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THE FINANCIAL September 2013, Volume No. IV Issue No. I

Cover Story


The Financial Volume no. IV Issue no. I September 2013

Senior Team Prakash Nishtala Vidhi Shah

Creative, Design, Content Ajit Nayak K V Arghyapriya Bhattacharjee Bhuvanesh Kumar Jeenoy Pandya Kumar Mayank Mitali Goyal Sarthak Mohanty


Dear Readers, It has been more than six decades since India has achieved its sovereignty and birthright of freedom. In the course of this journey, we have achieved independence in so many aspects. We achieved independence from “socialism” and have embraced “capitalism”. We tweaked and turned constitutional, fiscal as well as monetary policies in our pursuit of independence. In the process, we might have arguably achieved democratic independence but are we financially dependent yet? In 1991, we entered into the financial renaissance, hoping to achieve this elusive independence. But, as we hoist the flag of independence once again this year, the question that pops up is “Are our efforts towards financial independence proved to be a wild goose chase?” The current issue of “The Financial” invited the budding finance mavericks from across the top B-schools to share their views on how we could achieve this coveted independence. In these changing times, when “change” seems to be the only “constant”, we have made an attempt to change ourselves by expanding our reach from Indian to Asian B-schools, from being a magazine that showed business as we saw it to being the magazine that will show the business as we should see: the case in point being inclusion of a host of new sections like Grassroots etc. 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 contemporary 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 discussions. 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 welcome. 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 magazine, a two-way interactive channel. As we exchange ideas, we will evolve and grow to greater heights. Wishing you bon voyage in the journey towards the “intellectual” independence.

Finomenon NMIMS ,Mumbai

Prakash Nishtala, Editor-in-Chief,

All design and artwork are copyright work of Finomenon NMIMS Mumbai

The Financial





FROM 1991 TO 2013 : ARE WE FINANCIALLY INDEPENDENT YET? BY SARTHAK MOHANTY, NMIMS-MUMBAI Air India to Indigo, Doordarshan to NDTV, local cinema theatres to Inox, PSUs to MNCs, the list is endless. You guessed it right. The impact of opening up of our markets in 1991 has indeed been significant. Our generation has been brought up in the 90s and have experienced the transition first hand. Exigencies leading to the big leap Four decades of "The permit and licence raj" inspired by the Marxist ideology and justified on the then superpower status of the Soviet Union had no doubt contributed in creating a just and welfare oriented society after independence but times had changed by the end of the 1980s. The USSR collapsed in 1991, socialism had lost its worldwide appeal, China was already a step ahead and had begun the process of decentralization of state control , corporate giants of the capitalist world were eager to venture into the untapped markets of the third world, our oil import bill swelled on account of the Gulf War and our foreign exchange reserves had been reduced to such a point that could barely finance three weeks’ worth of imports (we had to airlift our gold reserves as a pledge with the International Monetary Fund for a loan). Opening the door to foreign investment had become inevitable. The Narasimha Rao government ushered in several reforms that were collectively termed as "liberalisation" in the

Indian media. Audacious and unconventional as it was, the decision was a landmark in modern India's economic history. It has thrown around a plethora of intriguing questions which has baffled economists and policy makers for the last two decades. Let's try to answer the most logical of them all, "Has liberalization achieved what it intended to?" The question seems lucid enough and it's a propensity of the human psyche to attribute a simple answer to a seemingly straight forward question but a comprehensive analysis of the benefit and costs of the reforms and their conformity with the stated objectives of our policy makers is what would do justice to the theme of this edition of our magazine. Let's look at the spectrum through a pragmatic prism and evaluate the level of "Financial Independence" of India in 2013 vis-Ă -vis that in 1991.


Sarthak Mohanty is pursuing his MBA from NMIMS, Mumbai. He has worked for Accenture Services Pvt Ltd. He holds a B.Tech degree from KIIT University, Bhubaneswar. Email ID:

Did we hit the bulls eye?

The Socialist model would have been adequate if goods and services were bestowed on mankind by the almighty and our job was only to distribute them but, as the adage goes "God helps those who help themselves". Its implication in the economic context is that humans have to "produce and distribute" for their sustenance.


"Production" is what I consider as the first parameter to analyse how far we have travelled on the road to self sufficiency. The obvious indicator which props up on the back of our mind is the Gross Domestic Product (GDP). It's the first socio-economic indicator of development. It's simplest definition is "The monetary value of all the finished goods and services produced within a country's borders in a specific time period". Despite its shortcomings, GDP provides a fairly reasonable estimate of economic progress. Charles Darwin's "Survival of the fittest" concept has manifested itself throughout the history of human civilization. In the ancient and medieval ages, empires relied on military might to establish their hegemony over others. In the early modern era, colonial powers of Europe had entered into a race of global domination which culminated in the first and second world wars in the first half of the 20th century. Consequently, with the inception of the United Nations, the polarisation of the globe into two power blocks and the ideological backlash against imperialism, mankind's pugnacious instincts needed an alternate outlet so the power struggle shifted to the economic arena. Balance of trade of a nation with its trading partners was considered as the yardstick of strength and recognition. In simple words, the lesser a country's Current Account Deficit (The difference between a country's imports and it's exports in monetary terms), the stronger it was. The capitalist world led by the United States and western Europe embarked on an accelerated journey of economic development. The eastern bloc led by the Soviets clinged to the hard core principles of Socialism propagated by Karl Marx and implemented in the 1917 October revolution by Vladimir Lenin. During the freedom struggle, our leaders were influenced by the ideas of Socialism and Welfare State but were also aware of the threats posed by autocratic communism so, after independence, India chose the middle path and adopted a mixed economic approach in which a variety of government-run enterprises were involved in the provision of public goods. The model was ideologically sound but implementing it in a third world country was easier said than done. India became self sufficient in agricultural production after the green revolution but industrial production remained low as private entities and entrepreneurship were discouraged. As a result, imports exceeded exports and the Current Account Deficit continued to remain high. The situation reached its zen-

ith by the end of the 1980s. The 1991 reforms should therefore also be evaluated on the basis of their impact on the Current Account Deficit. Breaking the shackles of the past Government run enterprises provided job security and a stable source of income but they also became breeding grounds of complacency and inefficiency. Welfare schemes scored high on moral grounds but took a toll on the government's treasury. Fiscal bills swelled on account of subsidies and losses incurred by PSUs. Fiscal Deficit, hence, is another key identifier to assess the efficacy of the post 1991 policies.

Another adverse fallout of the economic model post 1947 was its catalytic effect in encouraging corruption. Government run companies became monopolistic. Red-tapism became the major hindrance in the functioning of public offices. High custom duty on import of goods led to the mushrooming of illegal activities like smuggling. The situation was further exacerbated by the opaque disclosure policies of certain European banks which had become safe havens for black money stashed into anonymous accounts. Thus, another relevant question which needs to be asked is, "Have the liberalization reforms played a role in mitigating the pervasive culture of corruption in the Indian public space and enhancing transparency?" Post independence, India scored low on socioeconomic indicators like literacy and health. This was primarily because the state-run machinery was inadequate to cater to the needs of such a huge population and also because of the rampant corruption prevalent in the distribution system. Allowing the private sector to shoulder the responsibility of delivering on these tasks was one of the objectives of our policy makers. A closer look at the trajectory of these indicators post 1991 is a prerequisite to a comprehensive analysis of the reforms as reaping the economic dividend from their amelioration is an obvious step towards accomplishment of the desired objectives. Reaping the benefits Economic progress of a nation at a macro level doesn't make sense till the benefits trickle down to the masses. Distribution of wealth is as important as its creation. Merely looking at the per-capita income can be deceiving. There are mathematical indices like the Gini-coefficient which measure the level of disparity of a particular parameter (wealth in our case) among the members of a population group. These indices give us another perspective for a multidimensional


analysis of the costs and benefits of our policies since 1991. Advancement in science and technology is another key indicator of progress . Developed nations like the United States spend billions of dollars every year on research and development in diverse fields ranging from agricultural practices to cutting-edge space technology. In India, lot was left to be desired in this area post independence. The then Prime Minister Pandit Jawaharlal Nehru spearheaded the establishment of engineering colleges like the IITs and NITs in the 1960s but the focus was more on producing engineers to work in PSUs or going abroad to work for MNCs in the developed world. Research and development received scant attention. Inflow of foreign capital post 1991 was supposed to transform the scene and India was to emerge as a knowledge hub because of healthy competition from world class institutions. The pay off from this paradigm shift measured in economic terms would definitely qualify as one of the indicators of financial independence. Has this objective been achieved? If yes, to what extent? These are some of the relevant questions ought to be asked. Daily wage labourers in the manufacturing sector, construction workers , low income farmers and a plethora of others employed in the so called "unorganised sector" form the most vulnerable segment of the workforce as a whole. During the 1950s80s, their demands were paid heed to not solely for the sake of benevolence or social service but also because of the compulsion to legitimize the ideology of socialism or welfare state. Political parties rallied around lofty slogans reiterating the importance of farmers and "mazdoors" as nation builders. Workers' unions were encouraged and conscious efforts were taken to support rural farmers by providing them cheap seeds, fertilizers and information on agricultural practices; but the advent of MNCs and the concomitant metamorpho-

sis of the concept of "fair trade" in line with western

principles of a market economy has raised more questions than it has answered. Are farmers and workers better represented in the economic mainstream than they were before 1991? Needless to remind, there is a direct co-relation between the integration of these groups into the mainstream and the impact it has on the nation's production and consequently on economic strength as a whole. Where do we stand now? Former British Prime Minister and a hardcore protagonist of imperialism, Mr. Winston Churchill had commented on India after her independence that Indians don't deserve to be free and if granted freedom, the country would relapse into anarchy within half a century. Fortunately, we have proved him wrong at least in the domains of national integration and every 15th of August after 1997 is a testimony contrary to his remarks but the term "integration" has numerous ramifications and is not confined to political or geographic unification alone. Achieving financial independence is an onerous task especially when it goes hand in hand with economic integration and requires involving the aspirations of millions of citizens spread across different strata. As we enter the 67th year of our independence and the world looks forward to emerging economies as the panacea for the malaise of a global economic meltdown, India has to leverage the advantage of a robust infrastructure sector, relative insularity from fluctuations in the world economy and a promising demographic dividend with half of its population below the age of 25. The costs of this opportunity foregone would undeniably be high enough for our policy makers to ignore. We can make India shine only if we make hay while the sun shines. We surely are up to the challenge , so what are we waiting for?



From the time the US Federal Reserve chairman Ben Bernanke hinted at slowing bond buying under the so-called quantitative easing programme, the rupee has lost 6.69% and been the second worst performing currency among the emerging market currencies, after Brazil’s real (7.21%). In totality, the rupee has lost 34% from its January 2008 high of 39.27 against USD. To prevent this depreciation, the recent past has witnessed several critical decisions being taken by the Indian government & RBI such as raising the natural gas prices it pays to the producers from 2014, easing the external commercial borrowing norms etc to arrest the fall in rupee. Despite this, the Indian rupee sunk to a historic low of 64.13 against the U.S dollar on August 20, 2013. One of the key reasons for the sudden fall in the rupee is the sale of bonds by foreign institutional investors (FIIs) of about $5 billion but in order to understand this fall in the Indian rupee one needs to look at the long term as well as the short term factors driving the rupee movement. Fair Valuation of Rupee One of the widely accepted methods to access rupee’s fair value is the use of real effective exchange

rate (REER). However in the long run what will make up the rupee level is India’s productivity and inflation differentials with its trading partners (Figure1). With higher the inflation differential and lower growth differentials the rupee depreciation will be higher. On short term basis balance of payments (BoP) fundamentals will drive the rupee. This can be estimated by studying India’s current account deficit (CAD). Quantifying Foreign Outflows In 2010-11, rupee depreciated by 5%, and the CAD surged from $46 billion to $78 billion. One would expect depreciating rupee to provide an opportunity for Indian exporters and reduce CAD, but the exports grew only by a marginal amount due to the weak demand from the developed market and commodity prices remained high. In 2012, rupee depreciated another 12%, crude prices actually fell, and gold imports moderated in value terms but CAD further soared to $88 billion. Another noteworthy factor is that the performances of currencies of other emerging nations with which Indian exporters compete have also depreciated thereby leaving no unique

Zeeshan Bagwan is pursuing his PGDM from IIM Ahmedabad. He holds a B.E. Degree in Electrical Engineering from Govt. College of Enginnering Pune (COEP). He has interned in HDFC Bank Ltd under Treasury Advisory Group and has worked for 20 months in Oil & Gas Sector. Email ID : p12bagwanza@iimahd.erne


advantage to the Indian exporters. Moreover, the advantage gained by the exporters is also cannibalized to some extent due to the rising cost of the importers. Thus, rupee depreciation would not boost Indian exports and shorten CAD. On the contrary coal, scrap metals and fertilizers imports doubled over the last five years and iron ore exports turned virtually zero. The deficit on these fronts have increased from $22 billion to $38 billion between 2010-11 and 2011-12—driving 50% of CAD increase during that year. India has imported 135 million tonnes in 2012-13 though it has third largest reserves of coal. Being an agrarian economy where agriculture contributes 15% to the overall GDP, one-third of the annual consumption of fertilizer is imported. Despite being the largest consumer of edible oils, India has high imports of crude palm oil from Malaysia and Indonesia. All these subsidies cost the exchequer around Rs1 trillion annually. Issues such as the ban on iron ore mining in several states have increased the iron ore imports by the steel manufacturers. Another alarming fact is that the Chinese imports in power equipment and consumer items contribute that half of the total non-oil trade deficit. India is also lagging on terms of garment exports in absolute terms when compared with Bangladesh and Turkey. Even though gold imports are assumed to fall by 20% over the last year, the Indian oil basket to average $105 the FY14 CAD is anticipated to stay at $85 billion. Quantifying Foreign Inflows During the last three years, FDI, ECBs, trade credits, NRI deposits have been around $50 billion with a maximum of $62 billion last year. With easing FDI norms and rising NRI deposits due to weaker rupee will take the deposits to an estimated level of $ 65

billion. This leaves India with a CAD gap of $20-25 billion for which it depends on portfolio inflows. Attracting this huge amount through portfolio inflows seems to be challenging given the withdrawing of QE program, high yields of US treasury and depreciating rupee. Options Available This CAD gap can be bridged by raising sovereign bonds like the India Development Bond ($2.5 billion), India Millennium Deposits ($5.5 billion), RBI intervention or liquidity tightening. India can raise sovereign bonds to fill the gap but this is very challenging given the present nature of emerging markets which are struggling to attract FIIs. RBI can

intervene in the forex market to bridge this gap and avoid more depreciation by spending around 10% of its reserves to finance one year’s CAD. India's FOREX reserves have depleted to $288 billion from $320.4 billion in October 2011 are merely 15% of GDP. These reserves have been accumulated through capital flows rather than current account surpluses and hence there are liabilities present in the economy. Lastly, this gap can be bridged by tightening fiscal and monetary policy to compress growth and thereby throttle the current account deficit (Figure 4). However, this option is unfeasible as India is already facing sluggish growth as seen in the factory output growth data which was 2.3% on y-o-y basis in the month of April 2013. Rupee – The Burden Carrier Since neither of these options are pleasant rupee has to take the beating and abide the burden of the adjustment. Therefore, no level of rupee appears to be untouchable. Hence, rupee’s near term problem lies in the CAD, dependence on volatile capital flows & sudden stop of these flows.


The Way Ahead

On the flip side, a weak rupee would nullify all the efforts taken by the GoI and RBI to curb fiscal deficit and inflation. For the financial year 2013, fiscal deficit for India was 4.9% in comparison to expectation of 5% and WPI & CPI inflation dropped to 43 month low of 4.7% and 9.31%. Moreover, the core inflation which is calculated excluding the volatile food and fuel prices had been reducing rapidly but the weak rupee will hinder this decline. The 11% depreciation in rupee is expected to push up WPI by 80-100 basis points and increase the fuel subsidy bill by 0.3% of GDP. India has been a net importer of crude oil, importing 80% of its requirement from foreign nations. With weak rupee it has to shell out more currency for making the oil imports payments and this in turn will inflate the oil subsidy bill. Similarly, fertilizer subsidy will also rise. This can be avoided if the government passes on the entire burden to its consumers but the option is highly unlikely for India has its assembly election in coming year. Therefore, all this will impact the fiscal deficit.

The rupee depreciation will also contribute to the rising cost of imports. As a result, firm’s profitability will be under stress as they won’t be able to raise the prices of their products and services in a sluggish economy. Thus, there will be impact on the corporate and banking system of the nation. Companies with dollar loans and unhedged positions will have to pay more if they have not already hedged their foreign currency exposure. As per an industry report approximately $20 billion worth of overseas loans are maturing in fiscal year 2014. Therefore, cost of getting new foreign loans will be substantially higher. All this will have a direct impact on the loan re-

payment capacity of the firms and there would be multi fold increase in the banks NPA. Therefore, in the long run, if the growth differentials between India and other developed nations continue to narrow and inflation differentials stay wide, rupee is bound to face further depreciation. Thus, India should focus on labour driven exports, increase inhouse production of edible oil, fertilizer, coal and iron ore to addresses structural aspects of the trade deficit and stop the free fall of the rupee.


IS Bitcoin the currency of the future? BY S.ABHISHEK, SCMHRD-PUNE They say that desperate times call for desperate measures. India as a nation is reeling today as the Rupee is in a freefall, the global economy is down and due to the Indian love for Gold, the Current Account Deficit or the difference between imports and exports has burgeoned to unsustainable levels. Quantitative Easing in the US and Abenomics in Japan are two unconventional methods which have been employed by the respective governments to revitalize the economy? Can the Indian government look towards a radical new currency i.e Bitcoins instead of the weakened Rupee? What is Bitcoin? Bitcoin is an experimental, decentralized digital currency that enables instant payments to anyone, anywhere in the world. Interestingly, unlike fiat currency which derives value from government regulation or law, Bitcoin derives value from computer processing power. Simply put, if user A can calculate complex puzzles using his computer faster than user B, user A gets 50 Bitcoins whereas user B gets nothing. Bitcoin, the brainchild of Japanese IT whiz Satoshi Nakamoto, is generated by the following

'process': Complex cryptographic puzzles are randomly generated by a pre-defined computer program at a fixed rate, and transmitted to a network of volunteer Bitcoin 'miners'. Using open-source software freely available and insanely high speed processors, miners crunch data to solve these puzzles. Naturally, the first miner to solve it gets 50 Bitcoins. The program has been preset to generate puzzles till 2140, when it will stop after generating 21 million Bitcoins. The number of new Bitcoins generated is halved every four years until 2140 when this number is rounded out to zero. At that time, no more bitcoins will be added and to accommodate the limit, each bitcoin is subdivided down to eight decimal places, forming smaller units called Satoshis which will number 100 million per Bitcoin. Since the puzzles are insanely complex and require ultrafast processors, mining is the sole purview of IT professionals and the rich who mine Bitcoins and trade them online.

S.Abhishek is pursuing his MBA from SCMHRD, Pune. He is a bibliophile and a part time writer. Email ID :

Why Bitcoin? Each Bitcoin buyer gets a digital wallet to which only he retains a encrypted private key.


Each user transaction can only be initiated by the user using his digital key for authentication. The demand for Bitcoin has been rising due to the following factors: 

General perception that the world economic system is inherently unstable and headed for collapse leaving all paper money, well, just thatpaper!

Users who want to remain anonymous since the digital domain offers secrecy: Illegal arms traders, drug dealers and the likes.

Speculators and millennials who feel the Internet will soon take over the real world.

Advantages of Bitcoin since there are no financial institutions to mediate between buyers and sellers and also the absence of regulation by banks and governments, whose 'bad' financial sense is being seen as the main factor for the collapse of world markets.

Since the currency is electronically encrypted, they are impossible to counterfeit.

Bitcoins can be easily sent through the internet, without needing to trust any third party.

Bitcoins can be transferred extremely fast as in instantly with almost zero time lag!

Bitcoin solves many problems which have plagued paper money since centuries. They can't be created by banks, individuals (counterfeiting) or governments (printing). They are a form of 'virtual gold', made for the internet era. Bitcoins around the world Bitcoin is quickly gaining acceptance across the world as more and more online retailers start accepting digital money. Wikileaks and other major organisations across the US and Europe have started accepting Bitcoin as payment and certain companies in the US have also started paying their employees a certain percentage of the salaries in Bitcoins. As online commerce increases exponentially and the world shifts online, Bitcoins are truly going to become the most common and preferred choice of currency.

Though introduced only in late 2009, Bitcoins have quickly gained traction and the Bitcoin economy is now worth more than 1.1 billion dollars. The growing clout of Bitcoins can be seen through some of the recent developments around the world. Argentina, where inflation has been increasing at highly unsustainable levels, making life increasingly tough for the middle class Argentinian, has seen a 30-40% surge in the value of Bitcoins. In an economy where the people are slowly but surely losing faith in government economic measures, Bitcoin is being dangled as a safe haven. A similar effect can also be seen in neighbouring Uruguay where again inflation is on the rise and paper money is seen losing value. Another example is Kenya, where already mobile SIM card powered M-Pesa (digital currency) is popular. But for the huge number of Kenyans who work abroad, remitting money back home is an onerous, time-consuming and costly affair. Bitcoin, with little to no extra charge and extremely fast transfer is again the saviour here with more Kenyans looking to take advantage of it. Icelandic currency expert Sveinn Valfells has a radical suggestion for the Icelandic government: that Iceland should adopt Bitcoins as the national currency so that people can weather the brutal economic climate destroying Europe. Iceland is facing doubledigit inflation. History is proof that an alternative form of currency can help the country emerge stronger from a recession as Iceland itself has seen. In the 1970s, Valfells Senior introduced vouchers as an alternative form of currency in Iceland which eventually the Icelandic government accepted as payment for taxes and helped Iceland survive the tough economic climate then. When the Cyprus banking system collapsed earlier this year, people who had invested in Bitcoins became instant millionaires as the value of Bitcoins surged to $265! Bitcoin is also seen as a threat to Gold, which till now didn't have a proper competitor as an alternative to paper money! Bitcoin mimics Gold in the sense that it has limited supply but while more gold may yet be found, Bitcoins has a predefined limit, hence enhancing it's value over the long term. Also Bitcoins are hard to steal and don't require armed men or vaults to guard them, unlike Gold. Last but not least, digital currency is least likely to be manipulated by the government and financial institutions since Bitcoins don't have any central authority controlling them.


Why Bitcoins in India?

which promote, scale and standardize Bitcoins and which may convert ordinary cash into Bitcoins. Also, Bitcoin-based bonds maybe issued by the government

Now why would bitcoin be relevant to India? Primarily seen, four reasons are plain obvious: 

After petroleum, Gold is India's biggest weakness which has led to India's today having an unhealthy Current Account Deficit. India imports massive amounts of Gold leading to a monstrous gap between imports and exports

The Rupee which has an unhealthy dependency on global factors is on a freefall and requires intervention by the Government of India and the Reserve bank of India. The central Bank has had to raise interest rates and The government's borrowing costs have also gone up whilst defending the Rupee. The defense of the Rupee has also tied up the government's hands in implementing key economic reforms aimed at kick starting India's growth back to where it belongs

India is home to more programmers/ IT professionals than the rest of the world

A vast majority of the country has no access to Banking services

What makes Bitcoin so interesting and alluring is the fact that the entire Bitcoin economy is based on principles of liberalization, democracy, transparency and absolute simplicity! At the moment there are around 3000 traders trading in Bitcoins in India and with average gains of around 300% , Bitcoins sure are booming. Also, since Bitcoins are non-taxable and do not attract VAT, it is paradise for Bitcoin investors.

What India stands to gain? 

The smartphone market is exploding in India and Bitcoin banking may be offered to more than 40% of India's population which don't have access to the banking system

India is the world's leading receiver of remittances, receiving more than 15% of the world's total remittances. Bitcoins offer an extremely quick and cheap way to send remittances back to India, enabling easy flow of money to India and increasing growth of India's GDP

The internet industry, which research has found to constitute around 20% of the GDP in developed countries would enjoy unprecedented growth once Bitcoins are standardized and introduced.

While Gold is just a 'refuge' from the ever rotting world financial system, Bitcoins offer a real 'solution' and history has observed that in the long term, it is the solutions which get well and truly rewarded. Once Indians realize that Bitcoins are more valuable than Gold, they would start investing more in Bitcoins since Gold is just an alternative to paper money at the end of the day

Over the past 4 years, the value of fiat currencies around the world has fallen relative to Gold but the biggest surprise has been the fact that Bitcoins have absolutely crushed gold in terms of value! If you paid a gram of gold to buy Bitcoins 3 years back, today you will receive 4 grams of Gold in return for those Bitcoins

What should India do?

India must first introduce a slew of comprehensive measures including:  Payment through Bitcoins: India should start accepting payments through Bitcoins for tax payments, fees, custom duties and the like  Incentivize Bitcoin-based Businesses so that all companies start accepting payments in Bitcoins and use Bitcoins to pay salaries to employees and in other transactions 

The Government can invest money saved in national pension schemes in the Bitcoin market, start setting up digital financial institutions

Introduce Digital Finance courses across the various educational institutions across the country so as to position India as the Digital Financial Hub of the future. It can also offer expertise to other countries which may want to follow India into the future of finance when they realize their present economic model is unstable and unviable. India can thus accelerate it's ascension as a world superpower


Bitcoins eliminate dependency on 'too big to fail' Bitcoin does have it's shortcomings, among which is banks and are the precursor to a new era of digi- it's price volatility, inspired by it's limited supply and investor speculation. But in an increasingly untal finance certain world, where fiat currencies are increasingly In this age of cost-cutting, small businesses and becoming volatile and the governments and premier startups, which are the engines of growth in any financial institutions can no longer be trusted to do developing economy, can save huge amounts of the 'right' thing, Bitcoins are becoming an increasmoney by accepting bitcoins since they drastical- ingly attractive option. ly cut down transactional costs which account for nearly 10-12% of the total costs in any busi- History has shown that the pioneers who embrace change wholeheartedly and before anyone else, ness stand to reap untold benefits and riches. The future ahead is clear since Bitcoins are going to take over Bitcoins would reduce Indian dependency on the the world of finance sooner rather than later but the Rupee and would free up the Reserve bank of million dollar question or should I now say: The milIndia and the government to focus on other vital lion Bitcoin question remains: Is India ready to say areas to speed up growth of the Indian economy 'Goodbye gold, silver and paper money; Hello Bitcoin!' Taxing the Bitcoin trade in India would open up a new revenue stream for the Indian government.


f A C U L t Y


What are the key challenges CFOs are facing today?

I would enumerate some of them as follows:  Effective decision management and accelerate the process for faster decision-making with an ‘Enterprise-wide Risk Management’ approach. Make decision makers at all stages aware of what can go wrong and insist for making mid-course correction and/or keeping the ‘Plan B’ ready to move ahead, if met with any sub optimal result or failure; 

Proactive management of all accounts and finance functions related processes and deliverables as well as keep them ready to enable operating functions successfully, meet challenges in achieving turnover, growth of products and services across geographies and customer segments;

Be providential and meet challenges in achieving trade-offs, both in Product Pricing and Capital Expenditure through life-cycle based approach which is gradually getting shortened;

Meet all stakeholders’ demands for total transparency in the entire process of corporate governance, both in internal and external environment;

Talent Management with specific focus on Ring-fencing, Multi-tasking and ‘Innovention’ (Innovation, Invention and Creation). Stretching and sweating of all human resources to the optimum level for productive value addition without impairing organization’s culture and level of motivation; and

As an aiding process to the above, IT-enablement of all routine functions (SOPs) and thus release time and space to team members so that they can think and work more for maximization of value additions and minimization of ‘value destruction’.

Dr. Paritosh Basu is the Senior Professor at SBM, NMIMS, Mumbai. He has more than 34 years of industry experience across diverse functional areas of finance. Prior to joining NMIMS in July 2013, he served as the Group Controller of Essar Group, one of the largest business conglomerates of India. He was with Reliance Communications Ltd. as Joint President and CFO till mid August, 2008. Email Id:

How geared are Indian firms to face the challenges posed by uncertain global environment, besides worries on domestic front such as widening fiscal deficit and an apparent liquidity crunch? India has shown her immense resilience during the crisis period of 2008 and its aftermath. Indian regulatory system, particularly concerning the banking and financial services sector, has been proved to be more successful in avoiding crisis than many other countries. In my personal view, Indians in general have become used to experience GDP growth of 8-9%, and adversely panic and vocalize


S P E a k

through all media if the rate comes down to al level of 5.5%. There is lesser realization that we are not in an isolated island of the global village and to a considerable extent, our growth is dependent upon the state of affairs in the developed economies. Considering their near recession like situation 5.5% is definitely a good rate to grow at. Having said so, Indian firms both in large and SME sectors, being the drivers of the Indian economy, continues to perceive huge opportunity to grow within India itself. They are continuously striving to achieve a state of readiness to face all challenges in the path ahead. This is commendable particularly keeping in view that the macro drivers of growth till recently had considerably slowed down due to inactions of government in many facets of managing the economy.

Organise equity capital for growth first and then borrowed funds for expansion and diversification. In a predicted scenario, in emerging economies, there will be an estimated supply of 3.5 trillion dollars from retail equity investors as against demand of 10.5 by 2020, as forecasted by McKinsey. This is going to be a huge challenge keeping in view the state of managing and respecting interest of minority shareholders.

Remaining away from the clutches of Anti Bribery Act of the UK, FCPA of the USA and Prevention of Corruption Act, India, are going to be huge challenges, keeping in view the present practices prevalent in the corridors of power in India and abroad. This is true for all organizations which have any type of business connections with overseas countries.

Throw away executive summaries and treat every piece of detailed information as a strategic asset even when working under huge stress and pressure days-in, days-out. Have a 360-degree approach for knowledge in all allied subjects, otherwise the CFO will not be able to work and decide based on advices received from his subject matter experts in accounting, taxation, currency exchange risks and so on.

Business Performance Management with specific focus on ‘Sustainability’ from the perspective of Planet, Profit, People and Product and prioritization of those ‘Four P’s’. Challenges are to be met keeping in view given internal realities and existing pillars of every organisation as well as external economic and geo-physical environment. Questions to ponder over are:

My prophecy is that the day India and Bharat are largely integrated and the demographic dividends start yielding more, upon progressive implementation of the national Skill Development Mission, India will be the ‘Power House’ of world economy. The only era of anxiety is the fractured electoral opinion both at central and state levels, coming as a hurdle in the way of policy decisions and economic legislations. If the Parliament is not a hung one, the politicians will also not actively look for their pound of partisan gains. But I think perceived changes are being seen in the recent state level elections. I am also hopeful that India will start experiencing low tide in matters of corruption. What KEY challenges do you foresee for CFOs in India in the backdrop of growing uncertain business environment and rising cases of scams? The challenges will be forthcoming, particularly from the context of growing global business environment and rising uncertainties in the socioeconomic environment in the following areas: 

Establishing a firm position and practicing zero tolerance in each and every matter of corporate governance;

Risk-based approach in ‘Financial Reporting Practices’ and ‘Business Performance Management’ in line with best of combined benefits from SOX 404, requirements for listing and remaining listed at bourses of major European countries, e.g., London Stock Exchange, and so

on. Overcome the given realties of ‘My-money Type of Control’ particularly in those organizations where management has still not been separated from ownership. This will help in many ways to avoid another ‘Satyam’ in India.

Are resources of the Earth finite or infinite? Is the capacity of the Earth limited? Is it possible to restore or reform its capacity?  Will growth in the earth be limited to its capacity?  Can an organisation ignore such questions and grow?   


Do you foresee CFOs acting more as catalysts and strategist, going ahead? Certainly yes, but let me hasten to add that he cannot be considered as the panacea for all problems. I agree that the CFO to a very large extent will have to play the role of Lord Krishna for the CEO Arjun in today’s Kurukshetra of cut-throat competitive commercial world. But there have to be many more CXOs in leadership role with convictions to collaborate and perform and deliver results in their respective functional area. What are your key expectations from Government and Policy makers on Financial and Taxation Regime? 

A long-term approach with fair but firm standing in all matters of policy decisions and implementation. The directional thinking, as manifested through various actions, should be such that it is perceived by all stakeholders of India Inc., including entrepreneurs from overseas, as predictable one towards a definite vision with milestone based objectives of making India a super power

We should not see reversal or stacking into cold storage type of actions for legislated policies and procedures. Government should be seen to be out of lackadaisical attitude towards implementation

More collaborative and consultative approach towards the political parties in opposition without ‘our- their’ attitude and respect for constructive criticism which are in the ultimate long-term interest of the people in general. At times, the approach could be to accept some critical changes and move ahead so that corrections can be brought in the path ahead.

Make direct credit of subsidy to the real beneficiary’s bank account an accomplished and sustainable reality in near future. This is a pathbreaking momentous initiative and a great example to the world that Indians are also creative and innovative in matters of simultaneous macroand micro-economic management and that too in a country with a population of over 120 crore.

Maintain India’s dignity, wisdom and age-old respected tradition as a responsible citizen of the world.

What are the key challenges Indian Industry is facing and what support do you envisage and expect from the government? Industries as a whole in India is facing the key challenge of living with uncertainties in policy decisions, and lack of predictability about the man-made state of affairs that are going to unfold from Delhi and State Capitals. The Industry leaders are not in a position to set a goal for their own business operations and work towards achieving them as there are many ifs and busts to be handled in the external socioeconomic and political environment. Volatilities are there in too many matters which cannot be addressed only through actions at individual organization’s level. In my previous answers my views are some of the issues that can also be considered to have consequential effects for the points to be covered under this question: Balance of trade and Fiscal Deficit continue to be major areas of concern, where Industry will expect explicit and quick corrective actions from the government. Let the huge burden of subsidy not continue to breathe hot air through shoulders of the executive machinery of the country. Perhaps the demons should be killed through bitter medicine which one of the senior ministers has recently suggested! Government’s actions taken in that direction can prima facie be seen to be a fuel to the fire of inflation, but in ultimate analysis if it reduces fiscal deficit and regulates/ controls consumption of commodities like hydro-carbon, etc., so be it. Let the real user pay for the cost like the owner of the diesel car. Let all others indirectly or surreptitiously enjoying benefits of subsidies innovatively find out solutions to live without subsidies.

How do you see India’s competitiveness vis-à-vis China, and, in your view what policy intervention is needed to enhance India’s competitiveness? I feel, India is on the right path of its own deep rooted value system, i.e., ‘Satyameva Jayate’. Contextually by that I mean more focus towards quality without compromising for short-lived gain in cost and quantity. I strongly believe that the world-wide movement of sustainability management is gaining momentum. One of the prime mottos of this movement is to increase life of a product by material substitution and increasing quality of inputs and


processes, which in ultimate long-run analysis reduce the consumption of raw material, energies, utilities and cost for maintenance, green/reverse logistics and recycling/bio- friendly degeneration of used items.

Responsible behaviour in repayment of instalments and interest should be encouraged by tracking each borrower. For this financial institutions should serve with a collaborative approach, instead of a mere lender.

However by no means, I have any intentions to undermine the achievements of China in becoming the ‘Workshop of the World’. India must have to work hard for long to reach that level of output volume which gives economies of scale and competitive cost advantage without impacting quality. For this, we need definitive policies and support from government for all-round development of Micro, Small and Medium scale sectors including cottage industry.


With a directional policy decision and right approach India has taken up skill development as a National Mission and aiming to accomplish it through a nation-wide movement. This will make millions of vocationally trained young people available who can either be deployed by SME’s and/or on their own set up cooperatives, self-help groups for entrepreneurial initiatives. A case in point is the Agarbatti industry in Odisha. Government should also intervene in ensuring that proper technical assistance is available to SMEs on the basis of solicitation. For that it should open many Technology Assistance Centres at District Level and make the existing ones more effective so that they provide technical and knowledge inputs. Lot of visibilities about availability of their services are to be created in rural and semi-urban India. Inclusive banking should no longer remain in pages of planning documents of the government. Besides technology, more and more funds are to be made available to SMEs, through duly structured, transparent and monitorable routes- by way of loans with more attractive terms.

Through this publication I wish to pass on a few of experiential learning points to all budding professionals in any discipline. I am sure this will help them in successfully addressing many issues and turning threats into opportunities in the new era. 

Let us first become a good human being and then a good professional with a positive approach. Otherwise the fruits of our good deeds and efforts will not ultimately contribute towards the overall development of our society and the humanity as a whole.

Let us proactively assess the impacts of seeds in the womb of time and convert the same into a unique business opportunity to reap larger benefits of being the first mover.

Do not ignore any thing small or any new idea. Try to see opportunity and generate value out of small things keeping in view that “Value has a value, if its value is valued”- as propounded by Bryan Dyson, the former CEO of Coca-Cola. Bring in the benefit of collective wisdom, encourage and involve young performers in all matters of analysis, evaluation and strategic decision-making

In a competitive world, sustained value generation skill will be the only criteria for occupying the driver’s seat of a business firm and not ownership.

Disclaimer: The views expressed in this article are personal. ‘The Financial’ does not endorse them. Reprinted with permission from ‘The Global Analyst, January 2013 Issue’



GRASSROOTS BY JEENOY PANDYA, NMIMS-MUMBAI Our topic for the first edition is “TAPRI CHAIWALAS” where we have compared two businesses operating at different scales to facilitate comparison with the help of firsthand interviews Monisha Stall It is a medium scale tea-stall located at one of the busy cross-roads in Vile Parle (W) opposite D J Sanghvi College. The 30 year old stall is mainly run by Mrs. Monisha (formally educated up to class 7) who is lent a hand by her husband who also does some part-time jobs (like driving a tempo which is owned by them & was purchased from the savings from the main business) to complement the main income. As is the case with most such businesses, it is the main source of income for the extended family of 5. The owners are migrants from Calcutta & selected this form of business as they were proficient in the matter as also due to the low investment required. They earn a net profit of 10-15 thousand from the business even after paying all their bills & also the staff (6 employees paid a daily wage of 200 Rs each which turns out to be 5-6 thousand in all monthly). They offer additional complementary items at their stall to generate additional revenues & improve their top-line. The items they sell & the potential margins are shown in the following table: On the basis of the bottom-line of their existing business, the owners have been able to expand their busi-

ness & they now own a dosa-shop directly across the road from their teastall. The business though registered for electricity bill & possessing the appropriate documents of land possesItem



Tea (cutting)









Egg Bhurji



sion, doesn’t have a business permit due to which it has faced severe problems including razing of their structure by the anti-encroachment team once. The owners do have access to formal banking services (they have a bank account) but haven’t been able to access loans to invest in the business due to the lack of business permit. Monisha maintains the accounts by herself .

Jeenoy Pandya is a B.E. (Mechanical) from MS University, Baroda & he’s presently pursuing MBA from NMIMS, Mumbai. Email ID— m

In an attempt to connect to the hinterlands and understand the small businesses that make our big economy, we present to you our first edition of “GRASSROOTS”

One can find the clientele which consists of small crowds of bubbly students from the opposite college (the tea-stall is located strategically) & the people from the working crowd who have stopped for refreshments or just to take a break from the daily grind right from 8 in the morning to 9:30 in the night, 7 days a week. There’s seldom a day when Monisha stall is closed. The peak hours of the stall are from 13 pm & the monsoon season proves to be a lull for obvious reasons. In spite of all the strife they undergo, what is encouraging is both the



children of Monisha go to English medium schools & proper tuitions the educational expense per each girl amounting approximately to 1.5 lakhs per year (Even more heartening is the fact that both her children are girls but in no way ever has she differentiated or treated them as being inferior to boys – a lesson we can all learn). Ashraf Bhai Ashraf Bhai's tea-stall just a small distance away from the Monisha stall though 40 years old is of modest measures. He belongs to Kerala & his community has a very strong support system in place to the great benefit of everyone – in fact at the time of the interview the shop was being run by a friend of the owner as the owner has gone to his village for a couple of months. The protagonist doesn’t have any farm-land back home & hence the business is the main source of income for his family of 5 (including 3 kids) to whom he sends around 8-10 thousand earned from the business every month. Ashraf Bhai also sells biscuits at his stall apart from tea wherein his margins are of the order of 50-60 paisa per cup of tea worth Rs 5. The self-maintained stall is open from 6 am to 6 pm every day. The clientele includes mostly people from the lower-middle

or middle income groups & mostly end up at the stall by word of mouth. Ashraf Bhai as an individual inspires you by his flair to progress & to demand & acquire whatever is rightfully his (rations, benefits announced by government etc.) despite his modest means. He too is pestered by the non-availability of permit to do business for which he blames the inefficiencies & corrupt practices rampant in the municipality office. Due to this very reason, he can’t access credit & hence the one thing that can boost both his morale & business is a business license. Conclusion

There are a lot of lessons that we can learn from these humble people & India is a long way from extending resources, credit to the needy (one question that can be asked is: Can microfinance do the trick?). Once this is achieved – in this case, a license to operate business, access to credit & support as opposed to the hostility presently shown by the local authorities, the businesses, the families, the communities & the nation as a whole can flourish. Way to faster, inclusive growth (that has long eluded the Finance ministry & RBI).


Is US Directing Or Dictating The World Economy? – A Quantitative Analysis BY AKSHAY KANSAL & VIKRAM JAIN, IMT-GHAZIABAD Introduction The United States of America has been considered the bellwether of the world economy since the end of the Cold War. But is it really the case? Did the slump in the developed economies following the 2008 financial crises and the great rise of the BRIC economies during the same time space, signal to a paradigm shift in the way world economies are working? Or does the recent rebounding of the greenback portends to the old order being reaffirmed? To find answers to these labyrinthine of conflicting views being presented by the intelligentsia, we took the umbrage of the stock markets. Exchanges: Boundaries



The size of the stock markets across the world was estimated to be about $ 37 billion at the beginning of October 2008 which shows the heightened activity that takes place. In the new world order of globalized economies that had started to develop in the mid-90s, an inalienable element was the financial system of the world. The global economic environment became more complex with even the most prolific financial gurus having no clue or prescience regarding dot-com bubble, soaring oil prices etc. At the same time the emerging economies relaxed regu-

lations to bring institutional investors to their shores. This opening up of the system led to heightened crossborder flow of capital, with countries like India emerging as an investment ‘hot spot’ resulting in its stock exchanges being impacted by global cues like never before. Through this article we aim to examine the degree of correlated movements in the different equity exchanges around the world in comparison to those on the Wall Street. Exchanges are now crossing national boundaries to expand their service areas and this has led to cross-border integration. Also, they’ve begun to offer cross-border trading to facilitate overseas investment options for investors. Exchanges regularly solicit foreign companies and competition has put pressure on firms to seek capital outside their precincts. Comparative Analysis: Approach 

This is the main stay of the study wherein the New York Stock Exchange (NYSE) Composite Index has been compared with three different MSCI (Morgan Stanley Capital International) Global Equity Indices.

The period chosen is from August ’93 to July ’13. The analysis could not be done from ’91 for want of data. This period has been divided into different intervals to deduce more meaningful inferences.

Akshay Kansal is a first ye ar P GDM -Finance student at IMT Ghaziabad. He is a coordinator of FinNiche- the Finance Club of IMT-G. He has a keen interest in market analysis and economy. Email m

Vikram Jain is a first year PGDM-Finance student at IMT Ghaziabad. He is a coordinator of FinNichethe Finance Club of IMT-G. He has a keen interest in Risk Analytics and has cleared FRM Level 1. Email


 

Period 1 - 1993-1997: It represents the era of East Asian miracle and crises. Period 2 - 1998-2001: It represents the technology boom and the bursting of the bubble. Period 3 - 2001-2004: It represents the recovery from the technology bust. It was during this period that the grouping acronym BRIC was coined. Period 4 - 2004-2007: It represents the investment boom period especially in the developing and emerging markets. Period 5 - 2008-2013: It represents the world under a dark shadow of the global financial meltdown and its slow recovery.

The three indices taken for a direct comparison with the NYSE Composite Index are – All Country World Index (ACWI) Excluding US, All country Asia-Pacific and BRIC.

Correlation, a measure to determine how two indices move in relation to each other was employed to draw inferences.

Period 1 - The NYSE was rising sharply. Led by the technology companies, the US economy was rising at a steady pace. On the other hand, MXWDU didn’t show any correlation with NYSE and was constant over the Period 1.

Period 2 & 3 - The MXDWU showed a slight rise along with the NYSE. This was mostly due to the tech boom in US which also affected the other indices of the world.

Period 4 & 5 - This period shows the high dependence of the indices of the rest of the world on the US in terms of trade. Both the indices have risen sharply. Although the % change in MXDWU was much larger but it shows high correlation with NYSE. NYSE Composite Index vs All Country Asia Pacific

Comparative Analysis: Technical Details

The following section covers the three comparisons that were carried out as well as the conclusions that were drawn from them for different periods. NYSE Composite Index VS All Country World Index Excluding US

Figure 2: NYSE vs. All Country Asia Pacific Note: MXAP values were scaled up by a factor of 20 Source: Bloomberg

Period 1 & 2 - The Asia Pacific region was rising sharply. On the other hand, the US economy was rising at a steady pace. As evident, stock indexes across the Asia Pacific didn't show any correlation with the NYSE during the period 1993-2001.

Period 3 - The indexes from Asia Pacific fell sharply and didn't show much correlation with respect to the US stock index. However with the onset of 2003-04, both the indexes showed some signs of correlation.

Figure 1: NYSE vs. All Country World Index Excluding US Note: MXWDU values were scaled up by a factor of 20 Source: Bloomberg


Period 4 & 5 - This period shows the high dependence of indexes of Asia Pacific region on the US in trade and was reflected by the two stock indexes. Both the indexes have risen sharply. Although the % change in MXAP was much larger but it shows high correlation with NYSE.

on US economy was clearly visible on the BRIC index. Correlation Analysis

NYSE Composite Index vs. BRIC (Brazil, Russia, India, China)

Figure 3: NYSE vs. BRIC

Note: MXBRIC values were scaled up by a factor of 20

The analysis shows that since ’93 there’s been a rising integration between the US and the world at large as reflected by the increasing correlation values. Also, it is seen that during the last couple of years there’s an increasing divergence between the two.

Source: Bloomberg

Observations 

Period 1 & 2 - The Russian Stock Exchange was awarded the best performing stock exchange in the year 1997 but the very next year it crashed due to the collapse of one of the largest bank in Russia and the country defaulted on its government securities. Also NSE rose because of tech boom till mid of 2000 and went down to the 1998 levels but volatility was much higher in this period. Period 3 - NSE moved up very sharply responding to the favourable interest rate regimes and other macroeconomic factors. NYSE was a success story in this period. Led by the technology companies, the US economy was at its peak. The high dependence of MXBRIC on NYSE in trade was reflected by the two stock indexes. Period 4 & 5 -The manner in which both the indexes moved in this period was highly correlated. Although the indexes took a hard hit during the recession in 2008 but the impact of recession

The fact that the world moved at the command of the US was also known but is proved even more so by the first graph. This is especially true of the period between ’99 and ’07.

But during the financial meltdown during the year ’08, the rest of the world although experiencing a downtrend caught up with the US.

The gap which seemed to reduce between the two comparables has again started to widen in the last one year or so with the resurgence of the US economy as evident from the declining unemployment figures and appreciating greenback.

Similar is the case with the BRIC economies which were on a roll during the pre-crises period and almost caught up with the US during the crisis but eventually the growth story in these countries took a hit while the US recuperated, as seen by the third graph.


Economic environment took a paradigm shift with ‘the dot com bubble burst’, 9/11, and soaring oil prices

It wouldn’t be an over-reach to say that, in the current scenario, any apprehension about stocks in one country can escalate into a panic selling

After 2000, due to robust growth, maturing economy and relaxed regulations, outside investors – institutional and others got scope to operate in various regions which includes the Asia Pacific region and the emerging markets

In a way, though the attractiveness of the strategy is gradually diminishing, it can still be profitably used for investing in countries whose stock exchanges do not yet have high correlation amongst each other

This led to increased integration and heightened cross-border flow of capital with Asia resulting as investment ‘hotspot’ resulting in stock exchanges being impacted by global cues like never before


This has been due to the fact that ‘cross holdings’ are increasingly becoming common wherein the geographical barrier is dissolving with respect to investing

We can conclude that that the strategy of globally diversifying investments is slowly losing its profitability. Especially after 2000, the markets are fast converging

In its heydays, the US economy could be seen as dictating the world economy. But, through our study we can conclude that it is no more that superpower that it used to be. It still has enough ammo to direct the movements on the global stage. Thus we can conclude that probably the days of one country ruling over the rest are over, it still holds sufficient clout to direct the money markets all over the world and make investors dance to their tunes.


Is India ready for full capital account convertibility? BY MAHALAKSHMI IYER & VIRAJ RAJPUT, FMS-DELHI Full capital account convertibility (FCAC) is ability to convert local financial assets into foreign financial assets and vice versa at market exchange rate. In a wider sense capital account convertibility means freedom for organizations and residents to freely buy an overseas asset such as equity, bonds, property and acquire ownership of overseas firm. There is a difference between full currency convertibility and a fully open capital account. Currency convertibility refers to the absence of any restrictions on the holding of foreign currency by resident and national currency by foreigners and free conversion between currencies. While an open capital account, on other hand is total freedom on exchange of non currency asset holdings like real estate etc. Economists view FCAC liberalization as important for opening of global trade and financial markets. They observed that FCAC lead to faster economic growth since external capital is required by developing countries to sustain external investments over domestic savings; it is difficult to continue with capital controls in a globalized economy and FCAC will make govern-

ment more responsible as unstable deficits will frighten investors and lead to outflow of capital. Fears about full capital convertibility have been voiced by several critics. The main problem of FCAC is prospect of outflow. It also poses the threat of outward flows and higher interest rates which will make the economy unstable. The volatility in exchange and interest rates with capital inflows can lead to unsound funding and unhedged foreign liabilities. In order to understand the concept, it is important to pay a visit to the financial history of the world and to the inception of the concept of capital account convertibility way back in the 1970s.Capital account convertibility, during the early days of the formation of the world bank and the International Monetary Fund was considered to be the greatest destabilizer of the global economy. However, since then there has been a radical change in the perception towards capital account convertibility. Many now regard capital account convertibility as the ultimate step in the process of integrating a country’s economy with the world economy.

Mahalakshmi Iyer is a first year MBA-FT student at FMS Delhi. She holds a B.E degree from Goa College of Engineering. She has 28 months of work experience in Infosys in Financial Services and Insurance unit. Email

Viraj Rajput is a first year MBA-FT student at FMS Delhi. He is a mechanical engineer from VIT, Pune. Email ID–


During the Bretton Woods conference in 1948, as part of the exercise of post war reconstruction of the World, it was postulated that since money was basically a de-stabilizer, it should be kept under scrutiny and must be controlled with appropriate checks and balances. With this purpose, the World Bank and the IMF were created. A global financial system was created in which each participating Government promised to exchange its own currency on demand for US Dollars at a fixed rate. In turn the US Government guaranteed to exchange Dollars on demand for gold at a rate of 35 USD per ounce . Now all the currencies were effectively placed on an indirect gold standard which was supported by the US gold reserves. The participating governments thus came to accept US Dollars as gold deposit certificates and chose to hold their international foreign exchange reserves in Dollars rather in gold. This worked well for over two decades. This was notably the most stable period for the global economy during which the economies recorded unprecedented and unparalleled growth and rose to new heights. The problem in this picture perfect economic scenario came after the cold war. The cost of the cold war along with the United States’ involvement in the Vietnam War considerably eroded the faith the rest of the world had in the Dollar as being “the reference point” of global finance. There was a looming threat that investors and countries who held dollars would return the dollars for Gold. As a preventive counter measure to these threats the then US President, Richard Nixon, removed the convertibility of the Dollar to Gold in August 1971. This move completely debased the very structure of global finance that was conceived by the Bretton woods meet. Now, the Gold- Dollar exchange rate which was 35 Dollars to an ounce of shot up to over 300 Dollars to an ounce of gold within a few years. This led to the world staying hooked on to the dollar as the global currency and it also heralded the end of the fixed exchange rate and the birth of a floating exchange mechanism, resulting in the possibility of destabilization of the monetary system. India has a long history of using capital controls as they were a key element in the country’s quasisocialist, import-substitution economic strategy prior to 1991. They were first introduced in the late 1950s and became comprehensive and draconian by the mid-seventies. In the 1980s, controls on external

borrowing, including short-term borrowing, were selectively eased. However, it can be argued that this lopsided easing of controls eventually contributed to the external crisis of 1991. The country embarked on the path of liberalization after this crisis. Industrial licensing was abolished, import quotas and tariffs were lowered. As part of this effort, the authorities lowered restrictions on foreign investment flows, both for FDI and for portfolio investments. Other controls were retained but were steadily eased as the economy in general and external accounts in particular showed improvement. By the end of the decade, restrictions on current account transactions had ceased to be binding and those on foreign capital were no longer especially cumbersome. Nonetheless, controls remain on debt-creating inflows (external borrowings) and on investments abroad by residents. India’s move towards capital account convertibility In the view of the risks, the RBI chose a path of gradual and phased move towards capital account convertibility. Tarapore committee (First) The RBI appointed the committee on CAC with S.S Tarapore as chairman. The committee submitted its report in 1997 setting a three phase timetable (1997-98, 1998-99 and 19992000) to achieve CAC. According to the committee , capital account convertibility would greatly benefit India in making available large funds (which would promote growth) and improved access to world financial market. Fiscal consolidation: reduction in gross fiscal deficit from 4.5 percent of GDP in 1997-98 to 3.5 percent in 1999-00. Mandated inflation rate: the mandated rate of inflation for 3 years should be an average of 3 to 5 per cent. Strengthening of financial system 

CRR to be reduced to 8 percent in 1997-98, 6 percent in 1998-99 and 3 percent in 1999-2000

Gross NPA’s in banking system to be brought down to 12 percent in 1997-98 and to 5 percent by 1999-2000

Weak banks to be liquidated or merged with stronger banks


Forex reserves should not be less than months import cover

The committee further recommended that RBI should have a monitoring exchange rate band of 5 per cent around the real effective exchange rate (REER) and intervene only when the REER went beyond this band. The committee also called for manageable size of current account deficit; a reduction in debt service ratio to about 20 percent of export earnings; foreign exchange reserves between $22 billion and $32 billion; removal of all restriction in the movement of gold. Tarapore committee (second) was formulated in March 2006 to have another look at CAC. The recommendations given by committee in its report were: 

 

The annual limit to open foreign currency accounts overseas be raised to $50000 in phase one from the current level then of $25000 and further raised to $100,000 in phase two and $200000 in phase three. All individual non residents and corporates should be allowed to invest in the Indian stock market through SEBI registered entities which will be responsible for KYC norms and money should come through bank accounts in India. Non residents (other than NRI’s should be allowed to benefit from deposits scheme like FCNR and NRRA which are only for NRI’s benefit. The government to review the present tax regulations on these deposits for NRI’s Review of double taxation treaties which favour some countries as source of investments Foreign institutional investors (FII’s) should be prohibited from investing fresh money raised through participatory notes (PNs) and the existing PN holders may be provided an exit route and phased out completely within one year The banks limits for borrowing overseas should be linked to paid up capital and free reserves, and not to unimpaired Tier I capital as at present, and raised substantially to 50 percent in phase one, 75 percent in phase 2 and 100 percent in phase 3 The limit for mutual funds to invest overseas must be increased from the present level of US $2 billion to $3billion in phase one, to $4billion in phase two and to $5 billion in phase three and

these should be available to SEBI portfolio management schemes apart from mutual funds. CAC— Positives and Negatives Positives of CAC are that CAC could encourage greater efficiency, higher specialization and increased innovation by exposing the domestic financial sector to the highly developed and diverse global competition. CAC could facilitate the increased inflow of global capital which is much needed in order to augment our domestic savings. This is especially relevant in the Indian context where equity investment has not really penetrated the Indian population significantly. Indian residents would get access to a wider range of investment options. Through this, an open capital account would allow domestic investors to protect as well as possibly enhance the real value of their assets through risk reduction by diversification. However, there some drawbacks of CAC, it could lead to the export of domestic savings, which could spell disaster for a country like India where capita is scarce and in high demand. CAC almost certainly causes exchange rate volatility of currency. This could cause instability on a macroeconomic scale due to rapid and unbalanced inbound as well as outbound capital flows. India’s Stance Being a highly regulated economy, India has done the right thing by not opting for a full float of its currency, fuller capital account convertibility may lead to more outflow of currency than inflow in the country. We have to ensure an investor friendly infrastructure in our country and a stable economy before stepping towards fuller capital account convertibility. With the Rupee breaching new lows, it is only obvious that the time has not yet arrived when we can opt for full CAC with the confidence that this will not lead to a complete flight of all capital from our already capital-scarce economy. In short, the moot question remains – should we not factor the experiences of others in our policy formulations? More importantly, as some of the pre-conditions of the Tarapore Committee are yet to be met and given the experiences of other countries, notably East Asia, one feels that the time for CAC is not ripe. But the in between point, a hybrid between controls and liberalization of the Capital account, has served well for a decade for Indian economy.

3 26


The Zero Rupee Note


BY MITALI GOYAL & BHUVANESH KUMAR, NMIMS-MUMBAI We often hear about zero coupon bonds, zero interest on EMIs. This article will tell you about a fascinating initiative by Fifth Pillar, The Zero Rupee Note. The protest note - widely known as the zero currency note is a campaign on behalf of the ordinary Indians who are forced to grease the palms of millions of civil servants. It can be handed over to any crooked bureaucrat who solicits bribes in return for services which are supposed to be free. A Zero-rupee Note is a type of fantasy money issued in India to fight systemic political corruption. It closely resembles the 50 rupee Indian banknote that is graced with the picture of Independence leader Mahatma Gandhi. It carries the slogan “eliminate corruption at all levels” with the usual promise of redemption by the Reserve Bank of India being replaced by the solemn vow, “I promise to neither accept nor give a bribe”.

An Indian expatriate, Satindar Mohan Bhagat, who is currently a Physics Professor at the University of Maryland, is credited with originating this concept in 2001. He was frustrated by the demands of government functionaries and conceived the idea of a zero rupee note as a polite way of declining participation. Fifth Pillar, a non-government organization, put the idea into prac-

tice. It began the campaign in the spring of 2007 with a first printing of 25000 notes that were distributed in the Indian city of Chennai. Additional printings followed and use of the zero rupee note spread across the nation. Zero-rupee notes have been issued in five of the 22 scheduled languages of India, including Tami, Hindi, Kannada, Malayalam and Telugu.

Bhuvanesh Kumar is a first year student of MBA at SBM, NMIMS. He holds a B.A. degree in Economics from Hansraj College, Delhi. Email ID7bhuvaneshkumar@gmail. com

This concept has recently been extended to Mexico and Nepal who are also suffering from endemic government bribery problems. Plastic Cash is Cool Plastic money is widely used by us, that is the cashless, swift and smooth Debit and Credit Cards. The pioneering new development is the Plastic Currency Notes. Reserve Bank of India is planning to introduce Plastic currency Notes, on a trial basis, in India. The five cities - Kochi, Mysore, Jaipur, Bhubaneswar and Shimla - have been chosen for their geographic disparity and to test the effect of their varying climates on the notes.

Mitali Goyal is a 1st year student of NMIMS, Mumbai (MBA Capital Markets). She has graduated in B.Com(H) from Shri Ram College of Commerce, Delhi . Email ID:

Pioneered by Australia, the plastic currency notes are already in use across a number of other countries, including Singapore, Canada, New Zealand, Malaysia, Vietnam, Fiji, Brunei, Papua New Guinea and Romania, while the UK is also said to be toying with the idea.

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The growing menace of paper currency getting soiled and the rising costs of their disposal are encouraging this move by the RBI. On an average, one out of five paper notes in circulation (over 20 per cent) gets disposed of every year after getting soiled and the number of such soiled currency bills stood at over 13 billion units during the financial year ended March 31, according to the latest data available with RBI. Advantages over Paper Currency According to Gerry Wilson of Australia-based Commonwealth Scientific and Industrial Research Organization (CSIRO), the polymer notes have longer life time and can be produced at a faster rate than paper currency. Wilson is Theme Leader (Flexible Electronics), Materials Science and Engineering, at CSIRO, which worked closely with the Reserve Bank of Australia in developing polymer notes. This will tackle the problem of soiled currency notes to a large extent because of a much longer shelf life of the plastic bills. Polymer notes cannot be teared with fingers as plastic notes and are less affected by the weather conditions.

There is another angle to the story; Polymer notes incorporate many features not available to paper bank notes, including the use of metameric inks. This makes it difficult to churn out counterfeit notes to flood India. Thus they provide better security. Their longevity results in a decrease in negative environmental impact and a reduction of production and replacement costs. Once Plastic currency is produced in bulk, Economies of Scale will come into motion. This will result in low overall cost of production given the durability of the Plastic notes. India also has the domestic industry of polymer so it would be easier to manufacture the currency in India and it will give a boost to the polymer industry in India. Currently we have to import the paper for printing currency notes which increases our import bill and Current Account Deficit. Countries that have switched completely to polymer banknotes include Brunei, New Zealand, Papua New Guinea, Romania and Vietnam. Canada is in the final phases of implementing polymer banknotes.

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Services Sector – A Phoenix in the Making BY VIVEK HARIHARAN & BHARAT GOSWAMI, NMIMS-MUMBAI The phoenix truly is an amazing creature. It is made of fire and keeps on growing in size and intensity, spewing out flames and affecting all those around it. It brings magic to those who come into contact with it and inspires awe and amazement to all those who stray across its path. When nearing the end of its life, it consumes itself with its own flames and from its ashes emerge a new Phoenix that burns even brighter and much more beautiful. Such is the beauty ascribed to this mythological beast. The Services sector is similar to a Phoenix in its making. The only difference between the Phoenix and the Services sector is that the former is a Myth while the latter is reality. The services sector is a spectacular industry. From its inception, the only way it has been going is upwards and along with it has pulled up the growth of the entire country. For more than a decade, the sector has been pulling up the Indian economy with great stability. The share of services in India’s GDP at factor cost (at current prices) increased from 33.3% (1950-1951) to 56.5%. The services sector has been a major and vital force steadily driving growth in the Indian economy for more than a decade i.e. from the early 90’s. The economy has managed to navigate the turbulent years of the recent global economic crisis because of the vitality of this sector in the domestic

economy and its role in India’s external economic interactions. In order to understand more about the services industry we must first classify it. The services sector covers a wide range of activities. It includes the most sophisticated information technology (IT) which comes in the organized sector and even the simple services provided by the unorganized sector, such as the services of the barber and carpenter. National Accounts classification of the services sector incorporates: 

Trade, hotels, and restaurants

Transport, storage, and communication

Financing, insurance, real estate, and business services

Community, social, and personal services

Construction is not considered under services as per National Accounts Classification. However, under the classification by World Trade Organization (WTO) and Reserve Bank of India (RBI), construction is also included. The share in India’s GDP with all sectors in services included would amount to 64.8% in 2012-13. With 18%, trade, hotels and restaurants are the largest contributors to GDP among the various sub sectors. This is followed by financing, insurance, real estate and business services

Vivek Hariharan and I’m an ECE graduate from Mepco Schlenk Engineering college. He is pursuing MBA Banking at NMIMS Mumbai. Email IDvivek.hariharan.1989@gm

Bharat Goswami is an IT graduate from Bharati Vidyapeeth’s College Of Engg. He is pursuing MBA Capital Markets at NMIMS Mumbai. Email IDbharatgoswami418@gmail. com

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with 16.6% share.

1. Rupee Volatility

Community, social, and personal services with 14% share stand in the third place. This is followed by construction at fourth place with 8.2% share.

Rupee with respect to dollar has depreciated by around 17 percent in the last quarter as shown above

Services sector is the lifeline for the social economic growth of a country. Today it is the largest and fastest growing sector. It contributes maximum to the

global output and also employs more people than any other sector. Most developed countries have the largest proportion of their GDP contributed by the services sector. The manufacturing is outsourced to developing countries wherein the labour cost is cheapest. Another reason for the growth of the services sector is due to an increase in urbanization, privatization and more demand for intermediate and final consumer services. Availability of quality services is vital for the well being of the economy. In order to understand how well the industry is performing, we take a peek into the current scenario and also the future possibilities that it holds. Current Scenario

With depreciation of the rupee, imports are most affected. It has affected sectors in the following ways: 

Petrol and diesel prices are increasing mostly due to weakening of the rupee which is directly

affecting the Transportation Sector. Transportation getting affected leads to Inflation. 

High debt industries such as Telecom and Infrastructure, which include companies like Reliance Communications, Idea Cellular, Bharti Airtel, GMR Infra, Jaiprakash Associates have heavy foreign debt are finding it very difficult to pay off their debt which has expanded due to rupee depreciation.

Aviation industry has also been hit badly since they pay most of their expenses in dollars. With rupee depreciating, it has cast deeper holes in their debt ridden pockets.

India’s services sector amounts to nearly 64.8% of the national GDP. As it can be seen below, the HSBC India Services PMI (Purchasing Managers Index) graph, which shows the health of the services sector, the services sector shrank for the first time in last 2 years in July 2013 where it reached a value of 47.9. A value less than 50 shows contraction in the sector. Some of the main drivers for this decline were transport, storage and the renting sector. There were some sectors like Telecom, financial intermediaries which showed some growth but overall there was a contraction in the services sector. There are several factors which can be attributed to this decline. The major factors are listed below.

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IT and BPO sectors are some of the few sectors which have gained, in short term, from the decline in the rupee.

Liberalization of FDI limits 

FDI limit in Telecom sector has been increased from 74 percent to 100 percent.

Tourism industry has also gained from this volatility since India has comparatively become a cheaper holiday destination.

FDI limit in Insurance sector from 26 percent to 49 percent.

It has been proposed to allow 49 percent in Multi -brand retail.

Various norms have been liberalised for easier flow of FDI in various other sectors such as aviation, courier services, pension, etc. as it will help the economy in the following ways.

There may have been some sectors which have gained from this depreciation in the short run but volatility in the rupee is not good for the whole sector or Indian economy in the long run since it induces uncertainty in the business and stable currency is the most important factor for any business to prosper in a country. 2. Difficulty in raising debts With rupee depreciating and rising inflation, Government is trying to control them by using various Capital control methods which include methods like raising short term lending rates i.e. MSF (Marginal Standing Facility) which in turn has created a liquidity crunch in the economy and companies are finding it more difficult to raise debt. New companies are finding it very difficult to arrange funds for expansion. With rupee falling, even FIIs and FDIs are not investing in bonds and debentures. Thus it has become difficult for companies to arrange funds for their future projects. This has contributed to a contraction in this sector. 3. High Inflation With increase in all the direct and indirect costs, profit margins have decreased. The businesses have become less profitable. Due to all these reasons combined with rupee volatility, FDI flow into these sectors has reduced when in comparison with the previous years. In summation, with depreciating rupee, high inflation and higher interest rates it has become difficult to raise debts. With depleting economy, FDI inflows have reduced which again adds to the liquidity crunch for the whole economy. In the light of this economic mess, the Government has taken several steps to improve the current scenario. They are listed below.

Clearance of stalled projects CCI (Cabinet Committee on Investment) has cleared 171 projects worth Rs. 1.69 lakh crore in August. They include various Infrastructure, power sector projects, etc. These projects were stuck for years awaiting clearances from various government departments. This will boost investor’s confidence. But there are still many projects still in the pipeline since they await clearances. This requires more attention from the government. These projects will provide some impetus to the recovery of this sector as well as the whole economy. Besides these, several new reforms can be implemented. Some of the reforms that have to be given attention to are listed below. New reforms that can be taken to improve the services sector 

There is no central ministry for certain services sector industries like retail. On the other hand, there are certain other industries that have multiple regulatory bodies which complicates matters. Many proposals await clearance being shuffled back and forth between these different regulatory bodies. If a central ministry for services sector is introduced, it will help enable faster clearance of projects.

A directory should be constructed comprising of the entire available services sector and its sub sectors. Only if there is a proper classification can we give required attention to the sub sectors thus bringing up the services sector as a whole. It will make the scenario clear for foreign investors as well.

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The passing of the Public Procurement Bill 2011 will help improve transparency and streamline processes. This in turn will pull in investors, domestic as well as foreign.

The looming threat

over 50% of their workforce on such visas. USA alone contributes to 60% of India’s IT sector revenue. Any increase in fee will affect the industry as a whole. This will even force IT companies to cut down on the employees working in onsite locations and hire local workforce destabilizing the entire structure of IT companies. Besides this, there are several other proposals that might force companies to cut down on Indian workforce in USA. This could be detrimental to the services sector. Future Scope – The Phoenix Reborn Once the rupee stabilizes, there will be a larger inflow of funds from foreign as well as domestic investors. An increase in the FDI limit in the various sub sectors will provide impetus to the expansion of the services sector. As of now the world is going through an economic downturn. As the situation improves, demand for services will pick up.

The pending US immigration act, if passed could deal a severe blow to the IT wing of the services sector. Most of the large companies in the IT sector such as TCS and Cognizant have 80% of their revenues from USA. The act proposes a further increase of $5000 on its visa processing charges. Moreover it proposes an additional charge of $10,000 on companies which have over half of their employees on H1B or L1 visas. This will eat up a heavy chunk of the profit margins of companies since they have well

One might say that, at the moment the industry is going through a recession. But then again we must never forget that it, like a phoenix, is immortal and ever shining. At the moment it may look as if the phoenix has burnt out its flames. Those who have risen the largest will always be the ones who fall the sharpest. However as the world becomes more developed, the need for the phoenix shall arise again. It will be summoned again from its ashes and new phoenix will be born, stronger, brighter and more beautiful than ever before for the services sector is an evergreen industry, one the likes of which the world can never live without.

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Critics’ review and rating

Inside Job (2010)

'Inside Job' provides a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused millions of people to lose their jobs and homes in the worst recession since the Great Depression, and nearly resulted in a global financial collapse. Watch it for : A thorough exhaustive research of the 2008 crises and extensive interviews with key financial insiders, politicians, journalists, and academicians

Enron: The Smartest Guys in the Room (2005)

Enron dives from the seventh largest US company to bankruptcy in less than a year. In this tale told chronologically, the emphasis is on human drama, from suicide to 20,000 people getting sacked. Along the way, we watch Enron trick California's deregulated electricity market, get a free pass from Arthur Andersen (which okays the dubious mark-tomarket accounting), use greed to manipulate banks and brokerages, and hear from both Presidents Bush what great guys they are. Watch it for: A thorough understanding on the downfall of Enron

Wall Street owns Washington. You might think you know this, but "Inside Job" makes you feel the enormity of it.


Enron... is a film of tragic proportions; it sheds light on the venal humanity that led to more than a giant corporate fall - a human tragedy.


Catch me if you can (2002)

High schooler Frank Abagnale Jr. idolizes his father, who's in trouble with the IRS. When his parents separate, Frank runs away to Manhattan with $25 in his checking account, vowing to regain dad's losses and get his parents back together. Along the way, he's posed as a Pan Am pilot, a pediatrician, and an attorney cashing more than $2.5 million in fraudulent checks in 26 countries. And, from nearly the beginning of this life of crime, he's been pursued by a dour FBI agent, Carl Hanratty. What starts as cat and mouse chase becomes something akin to father and son relationship. Watch it for: Steven Spielberg, Tom Hanks, Di Caprio.. Need we say more?

To those who have said in the past that Spielberg, my hero, has lost it as a filmmaker, here's mud in your eye.


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F I n n y w o o d (2001) is a documentary film that chronicles the dot-com start-up phenomenon and its eventual end. The film follows ecommerce website govWorks and its founders Kaleil Isaza Tuzman and Tom Herman from 1999-2000 and its eventual collapse Watch it for: The inside view of bursting of internet bubble

Distilled from over 400 hours of filmed material, offers continued evidence of the essential nature of the documentary format.


The Corporation (2003)

In the mid-1800s, corporations began to be recognized as individuals by U.S. courts, granting them unprecedented rights. The Corporation, a documentary by filmmakers Mark Achbar and Jennifer Abbott and author Joel Bakan, delves into that legal standard, essentially asking: if corporations were people, what kind of people would they be? Watch it for: its coolheaded, incisive, a thorough and informative study of corporations, their origins and their place in the modern world.

It's the Lord of the Rings of modern documentaries: epic, vivid, wise, well-paced, expansive, the kind of movie that makes you want to do more with your life.


Margin Call (2011)

A respected financial company is downsizing and one of the victims is the risk management division head, who was working on a major analysis just when he was let go. His protĂŠgĂŠ completes the analysis late into the night and then frantically calls his colleagues in about the company's financial disaster he has discovered. What follows is a long night of panicked double-checking and double dealing as the senior management prepare to do whatever it takes to mitigate the debacle to come, even as the handful of conscientious comrades find themselves dragged along into the unethical abyss. Watch it for: its quick pace and all-star cast.

Margin Call is one of the strongest American films of the year and easily one of the best Wall Street movie ever made.


Trading Places (1983)

The fabulously wealthy but morally bankrupt Duke brothers make a bet over heredity vs. environment. Curious as to what might happen if different lifestyles were reversed, they arrange for impoverished street hustler Billy Ray Valentine (Murphy) to be trained for a career in commodities brokerage. Simultaneously, they set about to reduce aristocratic Louis Winthorpe III (Aykroyd) to poverty and disgrace, hiring. When Billy Ray finds out that the brothers intend to dump him back on the streets once their experiment is complete, he seeks out Winthorpe to have their revenge. Watch it for: it is one of the very few brilliant comedy movies from business/trading genre of the most impressive comedies to emerge out of the 1980s.



Too Big To Fail (2011)

A close look behind the scenes, between late March and midOctober, 2008: we follow Richard Fuld's benighted attempt to save Lehman Brothers; conversations among Hank Paulson (the Secretary of the Treasury), Ben Bernanke (chair of the Federal Reserve), and Tim Geithner (president of the New York Fed) as they seek a private solution for Lehman's; and, back-channel negotiations among Paulson, Warren Buffet, investment bankers, a British regulator, and members of Congress as almost all work to save the U.S. economy. By the end, with the no-strings bailout arranged, modest confidence restored on Wall Street, and a meltdown averted, Paulson wonders if banks will lend.

HBO's Too Big to Fail is mesmerizing and, if you can call watching an economics lesson from hell entertaining, then yes, it's entertaining.


Watch it for: Its simplistic portrayal of 2008 financial crisis

Wall Street (1987)

Bud Fox is a Wall Street stockbroker in early 1980's New York. Working for his firm during the day, he spends his spare time working for the extremely successful ,but ruthless and greedy, broker Gordon Gekko. Fox finally meets with Gekko, who takes the youth under his wing and explains his philosophy that "Greed is Good". Taking the advice and working closely with Gekko, Fox soon finds himself swept into a world of "yuppies", shady business deals, the "good life", fast money, and fast women; something which is at odds with the way Fox was brought up.

Wall Street gives us a whirlwind tour of instant Manhattan wealth - one that catches our interest, but doesn't satisfy our need to understand what makes these people tick.


Watch it for : a sneak peek into the high (and sometimes overhyped) life of an investment banker

Boiler Room (2000)

In this drama that explores greed and corruption in American business, Seth Davis, a college dropout runs a casino in his apartment. Eager to show his father that he can succeed, Seth lands a job with a small stock brokerage firm. He is given a space in the company's "boiler room," where he makes cold calls to prospective clients. As it turns out, Seth has a genuine talent for cold calling, which gains him the approval of his superiors, the admiration of his father. However, the higher up the ladder Seth rises, he sinks into a quagmire of dirty dealings, until he's breaking the law in order to keep his bosses happy and his paychecks coming. Watch it for: a master performance by Vin-diesel sans the cars.

Boiler Room's greatest strength is its energy level. Every scene clips along at the pace and energy level of the world in which it's set.


Source: , ,

Compiled by: Ajit Nayak.K.V , MBA I Year, NMIMS, Mumbai 35


“Interest Rate Risk” is one of the latest bulletins by “The Securities and Exchange Commission”. This warning is a cry for understanding.

Why does this happen?

To explain, let’s assume that you invested 10,000 in a 6% bond in 2012. If current It’s about interest bonds, and for rates were most people to rise, the subject is giving confounding. newly isThe problem sued bonds is not a new a yield of investment 10%, then fraud or scam the bond but a lack of yielding knowledge Higher market interest rates - lower fixed-rate bond prices will about how Lower market interest rates - higher fixed-rate bond prices 6% become bonds work, less attractive to investors. To atwhich can be dangerous in a time tract demand, the price of the 6% of rising interest rates. bond would have to decrease enough to match the same return The bond dynamics are fairly obyielded by prevailing interest rates. scure to the common man. The inHence, if interest rates rise after verse relationship between bond you purchase a bond, generally price and interest rates is a fact of speaking, the value or the market life in bond market. This is like a price of the bond will fall. Of seesaw, with interest rates sitting course, the reverse is also true. on one plank and the price on the other. When one rises, other has to Link between Market price of fall. Bonds and Yield The Effect of Market Interest Rates Yield measures the effective return on Bond Prices and Yield you get on a bond. It is simply calculated using the formula: yield = A fundamental principle of bond coupon rate / price. When a bond investing is that market interest is bought at par, the coupon rate or rates and bond prices generally the interest rate received on the move in opposite directions. When bond is equal to the yield of the market interest rates rise, prices of bond. But if the price goes down, fixed-rate bonds fall. This phenomyield goes up and vice versa. enon is known as interest rate risk.

Mitali Goyal is a 1st year student of NMIMS, Mumbai (MBA Capital Markets ). She has graduated in B.Com(H) from Shri Ram College of Commerce, Delhi . Email ID:


Technically, bond prices and yields are inversely related. Bond- Bubble Bonds have always been a bastion of safety. In contrast to stocks and other investment avenues like gold and housing prices which have some measure of euphoria or ‘ animal spirits’ attached to them. However, now the music has stopped and interest rates are reversing course. Following the liquidity tightening by RBI in its recent measures and fresh bond supply by government through weekly auctions, the bond prices have crashed. The yields on government bonds rose to a five-year high of 9.26% (at the time of writing). Currency and equities are falling, but a far greater damage has happened to the bonds market. Those who chose the safety of fixed income investments such as bonds after the 2008 crisis are nearly wiped out of their investments in bonds. U.S. Fed’s monetary easing programme was working as supporting wheels to the economy. With huge supply of money and interest rate levels at an all time low, bond prices were booming. Foreign Investors were able to borrow at cheap interest rates and were investing in emerging economies like India and Indonesia, helping India with Capital Inflows. Now that the U.S. growth outlook has improved, expectations are that the US Federal Reserve may begin tapering its $85 billion-a-month bond purchases. This will also lead to rise in interest rates which were kept low all this time by infusing money supply. When market rates rise, investors run into a pricing problem if they need to sell the bond. There are only two options left with investors in such cases. First is to wait till maturity to get the redemption at par val-

ue, and continue the investment with fewer returns even though the actual market interest rates have risen. Second is to exit the investment at the maximum price available in the market. In both the cases, investor has to suffer a loss. Other Effects Companies may face bigger interest rates outgo on their loans. Increase in interest rates could push up the cost of Indian companies planning to borrow abroad and portfolio investors who take loans in the West to invest in emerging markets such as India to benefit from higher returns. Banks are already struggling with liquidity due to the tightening of shortterm money market rates by RBI to stabilise rupee. Defaults are rising on loans. The combined gross non-performing assets and restructured loans for the banking industry is around 10% of the total loan outstanding. PSU banks are struggling with asset quality. When interest rate rises, Investments fall and this may affect the growth of the country. Positive Side: Good entry point for investing in bond markets The central bank’s primary aim is to stabilise a falling rupee, and the tightening measures are likely to continue for some more time. This means interest rates in the near term may remain high. An all time high yield on bonds is giving investors a good entry point. Short term funds may prove to be a safe bet because it does not carry high interest rate risks. For high risk takers, there is an opportunity to earn extra returns by investing a small portion in long-term income funds. As volatility in the forex markets settles down, the RBI would focus on growth and decrease the interest rates. If this happens, there is a possibility of increase in bond prices and profit in terms of capital appreciation.


F I N L E G E N D s

A legend in the making – Raghuram Rajan BY JEENOY PANDYA, NMIMS-MUMBAI Jeenoy Pandya is a B.E. (Mechanical) from MS University, Baroda & he’s presently pursuing MBA from NMIMS, Mumbai. Email ID—

The story dates back to 2005, the occasion was the annual conference of the Federal Bank which was supposed to be a eulogy for the outgoing president Alan Greenspan. But one man had the guts to sail against the winds, & predict that the days of easy cash availability were soon to become history & the realty prices were severely overpriced. In spite of the early flak he drew, his premonition turned out to be true & he was one of the first few to predict the sub -prime crisis in America. The man we are talking about is none other than the newly appointed Governor of RBI (23rd), Raghuram Rajan who

is to succeed the present Governor D. Subbarao due to retire on September 18.

It is rarely in India, that merit triumphs over influence & this surely is one of those moments where a reform -minded outsider has been appointed for a job traditionally held by veteran bureaucrats or heads of India's staterun financial institutions. Currently the chief economic adviser to the government of India, this highly celebrated man, is an alumnus of IIT Delhi (B Tech. – Electrical Engg.),

As a tribute to the great people in the field of finance and to inspire young minds on the same path by illuminating them with the light from the lives of these great men, we introduce "F I N L E G E N D S" from this issue onwards. We start with a person who has already left his footprints on the sands of time - Mr. Alan Greenspan & one who is in the process of doing it - Mr. Raghuram Rajan.


a gold medallist at IIM – A & did his PhD from MIT. In 2003, he became the youngest person to be appointed as IMF's chief economist and the first nonWesterner in that position. In 2003, he also won the first Fischer Black Prize, which is awarded to the most promising economist under the age of 40, by the American Finance Association. He is also a Professor of Finance at the Chicago University’s Booth School of Business & featured on Foreign Policy magazine’s Top 100 Global Thinkers list in 2010 and 2012. That he is a maverick is evident from his following lines in an interview, “When we have capital either coming in or flowing out, sometimes it is very costly standing in the way. We would rather wait till our actions have the most impact. It would wait till the moment of maximum advantage and then use all the firepower that it has to pushback.” Clearly, Mr. Rajan is clearly not a jhollawallah & has a reputation for pro-growth policies. Mr. Rajan has shown great fiscal prudence reflected in the following views expressed by him: 

Savings have been diverted into real estate and gold in the hope of earning returns higher than the prevailing inflation. And financial savings will only go up if inflation comes down, pushing up the real returns on bank fixed deposits

The focus of the RBI on controlling ‘inflation’, which continues to be close to double digits, is likely to continue under Mr. Rajan as well. Lower inflation leading to higher savings will also help in bringing down the high current account

Lower government spending, together with tight monetary policy, will contribute to greater price stability

Welfare schemes such as NREGS are just a short term fix & stand in the way of inclusive & long term growth which can be achieved only by opening up the rural areas, connecting them, education & capacity building

The daunting, formidable challenges facing Mr. Rajan as he enters his office are: 

The exigent challenge facing him is to stabilize the rupee without sacrificing growth

He needs to roll back the liquidity tightening measures that RBI has taken over the past few weeks to drain liquidity in the system and increase the cost of money

After the roll back, there must be a plan to resume monetary easing, depending on the macroeconomic scenario

Even though both wholesale price inflation and the so-called core inflation are low, retail inflation continues to be very high. Mr. Rajan needs to take care of the same

Finally, Mr. Rajan needs to rebuild the market’s confidence in the banking regulator

The man definitely has the credentials & the experience to justify his choice as the saviour in the present ominous scenario. He will in all probability deliver results too. Another factor working in Rajan’s favour is that this is clearly not his last job. He is still just 50-years-old. Given this, it is unlikely that he will make any compromises to please the politicians who have appointed him and is likely to make decisions that are best suited for the Indian economy, rather than those that help him win brownie points with politicians. One venerated man to truly look out for, who shall shoulder the responsibility of the great Indian dream & hopefully play a significant role in the great Indian revival. Ladies & gentlemen, I give to you Raghuram Rajan – A legend in the making.


F I N L E G E N D s

The Legacy of Alan Greenspan BY KUMAR MAYANK, NMIMS-MUMBAI Kumar Mayank is a first year MBA student at NMIMS Mumbai. He completed his engineering from VNIT, Nagpur. His interest are travelling and online gaming Email

The Sunday Times named him one of the three most powerful persons in the world. Awarded with “The Presidential medal of Freedom” by United States, “Legion of Honor” by French government in 2000 and named as “Honorary Knight” in 2002 by United Kingdom, his name needs no further salutation. Considered as one of the greatest bankers of all time we are talking about the longest serving chairman of Federal Reserve of United States Mr. Alan Greenspan An economic enthusiast, Greenspan completed his bachelor and master degree in economics from New York University summa cum laude. In the initial years of his glittering career,

Greenspan worked as an economic analyst in an industry oriented think tank, he was the chairman and president of Townsend-Greenspan & Co, economic consulting firm for 33 years. He even served under Richard Nixon in 1968 as coordinator of domestic policies in the nomination campaign. Mr. Greenspan took the helm of affairs in Federal Reserve in the year 1987 when President Ronald Regan appointed him as the chairman of Board of Governors. Within months of being appointed, Greenspan had to grapple with the stock market crash


which was one of the biggest in US history. This was his litmus test which was to determine his future and capabilities to handle difficult situations and in the end Greenspan came out with flying colors. Mr. Greenspan is credited as one of the main forces which helped in growth of US economy during the 90’s. He was able to successfully navigate the US economy through booms and busts in the past decade. Some of the main highlights during his tenure as Federal chairman are 

Fight against inflation was his top priority. He considered that high inflationary rates would have extremely negative effect on economy over long period of time and hence he took key steps to arrest inflation. He is sometimes referred to as “inflation-fighter”.

Maintaining low levels of unemployment has been one of the key features during his overall tenure.

Supported the deficit reduction program of US government in mid 90’s to overcome the mounting fiscal deficit.

Undertook decisive steps to cut down interest rates in early 2001, which helped US economy to withstand the series of blows including decline in stock market, collapse of Enron and last but not the least terrorist attack in September 2001.

Although Greenspan has been credited to have taken US economy to great levels, he is criticized for his low interest rate strategy which is considered as one of the prominent reasons for Housing Bubble, which he himself considered as a failure on his part to assume that financial organizations could regulate themselves.

Alan Greenspan tenure as chairman of Federal Reserve has been one of the most prolific periods for Federal Reserve during which it tackled many economic problems and successfully overcame them. Alan Greenspan has left behind a great legacy which is well evident from his statement below“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”


And we Believe, U.S. Economy Will Not Crash!! BY PRAKARSH JAIN , S P JAIN SCHOOL OF GLOBAL MANAGEMENT-DUBAI The thought that U.S. economy can keep going along the way it is, is crazy. Country is in the terminal phase of an unprecedented debt spiral, which has allowed it to live

So how did America get there? Well, no doubt FED has been the biggest offender. Nevertheless, it would be an understatement to say that the politicians in Washington too have been reckless. Since the dot com bubble, the size of the US national debt has grown by more than 10 trillion dollars.

Prakarsh Jain, is a graduate from Jai Hind College and a Chartered Accountant. He is currently studying Master of Global Business Email

The chart below demonstrates the dramatic growth of the national debt as a percentage of GDP.

far beyond its means since last several decades. Regrettably, debt spirals are known to eventually end, and usually they do so in a disorderly manner. The chart above compares the growth of US GDP to the growth of total debt and no doubt US GDP has grown at a decent pace, but the total debt has exploded in that regards. Decades ago, the total amount of debt (government debt + corporate debt + consumer debt, etc.) was about 2 trillion dollars and today the number has rocketed to more than 55 trillion dollars. This depicts that debt has grown at a much faster rate than the economy and there is no way that the same will sustain for long.

Does this look sustainable? Currently the mainstream media is very excited that the fed budget deficit might be less than a trillion dollars, but they are ignoring or really missing the point. Debt of the US government is still growing much faster than the economy is, and US already has more debt per capita than Spain, Greece, Italy, Portugal, France or Ireland. 42

What United States is doing to future generations is criminal. It is piling up debt that will haunt the future generations for the rest of their lives and this is just to live a pleasant present. In Obama's first term, the federal government accumulated more debt, than it did under the first 42 President in 53 terms combine, which is from $10,626,877,048,913.08 to $16,432,631,489,854.70. US is now entering a time period when demographic forces are ready to put pressure on the finances of the FED. Baby-Boomers have started to retire, and sooner than later, they are going to start collecting all financial promises that have been made to them. The number of Americans on Medicare is envisioned to grow from around 50 million today to 75 million in 2025 and those collecting Social Security from about 55 million today to 90 million in 2035.

The shocker, chart above does not take into account the massive unfunded pension obligation that state and local governments have. The figures are mind boggling, state governments are facing unfunded pension obligations of nearly a trillion and a half dollars. Detroit was the first to go; could Chicago and Los Angeles eventually be forced to declare bankruptcy? Chicago was recently downgraded due to $19 billion unfunded pension liability and Los Angeles is estimated to be facing a liability of more than $30 billion. So where is all this money planned to come from? Good question and nobody has an answer at this point. Meanwhile, consumers have been racking up staggering amount of debt over the past several years. Let us consider some numbers: 

Total home mortgage debt is about 5 times larger than it was two decades ago.

Car loans are approximately 70 percent of all car purchases.

The amount of student loan in America surpassed one trillion dollar mark.

Approximately 40 percent of working age Americans, either have medical bill problems or are paying off medical debt.

Consumer debt has risen by a whopping 1700 percent since 1971, and 50 percent of Americans carry a credit card balance from month to month.

Where is US planning to get the money from? Economist Laurence Kotlikoff calculated that US government is facing unfunded liabilities of approximately 200 trillion dollars in the years ahead. There simply seems no way that US government can or will be able to meet this obligations without printing money. Of course, the federal government is not the only one with this problem. We just saw a trailer of Detroit going Bankrupt. Let’s look at the chart which shows growth of state and local government debt over the years. Take a special note, that total amount of state and local government debt has grown up from approximately 1.2 trillion dollars in 2000 to 3 trillion dollars in 2013.


People don't realize the damages of credit card debt. If an individual carries an "average balance" of credit card each month, and those credit cards have an average interest rate, the amount could end up to be millions of dollars by the end of an individual’s life.

Do we start to understand why approximately 50 percent of American’s die broke? The nation is completely addicted to debt. If citizens, yet do not believe that it will ever catch up, they are being delusional. The biggest mountain of debt in the history of the planet has been built, and a day of reckoning is fast approaching.

Implausibly, larger chunk of the population does not seem to understand this thing. Approximately, 50 percent of all families in America spend more than they earn each year.


F I n

The Scam that shook West Bengal– Saradha BY AJIT NAYAK KV , NMIMS-MUMBAI As the word ‘Bonzi’ started making rounds in the Dakshin Barasat district of West Bengal, it ruined the households of some and gave nightmares to others. For the readers wondering what ‘Bonzi’ is all about, it’s a wordplay of ‘Ponzi’ and ‘Bengal’, a reference to the Saradha Group Scam which broke out this year.

these fly-by-night operators? These are some of the critical questions that this article intends to answer. Origins of Ponzi scheme

Charles Ponzi, an Italian born American was a shrewd con man who promised clients a return on investment of 100 % in just 90 days, he did this by exploiting an Saradha Group, a consortium of arbitrage opportunity. Charles bought postal reply multiple companies ran a coupons at cheap range of Collective Inrates from Italy vestment Schemes (CIS), and redeemed most of which offered them at their more hard-to-believe interest expensive face valrates. Sudipto Sen, the ue in United mastermind behind the States. These couSaradha Group enjoyed a pons were later brief period of riches and success with his The man behind Saradha - sold to generate profits. This partners-in-crime Kunal Sudipto Sen whole mechanism Ghosh and Srinjoy Bose, seemed complex in structure for both Members of Parliament from Trinamool Congress. But the hon- the clients to comprehend but eymoon period came to an end in nonetheless it looked profitable, as April 2013 when the group col- a result many clients fell to his trap lapsed causing estimated losses of and lost their money. Thus, origiaround ₹ 30000 crores to its inves- nated the word Ponzi scheme. tors and bringing a whole state to A Ponzi scheme is a fraudulent its knees. investment scheme where investors What is Ponzi scheme? How does are promised incredible returns it work? How did Saradha Group which is often greater than the marmanage to dupe people of such ket returns. The returns paid to the large quantum of money? Why is investors are from their own money our populace so easily fooled by or money siphoned off from other


Ajit Nayak K V is a first year MBA student at NMIMS, Mumbai. He holds a B.E graduate from MSRIT, Bangalore and has a worked for 30 months in Infosys and an NGO. His interests include Football, Teaching and listening to heavy metal. Email in

Right from the genesis of the financial offerings to the humankind, we have witnessed ways finance can serve a man’s need as well as greed. So, to bring forth the most infamous events in the financial world, we are starting a refreshingly new section “F i n - S c a m s” from this issue onwards.


investors, and not from the profit generated by the company. Not a Chit Fund As is widely reported in the media, Saradha scam is not a Chit Fund scam. On the contrary, registered Chit Funds are perfectly legal under the Chit Funds Act of 1982. Chit Fund is an investment scheme where a group of investors pool in their money every month with a single investor getting lump sum cash, for example, let us assume 10 investors decide to pool in ₹ 6000 each, every month for a year, hence ₹ 60,000 is collected for each month. At the end of each month, a discount bid is invited from all the investors. After taking in all the bids, the investor with the maximum bid gets the total money after deducting the discount bid i.e. if investor A raises the maximum discount bid of ₹ 15,000 then he walks away with ₹ 45,000 (60,000 -15,000), thus A received a return of ₹ 45,000 by investing only ₹ 6,000. It goes without saying that investor A has to contribute ₹ 6000 for each of the remaining 11 months. Thus, any investor in dire need of cash would try to raise the maximum bid. Chit fund serves a boon for investors with liquidity crunch, as one gets a large sum of money in times of need. But in comparison, Ponzi scheme is day-light robbery, the next section shows how. Working of a Ponzi scheme Ponzi schemes like Saradha work by shifting the investors’ money from one source to another. Suppose an investor A invests money in the scheme and is assured of high returns. Similarly investor B ploughs

in his money after few days which is later followed by C. These investments schemes have a tenure of payment, at the end of which a high rate of interest or assets like land, jewelry etc. is promised. At the end of A’s tenure of investment, B’s money will be used as returns to A and similarly C’s money for B. Hence there is cyclic flow of cash among the investors generating a false hope of profit when in reality there is none. This cycle continues until the scheme operator runs out of money or runs away with the money. Building the Saradha Brand Named after Saradha Devi, a highly respected cultural icon in West Bengal and wife of Ramakrishna Paramahamsa, the group built a façade of respectability around it. Every Ponzi network though varied in their size and mode of operation, have some common qualities within them. One of them is to offer high rates of return which is higher than in other modes of investment. Saradha Group had schemes which catered to all kinds of investors with tenures varying from 12 to 60 months with minimum investment of ₹ 100 every month. Some of the investors put in close to 1 lakh for a tenure of 120 months. Upon completion of the tenure, the investors were offered either an allocation of the land/plot or a return of the amount along with interest, which ranged from 12% to 24%. Such high rate of returns is what drew common people in hordes to Saradha. But investors would return to Saradha only if they felt their money was safe. Saradha, being an upstart company employed agents of Peerless General Finance and Investment Co. Ltd.


Peerless, established in 1932 was a seasoned and reputed player in collection of small savings. Saradha tactfully made use of the brand name of Peerless to strengthen its customer base. Saradha also clouded the judgment of its investors by drawing in patronage of film actors and Trinamool Congress leaders. Rajya Sabha member from Trinamool Kunal Ghosh was made the media head of Saradha Group. Under Kunal Ghosh, Saradha Group went on a buying spree of newspapers - Sakalbela and Bengal post; and television channels – Channel 10 and Tara.Cine actor Mithun Chakraborty, a matinee idol in West Bengal, was hired as the ambassador for Channel 10. People believed that the company which had the backing of such big luminaries can never go bust. Saradha Group did not clearly reveal the functioning of their business. A cursory look at their website would reveal Saradha Group running over 100 registered companies dealing with multiple lines of business from media to real estate, from tours and travels to bio gas; thus showing multiple sectors of operation to a naïve investor. This gimmick was used to draw additional money from the investors who gracefully obliged. The company also brought a highly indebted motor company called Global Motors as a display of their wealth. The company was shut down in a few days of buying, but Saradha continued to keep 150 employees on the rolls just to assure any agents or investors visiting that everything is hunky dory. All these carefully planned ploys created a huge illusion which helped Saradha grow in business. Bursting of the Bubble The group came into spotlight when opposition MP’s from West Bengal started raising the issue in the house. Although SEBI requested the West Bengal government to look into the companies which engage in financial malpractices, no action was taken by the government. By this time, the group had started defaulting on its payments. The final nail in coffin was put when on 6 April, 2013, the kingpin Sudipto Sen wrote an 18- page report to CBI where

he revealed the modus operandi of the racket and also spilled the beans on various payments amounting to crores of rupees made to Kunal Ghosh and Srinjoy Bose, Members of Parliament, to buy ‘protection’ and allow ‘smooth functioning’ of the group. Sen alleged that Kunal Ghosh forced him into selling the television channel, Channel 10 at throwaway price. Sen went absconding after sending this shocking letter. Huge chaos ensued in West Bengal wherein investors, most of whom had lost their lifelong earnings, protested outside the CM’s residence and ransacked houses of agents demanding refund. Meanwhile, SEBI ordered Saradha Group to wind up its operations immediately and refund investors’ money within 3 months. By now, the issue had grown into a full-blown crisis with the government facing the heat. Chief Minister Mamata Banerjee went into damage-control mode and ordered a SIT probe. A stimulus package of ₹ 500 crores was also introduced by the government which generated huge controversy as an additional tax of 10% was imposed on tobacco products to raise the capital for the package. The absconding CEO, Sudipto Sen was captured in a dramatic manhunt at Kashmir on 23 April 2013 who is now languishing in jail. Gullibility – in our genes? The sprouting of innumerable Ponzi schemes holds mirror to the inefficiency of the current saving and banking system. Low financial literacy and banking penetration makes rural population an easy target for these Ponzi groups. As banks require some kind of valid proof to open bank account, rural poor find it difficult to avail their services due lack of identification. With such large returns on offering, they fall prey to these informal investment schemes. In addition to this, declining rate of returns in alternative investment instruments, lack of stringent policies and their lackadaisical implementation can be termed as some of the root causes for the present state of affairs. With the twelfth five year plan placing high importance on rural banking development and financial inclusion, scams like Saradha question their very existence.


The Future of Rupee: The Senior Citizen (>60) BY SHIVSHANKAR GURUMOORTHY & SHRIRAM PRABHU V, GREAT LAKES-CHENNAI The rupee is on a roll literally! Ever since 2008, the rupee has consistently been declining only to create a new record each time. Finally, the rupee has now become a senior citizen, hitting an all-time low of ₹64 per USD. The big question is does the rupee have a future? Will it ever be able to make a comeback? Has the rupee grown senile? Will the rupee ever go up? Well, the answer is yes. The rupee will go up only when tossed. History of the Exchange Rate Trend Would you believe it if someone was to tell you that there was a time when 1 USD was equal to ₹1? Well, irrespective of whether you believe it or not, this is a fact that cannot be challenged. This time was none other than the golden period, soon after our independence. Thanks to the effort of our political leaders to develop the nation, our currency has constantly depreciated in the global market. The value of the rupee continued to hover around 4.97 against 1USD from 1948-1966. The war with China and later on with Pakistan, forced the Indian Government to

decrease the value to ₹7.57 per USD. In 1971, the rupee’s link with the British Pound was broken and was directly linked to the USD. From 1972-1985, the Rupee was further devalued and pegged at around ₹12 against 1USD. From September 1985 to July 1991, the Rupee followed a more rapid descend, depreciating by about 40 %(in nominal terms). Between 1981 and 1991, the Rupee was actively managed downwards. Discrete downward trend occurred by 6.4 % at the end of 1981, 4.3 % at the end of 1982 and 4.5 % at the end of 1983. In 1991, the currency was devalued at ₹17.90 per USD. The year 1991 is of prime importance in the history of the Rupee and the Indian Economy alike. It was in this year that the currency was let free to flow with the market sentiments. The Indian Economy opened its doors to the outside world, leading the Indian industries to witness the downfall of the License Raj that hindered the country’s growth. The exchange rate was freed to be determined by the market. In 1993, one was required to pay ₹31.44 to get 1 USD.

Shivshankar Gurumoorthy is a B.E. graduate and has worked at Aditya Vidyut Appliances Limited.He is currently pursuing PGPM at Great Lakes Institute of Management, Chennai Email IDShivshankar.pgpm14c@gre

Shriram Prabhu V is a CMA and B.Com graduate and has worked at : Ernst & Young Pvt. Ltd. .He is currently pursuing PGPM at Great Lakes Institute of Management, Chennai Email IDShriram.pgpm14c@greatla


Looking back at history ,the 1991 globalisation reforms in India had given the Indian economy a tremendous boost in terms of growth due to increase in trade and competition. The Sensex had rallied from below 1000 levels to 20000 just in the space of 16 years. So why the need of decoupling of economies? The main problem is that countries like India via IT exports and China via exports of manufactured goods have synchronised their business cycles with developed economies to such a large extent that even if there is a slight hiccup in those economies, there is a strong wave of uncertainty in developing economies’ markets.

Shortage of FDI Inflows– Despite major reforms, the government has failed to tap FDI inflow into the country. The steel making giant Posco’s withdrawal of ₹30,000 crores steel plant project and Arcelor Mittal’s scrapping of ₹50,000 crores steel plant project has hurt the economy considerably.

FII Outflows - Overseas investors withdrawal of nearly ₹44,162 crores (USD 7.5 billion approx.) from the Indian capital markets, has further ensured the sinking of the Indian Rupee.

Growing Import Bill – Import bill arising out of gold is also a factor that has restricted the government’s effort to prevent the fall of the rupee. Gold accounts for 10% of the total import bill and the import of gold increased by almost 15% between April and May this year and then declined by 80% in June.

Overall Economic Contraction–Poor economic growth in the agricultural, manufacturing and mining sector has shattered the sentiments of investors.

Strengthening Dollar – The US Dollar index has strengthened by 1.91% this year. The gradual recovery of the US economy along with the expected withdrawal of the stimulus package by the Federal Reserve has come as a blessing to the US Dollar.

The then finance minister Dr. Manmohan Singh was instrumentalin liberalizing the Rupee regime. The move led to a gradual peak in foreign investment inflows and boosted the economic growth. The rupee traded in the range of 40-50 per USD between 1998 and 2010, mostly around ₹44 or ₹45. The Indian currency has gradually depreciated since the 2008 economic crisis, post which, the Indian Rupee has become highly volatile and susceptible to fluctuation. It touched the 49 mark in 2008, broke the 50 barrier in 2011 and completed 60 in 2013. Current State of the Rupee The rupee has depreciated almost 13% against the dollar this year, hitting an all-time low of ₹68.80 per USD. The RBI’s measures to stop the fall of the currency have gone in vain. The rapid decline of the currency is fuelled by the US Federal Reserve, trimming its monetary easing programme. As the US Federal Reserve is about to release the minutes of its July policy meeting, the fall of the Rupee is only expected. The influx of the USD is a major difficulty given the stringent regulations of the government in FDI.

Given this scenario, one cannot stop comparing this situation to the 1991 crisis. The government has however clarified that there are sufficient reserves to meet the short-term BoP. Causes for the fall of Indian Rupee 

High Current Account Deficit– High Current Account Deficit has constantly occluded the initiatives of the govt. to arrest the fall of the currency. The government’s failure to identify new destinations has led to poor growth in exports. The CAD posted a record-high of 4.8% of GDP.

Future of the Indian Rupee The government is actively taking initiatives to revive the Indian rupee. We believe the rupee could bounce back, at least marginally, if not significantly. According to the Big Mac Index, the rupee is the world’s most undervalued currency against the dollar. Hence, the rupee value at 64 per dollar today, is not a true reflection of the purchasing power of the currency. Considered at an appropriate value, the rupee will definitely not be as low as it is today. Current Account is likely to correct itself as the import cost of gold and oil has declined and weak growth has lowered import demand. Also, the inflows look positive with a number of disinvestment programs in the pipeline. On the contrary, what makes us rethink whether the above factors will in fact do any good is the 2014 elections, which is likely to have a critical impact on the economy and the future of Indian Rupee. The UPA government has been in power for almost a 49

decade and will be completing two full terms in 2014, undeterred by its allies during the term. The last couple of years have been quite sultry for the UPA government with corruption scandals affecting it one after another. But the unfortunate part is that the government has not handled these tough situations efficiently, leading to it being accused of implicit complicity. Slowing economy, depreciating Rupee leading to inflationary trends and importantly leading to it being accused of implicit complicity. Slowing economy, depreciating Rupee leading to inflationary trends and importantly, the policy paralysis that has struck the government during the last two years could have an impact in the coming elections. Hence the next elections will be a vital development for the India Rupee and the economy. Until the next general elections, the political risk could undermine the economic development and reduction of fiscal deficit up to the budget estimate. Economic reforms could trigger investment inflow into the country to reduce CAD and fiscal deficit. However, it is not certain whether the assembly elections and the Lok Sabha elections will be a deterrent to the government acting strongly to push reforms in the parliament to bring in synergy into the economy until the completion of its term. In the event that the NDA is elected to power in the election, the then government might be unable to revive the currency immediately. Recommendations The most important step to curb the downfall of Indian Rupee is to reduce the CAD. The recent downfall of the Rupee against the USD and the stock market crash was mainly due to the lack of faith of in-

vestors in government policies. Hence, we need to focus on medium-term plans to cut the CAD, by improving the condition of domestic coal production and lowering the dependency on imports of coal, as the same has increased by almost 40% over the years (Coal imports have increased from 20.93 MT (Million Tonnes) in 2000-01 to almost 102.85 MT in 2011-12) . The government needs to seriously plan to increase the coal output to cater to the domestic power needs. However the policies need to be framed keeping in mind the environmental and land acquisition issues. There is also a need to reduce the import of gold and oil so as to reduce CAD. This measure is important considering the volatility in the market. One of the best ways to cut oil imports is to reduce energy subsidies. But a further cut in subsidies will allow the opposition parties to paint the Congress-party led coalition government as the “anti-poor� villain ahead of a general election due by May 2014.Hence this option seems unlikely. Then on a long-term need, it is imperative to bring in more FDI into India, which will bring in the much-needed capital and money into the country and help in improving the Balance of Payment and subsequently reducing the CAD. It would be advisable to follow the Mayaram Committee report on FDI. When foreign players bring in large chunks of funds into India, they expect to have a greater say in the control and management of investee companies; a lower FDI cap restricts foreign investors to exercise control. An uncertain regulatory regime and judiciary only adds to their woes. Hence, easing FDI caps and other regulatory hurdles is the need of the hour. Investors are disenchanted with India, and politics is an obstacle to reforms. In the past, FDI has been an integral part of India’s growth story. Hence, if policies are implemented positively, these could prove to be a boon for the present state of the economy.



All About Companies Bill 2012


BY BHUVANESH KUMAR & MITALI GOYAL, NMIMS-MUMBAI Thankfully, the laws regulating companies in India will no longer be as archaic as some of the other important laws in this country. The companies bill 2012 which was passed in Lok Sabha in December 2012, has now also been passed in Rajya Sabha. The aim of this bill is to enhance transparency, improve disclosures and put more responsibility on companies to maintain high standards of corporate governance. It would also require companies above a certain threshold to undertake mandatory corporate social responsibility (CSR) activities. Some of the key highlights of the bill are as follows:

prises in India may face difficulty in meeting the requirements of this rigorous law and the additional compliance cost may also hurt them.

1. Internal Financial Controls:

Private companies will need to disclose inter-company loans, cross holdings and investments in other companies which will help in greater transparency. This may affect small family owned companies as they will not be able to vote on special resolutions in matters concerning the related party.

Every auditor’s report should state the adequacy and operating effectiveness of the company’s internal financial controls. There seems to be greater focus on policies and procedures, internal reporting frameworks, operational controls, and propriety of financial transactions. On first hand, it looks that the new set of rules are more stringent than what is prescribed under the Sarbanes-Oxley Act (SOX) in the US. Although, it’s a step in the right direction, however, private enter-

2. Appointment of Directors:

Bhuvanesh Kumar is a first year student of MBA at SBM, NMIMS. He holds a B.A. degree in Economics from Hansraj College, Delhi. Email ID7bhuvaneshkumar@gmail. com

Every company can have a maximum of 15 directors, first meeting is to be held within 30 days of the date of incorporation and the time gap between two board meetings should not exceed 120 days. All listed companies are required to appoint 1/3rd of the board as independent directors. 3. Related Party Transactions: Mitali Goyal is a 1st year student of NMIMS, Mumbai (MBA Capital Markets). She has graduated in B.Com(H) from Shri Ram College of Commerce, Delhi . Email ID:

4. Appointment/Reappointment of Auditors: As per the new bill, the individual auditor and audit firm needs to be changed after one term and two terms of five consecutive years respectively for a listed company.


In addition, a person can be appointed as an auditor in a maximum of 20 companies. These steps will help check the complacency that seldom creeps in between auditors and companies due to their long standing relationships. 5. Corporate Social Responsibility: Every company whose net worth exceeds Rs. 500 crores or turnover of Rs 1000 crore or more or net profit of rupees Rs. 5 crore or more during any financial year shall constitute CSR Committee under section 135, with atleast one independent director, to spend at least 2% of the average net profits of the company made during three immediately preceding financial years.

This is no doubt a noble initiative with the goal of increasing welfare of the society. CSR activities will also lead to more sustainable business practices, transform business partnerships where CSR becomes part of strategy and also increases financial inclusion. But the clause lacks clarity, it’s not known whether CSR spending will be tax deductible; it may also be difficult for companies in the current tough economic environment to part with 2% of their profits, when there is already pressure on margins and growth.

6. Financial Year Reporting: In the past the financial year couldn’t exceed 15 months, but now the financial year can only end on March 31 for all companies. Companies with different financial year reporting periods need to align it with the stated clause within a period of two years. Only exception is for companies, which are holding/subsidiary of a foreign entity requiring consolidation outside India, can have a different financial year with the approval of tribunal. Looking at the bill in its present form, there may be a case for greater clarity in some areas. The government will also need to look into the effective implementation and compliance of the bill when it becomes an act. The bill will certainly increase costs for companies in the form of additional compliance and audit costs and in some cases also reduce profits due to mandatory CSR activities. It will be interesting to see how small private companies react, whether some of their concerns are addressed and they don’t bypass the law. On the positive note, public companies that plan to delist and become 100 percent private company may not face hurdles due to minority shareholders anymore. To conclude, companies bill 2012 is a step in the right direction, the litmus test starts now when focus shifts to compliance.


Decoupling of Indian Economy BY AMAN VIJ & SAURABH JAIN, IIM-RANCHI Indian Economy is the 3rd largest economy by GDP (PPP) and is expected to overtake US as the 2nd largest economy by 2030.It is a mixed economy which is a mixture of socialist and capitalist economy wherein privately owned business and public sector business (owned by the government) plays a vital role in the running of the economy. In a mixed economy both consumers and producers have a right to consume and produce the things they want with the government taking the role of a moderator to remove harmful goods from the economy. What is Decoupling? Decoupling is the ability of a country to be self-sustaining or self-sufficient. With respect to developing economies like India it can be said that for decoupling to take place it’s financial markets and economy should have enough strength so that they don’t require support of developed countries

The Problem Looking back at history ,the 1991 globalisation reforms in India had given the Indian economy a tremendous boost in terms of growth due to increase in trade and competition. The Sensex had rallied from below 1000 levels to 20000 just in the space of 16 years. So why the need of decoupling of economies? The main problem is that countries like India via IT exports and China via exports of manufactured goods have synchronised their business cycles with developed economies to such a large extent that even if there is a slight hiccup in those economies, there is a strong wave of uncertainty in developing economies’ markets. But there was a depression in the U.S economy. The housing bubble which was being built since the 2000 suddenly blew out and the DJI came crashing down and so did Sensex (as shown below) which fell from 20000 levels to the 8000 levels.

Aman Vij is the Co-ordinator, Finance Club at Indian Institute of Management Ranchi Email

Saurabh Jain is the Co-ordinator, Finance Club at Indian Institute of Management Ranchi Email IDsaurabh.jain13@iimranchi.

like US and European countries for their growth.


The decline of America was being transmitted to India in these two ways : 

The cost of production of goods in America was high compared to developing countries so companies were closing its plants in America and increasing production in its plants in India and China. Due to this America’s disposable income decreased which led to less consumption of Indian goods and our exports declined. Due to weak U.S. economy, investors were unwilling to take risks of investing in emerging markets like that of India. Instead, they started selling shares to make up for the losses incurred in America which led to decline in the value of the rupee and crash in our stock markets.

If you look at the recent trend ,even after our government had taken a number of steps to revive our economy like reducing government spending, allowing FDI in number of sectors like aviation and communication, and deregulation of the fuel pricing, the rupee still had a fall of around 14% and reached an all-time low of 64 compared to the Dollar just because of Ben Bernanke’s (Fed’s Chairman) comment on tapering on Quantitative Easing. Thus, the need for decoupling on Indian economy.

The Solutions In order to be truly decoupled we need to focus on three things 1) Increasing domestic consumption 2) Reviving the manufacturing sector 3) Reducing our dependence on other economies for energy For tackling the 1st problem we can take the help of China model wherein, China in order to overcome the impact of fall in exports because of reduced demand from developed economies moved onto increasing the investment on infrastructure which ultimately led to higher domestic demand. We should provide better business starting environment by removing policy paralysis. Other than that our priority should also be to clear the 215 odd projects worth Rs 7 lakh crores stuck in red tape. This will lead to greater job opportunities which in turn lead to greater incomes and thus greater demand and our consumption will increase. Thus our Indian business houses which go outside because of better support will stay in India itself and thus we would reduce our dependence on FDI and FII. India’s Manufacturing Sector contributes to only 15% of GDP. The gap between India’s domestic production and needs of its 1.2 billion population is therefore met by imports. To reduce the dependence on imported goods, India needs to have a sustainable, self-sufficient manufacturing sector. To revive the manufacturing sector, Government of India needs to provide incentives for enhancing the private investment in the sector.


The incentives could be in the form of tax breaks on investment, lesser restrictions on opening of a new business and lower interest rate loans. For overcoming the 3rd problem we need to encourage oil companies to invest more on R&D and explore more sources like the underwater reserves, new basins. In spite of the fact that India has huge coal reserves, we are still importing coal. Also we have a huge gap between our oil production and consumption which is adding to our trade and current account deficit.

We should also invest more in renewable sources of energy like solar, wind and hydro. Other than that we should also focus on entering into long term contracts with oil rich countries to reduce the effect of volatile pricing of spot markets. To summarize in today’s globalised world complete decoupling is only a myth but we can always work towards reducing Indian economy’s dependence on outside world so that our economic policies are not ruined by outside turbulences


Services sector: Is the sun still shining bright? BY NAVIEN POTHERI RAAMESH & NAVJEET GORAYA, XIME-BANGALORE “As sure as the spring will follow the winter, prosperity and economic growth will follow recession.” Bo Bennett Essel Group, Lindstrom, Manulife Financial- these are the names of some of the largest service sector companies that are based in USA, Finland and Canada respectively. Out of these three companies, Essel Group and Lindstrom have already established their operations in India whereas Manulife Financial is planning to venture into the Indian service sector territories. The interest level of these three companies partially indicates that the Indian service sector has the potential to bring India’s declining growth rate back on tracks; that the sun is still shining bright. The service sector plays a major role in the Indian economy, both in terms of its contribution to the national income and employment generation. Presently the service sector accounts for around 60 percent of the Gross Domestic Product (GDP) and it is also responsible for generating about a quarter of the total employment in the country. The Advance Estimates suggest rapid expansion of the share services in India’s Gross Domestic Product (GDP) at factor cost from 33.3 percent in 1950-51 to 56.5 percent in 2012-13 (excluding construction). Among the various services sub-sectors, the contribution

of ‘trade, hotels and restaurants’ as a group is the highest at 18 percent while that of financing, insurance, real estate, and business services stands at 16.6 percent. In the first three decades post India’s independence in 1947, major stress was given on the agricultural and manufacturing sector. The services mainly existed in the form of government monopolies and the share of the service sector was small. However, in the mid-1980s the government fund allocation to the service sector caught up and a nominal growth in the service sector was witnessed. It was the era of economic liberalization that finally ushered in the much needed and rapid change in the service industry; thus making it the fastest growing sector of the Indian economy. The growth rate of the service sector increased from 6.6percent in 1980s to 7.7percent in 1990s. The growth in the service sector continued to progress during the 2000s and it rose to the level of 9.2percent.One of the remarkable things that needs to be highlighted over here is the resistance of the service sector to the external shocks during the global slowdown period of 2009-10. Even during the period of economic downturn the service sector grew at 9.96 percent compared to 8.81 percent growth in industries and 1.57 percent in agriculture.

Navien Potheri Raamesh is a student of PGDM in Management at XIME, Bangalore. He has a B.Tech in Information Technology from Anna University and a work experience of 2 years as an Associate Software Engineer in Mphasis. Email

Navjeet Goraya is a student of PGDM at XIME, Bangalore. She has a Masters in Commerce from Delhi University. Email


However, the service sector could not maintain its defensive position for long and finally crumbled to a certain extent due to the pressures being mounted on it by continued recession in the economy. In FY’12 and FY’13, there has been a deceleration in growth rate of services sector at 8.2 percent and 6.6 percent respectively. The HSBC/Markit purchasing managers index for the services industry has fallen in the current year from May's three-month high 53.6 to 51.7 in June. Also the HSBC India Composite Output Index, which maps both services and manufacturing activity, has fallen from 52.0 in May to 50.9 in June in the current year. Can we conclude from the proceedings of the last two financial years that even the service sector is treading the path of the manufacturing sector and is losing its sheen? Well, not necessarily. The moderation in the service sector activity in the current year can actually be attributed to the fact that the pace of growth in new orders placed at private sector firms has been very weak due to subdued economic conditions. We can also trace another reason for these negative happenings in the service sector. During the post 2008 crisis period the growth of the services sector did not fall due to higher government spending with a major emphasis on ‘community, social and personal’ service subsectors. This is evident with the government spending 19.8 percent of its overall spending on these subsectors in 2008-09; nearly 10 times more than what was spent in 2006-07. This spending along with the backing from the ‘financial, insurance, real estate and business services’ and ‘transport, storage and communication’ sectors contributed in a major way in stabilizing and propelling the service sector towards growth. But in 2009-10, the government spending on ‘community, social and personal’ subsector came down to 17.6 percent. This move by the government to reduce the spending had an adverse effect on the service sector. Though this effect was not immediate, it came to the stage in 2011-12. Moreover, the lower growth of trade, both internal and external, also resulted in the decline in transport and related activities. This led to the further deceleration of the service industry. The service sector was ably backed by the ‘finance, insurance, real estate and business services’, ‘trade, hotels and restaurants’ subsectors. These subsectors contributed to 34 percent and 16.9 percent of the GDP during 2011-12. But during 2012-13, theses subsectors also wit-

nessed decelerated growth. This decelerated growth also led to the slowdown of the service sector. The potential of the service sector can be understood clearly by the government’s decision to open up the Indian market to foreign direct investments. The Government of India is completely aware of the fact that our country’s growth is basically a services-led growth and hence it is taking steps to reinforce the earlier position of the service sector. The foreign investment limit for teleports, cable and DTH has been increased from 49 percent to 74 percent. Foreign companies are now permitted investments up to 74 percent in mobile TV. Also, the investment limit for the air transport services by foreign institutions has been increased to 49 percent. Last but not the least, the government has allowed foreign direct investments up to 51 percent in multi brand retail trading. According to the department of Industrial Policy and Promotions, the service sector in India was boosted by US$ 4.75 billion in AprilFebruary 2012-13. These funds came in through foreign investments. This demonstrates that the service sector still has potential for growth and development. While relaxation of the FDI limits is one of the major policies that has been adopted, the Government can also look into other options to bring back the growth rate of service sector to the previous level can also look into other options to bring back the growth rate of service sector to the previous level. The government should invest in new subsectors like tourism which will provide sustained and enhanced growth. Investments in the tourism sector will not only propel its growth but it will also assist the other sectors which are dependent on the tourism sector like the hotel industry, travel industry, etc.

In short, investment in tourism will lead to growth which will be inclusive in nature. According to the World Travel and Tourism Council, tourism in India contributes to 6.4 percent of the GDP. The GDP of the tourism sector has expanded 229 percent between 1990 and 2011. Not only this, tourism is also expected to grow annually at a rate of 7.7 percent in the next decade. The government can also focus on new concepts like medical tourism which is gaining popularity with every passing day. The medical tourism sector is expected to grow at rate of 30 percent to reach about 9500 crores by 2015.


Hence, there exists a huge opportunity for growth in the service sector as a whole through tourism. With India ,facing stiff competition from China and Philippines, the major challenge for the Indian government is to endure and uphold growth in the already established service segments. With the service segment contributing to 55.2 percent of the GDP, it is very essential for the government to maintain and accelerate this growth. Though India is positioned well in the service market, it cannot hold on to this advantage for long with new competitors coming to play. The Indian government should focus on developing a knowledge economy. This would help the service sector to understand the needs of the market and wants of the customers. The best example of this would be the information technology service sector. Though India had a huge initial advantage, India now is facing heavy competition from other players. The main reason behind this being the lack of innovation associated with it. On the other hand, innovation played a major role in the development of the banking sector in India. The concept of combining IT with banking services

helped the banking sector to grow leaps and bounds capturing huge numbers of customers, tackling competition and satisfying the needs of these customers. The Indian service sector has not reached its maturity yet; it is still in a growing phase with many exciting opportunities to offer. Also, with increase in literacy rate and income levels, the demand for discretionary services like education, private health, personal care and hotels and restaurants is expected to increase further in the coming years. According to 'India Food Service Report 2013', prepared by the National Restaurant Association of India (NRAI), the Indian food service industry is expected to grow from a current size of US$ 44.54 billion to US$ 73.39 billion by 2018. Also, the research conducted by Internet and Mobile Association of India (IAMAI) suggests that the value of online advertising market is expected to increase from the present levels of US$ 314.85 million to US$ 528.41 million by March 2014. These forecasts strengthen our belief that the sun is still shining bright in the service sector. All that is required is the maintenance of the quality of the services and the improvement in their export potential.


I R g


The 1st quarter registered a GDP growth of 4.8% down from 5.3% in the same quarter of previous year.

Etihad is likely to complete its purchase of a 24% stake in Jet Airways by September 20 as all regulatory clearances are expected to be in place by then. The deal, once consummated, will see an inflow of $379 million

The Reserve Bank of India (RBI) received 26 applications for new bank licences among those are Tata Sons Ltd, Reliance Capital and Aditya Birla Nuvo etc.


Microsoft to buy the handset business of former market leader Nokia for 5.44 billion euros ($7.17 billion) in an effort to catch up to rivals Apple and Google in the fierce smartphone market.

The Food Security Bill was passed by the Rajya Sabha.It is considered as the biggest programme in the world to fight hunger as it seeks to provide highly subsidised food grains to the country's two-third population

Internationally renowned economist Raghuram Rajan takes over as RBI Governor and plunges straight into a fire-fight situation as the country battles a rapid fall in rupee, high inflation, low growth and burgeoning current account deficit (CAD).

The city of Detroit filed for Chapter 9 bankruptcy on July 18, 2013. It is the largest municipal bankruptcy filing in U.S. history by debt, estimated to be $18–20 billion, exceeding Jefferson County, Alabama's $4 billion filing in 2011.

On August 23, 2013, Microsoft announced that Steve Ballmer would retire within the next 12 months. A special committee that includes Bill Gates will decide on the next CEO

On 28 July 2013, it was announced that Publicis Groupe and Omnicom Group would merge to form Publicis Omnicom Group.

On April 4, 2013, the Bank of Japan announced that it would expand its asset purchase program by US$1.4 trillion in two years as per Abenomics policies

AirAsia India would be operated as a joint venture between Tata Sons and AirAsia, with AirAsia holding 49% of the airline, Tata Sons holding 30% and Amit Bhatia taking up the remaining 21% in the airline. Land acquisition Bill was approved by rajya sabha on 4th September. It will become a law after the President signs off on it.

Ishant Soni is a Bachelor of Business Studies graduate. He is a first year MBA student at NMIMS, Mumbai. His interests include Chess, Lawn Tennis and Puzzles. Email Id:

IRG – Investment Research Group, a vertical under Finomenon which is responsible for carrying out industry research and analysis. IRG comes up with weekly updates on the recent happenings in finance which are posted at Finomenon’s Official Blog


U P D a t E s

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Rupee : ‘too old to be 60’ BY PULKIT GARG & AYUSH BAGLA, NMIMS-MUMBAI The Indian Rupee has been depreciating at a very high pace since the past one year. Economists put the blame on “Tapering of QE”, high CAD, and FIIs etc. But another take on the same can be the concept of Purchasing Power Parity (PPP) which values one currency in terms of the other currency after making adjustments for Inflation. The income level through consumer spending strongly influences the exchange rates as the forces of demand and supply start operating. To understand how the PPP model works, let us take an example. Let us say that the price of wheat in India is Rs. 40 per kg and the same wheat costs $1 per kg in USA. This determines the exchange rate to be Rs. 40/$1. Now, the inflation in India is 10% while in the US it is only 1%, so after one year wheat in India would cost Rs. 44 against $1.01 in the US. Hence, the new exchange rate would be Rs. 44/ $1.01= Rs. 43.56/$1. This implies

Indian Rupee. The PPP model overvalues the rupee against the likes of our Finance Minister, Dr. P. Chidambaram and says that the rupee is yet to reach its fair value of close to 69-70 and then stop; hence the rupee needs to depreciate more as it is overvalued in comparison to the USD. This claim is made because of the huge differences in the inflation rates of India and the US. While the US sustained its inflation rate to a mere 2%, India’s inflation has always seen an upward sloping graph. The implications are being felt. With the fall in its Purchasing Power Parity, the Indian Rupee has been depreciating since 1980s. An IMF study suggests that if we used the end-1991 dollar-rupee exchange rate of 25.8 as fairly valued and then proceeded to calculate the PPP exchange rate between the two using inflation differentials between US and India, we will find








PPP value Actual value













that the rupee has depreciated by 8.9%. The PPP phenomenon if considered in the current scenario can explain the depreciation of rupee to such an extent and also the future of the

that the actual exchange rate and the PPP exchange rate closely track each other till 2008. But in the last four years, with rampant inflation in India, the rupee has become overvalued against the dollar

Pulkit Garg is a B.Com (Hons) graduate from Shri Ram College of Commerce, Delhi. He is currently pursuing MBA at NMIMS, Mumbai. His interests include Dramatics, Teaching and Music. Email Id:

Ayush Bagla is a commerce graduate from St. Xavier’s College, Kolkata. He has completed the intermediate level Chartered accountancy and Level 2 CFA. He is cuurently pursuing his MBA at NMIMS,Mumbai. Email ID:


against the dollar. The situation could be even worse if we started with end-1993 when it ended the dual exchange rate. India’s real effective exchange rate must appreciate over time so that this downfall can be controlled. Below is a table which shows the valuation of rupee as per PPP which takes 2002 as the base year when actual exchange rate was 48.24. It shows that the exchange rate would be 75.28 now. PPP value is defined as per inflation rates. The inflation rate of India in Jan-13 was 0.46% and that of US was 0.18% on a monthly basis. Based on this, the value as on Aug-13 should be 73.62 x (1.0046/1.0018)8 = 75.28 Many studies have been undertaken in the past to test the validity of PPP model and its relation with the flexible exchange rate system. While it is gener-

ally accepted that relative PPP model does not hold true in the short run, long run PPP is still under investigation. Depending on the sample size and type of tests employed, some evidence in favor of long run PPP can be derived. Yet, the speed of adoption to PPP is extremely slow due to the deviations that are roughly 15%. Though domestic problems like a high Current Account Deficit, high inflation and lowering of growth to just 4.4% are some of the reasons responsible for the falling rupee, an equally important factor is the global uncertainty. In such a situation, policy paralysis has made the rupee slide further and hence the investors have been suffering. The government needs to assure the investors backed by some strong policies to reassure their belief and fight this crisis, else promoting growth would be difficult and rupee would slide further.


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The Financial-September 2013