Volume II, Issue 1
April, 2011| April 2011 Pratibimb
The reflection of management
A Bi-Monthly Magazine
Pratibimb | April 2011
A remote village in Kerala is famous for a unique feat. The artisans in this village, Aranmula have perfected the craft of making a mirror without using any glass. Through one of the toughest and most skilful jobs humans have ever done, these gifted people have found the right mix of various metals which when alloyed together give one of the best mirrors in the world, a mirror that has zero convexity - one that reflects the truth â€“ the real pratibimb. Going through this edition of PRATIBIMB, the student magazine of TAPMI, I was reminded again of the skillful art that made the Aranmulakannadi, the world famous. Like that work of art, the magazine had taken extra pains to reflect the contemporary thoughts and action in management without any skewness or bias. It needs a lot of courage to look at things and form unbiased opinions. To a large extent the second edition of Pratibimb achieved the same. The magazine provides a holistic view to management, from the perspectives of various specializations offered. Not only does it include insights from our very own students, but also embraces ideas from the best brains across the country. The magazine also has expert inputs from across the industries, thereby bringing the academia and industry together. It gives me immense pleasure to congratulate the team members for their sincere and consistent efforts in bringing out this edition of Pratibimb and would also like to extend my heartfelt wishes for all their future endeavours. Saji Gopinath 2
Pratibimb | April 2011
With the world hit by catastrophes especially Japan and the growing fear among public, the value of precise and timely information has amplified for the decision makers, to bring in the inclusive growth and save the lives from natural calamities. We understand this responsibility very well and with the promise to bring the apt, relevant and correct information by academia and industrialists, we are pleased to present the April‘s issue of Pratibimb.
Chief-Editor Creative Designer
The highlight of this issue is the interview with Mr. Dhanendra Kumar, Chairman, Competition Commission of India who discussed with us the importance of competition in the changing competitive markets, the need to regulate the competition for the benefit of general public and the role of CCI in regulating various sectors.
In this issue, we have also added a new section for quiz lovers ―Quick Wits‖ which is powered by ESPIRIT, TAPMI‘s Quiz Club. This will give a platform to all the readers to showcase their all-round knowledge on various platforms like business, science, history etc. We are thankful to all the students from various colleges who put in great efforts in writing articles on various issues/topics and worked hard to send entries for ―Beat-The-Market‖. The articles have been selected by the Editor‘s Team whereas BeatThe-Market has been judged by Mr. Vivek Didwania, Analyst, CitiCorp. We thank him for his precious time. We thank all those who helped us in improving Pratibimb through their feedbacks. We would like to take this opportunity to extend our gratitude to Dr. Saji Gopinath, Director, TAPMI, Prof. Chowdari Prasad and all other faculties at TAPMI for their continued support, guidance, motivation and inspiration to take Pratibimb to next level. Our special thanks to Prof. Ajith Kumar J. who could contribute an article for Pratibimb in spite of his busy schedule. Please continue to send in your valuable suggestions/feedbacks at email@example.com so that we can make improvements in the coming issues. Happy Reading!!
Special Thanks Mr. Dhanendra Kumar, Chairman, CCI Mr. Vivek Didwania, Analyst, CitiCorp Dr. Saji Gopinath, Director, TAPMI Prof. Ajith Kumar J. Prof. Chowdari Prasad Prof. Sankalpa Bhattacharjee Mr. Shrinidhi Kamath - Cover Page Design
Pratibimb | April 2011
Leadership in the Changing World
Satyajit Bagchi, FMS
The Learning Paradox in the Modern Innovative Organization
Prof. J. Ajith Kumar, Associate Professor, TAPMI
Currency Wars—Race to the bottom
Rahul Agarwal, MDI Gurgaon
Interaction Vs. Interaction Marketing
Rohit Arora, TAPMI Alumnus
The Employment Relationship: Crucial Challenges for HR
Mansi Praveen | Bhavana Khar, XLRI
Interview with Mr. Dhanendra Kumar
Chairman, Competition Commission of India
Social Media Marketing
Mansi Gupta, MIB, Dept. of Commerce, Delhi School of Economics
Enterprise 2.0—A way to innovate
Rohit Kumar, TAPMI
Overheating of emerging marketing economies & the role of central banks
Ankur Choraria | Anurag Mishra | Saurabh Surana, SJMSOM, IIT-Bombay
Dollar as the world’s reserve currency - Is it helping? Rahul, TAPMI Alumnus
Pratibimb | April 2011
Leadership in the Changing World Satyajit Bagchi, FMS, Delhi
eadership for me means the ability to make the choices that matter the most. Often in our lives we have to choose between what is right and what is easy. Sometimes failures encumber the minds of the bravest souls, but a true leader always finds hope even in the darkest of the times. Leaders often have to trudge along a path often less taken. And it takes a lot of courage and resolve to stand up against the tide. There have been many debates in the past on whether leaders are born or whether they can be nurtured. Time and again it has been witnessed that the greatest leaders were the ones upon whom leadership was thrust upon them and who to everyone‘s surprise turned out to be exemplary forerunners. It is that extra mile that one has to traverse that separates a leader from the rest. A pioneer envisages a vision not only for himself but for the greater mankind; he dreams not only for himself but for everyone: a dream to make the world a better place to live in. The history is adorned with exemplary leaders like Mahatma Gandhi or Martin Luther King who have single headedly made significant and unexpected changes to this world. They invoked in the masses a zeal for individual struggle and generated immense passion among millions through their vision and dreams. They used their leadership abilities and degree of influence to conquer hostile situations and continued their work for the cause of the masses. The changing world The world is changing at a fast pace. The urban lifestyle, the rural livelihood and practices, workplace dynamics as well as the personal spaces have all undergone radical changes over the past few years, decade maybe. Managing organizations or governing a nation has undergone a transformation. In a developing nation the lives of the people are affected by a degree of insecurity (in form of job security or even life security), food issues and corruption. Even the developed nations
are fraught with problems like terrorism, global warming and economic instability. Often an ordinary citizen can be heard wishing for a governance to lead them out of the mess; a form of leadership which can show them the light. However, despite all the problems, the world is now a more convenient place to live in. We have conquered the Moon and sustaining life beyond our Mother Earth is not a scientific fiction anymore. Information is easier to access, connecting with people is definitely much easier than in the times of President Lincoln or Mahatma Gandhi. The changing dynamics First, there was an era of sharing and giving, followed by a dominant spell of capitalism. Individualism heightened to a level where you did not even know your next door neighbour‘s name. However in the recent times people have realized the virtues of giving back to the society, of working for a cause more than one‘s personal gains. The money-making process has now transformed into the development of the whole and collective improvement. The Asian, African and Latin economies are growing rapidly and are becoming the incubation zones for technological developments and innovative ideas. With the rapid development of telecommunication, satellite networking, information repositories on the internet or the social networking sites, the world can be truly termed as a global village. The gap between the personal life and professional life are blurring. Social and political events have more profound an effect on us nowadays. Adam Smith‘s Free Society is a practicality now. There is an ever growing interdependence amongst the countries and people are emphasizing on the need of ethical values and practices more than ever. Serving the society is not an NGO‘s job anymore. Organizations, whether big or small, are increasingly participating in CSR activities. Any 5
Pratibimb | April 2011 action by an individual or an organization or on a larger frame a nation now has far reaching consequences. Effective leadership is needed to choose the best way ahead by taking stock of the status quo. A century back Nobel Prize Winner Rabindranath Tagore probably had this on his mind when he scribed ―Jirno sthobir jak huche jak‖ (Wake from the slumber and challenge the stalemate) Leadership in workplace: The old school Earlier leaders in organizations only commanded. They were chiefs at the top of the hierarchy pyramid involved in taking independent decisions, delegating work and assigning responsibilities to their subordinates. Work pattern was structured and offered limited defined growth opportunities. Innovative thinking was hardly appreciated. Protocols were meant to be never breached. The work place was, well, just a work place. The essential ―emotional connect‖ with the organizations was limited. Work was like a welloiled machine always moving in one pattern churning out steady but assembly-line output. The functioning of an individual was constricted to a pre -determined set of orders and the impact of the individual‘s role on the whole organization was never the focus. An individual was expected to stick to his own role only. Nouveau Leadership Leadership
The traditional method created an individual as a subdued follower. But leadership must develop via a series of mature, conscious (also subconscious) decisions over a long duration through a series of events. The baptism of fire tests a person‘s abilities to its maximum threshold. Entrepreneurial ventures are steadily gaining dominance and we have seen amazing visionaries transform the way organizations do business nowadays. We have the Tatas or Mr. Narayana Murthy of Infosys who have brought to the work table never-before-appreciated virtues. Doing business ethically is not unheard of in such organizations. And these organizations are doing so without hampering its profit levels or hurting the interests of the stakeholders. Why are these businesses an exception? Is it because the organization got lucky of having the service of an
exceptional workforce? Or it is because of the way the leaders of these organizations have led the company forward? Or is it the way they wanted their vision realized? (Is Google‘s ―Do no evil‖: an addendum to Gandhi‘s ―Speak no evil, See no evil, Hear no evil?) In progressive workplaces employees are given more free reign. Taking of unnecessary pressure from the employees enhance their marginal productivity. Now, 360 degree appraisals in most of the companies are in place. The head of an organization (policy makers, management etc.) is still the most important decision maker, but the opinions of the lower and middle management are also taken into opinion and due diligence is put while making important decisions. In the employeefriendly organizations, good ideas are praised and the relevant employees are given their due credit. Such transformations in these organizations have occurred because of the leader‘s propensity to support his employees in the collective decision making to realize the organizational goals. However, it needs to be ensured that there are no confusions created, where everyone is a decision maker or a leading player that is the defining force in itself. The role of the new leadership style is to prepare us for the future. It shall provide newer avenues over the working-life period of an individual for experimenting with leadership actions and activities so as to enhance the formation of leadership abilities. The times are tough and we are fraught with newer and complicated challenges. It is the time to join hands and start making the difference. Collaborate to excel is a byword now. For any job, so to speak, there has to be a leader. But instead of that sole individual taking all the calls or all the responsibilities, the job can be divided among individuals. Each member can be delegated with their own responsibilities and in turn each member in a team can don the cap of the leader. That individual gets to discuss, share and implement his thoughts, and rise up to the occasion when the situation demands and guide his team forward. A king alone can‘t win a battle; even the pawn has a role to play and as per the situation needs to take up
Pratibimb | April 2011 the mantle. If the responsibilities are divided amongst all, the chances of corruption are reduced.
brought about a sense of assurance. (The ―Yes, we can‖ campaign?)
Everything is interlinked now and when a single entity goes wrong, the whole system crashes and creates trouble for everyone. The learning process has ceased to be a localized one and instead consists of diverse aspects. Different people with their different backgrounds and viewpoints bring different characteristics to the organization. These individual values need to be respected and this in turn should only end up enriching the organization.
The Power of Voice can invigorate and shake people into action. It has the power to move the world. In a free society people have the power to think, to formulate newer ideas and more importantly express them. Such societies have been built, brick by brick, by great pioneers. By leaders who envisaged a world of happiness for not just himself. People feel safer to know that someone is out there who would stand up for them. Each job need to be done with a passion and the voice in command must have passion and credibility in it. It should be able to satisfactorily deliver the values and the greater goals to the stakeholders. A transformational leader can change the way a person thinks, the team operates and the society feels.
A leader needs to communicate to the new employees the vision of the company. It‘s not just about setting goals and responsibilities, but also about articulating the views and imprinting them into the minds of your employees. It is about giving a direction from whereon the employees shall have the platform to choose their own methods. Collaborative leadership shall promote ethical practices and create harmonious groups and congenial workplace environment. There is a need for the focus to shift from the ―power over others‖ to the ―power amongst all‖. Tagore had written ―Amra sobai raja amader ei rajar rajotte‖ emphasizing on the right to voice one‘s opinion. A leader can initiate a project, but any success story is a culmination of the efforts of the whole team. So if each member can in whatever small way become a leader, they would be able to put in more effort (and heart) in their work and optimally utilize their abilities and talents. Then their tasks will no longer be monotonous. The power of Voice One of the best gifts human kinds is speech. It is a channel to express one‘s thoughts and emotions. The human mind is a complex one and all the discussions about the everyday life, the world, the society, or the intricacies of nature are discussed through speech. A great leader has almost always been a master speaker. They stirred immense passion among the masses by touching their consciousness, by captivating their attention, and propelling them to think. The inspiring speeches shake us up from our slumber and make an ordinary man have a reason to feel alive. The greatest of the leaders have instilled confidence in his people and steered them through the worst of time. They
At Crossroads Some of us have the privilege of leading a more comfortable life than our forefathers could have ever dreamt of. There has been an unprecedented growth of opportunities over the past century along with its own share of chaos. There is now a greater scope for growth in this globalized world. Sensitive issues like holistic development of the society, mental well-being are all finding prominence. We are at a dawn where we can decide how to govern ourselves. It is a time to make the proper decisions to ensure a brighter future. Hard questions need to be raised. Should we step aside on issues like global warming and instead focus on reaping economic profits? Should an offender responsible for a Satyam scam or creating a recession in the economy and thus affecting lives of millions let go unquestioned? Or should a man be allowed to die because of inadequate food or warm clothes? But more importantly for how long can we keep mum? We need to choose between what is right over the broader perspective and what is the more convenient in the shorter run. Our wrong choices may bring our severe repercussions on our future generations. Is there a need for a leader to show us a way? Or should everyone be given the freedom to decide collectively for our future? There are no easy answers. It is high time we decide on how to lead ourselves tomorrow. 7
Pratibimb | April 2011
The Learning Paradox in the Modern Innovative Organization Prof. J. Ajith Kumar, Associate Professor, TAPMI
n this essay, I discuss what can be called the learning paradox in the modern innovative organization. To understand what this means, it is important to first understand what the terms innovation, learning and paradox mean by themselves. The word ‗innovate‘ comes from the Latin word novus, which resonates closely with the Sanskrit word nava. Both these words mean ‗new‘. Innovation is essentially about creating something new and different from what exists at present. In the world of economics and business, innovation is taken to indicate the successful implementation or commercialization of novel and useful ideas (Amabile, 1997). Innovation involves either improving an existing product, service, method, process, strategy or structure, or creating a new one that did not exist before. ‗Learning‘ is a more commonly used word than innovation and does not normally require much explanation. However, in this essay it is used in a specific sense. Learning here means ‗change‘. Any learning by an entity involves some change or the other, either in its cognition and mental models, or in its behavior. Without any change, it is difficult to ascertain whether any learning has taken place. The entity can be an individual, a team or even the organization and accordingly, extensive research has been done on the concept of learning at individual, team and organizational levels (e.g. Crossan, Lane and White, 1999). Often, learning involves the acquisition and/or application of knowledge in some way or the other. When we acquire knowledge, our understanding of the subject changes, and we say that we have learnt something. Likewise, when organizations acquire knowledge and/or create new knowledge, they can change (improve) the way they work and the products or services they offer. Owing to this, it is believed today that knowledge is a key input to
organizational learning. Innovation in the modern organization is essentially a learning process and this is so in at least two different ways. First, innovation drives the organization‘s change and growth over time; as such, the organization ‗learns‘ by virtue of its innovation. Second, innovation itself is driven by several learning processes. Innovators continuously try to change and improve the way they innovate – the steps in the processes, the time taken, costs involved and the resources needed (Aggeri and Segrestin, 2007). Although innovation brings together several important resources such as people, time, technology and raw materials, the most critical resource is knowledge (Nonaka and Takeuchi, 1995). The output of innovation always involves at least some new knowledge. In turn, the creation of such knowledge requires invoking the creativity of organizational members and the generation of new ideas. Now, creativity always depends upon existing knowledge. In her componential model of creativity, Amabile (1988) recognizes existing domain knowledge as one of three predictors of creativity, the other two being creativity-related skills and task motivation. There are several ways in which innovators use existing knowledge to innovate. They reuse existing designs, re-apply old ideas, replicate current practices and re-present the same product in multiple contexts. For example, market scanning and competitor watch – most important elements of modern innovation – are often done to copy, adopt or adapt elements of a product developed elsewhere. This knowledge may already be present with them from past documentations and experiences. Or, it may be brought in from outside either through engaging experts, or by applying methods such as reverse engineering, which 8
Pratibimb | April 2011 involves carefully studying a competitor‘s product and trying to understand its aspects. Sometimes, new ideas may appear serendipitously during innovation. Serendipity refers to the unexpected occurrence of an idea that has great value, such as the sudden emergence of a good solution to an evasive problem. A commonly cited example is that of the discovery of the structure of Benzene by Kekule (Austin, Devin and Sullivan, 2007). It may appear that existing knowledge has little role to play here. However, research has noted that serendipity occurs to those who have the sagacity, which includes the background knowledge and the preparation, to recognize the idea as being valuable, when it arises (e.g. Mendonca, Cunha and Clegg, 2008; Weisenfeld, 2009). Thus, existing knowledge not only fuels the creation of new ideas, but also enables the recognition and filtering of those ideas, and helps convert them into the targeted result of the innovation process. It is also important to add here that all innovation is not alike in terms of the degree of novelty it requires. Often, innovators improve an existing product only marginally by inducing a new feature or functionality. This is called ‗incremental innovation‘. Here, the degree of newness of the knowledge required is low. This differs from ‗radical innovation‘, which involves creating something that is radically different from existing designs and which, therefore, requires a higher degree of newness in the knowledge created. However, irrespective of whether the new knowledge required is incrementally or radically different from existing knowledge and irrespective of whether the new knowledge arises serendipitously or in a planned manner, its creation depends upon the availability and application of existing knowledge. Despite these realizations, it is also recognized that existing knowledge can be detrimental to the creation of new knowledge. For example, Subramaniam and Youndt (2005, p. 453) argued that organizational capital or the existing knowledge in an organization is self-reinforcing ―… when organizations harness their preserved knowledge through structured recurrent activities, they deepen their knowledge and further legitimize
its perceived value... Eventually, such processes create a path-dependent trajectory of reinforced knowledge.‖ Similarly, Barnett and Hansen (1996, p. 142) noted that organizations are constrained by lessons learned in the past, as a result of which they ―…respond to new developments using routines that were learned under a previous regime, harming their performance by doing precisely what worked well under different circumstances‖ (emphasis added). What worked well before, need not work well always. This situation was termed ―competence traps‖ by Levitt and March (1988). Leonard-Barton (1992, p. 118) argued that when a gap arises between environmental requirements and the organization‘s ―core capabilities‖ (such as, when a novel product has to be designed), then the capabilities that normally provide tremendous support for the organization‘s innovation activities, turn into ―inappropriate sets of knowledge‖ or ―core rigidities‖. Leonard-Barton further noted that such core rigidities are not neutral, but can actively create problems. Thus, giving importance to existing knowledge can foster competency traps and core rigidities, and influence employees to think in old and known ways. It can deter them in their attempts to generate new ideas and concepts. From another managerial perspective, if resources such as intelligent and capable designers, time and money are used to increase focus on old and existing knowledge, then at least to that extent, they are less available for creating new ideas and knowledge for innovation. Paying attention to existing knowledge will ―eat into‖ the time and other resources available for creating new knowledge. All this implies that existing knowledge acts as a detriment to the emergence of new knowledge. Greater the attention we give to existing knowledge, the lesser is our ability to create new knowledge. We now face a contradiction, or a paradox. What is a paradox? In her paper on exploring paradox in organizational life, Lewis (2000) explains that a paradox denotes the presence of contradictory yet interrelated elements, which seem logical in isolation but absurd and irrational when appearing simultaneously. Ford and Backoff (1988, as cited by Lewis, 2000) define paradox as some ‗thing‘ that 9
Pratibimb | April 2011 is constructed by individuals when oppositional tendencies are brought into recognizable proximity through reflection or interaction. Although these definitions may seem somewhat complex to comprehend, we can use them to examine whether ―contrasting‖, ―absurd‖ and ―opposing‖ elements are present in something that we intend to call a paradox. The learning paradox is recognized precisely in this way. Although we said earlier that existing knowledge is essential to the creation of new knowledge, we are also saying that existing knowledge is detrimental to the creation of new knowledge and thereby, learning. This is somewhat like saying that a mother is essential to the birth of a child, while at the same time asserting that the mother prevents the child from being born. It appears that one of the statements has to be incorrect for the other to be correct and that it is impossible to accept both of them simultaneously. The simultaneous acknowledgement of two such opposing claims leads to a tension in our understanding, and such tension is at the crux of any paradox. How do innovators resolve the learning paradox? This is a very difficult question to answer, almost impossible. Paradox is inherent in all organizational life and this is particularly true in the contemporary innovative organization, which lives in an environment of rapid technological, economic, social and political change. Greater the rate of change, greater will be realization of the learning paradox. Managers are expected to continuously develop, learn and adopt ‗best‘ practices to improve their efficiencies and save costs. At the same time, they are also told to constantly unlearn, reinvent, change and look for new and better practices. The smart organization is described as one that learns to make its own product obsolete before its competitors do so and as such, it has to create as well destroy its own offsprings. Likewise, the modern manager has to develop new rules to govern employees, to ensure that they are more accountable and responsible and that they deliver what they are expected to. At the same time, s/he also has to make employees feel that they are trusted and valued, that they need not be monitored and that they have the
autonomy to be more creative. The modern innovative organization thus has to learn how to learn, while simultaneously ensuring that it learns to unlearn. In essence, managers in the modern innovative organization must learn to live with the learning paradox, and not try to resolve it. The learning paradox cannot be resolved; it can only be coped with. There will always be a tension between the old and the new. While the old is a detriment to the new, it is also required to build the new. Not realizing this can be frustrating and can lead to undesirable reactions, while acknowledging it can be liberating. The learning paradox is real and easy to acknowledge, but requires diligence to cope with in practice.
Aggeri, F. and B. Segrestin (2007), Innovation and project development: an impossible equation? Lessons from an innovative automobile project development, R&D Management, 37 (1), 37–47.
Amabile, T. M. (1988), A model of creativity and innovation in organizations. In B. M. Staw & L. L. Cummings (Eds.), Research in organizational behavior, 10, 123–167, Greenwich, CT: JAI Press.
Amabile T. M. (1997), Motivating creativity: On doing what you love and loving what you do, California Management Review, 40, 39– 58.
Austin, R.D., Devin L. and E. Sullivan (2007), Accidental Innovation, HBS Note 9607-082, Harvard Business School Publishing, Boston, MA.
Barnett, W.P. and M.T. Hansen (1996), The red queen in organizational evolution, Strategic Management Journal, 17, 139–157.
Crossan M.M., Lane H.W. and R.E. White (1999), An organizational learning framework: from intuition to institution, Academy of Management Review, 24 (3), 522–537. 10
Pratibimb | April 2011 7.
Ford, I. D. and R. W. Backoff (1988), Organizational change in and out of dualities and paradox. In R. E. Quinn & K. S. Cameron (Eds.), Paradox and transformation: Toward a theory of change in organization and management, 81–121, Cambridge, MA: Ballinger.
Levitt, B. and J.B. March (1988), Organizational Learning, Annual Review of Sociology, 14, 319-340.
Lewis M.W. (2000), Exploring Paradox: Toward a More Comprehensive Guide, Academy of Management Review, 25 (4), 760–776.
Leonard-Barton D. (1992), Core capabilities and core rigidities: A paradox in managing new product development, Strategic Management Journal, 13, 111–125.
Nonaka, I. and H. Takeuchi (1995), The Knowledge Creating Company, Oxford University Press, New York, NY, USA.
Beat the Market As Jim Cramer, a former hedge fund manager, and a best-selling author put it, “As long as you enjoy investing, you'll be willing to do the homework and stay in the game… I mean I'm not smarter than the market, but I can recognize a good tape and a bad tape. I recognize when it's right and when it's wrong and that's what my strength is.” Stock markets have never been predictable, you may apply the best of logic and reasoning, but there could be a possibility that you may falter if the emotions of the investors take control. The entries for this contest have been judged by Mr. Vivek Didwania, Analyst, CitiCorp. The winning entry of ‘Beat the Market’, February 2011 edition is of Team Finsomniac, Mr. Ankit Bansal, SJMSOM, IIT Bombay!! Congratulations!! Also, the last time winners - Mr. Piyush Agarwal and Mr. Ankur Gupta - are from IIFT Kolkata and not IIFT Delhi. We apologize for the mistake. We thank all the participants for their effort. Beat the Market is a game designed to prove your mettle in stock market analysis. You have to pick any 2 listed companies from BSE and analyze their stock movements till 25 th May, 2011. On the basis of fundamental and technical analysis you need to give us your share price estimate of these two stocks as on 5th June, 2011. Fundamental & Technical analysis will carry 70% weight while 30 % weight will be given to Accuracy of the estimated prices in the final score. The winning entry will receive a letter of appreciation and prize money of Rs. 1000 /Rules: You can pick any stocks but the stocks should be from different industry You need to send us file by 09:59 AM, 25th May, 2011 You may analyze in a team of not more than 2 members The file should not be more than 7 pages long including cover page, the cover page should contain the team name, team members name, Institute name, contact number File name should be BTM_<TEAM_NAME>_<INSTITUTE_NAME> Mail the file at firstname.lastname@example.org 11
Pratibimb | April 2011
Currency Wars - Race to the Bottom Rahul Agarwal, MDI, Gurgaon
he modern day warfare has shifted from the traditional battle field to the corporate boardrooms. The decisions on who survives and who does not are taken by those who strolls the corridors of power. The battle is gauged, not by the number of soldiers felled but by the points the currency has fallen. Today, the currency symbol and not the armoury is the sign of strength. The war is definitely on, but there will not be a single drop of blood; red will only be the spilt ink. This is the new world order; this is the new way of life. ‗Currency War‘ was the term coined by the Brazilian Finance Minister Guido Mantega. It is an economic warfare where countries competing against each other try to achieve a relatively low exchange rate for their home currency so as to protect their domestic economy to preserve jobs and growth at home. It is better known as ‗Competitive Devaluation‘. It started as a duel between China and the US, but has now developed into an all-out currency war.
assets, which increases the supply of Yuan relative to dollars in currency markets. This makes Chinese exports artificially cheaper, while making foreign goods artificially expensive to the Chinese. Various estimates are that the Yuan is currently 2540% undervalued against the dollar. China is adopting export-led growth (exports make nearly 25% of its GDP) since long and has posted a trade surplus of $13.91 billion in December. Hence, China has resisted pressure from IMF and other advanced countries to allow for a sharp appreciation of its currency citing it could cut down China‘s growth rate to half. China said in June‘10 that it would allow its currency to rise gradually, but so far, it's risen less than 3% (Figure 1), indicating China is more interested in cosmetic changes than real appreciation.
Figure 1: Change in price of Yuan
Current Scenario China China pegged its currency Yuan to the US dollar in 2007 and stuck with it throughout the crisis. China constantly buys billions of dollars-worth of US
Figure 2: Exchange rate 12
Pratibimb | April 2011 US US economy posted an enormous budget deficit to the tune of $1.3 trillion in 2010. Federal Reserve has reduced the dollar‘s exchange rate by providing nearly free credit to banks at only 0.25% interest. This ―quantitative easing” aims at inhibiting U.S. real estate, stocks and bonds from dwindling further in price. Low U.S. interest rates and easy credit motivate investors to lend overseas or buy foreign assets yielding more than 1%. This dollar outflow coerces other countries to defend their currencies from being appreciated. (Figure2)
beginning of 2011 causing a loss of more than Rs. 11 lakh crores. Other Countries In October 2010, to disallow huge inflow of foreign capital, Brazil increased the Tobin tax on foreign capital from 2% to 6%. Some other countries in Latin American and Asia have initiated programs to buy dollars to check currency gains and loss in competitiveness (Figure 3).
Japan In 1985, Japan bowed down to US pressure and agreed to increase its exchange rate against the dollar as per the Plaza Accord. Within one year, the value of the yen had increased by some 60 percent. In an effort to stall the appreciating, Yen Bank of Japan (BoJ) lowered interest rates to nearly zero but Japan has still not recovered from the prolonged crisis that followed.
Figure 3: Loss in Competitiveness
China recently invested heavily in Japanese government bonds forcing Japan to publicly intervene in the foreign exchange market. Japan lowered its benchmark interest rate to ―virtually zero‖ and its bold 12 billion dollar move to push down the value of the yen proved ineffective.
The threat in all this is obvious: everyone may start intervening in currency markets, erecting tariff walls, passing anti-dumping legislation and quotas to protect powerful domestic lobbies. This could lead to deflationary spiral, the kind of protectionism that was one cause of the Great Depression.
How severe is Currency War?
Foreign institutional investors bought Indian stocks and bonds worth $221.43 billion in 2010 causing the rupee to appreciate over 6% since September. RBI has not intervened in the exchange rate and is looking at this as a two pronged strategy. Firstly, an appreciated rupee will reduce the imported goods prices, thereby curbing inflation. Secondly, RBI is permitting capital inflows to fund the current account deficit which has reached 3.5% of the GDP in 2010-11 fiscal. In the last quarter, the current account deficit was $13.7 billion while capital account surplus was $17.5 billion.
Currency war is severe because of its size. Some $3.2 trillion worth of currencies are traded each day. To put that number in perspective, the entire world stock market is about $36 trillion in market capitalization. The currency markets trade this amount every week and a half. Contrasting from trade, it is a ―zero-sum‖ game. If one country‘s currency rises, another country‘s currency must fall. Hence, there are winners and losers and no economy wants to be on the losing side with a "winning" strong currency.
But, RBI may soon decide to intervene in the currency markets because the ―hot money” that came to India in 2010-11 is already starting to reverse its direction. Consequently, the Sensex has already shed more than 3000 points since the
US want to levy taxes on imported Chinese goods. In other words, it wants to put a 40% tariff on a Chinese good that is enjoying 40% subsidy on account of undervalued Yuan. Today, the United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods 13
Pratibimb | April 2011 Short term solution Appreciating the currency is in the interest of the Chinese government because they need to build their domestic consumption market and not be longterm dependent on the whims and fancies of the American consumers. The undervalued Yuan has also created inflationary burdens in China (Figure 7). US should also control the printing of the dollar to fund the government debt.
Figure 4: Trade Imbalance from the United States. Figure 5 shows how much leverage China has over the US. Moreover China has almost a complete monopoly on rare earth elements. If China totally cut off the supply of rare earth elements, US would have no hybrid car batteries, flat screen televisions, cell phones or iPods. (Figure 6) Figure 6: Inflation in China Alternatively, US and Japan can stop China from carrying on its intervention policy without violating any international agreement. They only require enforcing the principle of reciprocity. If the Chinese want to buy more US Treasury bills and Japanese bonds, they can do only if they permit foreigners to buy domestic Chinese debt. The Chinese Central Bank would no longer be able to intervene in the exchange market and face problem of reinvesting the flow of T-bills coming due. Long term Solution
Figure 5: Unequal Competition Hence, both the U.S. and China have abundant reasons to avoid a serious breakdown in relations. Nations should focus on more coordination rather than adopting â€—beggar thy neighborâ€˜ policy.
We are beginning to see the dollar as something like a beached whale, basically in trouble. All this friction among nations marks the end of the process by which the US Dollar has been the undisputed world reserve currency. The world is changing and the institutions that surround the world will have to change with it; one of the institutions being the dollar itself. The last two years have seen mounting concerns around the validity of US dollar as the dominant 14
Pratibimb | April 2011 currency. This has originated from a horde of reasons, chief amongst them being the weak fundamentals of the United States as highlighted by its huge federal debt that reached 93% of the GDP in the fiscal year 2010, mounting unemployment (9.8% in November 2010) and enormous budget deficit of the order of $1.3 trillion in 2010. The strongest contender to replace dollar is Special Drawing Rights (SDR) of the International Monetary Fund (IMF). The nominal value of an SDR is formulated from a basket of currencies – precisely, a fixed aggregate of Japanese Yen, US Dollars, British Pounds and Euros. The share each of these four currencies contributes to the nominal value of a SDR is reevaluated every five years. After the onset of the global economic crisis in 2008, the BRIC countries – Brazil, Russia, India and China – led largely by Russia and China, have called for abandoning the dollar and moving into a global currency scheme. There have also been dialogues to expand SDR‘s reference basket to embrace all major international currencies which will be a better representative of the forthcoming multi-polar world.
Sharon Lafraniere and Bettina Wassener, China‘s Trade Surplus Decline Suggests Less Reliance on Exports, nytimes.com, January 2011, http://www.nytimes.com/2011/01/11/ business/global/11yuan.html?_r=1
Ketaki Gokhale and Adi Narayan, Rupee Gain to 43 May Prompt Sales as Exports slow: India Credit, businessweek.com, October 2010, http://www.businessweek.com/ news/2010-10-19/rupee-gain-to-43-mayprompt-sales-as-exports-slow-indiacredit.html
Press Trust of India, Market Crash: Investors lose Rs. 11 lakh crore since Diwali, businessstandard.com, January 2011, http:// www.business-standard.com/india/news/ market-crash-investors-lose-rs-11-lakh-crsince-diwali/123851/on
US budget deficit reaches 1.3 trillion USD in 2010, business.globaltimes.cn, October 2010, http://globalglassonion.blogspot.com/2010/08/ weel-ending-aug-21.html
Daniel Mello, Brazil Slaps 6 % Tax on Foreign Investors to Reduce Speculators’ Appetite, brazzilmag.com, October 2010, http:// www.brazzilmag.com/component/content/ article/91-october-2010/12401-brazil-slaps-6 -on-foreign-investors-to-reduce-speculatorsappetite.html
William Gamble, Currency Wars: Why are they now hitting a low note?, moneylife.in, October 2010, http://www.moneylife.in/ article/currency-wars-why-are-they-nowhitting-a-low-note/10070.html
Bring on the Repulicans!, agentlemansview.com, October 2010, http:// agentlemansview.com/2010/10/19/bring-onthe-republicans/
US Federal Debt as percent of GDP, usgovernmentspending.com, http:// www.usgovernmentspending.com/ federal_debt_chart.html
Globalist organizations such as the IMF believe that devising a true global currency would assist world trade; it would make currency wars unlikely, it would soothe the global economy and it would make the rest of the world less dependent on what is going on in the United States. Conclusion So far world finance leaders have failed to find an appropriate solution to the on-going currency tussle and the dialogue has remained at the diplomatic level only. The finance leaders should put the interests of the global economy ahead of their national economies during negotiations. Otherwise, global tensions will further rise over currency rates as emerging markets try to repel off a torrent of investment funds pursuing higher returns, and countries struggle to keep the prices of their exports competitive, leading to a virtual trade war.
Pratibimb | April 2011
Interaction Vs. Intervention Marketing Rohit Arora, TAPMI Alumnus
he long lasting big players of the industry have always talked about the importance of customer satisfaction and the need of aligning their marketing activities with the interest of customers in order to make it more interactive. The basic foundation of marketing is bricked by the importance of customers in a business and the utmost priority given to the customer needs. But it
more a problem for any person since the introduction of spam box and most of the people have learnt to block the numbers from which they frequently receive sales calls. But are these the only areas where interruption marketing has extended its reach or have the companies, intentionally or unintentionally, flooded one of the most effective media of marketing with so many of repetitive
seems that the emerging market trends and the developing economic conditions of the world have forced the marketers away from the belief and led them on a path which might become more of intervening than of interacting.
advertisements that it has started interrupting the customer‘s day to day life?
The term ‗interruption marketing‘, a marketing practice which believes in interrupting people during their day to day life to get some sort of response from them, was coined by Seth Godin. Though, according to many marketers, interruption marketing worked in past and will work in future, some practices adapted by the concept did interrupt the customers and the result was not surprising – customers ignored it. Large number of emails flooding the mail box with advertisements is no
According to The Cable Television Network Rules (1994) section 7(11), a television channel must not show advertisements for more than 12 minutes in an hour, though the current average advertisement time on television can be as much as 25 minutes for many of the channels, specifically those loved by the customers. The cluttered information is not only difficult to assimilate for the consumers but also not appreciated by them. The lesser willingness to extract anything useful out of the gamut of advertisements makes it even less probable that a consumer might well remember the brand or the information communicated by the advertisement. 16
Pratibimb | April 2011 Companies, blindly running in the race to acquire more share at the T.V. channels during the most popular shows, never try to know if the viewers (the consumers for the companies) look at those advertisements as a source of entertainment or an interruption, a source of information or just cluttered mass scattered randomly in front of them. Moreover, if they actually watch them or the developing technology has enabled the viewers to skip the advertisement by quickly changing the channel or by watching a recorded version, courtesy to the invention of DVR, of the show just to ensure that they are not disturbed by the long chain of advertisements which sometimes continue for longer periods than the show itself. The increasing number of downloaded daily soaps do indicate that the consumers are shifting towards other technologies to watch what was limited to T.V. till a few years back, for some reason. A report by Morgan Stanley, published in 2009, based on the experience of an intern states that there is a lesser inclination for television among the teenagers or the younger generation which is supported by a number of factors, one of which is – the large number of advertisements on T.V. which they want to avoid. The older generation which doesn‘t share the fondness for technology as much as the generation Y, develop an easier way of skipping the advertisements: mental blocks. According to the psychologists, ‗selective memory‘ is a defense mechanism of our brain to combat the assault on our senses; brain tends to retain only what is necessary. The information perceived to be unwanted or interrupting cannot create a recall in a person‘s brain. And for more tangible approaches which could be noticed, muting the television during the course of advertisement is the easiest to follow. The race towards advertising to gain the mindshare of the customer without knowing whether the advertisement is reaching the customer in the planned way or not, has led us to the scenario where
customers have started thinking of options to avoid the advertisements. Companies have simply believed that they have to be everywhere in order to get noticed. But the willingness to notice something cannot be attained until consumers involve themselves in the advertisements. May be the mantra of ‗less is more‘ would be able to get the same attention back once again and reduced advertisements might push the consumers towards noticing them. Present world‘s consumers are well informed and aware of the fact that advertisements are one of the tools of the marketers. With the development of value offerings like ‘T.V. on demand’ speeding towards penetrating the market; it will be even more difficult for the advertisers to grab the attention of consumers, given the same condition continues. It‘s just a matter of time when consumers will be willing to part off with the extra penny in order to watch a commercial free episode of their favorite show. Therefore, it‘s time to ask if we are exposing the right advertisements at the right time to the consumers or simply cluttering the market with ample of them to grab their attention at some point of time, otherwise it wouldn‘t be too late when the emerging technology would equip the consumers with a tool which will once again enable them to get rid of the interruption completely and put all the advertisements in the spam box of their television set.
References 1. Victoria Jeffrey, Too many commercials: Are they strangling TV?, helium.com, December 2007, http://www.helium.com/items/727604-toomany-commercials-are-they-strangling-tv? page=2 2. So, interruption marketing isn‘t working!!, angelofernando.com, http:// www.angelofernando.com/Interruption.htm 3. ‗How teenagers consume media‘ by Morgan Stanley, 2009 17
Pratibimb | April 2011
The Employment Relationship: Crucial Challenges for HR Mansi Praveen | Bhavna Khar, XLRI, Jamshedpur
he fundamental reason behind the highly flow of produce created by the various dynamic employment relationship of today functions in the organization stems from hyper-competition - the 3. Delineate and control the duties, rights, unpredictability, disorder and stress facing modern functions and roles of the organizational organizations. And other environmental forces are members said to have created this waves of changes. Disorder is created at the interlude between the end of a cycle In the present era, knowledge based resources and the beginning of a new economic cycle, based within an organisation will base the success and on political, economic or technological forces as guide the organizational structure design. For drivers of change .Organizational behaviour example, ERP, sales systems have an influence on specialists concur that such disorderly changes will the workflow and organizational functional differentiation because the efficiency associated result in corporate with these systems garners confusion and anarchy due profitability of the to the economic and ―Treat people as if they were organization. Knowledgecompetitive forces. based systems today have what they ought to be, and Managers are, thus, facing empirically proven their strong and highly career you will help them become mettle in cost reduction challenging forces. They what they are capable of and better communication contend that their work in along with increased becoming.‖ ~ Goethe business has transformed capabilities to support to an almost war-like employee learning and situation. Businesses have become synonymous with cut-throat and survival of knowledge management. the most competitive. Thus, in order to cope with hyper-competition, organizations will value human capital as a highly valuable asset and will develop the same in new ways, along with their systems and core competences. This pressure to be flexible will challenge employment relationship, especially so because it will necessitate the development of new organizational structure. New organizational structures and knowledge based competition The basic purposes served by organizational structures are as follows: 1.
Identify and percolate the organizational aims.
Control the allocation of resources and the
Bureaucratic organizations today have their inbuilt design deficiencies exposed. They were initially created when it was possible to commoditize knowledge. Today, very little control can be exerted on knowledge flow, and the insights can flow in a more open manner. Controlling the knowledge, as it happens in bureaucratic organisation stymies creativity and learning - the corner stones to learning organizations. An organization which ceases to learn soon declines and enters the death stage of the organizational life-cycle. Following are some of the new organizational forms:
Boundary less organizations
Distributed knowledge system 18
Pratibimb | April 2011
The challenges associated with these new organizational structures are related to interdependence. Highly needed advances in IT and communication systems and capital mobility related reforms have made it more cost-effective. All parties to a business transaction are highly dependent on each other for their desired outcomes. Management of such systems has increased the complexity due to dispersal of authority across parties.
three issues are the basis for the deep shifts taking place in the very nature of work: The time gap between technological changes and their impact on organization structure and processes How the structural changes and new forms of organizations affect the integration, organization and distribution of roles and responsibilities Job–content, job-design and their co-ordination by HRM systems In order to perform skill matching, exploit employee creativity, organizations have been using total quality management, just-in-time, lean manufacturing, team-work and empowerment. Past
For instance, the knowledge base of a firm is intrinsically linked to the knowledge of their employees. This is particularly the case in knowledge-intensive business services, where the production of services is almost entirely dependent on the ability of the firm to make use of the knowledge of the employees. Applying a distributed knowledge system view of the firm helps us understand that how knowledge is created is more important than what knowledge the firm and its employees have. (2001, JACOB NORVIG LARSEN) Workplace Flexibility and Its implications on the employment relationship To survive in this hyper-competitive world, new workplace practices are being designed to pass on some part of the risk burden from the State and the private organizational entities to the employees themself. The following important choices have emerged: 1.
Stable vs. a new contingent workforce
Highly informational, technologically intensive vs. low skill, low pay and low training jobs
Flexible specialisation of workforce allowing de-skilling and multiskilling of workers vs. new structures introduced only for the sake of perpetuation of inequality and power centres
How the previously listed organisational structures affect the employment relationship has not been ascertained empirically yet. However, the following
changes have increased relevance of operational knowledge, higher level of work interdependence, higher cognitive-abstract qualifications needed for optimum performance, emphasis on soft skills and social competences. New systems of work organization, such as lean production and total quality management, have been introduced by employers throughout the industrialized world to improve productivity, 19
Pratibimb | April 2011 quality and profitability. However, few studies have examined the impact of such systems on occupational injuries, illnesses and on job characteristics related to job strain. And it has been found out that these systems lead to hypertension and cardiovascular disease. The studies provide little evidence to support the hypothesis that lean production "empowers" auto-industry workers. In fact, auto industry studies suggest that lean production creates intensified work pace and demands. The increase in decision authority and skill levels is modest or temporary, whereas decision latitude typically remains low. By flexibility, the manipulation of job-context, jobcontent and so forth is implied today. Managers have been simultaneously manipulating the following aspects: 1.
The tasks, duties, responsibilities, workelements that are bundled together into jobs
through the use of various HRM systems like compensation, Performance management etc. Psychological Contract In this changing business environment, the psychological contract between the employer and the employee is susceptible to be broken. It is important for managers and supervisors in organizations to have a proper appreciation of the nature and dynamics of the psychological contract and its implications on employee behaviour and attitudes. Psychological Contract serves many functions like predictability, stability, security and control. The cognitive view of Psychological Contract conveys important principles about managing change in employee‘s mind-set e.g. experts process information differently from novices. Thus, the organization should support this change in employee mind-set through some HR policies like
Framework for Psychological Contract
Redesigning job contexts into which jobs are placed, positioning new jobs through job families into the broader framework of organizational design, the job–holder`s occupation, the career stream to which jobs belong, the work process of which it forms a part
The interaction between jobs, informational flow and control, power associated with the jobs
Aligning of these jobs with the organizational strategy – by modifying the competence and commitment required by the employees –
getting employees actively negotiate new job conditions after a merger. Through these exercises, the psychological contract would change, thereby enabling the organizations to redefine the employment relationships. Changing Structure of employment With the changing business scenario, there is a dynamic change in the way short term employment relationships are perceived. For example, some of the perceived trends in the changing relationship are:
Long term jobs with a single employer are a thing of the past 20
Pratibimb | April 2011
The labour market offers mainly short term and unstable jobs
New job sites, new bosses, new visions, new team roles, responsibilities and new policies
The attitudes most appropriate to employment relationship are entrepreneurial because individuals need to manage their career efficiently to maintain their own employability
Taking on more work, managing on-going cost reductions
Different progression opportunities
New rules of employment relationship and new rules for the negotiation process within the relationship
Loss of peers and changes in the social fabric of their work life
On-going fears about the survival of their own job
But, studies have shown that the long term employment relationship have proved to be very resilient. Heere and Salmon, in their research have drawn attention to a theory called ―insecurity thesis‖ which is a social theory stating that there is a connection between the developments in the world of work (as stated in the bullet points above) and the changes in the individual‘s and society‘s life beyond. They note that government, policy makers, trade unions and management organizations - all express concern at the levels of risk and instability which is defining contemporary life nowadays. They are working towards strengthening employment relationship as employees are the greatest asset of an organization which provides them competitive advantage. Job stability and employee outcomes Jon stability of an employee in an organization is a signalling effect of the employment relationship. But this relationship is not empirically proved. For example, there is a market variation in the average tenure that employees have on jobs across countries. Also, employees change jobs more frequently while they are young which shows that the age structure can influence job security. Restructuring In a dynamic economic environment, the behaviour and attitude of the employees is changed drastically. Thus, special emphasis should be paid by the employers to strengthen the employment relationship. The changes felt by the employees are:
Working in a new organizational structure and design
The organization resorts to strategies which are mainly based on control and containment. Due to this, there is a loss of honest communication, resistance to change and decreased morale. Employees sense a loss of trust and lack of information sharing. This lays more stress on individualism and a sense of vulnerability and insecurity pops up in the employees. The organizational structure changes to a centralized. Also, many studies have been done to capture the attitude of employee after layoffs. It is proved that job satisfaction, organizational commitment and job involvement reduce drastically among employees after layoff. Attrition rate shoots up for the organization once the economic situation starts reviving. Thus, as stated above, there are many areas which affect employment relationship and HR is evolving to fill these gaps. Employees are the greatest asset of an organization and nurturing and providing them the opportunity to grow will act as a competitive advantage for the firm. The growing importance of employees and their relationship is described by Steve Jobs in the quote: ―The people who are doing the work are the moving force behind the Macintosh. My job is to create a space for them, to clear out the rest of the organization and keep it at bay‖ 21
Pratibimb | April 2011
An Interview with Mr. Dhanendra Kumar Chairman, Competition Commission of India
Mr. Dhanendra Kumar assumed the office of Chairperson in the Competition Commission of India (CCI) in February, 2009. Previous to this Mr. Kumar was Executive Director for India at the World Bank in Washington, representing India, Sri Lanka, Bangladesh and Bhutan, during 2005-09 Mr. Kumar spent the vast majority of his professional career with the Indian Administrative Service (IAS), of the Government, in various jobs in industrial and economic development. Mr. Kumar joined the IAS in 1968 and served at the State Government of Haryana and Government of India. He gradually climbed the ranks to become a senior official with vast experience in the economic and infrastructure development sectors. From 1983 to 1986 he was stationed as the Resident Director of the India Investment Centre in London, England, responsible for promoting investments into India, joint ventures and collaboration ventures. Just prior to his move to the World Bank he served
as the Secretary in Government of India for Defence Production. Formerly, he also served as Secretary Road Transport and Highways and Secretary Ministry of Culture in the Government of India. As the Additional Secretary, Telecom, he was closely associated with the telecom revolution in India through opening of competition in telecom sector during 1998-2002. Mr. Kumar also served as the Principal Secretary to Chief Minister, Haryana and as the Chairman of the Haryana State Industries Development Corporation at state level during 1991 -1996 and was closely associated with industrial development in Gurgaon and around Delhi and was awarded ‗National Citizen‘s Award‘ by Mother Teresa for outstanding contribution in development of Industrial Parks in Haryana. During his visit to TAPMI, he shared his views on various areas with us. His short interview with Pratibimb is as following: 22
Pratibimb | April 2011 Q: Can you please give us a brief on the role and functions of CCI for developing India? The role of CCI is meant for economic development of India. CCI essentially seeks to regulate the com petition to ensure that there are no abuses of domi nance, no cartels, no anti-competitive agreement and there should be no attempt to disturb the state of competition in a manner that customer's interest are adversely affected. Q: Various sectors have to be regulated under CCI, but what if regulators of some of the sectors like RBI and IRDA ask for their sector to be exempted from CCI? What will be the role of CCI in future under such circumstances? Will it not reduce the scope of CCI? Government of India has not notified any sector to be exempted under the Act. There is a specific pro vision under Act Section-54 of competition which gives the power to government for exemption for a sector for a specific period. The government, in or der to assess the growth of particular sector at a par ticular point of time, can take a call if they need to exempt a sector for a period. The CCI has no role in that as this has to be decided by the Government of India, taking account of all factors. This process is a dynamic process and based on various factors they can exempt a sector. One of the major factors to be taken into account is whether the sector‘s respective regulators which are acting in a particular sector are competent enough to undertake that regulation. There are various sectors whose respective regula tors like RBI, IRDA, PFRDA and others are play ing roles regards to regulations for their respective sectors. The CCI is supposed to be a specialized body which looks after the competition related mat ters. The other issues like quality, standards, prices and others are handled by those sectors‘ respective regulatory body, but competition related issues are handled only by CCI. But under Section-54 of Act, Government has powers to exempt any sector for a specific period and from a specific provision to ben efit the economy. But, till now, there has been no such notification for any sector. Q: You have a diverse experience of working in various sectors. There have been lots of scams in past in various sectors. What will be the role of
CCI in preventing them from occurring in future and your view on those? What will be role of CCI to eliminate cartel? Any cartel in any sector wherever it exists is bad. Cartels among companies to the extent when they adversely affect the interest of consumers are not good. When competitors get together to promote a common view point before the GOI which in a way could be the role of association, groups or so on, there can be a common interest to form a cartel on any issue like prices, operations in a territory which are against laws, bid rotation, bid rigging, bid distri bution or any undesirable acts which are against rules and competition act. If a particular company takes up with the government a cause, which they feel is a concern whether individually or collective ly, then one will have to see whether it is on foul as per the competition act or not. Q: The time-period for M&A’s approval from CCI has been reduced to 180 days from 210 days. But, it is still higher. What are your views about the time frame about mergers and acquisition act in India? In India, the mergers and acquisition have been stipulated in regulation within two phases. The phase-1 is for 30 days and 90-95% is cleared within 30 days where there is no appreciable adverse effect on competition whereas the remaining 5-7% could take up to 180 days. There are various stages which are involved in detailed scrutiny and hence these numbers of days are quite comparable with rest of the world. In USA, the part-1 or phase-1 takes around 15 to 30 days and part-2 has unlimited time when detailed scrutiny takes place. Q: Sir, what’s your view on the rise in onion and cement prices. Was it because of cartel formation or hoarding? What is the role of CCI in this case? Under competition act, any anti-competitive is per say illegal. It is automatically illegal. Now, the problem lies in detecting it. In order to establish that there is cartel, we need to have evidence. It is not an easy task. We take a few motto-notices and ask Di rector General to carry out investigation and he works to compile all the facts. Based on the report, we can conclude on the factors responsible for price 23
Pratibimb | April 2011 rise. In other case, to break a cartel, the most effec tive mechanism is leniency provision or whistle blowing or indemnity scheme. If a person comes out against a cartel, and shares the information, full immunity is granted to him. Based on the evidences and information, cartel can be bust. Q: Many people still don’t know much about CCI. How are you planning to spread awareness about CCI in India? How CCI is different from consumer commission and what difference will it create for consumers? Competition Commission of India is supposed to undertake the competition advocacy under Act-49
of competition act. Through this, we can create awareness and education and sensitize various stakeholders. We go around the country e.g. we had a session with industry, consumers and trade. Indi vidual cases of consumer grievances are supposed to go to consumer courts, while the class sections which arise as a result of competition come to CCI. For example, if you take the case of onion, if it is an individual case it should go to consumer commis sion, but when it is a case of a class or wider socie ty, it should come to Competition Commission of India. This is one of the differences between con sumer commission and CCI.
1. His family send him to study chemistry in England in 1924. Instead, he changed ships and went to Humboldt Germany, then became the world's leader in chemicals. On a Berlin lake, he met a Lithuanian Jewish socialist and married her later. They fled when Germany was shifting into Nazi hands, and founded------------- in 1935. Identify the person and the company he started. 2. The day he graduated from the military college, Indo-Pakistan war was started. Since he hated war, he wanted to leave army. After he left army, he started silkworm farming and few years later won the Gold Rolex award for ecological farming. But he is known to us for a different revolution that he started in India. Identify the person. 3. He started his career in his father in law’s garment business. In a deal with American importer, Bill Jacobson, the clothes made by his company were exported to the US and made into suits, sold exclusively at Brooks Brothers. However, his instructions to Jacobson that the clothes should only be dry washed and never washed was not communicated to all the clients. The clients washed the clothes and the colours faded. Instead of getting into legal entanglement, he decided to sell the clothes with USP of getting new colour on each wash. Identify the person who earned his first fortune this way. 4. This company’s first name has just 3 letters: 1st letter as founder’s father’s name initial, 2nd letter as founder’s mother’s name initial and the third letter symbolises everybody else. Identify the company. 5. Person (A) set up a small perfumery shop in the year 1929 and within a short time his shop became very renowned. Later on he was joined by his son (B) who brought the dawn of a new era in the business. They entered into various related and unrelated diversifications. Currently the group is a Rs. 1600 crore diversified conglomerate and a market leader in many product segments.
Send in your entries before 10th May, 2011 @ email@example.com with subject line as QW_<Sender’s name>_<Institute name> The name of the first person with maximum correct answers will be published in the next issue of Pratibimb Powered by : 24
Pratibimb | April 2011
Social Media Marketing : A New Dawn in Marketing Revolution Mansi Gupta, MIB, Dept. of Commerce, DSE
n eight months of its grand opening at Gurgaon, Kingdom of Dreams, a unique cultural hotspot in India, has garnered a popularity that only a few would have thought of. A close look at its Facebook page and the fan numbers bear testimony to the fact. Over 130,000 fans discussing their experiences at the cultural galleries, making others go gung-ho about visiting the place.
that is here to stay for times to come, and shall only delve deeper and deeper in the grounds of virtual market space.
A similar assessment of Facebook page of Pizza Hut with over 850,000 fans provides new food for thought. Latest World Cup Campaigns, and posts flooded with patrons going gaga over the new items on the menu, provide a perfect launch pad for every marketer‘s aspirations of connecting to millions at a time.
Another subset of Social Media Marketing is the concept of Crowd Sourcing, which revolves around close consumer engagement, taking inputs from those who are to be targeted. This is perhaps what Unilever wanted when it decided to source consumer generated advertising content in April, last year and decided to give away 70,000 GBP in prizes. Same is the case with Starbucks with over 20,000,000 fans at Facebook, taking public polls
The ongoing PepsiCo‘s Social Media Campaign, ―Pepsi Refresh Project‖ echoes similar sentiments. The campaign aimed at inviting ideas from general public in various domains like education, culture, arts and music is wired around the concept of building corporate social responsibility through consumer engagement, which is yet another stretch in the social media marketing quagmire.
Broadly defined, Social Media Marketing involves branding and building customer relations over new media channels that primarily include advertising over Internet, through public portals. But, this is only one of the many facets of it!
And these are only a few of the millions of such success stories, marking an onset of a new dawn in the Marketing Revolution, to what is now called the ―Social Media Marketing‖. It is not a phoenix that has risen out of the ashes all of a sudden, but an outcome of diligent efforts of companies branding in the digital world. Gone will be the days when marketers would be worrying about jostling with the competitors in the real time market arena. Not far will be the times when they shall be going berserk with anxiety over the dwindling fan followings at public portals like Facebook and Twitter. Is it the beginning of what will be known as a ―Social Media War?‖ Howsoever it may be termed, but it surely is a trend
and ideas and in the process retaining a large pool of loyalists. So, the question that arises is why every marketer is vying to be ahead of all in this rat race? The answer lies in the changing trends of Consumer Decision Model which governs the laws of consumer engagement. It was not many years ago that the principle of the famous Funnel Metaphor decided 25
Pratibimb | April 2011 the consumer engagement strategies of firms. Based on the premise that consumers narrow down, from many brands that they see and get to know, to fewer and then eventually final choice, the metaphor was the holy Bible of the marketers then. But with the advent of digital age, the metaphor used traditionally by marketers to build on recall value and awareness strategies around the visible points at the periphery of the funnel, failed to realize why consumer engagement shifts. Today the internet with 1,966,514,816 users worldwide, which shows a steady 28.7% penetration (percent of world population), as per World Internet Usage and Population Statistics, cites why the digital success story is going strong and registering a phenomenal growth. And this is the reason, why more and more companies felt the need to mark their presence in this virtual market arena, roaring to be captured and tamed. So, what are the new rules of the Game? Is it a new kind of consumer involvement model that is based on the concept of the loyalty loop? Is it the one that draws strength from the concept of Buy-enjoyadvocate and bond? So, are we not looking at a concept which starts right from the time the consumer buys the product and keeps them coming back? Well, the answer to all these questions is an outright YES! These are essentially the stages in the Model of Social Media Marketing. Well, now the question arises that how well this model is able to justify the growing needs of businesses to go online, where their target audience is waiting for them to open the doors and embrace the buzz! Does it not hinting towards the effectiveness of Social Media Marketing? Well, Yes! Social Media Marketing is generally not taken up
by the companies as Standalone Branding Strategy. Often, it is undertaken as a Complementary medium to the traditional push marketing approach and advertising, with intent to catch the customers once they log off from the traditional media like the TV or the print media advertisements. To put it simply, the link to social media in a businessâ€˜s traditional advertisement is a way of saying, â€•See you thereâ€–! So, it is right to say that the job of Social Media Marketing starts from where the traditional marketing ends, and not only this, it sews the loose ends left in the traditional campaign. This is justified with a wholesome experience that we get when we select the phone model that we wish to purchase, and the Company website plays the role of a nearby retail store. Merely advertising the product on TV and print media does not ensure many eye balls these days. And that is why, companies take special care to meet their target audience online, where there is no dearth of creativity that can be put to work. They know that the consumer these days spend more time watching stuff online than remaining glued to their television screens. According to a study, an average internet user spends 13 hours a week online, excluding e-mails. However, this does not necessarily indicate that Social Media Marketing is the only effective medium. Generally, it acts like a complement to garner as many eyeballs as possible. Now, the question arises that how Social Media Marketing converts these eyeballs to potential customers for the businesses? It also leads one to think, is it not too dangerous a thing, considering it leaves the business open to criticism and negative publicity? Well, Social Media Marketing can be considered as a double edged sword, a tool that opens myriad of opportunities to businesses, but may also present unanticipated events in store that may go off the track. So, it is up to the marketer 26
Pratibimb | April 2011 how to carefully cut through the competition, to make the brand heard! And not just to let self-heard and the products speak, but also to let the customers be heard. This is what ensures retaining the pool of the loyalists. So, how to ensure that an online marketing campaign does not come under the hammer and thus, protect the brand from negative publicity? One way is to understand why it might be so. Probably, the situation might not just be that grave and might be warded off with a little interference. For instance, have a look at a hypothetical situation at the social media campaign of a fast food chain: Campaign says, ―Time to savor sugary delights with our new exciting range of strawberry mousse topped with soft coconut gratings‖ Following are the comments posted by users: A: Yummy! I have tasted it and found it really good. B: I second. C: Waste of money! The coconut gratings with strawberry make a poor combination. On top of that, slow service spoiled my date. D: I found it terribly good. E: I second C. …suppose a hoard of customers now try to bring on board the criticism, and the product is losing the sheen. In such a situation, a little interference from the brand saying, ―We apologize for the unpleasant experience that you might have had with our service. Did you try our new range of dark chocolate mousse? Probably, you might like it better than the strawberry one‖. Such a response may re-instill confidence in the patrons, and they feel that they are being heard! So, the point that is to be considered is that some times, the customers are only looking for a platform to be heard, and vent off their frustration that might come up with an occasional bad experience with the brand or service! So, instead of reacting immediately, it might be advisable to wait and watch, for it may happen that the onset of a storm may be abated by a pleasant cool breeze of positive poll. However, a timely interference by the
monitoring team shall be made in order to make the customers feel that they are heard and they matter! But, all might not be well with Social Media Marketing Quagmire. And, this can be seen through the challenges that companies face worldwide in improving their bottom line through community interaction and communication. At times, the difference of purpose between communities and firms going social ensures no positive or less than targeted results for the firms. And, this is one of the reasons behind failures of Social Media Campaigns. Having a mutual sense of purpose is a pre-requisite and hence merely getting people talking will not work if the firm is looking at improving its bottom line. Now, let us analyze the Social Media Marketing Model with respect to Indian Market to explore its scope in the times to come. India ranks fourth in the world in terms of number of Internet users, after China, United States and Japan. India has over 6% of total world‘s population of internet users and it is expected to grow, as per Internet World Stats. China has 21.4%, followed by United States (12.2%) which is followed by Japan (5%). This shows that there is a huge scope of Social Media Market in Indian Market. And the growing number of brands showing successful social media presence bears a testimony to this fact. Often businesses try more innovative customer engagement activities online, as witnessed by the New ICC World Cup 2011 Campaign adopted by Pizza Hut on Facebook, gauging the craze for cricket in India. Another success story is of Pantaloons Group with over 520,000 fans at Facebook, giving daily updates on their new collections and receiving feedback from the patrons. And same can be observed in services, with institutions like Career Launcher coming up with GD/PI tips, B-school updates and quizzes to keep the MBA aspirants hooked. To conclude, Social Media Marketing is not only a new wave in Marketing Revolution, but a metamorphosis of businesses‘ initiatives towards connecting to customers digitally! It is more of a complementary activity, rather than a standalone strategy, which is to shine in the times to come.
Pratibimb | April 2011
Enterprise 2.0â€”A Way to innovate Rohit Kumar, TAPMI
he world today is undergoing rapid changes. The traditional way of doing business no longer holds importance. As the Great recession is fading away, a new business environment is emerging which poses new challenges to the organisations. The businesses have become a matter of survival. Those who will not change with time will be thrown out from this new landscape. As per this yearâ€˜s Bloomberg/ Business Week/Boston Consulting Group (BCG) annual survey of top executives, eighty three
can do, but also publicizes what it needs. P&G is looking for & inviting new ideas from everybody and about anything from the way they do marketing to the way the organisation functions as a whole. It has recently bought a new technology for an antimicrobial product from a company that submitted its proposal through P&Gâ€˜s website. So, we see how P&G innovated to bring customers, partners and employees under same umbrella of their website.
percent of the executives surveyed said innovation will play a major role in benefitting from the recovery. So, businesses are trying to innovate more & more to stay ahead of the competition.
technologies. Today, technology has the power of making new industries and breaking existing industries. Some years ago when e-mail technology arrived, most of the companies adopted it to increase collaboration and help its workforce to do the work more rapidly. People also adopted it comfortably in their personal and professional life. But as the environment around the companies is getting more complex, they need new technologies combined with innovation to increase the collaboration.
Earlier, organisations had pre-defined innovating team consisting of engineers, researchers etc. But under the changed circumstances, they no longer want to have a limited team for innovation. They now have a broader view on this topic and they invite ideas from every corner of the world. There are many organisations which have already adopted this philosophy e.g. Procter & Gamble which applied open-innovation strategy through its website. It not only shows what it knows & what it
One of the ways to innovate is to adapt to new
The organisations are trying to bring in the power of Web 2.0 tools and social software platforms 28
Pratibimb | April 2011 which enable people to collaborate and/or form online communities into enterprises to create ―Enterprise 2.0‖. It is a term coined for the Web 2.0 technologies that liberate employees from the constraints of using earlier communication tools like e-mail. It is a web of inter-connected services and applications which provides managers with the
they need to better capitalize on collective intelligence of their organization. The study also shows that the companies which outperform financially are 57% more likely to use social networking and collaborative tools so that different teams spread across world can work more efficiently than those companies which
right information at right time. It provides organisations with a competitive advantage in terms of innovation & productivity. The new Web 2.0 technologies are not just for socializing like Facebook, Twitter etc., but if applied in a proper manner can help organisation in solving severe problems, capturing fast changing knowledge, leveraging expertise, generating and refining ideas and harnessing the wisdom of the crowds. The web 2.0 can be used to improve communication, cooperation, collaboration and connections which has been called the 4Cs of social software by Niall Cook in his book titled ―Enterprise 2.0 – How social software will change the future of work‖. It can help organisation in making information exchange and collaboration among its employees and among its partner network more simple and agile, keeping the organisation ahead of the competition.
underperform financially. Of the 707 executives surveyed, 78% HRs think that their organization is not effective at encouraging the use of collaborative and social networking tools. Instead of this, only 21% companies have increased investment in collaborative tools. The figure below shows the percentage of respondents who use collaborative tools for different purposes.
According to a study conducted by IBM in 2010 named ―Working beyond borders‖, most of the surveyed Chief Human Resource Officers said that
This survey by IBM showed that many organizations are still at a very nascent stage of deploying social networking and collaborative tools. Today, social software is being adopted in the organisations to have better performance of their work forces. This gives employees a bigger platform to collaborate and communicate than e-mail. Due to this, relationships between company and employee and also among employees are changing rapidly. This is helping organizations to reshape from bottom to up. There is also an increasing trend where customers share their problems, new products and opinion on 29
Pratibimb | April 2011 improvements in real time on the web. New ideas generation today are taking place on the web where your competitors can see your changing strategies and can act accordingly. This means companies need to continuously innovate and take fast decisions. Enterprise 2.0 helps manufacturing companies to integrate their suppliers through secured communication network, thereby reducing the cost and improving the quality. In this flatter world where even the smallest companies want to compete at global level, social software provides them a means to find and connect with new customers and thus expanding their business. Going forward, industries not only need to innovate but also to manage and strategize innovation as per the need of the time. They will also need to adopt new technologies as early as possible to increase productivity and collaboration and there by staying ahead of competition. References 1. “Are Collaborative Technologies On Your HR Department’s Agenda?” by Rawn Shah - http://
blogs.forbes.com/rawnshah/2010/10/22/arecollaborative-technologies-on-your-hrdepartments-agenda/ 2. “Enterprise 2.0: How Social Software Will Change The Future Of Work” by Niall Cook 3. “Enterprise 2.0: A new approach to strategy” by Dhiraj Mukherjee http:// www.infosysblogs.com/digitalconsumer/2010/06/ enterprise_20_a_new_approach_t.html? shr=twtm 4. “Managing Innovation in an 'Enterprise 2.0' world” by Dhiraj Mukherjee - http:// www.infosysblogs.com/digitalconsumer/2010/07/ managing_innovation_in_an_ente.html 5. Whitepaper on “Accelerating Business Performance” by Sovos Group - http:// www.e2conf.com/downloads/whitepapers/ent2 -10_TWwhitepaper.pdf
Inviting Articles “Best Article”: Rahul Agarwal | MDI Gurgaon Congratulations!! The winner will receive a cash prize of Rs. 1000 & a letter of appreciation. We are inviting articles from all the B-schools of India. The articles can be on any field of business from Marketing, Finance, Operations, HR to Systems. You can send us articles on: Recent developments or trends in any of these fields Articles covering latest trends, innovative practices, strategies, etc. in the global perspective We also invite articles on management thinker similar to the current section Apart from above, creative works in relation to any of the fields will be equally appreciated The best entry will receive a letter of appreciation and a cash prize of Rs 1000/-. The format of the file should be MS Word doc/docx. Articles should not be more than 2500 words.
The last date of receiving all entries is 25th May, 2011. Please send your entries marked as BAC_<ARTICLE NAME>_<SENDERS’ NAMES>_<INSTITUTE> to: firstname.lastname@example.org
Pratibimb | April 2011
Overheating of Emerging Market Economies & the role of central banks Ankur Choraria | Anurag Mishra | Saurabh Surana SJMSOM, IIT-Bombay
n the aftermath of the Great Recession, the developed world is striving to reduce its current account deficit. In the emerging markets the private consumption and capital expenditure is comparatively very high. As recovery is picking up in the west, commodities are becoming dearer, leading to inflation in the developing world. Emerging markets fear overheating. The respective central banks are raising key interbank rates to dry up liquidity in an effort to control the rising inflation rates and to avoid the formation of asset bubbles. The US unemployment and EU debt continues to be a concern as a result the emerging economies need to monitor the economic data closely.
Global Financial Crisis After the dot.com bubble burst in 2000, the developed countries went into a mild recession. To shorten the time taken for reversal and to alleviate the pain caused by it, US Fed reduced interest rates to unprecedented levels to boost consumption. This led to a global shift in aggregate demand which boosts GDP growth albeit in the short term. These rates were not increased even when the economy came back on track. Indeed, the real (inflation-
Figure 1: Growing consumption in the US during the boom years despite stagnant real wages, 2006-2007 corrected) funds rate was negative for 31 months (from October 2002 to April 2005). The argument against raising rates was that inflation was low and so there was no need to raise rates. But the prices were lower because of massive cheap imports of goods and services from China, India and other emerging economies. Thus, the US consumption was being fuelled by emerging economies and the US trade deficit was at record high levels. This would normally lead to devaluation of the currency and make the imports costlier. But, there was huge appetite for dollar reserves from China and MiddleEast. Thus, the slide of USD was not much 31
Pratibimb | April 2011 pronounced and imports continued to grow. An important distinction between open and closed economies is the fact that the effect of fiscal stimuli is significantly different for both models. In a closed economy, fiscal stimulus can increase aggregate demand which can give a boost to real GDP in the short term when prices are sticky or constant. But, for an open economy, growth in aggregate demand can be satiated by increase in imports which has no effect on GDP. US, being the most open economy, fuelled growth in many emerging markets since 2001, but hasnâ€˜t been able to raise its own GDP vis-a-vis its private Consumption. This was a period of jobless growth and sluggish real wage growth. Thus, private savings were getting depleted and loan repaying capacity had slowly decreased to alarming levels. But, financial models which were based on statistical models and historical behaviours could not capture this. Also, with the complex derivative products like CDOs, risk was passed on to the higher level. Asset bubbles formed in real estate and equity markets. Commodities too were at all time highs in 2007 before recession hit. All this eventually led to large scale defaults and collapse of major capital markets.
Figure 2: Real Consumption
A total of 48 countries provided fiscal stimulus packages. Collectively, the fiscal stimulus packages accounted for 3.9 per cent of world GDP (as measured in 2008). 20 out of the 48 can be classified as developing countries. Stimulus packages helped in averting a disaster. But
Steps taken by economies of the world to contain the effects of the Great Recession To avoid the catastrophic collapse of the financial markets and real economy, the governments intervened in the following three ways: 1. Bailouts and injections of money into the financial system to keep credit available. 2. Lowering lending rates to stimulate borrowing and investment 3. Extra fiscal spending to shore up aggregate demand These measures have sought to prevent further economic deterioration and ensure continuation of jobs where possible and help create new jobs to provide opportunities for the unemployed.
the effects of the stimulus were different for the developing and the developed world. Developed world continued to struggle with low growth and high unemployment whereas growth in the developing countries was back to pre-crisis levels. G20, the consortium of twenty largest economies of 32
Pratibimb | April 2011 the world, in their meeting decided one of the most important actions to be taken to bolster economic recovery: ‘In advanced G-20 economies, internal rebalancing is advancing, albeit slowly.’ The focus of the meet was to reduce dependency of the world on demand from the developed world. As the private savings were at an abysmally low level, there was little demand left. Also, huge trade deficits of the developed world had to be reduced. This will need to be done through export promotion and import substitution by the developed world. The US wanted demand to come from India, China and other
the emerging market currencies were undervalued, the commodities were costlier for them as well. In an economy which is completely free of any manipulation, this rise would have been negligible as the currency appreciation would have countered the rise of commodity prices in dollar terms. These prices caused high core inflation. The central banks have not been able to control prices as the rally is happening globally.
emerging economies to substitute for the lack of demand in its own territory. With newer rounds of Quantitative easing, the US was putting a lot of greenback into the market which would put downward pressure on the USD. But, export oriented economies needed a strong political will power to move from exporting to consuming economy. China which had pegged its currency Yuan since the advent of the Great Recession is still reluctant to let its currency appreciate. This will help shield itself from the decline in exports considering the untested domestic demand. Private savings in China are not high as most Chinese workers work at the lowest possible wages. There have been attempts by the Unions (urged by the government) to increase the daily wages of the workers which will increase disposable income. Although these measures have increased the demand, the extent of easing by the government is questionable.
Figure 3: BRICS Income per Capita
Social Policies impact demand
Through policies such as NREGS in India, raising Minimum Wages in China etc. there was tremendous increase in the demand at the bottom of the pyramid thus boosting demand in these economies.
Infusion of liquidity in emerging economies
Other countries with floating currencies have also taken a cue from China and have undertaken measures to depreciate their currency to safeguard their exporters. As a result, we see the following major themes playing out:
Rise in commodity prices
As the USD weakened (oversupply of dollars), commodities rose collectively as an asset class. As 33
Pratibimb | April 2011 As the currency is undervalued and emerging economies are poised to grow, the global capital is finding its way into these economies. This hot money is sought to take advantage of this arbitrage opportunity. As a result, there is ample liquidity in these markets and the central banks have had a tough time sucking this amount of liquidity out of the system. For example, Reserve bank of India raised interest rates and cash reserve ratios many times before the commercial banks actually raised rates. This liquidity was also giving rise to many asset bubbles like in the real estate sector in china. Equities were performing ever so well. But, these economies are capital deficient and need capital to support their capital expenditures. It is extremely difficult for governments to distinguish between hot and real investments. With ample liquidity, there is always a shift in aggregate demand and as such the prices start rising. ď‚ˇ
Reluctance of Emerging marketâ€˜s Central banks to increase rates fast
Rates in the US were at all time lows. If the emerging markets raised the rates at such a juncture, it could have caused arbitrageurs to put more money into emerging markets and add to the liquidity. Hence, the rates were raised slowly which meant asset bubbles were given a free ride till then. The existence of low interest rates led to an increase in demand compared to what the supply could match. This led to a slow inching of asset prices towards pre-crisis levels. These are signs of overheating in the economy. As the interest rates were low to avoid massive capital inflow, the consumers had a negative real rate of interest scenario and as such their propensity to save became lesser and to spend higher. This higher propensity to consume led to an increased demand of commodities e.g. the demand for automobiles in the emerging markets was at an all time high. This coupled with a buoyant equity market encouraged businesses to expand production to meet demand. But is the demand sustainable?
With green shoots of recovery in the US and relatively stable Europe (barring a few sovereign default scares), the hot money will eventually shift
out of the emerging economies back to the west. The demand in these emerging economies which was largely liquidity backed will dry up. Additional capacities created during this boom may hurt the economy as there is a possibility that the additional capacity will remain idle. The USD and Euro are depreciating against the Asian currencies since the last two decades and the momentum will continue. As a result, exports by emerging economies will also not pick upto precrisis levels. Moreover, with the focus of the US to reduce trade deficit, there will also be an increase in imports into emerging economies. In such a scenario, there can be a deceleration of growth in export oriented emerging economies. It may cause unemployment and reduce domestic demand further. As a result, demand from both domestic and international markets may dry up further putting pressure on the growth prospects. We may not see these economies replicating the runaway growth that we witnessed during the last decade. 34
Pratibimb | April 2011 Course of Action to be taken by the Central Banks As the private investment is growing to accommodate the overheating demand, base metals prices are growing at an alarming rate. The central banks which co-ordinated by providing simultaneous stimulus packages must now prevent asset prices to balloon; especially crude and base metals. The recent growth in the last few decades has created a strong middle class with considerable amount of disposable income. Hence, there is an upward pressure on food prices as well. Labour wage rates have increased substantially too. Inflation is a very important political concern for the governments too. Food prices constitute a major portion of their income and as such food inflation can cause political tensions in the developing economies. Central banks and governments must now look to reduce the money supply and roll back fiscal stimulus packages. This may increase unemployment, but will also cool off labour wage rates. Food prices have been increasing steadily since 2005 levels barring a blip in 2008. Thus, food price inflation may be a result of supply concerns as well as increases demand. Steps should be taken to increase the supply of food grains to bring food prices under control. Another major aspect that the central banks need to control is the credit growth. As the liquidity was ample many companies went on capital expenditure spree to meet the rise in demand. It can cause upward pressure on commodity prices. The cooling down of emerging markets will help in checking asset bubbles and create an environment more sustainable for long term growth. Signals from the developed world have been mixed. The G20 meet too recognized threat to global recovery. The major reasons could be:
Renewed pressures in the U.S. housing market
Spill-overs from renewed turbulence sovereign debt markets, notably in Europe
The lack of credible medium-term consolidation
Financial and trade protectionism and currency instability
This has kept the possibility of double dip still on. Thus, fiscal and monetary expansion cannot be rolled back in a jiffy. But the impact of overheating can be equally disastrous for the developing world. Hence, central banks need to take a balanced approach under current scenario. They should also learn from the previous scenario where excess liquidity caused monetary transmission to be perilously slow. Central banks need to keep the liquidity under tight control so that any change in the policy will affect the economy swiftly.
References 1. Brazil, India, China may be overheating, says Roubini, economictimes.indiatimes.com, June 2010, http://economictimes.indiatimes.com/ news/economy/Brazil-India-China-may-beoverheating-says-Roubini/ articleshow/5996621.cms 2. India needs tighter policy to prevent asset bubbles: OECD, economictimes.indiatimes.com, Nov 2010, http:// economictimes.indiatimes.com/news/economy/ policy/India-needs-tighter-policy-to-preventasset-bubbles-OECD/articleshow/6948437.cms 3. Meeting of G-20 Finance Ministers and Central Bank Governors, imf.org, October 2010, http:// www.imf.org/external/np/g20/pdf/102110.pdf 4. Moodys cautions against overheating of economy, reportlinker.com, December 2010, http://news.reportlinker.com/n04101071/Moodys -cautions-against-overheating-of-economy.html 5. Rowley, A., Asia overheating risk looms – IMF, emerging markets.org, October 2010, http:// www.emergingmarkets.org/Article/2690778/ Asia-overheating-risk-loomsIMF.html 6. Verick, S., & Islam, I, The Great Recession of 2008-2009: Causes, Consequences and Policy Responses, May 2010 35
Pratibimb | April 2011
Dollar as the world‘s reserve currency - Is it helping ? Rahul, TAPMI Alumnus
t was after the second world war that the UK sterling lost its power as the world‘s reserve currency and the world leaders convened at Brenton Woods, to decide on a new financial and monetary policy for international exchanges. It was here, in the Brenton Woods Summit, that the dollar was chosen as the reserve currency. Dollar was backed by gold , and 1 ounce of gold was worth $35 in 1944.
stimulus it has provided to various banks. Most of the countries now are hesitant to accept dollar as the reserve currency in wake of the recent US borrowings and the economic turmoil in 2008 which is likely to depreciate the dollar further and increase its inflation. The recent happenings have also seen various countries raising demands/debates over the feasibility of dollar being the world‘s
Since then, the dollar enjoyed a free run in the world markets and for nearly six decades. It was the currency which every nation in the world wanted to fill its forex reserve with. These dollar reserves created a hedge for them against their own presumably less stable currencies. As for America, it enjoyed having a currency which could be, and was over evaluated to buy assets in other countries and not needing to go to the other sources of borrowing. The dominating reserve currency also meant that every major commodity in the world market was traded in dollars, which helped to maintain constant demand for the American Dollar. Being the issuer of the reserve currency helped America greatly in becoming the largest creditor nation in the world and almost every country in the world had two-third of its forex reserve in US dollars. But this was when everything was all hunky dory for America and it could do no wrong. Things have changed in the last 10 years and more so, in the last 2 years which also saw a major recession in the economies world over. In 1999, almost 71% of the world‘s official forex exchange reserves were denominated in Dollars; today the figure stands at 63%. US is also now the largest debtor nation in the world with the debt being almost 10% of its GDP standing at $10.6 trillion. The US government also has plans to double its debt in the next 5-10 years owing to its large bail out plans and the fiscal
reserve currency with the BRIC nations even demanding that the dollar be replaced with a ―supranational‖ currency. Their demand is lead by a vociferous China which ironically is the largest holder of the US dollar with $1 trillion lying in its banks. It makes for an interesting study as to why China, will want the dollar to be replaced when it 36
Pratibimb | April 2011 has its own fortunes intertwined with the dollar. Let us look at what might be China‘s concerns. To repair the economy in crisis, with US having a $1.75 trillion-fiscal-deficit for 2009, the Federal Reserve has already been printing money. The extra money supply may provide an abundance of liquidity and stimulate the economy to avoid a depression. Meanwhile, as the world‘s largest debtor, the US may also manage the pressure to repay foreign debts through the inflation brought by the extra money supply. This allows the US to pay back in dollars that are worth less in terms of what it can purchase. The US Dollar will depreciate in this course and this makes other reserve currencies such as the Euro, Pound and Yen appreciate. In order to promote their own economy and exports, these countries may also start to print money. Finally, this will hurt two types of investors— creditors and savers. Creditors receive a relatively low interest rate if interest rates rise whereas the saver‘s holdings are devaluing day by day. As the biggest saver in the world and the biggest creditor of the US, China do have reasons to be worried.
considering that these countries form almost 12% of the world‘s GDP, it would be difficult for the world‘s financial authorities to overlook their demands.
China is also proposing the use of ―Special Drawing Rights‖ or the SDR as the replacement for the dollar. The SDR is an international reserve asset created by the International Monetary Fund in 1969 that has the potential to act as a super-sovereign reserve currency. A super sovereign reserve currency will not only eliminate the risks associated with a credit based currency like dollar, but also make it possible to manage global liquidity backed by gold. China‘s demand is also backed by other BRIC nations like India, Russia and Brazil. And
Whether the dollar will be replaced or not, or whether SDRs will come into play or not, are not the primary question. The focus of the world should be on, in the world of globalization where every nation‘s fortune is dependent on every other nation, can we afford to put all our weight behind one single currency? Wouldn‘t it be better to distribute the risk/gains among the other currencies as well as the SDRs? But then, the world has ridden high on the back of the US dollar for 6 decades and it might surge again before we count it out!
Amidst all the hue and cry regarding the replacement of the US dollar, President Obama issued a statement saying ―The dollar is extraordinarily strong right now and the reason the dollar is strong right now is because investors consider the United States [to be] the strongest economy in the world with the most stable political system in the world.‖ The US authorities are confident that the dollar will continue to enjoy its status as the primary reserve currency and they would do what is required to sustain confidence in the capital markets. No wonder, the United States is still the most preferred destination of the investors. Also the fact that almost every nation in the world has taken a hit in the recent financial meltdown, there condition is not much better than that of the States. In such a situation, they are looking up to the world leader for support and guidance and putting their faith in the surge of the dollar sooner than later.
Pratibimb | April 2011
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