the financial - january 2014
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The Financial January 2014, Volume no. IV, issue no. II
Cover Story
India 2014 - How will 'GLOCAL' factors play
out for India?
Senior Team
Prakash Nishtala
Vidhi Shah
Dear Readers,
Greetings from Team Finomenon!
The year gone by, managed to keep us on our toes with its flurry of capricious unfold-ing of events; be it a sudden slump in the value of Indian Rupee or the switch-hits played by RBI on hawkish and dovish stances. The story on the global front too was equally intriguing. The year started with a cliffhanger on fiscal cliff before Cyprus cri-sis could garner the attention amidst some seriously hard landing in China, the world of economics was kept confused by Abenomics and when it appeared the show would Shutdown (read US Shutdown), the game was about to begin. All these events make 2014 a much promising year that would bring even bigger surprises and thrills. At the global level, it is interesting to see how India walks through the ‘taper’ed roads of bringing hot money while at the local level it would be interesting to witness the mel-odrama of the great Indian political tussle and how India juggles to manage inflation, growth and deficits.
The Financial, through the theme for this edition, “India 2014 - How will 'GLOCAL' fac-tors play out for India?”, makes an attempt to know from the budding fin-mavericks what they think about the road ahead for India in 2014.
We have aligned our magazine, time and again, to the needs and wants of our reader base. The newly introduced sections like Grassroots received a huge appreciation from all the corners. We promise to bring, in future, even more insightful sections, articles and competitions for our beloved readers.
We are happy to bring to you, with this revamped issue, a 3600 view of the financial world. In this issue, we have delved into the viewpoints on a wide array of contempo-rary topics. The perspectives put forward by the budding managers from across the B-schools are sure to give a new dimension and importance to this issue. The process of evolution of ‘The Financial’ will see a deliberate attempt from Finomenon, to involve the readers as much as possible. The aim this time is not to have an article end with its last word in the magazine but to take it beyond through comments and discus-sions. Feel free to contact the writers of each article and discuss their views or to even dispute them! As always, I hope you enjoy this issue! Let us know how you feel about the content. Criticisms, suggestions, requests, and jokes, they are all more than wel-come.
We thank one and all for their valuable contributions to this magazine and hope you enjoy the articles. ‘The Financial’ is an interactive magazine and, beyond just a maga-zine, a two-way interactive channel. As we exchange ideas, we will evolve and grow to greater heights.
As I sign off, I’ll leave you with this beautiful quote by T. S. Eliot,
“For last year's words belong to last year's language, And next year's words await another voice. And to make an end is to make a beginning."
Wishing you a great start to this new beginning!
Regards, Prakash Nishtala Editor-in-chief, The Financial
From the Editor’s Desk
The Financial
Volume no. IV
Issue no. II
January 2014
Finomenon
NMIMS ,Mumbai
All design and artwork are
copyright work of Finomenon
NMIMS Mumbai
Creative, Design,
Content
Ajit Nayak K V
Arghyapriya B.
Bhuvanesh Kumar
Jeenoy Pandya
Sarthak Mohanty
C
ON
TE
NT
S
India 2014 - How will 'GLOCAL' factors play out for India? - Part 1
1
China unleashes new Economic Reform 5
India 2014 - How will 'GLOCAL' factors play out for India? - part 2
10
REIT’s - will they breathe life into India's coma-
tose real estate sector? 15
Are we on a path to recovery or it is the central
banks' effect across the world. Is another crisis
looming ?
19
The Rivalry That Turned Goldman Sachs ‘Golden’ 23
Facebook and Twitter going public 25
Grassroots 28
How can India’s growth be recuperated? 30
Top Newsmakers in business –2013 33
Opening the renminbi to the world– currency re-
form in china
35
During the good times of the past
decade, India was one of the most
favoured countries for deploying
capital to achieve best returns ad-
justed for risk. India along with
Brazil, Russia, China and South
Africa were termed as BRICS ow-
ing to their fast economic growth
and a
belief
that they
would
in due
time
eclipse
the de-
veloped
econo-
mies of
the
world.
The
speed of
inflow of Foreign
Direct Investment (FDI) and For-
eign Institutional Investment (FII)
during 2007-08 was unprecedented
and during the period of 2007 to
2013, India recorded its highest
growth in annual FDI inflow at
73.6% in 2008. FDI increased from
USD 25 billion in 2007 to USD
43.4 billion in 2008. India during
this period was also growing at one
of the fastest rate in the world by
consistently recording GDP growth
rates of above 9% between 2006-
08.
But like all economic cycles, this
boom also had to be followed by a
bust which came in the form of a US
subprime mortgage crisis. This re-
sulted in major risk aversion, flight
of capital to safe havens and slow-
down in the global economy. Alt-
hough, India wasn’t affected drasti-
cally and only ripples were felt by
the Indian economy in the beginning.
But ensuing
policies fol-
lowed by
the govern-
ment and
the subse-
quent Euro-
pean debt
crisis has
seen the
Indian
economy
worsen. In-
dia today is
plagued by
policy paralysis which
seems to be slowly receding, high
inflation, unsustainably high level of
fiscal deficit, negative trade balance,
contracting Index of Industrial Pro-
duction (IIP), and falling economic
growth. A toxic cocktail for any
economy.
In the period for 2008-13, the Indian
economy has been growing below its
potential and economic activity has
been stagnant. A good indicator of
economic activity in any country is
the stock markets of the country and
looking at India’s Nifty-50 and BSE-
Sensex, the markets have given flat
to negative returns during 2008-13
which is a testimony to stagnant
India 2014 - How will 'GLOCAL' factors
play out for India? - part 1
BY BHUVANESH KUMAR, NMIMS, MUMBAI
Bhuvanesh Kumar
is a first year stu-
dent of MBA at
SBM, NMIMS. He
holds a B.A. degree
in Economics from
Hansraj College,
Delhi.
Email ID:
7bhuvaneshkumar
@gmail.com
C
O
V
E
R
S
t
O
R
Y
Figure 1 GDP Growth Rate India 2002-13
1
growth.
As the global economy is showing signs of econom-
ic recovery, with US leading the charge, India needs
to get its act together to reap the benefits of this re-
covery and regain the status of one of the most at-
tractive investment country in the world. The GDP
growth for Q2 FY14 came in at 4.8 per cent and go-
ing by the consensus estimate it’s expected that In-
dia’s GDP growth for FY 14 would be between 4.5 –
5%. Considering all these factors, 2014 will be a
crucial year for India as a country and its economy
especially.
A lot of factors will determine the direction of the
Indian economy. On the global front – the quantita-
tive easing (QE) tapering by the Federal Reserve,
stability of the Euro and the policies of European
Central Bank, the growing debt concerns in the Chi-
nese economy, money priniting by Japan and the
price of commodities especially crude oil. While do-
mestically, the general elections in April-May this
year, taming inflationary expectations, reducing the
fiscal deficit, clarity on government policies, renew-
al of investment activity and the stability of the ru-
pee. Though crucial, I have purposely not stated the
role of Reserve Bank of India (RBI) in shaping the
Indian economy in 2014 because its action will be
governed by inflationary and fiscal deficit trends, the
stability of the rupee and the dwindling economic
growth. To analyze how these factors will affect In-
dia, it is important to note that some factors are im-
portant than others and will have a commensurate
effect.
Firstly, a lot of people are betting on the general
elections of 2014 to give a mandate which will see a
change at the center and the market expects that the
next government will be formed by the BJP led Na-
tional Democratic Alliance (NDA) with Narendra
Modi as the PM. Traditionally, BJP is considered to
be more pro-business than the Congress. Narendra
Modi is believed to be decisive, supports growth of
business, believes in minimum government and
maximum governance and has a clean track record.
His economic model of Gujarat has seen rise in in-
vestments, economic activity, development and well
being of citizens. This is in complete contrast to the
way Congress has ruled over the past five years,
which has seen large scale scams, delay in clearanc-
es of corporate projects, rising populism which has
led to rise in fiscal deficit and subsequently inflation,
and a weak leadership unable to take hard policy de-
cisions. If the script plays out as corporate India ex-
pects it to, the business sentiment would improve.
We could see an increase in investments giving
boost to employment and economic growth. But,
even if NDA doesn’t reclaim power from UPA but
we see a stable formation, there could be a pickup in
the economic cycle. On the other hand, if there is
weak formation cobbled up of regional parties which
may not be politically sustainable for too long, we
may see outflow of capital from the country and fur-
ther worsening of the economy.
Secondly, rising inflation and fiscal deficit need to
be checked. The last few CPI inflation readings have
not been encouraging for the market with pressure
being exerted from mainly food articles. There has
also been no respite on the WPI front with WPI in-
flation rising to 7.52 percent in November. Govern-
ment has also been running a high fiscal deficit due
to rising subsidies and populist schemes such as
NREGA and the Food Security Act. A high fiscal
deficit has meant greater borrowing by the govern-
ment thereby leading to crowding out of private in-
vestment. High consumption by the government im-
plies a rise in demand and thereby a rise in inflation.
Inflation and fiscal deficit together have ensured that
interest rates have also remained at elevated levels to
control them. In 2014, it would be important to
break the back of inflation and reduce inflationary
expectations. It is expected that the good monsoon
of the previous year will help in a gradual fall in
food prices, the major cause of inflation. In addition,
some of the measures to directly procure fruits and
vegetables from the farmer could also help reduce
inflation. A fall in inflation will have multiple bene-
fits for the economy, as it will result in a fall in inter-
est rates which could help boost economic growth,
increase investment activity, reduce existing debt
costs for most companies which has acted like an
Achilles heel on most balance sheets and help build
2
a sustainable foundation for the next growth cycle.
Thirdly, there is a
concern emanating
from the QE taper
of the Fed in the
US. Most of the
economic indica-
tors are pointing
towards recovery
with the health of
the economy im-
proving. The unemployment
rate has decreased to 6.7% as per the latest figures
published by the labour department for December
2013, in addition to the Q3 GDP growth which came
in at 4.1%. The Fed has already announced that it
will reduce bond
purchases by $10
billion starting
January 2014 and
progressively de-
cide on the taper
depending on the
US economy. This
signals the begin-
ning of the end of
bond purchases by
the Fed, which
will result in de-
creasing liquidity in the US and the global economy.
Emerging Markets (EMs) especially those running
high CADs are expected to be hit harder due to the
taper. Although India is much better off today com-
pared to the middle of last year, it will be important
to see how India reacts to the taper going forward. If
there is a pause in the taper, it could be positive for
India as it will give her more time to rectify its
CAD.
Fourthly, other global factors such as the policy de-
cision of the ECB will also affect India. ECB chief
Mario Draghi has signalled that ECB’s lending rate
will remain at 0.25% for a considerable period of
time. Also, they would want
decouple from the Fed’s
decision of tapering, instead
they may increase asset pur-
chases to counter worries of
deflation. On the other
hand, there is also growing
uneasiness with high debt
levels in China, especially
in regard to shadow bank-
ing. You hear whispers
about how Chinese banks
owned by the state are indulging in various forms of
debt financing which are not sustainable over the
long run. Renowned investor George Soros has al-
ready raised questions about the existing banking
system in China. He believes structural reforms and
economic growth cannot be
achieved simultaneously,
contrary to what is being
claimed by China. In addi-
tion, there are the easy
money policies being fol-
lowed by Japan to reinvig-
orate their economy. Bank
of Japan (BoJ) aims to in-
ject $1.4 trillion annually in
the Japanese economy
which is larger than the
QE3 program on an annual basis. Some part of this
money will also move into India and other EMs to
make swift returns and gain on the yen carry trade.
Although significant, it’s difficult to predict what
effect each of these factors will have on the Indian
economy. While the loose monetary policies of ECB
and BoJ is positive for India as it will increase li-
quidity across the globe looking for avenues of high-
er returns, the China problem could pose a great risk
to India if it were to come true. The freezing up of
the banking system China could have a severe ad-
verse effect on the global economy which is just
starting to stabilize. Fifthly, the price of commodi-
ties especially oil will be significant for the Indian
Figure 2 Headline Inflation y-o-y Courtesy: Crisil
Figure 3 Monthly US Unemployment Rate in % Courtesy: Bureau of Labour Statistics
3
economy in 2014. Currently, Brent Crude has been
consistently trading above USD 100/barrel. Given
the facts, that the social unrest problem in the Mid-
dle-East which for the moment seems to have died
down except in Syria. Iran which is the second larg-
est producer of oil in the OPEC has agreed to halt its
nuclear enrichment programme, which has in return
meant some economic sanctions have been lifted by
the West. All these factors including the moderate
outlook of global growth and the discovery of alter-
native source of energy such as Shale Gas have en-
sured that crude prices don’t move north. 2014 could
further see correction in prices if economic sanctions
are completely lifted from Iran, leading to Iran re-
storing oil production to its capacity and selling
crude to the West. This could be a major positive for
India, as it will reduce the import subsidy bill and
thereby the fiscal deficit. As petrol prices have al-
ready been deregulated and diesel partially, a fall in
crude prices could mean a fall in petrol and diesel
prices. This could reduce manufacturing, transporta-
tion and other cost, in effect also reducing inflation.
Keeping all these factors in mind and other that may
not be significant today but could shape the Indian
economy in 2014, it is important to address those
factors that are in our control. I also believe that ma-
jor thrust to the economy would come by working
on the local factors such as inflation, fiscal deficit,
clarity on governmental policy, creating an investor
friendly environment and having a stable govern-
ment at the center. While India may be bottoming
out in terms of growth, there is no room for being
complacent in anticipation of future growth. We
can’t afford to make the mistakes committed during
the past 5 years and the polity needs to realize that
economic growth and employment can’t be sacri-
ficed for populism. For India needs to regain its past
glory!
4
In a view of the government to
reach a new stage of development,
China's new President, Xi Jinping,
along with China’s other leaders
have unveiled a series of reforms
that aim at overhauling its econo-
my over the next decade. This has
signalled a commitment to liberal-
ize the existing economy.
Mr Xi’s was quoted saying Deng
Xiaoping’s warning in 1992 of a
“dead end” if the country failed to
reform and improve living stand-
ards. Mr Xi bluntly said about the
challenges that China faces: a
mode of development that is
“unbalanced, uncoordinated and
unsustaina-
ble”; an in-
crease in
“social con-
tradictions”;
and a
“severe”
struggle to
contain cor-
ruption.
These chal-
lenges were
cited as a need to lead another set
of reforms that could set China on
a continued growth trajectory.
The news of China's bold economic
reform came as the ANZ- Australia
and New Zealand Banking Group,
received the green light from the
Chinese regulator to open up a sub-
branch in the Shanghai free trade
zone. This is expected to play an
important role in the country's further
liberalisation effort.
The Shanghai free trade zone initia-
tive is considered to be an important
initiative as part of China's reform
agenda and is expected to further
open up the financial services indus-
try to private and foreign capital.
It is also believed that it will help
bolster RMB, the official currency of
the People’s Republic of China, con-
vertibility, hold up a path to interest
rate liberalisation and increase the
volume of cross-border transactions
given companies located in the zone
will be able to take advantage of both
on-
shore
and
off-
shore
mar-
kets.
China's
lead-
ers, in
hopes to stimulate growth and curb
corruption, have laid out a plan to
wrest a bigger chunk of the country's
economy from state control and turn
it over to the free market. Com-
munist Party leaders in China said
that state ownership would continue
to play a key role in the economy but
more emphasis will be en-
dorsed on private ownership. Though
state ownership would remain a pillar
China unleashes new Economic Reform
BY ASHITA GUPTA, IMI, DELHI
Ashita Gupta is cur-
rently pursuing her
MBA from IMI, Del-
hi. She has complet-
er her engineering
in CSE and is a gold
medal recipient
from the university.
She’s a sports en-
thusiast and loves
playing guitar.
Email ID:
ashita.p13
@imi.edu
Figure 1
5
of the economy. [Refer exhibit 1]
It is believed that the core issue is to straighten out
the relationship between government and the market
so that the market can be allowed to play a decisive
role in allocating resources and improving the gov-
ernment's role.
Xi Jinping is cracking down on corruption which
can determine the future of China’s economy. It can
be predicted that if Xi seriously works on anti-
corruption then China's economy will build a base
over the next few years based on consumption. This
will take China's economy to the largest in the world
by 2030.
In a meeting of China’s top leaders a 60-point re-
form plan was seen paving the way for sweeping
changes in the world's second largest economy as it
tried to steer away from investment-led growth to a
consumption-driven economy.
Major reforms were as follows:
Relaxation in one-child policy
Was introduced in 1979
Contributed to falling birth rates
Will allow couples to have two children
if one the parents is an only child
Baby-product related stocks such as
Goodbaby International soared in Hong
Kong following the easing of the one-
child policy
The reason that the China's leaders changed the one-
child policy is because China has aging popula-
tion and an aging population needed support. More-
over there has been a gender imbalance prevailing
with this policy.
Welfare-system reformed
Relaxation in the sys-
tem of household registra-
tion known as the hukou
system
Under this system mi-
grants give up the public
services they are entitled
to when they move to ur-
ban areas.
Analysts say changing
this system is a key step
towards liberalizing the
labor market that will allow the free
movement of labor and encourage urban-
ization
The urbanization policy change with the relaxation
of the hukou policy is considered to be the biggest
reform since 1958. The largest cities such as Beijing,
Shanghai, Guangzhou and Shenzhen will still have
strict rules applied to it though the changes will
mean a more mobile labor force and an increase of
workers into factories struggling with the demand
of work needed.
The government will open up rural migration to
small cities which will be a boon to the economy as
it will boost the wellbeing of migrant workers who
will now have more money to spend on goods and
services. Still the government is likely to move very
slowly on this reform as it will trigger a rush by rural
dwellers into the cities—which the cities are unlike-
ly to be able to absorb.
Greater rights for farmers
Farmers will be granted rights to possess,
use, benefit from and transfer their land
along with the right to use their land
ownership as collateral or a guarantee
Figure 2
6
Presently all land in China is
owned by the government with farmers
only permitted the right to work the soil
in their area
It has become important to encourage
urbanization and shift China's economy
to a consumer-driven one since it could
enable farmers to cash in on the value of
their land while investing in new ven-
tures and move to the cities
If farmers are given the right to actually sell their
land instead of having it appropriated by the local
government then there will be a situation where the
right kind of housing development will happen. This
“Land reform” is going to be part of a major push
towards the right kind of housing in China.
Stepping up financial reforms
Setting up a deposit insurance system by
early 2014 that will give the qualified
private investors the go ahead to set up
banks, loosen controls on the pricing of
water, electricity and natural resources
and revamp the system for Initial Public
Offerings (IPOs)
It is believed that the insurance scheme would pro-
tect depositors as China is worried that some smaller
lenders are at risk of going under as banks compete
for deposits in a more open regime. China's central
bank had removed controls on lending rates.
State-Owned Enterprises (SOEs):
SOEs will be required to pay larger divi-
dends to the government by way of 30
percent of earnings from "state capital" to
be paid back to the state and used for so-
cial security by 2020
Private firms will be encouraged to play a
greater role in the economy
According to a report, China's 113 large SOEs under
direct government control typically pay 5 to 20 per-
cent of their profits to the government in dividends.
Some people believe that reform of the SOEs is one
area where reform could be slow.
Of these reforms, the major three viz-a-
viz permission to establish regulated banks by pri-
vate investors to serve small and medium enterpris-
es, payment of larger dividends to government by
state-owned lenders and effective replacement of
one-child policy with a two-child policy will play a
major role.
While these three changes aren't sufficient to put
China on the path to sustainable growth there will be
a significant contribution in solving China’s biggest
problem i.e. too much investment and not enough
personal consumption.
There has been excessive infrastructure lying around
unutilized. China can boost the value of this unu-
tilized capacity by making sure there are more Chi-
nese people around to use it. China’s population
is projected to shrink by about one-third before the
end of the century at the same time as it rapidly ages
under its one-child policy. With this, the re-
sult would be a country with about two people of
working age for every one person older than 65 by
the year 2050 with more old people than young peo-
ple capable of supporting them in their dotage by the
year 2100. This restriction is still too severe to keep
the population from shrinking; China still needs to
produce at least 2.1 children per mother on average.
The government had also decided to work towards
an independent judiciary i.e. the courts would be
7
"appropriately" separated from local govern-
ments.
Under
govern-
ment re-
form, re-
laxation
on the
need for
govern-
ment ap-
proval on
projects
was real-
ized and
the perfor-
mances of local officials would be rated on measures
other than just economic growth such as in environ-
mental protection were noted. Xi was facing much
resistance in the commitment to abolish re-education
through labor camps though they were remarkable.
Drawbacks
China’s Plenum outlined ambitious reforms however
there have been many qualms about the implementa-
tion of its policy.
Each of the reforms will have costs for and
might adversely affect powerful players in the
Chinese system
The year 2020 is set as a target by the party
leaders for implementing all of this gauging how
tough it will be to implement it
These reforms could also be delayed or even
abandoned with the scale of the obstacles ahead
becoming more and more apparent
Also, these reforms will come head to head
with vested interests that stand to lose huge pow-
er
partic-
ularly
the
state
enter-
prises,
local
gov-
ernments, banks, well-connected prince lings,
security authorities, and ultimately the party it-
self
If these reforms aren’t carried out then China
can’t continue to growthe way it has and risks
social and economic fracture
While it pursues these reforms the party is
diluting its control in multiple ways:
Its privileged role controlling the
purse strings if more and more lending is
to go through non-state banks
Its leading position guiding the econ-
omy’s development if the private sector
starts to move into areas long controlled
by state enterprises
Increasingly its sway over the people
as the party loosens the hukou and allows
migrants to move more freely where they
want while it gives farmers more power
over the land they occupy
Figure 4
8
There is an associated possibility of greater
social unrest if huge new numbers of people flow
into the cities and feel less inclined to be quiet when
they
feel
the
state
has
mis-
treated
them.
Hav-
ing
been
the
facto-
ry to
the
world,
the
Chi-
nese
leaders want to avoid the so-called middle-income
trap- where wealth creation stagnates as market
share is lost to lower-cost rivals. Chinese leaders are
acutely aware of what is at stake as years of rapid
growth come to an end.
The World Bank says China's per capita GDP was
$6,188 last year, compared with $22,590 in South
Korea, $36,796 in Hong Kong and $51,709 in Singa-
pore - Asian peers that have succeeded in making
such a transition.
It was believed that significant attempts were to-
wards the powerful state monopolies though many
economists argued that loosening the stranglehold of
big state-owned firms' on markets from banking to
energy was key to success of other reforms.
On the whole, the proposed reforms are part of Chi-
na's
grand
trans-
formation design: retooling the economy towards
greater reliance on consumption, services and mov-
ing up the manufacturing value chain, while tackling
deepening inequality and discontent, a source of
great anxiety for a leadership that prizes stability
over everything else.
The past reforms have been good enough for China
to evolve as a second-largest economy but still it
can’t avoid the consequences of its past policy mis-
takes. These new reforms suggest that the leadership
is willing to take small steps to address the country’s
challenges and the only question that remains is
whether the pace of reform will be fast enough to
allow it to be on the track of continued growth for
China.
Figure 5
9
The story of Indian economy in
2014 will be
determined by
numerous
global and
local factors.
To get India
back to the
growth trajec-
tory, various
structural is-
sues need to
be corrected
by the govern-
ment keeping
in mind that it will be impacted by
various ‘glocal’ factors. India reg-
istered a
growth of
4.4% in the
first quarter of
the current
fiscal, the
slowest in 4
years, before
improving in
the second
quarter to
4.8%. This
growth is well
below the
economy’s potential of 7-8% which
it achieved a couple of years ago.
Let us analyze the various factors,
both global and local those are go-
ing to largely impact the economic
scenario of the country in the fu-
ture.
Global Factors
Advanced economies improving -
The gap between emerging mar-
kets like
India and
advanced
econo-
mies
such as
US and
UK is
reducing
In
terms of
growth
and in-
flation. This can be an ominous
situation for the financial stability
of
emerg-
ing
coun-
tries.
Most
ad-
vanced
econo-
mies are
facing
low and
falling
inflation
whereas countries like India and
Argentina are facing high infla-
tionary pressures.
This realignment of growth and infla-
tion factors in advanced economies
(AEs) can lead to change in direction
of capital flows from countries like
India to AEs. Monetary tightening
India 2014 - How will 'GLOCAL'
factors play out for India? - part 2
BY PRATIK DAS, NMIMS, MUMBAI
Pratik Das is a
B.Tech in ECE and
he is presently pur-
suing MBA from
NMIMS, Mumbai.
Pratik also has a
work experience
with Infosys Tech-
nologies Ltd.
Email ID:
pratik.das@nmims.
edu.in
Fig 1: GDP Growth %
Fig 2: CPI Inflation
10
policies by the Reserve Bank of India (RBI)
came as an obvious step to curb the rising inflation
in the country which is in turn restricted the growth.
Therefore, it is imperative for India to fix the infla-
tion issue
as soon as
possible
in 2014
before
easy mon-
etary poli-
cies in
AEs are
wound up.
QE
Tapering - The third edition of the stimulus pro-
gramme, better known as Quantitative Easing
(QE) began in 2012, under which the Fed was
buying $85 billion worth of assets every month
created liquidity in the market which ultimately
led to easy flow of money to emerging econo-
mies like India. India has received $19 billion as
foreign institutional investment in 2013, of
which about $7.5 billion came after September,
when the US Fed decided to postpone the taper
to 2014. But as pointed out by Dr. Rajan, taper-
ing is imminent in the coming months. To make
a ‘bullet-proof’ economy, so that India is least
affected due to the tapering by Fed, the RBI gov-
ernor passed a slew of reforms, mainly structur-
al, which not only brought more forex reserves
and stabilised the currency fluctuations, but it
also built a strong monetary foundation to pro-
tect the economy in case of a sudden rollback of
the US stimulus program. Later this year, the
Fed decided to start wrapping up its gradual
bond buying program by reducing the amount
invested in bond buying by $10 billion. Despite
that, the rupee was not seen weakening much as
com-
pared
to its
May
22,
2013
levels
when
the first
talk of
taper-
ing
happened. The various macro parameters includ-
ing CAD and Forex reserves have shown healthy
revival signs, therefore, the vulnerability has def-
initely come down which clearly shows that the
country is now better prepared against the QE
tapering that is likely to be complete in 2014.
Local Factors
1. Lok Sabha Elections – Probably the most im-
portant factor that is going to decide the fate of the
Indian Economy in 2014 is going to be the upcom-
ing national elections in May. The general elections
have the potential to reset the system and kick start
the reform process. The entire nation is hoping for a
business-friendly government, no matter who is
elected eventually. If the Congress-led UPA comes
to power, the agenda will be to bring in reforms
which they already have in pipeline. As put forward
by Rahul Gandhi in his speech at FICCI, the UPA
government will look to provide fast track clearanc-
es to projects which are stalled due to delays in
Figure 5
Fig 3: FII Net Purchases/Sales
11
environmental and social issues. It will
also focus on investments in education, R &
D and will stress on passing tax reforms such
as Goods and Service Tax and Direct Taxes
Code. If BJP-led NDA comes to power, the
economy may get even more excited due to
widespread perception of Narendra Modi
seen as a pro-business leader who has con-
stantly boosted both foreign and domestic
investments in his native Gujarat. A third
front is certainly the least desirable outcome
as the stability of the government will be in
question.
The recent state election defeats by the Congress
can also bring about a change in the working
mindset of the party. If the party views this
defeat as voter dissatisfaction against the ris-
ing inflation, then the policy might comple-
ment with the central bank’s strategy of con-
trolling inflation. . If the party sees this as the
need for more freebies, it will be tempted to
pour money into populist schemes to win
votes which can dent the fiscal situation of
the country even more. Therefore, whatever
the country decides in 2014 will certainly
pave the way for a change in the business
landscape throughout the country.
2. Fiscal worries – The fiscal deficit in the
country is a major issue which will largely
impact the future policies of the government.
Although the finance minister has been
stressing on limiting the fiscal deficit to 4.8%
of GDP for the current financial year, main-
taining that will be a huge challenge and
most probably impossible. As per the latest
data published by the Controller General of
Accounts (CGA), the fiscal deficit of the Un-
ion Government in the April-November peri-
od was Rs. 5.09 trillion, against a budgeted
target of Rs. 5.42 trillion for the year ended
31st March, which is 94% of the full year tar-
get. There is very little that the government
can do to contain the fiscal deficit with only
1 quarter left except pushing for some big-
ticket reforms such as Goods and Service
Tax (GST). However, implementation of
GST, which aims to rationalize the indirect
taxation system in the country, may not be
implemented in 2014. The much needed tax
reform was tabled in August 2013 by the
Standing committee on finance. But the ina-
bility of the winter session
of parlia- ment to come to a
decision on the GST rollout makes it impos-
sible for GST to be a reality before 2016.
Therefore, it remains to be seen how the gov-
ernment cuts down on some of its expendi-
tures such as food and fuel subsidies and also
focus on collection of non-tax revenues to
ensure that the fiscal deficit doesn’t exceed
FY14 target, which may negatively affect the
economic growth momentum. Therefore, im-
provement in the fiscal strength of the coun-
try through reforms in the indirect taxation
system is unlikely in the next year.
3. Inflation – Wholesale Price Inflation (WPI)
maintained a consistent 7 percent throughout
the year 2013 while retail inflation, measured
by Consumer Price Inflation (CPI) rose
sharply and crossed the 11% mark in No-
vember 2013
Figure 5
Fig 4: Inflation– CPI and WPI
12
To
address the inflationary concerns, the central
bank increased the interest rates in September
2013. This is going to be a huge concern for the
policy makers in 2014 as unless inflation is ad-
dressed, infusing liquidity in the system to accel-
erate the much needed growth
is not possible. Even as some moderation is ex-
pected in food inflation going forward, persis-
tence of retail inflation remains a concern. To
address the inflationary concerns and to strength-
en the environment for sustainable growth by
fostering macroeconomic and financial stability,
monetary policy was tightened in September
2013 and October 2013 by a cumulative 50 basis
points hike in repo rate. As a result of this persis-
tent high inflation, the financial assets of house-
holds (money saved as bank deposits and capital
market instruments) have fallen from the highs
of 2000s.
Recent measures such as the re-introduction of
inflation indexed bonds (IIBs) and introduction
of CPI linked saving certificates for retail cus-
tomers are part of the strategy to encourage in-
vestors to invest in financial assets. These bonds
protect the investors against rising inflation. It
also gives 1.5% return over and above the infla-
tion. It remains to be seen how the IIBs are able
to provide a healthy return against inflation in
2014. Further Securities and Exchange Board of
India (SEBI) recently brought out the draft con-
sultation paper on Real Estate Investment Trusts
(REITs). REITs are a positive development in
the real estate domain as it will ensure that in-
vesting in real estate more accessible, long-term
and income-oriented. In 2014, investors will be
looking for the rule formulations for REITs.
4. Industrial Production - Manufacturing sector,
the key driver of the Indian economy, has wit-
nessed a slowdown leading to a decline in indus-
trial output over the year. The HSBC Purchasing
Manager’s Index (PMI) in manufacturing was
down at 50.7 points in December 2013 from 51.3
in the previous month.
The Index of Industrial Production (IIP) contract-
ed to 1.8% in October 2013. The manufacturing
sector declined by 2% in October compared to a
growth of 9% in same period last year. The min-
ing sector saw a contraction of 3.5% in October
as against a dip of 0.2% in the same month last
fiscal. Power generation, however, posted a
growth of 1.3 percent in the month under re-
view compared to 5.5 percent a year ago.
Though India is the country with the 5th largest
coal reserves, the country is grappling with fiscal
deficit due to increased imports of coal. Accord-
ing to the latest International Energy Outlook
report of US-based EIA, demand for coal in India
is set to double by 2040 while production may
stagnate resulting in more than doubling of im-
ports to 281 million tonne by 2040. Coal India
Fig 5: Deposits after inflation
13
Limited, which produces 80% of the na-
tion’s coal requirements, is facing internal prob-
lems mainly pertaining to technological upgrada-
tion needs. This requires restructuring of the coal
units which is being strongly protested by the
la-
bour unions. Moreover, several private compa-
nies are under CBI scanner after the CAG al-
leged a scam over the allocation of captive coal
mines. The decline in the coal output affected
thermal power generation which decelerated to
1.8% during April-August 2013 from 8.6% last
year.
In 2014, clearing the coal blocks held for envi-
ronment clearance will be a big challenge. The
government should clear the roadblocks as soon
as possible and conduct fresh auctions of the dis-
puted mines. The government should attract for-
eign investments in mining industry and improve
coal production to meet the domestic require-
ments and subsequently reduce fiscal deficit.
With improvement in the coal output, more pow-
er generation will result which will ultimately
lead to a boost in the manufacturing sector.
In the upcoming year, the government in co-
ordination with the central bank has to address
various issues. Due to introduction of populist
measures such as Food security bill and in-
creased
subsi-
dies, the
fiscal
deficit
has widened which needs to be brought under
control. To tame that, the government has to de-
crease spending and increase revenue receipts
which are only marginally possible now through
non-tax reforms. Due to supply side constraints
and infrastructure issues, the food as well as the
retail inflation is on the rise. The central bank is
not being able to infuse liquidity in the system
through a rate cut due to inflation concerns.
Without liquidity in the market, the cost of bor-
rowing for businesses is becoming costly, which
is holding up more investments and increasing
unemployment. Therefore, more foreign infra-
structure investments, tax reforms to generate
more revenues, power generation through clear-
ing the policy logjam on coal issue, boost in the
manufacturing sector and creating an investment
friendly government for businessmen are the
needs of the hour to bring back the country on a
7-8% growth track.
Month Mining Overall
2012-13 2013-14 2012-13 2013-14
Oct - 0.2 -3.5 8.4 -1.8
Apr - Oct -1.0 -2.7 1.2 0.0
14
In a move to increase the depth of
the Indian Real Estate Market, in
terms of exit as well as financing
options for developers and new av-
enues for investment, The Securi-
ties and Exchange Board of India
(SEBI), has decided to allow Real
Estate Investment Trusts (REITs)
in India. The following article at-
tempts to dissect this seemingly
abstruse yet highly innovative in-
vestment vehicle from a global per-
spective where its impact is palpa-
ble and attempts to evaluate its
suitability in the Indian context.
Real Estate Investment Trust
(REIT) is a real estate company
that offers securities that trade on
stock exchanges like equity shares
and in turn it invests into income-
yielding real estate projects. On a
whole similar to any other equity
investment, REITs has two unique
features – the management of in-
come producing properties remains
its main function, and most of its
profits have to be distributed as
dividends. These dividends, in addi-
tion to price appreciation form the
main source of payoffs for investors.
Types of REIT:
Equity REIT – These typically
invest directly into income-
generating real estate projects
like Apartments, Malls, Commer-
cial Complexes etc. They may
even be responsible for managing
them by virtue of the kind of
agreement entered into. Sales,
rentals and service charges are
the revenue streams for the REIT.
Mortgage REIT – The REIT in-
vests in existing mortgages, mort-
gage-backed securities or may
even advance money to real-
estate owners for mortgages
Hybrid REIT – A combination of
Equity and Mortgage REIT struc-
tures primarily adopted for the
mitigation of risks and to seek
enhanced returns. More common
in the healthcare sector where the
trust can advance mortgages to
REIT’s - will they breathe
life into India's comatose
real estate sector?
BY ROHAN DHALL, SHARMAN MOHITE & TRIDIB PILLAI, NMIMS - MUMBAI The author is a Computer
Engineer from Mumbai
University and is
currently pursuing an
MBA in Banking
Management from
NMIMS, Mumbai.
F
I
n
K
n
O
W
L
E
D
g
E The author has done
B.Com (Banking and
Insurance) and is cur-
rently pursuing MBA-
Banking from NMIMS,
Mumbai
The author is a Me-
chanical Engineer from
Mumbai University
and is currently pursu-
ing MBA in Banking
Management from
NMIMS Mumbai.
15
healthcare companies and also buy medical office
parks.
Dividend yield:
Equity REIT < Hybrid
REIT < Mortgage REIT
Price appreciation:
Mortgage REIT < Hybrid
REIT < Equity REIT
Global REITs Footprint
The figure illustrates the
various countries that
have embraced REITs
and those that are still
contemplating doing so.
Since its introduction for
the first time in 1960 in
the US, it has managed to
gain a wide acceptance across the world and current-
ly enjoys a significant market capitalization in most
of the global financial markets.
Every country has its own policy framework within
which different manifestations of REITs have
evolved. The US REIT for example has rigorous
transparency and mandatory disclosure requirements
in addition to strict conditions that ensure 90% of the
taxable income is paid out to unit holders as divi-
dend.
However, this portion is
deductible for tax pur-
poses. Also the US REIT
must be widely held and
must derive a major pro-
portion of its income
from real estate held for a
long term. The Japanese
version referred to as J-
REIT resurrected the real
estate markets in Japan
after its introduction in
2000-01. Its management
structure is external and
hence varies from the US
REIT. Another popular destination for REITs is Sin-
gapore where listing of the REIT is mandatory on
the Singapore Stock Exchange. Taxation treatment
in Singapore is similar to the US. However, unit
holders are taxed on the payouts they receive from
the trust at income tax rates. Despite the myriad
structures, one can safely conclude that REITs are an
immensely popular channel for portfolio diversifica-
tion on the markets they
operate in.
Case for introduction of
REITs in India
The following factors make
REITs such a compelling
investment class world over
and the prospect of being
able to replicate the success
in India seems quite invit-
ing.
1. Superior returns at low-
er levels of risk: REITs are
characterized by a great
deal of predictability arising out of stable nature
of rentals and occupancy rates. They also have
low correlation rates and higher levels of liquidi-
ty. On an average, REITs have a D/E ratio in the
range of 0.5 signifying lower leverage. All of
these are indicative of lower levels of risk. Ex-
hibit reflects the historical returns achieved by
REITs over 4 decades juxtaposed with those wit-
nessed by other similar investment avenues. Se-
curities that offer such consistent and high rates
of returns at lower risks become a natural choice
for portfolio diversification.
2. Hedge against inflation
– As an asset class, real es-
tate offers an excellent
hedge against inflation.
However, the huge quan-
tum of investment required,
associated illiquidity and
lack of transparency deter
the small ticket investor
from being able to leverage
this feature. REITs will
provide the same hedge
against inflation and owing
to its lower entry load would protect the
“Average Joe” from increasing inflation by
yielding positive and appreciable “real” returns
on investment.
16
3. Infuse a high degree of transparency into a tradi-
tionally opaque sector – It would help clear the
smokescreen surrounding Indian real estate deal-
ings. Improved reporting and disclosure require-
ments in addition to stringent regulatory and su-
pervisory oversight by market watchdog SEBI is
likely to heighten the extant standards of corpo-
rate governance, im-
prove real estate market
efficiency by eliminat-
ing issues of moral haz-
ard and adverse selec-
tion and thereby safe-
guard the interests of
the smaller retail inves-
tors. It will also stream-
line and institutionalize
the process of raising
finance and flag several risks associated with
clear titles, project viability and minimizing
transaction costs.
4. Opportunities for investors in every business cy-
cle – Most real estate markets witness four dis-
cernable phases that constitute the real estate
business cycle. One of the foremost reasons that
have made REITs a runaway success is their
ability to offer lucrative business alternatives in
every phase of the cycle.
5. Mobilize financial resources – This is vital to a
sector that is currently witnessing a paucity of
financial resources in India attributable to high
risk perceptions and enhanced regulatory curtail-
ments that makes access to capital expensive and
arduous. EY estimates peg investments to the
tune of US $ 42 billion in Indian real sector
fuelled by growing urbanization, shifting de-
mographics and generation of employment op-
portunities in urban areas. REITs will prove to
be a game changer to bridge the vast investment
gap and fuel growth in the real estate sector at
lower costs of capital. Exhibit depicts the prolif-
eration of REITs in leading Asian markets and is
an emphatic assertion of their popularity and
success.
PROPOSED REGULATORY FRAMEWORK:
Realizing the importance of REITs, a regulatory
framework has been proposed under draft SEBI
(Real Estate Investment Trusts) Regulations, 2013.
Some of the prominent features of proposed frame-
work are as follows:
1. Structure of the REIT: REIT will be set up as a
Trust under provisions of Indian Trusts Act,
1882. It will consists of:-
i. Sponsor: Sponsor should have minimum net
worth of Rs 200 million and at least
five year of experience in real estate
ii. Manager: Manager should have
minimum net worth of Rs 50 mil-
lion and at least five years of expe-
rience in fund management
iii. Trustee: Trustee should be reg-
istered with SEBI and 50% should
be independent directors
2. Investment conditions and Dividend Policy:
i. It has been mandated that at least 90% of the val-
ue of REIT assets will be invested in completed
revenue generating properties ensuring return for
investors and reducing risk-return. Remaining
10% can be invested in Government Securities,
debt of Listed/ Unlisted corporate companies
ii. To ensure regular income to investors, at least
90% of net distributable income after tax of
REIT should be distributed among investors
iii. REIT shall not invest in vacant or agricultural
land and shall invest only in assets based in India
iv. Investment up to 100% of corpus of REIT can be
invested in one project provided minimum size
of such asset is more than Rs 1000 crores
v. Leverage of 25% is ordinarily allowed and lever-
age up to 50% is allowed only after getting posi-
tive consent from unit holders and credit rating
vi. All related party transactions by facilities manag-
er will be on arms-length basis and will be in
best interest of investors; in line with the invest-
ment objective of REITs
vii. Real estate investment trust can invest at least
51% in real estate directly or they can invest in
SPV (Special Purpose Vehicles) which in turn
holds real estate assets
viii.Guidelines related to listing of REITs:
Minimum value of REITs assets : Rs 10 billion
17
Minimum public float - 25%
Minimum issue size of lots is Rs 100 thousand
and for trading lots it is Rs 200 thousands
Sponsor needs to invest 25% in REITs for three
years since inception and continue to invest 15%
till lifetime of REIT.
There can be minimum 20 outside unit holders in
REITs.
3. Rights of Investors:
i. Investors will have
the right to re-
move manager,
auditor, and prin-
cipal valuer and
can also apply to
SEBI for change
in trustee
ii. An annual meeting
of all investors
needs to be con-
ducted by trustee
where information
like performance
of REIT, appoint-
ment of principal
valuer, latest annu-
al accounts needs
to be disclosed in front of investors
iii. Detailed Disclosures needs to be given in annual
and half yearly valuation reports to ensure trans-
parency and protect investor’s money
SEBI has requested comments and opinions from the
various stakeholders and public at large on its draft
regulations. The following nagging issues often fea-
ture as a part of erudite discourses on the topic:
Single level of corporate taxation (either at REIT
or SPV level) or pass through taxation and elimi-
nation of all other intermediate taxes including
those on distributions received by unit holders
Clamor to seek one-time tax exemption when the
REIT is created by a sponsor
In the event of payment of STT, the trading of
REIT units on the stock exchanges must be ex-
empt from long-term capital gains tax
FDI/FII should be allowed under automatic route
by the amendment of FEMA
Exemption of Stamp-Duty when asset is pur-
chased or sold by the REIT or rationalization of
the Stamp-Duty structure
Inclusion of ports, roads, airports and other com-
pleted infrastructure projects in REITs
Explore a relaxation in the minimum 5-years eli-
gibility criterion stipulated for ‘Sponsors’ to ena-
ble other entities
with prodigious
portions of land to
act as ‘Sponsors’.
Industry is seeking
a relaxation of
sponsor eligibility
criteria with regard
to requirement of 5
years experience in
the realty sector.
There is also a feel-
ing that the norm
mandating 90% in-
vestment in com-
pleted projects is
too harsh and it
should be brought down to 75%.
CONCLUSION:
Globally, REITs have been effective in attracting
and managing investments in the Real Estate sector.
This, along with an ever increasing demand for qual-
ity real estate in India, which REITs can help meet
by bringing the required investments in the real es-
tate sector, make the case for implementation of
REITs compelling enough to drive policy makers to
act fast on the implementation of a similar regime in
India with requisite adjustments, keeping in perspec-
tive the unique dynamics of its economy.
The issue of draft guidelines by SEBI should pro-
vide a fillip to the sentiment in the real estate sector,
and help attract capital from overseas markets.
18
“Lender of last resort” is what a
Central Bank of any country is
known as. Central Bank is an insti-
tute that can exercise its power of
damage control if the economy
goes for a toss. From ages, when-
ever a country undergoes a crisis,
the central bank always comes for
its rescue by implementing the var-
ious financial tools it possesses. No
matter how big the crisis is, the
Central bank of the respective
country always manages to bring
the economy back on track. Let us
analyse what measures have been
adopted by various central banks
during the recent period of stagnant
economic growth in the world.
ROLE OF BANKS
1. US FEDERAL RESERVE
Quantitative Easing (QE) – A term
which wasn’t even heard 5 years
ago has become a general topic of
discussion these days and is under-
standable by anyone who’s a little
interested in the world economy.
The dual agenda - of maintaining
the dollar’s value (i.e. managing
inflation) and managing the rate of
unemployment - resulted in the
Fed’s consecutive 3 cycles of the
QE program. With the initial
pumping of $1.7 trillion of QE1
( first cycle of QE) in the economy
the process was followed by an in-
fusion of another $ 600 billion dur-
ing QE2 and eventually QE3 (still
going on) at a rate of $75 billion
per month since Nov 2012 (recent
tapering by $10 billion in bond pur-
chases). Till now, a total money infu-
sion of $ 5 trillion has been done in
the economy.
The tapering was an indication of the
betterment of the economic situation
of the country accompanied with low
unemployment rates, a stable home
currency (USD), increase in the
mortgage value of the houses, gradu-
al inflation, an increase in the GDP
figures and an increase in the exports
and purchasing ability of the country.
But there is a down-side to this pro-
cess. The monetary stimulus given
by the Fed is going to fortify the
economy by encouraging banks to
lend more hence, leading to increase
in borrowing, investment, and spend-
ing.
By lowering the interest rates, the
policy of the fed reserve has deprived
the depositors from the interests that
they would have earned on savings
accounts, certificates of deposit,
money market funds, short and long-
term treasury bills and various inter-
est generating annuities held by the
retirees. The process of QE, which is
the purchasing of bonds from the
commercial banks of the country by
the central bank to infuse money into
the banks so as to make the currency
easily available to spend, invest and
trade, has a flip side. Quantitative
easing helps in financing a budget
deficit since the Fed continuously
buys many bonds, but like every-
thing, when the period ends, things
Are we on a path to recovery or it is
the central banks' effect across the
world. Is another crisis looming ?
BY PUSHPANJALI MITRA, SIMS
Pushpanjali Mitra is
a B.Tech (IT) from
West Bengali Uni-
versity of Technol-
ogy and she is pres-
ently pursuing MBA
in Finance from
Symbiosis Institute
of Management
Studies.
Email ID:
push-
panjali.mitra2015
@sims.edu
19
turn out to be a little difficult.
After the real estate credit crisis bubble, economy
slowed down, sales plunged and a recession started
setting in and the US treasury came up with what it
is known as the bailout bubble that resulted into the
introduction of more and more money-stimulus
packages in the economy. After the real estate bub-
ble burst, it was
time for the world
to face the conse-
quences. Fannie
Mae and Freddie
Mac, the govern-
ment sponsored
enterprises, estab-
lished to buy up
the mortgage
backed securities
were taken over
by the Federal.
Lehman Brothers
was not bailed out
and became bank-
rupt. Merrill
Lynch was on the
verge of bankruptcy and underwent an acquisition
by BofA for $50billion.
Along with these an infusion of $700 billion was
done by the US government - the biggest bailout in
the history of the US government known as TARP
(Troubled Assets Relief Program) - to shore up the
common man’s confidence and capital by buying out
the toxic assets of the financial institutions . Bear
Sterns was bailed out by the Maiden Lane Transac-
tions created by the Federal Reserve of New York
and was acquired by JP Morgan Chase along with
the AIG bailout where AIG was taken over by the
US Companies.
2. PEOPLE’S BANK OF CHINA (PBOC)
In China the monetary policy and financial institu-
tion are controlled by the PBOC, though at times the
communist party through its supremacy influences
the decisions of PBOC.China is an economy which
is semi-intervened by the central bank or the peo-
ple’s bank of China when suffers from liquidity or
credit crisis. During the US recession, China printed
400 trillion Yuan (approximately $600 million in
2009 rate) in order to avoid the downturn of the
economy. China suffered an interbank market crash
in the first half of 2013.The bank was already having
a hard time to keep up the deposit-to-loan ratio (a
technique used to check the amount of liquidity
available in the banks for the lenders) requirements,
even before the liquidity shortage hit the economy.
Banks didn’t have money to lend to the people and
the loans were kept on
hold. The tightened li-
quidity, which approxi-
mately started on June 6,
impacted the inter-
market, stock market and
security refinancing com-
panies. The overnight
lending rate (the rate at
which the banks lends
money to each other
overnight) jumped to
25% clearly showing the
reluctance of the banks to
lend money to each oth-
er.
The amount of total credit
in China’s financial system reached epic proportions
reached unsustainable levels. The world had never
before seen a debt acceleration of this magnitude in
any country ever. This was also knows as the Leh-
man moment. It has increased eight-fold in the past
10 years and is now around 220% of GDP.
The reasons associated with the Credit crunch or
‘SHIBOR Shock’ (Shanghai Interbank Offered Rate,
a benchmark interest rate) which contributed to
spike the inter-bank rates included the sharp fall in
the foreign exchange inflows due to the government
crackdown and illicit activities. If this case would
have happened in US, the Fed would have infused
money instantly but the PBOC (People’s Bank of
China) sat on its hands refusing to inject liquidity.
The explanation which the PBOC gave was that it
wanted banks to slow the pace of lending money.
PBOC wanted to curtail funds that were flowing into
the country's vast informal loans market. Generally
there is a shortage in liquidity at the end of the year
for different banks of China as companies increase
their demand for capital. The growing shadow bank
20
ing system of China, which tends to offer higher in-
terest rates to investors, has also been pumping out
funds from traditional banks. Investors feared the
combination of Fed tapering and the Chinese high
interest rates impact-
ing the stock market.
The Chinese equities
sank to 4 year low. Its
tough stance of allow-
ing tightening the cash
flow in the economy
raised fears of a last-
ing credit crunch and
affected the markets
globally. Soon, when
the Shanghai stock
market started seeing
its all-time low since
the US recession,
PBOC appeared to
soften its position
slightly. To allay the
fear of credit crunch, PBOC pumped in 29 billion
Yuan ($4.8 billion) into the economy via open mar-
ket operations resulting in the fall of the interbank
rates almost by half (it surged to almost 18% and fell
to 9% after the infusion).
3. BANK OF JAPAN
The Bank of Japan has introduced a larger bond buy-
ing program in comparison to the Fed, to revive the
Japanese economy and break the shackles of defla-
tion that have plagued the Japanese economy for the
past two decades. The BoJ is buying ¥7.5-trillion of
government bonds (JGB’s) per month, and interven-
ing directly in the equity market, by purchasing ¥1
trillion of exchange-traded funds linked to the Nik-
kei-225 each year.
The BoJ aims to inject $1.4-trillion into the Tokyo
money markets by April ‘15, equal to a third of the
size of Japan’s $5-trillion economy. These actions
have mainly been the result of public mood and the
decisive leadership of Japan’s PM Shinzo Abe.
These measures to revive the Japanese economy
have been termed by some as ‘Abenomics’. This is
showing result, as the Nikkei broke its historic highs
recently, business sentiment is at a 6 year high and
price have risen slightly.
4. RESERVE BANK OF INDIA
In a span of few
months, the eco-
nomic situation of
India has become
better than what it
was during the ini-
tial months of this
fiscal year. Low
GDP, depreciating
rupee, high current
account deficit
(CAD), ineffective
reforms and policy
paralysis were
holding on to the
progress of the
country. Another
event which hap-
pened during this
time was the Fed reserve chairman Ben Bernanke’s
announcement of tapering of the QE. The announce-
ment had repercussions in India resulting in an out-
flow of capital. The announcement made on 19th
June led to the crashing of Sensex by 526 points and
only two stocks, Sun Pharma and Ambuja Cement
closed in the green among the Nifty 50. Gold tum-
bled and the foreign investors offloaded Rs 2,094
crore from the equity market. This followed the sec-
ond quarter in which the dollar exchange rate of ru-
pee touched its lowest value ever of 68.38 on August
28, 2013. All the major sectors were under turmoil
and where probably seeing the lowest figures of
sales and profits ever.
Every change made by the RBI and finance ministry
was having the exact opposite impact on the econo-
my which made people think that India is approach-
ing towards a recession which will shake the finan-
cial system. Soon Raghuram Rajan became the gov-
ernor RBI and gradually things were under control.
With the different swap windows opened, new bank,
and the various reforms under taken to appreciate the
rupee the rupee almost touched 60. The estimated
fiscal deficit of this year is expected not to be be-
yond 4.8% of the GDP which is termed as the “red
line” by P.Chidambaram.
21
Along with this tool, the other methods adopted by
the Reserve Bank is to allow the foreign banks
which has commenced the banking services in India
before August 2010 to work in their branch mode
and were incentivised to be converted into WOS
(wholly-owned subsidiaries), but banks which have
started their operations after 2010 need to fulfil a
bunch of criteria to qualify the test of RBI. The ini-
tial minimum paid-up voting equity capital for WOS
shall be Rs 5 billion, the bank should be meeting all
the BASEL III requirements, and should be main-
taining a CAR (Capital Adequacy Ratio) of 10% for
the past 3 consecutive years and also the lending re-
quirement for the WOS would be 40% of its net
worth. The new policy says that at least 25 percent
of the total number of branches (initially proposed
by Dr Subbarao) that is opened during the first fi-
nancial year must be opened in unbanked rural area.
CONCLUSION
The Fed has always chosen the easy way out usually
by infusing money into the economy. The general
perception is by giving money into people’s hands,
the economy will be the same as the pre-global melt-
down era which actually is not possible. Most of the
big economists have criticised the usage of quantita-
tive easing since it’s a temporary and short term
money producing instrument that affects the econo-
my on a long run. Quantitative easing is meant to
benefit the wealthy. The US QE program led to the
rise in the stock and home prices that mostly benefits
the wealthy. If the central banks try to avert higher
inflation and interest rates when the economy starts
growing again, it has to drain the money it has
pumped into the banks before gradually reduce the
money supply. More the money infused, more will
be withdrawn to the extent that high money creation
has boosted asset prices. In case of PBOC, infusion
of money into the economy was a correct decision,
in fact, the decision should have been taken earlier
else the world wouldn’t have felt the pinch. China is
sitting on the largest pile of dollar reserve in the
world and the moment it starts releasing the curren-
cy the demand of dollars is going to fall. But since
China is an export-oriented country, they will think
twice before doing that as it will directly hamper the
valuation of China’s exports. QE can be an efficient
measure if used in a proper way. Using for US and
for UK back in 2009 never made the impact but in
case of China, it actually helped the economy to
come out from a recession. In India also most of the
reforms that are taken up by the RBI are long term
which directly impacts the micro-economy of the
country.
22
This is the tale of the two legends
in the field of finance whose rivalry
played an instrumental role in con-
ferring the name & fame to a firm
who started by marketing paper for
commercial use but is now one of
the most venerated companies in
the field of Investment banking,
Goldman Sachs.
The stalwarts we are talking about
are none other than the successive
senior partners at the firm, Sidney
Weinberg & Gus
(Gustave) Levy.
The firm not only
witnessed unprec-
edented & un-
matched growth
rates during the
tenures of these
two legends but
also diversified
into the multitude
of businesses it is
in now with Sidney
Weinberg & Gus Levy being the
champions for Investment Banking
& Securities Trading businesses
respectively. Here’s an insight in
the lives & careers of these two
legends.
Sidney Weinberg
In a real life rags to riches story,
Sidney Weinberg joined Goldman
Sachs as a janitor’s assistant & went
on to become the CEO of Goldman
Sachs. Apart from his mettle (a drop-
out from school who saw meteoric
rise to power), it was the liking
which Paul J Sachs (the grandson of
the founder; firm is named epony-
mously) took to Weinberg that made
his rapid ascension to power possi-
ble. To hone Weinberg’s skills, P J
Sachs sent him to business school in
Brooklyn’s Browne Business College
& then after a brief
stint in the navy
during World War
I, when Weinberg
joined back the
firm, it was as a
securities trader.
Because of his ex-
ceptional skills,
Goldman Sachs
bought Weinberg a
seat on NYSE in
1925. He became a part-
ner in 1927, co-running the division
with Waddill Catchings during which
period the market cap of firm shrunk
to a meagre $10 million from $500
million. Weinberg rose to the occa-
sion, wrested Senior Partnership
from Catchings & saved the firm
from bankruptcy. He held this posi-
tion until his death in 1969.
The Rivalry That Turned
Goldman sachs ‘GoldEn’
BY JEENOY PANDYA , NMIMS, MUMBAI
F
I
N
L
E
G
E
N
D
s
Jeenoy Pandya is a
B.E. (Mechanical)
from MS University,
Baroda & he is
presently pursuing
MBA from NMIMS,
Mumbai.
Email ID:
jeenoypandya
@gmail.com
Sidney Weinberg
23
Weinberg championed investment banking which
gave a defining direction to the firm’s business &
made it one of the most prominent firms around in
the field of investment banking, a privilege the firm
still enjoys. It was during the later years of his tenure
that Weinberg encountered the growing influence of
Gus Levy, a force to be reckoned with & who had
ideas conflicting with Weinberg’s own regarding the
strategy for the future of the firm. The naturally re-
sulting competition proved to be highly beneficial to
the firm. Weinberg finally had to give in & appoint
Levy as his successor but he formed
a supervisory committee to oversee
the functioning of Levy which
greatly limited the latter’s powers.
Weinberg’s story still remains one
of the most inspirational ones &
he’s remembered even today at
Wall Street with love & with re-
spect.
Gus Levy
His story being equally inspiration-
al, Gus Levy too was from a humble
background. He dropped out of
Tulane University & plunged into
the financial sector after spending a
few years in which he joined Gold-
man Sachs in 1933 where he would work for the rest
of his life. People who knew him described him as
very acute, volatile, magnanimous & a powerhouse
of energy,
He joined the firm as the head of a one-man trading
division, the same division which he championed
later in his career. He endeavoured to shift the firm’s
focus from Investment Banking to Securities Trad-
ing which he was able to accomplish to a great ex-
tent. This & his growing clout at the firm put him at
loggerheads with the then Senior Partner – Sidney
Weinberg. Weinberg held his own initially but ulti-
mately had to yield & although begrudgingly, ap-
pointed Levy his successor as Senior Partner in
1969.
Gus Levy pioneered several techniques in the field
of securities trading such as block trading &
amassed great respect for the same. During his ten-
ure as Senior Partner (1969-76), the firm achieved
stupendous growth, arguably, even more than that
during Weinberg’s Tenure. Despite his remarkable
career, the firm got embroiled in some major contro-
versies under his leadership such as “Penn Central
bankruptcy commercial paper capital” which tar-
nished the firm’s reputation for years to come.
Levy suffered a major stroke in
October 1976 following which
he went into a coma, one from
which he never recovered. He
died at a relatively young age of
66 but till date remains one of
the giants of Wall Street.
The rivalry that forged the
golden future
No doubt, several great men
have played part in transforming
Goldman Sachs from what it
was, a company who marketed
paper for commercial use to
what it is today, the company
which pioneered the use of commer-
cial paper (short-term debt instrument used by large
corporations), but the role that the duo played is spe-
cial.
Many a rivalries has destroyed companies but this
one is particularly intriguing as despite it being in
the field characterized by cut-throat competition,
high risks & high rewards, proved to be highly pro-
ductive for the firm, giving it strategic direction &
staggering growth. Till date, the verticals that this
duo devoted their lives & careers to (Sidney Wein-
berg – Investment Banking, Gus Levy – Securities
Trading) remain at the heart of multi-billion dollar
business of Goldman Sachs.
Gus Levy
24
In December 2011, Facebook was
the second most visited website
behind Google. At that time, Face-
book had almost 845 million
monthly subscribers. An invest-
ment report valued the company at
$50 billion. With huge present
profits of $1 billion and high ex-
pected growth in future, Facebook
decided to file for an IPO with the
Securities and Exchange Commis-
sion (SEC) on February 1, 2012.
The idea was to value the company
at about $100 billion.
Facebook followed the Silicon Val-
ley tradition to list on NASDAQ.
This IPO was led by Morgan Stan-
ley. Initially the company aimed to
$28 to $35 per share. Finally it set-
tled for $38 per share. This price
valued the company at $104 bil-
lion. It even decided to increase the
number of shares by 25% to 460
million shares. The reason behind
this high price of $38 was the strong
demand despite economic slowdown.
Also, investors didn’t want to miss
out on the massive gains Google and
LinkedIn saw.
On 8th May, 2012, the trading of Fa-
cebook shares was supposed to
begin. However, technical glitches
with the NASDAQ exchange result-
ed in a delay of half an hour. Several
orders were blocked and even con-
fused investors whether or not their
orders successful. As a result the
share price fell to $38.23. Although
the shares traded at just 0.23 more
than IPO price, the IPO raised $16
billion. The stock price eventually
reduced to as low as $20.011 in Au-
gust 2012. Today, the share trades at
almost $55 eventually lead to a mar-
ket capitalization of $140 billion.
Facebook and Twitter going public
BY JAY PARIKH, NMIMS, MUMBAI & DHAVAL SHETH, SIMSREE, MUMBAI
Jay has completed
his BE in EXTC in
2012. He has
worked with Ac-
centure in SAP
BOXI before joining
NMIMS.
Email ID:
parikhjay1701@gm
ail.com
Dhaval has com-
pleted his BE in
EXTC in 2012. He
has worked with
Accenture in CRM
before joining
SIMSREE.
Email ID:
dhavalsheth
@gmail.com
Figure 1. Facebook’s stock price vs the NASDAQ composite
25
NASDAQ had to offer $40 million to investment
firms for the technical problems. Also lawsuit was
filed against Morgan Stanley for selectively reveal-
ing adjusted earnings estimates to some investors.
The other underwriters also faced similar litigation.
This has eventually raised eyebrows against finan-
cial companies manipulating to benefit few investors
to gain loyalty.
What was meant to be one of the successful IPO
turned a bungled and botched one. Twitter, a micro-
blogging site, shows almost the same growth pro-
spect as Facebook. However there were few notable
differences when they registered for IPO. Twitter
has only 215 million monthly active users. As com-
pared to Facebook, Twitter is not profitable. While
Facebook entered IPO after seeing a lot of growth,
twitter went public at an early stage in the growth
cycle. The Facebook IPO was a learning experience
for Twitter and it successfully avoided the same fate.
Unlike Facebook, Twitter never revealed its wish to
go public until it filed for an IPO. And Twitter didn’t
follow the Silicon Valley tradition. The IPO was led
by Goldman Sachs. Goldman Sachs worked to keep
much of the offering of the hands of retail investors
and hedge funds. And it chose to be listed on NYSE.
Thus Twitter was committed not to make same mis-
takes that Facebook made. The firm was generating
$500 million revenues and thus it aimed to generate
$2 billion through IPO. This move was ambitious
but possible for this 140 character micro-blogging
website. Initially the share was to be offered at $18-
$20 per share. However the share was priced to be at
$26 per share. And the trading day was decided to be
in November, one of the year's best months for mar-
ket gains.
On 7th
Novem-
ber,
2013,
NYSE
got the
stock
open and
trading
in 90
minutes.
The
share
price
rose as
high as
$50.09 and closed at $44.90 per share. The under-
writers did not have to buy stocks to keep it above
IPO price as in the case of Facebook. The share
price rose by 75% which is one of the highest on the
first trading day. The IPO raised around $1.8 billion
and gave the company a valuation of $14.4 billion.
Also the money raised through IPO was to be used
for general corporate purposes, capital expenditures
while Facebook’s IPO mainly went to early share-
holders.
Twitter released fewer shares as compared to Face-
book and thus the demand exceeded than supply.
Although, Twitter was able to have a successful
IPO, it did put in further questions. Has Twitter been
over cautious and undervalued the company. This
seems to be in contrast with Facebook’s overvalued
shares.
Facebook went for an overpriced I.P.O., and the
company’s shares lost much of their value as a result
of it. Twitter avoided that mistake by under-pricing
its shares. Companies go public to make some mon-
ey that they can invest in their business; an under-
priced I.P.O. means the company is bringing in less
than it could have for every share it sold.
Just looking at the current valuation, the value per
user seems to be the highest for Twitter.
Figure 2. Twitter’s stock price vs the NASDAQ composite
26
However
in terms of
monthly
unique
users as
KPI,
outperforms Twitter. Twitter has something power-
ful which Facebook and LinkedIn does not have.
The power of tweets and this power are not just con-
fined to the platform. Today it extends to TV and
even in print media. If such indirect users are count-
ed, possibly the valuation looks very cheap now.
Twitter sold 70 million shares for $26 when actually
it could have sold at $45. It made less than $2 billion
where more than $3 billion was possible. But both
Facebook and Twitter successfully reached a valua-
tion remarkably high given their financial funda-
mentals owing to innovative technology and high
anticipated growth. As compared to Facebook, Twit-
ter has an advantage of mobile advertisements. Face-
book still will be more of desktop application. This
makes twitter’s growth after IPO more interesting.
The third quarter 2013 financial returns of Facebook
show income increased by 100% to $621 million
compared to a
loss of $311
million in 2012
Q3. The
growth of Fa-
cebook after
IPO has tre-
mendously increased from both advertisements and
mobile advertisements. The number of daily active
users has increased by 27% on y-o-y basis. And this
figures reflected back in the share prices which now
trades at a range of $50-$55. On the other hand,
Twitter underwriters have mixed opinions on the
stock where 2 of the 5 companies rating it as a buy,
other 2 as a hold and one as a sell option. Twitter
also has not made profits for last three years and lost
out $133.9 million, 89% increase from same period
of 2012. However Twitters’ stock has been very vol-
atile where it reached $80 and suddenly fell to $60
in 5 days. Although Twitter has played well on the
first trading day, will it be able to stabilize? Will the
stock grow with such a bright future? And compa-
nies with innovative technology and high growth
would be able to learn from Twitter and Facebook
and launch a successful IPO?
Valuation ($Bn) Users (Mn) Value/User
Twitter $24.46 230 $106.35
LinkedIn $25.25 259 $97.49
Facebook $115.5 1190 $97.12
Table 1: Valuation of Twitter, LinkedIn and Facebook
27
As an earnest endeavour on the part
of the Finomenon team to apprise
our readers of the economic imped-
iments faced by people from the
lower strata of our society; the so
called "bottom of the pyramid", we
focus our attention on a section of
the population, which although
termed "indigenous", is one of the
least developed in terms of the lev-
el of income and standard of living.
It is indeed an unfortunate fact that
these communities, popularly re-
ferred to as "Adivasis", primarily
concentrated in the eastern and
south eastern parts of the country
(the states of Jharkhand, Chattis-
garh and parts of Odisha and An-
dhra Pradesh) have been left out of
the bandwagon of mainstream eco-
nomic progress. We take three such
examples to drive the point home.
Sushant (age 27), paan shop own-
er, Koraput (Odisha)
He inherited the shop at the age of
9 after the death of his father in
1996 and has been running it to
sustain himself, his wife, 3 kids and
his old mother. His family has been
illiterate for as long as he remem-
bers. "No one in my family has ev-
er held a pen or speaks any other
language except Oriya and the lo-
cal tribal tongue", says Sushant
quite candidly. As of January’14, his
daily routine and the business activi-
ties of his shop are as follows:
Number of working hours: 14(8 am
to 10 pm) on all 7 days.
Average daily sales: Rs 300
Monthly rent: Rs 1000
Cost of supplies: Rs 4000
He stays at a rented chawl on the out-
skirts of the town with his family and
has to cycle 8 kms daily to the mar-
ketplace. His kids study at a govern-
ment run primary school run under
the "Sarvashikshya Abhiyan" which
has a mid-day meal facility. Life, in
general is quite tough and is a hand-
to-mouth situation considering the
additional cost of medicines for his
ailing mother.
Manoj(age 32), tea stall owner,
Bastar(Chattisgarh)
His case a bit different as he has set
up the shop quite recently after tak-
ing a loan from his brother-in-law in
2012. He hails from a small tribal
village 80 kms from bastar. He was a
daily wage labourer in a road con-
struction project from Bastar to Rai-
pur. People like Manoj are part of
what we refer to as the unorganised
labour market. They have no steady
Grassroots
BY SARTHAK MOHANTY, NMIMS, MUMBAI
g
R
A
S
S
R
O
O
t
s
Sarthak Mohanty is
pursuing his MBA
from NMIMS, Mum-
bai. He has worked
for Accenture Ser-
vices Pvt Ltd. He
holds a B.Tech de-
gree from KIIT Uni-
versity, Bhubanes-
war.
Email ID:
28
employment commitments. Manoj worked as a wait-
er in a local fast-food restaurant 4 years back. He has
also worked as a cycle rickshaw puller and a security
guard for a housing colony. He has a family of four
(wife and 2 kids) and stays in a relatively decent on
the outskirts of the town. Unlike Sushant, he takes a
bus daily at 7 in the morning and works at his stall
for 10 hours(8 am to 6 pm). His business schedule
and earnings are as follows:
Average daily sales: Rs 600(around 100 visitors dai-
ly and a glass of tea costing Rs 5 or Rs 10).
Daily variable cost of supplies(milk, sugar, kero-
sene, water supply): Rs 150
Fixed cost (stall, kettle, glasses): Rs 4000(invested
initially by taking a loan)
Daily travel expenses: Rs 50 (to and fro by bus).
His wife works as a house maid in the town and
earns around Rs 2500 monthly and his kids study at
the bastar municipal school. The average monthly
income of his family, thus, is around Rs 14,500
which is quite better than the previous case. He pays
a house rent of Rs 4000 and spends around Rs 7-8K
for food, clothes and his children's books and school
fees(a nominal price). He is able to save at least Rs 6
-7K monthly.
Kaushalya,(age 19), domestic help, Bokaro
(Jharkhand)
She has stayed in Bokaro for the last 5 years. The
steel plant in the town established in 1964 has at-
tracted a lot of tribal youngsters from the nearby vil-
lages to work as domestic servants, auto-rickshaw
drivers, security guards and construction-site work-
ers for decades. Kaushalya works at the house of a
senior officer in the steel plant and stays at the serv-
ant quarters. She is provided with food 4 times a day
and enjoys a fairly decent life with a salary of Rs
4000 per month. She visits her village once a month
and is able to send 1500 per month to her family
consisting of her parents and a younger brother who
is in high school. Her father is a vegetable vendor
back in the village and earns Rs 1800-2000 per
month. Her situation is tenuous as she is about to
attain marriageable age and is the major contributor
to her family's income. She is a school dropout (in
class 4) and can barely read Hindi.
Conclusion
The current tribal population of India is around
84.51 million (around 8.14% of the country's popu-
lation). Agriculture as an occupation has lost its ap-
peal among the young generation and a lot of the
tribal youth are migrating to towns and semi-urban
areas in search of a better standard of living. Lack of
formal education and skills manifest themselves in
the form of a wide disparity in income levels. The
vicious cycle of poverty and lack of decent employ-
ment opportunities is a major concern. The central
and respective state governments have undertaken
development plans like the NREGA and the impro-
vised Public Distribution System but a sustained en-
hancement in the level of economic self-reliance can
be achieved by accommodating such people into the
organised financial sector by opening up more banks
in tribal regions and encouraging them to take ad-
vantage of credit facilities. Microfinance initiatives
can also be undertaken in villages. Vocational train-
ing facilities can be provided in government run
schools under various national schemes at the high-
school level to equip teenagers with skills required
to earn a livelihood in towns and cities. Such
measures would go a long way in widening the hori-
zons of our economic policies and transform the
lives of thousands of individuals untouched by the
boon of economic development.
29
It is often heard now a days that
India’s growth story has been de-
ferred till May 2014. The citizens
of the country and analyst across
the globe believe that only Naren-
dra Modi can revive India’s growth
story and the worse scenario would
be the same government being vot-
ed back to power in 2014. The cur-
rent government has lost its credi-
bility and is pushing India to pre
1991 era. The incumbent govern-
ment and its authorities will never
accept, but India is currently in a
state of stagflation (i.e low growth
and high inflation), this fact is re-
butted by the latest GDP and infla-
tion numbers which stand at 4.4%
and around 10% for CPI respec-
tively. Our fiscal deficit and current
account deficit are ballooning at an
alarming rate. The fiscal deficit has
already reached 94% of budgetary
estimate in 2013 and now there is 1
more quarters to go. To widen it
further the Government passed the
food security bill.
As per popular sentiments the in-
cumbent Government will be voted
out of power in 2014 elections.
They are trying their best not to
lose by a huge margin. This fact is
conspicuous by their folly of pass-
ing food security bill in this debili-
tated economic condition, without
caring about the catastrophe this
bill will bring upon our economy.
The UPA blames the opposition for
policy paralysis which has led to
the current state of economy.
The most important problem is that
of ballooning fiscal and current ac-
counting deficit, which is causing a
variety of other problems like rupee
depreciation, slow growth, inflation,
high interest rates, etc. CAD has re-
duced but only on papers. No one is
tracking gold smuggling but gold is
being smuggled into India at an
alarming rate from our neighbouring
countries. The revenues which we
could have gained from duties on
gold are now being lost.
With the same numbers in Parliament
there are several steps which the
UPA can take to revive the growth.
These steps are politically possible
and the corresponding policy for
those steps can be framed without
much arousing acrimony. Whichever
the next Government that comes to
power in May 2014 or before that in
case of early elections, it is impera-
tive that they take these steps.
The fiscal deficit can be reduced by
reducing number of subsidies, pru-
dent spending by ministries like they
did last financial year and suspending
the MNEGRA scheme for 2 years in
the areas where this employment
scheme has failed to deliver. The
Food Security bill must be scrapped,
as currently the problem in India is-
n’t hunger its malnutrition. In 1984
27% of population said they were
hungry in 2004 just 1% of the popu-
lation said they were hungry. The
poor cannot afford balanced diet due
to high prices of dairy products and
how can IndIa’s GRowTh bE
recuperated?
BY NIBODH SHETTY, SIMSREE, MUMBAI
Nibodh is currently
pursuing MMS from
SIMSREE, Mumbai.
He likes to write
analytical articles
on varied subjects
including finance.
Email ID:
nibodhshetty
@gmail.com
30
other nutrient rich fruit and vegetables, hence infla-
tion is the main problem not hunger. Commission
for Agricultural Cost and Price (CACP) has found a
huge correlation between fiscal deficit and inflation
in India. Higher the fiscal deficit higher the inflation.
The Reserve Bank of India cannot reduce the interest
rates as it would further increase the inflation. This
is one of the reasons companies are holding back on
new investments and their margins are pressure. The
high interest rates have hampered the consumer sen-
timents and the demand for loans to buy car and real
estate is hit a low. The automobile and real estate
sector which are high dependent on Indian consum-
ers are facing huge liquidity crunch and their inven-
tory are piling up. These 2 sectors are a huge source
of indirect employment for other sectors.
Fuel subsidy must be reduced. This can be achieved
in two ways – one is to increase the fuel price and
the other is by reducing consumption. The diesel
price must be increased and brought to existing mar-
ket rates. Cairn India’s Barmer Oil Field in Raja-
sthan is today supplying 15-18% of India fuel con-
sumption. They are waiting for approval to explore
for further in that area. Cairn India estimates that oil
reserves in the area surrounding Barmer Oil fields
can cater to about 30-35% of India’s oil requirement.
They have got the expertise and experience for ex-
ploring in that area. Government must speed up the
process of giving approval for oil exploration by set-
ting up a body on lines with the Cabinet Committee
on Investment CCI which has been setup for infra-
structure projects. Several companies are waiting for
approvals to explore for oil fields across the country.
A higher domestic production will reduce our im-
ports and thus help in bridging the current account
deficit. The new resource that has been discovered is
Shale gas. US has reduced its dependence on OPEC
countries by active exploration of Shale Gas. It is
estimated that India has huge reserves of Shale gas,
hence a policy must be formulated for shale gas ex-
ploration.
After railways, telecom sector is the 2nd highest
consumer of diesel is telecom sector. They use it to
run the diesel generator attached to their network
tower in rural areas. The entire consumption of tele-
com sector could have been obviated with, if we had
24 hours electricity supply. India has coal reserves to
suffice our demand for next 50-100 years. Despite
this our power plants have shut down due to lack of
coal supply and some are yet to be constructed are
stuck waiting for approvals. Government must frame
a policy to allot coal blocks either by bidding or rev-
enue sharing basis. Monopoly of Coal India Ltd
should be reduced. As they don’t face any competi-
tion domestically it is ok if they do not perform as
there will always be companies desperate to sign
Fuel supply agreement with them due to monopoly.
Last year India imported $17.4 Billion worth of coal.
Our current account deficit for FY13 stood at $80
Billion. Our FY13 CAD could have been brought
down to $63Billion right away, if we had formulated
a proper policy to allot coal blocks and rupee would-
n’t have plummeted as witnessed.
Iron ore and other mineral mining which has been
suspended by the Supreme Court owing to illegal
mining. As a result the iron ore exports from these
mines have stopped. This is widening our trade im-
balance. Environment clearance is today causing
most of the delay for companies which have been
allotted block to start mining. As most of these ille-
gal mines have already violated the environment cri-
teria and the damage is irrevocable. In the above
case of illegal mining, the most pragmatic approach
would be to allot the mines without considering the
environment factor wherever the damage done, as
the damage is irrevocable. The Government must
formulate a policy for allotting these mines and also
it should formulate stringent policies to curb new
illegal mines. As exports from these mines would
resume the CAD which is basically difference be-
tween the export and imports would reduce as ex-
ports would increase.
In India the company takes 7 years to obtain all
clearance to start mining and it takes 3 years after
that to reach optimum capacity. So basically it takes
10 years for mining operation to commence. The
company will have to pay interest on the money bor-
rowed for auction and they incur expense without
any returns. Who will prefer to invest if in any pro-
ject if the first cash that would flow in would be af-
ter 10 years? Government must reduce the number
of unessential licensing and also see to it that the
licensing process is completed in a given time frame
of few months if not then the concerned department
must be made accountable. This a problem the Gov-
ernment can address without having to pass any
bills. It is just that the concerned department are too
lethargic to work and procrastinate.
31
For the things that have to be done by framing new
policy, passing bills for the framing of new policies,
it can be achieved even in the current political sce-
nario. Since framing and passing of these bills is im-
perative for the next Government, BJP will definite-
ly oblige. There is always a fear lurking in their
mind that in case they do not reach the required
number in May 2014, they would eventually have to
depend on tempestuous allies. In that scenario pass-
ing the bills for framing these policies would be dif-
ficult. Hence the number of votes required for pass
these bills in order to formulate these policies is pos-
sible.
Congress may have to abdicate Food Security Bill
but the Food Security bill is not the game changer
for them unlike MNEGRA in 2007-08. In India this
year 1/4th of the population would be voting for the
first time. For them the main concern is good econo-
my growth and jobs. If the Congress can revive
growth they may be able to regain lost ground. And
for the next government whoever it may be UPA or
NDA or third front, economic growth would be their
priority as the people in the coming years will de-
mand it and no government can win the election
without delivering on it. Hence BJP will definitely
agree to pass these crucial bills.
32
Raghuram Rajan: 2013 saw one man take entire country
by storm. As Raghuram Rajan took office as the Governor
of RBI in September we saw reactions on his academic cre-
dentials as well as his looks. He brought stability to the mar-
kets and continued to be in spotlight through out the year.
Rupee, which was the worst performing currency in Asia
was hovering around 68 when he became the Governor, end-
ed the year with 61-62 mark.
Never to be pressurized by the North Block or the markets,
Dr.Rajan believes in his own style of policymaking. He took
the market by surprise by raising the policy rates during Sep-
tember review and keeping rates constant in December re-
view. On being asked by a reporter after one of the policy
reviews, ‘Mr.Rajan, the nation was expecting a Volcker but
we got a Yellen?’ he replied with his characteristic wit ‘How
about a Raghuram Rajan?’
Arundhati Bhattacharya became the fir st woman
chairperson in SBI’s 207-year history. Having joined SBI
in 1977 as a probationary officer Ms.Bhattacharya has
seen it all when it comes to Banking. She has served right
from metros, rural areas to the bank’s New York branch
handling various assignments spanning credit, forex,
treasury and retail operations.
Bhattacharya is the first woman to lead a Fortune 500
company in India. She took charge of the bank at the time
when its grappling with bad loans, increasing non-
performing assets (NPA) and profits seeing a downward
fall. Known as a task master by her peers, she is known
for taking tough calls in times of distress.
Top Newsmakers in Business -
2013
33
Jignesh Shah 2013 turned out to be annus hor ibilis as he quit
from the board of his company Multi Commodity Exchange of India
Limited (MCX). Jignesh Shah had became a rage in 90’s due his rev-
olutionary trading software. He started Financial Technologies, the
holding company of National Spot Exchange of India (NSEL), an
online trading platform for commodity exchange. With the right set of
skills, this man created a business empire across the world.
All of this success was came crashing down in July this year, when
India’s investment community was jolted by a severe payment crisis
in NSEL. With a scam estimated to be around Rs 5,600-crore it was
considered to be bigger than the Harshad Mehta scam. While thou-
sands of investors were furious with anger, Jignesh Shah tried to
prove his innocence before the police. Shah claims that he was una-
ware that NSEL defaulted on payments to investors.
Chanda Kochhar took ICICI to rural hinter lands in 2013 by
exploiting technology that is at the disposal of every bank in to-
day’s world. Banks have been hesitant all these years in setting up
bases in rural areas due to high capital costs involved in setting up
branches. With ‘Financial Inclusion’ being only on paper for most
of the banks, Kochhar cracked the rural code by giving away
around 9000 tablets to her staff to open accounts.
With its bank on wheels model – one can see her staff walking
across villages and towns urging literates to open an account. The
bank opened 1.65 crore zero balance savings accounts, the most
by any private bank in the country and the second-highest in the
industry. It has reached out to over 15,000 villages through its
branches and business correspondents.
Narayana Murthy In what was termed as the biggest comeback of
recent times, Narayana Murthy was shocked India Inc when he an-
nounced his return the organization he built after its dismal perfor-
mance for the past two years. Murthy, however, was not a man with
magic wand as warned that the recovery would be time-consuming
and painful.
Apart from raising the morale of its employees, Mr. Murthy took a
slew a measures upon his arrival such as reducing costs, inviting for-
mer executives back to the company, hike in pay of employees and
hunt for a new CEO. All the Notwithstanding many senior-level exits
from the firm the firm has shown promising results with profits beat-
ing street estimates. It is to be seen what 2014 has in store for Infosys.
34
Compiled by - Ajit Nayak
The Chinese currency, the
Renminbi (also called the Yuan,
represented by ¥) is renowned for
being tightly controlled by the Chi-
nese Government. In November
2013, the Government unveiled a
list of sixty reforms that signalled
sweeping changes in the way the
world’s most populous nation func-
tions. While a few reforms – like
the relaxation of the one-child poli-
cy – are social, a majority of the
reforms deal with liberation of the
economy of the Asian behemoth.
These included allowing private
investors to set up banks, allowing
private equity into the State Owned
Enterprises, giving markets a more
decisive role in the allocation of
resources and loosening controls on
the pricing of necessities like wa-
ter, electricity and natural re-
sources. The government also sig-
nalled its intent to accelerate the
process of making the exchange
rate of the Chinese currency more
market based, which is the latest in
a series of steps to reduce govern-
ment intervention in the currency.
The importance of the reforms can-
not be fully appreciated without a
study of the history of the
Renminbi and the Government’s
control over the exchange rate.
Till the 1970s, the Chinese econo-
my was closed to the world, and
the value of the Renminbi was per-
manently pegged to the US Dollar
at ¥2.46 per Dollar. In the 1980s,
the economy gradually opened up,
and China began focussing on
growth through exports. To increase
the competitiveness of their exports,
the value of the currency was gradu-
ally devalued all the way to ¥8.62 to
the USD in 1994. This led to an in-
crease in the inflow of dollars into
the country, strengthening the Cur-
rent Account Deficit (CAD). A mas-
sive Current Account Surplus in the
latter half of the 90s allowed China
to peg the Renminbi to ¥8.27 per
USD without further devaluation
from 1997 to 2005 after the Asian
economic crisis in 1997.
At ¥8.27 to the US Dollar, the Chi-
nese currency was highly underval-
ued considering the Purchasing Pow-
er Parity of the United States and
China. The World Bank and the In-
ternational Monetary Fund estimated
that a fair price for the Renminbi in
2004 would be close to ¥1.9 to the
USD, as opposed to the existing rate
of ¥8.27 to the USD. This large dif-
ference in the actual and perceived
value of the Chinese currency led to
difficulties for US companies, which
could not compete with the extreme-
ly low-priced imports from China.
This effect was also seen in many
other countries across the globe,
leading to the rapid growth of Chi-
nese exports to many nations, which
adversely affected the local produc-
ers. The United States in particular
was at the forefront of international
pressure on China to loosen control
of the currency and allow it to trade
OPENING THE RENMINBI TO THE WORLD –
CURRENCY REFORM IN CHINA
BY RAHUL FERNANDES, SIMSREE, MUMBAI
Rahul Fernandes is
an MMS Finance
student from
SIMSREE, Mumbai.
He takes keen in-
terest in the macro-
economics of econ-
omies around the
world and their
effect on stock mar-
kets.
Email ID:
rahul.fernandes
@simsree.net
35
according to the market. Increasing tensions led to
the U.S. threatening trade sanctions against China if
a more market-based model was not developed for
the Chinese currency.
In 2005, China finally revalued the Renminbi higher
to the US Dollar and announced that it would no
longer be tied to a fixed rate against the US Dollar.
The Renminbi was instead tied to a basket of inter-
national currencies including the Euro, the Japanese
Yen and the South Korean Won, besides the existing
US Dollar and allowed to fluctuate on the basis of
market supply and demand. This represented a small
step towards realistic currency valuation, temporari-
ly appeasing the Governments of other nations and
alleviating the risk of being slapped with trade sanc-
tions. However, China did not allow the currency to
trade freely, setting a narrow trade limit band of
0.3% around the existing price to prevent large cor-
rections in the currency.
One of the major rea-
sons of the Chinese
government allowing
the value of the cur-
rency to start rising
was the need to rein
in inflation in the
economy. Spiralling
food costs due to
stagnating growth in
production and in-
creasing purchasing
power were leading to
high inflation, which
could not be curtailed
despite a series of in-
terest rate hikes. Also, the cost of keeping the Yuan
pegged to the Dollar was rising, without an equiva-
lent rise in the benefits to the nation. With a large
Current Account Surplus and huge foreign exchange
reserves, the Government did not feel the need to
keep devaluing the currency. The Yuan gradually
strengthened over the next few years, going up from
¥8.27 to approximately ¥6.8 to the USD by 2008.
The crash of 2008 did not affect China directly,
however, the sudden drop in demand from devel-
oped countries involved in trade with China led to
Chinese exports being hit hard. Millions of workers
lost jobs, and exports dipped by as much as 25% in
many sectors. This development forced China into a
rethink on their monetary policy.
Since 2005, the Chinese currency was linked to a
number of international currencies, of which the Eu-
ro was one of the major names. However, the
weightage of each currency in the calculation was
not disclosed, and China continued to make periodic
minor adjustments to deal with various economic
situations.
After 2008, the Greek and Spanish crises led to a
large fall in the value of the Euro. To protect the cur-
rency from rapid devaluation and give itself time to
consider a means to combat the crisis, the Govern-
ment increased the weightage of the US dollar, thus
unofficially pegging the currency to the USD again.
This policy persisted till June 2010, when the Gov-
ernment got rid of the peg once more and allowed
the value of the currency to increase based on mar-
ket supply and de-
mand and the rela-
tion to various world
currencies. The
trade band was also
increased from 0.3%
to 0.5% and then
1%, which led to a
higher rise in the
currency value.
The chart below
shows the Chinese
currency being
pegged to the USD
before 2005 and
from 2008 to 2010,
with a gradual strengthening at other times. It is
worth noting here that the currency never faced a
large drop due to the narrow trading band imposed
by the Government.
The internationalization of the Renminbi has gained
media and political attention recently. An interna-
tional currency is one that is used to a large extent in
world trade, even in the trades of other countries.
For example, if the trades between two nations like
India and Turkey are carried out in dollars, it would
show that the dollar is an international currency. The
US Dollar and the Euro are the world’s two biggest
international reserve currencies, since they are
Figure 1: Historical chart of No of CNY to 1 US Dollar. Note: A lower
value of the Yuan to the Dollar represents a stronger currency.
Source:XE Charts (www.xe.com/currencycharts
36
widely held in foreign exchange reserves of other
countries and used for international trade.
China is one of the biggest players in the world in
international trade, with more than 11% of all trade
involving China as either buyer or seller. However,
the contribution of the Chinese currency in 2010 was
a meagre 0.24%. This was due to tight Government
control on all transactions involving Renminbi. Till
2009, no external transactions could be carried out in
Renminbi. Hence, all payments to Chinese exporters
were in dollars, which would pass to the central
bank, which in turn would pay the exporters in
equivalent Renminbi. Hence, the use of Chinese cur-
rency for trade was virtually non-existent.
This began to change in 2009, when China agreed
on bilateral currency swap deals with various na-
tions. Since then, China has chalked out agreements
with countries like Russia and Japan to carry out all
trade in Renminbi instead of the US Dollar. A grad-
ual reduction in Government interference in foreign
exchange rates and implementation of Renminbi-
trading hubs in various major cities of the world like
London, Moscow, Paris and Tokyo has also helped
the Renminbi move towards being a more globally
accepted currency. In 2013, the Renminbi was the
8th most traded currency in the world.
How-
ever,
China
still
has a
long
way to
go be-
fore its
curren-
cy re-
flects
the
stature
of the
nation
in in-
ternational trade. The
Renminbi cannot be used as a
reserve currency as long as the Government main-
tains control on the conversion of its currency. The
recent economic reforms outlined in November 2013
are a step in the right direction, with the Government
pledging to completely quit daily interference in the
currency. The speed of implementation of these re-
forms remains to be seen, but if carried out sooner
rather than later, they could prelude the rise of a new
truly global currency.
Figure 2: Chart of trade and currency – 2010
(Source: Society for Worldwide Interbank Financial Telecommunication (SWIFT))
37