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> Indian Context

> BANK 2.0 All-

Pervasive Banking

>Middle East Unrest–

OIL v/s BLOOD

>ULIPs Simplified

>GST now the

Indian Case

>Indian Railway

>Market watch

>Iron Ore pricing

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Team Members

Hemant Kumar K

Sumanth

Manjushaa

Pritam

Piyush Chawla

Sukant

Anurag Nath

Designers

Raghuram

Ramasundari

Faculty Mentor

Dr. Senthil Arasu

Editor

Ashish Vazirani

The Monetarist Issue 4

February 2011

DISCLAIMER:

All opinions presented herein belong to the respective writers, and the copy is strictly for internal circula-

tion only.

Dear Readers,

When there is a will there is always a way …. After the reforms of

the finance club we are realising what we planned for. With few

sleepless nights, missing lunches/dinners and petty fights we are

on the way towards our objective

“Kudos to all the ten stakeholders of the club”

In the Last Month’s issue we came up with the Fundas of “Islamic Finance”, concepts which are much safer than the present conven-

tional tools and instruments. We have put details of different in-

struments, their application areas and also their relationship with

conventional instruments.

In the Indian context we saw stuff related to the food security bill

and related issues which might have helped students to know the

internal working of the food supply sector and the differences in

the approaches of different committees of the country. Moreover in

the Gyan part we talked about the Mutual Funds and its working

how and why we should invest in mutual funds.

The current issue starts with the deep analysis of banking sector,

the direction and future opportunities in banking sector, then the

outlook of Middle East Unrest where we see that how a political is-

sue is impacting the working of global economy and also about

the Indian railway which now showing the negative signs on bal-

ance sheet.

This issue also contains the working of GST( Goods and Service

Tax) which is the upcoming tax policy of India, and also the im-

pact of GST towards the fiscal reforms of economy.

Have a pleasant and knowledgeable reading experience.

Ashish Vazirani

Editor

The Monetarist

AASRAH

The Monetarist, Issue 4, February 2011

Introduction

Winds of change have been sweeping global banking system since the last decade. Some of the important changes

relate to growing competition from within & without, technological up gradation and enhanced supervision & moni-

toring.

The transition from one phase to another phase (Bank 2.0) has largely been influenced by the dynamics of three

critical factors, viz the players, the playing field and the end customer.

Banking of today is mostly „bank based „i.e., instead of customer centric offerings we get bank centric offerings. In

the new phase banks will have to let go of their traditional methods of interacting with the customers and instead

offer services that is on par with the public‟s expectations of availing banking services wherever and whenever they

need them. Welcome to the world of Bank 2.0.

What we need today is „the customization‟, as the complexities of the rapidly evolving situation; a one-size-fits-all

proposition is grossly inadequate in meeting the challenges of the present.

Shift in the global banking paradigm

Cheques, the mostly used credit instrument until few years back, is on the decline. In UK cheques will become obso-

lete by 2018 (according to UK Payment Council).

SNS bank in Netherland took the decision of entirely removing cash from its bank branches after noticing that fewer

than 2% of its customers visit the bank for cash transactions.

The above just show a subtle but significant shift in the global banking paradigm. In India also we will observe a

similar kind of change in banking practices in the years to come. Below is anticipated change in the Indian Banking

channels as our banks will compete on a global scale.

Shift in the Banking channels:

Similar to its counterparts in the developed economies, Indians banks too have started feeling the change in the cus-

tomer behaviour towards banking channels. At present, cash/ branch banking is the most used, but looking the steep

decline in customer preference towards cash transactions & bank branch transactions, we can say that by the start of

the next decade, most of the physical elements of our day-to-day banking will have been entirely replaced by digital

interactions.

The below exhibit show the expected change in the Indian banking paradigm on the basis of banking channels to be

preferred in the future.

Shift in the Indian Banking Structure

From the past half-a-century, Indian banking industry has undergone a massive change. The period till 1969 con-

sisted of traditional banking practices. To better align banking system to the needs of planning and economic policy,

it was considered to have social control over the banks. As a result, 14 of the major private sector banks were na-

tionalised. This was an important milestone in the history of Indian Banking.

In the period between 1969 and 1990 we had mainly development banking which focussed on development of pub-

lic enterprises, social sector units and industries. In 1980 again six of the private banks were nationalised. With the

nationalisation of these banks majority of the banking sector came under the direct control of the government. The

nationalisation of banks imparted major impetus to branch expansion in un-banked rural and semi-urban areas,

which in turn resulted in huge deposit mobilization, thereby giving boost to the overall savings rate of the economy,

which India is proud of. It also resulted in scaling up of lending to agriculture and its allied sectors. However, this

BANK 2.0 All-Pervasive Banking

By: Anurag Nath


arrangement also saw some weaknesses like reduced bank profitability, weak capital bases, and banks getting bur-

dened with large non-performing assets.

To create a strong and competitive banking system, a number of reform measures were initiated in early 1990s.

The thrust of the reforms was on increasing operational efficiency, strengthening supervision over banks, creating

competitive conditions and developing technological and institutional infrastructure. These measures led to the

improvement in the financial health, soundness and efficiency of the banking system.

The below exhibit will represent the paradigm shift in the Indian Banking Structure:

Universal Banking

Universal banking simply means the „one-stop show‟, where banks provide all financial services along with the

commercial banking; it does not differentiate between pure banking and non-banking financial activities. In a

broader sense, these are banks that offer a wider menu of financial services, beyond the typical conservative com-

mercial banking.

Universal banking results in greater scale economies in the form of lower cost, higher output and better products

due to optimum use of their resources. Economies of scale arise as universal banks offer multi-product and ser-

vices. This is based on the logic that costs of offering various activities by different units are greater than the costs

of offering them together. Customers have the advantage of obtaining all possible financial and banking services/

products at a single point and it relieves them from the hassle of searching different service providers for different

services.


Service as a differentiator

Today, bankers generally insist on customers coming to them. The greatest revolution in banking of the future

will not be technology that is cool, but will be reforming journeys for customers, delivering banking pervasively

when and where consumers need it.

The need to deliver bank functionality is not just about the product or service itself, but how that capability

meets persons needs as a customer in the context of life. If we are online at the Kingfisher Airways or Spice Jet

website, that is when the bank needs to think about offering us travel insurance or a great deal on a personal loan

for a holiday, not waiting for us to walk into a branch later to fill out a personal loan form. If we are attending an

auction for an apartment, it is then and there that we need to know how much loan the bank will give us as the

mortgage.

A bank can improve upon its services by indentifying the specific places in the service system where there is a

wide gap between what is expected and what is provided. Some major gaps include:

Gap between consumer expectations and management perceptions. A major quality gap occurs when a

bank‟s management does not understand what its customer‟s expectations are. For example, closure of

business by a bank by 2.00 PM to carry out the closure of books for that day even when it is not conven-

ient for customers who want to carry out their banking transactions after that time.

Gap between management perception and quality standards set by the bank. Quality suffers when a bank

fails to setup a quality specification programme. For instance, the fixed timings for specific transactions

as fixed by the management should be strictly followed.

Gap between established quality standards and service delivery. This is the main threat to the delivery of

high quality services by the banks which occurs as a result of inadequate or underperformance of bank

employees. Our public sector banks mainly faces such type of challenges in day to day banking due to

lack of proper measures to curtail them. When employees do not deliver the service at the level specified,

quality suffers.

Gap between service delivery and communication to customer. A banking firm should communicate ex-

actly what a customer can expect and what will happen if the firm doesn‟t deliver on its promise. For in-

stance, this generally happens that the money is debited twice from our account when we make an ATM

transaction. In such cases banks should clearly communicate the time period in which it will cancel the

double transaction and make adjustments into the customer‟s account. Also, if the bank is unable to ad-

here to the time limits set by it, then it should offer the interest to the customer for the delayed period.

Gap between expected service and perceived service. Sometimes customers perceive the quality of the

service differently from that expected. Thus, even when communications accurately describe what ser-

vice quality is provided and can be expected, customers are less than satisfied. For instance, high yield-

ing deposit scheme of a bank with a lock-in-period is perceived differently by the customer on account of

the lock-in-period.

Bankers need to detach themselves from their attachment to the physicality of banking and think about engaging

customers increasingly from a distributed, pervasive banking basis. As bankers of the future, we will need to

take the bank to our customers, not the other way around.

Happy Banking J !


Indian Context BY: Sukant Prusty

Pre-budget recommendations from

ASSOCHAM

Looking at the investment needs of infrastructure projects The Associated

Chambers of Commerce and Industry of India (ASSOCHAM) has recommended

that tax exemption should be granted to infrastructure capital companies.

In its pre-budget recommendations for investment this proposal was

given so that the investments can be given a boost.

Infrastructure development is one of the key factors for

the growth of our country and many projects are being undertaken in this

regard. Taxes result into higher cost of lending which ultimately in-

creases the overall cost of the infrastructure project which is not seen as a

good option. According to ASSOCHAM tax exemption is necessary to

avoid this. Till AY 2006-07 Section 10(23G) provided this exemption

which was then deleted by The Finance Act, 2006, but many experts be-

lieve that the exemption to infrastructure capital companies should be

reinstated owing to the owing to the recent rise in interest rates, and it

should also include the long-term capital gains.

The interest is coming down

According to the latest ministry data FDI received by India in the calen-

dar is $ 21 billion compared to $27 billion in 2009 a sharp decrease of

22%.According to market analysts, macro-economic conditions and the

negative political sentiments in the country are not in favour of the Indian

equity market. The primary reasons behind the increased negative senti-

ment about the country are high inflation and a surge in crude prices,

coupled with a series of corruption scams like 2G.

This is again confirmed by the February survey of Bank of

America Merrill Lynch, according to which the rising risk levels in

emerging markets and fragile recovery of global marketis resulting in the

country emerging as the least preferred investment destination in the Asia

-Pacific region in a new survey. According to the survey Of the 188 fund

managers, only a net 5 per cent of fund managers are focusing on emerg-

ing markets, down from a net 43 per cent in January, the lowest level

since March, 2009, and the largest one-month fall on record. The BofA

Merrill Lynch Global Research Head (European Equities strategy) Gary

Baker identifies the unusually higher risk appetite, accompanied by a dra-

matic downsizing in asset allocation to emerging markets as the root

cause behind this.

The Reserve Bank of India is now going to set up a panel to deal

with the situation.


Centralizedonline system for investors on the cards

SEBI is planning to put in place SEBI Complaints Redress System (SCORES) a web based centralized system to

deal with the complaints of the investors. The need for this arises because the current system lacks a centralized da-

tabase causing delays in resolution of complaints. The number of complaints is also increasing as SEBI had re-

ceived more than 32,300 investor complaints in previous fiscal year, and over 39,600 complaints till now in this fis-

cal year

The new system will have a centralised tracking system and will also facilitate lodging of complaints pertain-

ing to any of the regional SEBI offices from anywhere, help the investors access the status of their complaint-

sonline.All the grievances and Action Taken Reports would be in electronic mode and linked to the central server.

This is done to remove the physical movements of the complaints and make the process easier. The system is being

tested by SEBI, before the formal launching.SEBI also hopes to solve the e problem of storage, the risk of loss or

misplacement of records, by this system

Food inflation softens to 11% in early February The recent data about food inflation gave some respite to the common man as it was 11.05% on February 5 nine-

week low, down from 13.07 % of the previous week. The Finance Minister Pranab Mukherjee hopes it to come down

to single digit very soon. India's food price index was 11.05%, the lowest reading since the first week of December,

and the fuel price index was at 11.92% in the year to February according to a government data.

According to the minister WPI (wholesale price index) has also come down by 2 percentage point, the

headline inflation measured on WPI has also moderated to 8.23 per cent in January from 8.43 per cent in the previous

month.He also mentioned that the overall inflation may come down to7 % in March.

Meanwhile India‟s food inflation is among the highest in Asia and the Finance Minister is expected to declare

measures in the coming budget to tackle the food inflation. He may also announce fresh measures to boost productiv-

ity for key staples.

No more steps to ease liquidity-RBI There are no current plans of to ease liquidity, declared RBI in its post policy review conference.According to the

governor D Subbarao no buying of bonds will be done, nor there will be any cut in cash reserve ratio or lowering the

statutory liquidity ratio (SLR). He told that the central bank hopes that the system will begin to ease very soon.

Again the governor told that the bank would like the liquidity deficit to be 1% from the current level of 2%

but it doesn‟t want deficit in the liquid adjustment facility (LAF). He also added that the government should be raised

or cash balance should be carried forward. Banks were also asked to boost deposits or curb lending.

According to Mr.SubirGokran the deputy governor of the bank the hardening of government bond is an indi-

cation of firming up inflation exceptions.


The Union finance ministry has approved Rs 50,000 crore as National Electricity Fund in a bid to reform the

power sector. P Uma Shankar the power secretary confirmed it and hoped that this move will bring in more in-

vestments in the distribution sector.

A committee formed after the creation of the NEF,headed by the Member (Power) in the Planning

Commission, B K Chaturvedi had suggested a subsidy in interest mechanism after which a note was circulated

by the government in April last year, proposing an interest subsidy of Rs 18,438 crore over 14 years on loan

disbursements of Rs 50,000 crore.

In the last budget (2010-11), the power ministry had demanded an allocation of Rs 5,063 crore for an

NEF;however, an amount of only Rs 227 crore was finally allocated. The ministry was allocated Rs 60,751

crore for the current financial year as against a proposed annual plan outlay of Rs 64,551 crore.

The fund is expected to ensure the stability of most state electricity board and to revive the electricity

distribution which was considered as the weakest part in the country‟s power sector by the Planning Commis-

sion in its Mid-Term Appraisal last year, owing to heavy Aggregate Technical and Commercial (AT&C) losses

Increase in IT limit likely Facing many issues the finance minister is expected to prepare a budget that may have good news for everyone;at least the common

salaried class may have something to cheer about as the government is considering to raise the income tax exemption limit by

Rs 20,000 from the current Rs 1.60 lakh per annum. This move can ease the burden of the common man who is

finding it tough with sharp rises in prices.

A government official said that this move is aimed at giving some relief to the common man facing

many problems. The last major hike in exemption was in 2008-09 when the then finance minister increased the

limit to Rs. 1.50 lakhs, which was again increased to Rs. 1.60 lakhs in the following year.

Some new coins announced Coins of denomination of Rs. 10 will soon be circulated to mark the platinum jubilee of The Reserve Bank of

India. The central bank said that the front face of the coins will have the Ashoka Pillar while the reverse will

have emblem of the Reserve Bank of India, a palm tree tiger, along with the year "1935-2010" below the em-

blem. It also announced that the government of India, in exercise of powers conferred by Section 15-A of the

coinage Act, 1906 (3 of 1906), has determined to call in from circulation coins of denomination of 25 paisa and

below with effect from June 20,2011.From this date, these coins shall cease to be legal tender for payment, as

well as on account. Accordingly, such coins may be exchanged during working days and business hours at the

authorised banks branches by July 1, 2011, after which they will not be accepted, it said.

Similarly the Indian government will issue coins of Rs. 150, marking the number of years of taxation in

India. The special coinswill also be brought out in Rs. 5 denomination on the occasion of completion of 150

years, from 1860 to 2010, of the Income Tax department. The Rs. 150 coin, made of an alloy of Silver, Copper,

Nickel and Zinc, will have an international design with 'Satyameva Jayate' and 'India' on the front side while a

portrait of 'Chanakya and lotus with honeybee' on the reverse side.

The Rs. five coins will also be minted in the same fashion. While 200 coins will be minted in Rs. 150 denomi-

nation, 100 such coins of Rs. five will be issued. This is the first time that coins of Rs. 150 denomination are

being minted by the government. The Department of Economic Affairs under the Finance Ministry recently no-

tified the order.

Rs 50,000 cr approved as electricity fund


New series launched to measure Inflation The Government has launched a new consumer price index (CPI) to get a better picture of actual

changes in cost of living to prescribe policies. According to the data the Consumer Price Index based inflation

was 6% for January this year while measured by WPI the inflation was 8.23%.. The figure was arrived based

on a comparison with the annual all-India CPI index average for the whole of 2010. According to new series,

all-India Consumer Price Index stood at 106 (provisional figure) for January 2011 taking the base at an annual-

ised level of 100 for the entire year. While the rural CPI indices stood at 107, urban CPI indices was at 104

during the month under review.Though inflation in terms of CPI based on the new computation stands at six

per cent, the ministry said that actual rate of inflation would be available only after a period of one year.

These consumer indices have been released for five major groups -- food, beverages and tobacco; fuel

and light; housing; clothing, bedding and footwear; and miscellaneous. The index includes many key services

such as education, recreation. Most central banks around the world rely on CPI to decide the monetary policy

While the Reserve Bank Of India uses WPI( Whole sale price index).

BP and RIL sign one of the biggest deals in Indian history Oil and gas majorUK's BP Plc. has entered in to an agreement With RIL to buy 30 per cent stake in Reliance

Industries' 23 oil and gas blocks including the giant KG-D6 gas fields off the east coast for $7.2 billion. There

will be joint venture between the two companies for sourcing and marketing of gas.BP could further pay $1.8

billion "on exploration success that results in development of commercial discoveries," RIL said in a press

statement which can raise the investment including payments USD 20 billion.

The 23 oil and gas blocks together cover approximately 270,000 square kilometres and Reliance will

continue to be operator of the blocks. This announcement came on the same day when BP stopped its opera-

tions in Libya. BP was the largest player in Libya's oil exploration and production and the Libyan reserves add

up to almost three per cent of global oil and gas reserves.


http://businesstoday.intoday.in/bt/story/ril-net-up-28.14percent-to-rs-5136-cr/1/12642.html

http://businesstoday.intoday.in/bt/story/ril-net-up-28.14percent-to-rs-5136-cr/1/12642.html

Answers of January FinQ

First Trading Bank in the world

Economy

Sundaram Finance

Quipo

Budget

Thiruvalluvar, who is frequently quoted by

P. Chidambaram

1975

Paul Wolfowitz

Washington


What is a ULIP? Unit linked insurance plan (ULIP) is a financial instrument that offers the benefits of an insurance plan and also that of an invest-ment plan.

How does it work? In ULIPs, a portion of the investment goes towards providing the life insurance and the rest is invested in unit linked fund for which units are allotted to the investor based on the amount of investment. That is why the name unit linked insurance plan. ‘Unit’ stands for a portion or a part of the unit linked fund. The only difference in between the ULIPs and mutual fund schemes is the component of insurance.

Why ULIP? ULIPs offer the flexibility that no other plans offer. They are highly customizable. They give the flexibility to choose the insurance cover at

the time of taking the policy. Also, most of the ULIPs offer the facility to increase or decrease the insurance cover and the premium amount.

ULIPs also give the option of a rider using which you can avail additional insurance cover. There are different types of riders like critical ill-

ness rider, accident & disability benefit rider etc. Even there is an option to choose an investment fund from a range of funds based on the

investment objective and risk appetite. You can also switch the invested money between different fund options based on your requirements.

Charges

Policy administration charges

It is a charge that is deducted on a monthly basis based on certain criteria, so as to meet various administrative expenses. It may

be fixed or variable.

Premium allocation charges

These are the charges that are deducted immediately after the inception of the policy so as to meet the expenses incurred in

issuing the policy like the medical bills, the cost of underwriting and the commissions given to the agents and distributor etc.

Mortality charges

These charges are levied to provide the insurance cover. These charges vary with various conditions like the age of the person

being insured, previous health record, the amount of insurance cover being offered etc.

Fund management charges

In a ULIP a component of the premium will be used for investment, which can be put in different funds. So managing

those funds incurs some charges based on the component of the fund. Higher the equity component higher the fund

management charge and vice versa.

Surrender Charges

In ULIPs the amount being invested will be locked for certain period of time. So if the policy is withdrawn on a prema-

ture date then it attracts the surrender charges.

Fund Switching Charge

The part of premium that is invested in a fund can be switched from one fund to other, for which a fund switching

charge is levied.

ULIPS SIMPLIFIED

By Hemant Kumar K


Service Tax

Service tax is deducted from the amount that is invested in

a fund.

Disadvantages Money invested in ULIPs is locked for a certain period of time and closing the policy within that period attracts heavy charges

called as surrender charges.

ULIPs don‟t offer the full fledged benefits offered either by an insurance plan or by an investment plan.

The charges associated with a ULIP are very high.

There is very low liquidity in the beginning of the policy years because of the lock-in period, which blocks the funds.

Advantages The main advantage of investing in ULIPs is that you

have the flexibility to choose and change various elements like the insurance cover, premium

amount, riders and fund options according to your

risk profile and interest.

They offer high level of transparency through sales

benefit illustrations made by the company execu-

tives, brochures and key feature documents.

ULIPs offer a unique feature called „Free-Look Pe-

riod‟ according to which if a customer is unhappy

with the product, he has option of cancelling the

policy and he will get a refund of the entire pre-

mium less any charges incurred by the company in issuing the policy.

You can easily track the performance of your policy

using the NAV value of various fund options dis-

played in the websites of the insurance compa-

nies.

You can realize your important financial goals in life

by investing in ULIPs as they help you cultivate

disciplined saving habits by helping you set aside

a amount regularly for savings so as to fulfill the

objective. This concept is known as „Goal Based

Savings‟.

You can also use ULIP as an efficient tax saving in-strument as it offers many tax benefits. Invest-

ments in ULIPs are eligible for tax deductions

according to various sections of the Income Tax

Act, 1961.


Fin-Quiz By: Piysh Chawla

Ques 1. Statistically, X is the world's most popular transportation company. It is estimated that

the equivalent of the world's population travel in X every three days. According to United Tech-

nologies, X carries the equivalent of the world's population every nine days.

What are we talking about?

Ques 2 CONNECT

Ques 3. Who is the only cricketer to feature on a currency note of his country?

Ques 4. In corporate jargon who are referred to as „Whistle blowers‟?

Ques 5. Identify the logo

.Ques –6. Charles Coffin CEO from 1892 to 1912 realised that his co‟s real products weren‟t light

bulbs or electric motors but leaders. Which co?

Ques-7. „Guts, Grit and Gumption‟ is a book on the changes in which large Indian organisation?

Ques-8 The 83 world cup which India won had prize money of 30000 $. What is the total prize

money in the 2011?

Ques -9 IBA and govt have launched a project to bring banking services to 73000 unbanked vil-

lages by Mar 12. What is it called?

Ques-10 Which economy has been rated as the freest economy as the world for the 17th consecu-

tive year ?


There is an old adage which says “a small thing can‟t affect intensively”. But the present conditions are showing a different picture.

The Middle East unrest which started with Egypt and Tunisia is now spreading like a virus in the whole Middle East. The place is burn-

ing under the fire of autocratic leadership and people are ready to die for a democratic nation. The autocratic and dictatorship rule will no

longer stand the test of time and now people are ready to pay the price in terms of blood.

Egypt which is one of the most powerful countries in Middle East was governed under the dictatorship of President Hosni Mubarak for the last 30 years. Not only Egypt but even the currently highlighted country LIBYA is under dictatorship of colonel Muammar al-Gaddafi

from 1969 (Last 41 Years).

The case which seems to be a failure of leadership, governance and democracy is actually affecting the world economy in an intense

manner, the global economy which is running under the phase of fragile growth has been hit by the high prices of energy.

Let‟s look into the following facts:

The Oil production of Libya has fallen to 50% in the current time period of unrest.

Oil crossed the two and half-year mark and traded at $108.7 a barrel.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in March 2011 gained $7.64 a barrel to $93.84 a barrel

in the Globex electronic session.

The Investments at tourist spots like Egypt are devalued which caused a huge loss.

The Automobile sector started showing negative trends.

The impact of increasing oil prices was seen in highly related sector such as Air Transportation in which the major portion of cost is held by fuel.

The low investor sentiments were seen in most of the stock indices over the globe.

Gold Rises, Silver Gains to 30-Year High as Unrest Spurs Demand

The economic impact of unrest has been remarkable till now. The crude oil production from Tunisia and Egypt which together accounts

for 2% of global output pushed the oil prices sharply and crossed the mark of $100 per barrel, an all time high from 2008. Many indus-

tries in the region and over the globe suspended their production because of inconsistent supply of crude oil.

"The Libyan situation has just highlighted the concern for the entire Gulf region. As we have seen this contagion spread from Tunisia to

Egypt to Libya and now to Bahrain and Dubai and other areas of influence which are now coming under the concern of the people’s

revolution. It is more of a concern for the entire area and the potential that this could escalate, which is the concern and why people are

actually building in this Middle Eastern premium," Jonathan Barratt, the Managing Director of Commodity Broking Services said.

High crude oil prices

will increase the trans-

portation cost Sec-

ondly, as the factor of

production it will de-

crease the industrial

output which causes

INFLATION

John Lipsky, the IMF’s

first deputy managing

director, however, told

Bloomberg Television

that the spike in oil

prices so far isn't likely

to change the outlook

for the global econ-

omy.

BLOOD V/S OIL By: Ashish Vazirani


Libya produces 1.6 million barrels per day (Mbpd). This may not look much as against the 88.5 Mbpd in terms of global consumption.

However, when we compare this with the OPEC's spare capacity which is only around 5.25 Mbpd we can find the significance of Libya.

A strong cut in Libya's oil output is enough to warrant current prices and the same can be seen in the last month.

The biggest issue for the entire world is that the whole Middle East which is suffering under the same dictatorship is the holder of 50% of global Crude oil supply. The virus of protest and revolution is spreading from nation to nation. Many other nations are also showing the

signals of unrest and violence which can create the next phase of price increases.

“If oil continues to rise and the dots get connected beyond Libya, then you can set yourself up for a setback in

stocks,” said David Sowerby.

"The risk that the turmoil in the Arab states spreads further could very easily touch off further gyrations and up-

ward pressure on energy prices, especially with Chinese demand showing no sign of abating ... yet," said Mr.

Rosenberg.

Not only the present condition but future is also not secure which can be seen by the proactive approach of traders towards the turmoil

which is visible in the oil-options market. The difference between the cost of betting on gains and declines narrowed to 0.57 percentage

point on Feb. 18, an all-time low for June futures, according to data from the New York Mercantile Exchange. That‟s down from more

than 2 percentage points on Jan. 24, before the violence began spreading through the region.

If Libya, a supplier of 1.6 mbpd can cause $ 10 increase in prices, what will happen if the same will happen with Saudi Arabia(which

holds 20% of global supply) and Venezuela (supplier of 1.8 mbpd), with simple mathematics we can calculate a sky level price of $200

dollars per barrel. Just imagine the inflation, low industrial output and economic crisis.

Not only to the production side but unrest also affected the distribution side of oil. The Suez Canal which is one of the main routes for oil

transportation (3 million barrels per day) is also affected and as per reports there is no activity of such kind from last 15 days and the im-pact is maximum for Europe who import 80% of Libya oil and somehow to US which take only 5%.

The worry signal is coming from Libya and not from Egypt or Tunisia because Libya is the first OPEC country which got affected under unrest whereas Egypt and Tunisia doesn‟t have that much significance in oil market.

The impact is not limited to Crude oil. The unrest and violence in the Middle East also affected the price of GOLD in International mar-

ket. People started investing in the safe „Heaven of gold and silver‟ where they were assured of the return and sentiments started moving

away from indices to commodities which raised the price to $1418 per ounce which is almost 10 per cent since late January.

The impact of unrest went limited to gold and silver in commodities where copper, aluminum, platinum, palladium and others were on

the defensive strategy.

“I think it’s likely the gold market would have been higher anyway, but the geopolitical issues are an accelerant,”

said Jim Steel, metals analyst with HSBC. “In a time of change, investors will tend to seek safe havens. And gold

is principal among those.”

Egypt earned close to $5 billion last

year from ships that have to pay a fee

for using the strategic waterway.

"If this means we see $100 a barrel much sooner

than we expect, it is clearly going to impact on

global economic recovery," warned Yusuf Heusen,

senior sales trader at IG Index.


Egypt which is one of the most powerful countries in the region and has shown the step down of Hosni Mubarak has played a deciding

role in the governance of Middle East region. The geographical location of Egypt is very much significant and influential in the region

but the impact is limited to Crude oil and Gold and not to the financial sector of world economy because Egypt had kept distance from

the Global Financial System. Its banks were not connected to the International Banking System and it had very few Government bonds

that were held by investors abroad because they were classified as junk bonds even before the crisis so the huge drop in the stock market (16%) would also not affect the global economy because most of the investors were local.

The overall impact of a small spark is now becoming a nuclear bomb. Every part of global economy is now struggling due to the high oil

prices; the high intensity of impact is because of the significance of oil in the working of the economy. Almost all the industries are di-

rectly or indirectly affected by the fluctuations in prices, it went high in OMCs and also to Air transportation sector. Libya is the opening

of OPEC countries and has the largest oil fields in the African region, the unrest in Libya brought all satellites towards the Middle East

region.

Impact on India:

As the drawback of Globalization, India also got affected by the Middle East unrest. India, which is already facing Current account defi-

cit and fiscal deficit has been hit by crude oil prices. The recent conditions have shown the fall in rupee against dollar because importers

have become high buyers of dollars, not only limited to rupee value because of which the Indian Stock index also got affected by the un-rest.

As a result of increasing Crude oil prices, the Indian stock market on 22nd Feb came up with Hero Honda Motors (down 3.92%), TVS

Motor Company (down 2.33%), Maruti Suzuki India (down 2.28%), Tata Motors (down 2.79%), Mahindra and Mahindra (down 2.18%),

Ashok Leyland (down 2.27%), and Bajaj Auto (down 0.71%), BSE Auto index lost 188.30 points or 2.19% to 8,426.60 and was the top

loser from the 13 Sectoral indices on the BSE.

With the start of Egypt unrest the Brent crude oil increased with 12% from $94.59 to $106 per barrel. During the same period, the Indian

basket, which represents a mix of Oman, Dubai and Brent crude rose 9.48 per cent to $101.67 per barrel, the highest in the current finan-

cial year.

Protracted Middle East unrest will have “implications” for oil prices, flagging a fresh inflation risk, RBI Governor, Duvvuri Subbarao said on Feb. 10.

According to Petroleum ministry sources, India imported 104 million tonnes of crude oil from the Gulf countries such as Saudi Arabia,

Oman, Kuwait and United Arab Emirates (UAE) and this was followed by 33 million tonnes of crude from Africa mainly from Nigeria,

which also does not come through the Suez Canal. So the actual impact on India will come after the spread of this unrest in Saudi and

other adjoining countries.

The reason is the limited spread of unrest, but researcher report says that this is going to spread to every country in the region. In that case

the conditions for India who is already facing problems under inflation will be more difficult to overcome.

Conclusion: The present conditions are not defining the actual picture. People are not worried because of Egypt, Tunisia or Libya because these con-

ditions have alternatives and can be managed. The problematic situation of high oil prices and struggling supply can be solved by two

ways: either by increasing the supply or by the decreasing the demand. Saudi Arabia, which holds 20% of the global supply and has the

potential to increase its supply has shown its concern and has also assured that such high oil prices will not last. But what if Saudi doesn‟t

step in? then the only solution possible is the price demand destruction but the process can be quite harmful and long lasting. Forecasts

for oil prices to reach $200/bbl are starting to surface and if oil prices go ballistic under any further fire in the Middle East, the aftermath

will probably be dramatic for the World economy at large.

“OPEC is ready to meet any shortage in supply when it happens,” the Saudi oil minister, Ali al-Naimi, said at a

news conference after a meeting of ministers of oil producing and consuming nations in Riyadh, Saudi Arabia.

“There is concern and fear, but there is no shortage.”

Moreover the process of connecting the dots can show a drastic picture in near future. The region which holds 50% supply of the global

Crude Oil reserves has the potential to create a huge impact under conditions of unrest. If the unrest continues in the same trend, the ad-

verse impact will be drastic.


Iron Ore By: Shiva

IPE Hyderabad Major Issues in global iron ore business today

The major issue that is prevailling in the world iron ore trade is its pricing structure. Over the last 40 years iron

ore price is determined by the so called – “Benchmark system”. The benchmark price is the price determined by

the major iron ore supplier and buyer. The iron ore price was decided annually through negotiations between the

buyer and seller. The Annual pricing is in existence for the past two decades. The major producers of the iron

ore are CVRD, Rio Tinto and BHP Billiton, which contributes 70% of the world iron ore trade is forcing the

steel companies to move to Quartely pricing system from Annual pricing system. The annual contract price in

2009 was around $61 per ton but the spot market prices have gone up to $120. The variation is caused by the

high demand from the Chinese small steel mills. This huge variation has increased the demand for iron ore min-

ing companies to change to the quarterly pricing system.

The mining companies have succeeded in implementing the quarterly pricing system. From

March 2010 the contracts and prices between the iron ore suppliers and buyers – steel companies will be decided

quarterly. This change has a large impact on the steel companies and end consumer products.

The above chart shows the percentage of reserves which is under production and the life span of the reserves of

the top ten countries in the world. Kazakhstan is currently producing around 0.63% of their reserves so the life

span of its reserves is 159 years. Kazkhstan is the country which is producing less amount of their reserves.

China is the major country producing around 5.34% of their reserves so the life span of the Chinese reserves is

around 18 years. India is currently producing aroung 5% of its reserves. Australia and brazil are producing

around 2% and 3% of their reserves respectively. The iron ore reserves of these countries will last for another 47

and 28 years. The Indian iron ore reserves are expected to last for another 19 years. Russia, Ukraine, Venezula

are the countries producing around 0.80%, 0.87%, 0.98% of their reserves. The reserves of these countries will

last in another 125 yrs, 115 yrs, 102 yrs respectively.


The iron ore consumption is inline with the growth in world GDP. The iron ore consumption is inline because the

growth in GDP means the growth in world industries like Automobile, construction which are the major consumers of

the steel this inturn leads to increase in the steel production which finally responsible for increase in the iron ore pro-

duction and consumption.

The world GDP increased from 1.6% in 1991 to 5% in 2007. There is many fluctuations in global GDP growth from

1991 to 2009. The iron ore consumption is following the trend of the GDP. The consumption of iron ore is mainly af-

fected due to the fluctuations in the world economies. From 1991 to 2009 the world GDP is fluctuated by the crisis in

some specific countries like breakdown of USSR in 1992 , ASEAN currency crisis in 1998, US dotcom bubble in

2002 and finally the recent sub prime crisis in US all these events has a greater impact in the world steel industry and

in iron ore consumption. The iron ore consumption has decreased from 956 million tons in 1991 to 924 million tons in

1992. Also in 1998 there was a drastic fall and from thereon the world consumption has increased due to the increase

in China‟s demand and finally decreased due to the uncertainty in the world economy.

EFFECTS OF CHANGE IN IRON ORE PRICING STRUCTURE

Characteristics Annual Quarterly

Price Low High

Volatility Less High

Volatility in profits of Mining com-

panies

Less More

Transparency Low High

Fluctuations in steel prices Low High

To large steel companies Advantage Disadvantage

To Small Mills Disadvantage Advantage

Implications of Economical Policies Less More

Effect on end consumer Less More


Market Watch By: Ashish Vazirani

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NET-FII BSE

Top Gainers % Change

Oxford Industries 151.32

Polytex India Lt 134.67

Starcom Information 134.6

Betex India Ltd. 120

Shreejal Info Hubs L 118.18

Bridge Securitie 111.51

Total Hospitality 105.4

Top Loosers % Change

Jay Energy -92.61

Nicco Parks -88.44

Aurum Soft Sys-tems Ltd -87.04

Aurobindo Pharma -86.88

APM Industries -82.35

Inca Finlease -78.23

ONGC -76.52

Source: www.bseindia.com

Presently we are following a parallel system of indirect taxation at the Central and State levels in our country.

Each of the systems has certain limitations and to overcome those limitations and to deal with it, the Govern-

ment of India is now coming up with Goods and Services Tax (GST). The GST is a value added tax, which is

supposed to be implemented in India by April 1, 2011. It is a multi-stage consumption tax imposed on a broad

range of goods and services with comprehensive and continuous chain of „set-off‟ benefits from the producer‟s

point and service provider‟s point upto the retailer‟s level. It is essentially a tax only on value addition at each

stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism.

France was the first country which introduced a comprehensive

„Goods and Service tax‟ Regime in 1954. Around 150 countries have already introduced GST in one form or the

other till date. The GST rates in various countries ranges from 5 percent in Taiwan to 25 percent in Denmark.

GST, as consumption based destination tax, would be a major deviation in the arena of the indirect tax admini-

stration. After the implementation of Value Added Tax (VAT) in different states during the year 2005, the

Budget 2009 proposed to implement GST by 1st April 2010 but later shifted to 1st April 2011.

Dual structure of GST is to be followed by India. The Dual structure will split to Central GST (CGST) to be

imposed by Centre and State GST (SGST) to be imposed by different states. Both of them will be treated sepa-

rately and the acts to implement them will also be different according to their nature and needs therefore, taxes

paid against the CGST will be allowed to be taken as input tax credit (ITC) for the CGST and could be utilized

only against the payment of CGST.

The same principle will be applicable for the SGST. A taxpayer or exporter would have to maintain separate

details in books of account for utilization or refund of ITC. All indirect taxes collected by Central Government

like Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal & Toiletries Prepa-

ration Act, Service Tax, Additional Customs Duty, also known as Countervailing Duty (CVD), Special Addi-

tional Duty of Customs - 4% (SAD), Surcharges, Cesses etc will be abolished by the Central GST and all the

indirect taxes collected by different 0states like VAT / Sales tax, Entertainment tax (unless it is levied by the lo-

cal bodies), Luxury tax, Taxes on lottery, betting and gambling, State Cesses and Surcharges related to supply of

goods and services, Entry tax not in lieu of octroi etc will be abolished by the State GST. Other then this some

items are not taken under GST like Alcoholic Beverages, Crude oil, diesel, petrol and ATF.

GST with an Indian View By: Piyush Chawla


The effective implementation of GST is expected to benefit the government, industry, traders, compa-

nies, end-consumers, lawyers, accountants, IT service providers, etc It will be beneficiary in many ways like:

In GST system, both Central and state taxes will be collected at the point of sale. Both components

(the Central and state GST) will be charged on the manufacturing cost.

It will reduce the tax burden for consumers.

In GST only the additional value increased at each stage will be taxed.

It will develop a common market across the country.

GST has good potential to remove activities like corruption and leakages.

The producer will get input tax credit except at the hand of final consumer.

The transaction cost for tax payers will come down.

After GST, the need for maintaining several warehouses across the states will be removed.

It is hoped that the GST rollout will remove burden of multiple taxes.

It will increase tax collections due to wide coverage of goods and services.

Before implementation of VAT in our Country, we were suffering from multiple taxation because of pre-

existing Central excise duty and the State sales tax systems. Before any commodity was produced, inputs

were first taxed, and then after the commodity got produced with input tax load, output was taxed again. This

was causing a burden of multiple taxation (i.e. “tax on tax”) with a cascading effect. Moreover, in the sales

tax structure, when there was also a system of multi-point sales taxation at subsequent levels of distributive

trade, then along with input tax load, burden of sales tax paid on purchase at each level was also added, thus

aggravating the cascading effect further. After the implementation of VAT, introduction of GST is a very

good step taken for the improvement of taxation procedure in our country. If everything goes according to

the plan then it will make our county stronger and will provide lots of opportunities for everyone.


RISE AND FALL OF INDIAN RAILWAYS

By: Hemanth Kumar

Indian Railways, the biggest rail network in the world under single management is going to become bankrupt unless it takes proper steps to improve the efficiency. Gone are the days when there were huge cash surpluses and very low operating ratios. Indian Railways has once again gone into a state where it is not in a position to pay the vendors from a position where it had got huge surpluses to take up new projects and development plans.

Now we shall see the reasons behind the rise and fall of Indian Railways and how it can overcome the current crisis and what are the prime concerns and where it needs to focus so as to improve the efficiency and yield better results.

The Turnaround story

“Indian Railways is today on the verge of a financial crisis. To put it bluntly, the business as usual low Growth will rapidly

drive IR to fatal bankruptcy, and in sixteen years Govt. of India will be saddled with an additional financial liability of over

Rs.61, 000 crores. On a pure operating level, IR is in a terminal debt trap.” This was the opinion of the expert group on Indian Railways headed by Dr. Rakesh Mohan in July 2001

After that the then Railway minister Lalu Prasad Yadav took the challenge of spearheading Indian Railways into a profit making or-ganization.

“If you do not milk the cow fully, it falls sick.”

“Wagon is the bread earning horse of the Railways, load it adequately. Make it run and don‟t stable it.”

These were the lines quoted by the minister after taking up the ministry in 2004. This shows Lalu‟s attitude towards solving the prob-lem and again bringing back the Railways into profits.

Simple management and entrepreneurial activities have led to the revival of the Railways. There was a high growth in revenues after 2004 and it was continuously increasing till 2007. Even there was a significant decrease in the operating ratio (OR), which is an indica-tor of efficiency and the best figure was recorded in the 2007-08. In February 2007 Lalu Prasad Yadav announced the Railway budget and the mind blowing aspect of that budget was Rs.215 billion ($4.5 billion) surplus which is the highest ever in the history of Indian Railways.

The turnaround story of Indian Railways has made waves not only in the premier busi-ness schools but also has drawn the attention and admiration of the international corpo-rations. In fact Lalu was invited to many of the premier organisations to deliver a lec-ture on the transformation of Indian Railways.

Factors that led to the Turnaround Market orientation and customer focus

commercial orientation, aggressive marketing and economy measures

Reviewing parts of business that are not value adding. IR has leased out its catering and parcel service business that re-duced the catering and parcel losses of more than a thousand crores

Efficiency improvements. By decreasing the operating ratio efficiency improvements were done.

The IR took several initiatives at technology up-gradation and modernisation.

Downsizing. The number of employees were gradually brought down from 1.652 million in 1991 to 1.412 million by 2006.

Outsourcing. IR has tried to outsource most of the non-core and loss making activities like advertising.

Product differentiation. To win the hearts of passengers and provide more flexibility and comfort IR has introduced e-ticketing using which tickets can be booked from home through Internet.

Changes in planning systems. Necessary changes in accounting and management information systems were done to improve effi-ciency of financial, operating and management information and to meet emerging business needs and improve commercial orienta-tion.

Decentralising. IR has decentralised its operations by creating more zonal centres.

Human resources initiatives. Working conditions of drivers and guards were improved so as to reduce the number of accidents resulting from monotonous work schedules.

Changes in organisational culture. The railways have changed their work culture from a public sector company to that of a pri-vate sector corporation.

ENVIRONMENTAL FACTORS

Change in the macro-economic conditions. The general improvement in Indian macroeconomic conditions has shown a signifi-cant impact on the turnaround of the Railways.

Rise in demand. There was rise in freight revenue because of increased domestic demand for various industrial goods.

Change in the legal position. Supreme Court Ruling in November 2005 banning the overload of road transport vehicles has af-fected the railways positively.

In the above stated factors the environmental factors have shown more impact compared to the other factors.

Fall of the Giant

The days when the turnaround story of Indian Railways was being pursued as a case study in the top business schools and universities have

gone as it appears that the finances of the organization have gone into a bad shape. The cash surplus has been continuously decreasing over the years from Rs 25,000 crores in 2007-08 to Rs 1,328 crores in 2010-11.

The financial health of the Railways has been deteriorating. The latest operating ratio (it is an indicator of efficiency) of 95 which is higher

than 92, the figure expected in the budget. It means that to earn every Rs 100 Railways spends Rs 95. In the recent past the best operating

ratio was recorded in 2007-08 when it has spent just Rs 75.9 to earn Rs 100 The passenger fares for suburban sections and lower classes on long-distance trains have not been raised for the last seven years in spite of huge rise in the operating costs, which have been estimated to be around Rs 19,120 crore in 2009-10, up from Rs 14,000 crore in 2008-09. The cumulative losses in the last five years ending 2009-10 are more than Rs 61,000 crore. Further the loss in year 2010-11 is expected to be around Rs 20,000 crore.

Comparison of passenger fare-freight ratios

When compared with other countries like China and South Korea where the passenger fare-freight ratios are 1.2 and 1.4 respectively, the

passenger fare-freight ratio of 0.3 in India is very low

Reasons:

Slowing down of growth in its freight business

Delay in the dedicated freight corridor (DFC) development

Increase in the fuel prices

The financial burden of the payout for the sixth Pay Commission which is around Rs 55,000 crore between 2008 and 2011

Burden of subsidies given to various categories of people

Making populist announcements like not increasing the fares in spite of huge increase in the operating costs

PRIME CONCERNS

Missing vision statement: Railways don‟t have a clear long term vision as to know where it should be 10 to 20 years from now.

There should be specific goals which are to be achieved by certain point of time.

Capacity growth not in line with industry demand: GDP is growing at a rate of 9 percent which requires transport to grow at a

rate higher than that but it is the other way around, leading freight shipments to roads.

Technology Modernisation: Technology needs to be modernized so as to be on par with the global passenger trains which run at an

average speed of 240 kmph, but the average speed of our trains is 80 kmph.

Absence of statutory regulator to fix fares: The authority to fix the fares is vested in the railway minister who generally goes for

populist announcements leading to a unbalanced fare structure, with high freight rates and low passenger fares, which have several ad-

verse consequences. Planning Commission's proposal to set up a statutory regulator to fix fares is being rejected by Indian Railways.

Acquisition of Land: Railways were told to avoid land acquisition and instead "negotiate" with farmers, which is a very daunting

task.

Public-Private partnership: A clear cut and immediate decision on the role of Public-Private Partnership is needed.

Dedicated Freight Corridor (DFC) project: The DFC project is being delayed because of which there is track congestion and

also high turnaround time for wagons leading to the loss of freight to roads.

Contact:

The Finance Club

Department of Management Studies

NIT-Trichy

[email protected]

www.finclubdomsnitt.wordpress.com

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