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Volume 21, Issue 1

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The Financial Bulletin

FROM THE EDITOR

Money Matters Club IBS,Hyderabad Established—2005

Dear Readers

Editorial Enquiries Contact Money Matters Club Contact No +919948564613, +919573462013 Advisor Dr V Narendra Faculty Co-ordinator Dr. S Vijayalaxmi Student Co-ordinator & Editor Kanchan Kumar Roy Advertising Contacts Vikas Singh +9573462013

We congratulate the winner of the “Article of the month” award, Sanket Narkhede from MET’s Institute of Management ,Mumbai for his article “Buy and Hold is eternal” .

In this edition of February 2013, we have included a wide variety of topics. We looked into the present status of the Indian Economy and how to put it back on track. Also, there is a discussion on Quantitative Easing and interesting facts about it. What is Micro-insurance and what are the challenges it is facing? What is the current situation of ecommerce? We also tried to find out the answers to the question, whether investment is only about buying and holding or about other avenues too. Go through this brilliant collection of articles from the best minds of Indian B-schools and find out lots of interesting facts.

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The Financial Bulletin February 2013

CONTENTS 04 E-Commerce Effervescence -by Chandra Sekhar, ABV-IIITM Gwalior, M.P

06 State Of Indian Economy -by Nilaya Mitash Shankar, Department Of Management Studies, IIT Roorkee

04 E-Commerce Effervescence

10 Buy and Hold is eternal -by Sanket Narkhede- MET’s institute of Management, Mumbai

13 Steps to put Economy back on track -by Suraj Mansaram Munghate, Welingkar Institute of Management Development & Research, Mumbai

17 Challenges of Micro-insurance in 06

10

India –by Vishnupriya Sundararajan, Welingkar Institute of Management Development and Research, Mumbai

20 QUANTITATIVE EASING -by Rajat Garg, NMIMS, Mumbai

QUANTITATIVE EASING

3

20


E–Commerce effervescence Proceeding to this year, there were several hunch- business, in spite of relatively unproven gains. This es about the e-commerce effervescence finally trend has given rise to excessive competition in the portals e-commerce scene with margins thinning out, and like Taggle.com going out of business. Many feel firms being forced to compete on price. With that the e-commerce effervescence which is being customer acquisitions being done at the cost of erupting, especially with e-commerce

geared

up

expansion

with

will

excessive

pop

cash

for selling below cost price, the industry may very well go into price wars in the future. Furthermore,

one day much like the

countries

dot-com

riding on the e-commerce

efferves-

like

are

cence of 2000, while

wave

others are of the view

other capabilities like supply

that e-commerce is

chain. This may prove fatal

still the next big thing.

as the e-commerce business

One of the primary

grows

reasons

consumer mindset in these

regard

that this

many to

without

India

bigger.

enhancing

Also,

the

countries might prevent the

be

effervescence is the sky high valuations of e-commerce companies to actually realize all that e-commerce firms. Flipkart, India’s answer to they are set out to achieve, with a Big Bazaar still Amazon.com is valued at an astonishing $1 billion being overly preferred to a Flipkart. All these while having top lines of only about $10 million and factors taken together are contributing in building the company yet to break even. This over-valuation up the e-commerce effervescence. Yet, the may often give poor insights to investors as can be advantages of electronic commerce are seen from the example of US e-tailor Pets.com that undeniable. E-commerce gives a improvement on had its valuation reach astronomical heights only to the previous model of brick-and-mortar quietly collapse and expire in a few years. The companies, both on margin and reach. It has valuations can be attributed to accounting practices provided a quick and convenient way of employed by some e-commerce firms based on the exchanging goods and services both regionally and concept of future accrual of money. Thus with a globally. low cost of entry attached to the e-commerce One of the main reasons that one feels the space, more venture capitalists and private e-commerce scene would not emulate the entrepreneurs

are

funding

the

e-commerce dot-com 4

effervescence

is

the

exponential


penetration of internet into the emerging markets. It would be a constant weeding out of the weaker is now an important part of the lives of north of 50 players, especially in the aftermath of the million users in India as compared to the limited economic slowdown. Companies which have access it had back in 2000. The number of online deeper pockets might be more able and would be transactions taking place each day has increased likelier to survive. However, simply competing on many folds, and there has been a marked increase in price won’t do, as most firms would be offering its straddle, with e-commerce firms even venturing similar price ranges. The e-commerce firms that into niche categories. The e-commerce market in are able to differentiate themselves from others India is growing at an estimated 40-45% on a CAGR based on other offerings and create a brand basis vis-à -vis a global growth rate of 8-10%, and is positioning for them shall come out on top. We likely to touch Rs 50,000 crore this year. Even in the may conclude that though some weak players US, online retail sales are forecast to become more may fade away, the e-commerce industry will than half of all sales by 20131. Yet many believe the continue to thrive. The proverbial effervescence e-commerce industry to be still in the nascent stage, will not pop anytime soon. Coupled with a rapid and having a huge untapped market. The main growth rate and a transition in customer attitudes drivers of this projected growth are attributed to the towards online transactions, e-commerce is ever growing internet penetration, the fourth- poised to eventually change the way customers quarter still remaining a dominant cyber-season, the purchase things. success of flash sales sites such as Gilt, and customer trends shifting towards mobile shopping and social commerce. With startup e-commerce companies having rapidly stolen market share from traditional retailers in the past decade, many of these traditional players are being forced to deploy their own commerce websites. Hence, the future holds not only growth for pure-click companies, but also a transition from brick-and-mortar companies into the online space. Although these combined factors would only help boost the e-commerce market, there needs to be a consolidation and correction in the valuation of some of the players, so as to give a realistic estimate of future returns. The way forward for the e-commerce industry would be tricky, and even with a considerable amount of growth, there 5

Chandra Sekhar ABV - Indian Institute of Information Technology & Management, Gwalior


State Of Indian Economy India’s story in the contemporary world is nothing sort of mythology where the devil refuses to die and reappear again and again. India after independence till 1991 (i.e. In the pre - liberalization era) has witnessed protectionism, socialism, mind-bending red tape and suffocating bureaucracy. In the post liberalization period (since 1991) India has moved forward in a great way and today India is hailed as a land of rising opportunity and budding entrepreneurs. However of late this turbocharged growth has been reduced to rickshaw rate of growth of around 6% coupled with untamed inflation and alarming fiscal deficit level. The Indian rupee has been depreciated by 18% in 2012. Industry and infrastructure Infrastructure is the sum total of rail, road, transport, refining, coal, electricity, electricity, communication, cement etc. It is the base upon which growth takes place. It is the growth driving engine as infrastructure needs to be developed prior to any growth taking place. It is a dynamic concept which involves continuous improvement over the past. In other words it leaves no scope for reactive maintenance but has to be proactive maintenance. The world economic forum has ranked India at 89th position among 139 countries which indicates abysmal India infrastructure vis a vis global standard.

There is a plethora of problems such as land acquisition issues, lack of inter ministerial coordination, red-tapism, less foreign investment, environmental issue etc. Therefore the role of government becomes crucial. Unfortunately government seems to be devoid of new ideas and approaches. Time is running out and India needs innovative, out of the box solutions to the problems. The starting point would be a separate budget for infrastructure with railway clubbed into it. Public private partnership can also be a way forward. The problem has been highlighted by Manmohan Singh, prime minister of India,

“Expanding investment in infrastructure can play an important counter cyclical role. Projects and 6


Programs [are] to be reviewed in the area of

sufficiency to million of poor apart from strength-

infrastructure development, including pure

ening democracy at the grass root level. The

Public private partnerships, to ensure that

scheme came into being during UPA 1 but it failed

their implementation is expedited and does

to achieve its intended target mainly because of poor implementation, wrong design etc. The

not suffer from [the] fund crunch.�

scheme in its 2.0 reincarnation has tried to overcome Social sector Social

these

flaws

by

using

creative

destruction as now it will focus on bottom up

schemes

are

interlocked

with

any

approach and at the block level from where

economy. Its existence in India is mainly due to

demand

massive poverty. Though Indian has achieved

implemented.

admirable success in economic front but the

program of UPA 2 which is aimed at the massive

same is not true when it comes to the social

financial inclusion, providing cash directly to the

sector. In India large chunk of the population

intended beneficiary in his bank account. It will

depends upon the government spending to

obliterate

sustain themselves. Since independence many

massively on subsidies. Overall India is on right

social schemes have been implemented to uplift

track. There are some achievements such as child

the state of well being of the poor. But there has

malnutrition was reduced by 8% between 1993

always been a mismatch between outlay and

and 2005, average age increasing to 64 in 2009

outcome. In recent years the world largest

from 58 in 1990 and so on. However a lot more is

employment

been

required. One way is to give subsidy on the income

implemented in India, MNREGA, the scheme

status. This way we would also work on reducing

aimed

poverty.

at

guarantee

providing

scheme

rural

has

livelihood,

self 7

generators ADHAAR

ghost

and is

beneficiary

programs another

thus

get

flagship

will

save


Agriculture and Food Agriculture has traditionally been the backbone of Indian Economy. It employs roughly half of the labor force and accounts for around 14.7 % of GDP in 2011-12. It is the broadest economic sector demography wise and plays a major role in the overall socioeconomic development of India. Agriculture derives its importance from the fact that high agriculture growth lead to mute inflation and one rupee of contribution to GDP from farming is two times effective as other interventions in removing rural poverty. Also, strong agriculture growth leads to robust supply and demand for other sectors. The importance of this sector is highlighted in the World Bank country report 2011 for India which says ,

"‌.. it will be essential for India to build a productive, competitive, and diversified agricultural sector and facilitate rural, non-farm entrepreneurship and employment. Encouraging policies that promote competition in agricultural marketing will ensure that

Service sector After liberalization it became the main sector of the Indian economy with 58% contribution to GDP. It ranges from the IT to communication to banking to the barber. India’s service sector was resilient even during recession (grown at 10% against GDP of

8

farmers receive better prices."


6.7%) due to the introduction of sixth pay commission and increased social expenditure. It not only provides a critical contribution to the GDP but is also net earner of foreign exchange. It has attracted highest equity flow of 20.1%. Hence service sector requires unhindered growth and stability for overall growth. Overall the economic outlook of India looks satisfying. However there is a need to focus on agriculture and infrastructure building. These sectors are future of employee generation, reducing economic and

inequality

securing a place in world top nations.

Nilaya Mitash Shanker, Department Of Management Studies, IIT Roorkee

9


COVER STORY

Buy and Hold is eternal Investment is anything that is purchase today

to investors for high returns. In stock investment,

which will appreciate or give good return in the

there are many strategies employed depending

future. A quote from the legendary investor War-

on the need and investment style of each

ren Buffet , “The Stock Market is designed to

investor. The approach generally used in stock

transfer money from the Active to the Patient”. If

investment should be “buy and hold strategy”

time is given in the Stock market by holding a good

which can offer wealth in the long run.

stock , things are bound to blossom .This is the rule

Taking into consideration the benefits of Buy

of the market since its inception, It has rewarded a

and Hold strategy, it can build up the wealth to

patient investor more than a impatient trader.

investors who have not much experience in

Time frame is not the only factor which has played

stock, time to obtain the information of stock

a important role in the return of investment but

and time in trading. To apply this strategy, one

also holding the right company for the right time

should choose a good company that can be

has made the difference.

assured to generate the potential growth or profitability and then, buy the shares and hold them for long period. So, this strategy is safer for investors because the price fluctuation is not concerned. And also investors can gain from tax and commission savings. But things are changing due to volatility in the market has increased in the past decade as world stock markets has seen some big crashes which made investor loose their faith on long term investing. As due to crash in the markets stock prices had gone below

Typically this long-term investment is expected to be held for at least 10 years or through an entire

its expectation, which made the investor loose their money.

business cycle. There are various investments opportunities which investors can invest for the growth such as stock, bond, deposit, insurance,

Looking at the volatility in the recent past ,

gold etc. Mostly, the investors will invest in stock

traders have opted for short term gain method

market because it can furnish more opportunities

to achieve good amount of profit in a short span

10


of time. People do not want to stay invested in a

around 1990-91 when Sensex was around 4500

particular stock for more than few months. If you

mark and after almost 10 years in 1999-2000

do so you would be called Benjamin Graham of

Sensex was around the same mark i.e.4500-

the new era. As per the recent article people say,

4600.If to look at kind of returns did market

“Buy and hold strategy is dead”. It is no more

gave would seem to be very low as the index

widely used as the markets have turned highly

traded in a narrow range. Also there was a

volatile these days. The average holding period for

slowdown in the economic conditions. It was the

the S&P 500 SPDR (SPY) and the ETF which tracks

time when big scams like Harshad Mehta scam

the benchmark for U.S. stocks, is less than five

came forward which made the condition more

days. After three bear markets in the last decade,

difficult. But these 10 years were actually when

individual investors - especially baby boomers

people made big money. This was the time when

looking toward

people like Rakesh

retirement

-

Jhunjhunwala set a

don't have the

base to become “The

risk tolerance

legendary investor of

to be burned

India”.

once again. In

superb

markets differ-

which later turned

ent investment

out

styles

multibaggers.

go

in

By

holding

companies

to

be

and out of favour every so often, so to be a long term investor,

As it is rightly said “Time is the best

one needs a ton of patience and very thick skin.

medicine”, to overcome past memories. The same applies to markets as well. Time given to

Even when people think long term investment

good companies will help to overcome the

strategy is no more alive. Views of legendary

uncertainties or the volatility of the market.

investors like Warren Buffet ,Rakesh Jhunjhunwala

Volatility is an inseparable part of the market it

are highly respected. People stay away from long

was there in the past and it will be there in the

term investments due to volatility in the markets.

future as well because at the end it is mass

But actually long term investment helps the stocks

psychology. All people have different opinions

to overcome the volatility in the market over the

about the same subject. Likewise they have for

period of time and start a good run-up once things

markets, few prefer to buy the stock while

become a bit favourable. If to take few examples

others prefer to sell and remaining stay

in the Indian stock market .It would be the time

confused. This altogether adds up to volatility. 11


Company name

Price (Date)

Price (Date)

Wockhardt

86 - Feb2009

1738 - Nov2012

VIP Industries

135 - Nov-2009

949 - Sep 2011

Titan Industries

780 - feb-2009

4035 - June 2011

ACC

397 – Nov - 2008

1378 - Nov 2012

Tata Motors

135 - Jan-2009

1365 - Jan 2011

Below are few of the stocks which almost gave phenomenal return in just 3years, Only reason was, “good company bought at good price”. As there can be many examples which show completely opposite picture than the above but there are always some hidden reason behind it. The challenge here is not to overcome the volatile markets but to find great companies at good price and hold them for a good time which is bound to give good returns in future. Because only time has the power to overcome the past events and create new historical highs for that one needs patience and that is why “Buy and Hold is eternal”.

Sanket Narkhede MET’s Institute of Management ,Mumbai

12


affected Indian Economy. As no Economy works

ABSTRACT

in isolation, so is the case with India. Because of

The world economy is coming back on track

the Global slowdown and recession, the rate of

slowly and India seems to be the future power of

growth of Indian Economy is decreased. But,

the world economy. The eyes of the world are on

now the situation is changing. As the global

us. But we have to see ourselves that where are

market is recovering, Indian Economy is also

we? What preventive measures need to be taken

trying to regain its original position as the most

to prove ourselves in the world market? India is

attractive destination for investment. For this

having the potential and power to be the future

purpose,

nation but it has to take the necessary steps to

certain major steps are needed to be taken

travel the royal path

and

followed

efficiently.

to success.

When any company want to enter into Indian market, Indian

and

is the “Availability of Land” with necessary facilities. The

attractive

government of India has

destinations for the

made

business and the investment opportunities are

natural resources and strong fundamentals.

Current

of

question

Indian

fundamentals,

strong

remains

for

the

facilities.

So,

government must provide the required facilities

economy has been characterized by optimistic and

Economic

Investment (FDI) for the growth. But, the

macro-economic

scenario

Special

Zones (SEZ) and also allowed Foreign Direct

huge due to huge manpower base, diversified

progress

first

foremost thing that it wants

Economy

is one of the most

growth

the

as early as possible. Also government need to

macro-economic

give more than fair and long term compensation

particularly with tangible

for those who are losing their lands.

towards fiscal consolidation and a

“Infrastructure” is considered as a back-

strong balance of payments position.

bone of any Economy, especially for emerging economies like India. Higher spend on infra However, considering the current scenario

projects creates a cascading multiplier effect in

in the world market, the global slowdown has 13


the economy, driving GDP growth. In India, the

(PPP) model. Another thing is that the reversal

slower project execution and delay in recovery of receivables has resulted in an elongated working capital cycle leading to highly leveraged balance sheets. Thus, the government of India has to make pertinent efforts to remove bottlenecks

that

are

delaying

infrastructure projects in India. Positive initiatives by the government - like steps to revive investment in the country with the aim to bring GDP growth back on track, checking on subsidies on petroleum products by hiking fuel prices in the phased manner, restructuring of SEBs, direct

of interest rate cycle will help reduce costs and

monitoring of infrastructure projects by the

improve cash flow and profitability for the

PMO, and facilitating fund flow for infrastruc-

infrastructure companies. Rationalization of

ture projects are conditions providing an

interest rates is also likely to revive the slowing

additional tailwind for revival of the sector. The

economy fuelling capex cycle and improve

government has recently cleared way for setting

revenue visibility for infrastructure companies.

up of National Investment Board (NIB), now renamed as Cabinet Committee on Investments (CCI) as a window to grant necessary clearances

“Agriculture” plays a very important role

such as mining lease, forest clearances, and

in Indian Economy. The government of India

environmental management plan and land

should aim that no person should sleep hungry.

acquisition for accelerating commencement of

For that purpose “Right To Food” is important.

mining. This is expected to act as a major

Government has passed it recently. However,

accelerator for the economy. The XII th Five Year

government should aim to the following that,

plan (2012-17) envisages investments of about

for starters, the government should free the

$ 1 trillion in infrastructure projects and is look-

farmers from the tyranny of middlemen, by

ing for private sector participation to fund half

reforming the rent seeking, anti-farmer mandi

of this through Public – Private Partnership

system, at least in states governed by UPA 14


alliance, thereby creating a demonstration effect,

world’s largest migration may takes place over

where other states would be shamed into

the next 10 years where the people move from

following.

villages to Indian cities. So, the government must

In India, about 72 % age of population lives in the Rural area. Thus, the government must

be ready and build a regulatory infrastructure to oversee the urbanization.

make efforts to pull out the rural people out of

“Energy” is also a very determining factor

Agriculture by giving Manufacturing Industry a

of the growth of any nation. In India, with the

policy push. Basically, Agriculture contributes

increase in population, the government is unable

about 14 % to GDP but 60 % of the Indians are

to satisfy the Energy demand of the people. So,

dependent on it. So, if manufacturing industry is

this has to be changed. The government must take efforts to ensure long term energy security. In the areas, like- Jaitapur, Maharashtra, where people are opposing Energy projects, the government must take initiatives, arrange the campaigns, to make people aware about the importance of Energy because if energy is not supplied in required amount to industrial units or household use, then it will definitely affect the performance of company which ultimately

getting a push, definitely it will attract the labour. “Entrepreneurship”

also

plays

a

result in bad performance of the economy of the

very

nation.

important role in the developing countries like

“Income Tax” helps the government to

India. So, government must take efforts, provide

get the availability of the capital. So, government

policies and encourage entrepreneurs to set up

must pass the “Goods and Services Tax Bill” to

units that serve the

ensure

tax

world,

efficiency.

The

contribute

to

GDP, and absorb the

government

surplus

also

labour.

pass

must the

“Direct Taxes Code Bill” that will end all As stated earlier

uncertainty

that about 72 % of

on

Taxes. Also, government must ensure that all the

population lives in the rural India and 60 % of the population is dependent on the Agriculture, so the 15

companies and persons, who are eligible for


taxes, should pay it within time limit and also ensure that no one plays any fraud by avoiding taxes. “Interest Rate” is the rate charged for the use of money. Most of the companies take loans from the banks for its start-up. When companies earn profit, they have to pay back the loan. So, if the interest rate is high, then they will have to pay large amount, which companies don’t want. So, the government must show respect to the global capital and cut the interest rates drastically so that financial costs don’t deter the companies from expanding and households from continuing to drive the GDP growth. “Information Technology” plays a vital role in economy. As the technology gets developed at the rapid rate, the Indian IT companies are contributing much to the economy. However, government must encourage the Indian IT companies to open their “Research & Development” (R & D) centers in India itself so that the real talent will not go outside. The economy of any nation, GDP of any nation depends upon the “Better Governance”. Unless and until you are having best people at the best place, you cannot grow further. So, government must appoint the obedient and hard-working persons and throw out the corrupted persons as well as politicians. Because of the Corruptions and scams, the image of any nation damages in the mind of our own peoples as well as in the mind of others. So, government must take serious efforts to make “Corruption” at a zero tolerance zone. “Debt Free economy” is considered to be the best economy in the world. India is having a debt of about $ 300 billion that need to be repaid. So the government must take serious efforts for the repayment of the loan to World Bank, IMF, etc. Getting out of debt is good for the economy. It frees up money to spend on new goods and services, rather than only continuously servicing loans for past purchases. So if government follows and take the serious actions immediately, then India can definitely become the future of the world market. Definitely, India is having the power and potential to become the leader in the world economy.

Suraj M Munghate. Welingkar Institute of Management Develop16


“Micro-insurance is not a specific product or

low-

product line. It is also not limited to a specific

Regulatory and Development Authority has

provider type. Micro-insurance is the provision of

come

cover

micro-insurance. There is also a regulation for

to

a

specific market

segment, i.e.,

income

up

earners,

with

the

regulation

Insurance

regarding

low-income persons.�

insurers to mandatorily cover the rural

~ IAIS Issues Paper (2007)

population as well as fulfill the social sector obligation laid down by IRDA.

Micro-insurance is specifically designed for the

India is one of the first countries to have

protection of low-income people, with affordable

come up with micro-insurance regulation.

insurance products to help them cope with and recover from common risks. It is a market-based

A very big boost to the micro-insurance sector

mechanism that promises to support sustainable

is the introduction of Rashtriya Swasthya

livelihoods by empowering people to adapt and

Bima Yojana on 1st April 2008. It is a public

withstand stress.

private partnership scheme to provide health

Over the years, micro-insurance as a concept has

insurance coverage for Below Poverty Line

evolved and today insurance companies view this

(BPL) families launched by Ministry of Labour

sector as a big potential market and are coming up

and Employment, Government of India. The

with innovative ways to tap this market.

objective of RSBY is to provide protection to BPL households from financial liabilities

The problem of the rural population as well as the

arising out of health shocks that involve

low income group is unique and they have a lot

hospitalization.

more risks. In order to protect the interest of these

Also the private insurance companies are

17


taking forward this industry, thanks to the vast

micro-insurance

potential of this market and the regulation.

Prudential Life Insurance is 154%. (Claim ratio

However this sector is not without its share of

is the total amount of claims paid divided by

challenges and problems.

premium earned). A claim ratio of more than 100%

policy

offered

by

ICICI

indicates loss to the insurer.

Designing of the products: Micro-insurance is not just a scaled down version of regular insurance. The product and processes need to be

Reaching the customers: Reaching the rural

completely

reengineered

meet

the

customer is difficult as they are scattered

of

the

across India. However it is extremely important

low-income market. It is very difficult to design

to improve accessibility to remote customers

innovative products to match the requirements

and help ease the process of premium

of the heterogeneous needs.

collection and claims payment. Hence insurers

characteristics

and

to

preferences

need to look for innovative ways of distribution Pricing:

Pricing

of

these

micro-insurance

of the products apart from the traditional

products is difficult as there is lack of enough re-

methods of tie-ups with NGOs or Micro

liable statistical data. Also the pricing should be

Finance

such that there is a fine balance between the

Insurance has launched its micro-insurance

high costs and thin margin.

product ‘Max Vijay’ and it predominantly

Institutions. For instance, Max Life

focuses on retailer network for its distribution. Low margin business: Even though there is a

e.g. telecom, grocery and retail stores.

huge market, the margins are very thin. The very

Business

nature of micro-insurance is that the insured

technology can ease this problem.

correspondents

and

use

of

cannot pay high premiums and so premiums have

to

be

very

low.

This

makes

the

Low level of literacy and lack of awareness of

micro-insurance sector unattractive. The insurers

insurance products: A big problem for the

will be able to make profits only by high vol-

insurers is the lack of financial awareness on

umes.

the part of the consumers. Not just that, the premium payment is viewed as an additional

High Claim Ratio: The micro-insurance products

expense and not a risk cover. Hence educating

typically have a high claim ratio. The frequency

the consumers and creating awareness about

of claims also tends to be higher, hence straining

the insurance products becomes essential

the profitability of the insurer. For instance, the

which in turn adds to the cost of the insurer.

claim

ratio

of

Sarv

Jan

Suraksha

a 18


Consumer Awareness by ICICI Prudential

Conclusion: The key to growth of the insurance sector is the usage of information technology in all forms of insurance including micro-insurance. The use of Aadhar cards could be a good step in bringing down the difficulties of premium collection and claim payments. Technology can help significantly reduce costs and improve the viability of micro-insurance.

Vishnupriya Sundararajan Welingkar Institute of Management Development and Research, Mumbai

19


QUANTITATIVE EASING Quantitative easing (QE) is a part of monetary

institutions.

policy used by central banks to boost the national economy when the policy of modifying the interest

Quantitative Easing and Monetary policy can be

rates becomes ineffective.

implemented where the central bank controls the

country’s

currency.

For

example,

in

The Central bank buys financial assets from the

Eurozone, the central banks of different coun-

financial institutions and banks in order to inject a

tries cannot unilaterally expand their money

fixed amount of money into the economy. This

supply as the ‘European Central Bank’ controls

results in an increase in the bank’s reserves and

the monetary policy of Eurozone countries.

since demand for assets increases their prices increase

which

What are QE1, QE2, and

lowers

QE3

their yield.

In 2010, "QE2" became a ‘Quantitative Easing’ can

"ubiquitous

be used to achieve a

referring to second round of

target level of inflation.

Quantitative Easing by cen-

The policy aims to ensure

tral banks in the United

that inflation does not fall

States. Retrospectively, the

below that level. The risks

round

of

byname"

Quantitative

involved in the implementation of QE policy are:-

Easing preceding QE2 is referred as "QE1" and

Policy being more effective than intended in acting

similarly third round of Quantitative Easing

against deflation, leading to higher inflation.

following QE2 is referred as "QE3".

Policy not being effective enough if banks do not On November 25, 2008, QE1 was announced

lend the additional reserves.

and concluded in March of 2010. In this the Fed Consider a situation where the nominal interest

cut key interest rates to near zero and

rate is close to zero. The central bank cannot lower

purchased $175 billion of agency debt securities

the rates further as it may result in a liquidity trap.

and $1.25 trillion of mortgage-backed securities

In such a situation, the central bank may perform

in addition to purchases of Treasuries. This

‘Quantitative Easing’ by purchasing limited amount

resulted in mortgage rate dropping to as low as

of bonds and other assets from the financial

5.23% from 6.33%.

20


interest rates especially mortgage rates. On Nov 3, 2010, QE2 was announced. In this

But a careful examination shows both the

Federal Reserve announced to spend a total of

arguments to be weak and the second argument

$600 billion until the end of the second quarter of

to

2011, at a pace of $75 billion per month. The initial

experiment in monetary policy.

ironically

echo

an

unfortunate

past

reaction was fall of the dollar, but this was reversed quickly. The broad market rose much less,

The premise is that QE3 will artificially increase

and “the Information Technology sector did the

the wealth. ‘Artificial’ because productive assets

worst”.

will not become productive by increase of money supply in economy. The discussion does not even

On September 13, 2012 QE3 was announced. In

hinge on an increase in inflation that might

this, the Federal Reserve of US has decided to

depress real wages, which would improve

launch a new $40 billion a month i.e. to print US

business profits and thus justify an increase in

dollars worth $40 billion every month and using

asset prices.

them for bond purchasing program of agency mortgage-backed securities and this they will continue until at least mid-2015. According to NASDAQ, this is effectively a stimulus program which allows the Federal Reserve to print $40 billion dollars a month for an unlimited amount of time. Egan-Jones, Ratings firm, said it believes the Fed’s decision “will hurt the U.S. economy and, by extension, credit quality.” As a result the firm slashed the U.S. bond rating to AA-. According to Federal Reserve’s Chairman, Ben Bernanke, the intent of QE3 is to stimulate the

Another argument for QE3 is that pushing down

economy, which has been languishing and is now

long-term interest rates (especially mortgage

slowing further under current economic policies.

rates) will help the housing market to recover and hence strengthening the economic recovery.

Two key arguments in supporting QE3 are –

But problem with this argument is that mortgage

1) It will induce an increase in asset prices that will

rates are already very low and housing sector is

induce an increase in personal consumption by

also recovering. Also doubt is, how much more

increasing personal wealth.

can the Federal Reserve push interest rates

2) It will put downward pressure on long-term

down, and how much difference will it make to 21


housing market when so many homeowners are

including crude, which would be a "negative" for

underwater and cannot sell and unemployment,

import bill for oil importing countries like India,

already above 8%, threatens to rise?

while exports are "unlikely to be boosted significantly" as the overall economic impact

Effects of Quantitative Easing Quantitative

Easing

may be limited. Higher oil prices will keep India's is

fundamentally

a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or who already own homes, but

current account deficit "elevated". To put it simply: More Quantitative Easing is not going to move the dial much on the growth meter.

passing little along to the rest of the economy. Also lowering of interest rates may actually have negative impact on the economy as people dependent on the interest income may spend less in

response to their reduced income. However,

the Federal Reserve has assumed that the ad-

Rajat Garg

vantages of the low interest rates outweigh this

MBA-Banking, NMIMS,

effect.

Mumbai

On European Union In the European Union, World Pensions Council’s financial economists have argued that QE3-induced artificially low interest rates will have an adverse impact on pension funds in EU. As under-funding condition of pension funds, as without returns that outstrip inflation, pension investors may face the real value of their savings declining rather than racketing up over the next few years.

On India India, like EU, is unlikely to benefit too much from the Federal Reserve's new asset purchase program me. QE3 is likely to boost global commodity prices, 22


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