 20 per-

cent of their profits to the government in dividends.

Some people believe that reform of the SOEs is one

area where reform could be slow.

Of these reforms, the major three viz-a-

viz permission to establish regulated banks by pri-

vate investors to serve small and medium enterpris-

es, payment of larger dividends to government by

state-owned lenders and effective replacement of

one-child policy with a two-child policy will play a

major role.

While these three changes aren't sufficient to put

China on the path to sustainable growth there will be

a significant contribution in solving China’s biggest

problem i.e. too much investment and not enough

personal consumption.

There has been excessive infrastructure lying around

unutilized. China can boost the value of this unu-

tilized capacity by making sure there are more Chi-

nese people around to use it. China’s population

is projected to shrink by about one-third before the

end of the century at the same time as it rapidly ages

under its one-child policy. With this, the re-

sult would be a country with about two people of

working age for every one person older than 65 by

the year 2050 with more old people than young peo-

ple capable of supporting them in their dotage by the

year 2100. This restriction is still too severe to keep

the population from shrinking; China still needs to

produce at least 2.1 children per mother on average.

The government had also decided to work towards

an independent judiciary i.e. the courts would be

7

"appropriately" separated from local govern-

ments.

Under

govern-

ment re-

form, re-

laxation

on the

need for

govern-

ment ap-

proval on

projects

was real-

ized and

the perfor-

mances of local officials would be rated on measures

other than just economic growth such as in environ-

mental protection were noted. Xi was facing much

resistance in the commitment to abolish re-education

through labor camps though they were remarkable.

Drawbacks

China’s Plenum outlined ambitious reforms however

there have been many qualms about the implementa-

tion of its policy.

Each of the reforms will have costs for and

might adversely affect powerful players in the

Chinese system

The year 2020 is set as a target by the party

leaders for implementing all of this gauging how

tough it will be to implement it

These reforms could also be delayed or even

abandoned with the scale of the obstacles ahead

becoming more and more apparent

Also, these reforms will come head to head

with vested interests that stand to lose huge pow-

er

partic-

ularly

the

state

enter-

prises,

local

gov-

ernments, banks, well-connected prince lings,

security authorities, and ultimately the party it-

self

If these reforms aren’t carried out then China

can’t continue to growthe way it has and risks

social and economic fracture

While it pursues these reforms the party is

diluting its control in multiple ways:

Its privileged role controlling the

purse strings if more and more lending is

to go through non-state banks

Its leading position guiding the econ-

omy’s development if the private sector

starts to move into areas long controlled

by state enterprises

Increasingly its sway over the people

as the party loosens the hukou and allows

migrants to move more freely where they

want while it gives farmers more power

over the land they occupy

Figure 4

8

There is an associated possibility of greater

social unrest if huge new numbers of people flow

into the cities and feel less inclined to be quiet when

they

feel

the

state

has

mis-

treated

them.

Hav-

ing

been

the

facto-

ry to

the

world,

the

Chi-

nese

leaders want to avoid the so-called middle-income

trap- where wealth creation stagnates as market

share is lost to lower-cost rivals. Chinese leaders are

acutely aware of what is at stake as years of rapid

growth come to an end.

The World Bank says China's per capita GDP was

$6,188 last year, compared with $22,590 in South

Korea, $36,796 in Hong Kong and $51,709 in Singa-

pore - Asian peers that have succeeded in making

such a transition.

It was believed that significant attempts were to-

wards the powerful state monopolies though many

economists argued that loosening the stranglehold of

big state-owned firms' on markets from banking to

energy was key to success of other reforms.

On the whole, the proposed reforms are part of Chi-

na's

grand

trans-

formation design: retooling the economy towards

greater reliance on consumption, services and mov-

ing up the manufacturing value chain, while tackling

deepening inequality and discontent, a source of

great anxiety for a leadership that prizes stability

over everything else.

The past reforms have been good enough for China

to evolve as a second-largest economy but still it

can’t avoid the consequences of its past policy mis-

takes. These new reforms suggest that the leadership

is willing to take small steps to address the country’s

challenges and the only question that remains is

whether the pace of reform will be fast enough to

allow it to be on the track of continued growth for

China.

Figure 5

9

The story of Indian economy in

2014 will be

determined by

numerous

global and

local factors.

To get India

back to the

growth trajec-

tory, various

structural is-

sues need to

be corrected

by the govern-

ment keeping

in mind that it will be impacted by

various ‘glocal’ factors. India reg-

istered a

growth of

4.4% in the

first quarter of

the current

fiscal, the

slowest in 4

years, before

improving in

the second

quarter to

4.8%. This

growth is well

below the

economy’s potential of 7-8% which

it achieved a couple of years ago.

Let us analyze the various factors,

both global and local those are go-

ing to largely impact the economic

scenario of the country in the fu-

ture.

Global Factors

Advanced economies improving -

The gap between emerging mar-

kets like

India and

advanced

econo-

mies

such as

US and

UK is

reducing

In

terms of

growth

and in-

flation. This can be an ominous

situation for the financial stability

of

emerg-

ing

coun-

tries.

Most

ad-

vanced

econo-

mies are

facing

low and

falling

inflation

whereas countries like India and

Argentina are facing high infla-

tionary pressures.

This realignment of growth and infla-

tion factors in advanced economies

(AEs) can lead to change in direction

of capital flows from countries like

India to AEs. Monetary tightening

India 2014 - How will 'GLOCAL'

factors play out for India? - part 2

BY PRATIK DAS, NMIMS, MUMBAI

Pratik Das is a

B.Tech in ECE and

he is presently pur-

suing MBA from

NMIMS, Mumbai.

Pratik also has a

work experience

with Infosys Tech-

nologies Ltd.

Email ID:

pratik.das@nmims.

edu.in

Fig 1: GDP Growth %

Fig 2: CPI Inflation

10

policies by the Reserve Bank of India (RBI)

came as an obvious step to curb the rising inflation

in the country which is in turn restricted the growth.

Therefore, it is imperative for India to fix the infla-

tion issue

as soon as

possible

in 2014

before

easy mon-

etary poli-

cies in

AEs are

wound up.

QE

Tapering - The third edition of the stimulus pro-

gramme, better known as Quantitative Easing

(QE) began in 2012, under which the Fed was

buying $85 billion worth of assets every month

created liquidity in the market which ultimately

led to easy flow of money to emerging econo-

mies like India. India has received $19 billion as

foreign institutional investment in 2013, of

which about $7.5 billion came after September,

when the US Fed decided to postpone the taper

to 2014. But as pointed out by Dr. Rajan, taper-

ing is imminent in the coming months. To make

a ‘bullet-proof’ economy, so that India is least

affected due to the tapering by Fed, the RBI gov-

ernor passed a slew of reforms, mainly structur-

al, which not only brought more forex reserves

and stabilised the currency fluctuations, but it

also built a strong monetary foundation to pro-

tect the economy in case of a sudden rollback of

the US stimulus program. Later this year, the

Fed decided to start wrapping up its gradual

bond buying program by reducing the amount

invested in bond buying by $10 billion. Despite

that, the rupee was not seen weakening much as

com-

pared

to its

May

22,

2013

levels

when

the first

talk of

taper-

ing

happened. The various macro parameters includ-

ing CAD and Forex reserves have shown healthy

revival signs, therefore, the vulnerability has def-

initely come down which clearly shows that the

country is now better prepared against the QE

tapering that is likely to be complete in 2014.

Local Factors

1. Lok Sabha Elections – Probably the most im-

portant factor that is going to decide the fate of the

Indian Economy in 2014 is going to be the upcom-

ing national elections in May. The general elections

have the potential to reset the system and kick start

the reform process. The entire nation is hoping for a

business-friendly government, no matter who is

elected eventually. If the Congress-led UPA comes

to power, the agenda will be to bring in reforms

which they already have in pipeline. As put forward

by Rahul Gandhi in his speech at FICCI, the UPA

government will look to provide fast track clearanc-

es to projects which are stalled due to delays in

Figure 5

Fig 3: FII Net Purchases/Sales

11

environmental and social issues. It will

also focus on investments in education, R &

D and will stress on passing tax reforms such

as Goods and Service Tax and Direct Taxes

Code. If BJP-led NDA comes to power, the

economy may get even more excited due to

widespread perception of Narendra Modi

seen as a pro-business leader who has con-

stantly boosted both foreign and domestic

investments in his native Gujarat. A third

front is certainly the least desirable outcome

as the stability of the government will be in

question.

The recent state election defeats by the Congress

can also bring about a change in the working

mindset of the party. If the party views this

defeat as voter dissatisfaction against the ris-

ing inflation, then the policy might comple-

ment with the central bank’s strategy of con-

trolling inflation. . If the party sees this as the

need for more freebies, it will be tempted to

pour money into populist schemes to win

votes which can dent the fiscal situation of

the country even more. Therefore, whatever

the country decides in 2014 will certainly

pave the way for a change in the business

landscape throughout the country.

2. Fiscal worries – The fiscal deficit in the

country is a major issue which will largely

impact the future policies of the government.

Although the finance minister has been

stressing on limiting the fiscal deficit to 4.8%

of GDP for the current financial year, main-

taining that will be a huge challenge and

most probably impossible. As per the latest

data published by the Controller General of

Accounts (CGA), the fiscal deficit of the Un-

ion Government in the April-November peri-

od was Rs. 5.09 trillion, against a budgeted

target of Rs. 5.42 trillion for the year ended

31st March, which is 94% of the full year tar-

get. There is very little that the government

can do to contain the fiscal deficit with only

1 quarter left except pushing for some big-

ticket reforms such as Goods and Service

Tax (GST). However, implementation of

GST, which aims to rationalize the indirect

taxation system in the country, may not be

implemented in 2014. The much needed tax

reform was tabled in August 2013 by the

Standing committee on finance. But the ina-

bility of the winter session

of parlia- ment to come to a

decision on the GST rollout makes it impos-

sible for GST to be a reality before 2016.

Therefore, it remains to be seen how the gov-

ernment cuts down on some of its expendi-

tures such as food and fuel subsidies and also

focus on collection of non-tax revenues to

ensure that the fiscal deficit doesn’t exceed

FY14 target, which may negatively affect the

economic growth momentum. Therefore, im-

provement in the fiscal strength of the coun-

try through reforms in the indirect taxation

system is unlikely in the next year.

3. Inflation – Wholesale Price Inflation (WPI)

maintained a consistent 7 percent throughout

the year 2013 while retail inflation, measured

by Consumer Price Inflation (CPI) rose

sharply and crossed the 11% mark in No-

vember 2013

Figure 5

Fig 4: Inflation– CPI and WPI

12

To

address the inflationary concerns, the central

bank increased the interest rates in September

2013. This is going to be a huge concern for the

policy makers in 2014 as unless inflation is ad-

dressed, infusing liquidity in the system to accel-

erate the much needed growth

is not possible. Even as some moderation is ex-

pected in food inflation going forward, persis-

tence of retail inflation remains a concern. To

address the inflationary concerns and to strength-

en the environment for sustainable growth by

fostering macroeconomic and financial stability,

monetary policy was tightened in September

2013 and October 2013 by a cumulative 50 basis

points hike in repo rate. As a result of this persis-

tent high inflation, the financial assets of house-

holds (money saved as bank deposits and capital

market instruments) have fallen from the highs

of 2000s.

Recent measures such as the re-introduction of

inflation indexed bonds (IIBs) and introduction

of CPI linked saving certificates for retail cus-

tomers are part of the strategy to encourage in-

vestors to invest in financial assets. These bonds

protect the investors against rising inflation. It

also gives 1.5% return over and above the infla-

tion. It remains to be seen how the IIBs are able

to provide a healthy return against inflation in

2014. Further Securities and Exchange Board of

India (SEBI) recently brought out the draft con-

sultation paper on Real Estate Investment Trusts

(REITs). REITs are a positive development in

the real estate domain as it will ensure that in-

vesting in real estate more accessible, long-term

and income-oriented. In 2014, investors will be

looking for the rule formulations for REITs.

4. Industrial Production - Manufacturing sector,

the key driver of the Indian economy, has wit-

nessed a slowdown leading to a decline in indus-

trial output over the year. The HSBC Purchasing

Manager’s Index (PMI) in manufacturing was

down at 50.7 points in December 2013 from 51.3

in the previous month.

The Index of Industrial Production (IIP) contract-

ed to 1.8% in October 2013. The manufacturing

sector declined by 2% in October compared to a

growth of 9% in same period last year. The min-

ing sector saw a contraction of 3.5% in October

as against a dip of 0.2% in the same month last

fiscal. Power generation, however, posted a

growth of 1.3 percent in the month under re-

view compared to 5.5 percent a year ago.

Though India is the country with the 5th largest

coal reserves, the country is grappling with fiscal

deficit due to increased imports of coal. Accord-

ing to the latest International Energy Outlook

report of US-based EIA, demand for coal in India

is set to double by 2040 while production may

stagnate resulting in more than doubling of im-

ports to 281 million tonne by 2040. Coal India

Fig 5: Deposits after inflation

13

Limited, which produces 80% of the na-

tion’s coal requirements, is facing internal prob-

lems mainly pertaining to technological upgrada-

tion needs. This requires restructuring of the coal

units which is being strongly protested by the

la-

bour unions. Moreover, several private compa-

nies are under CBI scanner after the CAG al-

leged a scam over the allocation of captive coal

mines. The decline in the coal output affected

thermal power generation which decelerated to

1.8% during April-August 2013 from 8.6% last

year.

In 2014, clearing the coal blocks held for envi-

ronment clearance will be a big challenge. The

government should clear the roadblocks as soon

as possible and conduct fresh auctions of the dis-

puted mines. The government should attract for-

eign investments in mining industry and improve

coal production to meet the domestic require-

ments and subsequently reduce fiscal deficit.

With improvement in the coal output, more pow-

er generation will result which will ultimately

lead to a boost in the manufacturing sector.

In the upcoming year, the government in co-

ordination with the central bank has to address

various issues. Due to introduction of populist

measures such as Food security bill and in-

creased

subsi-

dies, the

fiscal

deficit

has widened which needs to be brought under

control. To tame that, the government has to de-

crease spending and increase revenue receipts

which are only marginally possible now through

non-tax reforms. Due to supply side constraints

and infrastructure issues, the food as well as the

retail inflation is on the rise. The central bank is

not being able to infuse liquidity in the system

through a rate cut due to inflation concerns.

Without liquidity in the market, the cost of bor-

rowing for businesses is becoming costly, which

is holding up more investments and increasing

unemployment. Therefore, more foreign infra-

structure investments, tax reforms to generate

more revenues, power generation through clear-

ing the policy logjam on coal issue, boost in the

manufacturing sector and creating an investment

friendly government for businessmen are the

needs of the hour to bring back the country on a

7-8% growth track.

Month Mining Overall

2012-13 2013-14 2012-13 2013-14

Oct - 0.2 -3.5 8.4 -1.8

Apr - Oct -1.0 -2.7 1.2 0.0

14

In a move to increase the depth of

the Indian Real Estate Market, in

terms of exit as well as financing

options for developers and new av-

enues for investment, The Securi-

ties and Exchange Board of India

(SEBI), has decided to allow Real

Estate Investment Trusts (REITs)

in India. The following article at-

tempts to dissect this seemingly

abstruse yet highly innovative in-

vestment vehicle from a global per-

spective where its impact is palpa-

ble and attempts to evaluate its

suitability in the Indian context.

Real Estate Investment Trust

(REIT) is a real estate company

that offers securities that trade on

stock exchanges like equity shares

and in turn it invests into income-

yielding real estate projects. On a

whole similar to any other equity

investment, REITs has two unique

features – the management of in-

come producing properties remains

its main function, and most of its

profits have to be distributed as

dividends. These dividends, in addi-

tion to price appreciation form the

main source of payoffs for investors.

Types of REIT:

Equity REIT – These typically

invest directly into income-

generating real estate projects

like Apartments, Malls, Commer-

cial Complexes etc. They may

even be responsible for managing

them by virtue of the kind of

agreement entered into. Sales,

rentals and service charges are

the revenue streams for the REIT.

Mortgage REIT – The REIT in-

vests in existing mortgages, mort-

gage-backed securities or may

even advance money to real-

estate owners for mortgages

Hybrid REIT – A combination of

Equity and Mortgage REIT struc-

tures primarily adopted for the

mitigation of risks and to seek

enhanced returns. More common

in the healthcare sector where the

trust can advance mortgages to

REIT’s - will they breathe

life into India's comatose

real estate sector?

BY ROHAN DHALL, SHARMAN MOHITE & TRIDIB PILLAI, NMIMS - MUMBAI The author is a Computer

Engineer from Mumbai

University and is

currently pursuing an

MBA in Banking

Management from

NMIMS, Mumbai.

F

I

n

K

n

O

W

L

E

D

g

E The author has done

B.Com (Banking and

Insurance) and is cur-

rently pursuing MBA-

Banking from NMIMS,

Mumbai

The author is a Me-

chanical Engineer from

Mumbai University

and is currently pursu-

ing MBA in Banking

Management from

NMIMS Mumbai.

15

healthcare companies and also buy medical office

parks.

Dividend yield:

Equity REIT < Hybrid

REIT < Mortgage REIT

Price appreciation:

Mortgage REIT < Hybrid

REIT < Equity REIT

Global REITs Footprint

The figure illustrates the

various countries that

have embraced REITs

and those that are still

contemplating doing so.

Since its introduction for

the first time in 1960 in

the US, it has managed to

gain a wide acceptance across the world and current-

ly enjoys a significant market capitalization in most

of the global financial markets.

Every country has its own policy framework within

which different manifestations of REITs have

evolved. The US REIT for example has rigorous

transparency and mandatory disclosure requirements

in addition to strict conditions that ensure 90% of the

taxable income is paid out to unit holders as divi-

dend.

However, this portion is

deductible for tax pur-

poses. Also the US REIT

must be widely held and

must derive a major pro-

portion of its income

from real estate held for a

long term. The Japanese

version referred to as J-

REIT resurrected the real

estate markets in Japan

after its introduction in

2000-01. Its management

structure is external and

hence varies from the US

REIT. Another popular destination for REITs is Sin-

gapore where listing of the REIT is mandatory on

the Singapore Stock Exchange. Taxation treatment

in Singapore is similar to the US. However, unit

holders are taxed on the payouts they receive from

the trust at income tax rates. Despite the myriad

structures, one can safely conclude that REITs are an

immensely popular channel for portfolio diversifica-

tion on the markets they

operate in.

Case for introduction of

REITs in India

The following factors make

REITs such a compelling

investment class world over

and the prospect of being

able to replicate the success

in India seems quite invit-

ing.

1. Superior returns at low-

er levels of risk: REITs are

characterized by a great

deal of predictability arising out of stable nature

of rentals and occupancy rates. They also have

low correlation rates and higher levels of liquidi-

ty. On an average, REITs have a D/E ratio in the

range of 0.5 signifying lower leverage. All of

these are indicative of lower levels of risk. Ex-

hibit reflects the historical returns achieved by

REITs over 4 decades juxtaposed with those wit-

nessed by other similar investment avenues. Se-

curities that offer such consistent and high rates

of returns at lower risks become a natural choice

for portfolio diversification.

2. Hedge against inflation

– As an asset class, real es-

tate offers an excellent

hedge against inflation.

However, the huge quan-

tum of investment required,

associated illiquidity and

lack of transparency deter

the small ticket investor

from being able to leverage

this feature. REITs will

provide the same hedge

against inflation and owing

to its lower entry load would protect the

“Average Joe” from increasing inflation by

yielding positive and appreciable “real” returns

on investment.

16

3. Infuse a high degree of transparency into a tradi-

tionally opaque sector – It would help clear the

smokescreen surrounding Indian real estate deal-

ings. Improved reporting and disclosure require-

ments in addition to stringent regulatory and su-

pervisory oversight by market watchdog SEBI is

likely to heighten the extant standards of corpo-

rate governance, im-

prove real estate market

efficiency by eliminat-

ing issues of moral haz-

ard and adverse selec-

tion and thereby safe-

guard the interests of

the smaller retail inves-

tors. It will also stream-

line and institutionalize

the process of raising

finance and flag several risks associated with

clear titles, project viability and minimizing

transaction costs.

4. Opportunities for investors in every business cy-

cle – Most real estate markets witness four dis-

cernable phases that constitute the real estate

business cycle. One of the foremost reasons that

have made REITs a runaway success is their

ability to offer lucrative business alternatives in

every phase of the cycle.

5. Mobilize financial resources – This is vital to a

sector that is currently witnessing a paucity of

financial resources in India attributable to high

risk perceptions and enhanced regulatory curtail-

ments that makes access to capital expensive and

arduous. EY estimates peg investments to the

tune of US $ 42 billion in Indian real sector

fuelled by growing urbanization, shifting de-

mographics and generation of employment op-

portunities in urban areas. REITs will prove to

be a game changer to bridge the vast investment

gap and fuel growth in the real estate sector at

lower costs of capital. Exhibit depicts the prolif-

eration of REITs in leading Asian markets and is

an emphatic assertion of their popularity and

success.

PROPOSED REGULATORY FRAMEWORK:

Realizing the importance of REITs, a regulatory

framework has been proposed under draft SEBI

(Real Estate Investment Trusts) Regulations, 2013.

Some of the prominent features of proposed frame-

work are as follows:

1. Structure of the REIT: REIT will be set up as a

Trust under provisions of Indian Trusts Act,

1882. It will consists of:-

i. Sponsor: Sponsor should have minimum net

worth of Rs 200 million and at least

five year of experience in real estate

ii. Manager: Manager should have

minimum net worth of Rs 50 mil-

lion and at least five years of expe-

rience in fund management

iii. Trustee: Trustee should be reg-

istered with SEBI and 50% should

be independent directors

2. Investment conditions and Dividend Policy:

i. It has been mandated that at least 90% of the val-

ue of REIT assets will be invested in completed

revenue generating properties ensuring return for

investors and reducing risk-return. Remaining

10% can be invested in Government Securities,

debt of Listed/ Unlisted corporate companies

ii. To ensure regular income to investors, at least

90% of net distributable income after tax of

REIT should be distributed among investors

iii. REIT shall not invest in vacant or agricultural

land and shall invest only in assets based in India

iv. Investment up to 100% of corpus of REIT can be

invested in one project provided minimum size

of such asset is more than Rs 1000 crores

v. Leverage of 25% is ordinarily allowed and lever-

age up to 50% is allowed only after getting posi-

tive consent from unit holders and credit rating

vi. All related party transactions by facilities manag-

er will be on arms-length basis and will be in

best interest of investors; in line with the invest-

ment objective of REITs

vii. Real estate investment trust can invest at least

51% in real estate directly or they can invest in

SPV (Special Purpose Vehicles) which in turn

holds real estate assets

viii.Guidelines related to listing of REITs:

Minimum value of REITs assets : Rs 10 billion

17

Minimum public float - 25%

Minimum issue size of lots is Rs 100 thousand

and for trading lots it is Rs 200 thousands

Sponsor needs to invest 25% in REITs for three

years since inception and continue to invest 15%

till lifetime of REIT.

There can be minimum 20 outside unit holders in

REITs.

3. Rights of Investors:

i. Investors will have

the right to re-

move manager,

auditor, and prin-

cipal valuer and

can also apply to

SEBI for change

in trustee

ii. An annual meeting

of all investors

needs to be con-

ducted by trustee

where information

like performance

of REIT, appoint-

ment of principal

valuer, latest annu-

al accounts needs

to be disclosed in front of investors

iii. Detailed Disclosures needs to be given in annual

and half yearly valuation reports to ensure trans-

parency and protect investor’s money

SEBI has requested comments and opinions from the

various stakeholders and public at large on its draft

regulations. The following nagging issues often fea-

ture as a part of erudite discourses on the topic:

Single level of corporate taxation (either at REIT

or SPV level) or pass through taxation and elimi-

nation of all other intermediate taxes including

those on distributions received by unit holders

Clamor to seek one-time tax exemption when the

REIT is created by a sponsor

In the event of payment of STT, the trading of

REIT units on the stock exchanges must be ex-

empt from long-term capital gains tax

FDI/FII should be allowed under automatic route

by the amendment of FEMA

Exemption of Stamp-Duty when asset is pur-

chased or sold by the REIT or rationalization of

the Stamp-Duty structure

Inclusion of ports, roads, airports and other com-

pleted infrastructure projects in REITs

Explore a relaxation in the minimum 5-years eli-

gibility criterion stipulated for ‘Sponsors’ to ena-

ble other entities

with prodigious

portions of land to

act as ‘Sponsors’.

Industry is seeking

a relaxation of

sponsor eligibility

criteria with regard

to requirement of 5

years experience in

the realty sector.

There is also a feel-

ing that the norm

mandating 90% in-

vestment in com-

pleted projects is

too harsh and it

should be brought down to 75%.

CONCLUSION:

Globally, REITs have been effective in attracting

and managing investments in the Real Estate sector.

This, along with an ever increasing demand for qual-

ity real estate in India, which REITs can help meet

by bringing the required investments in the real es-

tate sector, make the case for implementation of

REITs compelling enough to drive policy makers to

act fast on the implementation of a similar regime in

India with requisite adjustments, keeping in perspec-

tive the unique dynamics of its economy.

The issue of draft guidelines by SEBI should pro-

vide a fillip to the sentiment in the real estate sector,

and help attract capital from overseas markets.

18

“Lender of last resort” is what a

Central Bank of any country is

known as. Central Bank is an insti-

tute that can exercise its power of

damage control if the economy

goes for a toss. From ages, when-

ever a country undergoes a crisis,

the central bank always comes for

its rescue by implementing the var-

ious financial tools it possesses. No

matter how big the crisis is, the

Central bank of the respective

country always manages to bring

the economy back on track. Let us

analyse what measures have been

adopted by various central banks

during the recent period of stagnant

economic growth in the world.

ROLE OF BANKS

1. US FEDERAL RESERVE

Quantitative Easing (QE) – A term

which wasn’t even heard 5 years

ago has become a general topic of

discussion these days and is under-

standable by anyone who’s a little

interested in the world economy.

The dual agenda - of maintaining

the dollar’s value (i.e. managing

inflation) and managing the rate of

unemployment - resulted in the

Fed’s consecutive 3 cycles of the

QE program. With the initial

pumping of $1.7 trillion of QE1

( first cycle of QE) in the economy

the process was followed by an in-

fusion of another $ 600 billion dur-

ing QE2 and eventually QE3 (still

going on) at a rate of $75 billion

per month since Nov 2012 (recent

tapering by $10 billion in bond pur-

chases). Till now, a total money infu-

sion of $ 5 trillion has been done in

the economy.

The tapering was an indication of the

betterment of the economic situation

of the country accompanied with low

unemployment rates, a stable home

currency (USD), increase in the

mortgage value of the houses, gradu-

al inflation, an increase in the GDP

figures and an increase in the exports

and purchasing ability of the country.

But there is a down-side to this pro-

cess. The monetary stimulus given

by the Fed is going to fortify the

economy by encouraging banks to

lend more hence, leading to increase

in borrowing, investment, and spend-

ing.

By lowering the interest rates, the

policy of the fed reserve has deprived

the depositors from the interests that

they would have earned on savings

accounts, certificates of deposit,

money market funds, short and long-

term treasury bills and various inter-

est generating annuities held by the

retirees. The process of QE, which is

the purchasing of bonds from the

commercial banks of the country by

the central bank to infuse money into

the banks so as to make the currency

easily available to spend, invest and

trade, has a flip side. Quantitative

easing helps in financing a budget

deficit since the Fed continuously

buys many bonds, but like every-

thing, when the period ends, things

Are we on a path to recovery or it is

the central banks' effect across the

world. Is another crisis looming ?

BY PUSHPANJALI MITRA, SIMS

Pushpanjali Mitra is

a B.Tech (IT) from

West Bengali Uni-

versity of Technol-

ogy and she is pres-

ently pursuing MBA

in Finance from

Symbiosis Institute

of Management

Studies.

Email ID:

push-

panjali.mitra2015

@sims.edu

19

turn out to be a little difficult.

After the real estate credit crisis bubble, economy

slowed down, sales plunged and a recession started

setting in and the US treasury came up with what it

is known as the bailout bubble that resulted into the

introduction of more and more money-stimulus

packages in the economy. After the real estate bub-

ble burst, it was

time for the world

to face the conse-

quences. Fannie

Mae and Freddie

Mac, the govern-

ment sponsored

enterprises, estab-

lished to buy up

the mortgage

backed securities

were taken over

by the Federal.

Lehman Brothers

was not bailed out

and became bank-

rupt. Merrill

Lynch was on the

verge of bankruptcy and underwent an acquisition

by BofA for $50billion.

Along with these an infusion of $700 billion was

done by the US government - the biggest bailout in

the history of the US government known as TARP

(Troubled Assets Relief Program) - to shore up the

common man’s confidence and capital by buying out

the toxic assets of the financial institutions . Bear

Sterns was bailed out by the Maiden Lane Transac-

tions created by the Federal Reserve of New York

and was acquired by JP Morgan Chase along with

the AIG bailout where AIG was taken over by the

US Companies.

2. PEOPLE’S BANK OF CHINA (PBOC)

In China the monetary policy and financial institu-

tion are controlled by the PBOC, though at times the

communist party through its supremacy influences

the decisions of PBOC.China is an economy which

is semi-intervened by the central bank or the peo-

ple’s bank of China when suffers from liquidity or

credit crisis. During the US recession, China printed

400 trillion Yuan (approximately $600 million in

2009 rate) in order to avoid the downturn of the

economy. China suffered an interbank market crash

in the first half of 2013.The bank was already having

a hard time to keep up the deposit-to-loan ratio (a

technique used to check the amount of liquidity

available in the banks for the lenders) requirements,

even before the liquidity shortage hit the economy.

Banks didn’t have money to lend to the people and

the loans were kept on

hold. The tightened li-

quidity, which approxi-

mately started on June 6,

impacted the inter-

market, stock market and

security refinancing com-

panies. The overnight

lending rate (the rate at

which the banks lends

money to each other

overnight) jumped to

25% clearly showing the

reluctance of the banks to

lend money to each oth-

er.

The amount of total credit

in China’s financial system reached epic proportions

reached unsustainable levels. The world had never

before seen a debt acceleration of this magnitude in

any country ever. This was also knows as the Leh-

man moment. It has increased eight-fold in the past

10 years and is now around 220% of GDP.

The reasons associated with the Credit crunch or

‘SHIBOR Shock’ (Shanghai Interbank Offered Rate,

a benchmark interest rate) which contributed to

spike the inter-bank rates included the sharp fall in

the foreign exchange inflows due to the government

crackdown and illicit activities. If this case would

have happened in US, the Fed would have infused

money instantly but the PBOC (People’s Bank of

China) sat on its hands refusing to inject liquidity.

The explanation which the PBOC gave was that it

wanted banks to slow the pace of lending money.

PBOC wanted to curtail funds that were flowing into

the country's vast informal loans market. Generally

there is a shortage in liquidity at the end of the year

for different banks of China as companies increase

their demand for capital. The growing shadow bank

20

ing system of China, which tends to offer higher in-

terest rates to investors, has also been pumping out

funds from traditional banks. Investors feared the

combination of Fed tapering and the Chinese high

interest rates impact-

ing the stock market.

The Chinese equities

sank to 4 year low. Its

tough stance of allow-

ing tightening the cash

flow in the economy

raised fears of a last-

ing credit crunch and

affected the markets

globally. Soon, when

the Shanghai stock

market started seeing

its all-time low since

the US recession,

PBOC appeared to

soften its position

slightly. To allay the

fear of credit crunch, PBOC pumped in 29 billion

Yuan ($4.8 billion) into the economy via open mar-

ket operations resulting in the fall of the interbank

rates almost by half (it surged to almost 18% and fell

to 9% after the infusion).

3. BANK OF JAPAN

The Bank of Japan has introduced a larger bond buy-

ing program in comparison to the Fed, to revive the

Japanese economy and break the shackles of defla-

tion that have plagued the Japanese economy for the

past two decades. The BoJ is buying ¥7.5-trillion of

government bonds (JGB’s) per month, and interven-

ing directly in the equity market, by purchasing ¥1

trillion of exchange-traded funds linked to the Nik-

kei-225 each year.

The BoJ aims to inject $1.4-trillion into the Tokyo

money markets by April ‘15, equal to a third of the

size of Japan’s $5-trillion economy. These actions

have mainly been the result of public mood and the

decisive leadership of Japan’s PM Shinzo Abe.

These measures to revive the Japanese economy

have been termed by some as ‘Abenomics’. This is

showing result, as the Nikkei broke its historic highs

recently, business sentiment is at a 6 year high and

price have risen slightly.

4. RESERVE BANK OF INDIA

In a span of few

months, the eco-

nomic situation of

India has become

better than what it

was during the ini-

tial months of this

fiscal year. Low

GDP, depreciating

rupee, high current

account deficit

(CAD), ineffective

reforms and policy

paralysis were

holding on to the

progress of the

country. Another

event which hap-

pened during this

time was the Fed reserve chairman Ben Bernanke’s

announcement of tapering of the QE. The announce-

ment had repercussions in India resulting in an out-

flow of capital. The announcement made on 19th

June led to the crashing of Sensex by 526 points and

only two stocks, Sun Pharma and Ambuja Cement

closed in the green among the Nifty 50. Gold tum-

bled and the foreign investors offloaded Rs 2,094

crore from the equity market. This followed the sec-

ond quarter in which the dollar exchange rate of ru-

pee touched its lowest value ever of 68.38 on August

28, 2013. All the major sectors were under turmoil

and where probably seeing the lowest figures of

sales and profits ever.

Every change made by the RBI and finance ministry

was having the exact opposite impact on the econo-

my which made people think that India is approach-

ing towards a recession which will shake the finan-

cial system. Soon Raghuram Rajan became the gov-

ernor RBI and gradually things were under control.

With the different swap windows opened, new bank,

and the various reforms under taken to appreciate the

rupee the rupee almost touched 60. The estimated

fiscal deficit of this year is expected not to be be-

yond 4.8% of the GDP which is termed as the “red

line” by P.Chidambaram.

21

Along with this tool, the other methods adopted by

the Reserve Bank is to allow the foreign banks

which has commenced the banking services in India

before August 2010 to work in their branch mode

and were incentivised to be converted into WOS

(wholly-owned subsidiaries), but banks which have

started their operations after 2010 need to fulfil a

bunch of criteria to qualify the test of RBI. The ini-

tial minimum paid-up voting equity capital for WOS

shall be Rs 5 billion, the bank should be meeting all

the BASEL III requirements, and should be main-

taining a CAR (Capital Adequacy Ratio) of 10% for

the past 3 consecutive years and also the lending re-

quirement for the WOS would be 40% of its net

worth. The new policy says that at least 25 percent

of the total number of branches (initially proposed

by Dr Subbarao) that is opened during the first fi-

nancial year must be opened in unbanked rural area.

CONCLUSION

The Fed has always chosen the easy way out usually

by infusing money into the economy. The general

perception is by giving money into people’s hands,

the economy will be the same as the pre-global melt-

down era which actually is not possible. Most of the

big economists have criticised the usage of quantita-

tive easing since it’s a temporary and short term

money producing instrument that affects the econo-

my on a long run. Quantitative easing is meant to

benefit the wealthy. The US QE program led to the

rise in the stock and home prices that mostly benefits

the wealthy. If the central banks try to avert higher

inflation and interest rates when the economy starts

growing again, it has to drain the money it has

pumped into the banks before gradually reduce the

money supply. More the money infused, more will

be withdrawn to the extent that high money creation

has boosted asset prices. In case of PBOC, infusion

of money into the economy was a correct decision,

in fact, the decision should have been taken earlier

else the world wouldn’t have felt the pinch. China is

sitting on the largest pile of dollar reserve in the

world and the moment it starts releasing the curren-

cy the demand of dollars is going to fall. But since

China is an export-oriented country, they will think

twice before doing that as it will directly hamper the

valuation of China’s exports. QE can be an efficient

measure if used in a proper way. Using for US and

for UK back in 2009 never made the impact but in

case of China, it actually helped the economy to

come out from a recession. In India also most of the

reforms that are taken up by the RBI are long term

which directly impacts the micro-economy of the

country.

22

This is the tale of the two legends

in the field of finance whose rivalry

played an instrumental role in con-

ferring the name & fame to a firm

who started by marketing paper for

commercial use but is now one of

the most venerated companies in

the field of Investment banking,

Goldman Sachs.

The stalwarts we are talking about

are none other than the successive

senior partners at the firm, Sidney

Weinberg & Gus

(Gustave) Levy.

The firm not only

witnessed unprec-

edented & un-

matched growth

rates during the

tenures of these

two legends but

also diversified

into the multitude

of businesses it is

in now with Sidney

Weinberg & Gus Levy being the

champions for Investment Banking

& Securities Trading businesses

respectively. Here’s an insight in

the lives & careers of these two

legends.

Sidney Weinberg

In a real life rags to riches story,

Sidney Weinberg joined Goldman

Sachs as a janitor’s assistant & went

on to become the CEO of Goldman

Sachs. Apart from his mettle (a drop-

out from school who saw meteoric

rise to power), it was the liking

which Paul J Sachs (the grandson of

the founder; firm is named epony-

mously) took to Weinberg that made

his rapid ascension to power possi-

ble. To hone Weinberg’s skills, P J

Sachs sent him to business school in

Brooklyn’s Browne Business College

& then after a brief

stint in the navy

during World War

I, when Weinberg

joined back the

firm, it was as a

securities trader.

Because of his ex-

ceptional skills,

Goldman Sachs

bought Weinberg a

seat on NYSE in

1925. He became a part-

ner in 1927, co-running the division

with Waddill Catchings during which

period the market cap of firm shrunk

to a meagre $10 million from $500

million. Weinberg rose to the occa-

sion, wrested Senior Partnership

from Catchings & saved the firm

from bankruptcy. He held this posi-

tion until his death in 1969.

The Rivalry That Turned

Goldman sachs ‘GoldEn’

BY JEENOY PANDYA , NMIMS, MUMBAI

F

I

N

L

E

G

E

N

D

s

Jeenoy Pandya is a

B.E. (Mechanical)

from MS University,

Baroda & he is

presently pursuing

MBA from NMIMS,

Mumbai.

Email ID:

jeenoypandya

@gmail.com

Sidney Weinberg

23

Weinberg championed investment banking which

gave a defining direction to the firm’s business &

made it one of the most prominent firms around in

the field of investment banking, a privilege the firm

still enjoys. It was during the later years of his tenure

that Weinberg encountered the growing influence of

Gus Levy, a force to be reckoned with & who had

ideas conflicting with Weinberg’s own regarding the

strategy for the future of the firm. The naturally re-

sulting competition proved to be highly beneficial to

the firm. Weinberg finally had to give in & appoint

Levy as his successor but he formed

a supervisory committee to oversee

the functioning of Levy which

greatly limited the latter’s powers.

Weinberg’s story still remains one

of the most inspirational ones &

he’s remembered even today at

Wall Street with love & with re-

spect.

Gus Levy

His story being equally inspiration-

al, Gus Levy too was from a humble

background. He dropped out of

Tulane University & plunged into

the financial sector after spending a

few years in which he joined Gold-

man Sachs in 1933 where he would work for the rest

of his life. People who knew him described him as

very acute, volatile, magnanimous & a powerhouse

of energy,

He joined the firm as the head of a one-man trading

division, the same division which he championed

later in his career. He endeavoured to shift the firm’s

focus from Investment Banking to Securities Trad-

ing which he was able to accomplish to a great ex-

tent. This & his growing clout at the firm put him at

loggerheads with the then Senior Partner – Sidney

Weinberg. Weinberg held his own initially but ulti-

mately had to yield & although begrudgingly, ap-

pointed Levy his successor as Senior Partner in

1969.

Gus Levy pioneered several techniques in the field

of securities trading such as block trading &

amassed great respect for the same. During his ten-

ure as Senior Partner (1969-76), the firm achieved

stupendous growth, arguably, even more than that

during Weinberg’s Tenure. Despite his remarkable

career, the firm got embroiled in some major contro-

versies under his leadership such as “Penn Central

bankruptcy commercial paper capital” which tar-

nished the firm’s reputation for years to come.

Levy suffered a major stroke in

October 1976 following which

he went into a coma, one from

which he never recovered. He

died at a relatively young age of

66 but till date remains one of

the giants of Wall Street.

The rivalry that forged the

golden future

No doubt, several great men

have played part in transforming

Goldman Sachs from what it

was, a company who marketed

paper for commercial use to

what it is today, the company

which pioneered the use of commer-

cial paper (short-term debt instrument used by large

corporations), but the role that the duo played is spe-

cial.

Many a rivalries has destroyed companies but this

one is particularly intriguing as despite it being in

the field characterized by cut-throat competition,

high risks & high rewards, proved to be highly pro-

ductive for the firm, giving it strategic direction &

staggering growth. Till date, the verticals that this

duo devoted their lives & careers to (Sidney Wein-

berg – Investment Banking, Gus Levy – Securities

Trading) remain at the heart of multi-billion dollar

business of Goldman Sachs.

Gus Levy

24

In December 2011, Facebook was

the second most visited website

behind Google. At that time, Face-

book had almost 845 million

monthly subscribers. An invest-

ment report valued the company at

$50 billion. With huge present

profits of $1 billion and high ex-

pected growth in future, Facebook

decided to file for an IPO with the

Securities and Exchange Commis-

sion (SEC) on February 1, 2012.

The idea was to value the company

at about $100 billion.

Facebook followed the Silicon Val-

ley tradition to list on NASDAQ.

This IPO was led by Morgan Stan-

ley. Initially the company aimed to

$28 to $35 per share. Finally it set-

tled for $38 per share. This price

valued the company at $104 bil-

lion. It even decided to increase the

number of shares by 25% to 460

million shares. The reason behind

this high price of $38 was the strong

demand despite economic slowdown.

Also, investors didn’t want to miss

out on the massive gains Google and

LinkedIn saw.

On 8th May, 2012, the trading of Fa-

cebook shares was supposed to

begin. However, technical glitches

with the NASDAQ exchange result-

ed in a delay of half an hour. Several

orders were blocked and even con-

fused investors whether or not their

orders successful. As a result the

share price fell to $38.23. Although

the shares traded at just 0.23 more

than IPO price, the IPO raised $16

billion. The stock price eventually

reduced to as low as $20.011 in Au-

gust 2012. Today, the share trades at

almost $55 eventually lead to a mar-

ket capitalization of $140 billion.

Facebook and Twitter going public

BY JAY PARIKH, NMIMS, MUMBAI & DHAVAL SHETH, SIMSREE, MUMBAI

Jay has completed

his BE in EXTC in

2012. He has

worked with Ac-

centure in SAP

BOXI before joining

NMIMS.

Email ID:

parikhjay1701@gm

ail.com

Dhaval has com-

pleted his BE in

EXTC in 2012. He

has worked with

Accenture in CRM

before joining

SIMSREE.

Email ID:

dhavalsheth

@gmail.com

Figure 1. Facebook’s stock price vs the NASDAQ composite

25

NASDAQ had to offer $40 million to investment

firms for the technical problems. Also lawsuit was

filed against Morgan Stanley for selectively reveal-

ing adjusted earnings estimates to some investors.

The other underwriters also faced similar litigation.

This has eventually raised eyebrows against finan-

cial companies manipulating to benefit few investors

to gain loyalty.

What was meant to be one of the successful IPO

turned a bungled and botched one. Twitter, a micro-

blogging site, shows almost the same growth pro-

spect as Facebook. However there were few notable

differences when they registered for IPO. Twitter

has only 215 million monthly active users. As com-

pared to Facebook, Twitter is not profitable. While

Facebook entered IPO after seeing a lot of growth,

twitter went public at an early stage in the growth

cycle. The Facebook IPO was a learning experience

for Twitter and it successfully avoided the same fate.

Unlike Facebook, Twitter never revealed its wish to

go public until it filed for an IPO. And Twitter didn’t

follow the Silicon Valley tradition. The IPO was led

by Goldman Sachs. Goldman Sachs worked to keep

much of the offering of the hands of retail investors

and hedge funds. And it chose to be listed on NYSE.

Thus Twitter was committed not to make same mis-

takes that Facebook made. The firm was generating

$500 million revenues and thus it aimed to generate

$2 billion through IPO. This move was ambitious

but possible for this 140 character micro-blogging

website. Initially the share was to be offered at $18-

$20 per share. However the share was priced to be at

$26 per share. And the trading day was decided to be

in November, one of the year's best months for mar-

ket gains.

On 7th

Novem-

ber,

2013,

NYSE

got the

stock

open and

trading

in 90

minutes.

The

share

price

rose as

high as

$50.09 and closed at $44.90 per share. The under-

writers did not have to buy stocks to keep it above

IPO price as in the case of Facebook. The share

price rose by 75% which is one of the highest on the

first trading day. The IPO raised around $1.8 billion

and gave the company a valuation of $14.4 billion.

Also the money raised through IPO was to be used

for general corporate purposes, capital expenditures

while Facebook’s IPO mainly went to early share-

holders.

Twitter released fewer shares as compared to Face-

book and thus the demand exceeded than supply.

Although, Twitter was able to have a successful

IPO, it did put in further questions. Has Twitter been

over cautious and undervalued the company. This

seems to be in contrast with Facebook’s overvalued

shares.

Facebook went for an overpriced I.P.O., and the

company’s shares lost much of their value as a result

of it. Twitter avoided that mistake by under-pricing

its shares. Companies go public to make some mon-

ey that they can invest in their business; an under-

priced I.P.O. means the company is bringing in less

than it could have for every share it sold.

Just looking at the current valuation, the value per

user seems to be the highest for Twitter.

Figure 2. Twitter’s stock price vs the NASDAQ composite

26

However

in terms of

monthly

unique

users as

KPI,

LinkedIn

outperforms Twitter. Twitter has something power-

ful which Facebook and LinkedIn does not have.

The power of tweets and this power are not just con-

fined to the platform. Today it extends to TV and

even in print media. If such indirect users are count-

ed, possibly the valuation looks very cheap now.

Twitter sold 70 million shares for $26 when actually

it could have sold at $45. It made less than $2 billion

where more than $3 billion was possible. But both

Facebook and Twitter successfully reached a valua-

tion remarkably high given their financial funda-

mentals owing to innovative technology and high

anticipated growth. As compared to Facebook, Twit-

ter has an advantage of mobile advertisements. Face-

book still will be more of desktop application. This

makes twitter’s growth after IPO more interesting.

The third quarter 2013 financial returns of Facebook

show income increased by 100% to $621 million

compared to a

loss of $311

million in 2012

Q3. The

growth of Fa-

cebook after

IPO has tre-

mendously increased from both advertisements and

mobile advertisements. The number of daily active

users has increased by 27% on y-o-y basis. And this

figures reflected back in the share prices which now

trades at a range of $50-$55. On the other hand,

Twitter underwriters have mixed opinions on the

stock where 2 of the 5 companies rating it as a buy,

other 2 as a hold and one as a sell option. Twitter

also has not made profits for last three years and lost

out $133.9 million, 89% increase from same period

of 2012. However Twitters’ stock has been very vol-

atile where it reached $80 and suddenly fell to $60

in 5 days. Although Twitter has played well on the

first trading day, will it be able to stabilize? Will the

stock grow with such a bright future? And compa-

nies with innovative technology and high growth

would be able to learn from Twitter and Facebook

and launch a successful IPO?

Valuation ($Bn) Users (Mn) Value/User

Twitter $24.46 230 $106.35

LinkedIn $25.25 259 $97.49

Facebook $115.5 1190 $97.12

Table 1: Valuation of Twitter, LinkedIn and Facebook

27

As an earnest endeavour on the part

of the Finomenon team to apprise

our readers of the economic imped-

iments faced by people from the

lower strata of our society; the so

called "bottom of the pyramid", we

focus our attention on a section of

the population, which although

termed "indigenous", is one of the

least developed in terms of the lev-

el of income and standard of living.

It is indeed an unfortunate fact that

these communities, popularly re-

ferred to as "Adivasis", primarily

concentrated in the eastern and

south eastern parts of the country

(the states of Jharkhand, Chattis-

garh and parts of Odisha and An-

dhra Pradesh) have been left out of

the bandwagon of mainstream eco-

nomic progress. We take three such

examples to drive the point home.

Sushant (age 27), paan shop own-

er, Koraput (Odisha)

He inherited the shop at the age of

9 after the death of his father in

1996 and has been running it to

sustain himself, his wife, 3 kids and

his old mother. His family has been

illiterate for as long as he remem-

bers. "No one in my family has ev-

er held a pen or speaks any other

language except Oriya and the lo-

cal tribal tongue", says Sushant

quite candidly. As of January’14, his

daily routine and the business activi-

ties of his shop are as follows:

Number of working hours: 14(8 am

to 10 pm) on all 7 days.

Average daily sales: Rs 300

Monthly rent: Rs 1000

Cost of supplies: Rs 4000

He stays at a rented chawl on the out-

skirts of the town with his family and

has to cycle 8 kms daily to the mar-

ketplace. His kids study at a govern-

ment run primary school run under

the "Sarvashikshya Abhiyan" which

has a mid-day meal facility. Life, in

general is quite tough and is a hand-

to-mouth situation considering the

additional cost of medicines for his

ailing mother.

Manoj(age 32), tea stall owner,

Bastar(Chattisgarh)

His case a bit different as he has set

up the shop quite recently after tak-

ing a loan from his brother-in-law in

2012. He hails from a small tribal

village 80 kms from bastar. He was a

daily wage labourer in a road con-

struction project from Bastar to Rai-

pur. People like Manoj are part of

what we refer to as the unorganised

labour market. They have no steady

Grassroots

BY SARTHAK MOHANTY, NMIMS, MUMBAI

g

R

A

S

S

R

O

O

t

s

Sarthak Mohanty is

pursuing his MBA

from NMIMS, Mum-

bai. He has worked

for Accenture Ser-

vices Pvt Ltd. He

holds a B.Tech de-

gree from KIIT Uni-

versity, Bhubanes-

war.

Email ID:

13julys@gmail.com

28

employment commitments. Manoj worked as a wait-

er in a local fast-food restaurant 4 years back. He has

also worked as a cycle rickshaw puller and a security

guard for a housing colony. He has a family of four

(wife and 2 kids) and stays in a relatively decent on

the outskirts of the town. Unlike Sushant, he takes a

bus daily at 7 in the morning and works at his stall

for 10 hours(8 am to 6 pm). His business schedule

and earnings are as follows:

Average daily sales: Rs 600(around 100 visitors dai-

ly and a glass of tea costing Rs 5 or Rs 10).

Daily variable cost of supplies(milk, sugar, kero-

sene, water supply): Rs 150

Fixed cost (stall, kettle, glasses): Rs 4000(invested

initially by taking a loan)

Daily travel expenses: Rs 50 (to and fro by bus).

His wife works as a house maid in the town and

earns around Rs 2500 monthly and his kids study at

the bastar municipal school. The average monthly

income of his family, thus, is around Rs 14,500

which is quite better than the previous case. He pays

a house rent of Rs 4000 and spends around Rs 7-8K

for food, clothes and his children's books and school

fees(a nominal price). He is able to save at least Rs 6

-7K monthly.

Kaushalya,(age 19), domestic help, Bokaro

(Jharkhand)

She has stayed in Bokaro for the last 5 years. The

steel plant in the town established in 1964 has at-

tracted a lot of tribal youngsters from the nearby vil-

lages to work as domestic servants, auto-rickshaw

drivers, security guards and construction-site work-

ers for decades. Kaushalya works at the house of a

senior officer in the steel plant and stays at the serv-

ant quarters. She is provided with food 4 times a day

and enjoys a fairly decent life with a salary of Rs

4000 per month. She visits her village once a month

and is able to send 1500 per month to her family

consisting of her parents and a younger brother who

is in high school. Her father is a vegetable vendor

back in the village and earns Rs 1800-2000 per

month. Her situation is tenuous as she is about to

attain marriageable age and is the major contributor

to her family's income. She is a school dropout (in

class 4) and can barely read Hindi.

Conclusion

The current tribal population of India is around

84.51 million (around 8.14% of the country's popu-

lation). Agriculture as an occupation has lost its ap-

peal among the young generation and a lot of the

tribal youth are migrating to towns and semi-urban

areas in search of a better standard of living. Lack of

formal education and skills manifest themselves in

the form of a wide disparity in income levels. The

vicious cycle of poverty and lack of decent employ-

ment opportunities is a major concern. The central

and respective state governments have undertaken

development plans like the NREGA and the impro-

vised Public Distribution System but a sustained en-

hancement in the level of economic self-reliance can

be achieved by accommodating such people into the

organised financial sector by opening up more banks

in tribal regions and encouraging them to take ad-

vantage of credit facilities. Microfinance initiatives

can also be undertaken in villages. Vocational train-

ing facilities can be provided in government run

schools under various national schemes at the high-

school level to equip teenagers with skills required

to earn a livelihood in towns and cities. Such

measures would go a long way in widening the hori-

zons of our economic policies and transform the

lives of thousands of individuals untouched by the

boon of economic development.

29

It is often heard now a days that

India’s growth story has been de-

ferred till May 2014. The citizens

of the country and analyst across

the globe believe that only Naren-

dra Modi can revive India’s growth

story and the worse scenario would

be the same government being vot-

ed back to power in 2014. The cur-

rent government has lost its credi-

bility and is pushing India to pre

1991 era. The incumbent govern-

ment and its authorities will never

accept, but India is currently in a

state of stagflation (i.e low growth

and high inflation), this fact is re-

butted by the latest GDP and infla-

tion numbers which stand at 4.4%

and around 10% for CPI respec-

tively. Our fiscal deficit and current

account deficit are ballooning at an

alarming rate. The fiscal deficit has

already reached 94% of budgetary

estimate in 2013 and now there is 1

more quarters to go. To widen it

further the Government passed the

food security bill.

As per popular sentiments the in-

cumbent Government will be voted

out of power in 2014 elections.

They are trying their best not to

lose by a huge margin. This fact is

conspicuous by their folly of pass-

ing food security bill in this debili-

tated economic condition, without

caring about the catastrophe this

bill will bring upon our economy.

The UPA blames the opposition for

policy paralysis which has led to

the current state of economy.

The most important problem is that

of ballooning fiscal and current ac-

counting deficit, which is causing a

variety of other problems like rupee

depreciation, slow growth, inflation,

high interest rates, etc. CAD has re-

duced but only on papers. No one is

tracking gold smuggling but gold is

being smuggled into India at an

alarming rate from our neighbouring

countries. The revenues which we

could have gained from duties on

gold are now being lost.

With the same numbers in Parliament

there are several steps which the

UPA can take to revive the growth.

These steps are politically possible

and the corresponding policy for

those steps can be framed without

much arousing acrimony. Whichever

the next Government that comes to

power in May 2014 or before that in

case of early elections, it is impera-

tive that they take these steps.

The fiscal deficit can be reduced by

reducing number of subsidies, pru-

dent spending by ministries like they

did last financial year and suspending

the MNEGRA scheme for 2 years in

the areas where this employment

scheme has failed to deliver. The

Food Security bill must be scrapped,

as currently the problem in India is-

n’t hunger its malnutrition. In 1984

27% of population said they were

hungry in 2004 just 1% of the popu-

lation said they were hungry. The

poor cannot afford balanced diet due

to high prices of dairy products and

how can IndIa’s GRowTh bE

recuperated?

BY NIBODH SHETTY, SIMSREE, MUMBAI

Nibodh is currently

pursuing MMS from

SIMSREE, Mumbai.

He likes to write

analytical articles

on varied subjects

including finance.

Email ID:

nibodhshetty

@gmail.com

30

other nutrient rich fruit and vegetables, hence infla-

tion is the main problem not hunger. Commission

for Agricultural Cost and Price (CACP) has found a

huge correlation between fiscal deficit and inflation

in India. Higher the fiscal deficit higher the inflation.

The Reserve Bank of India cannot reduce the interest

rates as it would further increase the inflation. This

is one of the reasons companies are holding back on

new investments and their margins are pressure. The

high interest rates have hampered the consumer sen-

timents and the demand for loans to buy car and real

estate is hit a low. The automobile and real estate

sector which are high dependent on Indian consum-

ers are facing huge liquidity crunch and their inven-

tory are piling up. These 2 sectors are a huge source

of indirect employment for other sectors.

Fuel subsidy must be reduced. This can be achieved

in two ways – one is to increase the fuel price and

the other is by reducing consumption. The diesel

price must be increased and brought to existing mar-

ket rates. Cairn India’s Barmer Oil Field in Raja-

sthan is today supplying 15-18% of India fuel con-

sumption. They are waiting for approval to explore

for further in that area. Cairn India estimates that oil

reserves in the area surrounding Barmer Oil fields

can cater to about 30-35% of India’s oil requirement.

They have got the expertise and experience for ex-

ploring in that area. Government must speed up the

process of giving approval for oil exploration by set-

ting up a body on lines with the Cabinet Committee

on Investment CCI which has been setup for infra-

structure projects. Several companies are waiting for

approvals to explore for oil fields across the country.

A higher domestic production will reduce our im-

ports and thus help in bridging the current account

deficit. The new resource that has been discovered is

Shale gas. US has reduced its dependence on OPEC

countries by active exploration of Shale Gas. It is

estimated that India has huge reserves of Shale gas,

hence a policy must be formulated for shale gas ex-

ploration.

After railways, telecom sector is the 2nd highest

consumer of diesel is telecom sector. They use it to

run the diesel generator attached to their network

tower in rural areas. The entire consumption of tele-

com sector could have been obviated with, if we had

24 hours electricity supply. India has coal reserves to

suffice our demand for next 50-100 years. Despite

this our power plants have shut down due to lack of

coal supply and some are yet to be constructed are

stuck waiting for approvals. Government must frame

a policy to allot coal blocks either by bidding or rev-

enue sharing basis. Monopoly of Coal India Ltd

should be reduced. As they don’t face any competi-

tion domestically it is ok if they do not perform as

there will always be companies desperate to sign

Fuel supply agreement with them due to monopoly.

Last year India imported $17.4 Billion worth of coal.

Our current account deficit for FY13 stood at $80

Billion. Our FY13 CAD could have been brought

down to $63Billion right away, if we had formulated

a proper policy to allot coal blocks and rupee would-

n’t have plummeted as witnessed.

Iron ore and other mineral mining which has been

suspended by the Supreme Court owing to illegal

mining. As a result the iron ore exports from these

mines have stopped. This is widening our trade im-

balance. Environment clearance is today causing

most of the delay for companies which have been

allotted block to start mining. As most of these ille-

gal mines have already violated the environment cri-

teria and the damage is irrevocable. In the above

case of illegal mining, the most pragmatic approach

would be to allot the mines without considering the

environment factor wherever the damage done, as

the damage is irrevocable. The Government must

formulate a policy for allotting these mines and also

it should formulate stringent policies to curb new

illegal mines. As exports from these mines would

resume the CAD which is basically difference be-

tween the export and imports would reduce as ex-

ports would increase.

In India the company takes 7 years to obtain all

clearance to start mining and it takes 3 years after

that to reach optimum capacity. So basically it takes

10 years for mining operation to commence. The

company will have to pay interest on the money bor-

rowed for auction and they incur expense without

any returns. Who will prefer to invest if in any pro-

ject if the first cash that would flow in would be af-

ter 10 years? Government must reduce the number

of unessential licensing and also see to it that the

licensing process is completed in a given time frame

of few months if not then the concerned department

must be made accountable. This a problem the Gov-

ernment can address without having to pass any

bills. It is just that the concerned department are too

lethargic to work and procrastinate.

31

For the things that have to be done by framing new

policy, passing bills for the framing of new policies,

it can be achieved even in the current political sce-

nario. Since framing and passing of these bills is im-

perative for the next Government, BJP will definite-

ly oblige. There is always a fear lurking in their

mind that in case they do not reach the required

number in May 2014, they would eventually have to

depend on tempestuous allies. In that scenario pass-

ing the bills for framing these policies would be dif-

ficult. Hence the number of votes required for pass

these bills in order to formulate these policies is pos-

sible.

Congress may have to abdicate Food Security Bill

but the Food Security bill is not the game changer

for them unlike MNEGRA in 2007-08. In India this

year 1/4th of the population would be voting for the

first time. For them the main concern is good econo-

my growth and jobs. If the Congress can revive

growth they may be able to regain lost ground. And

for the next government whoever it may be UPA or

NDA or third front, economic growth would be their

priority as the people in the coming years will de-

mand it and no government can win the election

without delivering on it. Hence BJP will definitely

agree to pass these crucial bills.

32

Raghuram Rajan: 2013 saw one man take entire country

by storm. As Raghuram Rajan took office as the Governor

of RBI in September we saw reactions on his academic cre-

dentials as well as his looks. He brought stability to the mar-

kets and continued to be in spotlight through out the year.

Rupee, which was the worst performing currency in Asia

was hovering around 68 when he became the Governor, end-

ed the year with 61-62 mark.

Never to be pressurized by the North Block or the markets,

Dr.Rajan believes in his own style of policymaking. He took

the market by surprise by raising the policy rates during Sep-

tember review and keeping rates constant in December re-

view. On being asked by a reporter after one of the policy

reviews, ‘Mr.Rajan, the nation was expecting a Volcker but

we got a Yellen?’ he replied with his characteristic wit ‘How

about a Raghuram Rajan?’

Arundhati Bhattacharya became the fir st woman

chairperson in SBI’s 207-year history. Having joined SBI

in 1977 as a probationary officer Ms.Bhattacharya has

seen it all when it comes to Banking. She has served right

from metros, rural areas to the bank’s New York branch

handling various assignments spanning credit, forex,

treasury and retail operations.

Bhattacharya is the first woman to lead a Fortune 500

company in India. She took charge of the bank at the time

when its grappling with bad loans, increasing non-

performing assets (NPA) and profits seeing a downward

fall. Known as a task master by her peers, she is known

for taking tough calls in times of distress.

Top Newsmakers in Business -

2013

33

Jignesh Shah 2013 turned out to be annus hor ibilis as he quit

from the board of his company Multi Commodity Exchange of India

Limited (MCX). Jignesh Shah had became a rage in 90’s due his rev-

olutionary trading software. He started Financial Technologies, the

holding company of National Spot Exchange of India (NSEL), an

online trading platform for commodity exchange. With the right set of

skills, this man created a business empire across the world.

All of this success was came crashing down in July this year, when

India’s investment community was jolted by a severe payment crisis

in NSEL. With a scam estimated to be around Rs 5,600-crore it was

considered to be bigger than the Harshad Mehta scam. While thou-

sands of investors were furious with anger, Jignesh Shah tried to

prove his innocence before the police. Shah claims that he was una-

ware that NSEL defaulted on payments to investors.

Chanda Kochhar took ICICI to rural hinter lands in 2013 by

exploiting technology that is at the disposal of every bank in to-

day’s world. Banks have been hesitant all these years in setting up

bases in rural areas due to high capital costs involved in setting up

branches. With ‘Financial Inclusion’ being only on paper for most

of the banks, Kochhar cracked the rural code by giving away

around 9000 tablets to her staff to open accounts.

With its bank on wheels model – one can see her staff walking

across villages and towns urging literates to open an account. The

bank opened 1.65 crore zero balance savings accounts, the most

by any private bank in the country and the second-highest in the

industry. It has reached out to over 15,000 villages through its

branches and business correspondents.

Narayana Murthy In what was termed as the biggest comeback of

recent times, Narayana Murthy was shocked India Inc when he an-

nounced his return the organization he built after its dismal perfor-

mance for the past two years. Murthy, however, was not a man with

magic wand as warned that the recovery would be time-consuming

and painful.

Apart from raising the morale of its employees, Mr. Murthy took a

slew a measures upon his arrival such as reducing costs, inviting for-

mer executives back to the company, hike in pay of employees and

hunt for a new CEO. All the Notwithstanding many senior-level exits

from the firm the firm has shown promising results with profits beat-

ing street estimates. It is to be seen what 2014 has in store for Infosys.

34

Compiled by - Ajit Nayak

The Chinese currency, the

Renminbi (also called the Yuan,

represented by ¥) is renowned for

being tightly controlled by the Chi-

nese Government. In November

2013, the Government unveiled a

list of sixty reforms that signalled

sweeping changes in the way the

world’s most populous nation func-

tions. While a few reforms – like

the relaxation of the one-child poli-

cy – are social, a majority of the

reforms deal with liberation of the

economy of the Asian behemoth.

These included allowing private

investors to set up banks, allowing

private equity into the State Owned

Enterprises, giving markets a more

decisive role in the allocation of

resources and loosening controls on

the pricing of necessities like wa-

ter, electricity and natural re-

sources. The government also sig-

nalled its intent to accelerate the

process of making the exchange

rate of the Chinese currency more

market based, which is the latest in

a series of steps to reduce govern-

ment intervention in the currency.

The importance of the reforms can-

not be fully appreciated without a

study of the history of the

Renminbi and the Government’s

control over the exchange rate.

Till the 1970s, the Chinese econo-

my was closed to the world, and

the value of the Renminbi was per-

manently pegged to the US Dollar

at ¥2.46 per Dollar. In the 1980s,

the economy gradually opened up,

and China began focussing on

growth through exports. To increase

the competitiveness of their exports,

the value of the currency was gradu-

ally devalued all the way to ¥8.62 to

the USD in 1994. This led to an in-

crease in the inflow of dollars into

the country, strengthening the Cur-

rent Account Deficit (CAD). A mas-

sive Current Account Surplus in the

latter half of the 90s allowed China

to peg the Renminbi to ¥8.27 per

USD without further devaluation

from 1997 to 2005 after the Asian

economic crisis in 1997.

At ¥8.27 to the US Dollar, the Chi-

nese currency was highly underval-

ued considering the Purchasing Pow-

er Parity of the United States and

China. The World Bank and the In-

ternational Monetary Fund estimated

that a fair price for the Renminbi in

2004 would be close to ¥1.9 to the

USD, as opposed to the existing rate

of ¥8.27 to the USD. This large dif-

ference in the actual and perceived

value of the Chinese currency led to

difficulties for US companies, which

could not compete with the extreme-

ly low-priced imports from China.

This effect was also seen in many

other countries across the globe,

leading to the rapid growth of Chi-

nese exports to many nations, which

adversely affected the local produc-

ers. The United States in particular

was at the forefront of international

pressure on China to loosen control

of the currency and allow it to trade

OPENING THE RENMINBI TO THE WORLD –

CURRENCY REFORM IN CHINA

BY RAHUL FERNANDES, SIMSREE, MUMBAI

Rahul Fernandes is

an MMS Finance

student from

SIMSREE, Mumbai.

He takes keen in-

terest in the macro-

economics of econ-

omies around the

world and their

effect on stock mar-

kets.

Email ID:

rahul.fernandes

@simsree.net

35

according to the market. Increasing tensions led to

the U.S. threatening trade sanctions against China if

a more market-based model was not developed for

the Chinese currency.

In 2005, China finally revalued the Renminbi higher

to the US Dollar and announced that it would no

longer be tied to a fixed rate against the US Dollar.

The Renminbi was instead tied to a basket of inter-

national currencies including the Euro, the Japanese

Yen and the South Korean Won, besides the existing

US Dollar and allowed to fluctuate on the basis of

market supply and demand. This represented a small

step towards realistic currency valuation, temporari-

ly appeasing the Governments of other nations and

alleviating the risk of being slapped with trade sanc-

tions. However, China did not allow the currency to

trade freely, setting a narrow trade limit band of

0.3% around the existing price to prevent large cor-

rections in the currency.

One of the major rea-

sons of the Chinese

government allowing

the value of the cur-

rency to start rising

was the need to rein

in inflation in the

economy. Spiralling

food costs due to

stagnating growth in

production and in-

creasing purchasing

power were leading to

high inflation, which

could not be curtailed

despite a series of in-

terest rate hikes. Also, the cost of keeping the Yuan

pegged to the Dollar was rising, without an equiva-

lent rise in the benefits to the nation. With a large

Current Account Surplus and huge foreign exchange

reserves, the Government did not feel the need to

keep devaluing the currency. The Yuan gradually

strengthened over the next few years, going up from

¥8.27 to approximately ¥6.8 to the USD by 2008.

The crash of 2008 did not affect China directly,

however, the sudden drop in demand from devel-

oped countries involved in trade with China led to

Chinese exports being hit hard. Millions of workers

lost jobs, and exports dipped by as much as 25% in

many sectors. This development forced China into a

rethink on their monetary policy.

Since 2005, the Chinese currency was linked to a

number of international currencies, of which the Eu-

ro was one of the major names. However, the

weightage of each currency in the calculation was

not disclosed, and China continued to make periodic

minor adjustments to deal with various economic

situations.

After 2008, the Greek and Spanish crises led to a

large fall in the value of the Euro. To protect the cur-

rency from rapid devaluation and give itself time to

consider a means to combat the crisis, the Govern-

ment increased the weightage of the US dollar, thus

unofficially pegging the currency to the USD again.

This policy persisted till June 2010, when the Gov-

ernment got rid of the peg once more and allowed

the value of the currency to increase based on mar-

ket supply and de-

mand and the rela-

tion to various world

currencies. The

trade band was also

increased from 0.3%

to 0.5% and then

1%, which led to a

higher rise in the

currency value.

The chart below

shows the Chinese

currency being

pegged to the USD

before 2005 and

from 2008 to 2010,

with a gradual strengthening at other times. It is

worth noting here that the currency never faced a

large drop due to the narrow trading band imposed

by the Government.

The internationalization of the Renminbi has gained

media and political attention recently. An interna-

tional currency is one that is used to a large extent in

world trade, even in the trades of other countries.

For example, if the trades between two nations like

India and Turkey are carried out in dollars, it would

show that the dollar is an international currency. The

US Dollar and the Euro are the world’s two biggest

international reserve currencies, since they are

Figure 1: Historical chart of No of CNY to 1 US Dollar. Note: A lower

value of the Yuan to the Dollar represents a stronger currency.

Source:XE Charts (www.xe.com/currencycharts

36

widely held in foreign exchange reserves of other

countries and used for international trade.

China is one of the biggest players in the world in

international trade, with more than 11% of all trade

involving China as either buyer or seller. However,

the contribution of the Chinese currency in 2010 was

a meagre 0.24%. This was due to tight Government

control on all transactions involving Renminbi. Till

2009, no external transactions could be carried out in

Renminbi. Hence, all payments to Chinese exporters

were in dollars, which would pass to the central

bank, which in turn would pay the exporters in

equivalent Renminbi. Hence, the use of Chinese cur-

rency for trade was virtually non-existent.

This began to change in 2009, when China agreed

on bilateral currency swap deals with various na-

tions. Since then, China has chalked out agreements

with countries like Russia and Japan to carry out all

trade in Renminbi instead of the US Dollar. A grad-

ual reduction in Government interference in foreign

exchange rates and implementation of Renminbi-

trading hubs in various major cities of the world like

London, Moscow, Paris and Tokyo has also helped

the Renminbi move towards being a more globally

accepted currency. In 2013, the Renminbi was the

8th most traded currency in the world.

How-

ever,

China

still

has a

long

way to

go be-

fore its

curren-

cy re-

flects

the

stature

of the

nation

in in-

ternational trade. The

Renminbi cannot be used as a

reserve currency as long as the Government main-

tains control on the conversion of its currency. The

recent economic reforms outlined in November 2013

are a step in the right direction, with the Government

pledging to completely quit daily interference in the

currency. The speed of implementation of these re-

forms remains to be seen, but if carried out sooner

rather than later, they could prelude the rise of a new

truly global currency.

Figure 2: Chart of trade and currency – 2010

(Source: Society for Worldwide Interbank Financial Telecommunication (SWIFT))

37