niveshak feb 2013

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THE INVESTOR VOLUME 6 ISSUE 2 February 2013

TAXING THE RIGHT TO INHErit,

pG. 08

Taming indias current account

deficit: The need of the hour, PG. 15

Will it lead to an economic

switch?


2/28Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bearsno responsibility whatsoever.

F R O M E D I T O R S D E S K

NiveshakVolume VI

ISSUE II

February 2013

Faculty Mentor

Prof. P. Saravanan

Editorial Team

Akanksha Behl

Akhil Tandon

Anchal Khaneja

Anushri Bansal

Chandan Gupta

Gourav Sachdeva

Harshali Damle

Himanshu Arora

Ishaan MohanKailash V. Madan

Kaushal Kumar Ghai

Nilkesh Patra

Nirmit Mohan

Rakesh Agarwal

Creative Team

Anuroop Bhanu

Kritika Nema

Neha Misra

Venkata Abhiram M.

All images, design and artwork

are copyright of

IIM Shillong Finance Club

Finance Club

Indian Institute of Management

Shillong

www.iims-niveshak.com

THE TEAM

Dear Niveshaks,

Japan, once dubbed as the nex wave of the ftre of capitalism by ever-one, is in a bad economic health for the past to decades. Failure of political

leadership at the top of the pyamid coupled with the stctral and cyclical

problems has been a major concer for the count. With gowing discontent

among the people of Japan on account of rising unemployent, all eyes are

set upon Shinzo Abe, who has been elected as the new Prime Minister of

Japan last month.

Bank of Japan has upgaded its economic outlook on Febrar 14. While the

gowth rate has dropped for the quarer ended December, the small con-

taction conred that the economic slowdown was minimal. Weaker Yenand high stock prices have lied the sentiments of the investors. Most of

the goverments around the globe are increasingly war of Abenomics, the

economic policy advocated by Prime Minister Shinzo Abe and see it as an

aempt to weaken the value of the Yen. This months cover stor is aimed

at making our readers aware of the curent sitation of Japanese economy

and what Mr. Shinzo Abe has to oer to the people of Japan and to the world

economy by large. It would be interesting to see if Abenomics is just a buzz

word or if it would actally provide a much needed suppor to the lagging

Japanese economy.

This issue brings to you some more stimulating and insightfl reads. Weseek the aention of our readers towards Inheritance tax which ceased to ex-

ist in 1985. The Aricle of the Month section exlores the possibilit of reinto-

duction of inheritance tax in India, drawing its suppor om the economies

of U.S. and Italy along with the possible loopholes in Indian contex. Other

aricles in this issue focus on the impact of GST in India and Indias curent

account decit. The nistor section brings to you the Americas new deal

refors which helped America reviving its economy aer the Great Depres-

sion of 1929. Lastly, the Classroom section this month will help the readers to

understand Credit Ratings.We would also like to thank our readers for their constant suppor and ap-

preciation. It is your endless encouragement and enthusiasm that keeps us

going. Kindly send in your suggestions and feedback to niveshak.iims@

gail.com and as always,

Stay invested!

Team Niveshak


3/28

C O N T E N T S

Niveshak Times

04The Month That Was

Article of the month

08 Taxing the Right to Inherit

Cover Story

11Shinzos Abenomics: Will itlead to an Economic Switch?

FinGyaan15 Taming Indias Current

Account Defcit: The Need othe Hour

Finistory

19 Americas New DealReorms

Finsight

23 Goods and Services Tax:Wheel o Change

CLASSROOM

27 Credit Ratings


4/28February 2013

IIP shrinks 0.6 percent in December

Owing to persistent sluggishness in the economy,Industrial output contracted by 0.6 per cent inDecember, the second consecutive month of decline.

The decline was mainly due to poor performance ofmanufacturing and mining sectors and decline inproduction of capital as well as consumer goods. The

drop is also in sharp contrast to a growth of 2.7 percent in the Index of Industrial Production registered

during December, 2011. The manufacturing sector,which constitutes over 75 per cent of the index,registered a contraction of 0.7 per cent in December2012, as against a growth of 2.8 per cent duringthe same month of 2011. For the nine-month period

between April and December of current fiscal, theindustrial production grew at a meagre 0.7 per cent,as against a 3.7 per cent growth in the previousyear. In terms of industries, 12 out of 22 groups

in the manufacturing sector have shown negativegrowth in December, 2012 as compared to the same

month in 2011. Reacting to the IIP data, industrychamber Assocham said, The continued fall inintermediate and capital goods production indicatesthat the revival is a distant dream.

Indias growth rate to slip to 5 percent in

2012-13: FM

Indias GDP growth is expected to drop significantlyto 5 percent for the fiscal year ending in March,

according to advance estimates released by IndiasCentral Statistics Office, declining from the 6.2percent growth rate seen in fiscal year 2012. The newfigure is the lowest in a decade and substantiallylower than the 5.7% projected earlier by the

finance ministry. Slow growth may be attributedto the sluggish performance in the manufacturing(expected growth of 1.9 percent), agriculture(expected growth of 1.8 percent) and servicessectors. The finance ministry, in a statement, said

the growth projection is based on extrapolation of

numbers till November and that the actual growthrate is yet to be known. Since November, leadingindicators have turned up, suggesting some hopethat we will end the year on a better note. Also,sectors such as trade and transport, which are

related to industry, would also tend to get revisedupwards, if growth outcomes are better.

Dells buyout plan but investors say NO

For the last few years, Dell, which has been public forabout 25 years, has been dealing with the strugglingPC market, which has been continually hammeredby the sluggish economy and the fast emerging

tablet market. In 2011, Dell was surpassed by Lenovoin its no. 2 position. Last week Dell announced thebuyout offer in which Mr. Dell, Dells founder andCEO, and private-equity firm Silver Lake Partnerssaid they would pay $13.65 a share a premiumof 25% over stock market price then to make thecomputer maker private. Post announcement, anumber of shareholders have come out against thetechnology giants $24 billion plan to go private. T.Rowe Price and Southeastern Asset Management,the two largest outside

shareholders of Dell,behind founder MichaelDell, are against the$13.65-a-share dealbeing spearheadedby Dell and SilverLake Partners.Though some analystsargue that the dealmay go through despiteshareholders objections, many

seem to expect Michael Dell and Silver Lake to raisetheir bid.

RBI issues guideline for New Banking License

The Reserve Bank of India on 22nd February issuedthe much-awaited guidelines for new bank licensesculminating the 3 year long process. It allowscorporates and public sector entities with soundcredentials and a minimum track record of 10 yearsto enter the banking business. As advocated by theFinance Ministry, RBI has also not excluded anycategory like brokerages, real estate companiesfrom entering into the banking space. The majorprerequisites include minimum investment of 500Crs, 49% cap on FDI, sound track record of 10 yearsand 25 % branches in unbanked rural centres.

The Niveshak Times


IIM Shillong

Team NIVESHAK

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Following the grant of license, the promoter groupwill be required to set up a wholly-owned Non-Operative Financial Holding Company (NOFHC). TheNOFHC is aimed at protecting the banking operationfrom extraneous factors like other business of theGroup i.e., commercial, industrial and financialactivities not regulated by financial sectorregulators. The final guidelines pave the way forcorporate houses like Anil Dhirubhai Ambani Group,Larsen & Toubro, Tatas, Mahindra and Mahindra,Life Insurance Corporation and Aditya Birla Group to

enter the banking business.Barclays nance director Lucas to retire

The finance director of Barclays, Chris Lucas, willretire soon. Lucas has served Barclays for tough sixyears that spanned the global financial crisis. Butthe past nine months have been difficult for him.He is one of the four current and former employees

who are being investigated by UK authoritiesregarding a capital injection by Qatar in 2008. Butit is being said that his departure is not linked tothe investigations into Qatar. He is one of Barclaysexecutive directors still in his post after the bankwas fined $450 million in June for rigging the Liborglobal benchmark interest rate. Along with him, theGroup General Counsel Mark Harding will also retire.Both will remain in their roles until their successorshave been found and an appropriate handovercompleted.

Sahara case: SEBI freezes bank accounts

In Sahara case, SEBI ordered freezing of bankaccounts and attachment of all properties of twogroup firms, Sahara Housing Investment CorporationLtd (SHICL) and Sahara India Real Estate CorporationLtd (SIRECL), and their top executives, includinggroup chief Subrata Roy. The Supreme Court hadasked Sahara group firms to refund the money toinvestors with 15 per cent interest in August last

year and had asked SEBI to facilitate the refund.Later, the group was instructed to pay the amountin 3 installments 1st in December, 2nd in Januaryand 3rd in February. As per SEBI, neither of the firsttwo instalments was paid. So necessary action was

needed to be taken.The properties being attached include the landowned by Sahara group firm Aamby Valley Ltd,development rights of land at prime locations in

Delhi, Gurgaon, Mumbai and various other placesacross the country, equity shares held in AambyValley Ltd, units of mutual funds, bank and demataccounts and investments in all the branches of allbanks. SEBI has asked all the banks to transfer the

amounts lying in those accounts to its SEBI-SaharaRefund Account. It ordered immediate freezing ofall bank and demat accounts and attachment ofall moveable and immoveable properties in thenames of the four directors, namely Subrata Roy,Vandana Bhargava, Ravi Shanker Dubey and AshokRoy Choudhary.

Retirement savings under EET likely

The new Direct Taxes Code proposes to bring allretirement savings under the EET (exempt-exempt-

taxation) system from the current system of EEE(Exempt-Exempt-Exempt).

Under EET, a savings scheme would be exemptedfrom taxation at the time of contribution, duringaccumulation of the corpus and would be taxedonly on withdrawal. If the accumulated saving, onmaturity, is ploughed back into fresh savings, thecorpus would again be exempted from tax. Underthe EEE regime, the investments made in tax savinginstruments such as PF, were tax exempt at all thethree stages but under EET, the taxation is deferred

till the time of withdrawal. It is proposed under theCode that at the time of maturity of investments,the total amount of withdrawal shall be subject totaxation.

The Niveshak Times

www.iims-niveshak.com 5NIVESHAK

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FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG


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MARKET CAP (IN RS. CR)BSE Mkt. Cap 6,766,721

Index Full Mkt. Cap 3,199,724

Index Free Float Mkt. Cap 1,654,570

CURRENCY RATESINR / 1 USD 54.43

INR / 1 Euro 71.90

INR / 100 Jap. YEN 58.34

INR / 1 Pound Sterling 83.20

POLICY RATESBank Rate 8.75%

Repo rate 7.75%

Reverse Repo rate 6.75%

Market Snapshot


RESERVE RATIOSCRR 4.00%

SLR 23%

LENDING / DEPOSIT RATESBase rate 9.70%-10.50%

Deposit rate 7.50% - 9.00%

Source: www.bseindia.comwww.nseindia.com

Source: www.bseindia.com

Source: www.bseindia.com24th January to 22nd February 2013

Data as on 22nd February 2013

MarketSnapshot

CURRENCY MOVEMENTS


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MarketSnapshot

BSEIndex Open Close % changeSensex 19923.78 19317.01 -3.05%

MIDCAP 6848.68 6609.03 -3.50%

Smallcap 7069.84 6564.76 -7.14%

AUTO 10834.39 10700.90 -1.23%

BANKEX 14396.88 13855.12 -3.76%

CD 7423.32 7136.48 -3.86%

CG 10617.55 9677.21 -8.86%

FMCG 5780.34 5676.19 -1.80%

Healthcare 7873.41 8019.85 1.86%

IT 6355.87 6605.08 3.92%

METAL 10435.61 9561.05 -8.38%

OIL&GAS 9499.14 9059.97 -4.62%

POWER 1959.89 1828.17 -6.72%

PSU 7583.87 7227.68 -4.70%

REALTY 2091.28 2113.12 1.04%

TECK 3803.68 3822.99 0.51%


Market Snapshot

% CHANGE

IT


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With the Union Budget 2013 on cards, it is thetime for heated discussions, heavy negotiationsand high criticisms regarding many issues inthe budget. One of the most prominent is theissue of Taxation. The Indian tax systemhas seen many critics in the recent years forits vulnerable structure and inefficiency in

its working. This month one new fruit wasadded in the basket of discussions,Reintroduction of theInheritance Tax.The IndianGovernment hasbeen under pressurefor the last fewmonths owing tothe higher ratesof inflation, lower

growth rates,i n c r e a s i n gfiscal deficit,decreasingGDP growthrate andmany more.Of all these,the economistssay, controlling thefiscal deficit is the most

prominent and thus, bringing infiscal consolidation by increasing the revenuesand decreasing the expenditures is the need ofthe hour. Also, inequality has been one of the

daunting issues for any nation in the world andIndia is no exception.Recently, the failure of the 2G spectrum auctionsis an example of the increasing woes of theGovernment in increasing its revenues. The 2Gspectrum auction has fetched merely one-thirdof the target. Two major ways of dealing with

this issue are increased tax collection and bettertax administration or improvised utilization

of the existing public funds. Though boththe methods can lead to fruitful

results, if used efficientlythey can be used

as complementsrather thansubstitutes.India is not the

only country that

has consideredthe introduction of

inheritance tax. Obamain his tenure has always

stuck to the collection ofinheritance tax and the Italian

Prime Minister Mario Monti alsopassed the law for the increase of

inheritance tax rates in the times ofcrisis. Thus, it is no wonder that we are

hearing the whispers of the reintroduction

of the same now. But how relevant is this tothe current context of the Indian economy is aquestion Mr. Chidambaram will be expected toanswer.

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IIM ShIllong

Raghuveer MSSA

Taxing the

Right to Inherit

February 2013



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Inheritance tax is a levy paid by a person whoinherits money or property. It is different fromthe estate tax, one thats imposed on the estate/assets left behind by a deceased person. Howeverthis distinction is not generally perceived in thegeneral tax laws. For example, in the UnitedKingdom, Inheritance tax is a tax on the assets ofthe deceased, and is hence strictly speaking, anestate tax. It is sometimesreferred to as death tax.When a person dies, theGovernment assesses theworth of the estate of theperson. If its value exceedsthe threshold limit, a taxneeds to be paid at a ratefixed by the Government.Inheritance tax was leviedin the period between 1953and 1985 in India. All theassets below the limit ofRs.1 lakh were exemptedfrom the tax valuation. For aHindu Unified Family (HUF),this limit was just Rs.50, 000.The tax rates varied from aminimum slab rate of 7.5%to a maximum of 40% forthe estates worth more thanRs.20 lakhs. However, anyproperty thats passed to the heirs two yearsbefore death was not liable to taxation. Also onlythe legal heirs were supposed to pay the tax. Ifa property gets inherited by the owners spouse,no tax had to be paid. Though the objectives ofthis inheritance tax was reduction in the unequaldistribution of wealth and wealth maximisationof the states, it was scrapped in 1985 by the

then Finance Minister VP Singh, saying thatthe benefits of the tax were not as high as theadministrative costs thus failing to achieve itsobjectives.The tax added Rs.20 crore in 1984-85, constitutingjust 0.4% of the Rs.5329 crore direct taxes thatyear. The direct tax collection may reach themark of Rs.6.5 lakh crore going by the 14 p.c.

increase target set for thisbudget. If we consider 0.5p.c. of this would be frominheritance tax that wouldamount to Rs.3250 crore,which definitely is a goodshare of increase for theGovernment revenues. But,these arguments arent verylegitimate given the drasticchanges the Indian economyhas gone over the decades.The tax rates in India arentas high as they used to be in1984-85, with the maximumnow being 30 p.c. The GDPhas grown by more than35 times in the last 26years. With the advent oftechnology, the argumentof high administrative costsdoes not hold true anymore.

The Utilitarian economic theory says that themarket mechanism leads to an optimal socialstate only when the initial endowments areproperly redistributed. It says, everyone must beon the same level playing field when they areborn. If someone is inheriting property or wealth,then they are liable to be taxed. Thus, this canbe used as a tool for bringing down inequality.

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Fig 1: Direct Expenditure as percentage of collections


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The Indian tax system lacks progressivity. Itrelies more on the share of indirect taxes. Hencea new tax in the cover of direct taxes will be anadvantage. While the introduction of inheritancetax is right morally and can bring in millionsof money to the pool of Government revenuesin the time of woes and may help getting theproduction indices back on the growth track,there are also many pitfalls included in thisthought of reintroduction of Inheritance tax inIndia.

The basic difficulty in theIndian context is the definitionof the word rich. Consider aperson who inherits a property:an estate from his ancestorswhich has a high presentworth. Regardless of thepresent earning capability ofthe person, he will be coveredunder the tax net. To pay thetaxes, he may even be forced

to sell the property! And what about intangibleassets, interests in partnership firms or palatialproperty holdings? Moreover, the Indian sub-continent people are emotionally connected topersonal assets like jewellery or any art works.Even thinking of the option of selling them off topay the taxes is prone to high criticism.One other point of argument is double taxation.Wealth tax is being imposed upon the net wealthcomprising of farm houses, urban land, bullion,jewellery and others exceeding Rs.30 lakh. Thus

bringing in inheritance tax would be double blowto the taxpayers. Thus the wealth creators maygive out properties as gifts and donations totheir heirs which may make the implementation

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of inheritance tax frustrating for the Government,which may also be forced to implement Gift taxto overcome this! The government is alreadyfighting the problem of high inflation. This taxintroduction may force the public to reduce theirsavings owing to the lack of motivation for doingso. This may give rise to higher spending, thuspushing the inflation curve higher.With the complexities involved in the taxingmechanisms, India is already facing problems inattracting the investments from other countries.

Recent issues like the one ofVodafone have already startedraising concerns regarding theIndian tax structure. If this newtax gets introduced, it mayresult in making things worsefor the Indian economy. Highertax rates may drive away theinvestors and the Indian superrich to tax haven countrieslike Singapore, Mauritius and

others.All set aside, its also about the timing ofintroduction and the people introducing it. Theruling Congress party holds no right to counterthe culture of inheritance for reasons well known.In 1985, the inheritance tax was dissolved bythe Rajiv Gandhi Government and the dynasticGandhi Government is trying to reintroduce itnow. This is a double edged sword right on theneck of the Congress Government. The questionremains, can this super-rich tax, if introduced,

reduce the levels of inequality as it is expectedto or drive away the savings and investmentsthereby hurting the economy. Only the upcomingbudget can answer these questions.

February 2013

Fig 2: Total Tax Revenues(in crores)


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as compared to 1.3 percent which was forecasted by

the authorities. It now faces the danger of entering

into recession for the fifth time in the last fifteenyears. With persistent deflation and continuouslyincreasing public debt, Japan would be expecting

some bold steps from Shinzo Abe. Japan recorded a

trade deficit of JPY 641.50 Billion and inflation rate

(refer Fig.1) of -0.1 percent in December of 2012.

Economic and Structural problems

The real interest rates are hovering at zero levels

since 1998 but lack of demand has deterioratedthe performance of the economy. This has posed

the question on the solvency of banks in Japan.

The contraction of Japanese economy is marked by

several factors.

Japans public debt is entirely owed to its domestic

investors because of which the countrys political

and financial market dynamics are closely related.

Japan has witnessed nineteen Finance Ministers

in the last twenty years with nine differentFinance Ministers in the last five years itself. The

government debt has increased at an average of 6.06

percent per year since 1990. Currently it stands at

TeaM nIveShak

Anushri Bansal & Ishaan Mohan

In periods of crisis, pundits and policymakers tend

to scramble for historical analogies and most often,

fail in their endeavors. This time, many have seizedon Japans notorious lost decade, the decade

of stagnation that followed a mammoth property

bubble in the late 1980s. As many as five Prime

Ministers have come to power in five years before

the newly elected head of state, Shinzo Abe, but all

of them have failed miserably. The onus to bring

Japan back on the growth trajectory lies on Shinzo

Abe.

Two decades ago, Japans economic model was

considered to be the next wave of the future for

global capitalism by almost everyone. Today, itfaces a mounting economic crisis, providing a

stunning refutation of the claim that China or other

so-called emerging markets can form the basis

for stabilization of the world economy. The asset

price bubble burst during the late 1980s has turned

Japan, a miracle, into a disaster.

The economy of Japan, third largest, after the U.S.

and China, has contracted by 2.3 percent in the

fourth quarter of 2012. The decline was much more

CoverStory

Will it lead to

an economic

switch?

Fig 1: Japan Ination Rates

Shinzos

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bank.While exports steered the growth engine of Japanese

economy during 1960s and 1970s, domestic

consumption took over after that for twenty years.

The consumption pattern has not declined either, as

can be seen from the rising import penetration in

the last twenty years, dubbed as the lost decade(s).

Now the question arises that why could Japan not

replicate the tremendous growth which it had seen

before 1990. This forms only one half of the story.

The wage rates have risen marginally as compared

to those in 1990 which led to the decrease in

savings and hence deteriorated the investments.

We can expect the savings to come down further

in the coming future as the population age and the

percentage of seniors-to-working age population

increases.

Before economic crisis in 2008, Yen depreciated by

211.7 percent of GDP and is expected to reach 237percent by the end of this year as per the recent

estimates by IMF. As it can be seen from fig. 2,

this is majorly due to the decreasing tax revenues

and persistent deficit spending on public welfare

schemes and unproductive incentives. About thirtypercent population is over sixty years of age as

compared to meagre fifteen percent during the late

1980s.

Low rate of return on investment in public tradedcompanies is what makes investors risk-averse. The

prices of property have also taken a hit after the realestate bubble in late 1980s and till now people have

not been able to pay back the money. Japans stock

market index, Nikkei 225, has plunged by 77.64%between 1989 and September 2011. The yield for

government bond is very low which provides lack

of avenues for the investors to invest. Most of the

demand for government bonds comes from Japans

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Fig 2: Japans Fiscal Pain

Fig 3: Long Term Deterioration in Japans Trade Performance



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overall range was 0%-2% with a median of around

1%. The zero was removed in December 2009. This

time when the targets were announced, Governor

Shirakawa stated that the targets of 1% and 2% were

both there as consistent with the price stability

before and they are both there now, but the focalnumber has shifted from 1% to 2%.

Open-ended Asset Purchasing Method:

The new open ended purchasing method

introduced by Bank of Japan for its APP will focus

on its purchases of traditional assets including

Japanese Government Bonds (JGBs) and TreasuryBills (T-Bills). Unlike other programs, there is no set

target date for ending this program. Not marking

any change in the program for 2013, the Bank of

Japan has planned for a net increase of 36 trillionin its assets in the year ending December, which

would raise its total assets in the program to about

101 trillion (refer Table 1). This increase would

be brought through purchases of JGBs and T-bills

which are considered to be the most conservativecategories of assets.

Implications of the new framework

The basic question which arises in the minds ofmost of the people is Will these ideas work?

Through the ambitious price stability policy aimingan inflation target of 2%, the Policy Board of Bank ofJapan gave a median forecast that the CPI inflation

will jump from 0.4% in FY2013 to 2.9% in FY2014

i.e. year ending April 2015. But this jump is mainly

due to the scheduled increase of consumption tax

from 5% to 8% which is due in April 2014, as theunderlying inflation is estimated to be around 0.9%.

Given that the central bank expects GDP growth of

only 0.8% in FY2014, there is not much basis for

expecting underlying inflation to increase much in

the near term. Moreover, there is a basic disconnectbetween the target and the policy tools being used.

The problem is that there is no deadline or penalty

for not achieving the target, so the Bank has no

incentive to deviate much from the policy path it

nearly thirty eight percent but Japan failed to

capitalize on this opportunity also because of weaker

demand and incompetent Japanese firms. High

dependence of Japans economy on energy imports

has led to widening of trade deficit (Refer Fig.3) and

since 2008, it has been growing at horrendous rates.Lack of competency traces its roots to early post war

period when the government policies were aimed at

protecting the domestic companies by discouraging

the imports. Not only this, the failure of Japanese

government to attract foreign investors because of

pro-domestic protectionist policies has resulted in

high unemployment in the country. Only few years

back, Japan has signed free trade agreements with

the U.S. in agriculture products. As per the experts,

this will increase the competency levels in Japan

by fifty percent. The lack of policy innovation has

caused the ever widening gap between imports and

exports.

Adoption of a new economic policy

In order to deal with the financial crisis being faced

by Japanese economy, the newly elected Prime

Minister, Shinzo Abe, is being pressurized by the

Bank of Japan to pursue an unlimited monetary

easing so as to overcome deflation. In lieu of

this pressure, the Bank of Japan has come out

with its new monetary policy framework on 22ndJanuary, 2013 which has two major elements. The

first one being, a target price stability of 2% for

the consumer price index (CPI) and the second one

being, an open-ended asset purchasing method

for its Asset Purchasing Program (APP). This easier

monetary policy could help in lowering the value of

Yen which in turn would help in lifting Japan from

deflation.

Price Stability Target:

Since the time when Bank of Japan started withquantitative easing in March 2006, its decisions

have undergone many changes. Till February 2012,

the policy was related to understanding of medium

and long term price stability. In the beginning, the

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Program Size Change in Amount

Japanese Yen trillion End - December 2012 End - December 2013 End - December 2013

Total sizeAsset PurchasesJapanese Government BondsTreasury Bills

Commercial PaperCorporate BondsExchange Traded FundsJapan real Estate InvestmentTrusts

About 6540249.5

2.12.91.60.12

About 1017644

24.5

2.23.22.10.13

About +36362015

0.10.30.50.01

Fixed Rate Fund-supplying Operation 25 25 0


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has pursued to date. It can wait in the hope that

inflation will gradually pick up as a result of policies

implemented by the government.

The open-ended purchase program is quite

conservative in nature. The new asset purchase

program, although open ended, will probably

add a less significant amount of liquidity. Theinterest rates on ten year JGB are very low as the

yield varies from 0.7% to 0.8%. So the stimulative

effect from such purchases would be small. It is

being argued that more slackening of monetary

policy will send an exactly opposite message:that additional demand for JGBs created by more

quantitative easing might accommodate further

government debt increase. The idea is that one

of the major causes of deflation in Japan is the

ballooning government debt. Financing governmentdebt hampers spending from households directly

and indirectly. Directly, the purchasing power gets

subtracted through various social security schemes

aimed at channeling private earnings towards thepurchase of JGBs. On the other hand, indirectly,

it imposes a low share of risky assets in private

portfolios, putting a lid to significant increases

in financial wealth leading to fall in purchasing

power. If successful, these reforms will increasethe contribution of Japan in supporting growth in

the region and the global economy. If not, then thecombination of mild deflation or near-zero inflation

and weak growth will continue in Japan.

Conclusion

It can be said that the first moves that have

been taken by the new Abe administration reflecta completely changed policy scenario. Fiscal

consolidation has taken the back seat, a swift

change from the previous administration palaver on

the need to adjust public finances. It is believed

that deflation in Japan does not have monetary

roots; it reflects poor economic dynamics due tostructural (productivity) and cyclical (consumption)

factors. On the consumer side, a major cause of this

situation is the inflating government debt which

is subtracting resources for consumption. Certainfuture policies which were evoked during the

campaign by Mr. Abe, like deregulating the economy

which would allow an increase in potential growth,

still have to see the light.

FIN-Q Solutions

JANAURY 2013

1. Stephen Ross,X=arbitrage pricingtheory, Y=Binomialoptions pricingmodel

2. X=FranklinTempletonInvestments,Y= Templeton,Galbraith &Hansberger Ltd.,XY=FranklinTempleton, Z=JohnGalbraith

3. X=L&T Finance,Y=Fidelity

4. Facebook

5. Veto Switch Gears

And Cables Ltd.

6. Keogh Plan

7. Abdul Karim Telgi


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article explores answers to these questions witha focus on analyzing the implications of highcurrent account deficit on the Indian economyin 2013 and possible measures to bring down

such high levels of current account deficit.Current Account Decit (CAD)

Current Account Balance can be defined as thenet of export and import and if the import isin excess to the export it is called a deficit.Although CAD constitute of other factors likefactor income and transfer payment but majorconstituent of Current account balance is thetrade balance (i.e. Export-Import).

Major Implications of High CurrentAccount Decit

High current account deficit is major concernbecause it cannot be sustained for long asthe countries that lend money (through thecapital account surplus) will expect to get backtheir money with interest at some point. If themoney is not seemed to be present in future,the lending country may demand higher returns

A persistently negative current account deficitis a cause of concern for any economy. When acountry runs a current account deficit, it buildsup liabilities to the rest of the world that are

financed by flows in the financial account. Largedeficits and rising indebtedness could also leavecountries more vulnerable to adverse externalshocks.

Because India has a long history of sizeablecurrent account deficits, it makes for aninteresting case study. A closer look at figureone clearly reveals Indias inability to maintaina positive current account balance. We can seethat in only four years from the past two decadesIndia has been able to claim a current accountsurplus. The present levels of current accountdeficit have clearly reached unsustainable levels,consistently rising for the past three years. WillIndia be able to reduce present high level ofcurrent account deficit that is such a big causeof concern? What implications such high levelsof current account deficit have for the Indianeconomy in 2013. Can we learn something fromother developing or developed economies? This

MDI

Ashish Khare & Deependra Kumar

Fig 1: Current Account Decit of India

FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG


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or may take back their money. With no one tolend, the country cant import capital goodsto make own good or even import consumergoods.

Reasons for high current accountdecit (CAD) - Indian Economy 2012-13

To put some numbers into perspective, currentaccount deficit widened to 5.4 % of GDP in theQ2 2012. The current account deficit was $22.3billion in the three months through September,or 5.4 percent of GDP, compared with $16.6billion in the June quarter and $18.9 billion inthe September quarter of 2011.

The widening gap has been caused mainly bythe increasing trade deficit. The trade deficitwidened to 12.2% of GDP in Q3 from 9.7% inQ2. While oil prices have risen, most of this

worsening is in the non-oil segment. Goldimports were the major cause of the wideningcurrent account deficit. India saw $60 billionworth of gold imports in fiscal 2011-12 whichcontributed to high CAD levels. Gold importsin the 2010-11 were $40 billion. The increaseof $20 billion can be attributed to high level ofinflation.

While the imports were dominated by higherdemand for gold, the exports contracted. Inthe April-November period, Indias total exports

contracted by nearly 6 percent from a yearearlier, leaving a trade deficit of nearly $130billion.

Another possible cause has been the higherdemand or a supply shocks in the IndianEconomy. In 2011-12 the growth in aggregatedemand categories like consumption and fixedinvestment fell from about 8% to 5%. It has beenobserved that the Indian CAD is countercyclical,rising when output falls and not when demandis rising. This suggests the dominance of

external supply shocks rather than the demandfactor. Current account deficit is going to be asstrained in Q3 2012-13 as it was in the secondquarter because of the lower GDP growth.

The depreciating INR also contributed to for thepast one year and was the third worst performerin Asia in 2012. The rupee closed 2012 at 55.00inflating the import bill and the current accountdeficit.

Implications of the High CurrentAccount Decit for the Indian Economy

The recent level of the Current account deficitat 5.4 % of the GDP is above the sustainablelevel. According to research report from RBI,India can sustain a current account deficit of 2.5

% of GDP with a lower GDP growth. This clearlyis an alarming situation for the Indian economyand has the capacity to impair Indias financialstability.

This deficit will also cause the foreign exchangereserves to dry up if the inflows to make the deficit

do not materialize. It will have direct bearing onthe strength of INR. The depreciating INR hascome under a lot of pressure with the increasingcurrent account deficit. The Indian rupee hasdropped more than 20% from its August 2011peak against the dollar. This sharp depreciationis mainly due to Indias large current accountdeficit.

Action Taken by Indian Government andRBI

Government of India is considering steps to

make gold imports costlier in order to reducethe huge foreign exchange outgo on the yellowmetal, which has pushed the current accountdeficit to a record high.

Government is also trying to create an investorfriendly environment to increase investmentfrom foreign investment in the form of FDI andFII, the income from these foreign investmentspositively contributes to current account.

Current Account Decit: Story of otherDeveloping Nations

While focusing on the current account deficitproblem of Indian economy it becomesincreasingly important to have a look at similardevloping nations to understand current accountsituation in these countires.

Brazil

Brazil is currently facing a big current accountdeficit which is 2.11% of GDP at the end offinancial year 2011-12. Brazil has a currentaccount deficit despite having a positive tradebalance on account of large service deficit.The reason behind the positive trade balanceis the export-oriented Brazil economy heavilydependent upon soybean, orange juice and iron.

Russia

Russias current account surplus is fuelledprimarily by high oil exports. Oil prices haverisen steadily over the past few years whichhave increased their export prices. From 2000onwards, the country started to record positivetrade surplus, taking advantage of the devaluedcurrency. Russias current surplus decreasedsharply in 2008-09 due to the global recession anddecrease in demand for commodities. Increasein Russians income is set to fuel demand forimports; this would lead to narrowing of the


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period. Trade balance is only quarter of the

current account deficit which makes it difficultto reduce the latter simply by reducing imports.

Current Account Decit of developednations: a case study on USA

1991-2006: The phase of rising Current AccountDeficit

The U.S. current account deficit grew steadilyafter 1991, hitting levels of 4.4% in 2000 andsteadily rose to a record high of 6.1% in 2005 and2006. Much of the rise in the current accountdeficit over the period can be attributed to two

factors: accelerating U.S. productivity and asurge in household wealth driven by the stockmarket.

Due to the consumption boom, U.S. consumerssatisfied part of the increased demand for

current surplus.

ChinaChina has had a consistent Current AccountSurplus which today is approximately $ 300billion. The major reason for this surplus is thecompetitiveness of Chinese products whichhave gained a reputation in manufacturingsector and thus China has become the supplierof goods for the whole world.

South Africa

The current account of South Africas has beenin the red lately. The weaker outlook for theglobal economy in response to the internationalfinancial crisis has already resulted in a large-scale withdrawal of capital from South Africa.The Rand has depreciated by approximately30% against the American dollar during this

Fig 2: Current Account Decit of BRICS Nation

Fig 3: Current Account Decit of United States


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goods and services with imports, purchasingmore and more goods from foreign sources andthus increasing the CAD.

2007- Present: The decline of current accountdeficit (CAD)

CAD began falling in 2007, and reached 3% ofGDP in 2012. The decline may be attributed tocyclical causes. As a result of the recession andfinancial crisis, domestic savings became higher,domestic private investment became lower andso the need to borrow from abroad diminished.

ConclusionThe need to contain current account deficit asevident above is extremely urgent. Unfortunatelythere is no magic wand that can bring downCurrent Account (CAD) deficit in a go. It needs tobe achieved through the synergy of a number ofmeasures each aiming to strike at the very rootof reigning current account deficit.

The widening deficit is attributable to expensiveoil, high gold imports and a sharp drop inexports. There is thus a need to reduce imports

and boost merchandise exports to bring theCAD to sustainable levels. On the exports fronta lot depends on the global economic situation.Our major markets are the US, Euro zone andChina. If these markets recover and do well wecan improve on the exports front, provided wemaintain our competitiveness. With the worst ofrecession already behind us and United Statesaverting the fiscal cliff, the prospects do lookbetter.

The more dominant cause of worry is the import

bill. International commodity prices and rupeeexchange rate should be the focus areas as thecountry imports many commodities it needs.An important step would be to make the goldimports expensive. The Indian government has

taken right steps in this direction by imposingtax on gold jewellery and increasing the importduty for gold.

However, it will not be easy for Indian economyto correct current account in 2013, preciselybecause of strong domestic demand and a weakexternal demand. Already environment sensitivepolicies, land acquisition issues and availabilityof quality infrastructure have contributed tomoderation in FDI inflows which are extremelyimportant to finance the current account deficit.While the subdued growth of receipts is cyclicalin nature and can be expected to improve withthe recovery in world economy, the rise in crudeoil prices and reasons for moderation in FDI aremore structural in nature.

What is the ideal way out for Indian governmentthen? Since Indias linkage with the world

economy, in terms of trade and finance, is likelyto grow, it is important that resilience in itstrade account is built up mainly by promotingproductivity-based export competitiveness andimproving the domestic fundamentals. Thepersistent global uncertainty and capital flowvolatility demands increase in FDI to make thecapital account more resilient. India shouldlearn from other countries around the world.The competitiveness of products of China issomething to look upon as India doesnt have

resources like Russia or Brazil. India should tryto bring quality to its products similar to itsservices. One key thing to learn from USA is thatIndia cannot sustain its current account deficitas can US because capital account in India ishighly dependent upon the conditions of restof the world. Adjusting government spending tofavor domestic suppliers is another importantstep that needs consideration. Anotherimportant measure would be increasing theremittances through lucrative savings offer forIndian Diasporas all around the world by offeringhigher interest rates and lesser transactioncharges. It is with the cumulative effects of theabove outlined measures and a strong resolveto bring down the current account deficit thatwe can expect India to tame this monster andsafeguard the countrys financial health.

Fig 4: Trade balance between US and China

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The Origin

The Great Depression of 1929 is considered to bethe most significant economic slowdown to haveaffected not just the United States economy but theentire global economy. The beginning of the GreatDepression was marked by the stock market crashon October 29, 1929. The depression devastatedthe United States economy, with output levelsshrinking to about two-thirds and the fall in pricesby approximately 20%, making debt repayment a

humongous task. Unemployment levels reachedan all-time high to 25%, with no insurance on bankdeposits and several banks bankrupt. There was nonational safety net and no social security.

Herbert Hoover was the President of the US duringthe crisis and felt that the government should notget excessively involved in helping the masses dealwith the economic problems. However, this changedwhen Franklin D. Roosevelt accepted the 1932nomination for President and promised a new dealfor the American people.

Throughout the nation men and women, forgottenin the political philosophy of the Government, lookto us here for guidance and for more equitableopportunity to share in the distribution of nationalwealth... I pledge myself to a new deal for theAmerican people. This is more than a politicalcampaign. It is a call to arms.- Roosevelt.

New Deal

Franklin D. Roosevelts New Deal Reforms markedthe first step of the US Government towards the

cultural development of the country. The reformswere very similar to the current federal policy ofthe country; with democratic goals, support foractivities not patronized by the private sector andan emphasis on culture. The Reforms were inspired

by the settlement and rural work extension practicesfollowed in during the Russian Revolution. Theywere based on a concern for the labour; especiallythe professional artists and others involved in thecultural work.

The New Deal was a set of economic reformsengrafted in the United States during 1933-36. Thereform programs were focused on the 3 Rs: Relief,Recovery and Reform. This meant relief for theunemployed, recovery of the nation to the normal

level and reform of the financial system as a wholeto prevent any such slowdowns in the future.

The New Deal was implemented in two phases. Thefirst phase (1933-34) was characterized by fiscalconservatism. It mainly focussed on relieving theeconomy from the Great Depression by means ofprograms relating to business and agriculturalregulations, stabilization of prices, inflation andpublic works. The second phase, along with reliefand recovery measures, also aimed at providingeconomic and social legislation for the benefit of the

working population.The New Deal marked a significant shift in the

domestic policy and the political ideology. It led to

increased federal regulation of the economy and

marked the onset of complex social programs and

growing power of labour unions.

First New Deal

The American population was unhappy with the

failing economy, high levels of unemployment and

reduced wages. Roosevelt assumed the office at a

time when the nation was demanding prompt actionand he responded with a set of new programs in the

first hundred days of his office.

The Great Depression had caused a large number

IIM ShIllong

Anchal Khaneja

AMERICA'S

NEW DEAL

REFORMS


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of bank runs which destabilized the economy.Roosevelt implemented the Emergency bankingAct which allowed for a framework of reopening ofbanks under the Treasury supervision. This resultedin three-fourths of the banks being reopened in thenext three days of the enactment of the act. Money

poured back into the economy and hence stabilizingthe liquidity in the economy.

Another major reform implemented in the first phasewas the abolition of the gold standard system by theUS. By the end of 1920s the Federal Reserve Systemfaced a large outflow of gold which forced it toreduce the money supply in the economy. Rooseveltprohibited the export of gold, thus stopping theoutflow of the gold from the economy, which markedthe end of the era of the Gold standard. The US Dollarwas allowed to float freely in the foreign exchange

market, enabling the Federal Reserve System toelevate the money supply in the economy to therequired levels.

This phase also accompanied with the enactment ofthe Securities Act of 1933 which aimed at avoidinganother Wall Street Crash. Further, to pump up theemployment levels in the economy, Public WorksAdministration (PWA) was established. It organizedfunds for infrastructural activities such as buildingof roads, dams, hospitals and schools. Rooseveltliberalized the US trade policy and ushered the era

of the liberalization that still persists.Second New Deal

The second new deal was not only more liberal butalso more controversial than the first new deal. It

was mainly characterised by the implementation ofthe Social Security Act which established a systemof retirement pensions, unemployment insuranceand security benefits for the handicapped. TheWagner Act guaranteed labour the rights to collectivebargaining. It led to the birth of the National Labour

Relations Board that facilitated the wage agreementsand promoted employee welfare.

Roosevelt also formed the Works ProgressAdministration (WPA) in order to nationalize theunemployment relief programs. The WPA did notcompete with the private sector and financedinfrastructure projects that generated employmentfor many. He also instituted a tax program known asthe Wealth Tax Act to redistribute wealth. And oneof the last programs under the New Deal was theUS Housing Authority which aimed at abolishing the

slums from the country.Evaluation Of The New Deal Reforms

Roosevelt reinstated hope in the economy at a timewhen it was on the verge of a major collapse. Hisreforms established the labour unions, improvedthe nation-wide infrastructure, rescued the bankingsystem and hence upgraded the economy as awhole. However, the New Deal failed to rework thedistribution of wealth and power within the Americancapitalism.

The New Deal revised the role of the federal

government, to that of helping the less privilegedmembers of the society. It took up the responsibilityof providing welfare programs and benefits. Thegovernment expenditure on welfare programs

Fig 1: Snapshot of American Economy



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increased from virtually nothing in 1930 to almost$480 billion in 1940. The government also spentanother $480 million on eradicating unemployment.Nevertheless, the expenditurewas not adequate and just keptthe people alive.

Taking the year 1933 as the baseyear (the year when Rooseveltassumed office), we can observethat all the three parameters,namely GNP, amount ofconsumer goods bought andprivate investment, improvedsignificantly. Since investorsentiments play a crucial rolein determining the economicstrength of a nation, these

figures clearly point out thatthe American population hadshown greater confidence in thesystem after the New Deal. TheGNP witnessed an increase of60% from 1933 to 1939, amountof consumer products boughtincreased by 40% and privateinvestment increased by five times in a span of justsix years.

However, critics generally use unemployment figures

for the 1930s to argue against the New Deal.Opponents of the New Deal argue that America nevergot rid of unemployment and Roosevelts policiesonly had a short term impact which virtually created

an impression that all the problems were coming toan end. Many believe that it was World War II thattruly got the US out of the Depression.

Nevertheless, Roosevelt wasa leader whose skills wereunparalleled. In desperate

times he responded witha bold step and saved theAmerican economy. No matterhow sweeping his objectiveswere, they still helped inpreserving the free-marketeconomy of the United States.Industry was not nationalizedand a social security net wascreated in the nation.

Regardless of its weaknesses,

Roosevelt and his New DealReforms helped the UnitedStates struggle through thedark times and conquer itsuccessfully. RooseveltsOptimism became the nationsmost prized political currency.

Being bold entails failures, and Roosevelt had morethan his share of these. But it is because he was

bold, and persistent, that he is still honoured.

Fig 2: Number of persons unemployed


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Implementation of GST in India has been in thenews for quite some time and does look a distinct

possibility in the near future, especially consideringthe present pace of reforms that the Manmohangovernment has set. Before setting off into sunset,Manmohan Singh seems to at last reignite hiseconomist soul. Every industry is looking aheadwith anticipation and managers involved in logisticsplanning are delaying their decision making, hopefulof a new tax era. Logistics industry is bound toundergo great changes in its strategic planning anddecision making processes.

The present tax structure in India is a complicationpersonified sutra wherein taxes are levied atboth Central (Federal) level and the state level.Presently, only the central government is entitledto tax services as per Finance Act. Physical goodsare taxed at central level as CENVAT and states levytheir own independent taxes as per their whimsand fancies. Though introduction of VAT did bringsome uniformity but state governments, often out ofpolitical compulsions, have taken decisions resultingin critical differences in tax levels. Moreover somestates are yet to implement VAT.

The Story

Goods and Services Tax (GST) is an attempt to doaway with the multitude of taxes and introduce a

comprehensive and all-encompassing single tax to belevied on goods and servicesconsumed in an economy. GSTwill be applicable andcalculated for every stage inproduction-distribution stage

but the incidence oftax will be on finalconsumption. Thesystem is like a creditbased tax system

where credit-tax keeps on accumulating and at thetime of final consumption, the seller of goods or

services may claim input credit of tax which he haspaid while purchasing the goods or procuring theservice.

To understand how GST will bring about uniformityacross the nation, lets take the example of a bicyclemanufacturing company. First the central government

charges an excise duty as the product leaves thecompany. At the point of sale, state introduces itsown tax (VAT) which varies from state to state. ThisVAT is taxed on top of excise tax without givingcredit to excise tax levied earlier. If implementedin its true spirit, GST will neutralize this tax on taxstructure. Both central and state GST will be charged

at manufacturing cost.

It will be the single-biggest reform ever sinceindustrial de-licensing in 1991 and could be worth

$500 billion for India, according to ThirteenthFinance Commissions former chairman Vijay Kelkar.Owing to the continued opposition by states allegingencroachment of their financial and governingautonomy, the government is expected to introduce

a dual GST model. As per this, a Central Goods andServices Tax (CGST) and a State Goods and Services

Tax (SGST) will be levied on the taxable value of thetransactions. Out of 140 countries, where GST hasbeen implemented, Brazil and Canada are followingdual GST model. This structure provides a higherinvolvement from the states, and soothes theirapprehensions regarding federal encroachmentof powers. The applicability of CGST or SGST willbe determined by turnover value and thresholds

in this regard are still under discussion. Besides

there are concerns regarding loss of revenue formanufacturing based states as compared to servicedominated states. The Centre has promised to comeup with a compensation plan for first three years toaddress this issue.

MDI gurgaon

Rananjay Kumar

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Impact of GST on industry

Existence of complex and multistage taxationsystem has been eating up the profitability pie ofthe Indian manufacturing sector thus nullifyingthe cost arbitrage available because of low costeconomy. The manufacturing cost of most products

in India is almost half that of west, but the incidenceof multistage taxing diminishes the advantage to theextent of 50%. GST intends to nullify this cascadingimpact on value chain of a product.

Impact on Warehousing and Distribution

On an average, an FMCG in India operates with 25to 50 warehouses as compared to 5-8 in economiesof similar geographical area. To account for complexstate wise tax, companies have started maintainingwarehouses in different states and apparently withlittle distributive advantages. Union Territories like

Daman have attracted warehouses just because ofthe tax structure. Thus it is a matter of grave concernthat tax avoidance and not operational efficiency hasbecome a decision criterion for the firms. De facto,this results in operational inefficiency and highercost or cost-quality trade-offs.

GST will help reduce the warehouse space requirementby 20-50 per cent by nullifying the tax considerations.Also the number of warehouses will decrease andsizes will increase thereby providing the companiesthe advantage of economies of scale. Considerablereduction of overheads is expected by reduction inwork duplication. Strategically located warehousingfacilities will improve transportation efficiency andbring down the costs. The existing geographicallydistributed vast number of warehouses require ERPlinkages throughout the network to ensure real-time visibility of inventory. This results in higher ITcosts which will be considerably reduced. Materialhandling and compliance costs are also

expected to come down.

The state ofthe logistics

industry

The inefficiencyof Indian logisticsindustry can begauged from CRISILreport of September2009, which statesthat the primaryand secondary

(from hubs todepots) transportation andinfrastructure cost in India

is 10.7 % of GDP ascompa r ed to around 5-7 % in

the developed countries. Present states of affairsare a result of failure of government or industryto optimally invest in building scale, automation,human capital and technology. The logistics industryis characterized by its unorganized structure,lack of legislative infrastructure and chronicunderinvestment. On top of this, high competitionand penalizing tax structure has resulted in poorquality and value delivered by the industry, thuseroding the profits. The advent of GST will providecompanies to compete on the basis of their supplychain and logistics structure, thus proving a shot inthe arm for Indian logistics industry.

Advantages of advent of GSTThe multitude of benefits to be provided by GST has

been listed by Dr Vijay Kelkar, chairman of the 13th

Finance Commission. First and foremost, the burden

of taxes will be equitably redistributed between

manufacturing and services. Thus tax rate will

come down by broadening the taxation base. This

is necessary considering the present contribution of

service sector in GDP. It will reduce distortions by

completely switching to the destination principle.

It will promote operational efficiency by ensuring

decision making on purely economic concerns ratherthan tax considerations. The competitive advantage

will help promote exports, employment and growth.

LOGISTICS: Introduction of GST will catalyze much

needed consolidation in the industry. The state

boundaries will become meaningless for industries

and entire nation will emerge as a potential

market. This will bring operational efficiencies and

strategic planning in decision making processes of

manufacturers and distributors. Also it will trigger

large scale investment by logistics companies and

3PL service providers in scale, service focus and

technology.

TAX CREDITS: The tax credit system, as envisaged by

GST, would allow manufactures to offset the output


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tax liability on the sale of their finished productsas against input tax credit for all inputs and capitalgoods purchased from any registered dealer in thecountry. Similarly, distributors would also be ableto pass on the duty burden to their customers.Presently, no such credit can be claimed on services

taxes. Thus, cost of doing business would comedown.

INVENTORY COSTS: Currently, CENVAT is included inthe inventory costs of companies, thereby affectingthe balance sheet adversely. This impact is moreprofound for consumer durables companies andFMCGs. But the new GST structure would allowimmediate recovery of GST paid in form of inputtax credit, thus reducing the inventory financingcharges.

CASH FLOW BENEFITS: Dealers and distributors

would be collecting the GST at every sale but willbe paying the same to the government at theend of the month. This extra cashin hand can be utilizedfor further improvingthe efficiency of theirbusiness model andshort term investments.

CONSUMER BENEFITS:As manufactures receivethe aforementioned

benefits of GST, they might pass onthe benefits to the consumers making it a win-winscenario.

REVENUES: GST would broaden the tax base andreduce exceptions. Even service sector will comeunder state purview. Reduced compliance costshave proved to be an incentive for industries in thepast. Accordingly, the total revenue collections forthe Centre as well as states are expected to go up(as proved by post-GST scenarios in other countries).

Businesses need to gear up in tandem withgovernment to avoid getting caught off-guard at itslaunch. Businesses need to look into supply chaininfrastructure and bring in professional expertise intothe field. 3PL and specialized players are required toconsolidate the industry. Training and preparednessneeds to be there to implement changes in ERPmodels available to discount the tax impact andadopt wheel-spoke model. Even pricing strategiesneed to be worked upon as per the new tax regime.

GST elsewhere

Approximately 140 countries have introduced GST inone form or another and hence there are multiplemodels available to choose from as per our specificrequirements. For example, the United States hasnot yet introduced any GST or VAT structure on

goods and therefore states are free to apply taxes atrates varying from zero to 8.5 per cent. NeighboringCanada has multiple structures available but inessence follows the dual GST model. Although EUprophesizes a European Common Market, it hasvarying VAT rates for different countries. China and

Australia employ a single centrally-imposed VATmodel and the revenue is shared between the Centreand the States according to a pre-agreed formula.

Success of GST elsewhere has beenapparent. For example, introductionof GST in New Zealand in 1987

yielded revenues 45 per centhigher than anticipated becauseof improved compliance andstructural benefits resulting in

improved economic productivity and

efficiency. Canada had a similartaxation structure as India andreplaced it with dual GST modelas envisaged in India. It reapedthe benefits in terms of increase

in potential GDP by 1.4 percent which constituted 0.9

percent increase due to higher factorproductivity and 0.5 per cent increasefrom a larger capital stock (due toelimination of tax cascading). This

can be taken as a suggestion ofthe potential benefits to the Indianeconomy. Kelkar committee estimates this value tobe around US$ 15 billion annually. This value in itselfcan be a stimulant good enough for early actions.

Current status

The constitution needs to be amended to enablestates to tax services. For the proposed constitutionamendment, two third approval is required andalso 15% of state assemblies would have to ratifyit. Hence the role and attitudes of states is a matter

of concern and needs to be taken care of. Hence,an Empowered Committee of State Finance Ministershas been constituted under the leadership of ShriSushil Kumar Modi, the Finance Minister of Bihar,to ensure smoother transition and harmonizationbetween federal government and states. Thiscommittee recently went to Canada to derive fromtheir experiences in terms of the dual GST and helddiscussions with top Canadian politicians includingOntario Premier Dalton McGuinty, tax experts,legal luminaries and businesses to share their

experiences. Mr. Modi shared his optimism regardingthe implementation of GST in nearby future.

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Sir, there was an article in yesterdaysnewspaper; Fitch downgrades Indias creditrating outlook to negative, but I couldntunderstand what does credit ratings mean?

Could you please throw some light on it?

Its very easy to understand CreditRatings. A credit rating/score determines theability/worthiness of a person/institution to

pay back the borrowed money. In general, acredit rating evaluates the credit worthiness of a debtor,especially a company or a government. A credit rating isgenerally represented in alphanumeric symbols.

Sir, is there any formula for calculating theCredit Score?

There is no mathematical formula forcalculating the credit score, instead, credit ratingagencies use their judgment and experience

in determining, what public and privateinformation should be considered while giving

credit ratings to a particular company or government. Themain factors used to calculate an individuals credit score

are his or her credit payment history, current debts, timelength of credit history, credit type mix and frequency ofapplications for new credit. The scoring systems are based

on different criteria which are weighted differently, so forthe same entity, different rating agencies can come upwith different credit score and hence different ratings.

Which are the different rating agenciesapart from Fitch?

Some of the largest credit rating agencies

are A. M. Best, Dun & Bradstreet, Standard &Poors (S&P), Moodys. In India, CRISIL, ICRA arethe major credit rating agencies.

Sir, what does credit rating of BBB- signify?

Fitch assigns credit ratings from excellent

to poor on the scale as: AAA(Prime), AA+, AA,AA- (High Grade), A+, A, A- (Upper MediumGrade), BBB+, BBB, BBB- (Lower Medium

Grade), BB+, BB, BB- (Non-investment grade speculative),

B+, B, B- (Highly Speculative), CCC (Extremely Speculative),DDD, DD, and D (In default). I think, now you can interpret

what Fitch has to say about the Indian Economy.Does the -sign in a particular rating

has any negative connotation in relation to

the issuers performance or its debt-servicingcapability?

Not at all! + and - symbols are usedjust to indicate distinctions within a rating

category.

Sir, how do investors benefit from a creditrating?

Credit ratings help investors facilitatecomparative assessment of investmentoptions. In this way, companies or individuals

can decide the institutions in which they caninvest their money.

Sir, but this is same as Equity Research,

then why do we need Credit ratings?

No, Credit Ratings are not the same

as Equity research. Credit ratings are usedto evaluate debt instruments, while equityresearch is used to evaluate equity shares.A credit rating is determines the worthiness

of a debt issuer to pay back the borrowed money , theprimary variable in debt instruments. Equity research isfocused on growth possibilities, for that is what drives

equity valuations. I hope that clarifies your doubt.

Now I understood what Fitch meant.Thank you sir.

CLASSROOM

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Credit Ratings

NIVESHAK 25

Classroom

IIM ShillongSiddharth Gupta


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F I N - Q1. He was born in a Gujarati Jain family. He briefly worked for New India Assurance

Company until he decided to trade in the stock market of BSE and NSE. He created

one of the biggest scams in the Indian stock market history by carrying out there dayforward transactions between the banks. Identify the person.

2. This company manufactured the first Indian typewriter as well as Indias firstrefrigerator. It also had the order to manufacture 900,000 ballot boxes for independentIndias first general elections. Name the company.

3. This theory states that small individual investors can never be right. Hence wheneversmall individual investors are selling shares, its actually good time to buy them.Identify the third company?

4. Italian American artist A designed world famous B for $3.6 million, which putWal-Mart into trouble. Identify A & B?

5. In 2012 2 IPOs MCX and CARE saw huge over-subscription. MCX being oversubscribed

53 times and CARE 41 times. Which is the most oversubscribed IPO in Indian marketever and by how many times?

6. X was a listed fund first launched by an American financial services firm in 1993which tracked the S&P 500 share index. It soon got nicknamed as Y after the nameof an insect because of its ticker code SPDR and widely known as Y fund. Identify Xand Y.

7. A term coined by Warren Buffet and is used as a line of Defense around castles aswell as against competitors to maintain long term profits and market share.

8. International Bank X-Y was formed from merger of Bank X and Bank Y. It was one ofthe very few banks which did not book any losses during the recession years of 2008and 2009, primarily because of extraordinary gains from trading in its Investment

Banking division.

9. The given image is taken from a print ad. Identify the company that gave this ad andthe product they intended to advertise.

All entries should be mailed at [email protected] by 5th March, 2013 23:59 hrs.

One lucky winner will receive cash prize of Rs. 500/-


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Article of the MonthPrize - INR 1000/-

Raghuveer MSSAIIM Shillong

W I N N E R S

A N N O U N C E M E N T SALL ARE INVITED

Team Niveshak invites articles from B-Schools all across India. We are looking fororiginal articles related to finance & economics. Students can also contribute puzzlesand jokes related to finance & economics. References should be cited wherever nec-essary. The best article will be featured as the Article of the Month and would be

awarded cash prize of Rs.1000/- along with a certificate.

Instructions Please send your articles before 5th March, 2013 to [email protected] The subject line of the mail must be Article for Niveshak_ Do mention your name, institute name and batch with your article Please ensure that the entire document has a wordcount between 1200 - 1500 Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 Please do NOT send PDF files and kindly stick to the format

Number of authors is limited to 2 at maximum Mention your e-mail id/ blog if you want the readers to contact you for furtherdiscussion

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Drop a mail at [email protected]

ThanksTeam Niveshakwww.iims-niveshak.com

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FIN - QPrize - INR 500/-

Joanne FernandesIIM Shillong

niveshak feb 2013

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