SATYA NADELLA’S FIRST BIG MOVE AT MICROSOFT
BY PRIYANKA MALIK
THE IBS TIMES August 2014, Issue No. 169, Volume No. I
TCS IS THE BEHEMOTH OF INDIA INC. BY MANJARI
BRINGING SHADOW BANKS OUT OF SHADOWS BY SWATI GUPTA
CASHING ON CASH ON DELIVERY ! IS FLIPKART’S VALUATION JUSTIFIED? BY SACHI KHESKANI
FinStreet, IBS Hyderabad
CONTENTS FEATURES 6
Solvency II: Way Forward for Insurance Sector
Fiscal Consolidation: A Necessity
Need for BRICS Bank
Taming the Fiscal Beast (Article of the Issue)
Fiscal Deficit and itâ€™s Impact on Indian Economy
Bringing Shadow Banks out of Shadows
Changing Face of Manufacturing and Agricultural
Populism Breaking Our Economy REGULARS 14
Letter from the Editor
India Vetoes WTO
Road to Disinvestment
Industry Overview: Gems & Jewelry
TCS: The New Superstar of India Inc.
Cover Story: Flipkart
Microsoft: Creating a Leaner Organization
Impact of Change in FDI Caps
Fiscal Consolidation in India
The Stock Market Boom
Update on Airline Industry
Impact of Israel- Gaza Conflict
Company in Focus: Allahabad Bank
INTELLIGENCE BEYOND SUCCESS
“Food security is a humanitarian concern, especially in these times of uncertainty and volatility, and the issue of food security is critical to a vast swathe of humanity and cannot be sacrificed to mercantilist considerations.”- Nirmala Sitharaman, Commerce and Industry Minister of India
Letter from the Editor
THE IBS TIMES Faculty Mentor
Dr. Ravi Kumar Jain On the Cover: Sachin & Binny Bansal (Co-Founders, Flipkart) Cover Picture Source: Caravan Magazine
Team IBS Times Chaahat Khattar (Editor-in-Chief) Akshay Gupta Atharva Solanki
Manisha Mohapatra Nikhil Acharya Nishtha Behl Shivam Tandon Vanika Sharma Alisha Singh Apoorva Anusha Avik Chakrabarty Kaushik Chandell
Koisetty Sai Aishwarya Manjari Navjoth Sahu Priyanka Malik Rahul Mishra Ripu Daman Tandon Sachi Kheskani
Greetings from Team FinStreet ! We are very grateful to you for your keen interest and association with The IBS Times. We witnessed tremendous growth in our readership in past couple of months and we have clocked over two thousand five hundred impressions for our magazine since we have given a 360 degree makeover to it. We thank you for your support which has enthralled and motivated us to write and express more. This issue indeed is very special in terms of both the articles and the authors writing the same. We have formally inducted and trained the new recruits and the regulars in this edition of The IBS Times are covered by them only. Also, with due consideration to your suggestions, we invited articles from other business schools of the country and we were very humbled to receive large number of entries for the magazine. Though we have not included all of them for this edition, we will try our best to have them in our upcoming issue. Our team has put light on several recent commercial, economic and international developments including the recent fund raising by Flipkart which is also our cover story for this issue, the announcement of job cuts by Microsoft, the road to disinvestment, rise of TCS, India‘s tough say in WTO, the saving grace for UIDAI, the impact of Israel- Gaza conflict and the impact of recent changes in FDI allowances to name a few. The Article of the Issue- Taming the Fiscal Beast covers an out of the box analysis and opinion on managing fiscal crisis. The article very well charts out the strategies lawmakers can adopt to control the fiscal deficit of the country. We have included couple of more articles on fiscal management as each one of them expresses varied and interesting opinions by different authors. The issue also has analysis on the recent idea of having BRICS bank and curbing the activities of shadow banks. The magazine also covers industry analysis on the Gems and Jewelry Sector. In the market watch segment, the magazine puts light on the performance of various financial markets in the past two weeks. The magazine includes an exhaustive report from investment point of view on Allahabad Bank by Team Vriddhi Research.
Sameena Usman Srishti Karmakar
Hope you have an enriching experience reading The IBS Times. Your feedbacks and opinions will help us make it better !
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India Vetoes WTO
- Avik Chakrabarty, IBS Hyderabad
India blocked an agreement on new global customs
restrictions. The ability of countries to deliver goods
rules on 24th of july at a meeting of World Trade
and services in time and at low costs is a key
Organisation (WTO) in Geneva where 160 member
determinant of their participation in the Global
angering other members.
Economy. Easier movement of goods and services
Member‘s nations including Australia, Canada,
clearly drives export competitiveness and fosters
diffusion of better technologies through imports and
Thailand are saying they are ―dismayed‖ at the failure
foreign direct investment. Increasing awareness of
to agree at the meeting. Delhi‘s move could be costly,
those trade-related transactions costs has called for
economically and politically.
multilateral rule making and regional or plurilateral
WTO member countries were supposed to rubber
stamp a deal on ―trade facilitation agreement‖ (TFA)
facilitation is generally referred to as a reduction of
that was agreed in Bali in December 2013. Estimates
say the agreement could add $ 1 trillion to the world
administrative burdens on cross-border movement of
economy and create 21 million jobs worldwide by
goods and services between sellers and buyers.
cutting down red tapes.
Negotiating an Agreement on Trade Facilitation
India is unlikely to yield to pressure of developed
Despite the potential benefit of trade facilitation,
nations on pushing the WTO‘s Bali agreement
evolution of trade facilitation is not witnessed in every
without addressing New Delhi‘s concern on food
country, or cooperation in terms of trade facilitation
security issues at the Geneva meeting on 31 July.
has not been fully developed in the international
India said it would not sign the agreement until it gets
what it wants in a separate area linked to its system of subsidising and stockpiling crops.
On 1 August 2004 General council of WTO decided by explicit consensus to commence negotiations on
India is the most prevalent among a group of
trade facilitation. The Trade Negotiations Committee
developing nations angry at rich countries for failing
to address their concerns about a deal on trade
Facilitation and appointed Ambassador Muhamad
Noor of Malaysia as its Chairperson. This agreement
What is TRADE FACILITIATION?
was finally reached at the Bali Ministerial Conference
in December 2013. Nowadays trade costs associated with transportation charges, documentation requirements and delay in clearance at a national border are as important as traditional border such as tariffs and quantitative 3|AUGUST 2014
Several trade diplomats said they were mystified by Indiaâ€˜s stance, since it has not made any specific demands, making it impossible for the rest of the WTO to resolve the problem. According to some India might want to bring forward the 2017 target date for agreeing permanent rules on food stockpiling, or it might try to postpone the July 31 deadline for adopting trade facilitation. But the EU said it would not renegotiate existing timelines. INDIA vs Other Member Nations
Many trade experts think that if global trade negotiations lose momentum again, many WTO
TFA protocol may not meet the deadline of 31 July 2014 set at the Bali Ministerial Conference in December 2013. This is because India's stand is crucial without its approval WTO could not adopt
members, including the European Union and the United States, will effectively give up and focus all their efforts on more ambitious trade reforms that they are already negotiating bilaterally and in small groups.
protocol on TFA. India stockpiles food for its poor, putting it at risk of India will not move forward on TFA in absence of a concrete framework to find a permanent solution on public food stockpile which is necessary for the food
breaking current WTO rules. In Bali, WTO members agreed to give India a pass until 2017, while negotiating a permanent solution.
security programme. The developed countries will have to give a concrete framework to find a permanent solution for Indiaâ€˜s public stock holding issue and without that New Delhi will not adopt the TFA. Several countries issued statements saying that a failure to agree would be a massive blow to the WTO, which is trying to emerge from a decade of failed negotiations on further liberalising global trade. The European Union gave a warning, saying: "Without adoption of the Trade Facilitation Protocol by July 31 a great opportunity to mobilise trade as an instrument for growth and development would be lost, and the credibility of the WTO, which has during the financial crisis proven its value, would be damaged." 4|AUGUST 2014
The final protocol for the TFA, which is dear to the developed world including the US and the WTO members, concluded Australia, but no single meeting has happened on Indiaâ€˜s food security related issues. Sharp differences have emerged between rich economies like the US and Australia and emerging nations, including India and South Africa, on implementation of the Bali package. South Africa is said to be backing India, and other African member of the WTO have raised concerns over whether the financial aid they were promised to help revamp customs procedures will materialize. But broadly, India could be isolated.
The Food Security Act- The Problem India's
On the other hand India is getting prepared. In his that
government will provide very cheap food to the most vulnerable part of the population at extremely low prices. Apart from providing subsidies to the consumers, through the public distribution system, it
budget speech the finance minister Arun Jaitley said 16 new port projects are proposed to be awarded this year with a focus on port connectivity. ―11,635 crore will be allocated for the development of outer harbor project.
also provides subsidies to the producers of food
The finance minister also proposed to implement an
grains. So it buys food grains from farmers at a
―Indian customs single window project‖ to facilitate
minimum support price, and subsidises inputs like
trade. ―Under this, importers and exporters would
electricity and fertiliser.
lodge their clearance documents at a single point only.
Whereas the current WTO norms limit the value of food subsidies at 10 percent of the total value of food grain production. However, the support is calculated at the prices that are over two-decade old and not at
Required permissions, if any, from other regulatory agencies would be obtained online without the trader having to approach these agencies, reducing time and cost.
current prices. India is asking for change in the base
India as such doesn‘t have any problem with it so
year (1986) for calculating the food subsidies. The US
domestically it is getting prepared accordingly. But at
gives about $120 billion as agriculture subsidy as
the WTO platform it is opposing because it feels once
compared to India‘s $12 billion.
it signs off the TFA, there will be no leverage left to
WTO argues that if the developing countries continue to give prices to farmers which are higher than the
push for permanent solution of food security and public stockholding.
market prices, it might harm the poor farmers in other
Food and Trade policy analyst Devindra Sharma said
parts of the world.
that TFA will not help India‘s cause unless the non
The second problem which India feels needs to addressed is that even For providing subsidised food, India will have to open up its own stockpiling to international monitoring. It will not be able to add protein heavy grains like say, lentils, if it wants to, due to riders in the peace clause. Is India really against TFA? Critics have even hinted that India is blocking TFA because it is not prepared to take on the requirements of TFA, with a relatively weak trade infrastructure.
trade barriers faced by India in developed countries are removed. At a time when developed countries are closing their borders for free movement of skilled manpower from developing countries, we are opening our borders for free movements of their goods.
Solvency II: Way Forward for Insurance Sector
- Ajay Kumar Tawani, TAPMI
Risk is an inherent part of every one‘s life and
a non-zero failure regime. Though solvency II is EU
insurance is the backbone of any country‘s risk
Regulatory Initiative, it will have both direct and
management system. Insurance business in itself
indirect impact on the insurance industry across the
involves lot many risks and to keep the insurer solvent
(the ability to meet its obligations), the reforms and
It‘s a world leading process helping insurers to
regulations come in place.
improve the focus on risks facing their organization
As the saying goes on, ―The only thing that is
and managing them. It offers the insurers to improve
constant is change‖ and so is the case with these
their risk adjusted performance and operational
reforms. As markets have changed, sophisticated
efficiency which is a good news for the policy
models of risk management have been developed and
holders, insurers and the economy on the whole.
solvency II reforms are in the same line directed by European commission. The objectives of solvency II reforms are as follows:
The framework follows the Basel accord approach with three pillar structure, which brings this industry more in line with the regulation applied in the banking
Development of Risk Based approach and identification of key risks to the company.
sector. It sets out its own new set of capital requirements, valuation techniques and governance
Assessment of interactions of the above risks and
and reporting standards which are far better than
create a model on how these risks can be managed
solvency I directives in managing the risk of an
by the insurance companies.
Regulations related to the disclosure of the information by the insurers so that the regulators are enabled to assess the strength of the insurer‘s technical provisions in detail. valuation of the insurers. of insurers/ re insurers. advanced
and will encourage to develop an internal model of requirement (SCR) for major insurers and at the same time smaller insurers remain to calculate the SCR
Harmonize the approach to calculate the solvency of
better reflection of an insurers individual risk profile risk assessment to set out the solvency capital
Introduction of more consistent approach in asset
The changes in the capital requirements provides a
based on the standard formula. The new approach requires a uniform approach to evaluate the technical
techniques into the supervision regime. Briefly the regime intends to set out: WHAT IS SOLVENCY II? 1. Alignment of economic and regulatory capital Solvency II directive reforms are the new regulatory framework for European insurance industry which adopts a dynamic risk based approach and implements 6|AUGUST 2014
giving appropriate weight to diversification benefits between companies and subsidiaries.
2. Freedom to choose own risk profile and match it
good risk management and policy holder protection. It
with appropriate level of capital.
aims to promote capital adequacy, enabling greater
3. An early warning system to warn for solvency by active capital management.
transparent process in decision making and better supervisory review process. It is to be achieved through holistic approach of implementation that
4. Encouraging an improvement in the identification and mitigation of risks by better aligning risk and capital management. The first two columns depict the difference between
addresses better risk measurement and management, greater
governance and capital structure. PILLAR 1:
solvency I and solvency II wherein surplus capital in both the cases would be same but the difference will be from technical provisions. The Third column depicts the economic model of capital known as Internal Economic Capital Requirement (IECR) which a firm might use to operate the business. IECR differs from firm to firm depending on the internal model of risk assessment and the level of exposure of risk.
This pillar talks about the quantitative requirements. It ensures that the firms are adequately capitalized to operate their business under different situations. Firms can use a standard formula or internal model approach to quantify the capital requirements. Valuation through internal model will be based on stringent standards and supervisory approval to calculate its regulatory capital requirements. All valuations should be done prudently and in a market consistent manner.
THREE PILLAR MODEL: The European Insurance and Occupational Pensions Authority (EIOPA) defines three pillars as way of grouping solvency II requirements in the name of
PILLAR 2: This
BENEFITS TO INSURERS: imposes
Though transitioning from the older regime to the
management and governance in an organization. It
newer regime will be a costly affair, in the longer run
gives greater responsibility and power to supervisors
this regime offers several benefits to the insurers.
in self-assessing the risks and challenging the firm on
1. Better pricing the products.
risk management issues. It consists Own Risk and Solvency Assessment (ORSA) which enables own risk
of the firms.
PILLAR 3: This pillar aims to provide greater transparency for supervisors and public. There is a public solvency and financial condition report and private annual report to supervisors which increases the level of disclosures required by the firms. Any current returns will be replaced by reports containing core information that firms will have to make to the regulator on quarterly and annual basis. This ensures that the firmâ€˜s entire disclosed and is made up-to-date. 8|AUGUST 2014
stability and 3. Last but not the least maintaining the profitability
adequacy of capital resources.
financial information and position is
2. Better managing the risks and maintaining financial
Market Watch The
- Koisetty Sai Aishwarya, IBS Hyderabad
due to the increase in the demand for loans with the
fluctuations due to various geo political sentiments
rise of the new government in India, also Hero
prevalent at present. The Gaza war had already been
Motocorp is seen rising, which announces its
showing its effects when the Ukraine crisis and the
expansion plans of starting up plants and owning
absolute recent Argentina deficit started to mount up.
subsidiaries in Colombia. Few of the companies that
It‘s time for the European and American companies
did not perform well would have to be GAIL India
with exposure towards Russia to get cautious as the
and NTPC. The reason for NTPC‘s underperformance
markets look dicey out there. The major question here
could be attributed to the impact of CERC tightening
to ponder upon is whether the slight dip in the markets
its operative norms that reduced the company‘s
is here to remain or not? As there are no signs of
quarterly earnings. The downward trend of the
overvaluation of the markets currently we could say
markets could be a correction factor and hence we can
that the downfall is not here to stay or to conjure upon
say that it would be short lived. Also the NDTV Profit
us an economic crisis.
speculation states that the trading in august would be
Revisiting the last two weeks of the stock markets the trend shows a downfall in the previous week with sensex closing at 25480.84 and nifty at 7602.60 points. The dip created could have been an effect of Thursday being the expiry day of the July derivatives as the markets succumbed to a lot of selling, leading a fall in NIFTY by 70 points and the FII not taking keen interests in the markets. Our markets are largely driven by sentiments and due to the excess of selling by the FII over purchases as they sold $63.4 million worth of equities for the first time in the last ten sessions; a slight downfall has been noted.
a range bound trading between 7800 points to 7500 points. Monetary policy: The statement given by Raghuram Rajan on Tuesday indicates very minor changes in the monetary policies. The marginal standing facility rate has been reduced by 25 points from 9.0% to 8.75% and the repo rate has been increased from 7.5% to 7.75%. on the other hand
SLR(statutory liquidity ratio) are likely to remain unchanged presently being 4% and 22.5%. the strengthening of the exports and rising performances
Individually assessing the companies, Maruti Suzuki
in the service sector with better performances in the
has performed quite well due to the increase in net
agricultural industry, Rajan expects the growth in the
sales of about 11% as the cuts in the indirect taxes
GDP from 4.14 in quarter 1 to 5% for the whole year.
notably on the excise duty of cars, have proven to be largely beneficial for them. The other companies with an upward trend would include ICICI Bank which also had a 17% rise in its quarterly net profits mainly
Good days for the US as the dollar are getting stronger lately. The GDP of US for the quarter being 4 % has definitely shown its effects on the dollar price. The unexpected growth in GDP of the US in
underutilization of the labor market has
helped the economy get right back on track. A fall in the prices of Brent crude oil has been noticed in the last couple of days . The recent hike in the production of oil in the US has decreased the imports in US. Also with the dollar value increase and all the imports being done in dollar, there is a fall in the Brent crude oil prices as the demand from the other countries would be affected. Moreover, the trade sanction has ordered a halt on the export of oil to Russia considering the present situation which also might contribute to the explanation of the fall in price. The global threat for the market in the coming days could be the debt crisis of Argentina and mainly the Ukraine crisis. The unemployment in Argentina has reached the US markets and also the US hedge fund managers. Argentina‘s bonds are down and US investors have found a good reason to liquidate their stocks. Looking at the Ukraine crisis, hike in the price of oil and grain have been seen and people prefer to invest in safe havens like gold which has led to a wide spread of selling shares. So it‘s all about investing smartly. As Warren Buffett says ―risk comes from not knowing what you are doing‖ Net Price-Volume Movement
10 | A U G U S T 2 0 1 4
Fiscal Consolidation: A Necessity
- Saptarshi Sarkar, SIBM Pune
People all over the country are encouragingly talking
means, thereby bringing down the fiscal deficit and
about fiscal consolidation and reducing fiscal deficits
public debt. It includes, among other things, efforts to
to ensure economic growth and financial stability. But
raise revenues and bring down expenditures like
this raises the basic question: What is fiscal
subsidies, unnecessary bills and reforms which never
consolidation and how does it affect financial stability
reach the intended recipient. Fiscal consolidation
or economic growth?
efforts, thereby reducing the fiscal deficit are looked
In this article I will try to explain this concept through
at positively by investors and sovereign rating agencies. This is because it gives them an idea about
a subtle example:
the financial strength and condition of a countryâ€˜s Say my family consists of 5 members and I am the sole bread-earner of my family. My annual income is around INR 5lac. So I have to design a household
economy. Even if the fiscal deficit is low, a country may not be economically viable because of its poor efforts at fiscal consolidation.
budget where my entire family has to live within its means of INR 5lac. The moment my annual spending exceeds this limit; I will invariably run into losses and subsequently debts. So in order to minimize my annual debts/losses, I have to consolidate my annual budget and have to put in a concerted effort to live within my means. The moment I reduce my spending, I will invariably have more money to save, which I can then invest into other ventures or financial instruments or simply put it away in the savings account of a bank. This will eventually lead to a better so-called â€•economic growthâ€– of my personal finances and will probably act as a shield from any unforeseen catastrophes in the future. The same is true in case of a Union
policy effort needed by the Government to live within its 11 | A U G U S T 2 0 1 4
But fiscal consolidation has its demerits too. Detractors note that should the process be so stringent that it eliminates the potential for responding to current market situations in order to trigger growth, opportunities are lost that cannot be recovered at a later date. Both supporters and critics provide instances in which the methods of fiscal consolidation have proven effective and beneficial as well as detrimental in both the short-term and long-term. Against this backdrop, many governments have been
making substantial fiscal adjustments through a
challenge. He has already understood that treading the
combination of spending cuts and tax hikes to reduce
Fiscal Consolidation path will probably be a safer bet
their ratios of debt-to-GDP.
for him. So his maiden Budget focused firmly on
consolidation. But, post 2003-04, the government has made conscious efforts to bring down its fiscal deficit thereby passing the Fiscal Responsibility and Budget Management (FRBM) Act. This has enabled the government
committing to a reduced level of fiscal deficit. Its efforts went off well in the initial years but it stumbled somewhat post the global financial crisis of 2008-09. As a result, through its fiscal stimulus package, it had to announce several fiscal concessions and introduce certain reforms to balance the supplyside demand. This resulted in a further worsening of
financial stability and retained the ambitious target of 4.1 per cent of the GDP for the fiscal deficit in FY15. Arun Jaitley made it clear that the Budget would revive economic growth to 7-8 per cent over the next three years along with lower inflation, lesser fiscal deficit and a not-so-glaringly-huge current account deficit. The Fiscal Consolidation while reducing the debt-toGDP ratio of the country reduces the potential spends on infrastructure and puts more pressure on delivering on taxes. Reducing the infrastructure spend can have serious ramifications for the NDA Government. It was a Government which put economic growth as one of its key agendas in its Election Campaign. Economic
the countryâ€˜s finances.
growth and stability are needed to revive investor Today, the fiscal deficit of India stands at around
sentiment and put India on a high growth path.
4.47% of GDP (April-June fiscal deficit is $49.2 billion). The BJP led NDA won the 2014 Lok Sabha elections on basically two planks: reviving growth and lowering inflation. To achieve its growth objective, the Government has to spend millions on infrastructure
infrastructure, reducing subsidies and reforming its policies and tax revenue systems in India will irreversibly lead to an increase in its growth rate as well as lower the inflation rates. But this is easier said than done. Fiscal consolidation will be tough for the new Finance Minister, Arun Jaitley. Stagnant revenue and a sticky expenditure with a likely tight monetary policy by the Reserve Bank will make fiscal consolidation tough to achieve. So the new FM has to buckle up to the 12 | A U G U S T 2 0 1 4
Fiscal Consolidation is also critical for lowering Indiaâ€˜s debt-to-GDP ratio. The internal debt of the Government stands around 48% of GDP in the last two years. The declining trend of the debt ratio post
fiscal 2009 has been driven more by high inflation
―If our projections were to come to fruition, India‘s
rather than lower fiscal deficit or faster GDP growth.
economy would pass the $5 trillion mark (by 2025), a
In the coming days, a strong commitment to fiscal
feat that has been achieved by only the US and China
consolidation will be the key to lowering India‘s debt-
thus far and would make India the fifth largest
Fiscal Consolidation will not be easy for this government. There is very little scope for reductions in expenditure since there are very little guidelines on how to reduce subsidies. Therefore the only way to reduce fiscal deficit is to generate revenues as a share of GDP. To do so, the Government must implement structural tax reforms like GST, improve tax compliance and widen the tax coverage. Through fiscal consolidation and financial stability will India finally get back on the track of a high economic growth. The early signs have been quite ominous. India‘s manufacturing activity has rebounded to a 17-month high in July in a response to a surge in production backed by new orders, proving another piece of evidence that business and consumer sentiment has picked up and the economy was coming out of the slump of the last two years. So the days of economic gloom and policy paralysis and high fiscal deficit seem to be a thing of the past. As we march forward towards the Modi regime, the mood across all sections of the society is of optimism. We are looking forward to a revised fiscal deficit target of 3.6% and 3% for FY16 and FY17 respectively and a growth of 7% in the coming years. The report released by Investment Bank Morgan Stanley probably sums up our sentiments:
13 | A U G U S T 2 0 1 4
consumption and investment opportunities would rise to $3.6 trillion and $1.9 trillion, respectively.‖ It said in a report titled The Next India: From a cyclical downturn to a structural upturn.
Road to Disinvestment
- Kaushik Chandell, IBS Hyderabad
Before talking about the Disinvestment plans for India
to raise Rs.484.3 billion from selling its stakes in
we need to know what is Disinvestment? What are its
Public Sector Units (PSUs) and the second part, rest
objective and importance?
150 billion from selling the stake in non-gevernment
Conversion of money or cash into securities, bonds, debentures or any other claims on money is known as 'Investment'. Disinvestment is just the polar-opposite
companies. In the year 2013-14 UPA government planned to raise Rs. 540 billion but managed to mobilise only Rs. 190.3 billion. Current year targets three times the amount raised in 2013-14
of Investment. Now, suppose you own a car which needs to go to the workshop twice or thrice a month. In this case the car is more of a liability than asset. Suddenly some mishap takes place and you're in dire need of cash.
The Disinvestment target set by NDA for the current year is arduous and it is very pivotal to meet the fiscal deficit target as it is expected to contribute 4.6 percent to the total non debt receipts in 2014-15.
Wouldnâ€˜t it be a good option to dispose off the car for
PSUs to garner disinvestment includes some major
your liquid asset requirement rather than taking a loan
players such as SAIL, ONGC, Coal India, NHPC,
on which you will be required to pay interest. Assume
Hindustan Zinc, PFC, REC and Balco.
the government in your place and the car as an inefficient
Government takes steps like disinvestment in order to improve the financial conditions of the country. It not only reduces the financial burden but improves the public finances as well as introduces competition and market discipline. Small percentage of stake sale as
Governments expects offloading of 30 percent of the total disinvestment from the major PSUs for which the contribution of ONGC can be very much upto be 5 percent or Rs. 170 Billion which'll be the highest amount to be raised just by a single stake sale. Previous record was of the Coal India IPO, which had fetched 150 billion in the year 2011.
low as 1 percent can earn the government billions. Further, Government of India is targeting around 10 Modi government came into existence with a promise of low and stable tax regime as well as the finance minister Mr. Arun Jaitley himself promised to end the tax terrorism. And to perform upto the expectations Mr. Jaitley has set the highest annual target since the beginning of disinvestment plan. Target set by the former UPA government in the interim budget used to be Rs. 519.3 billion and the new target set by the current government is Rs. 584.3 billion which the government plans to raise in two parts. First part is 14 | A U G U S T 2 0 1 4
percent stake sale which can garner them an hefty amount of Rs. 230 billion. In 2013-14, UPA planned to fetch Rs. 200 billion from the very company but met with the refusal of the Coal India employees because of which the government was not able to dilute its stake in the company. Another ace in the card can be SAIL with 5 percent stake, it can offer a sum total of Rs. 18 billion, as per the current share price. Another trump for the government can be
NHPC from which the government is seeking a
stakes in a PSU bank to 51 percent. Currently,
contribution of 10 percent.
government holds more than 75 percent stake in 22
Vedanta even planned to buy government's 29.54 percent stake in Hindustan Zinc and 49 percent stake
non bank PSU firms and above 51 percent in PSU banks.
in Balco last year. However, government plans to sell
With the market being optimistic, Sensex reaching its
its stake through a market auction without showing
peak , even in the best of its time government was
any inclination towards a specific organisation.
able to raise Rs. 388 billion in the year 2007-08.
Intotal there are 11 names in the list out of which NHPC, SAIL and MOIL will be meeting Securities and Exchange Board of India (SEBI) in order to discuss minimum public shareholding norm after this round of stake sales.
Moreover analysis shows that the government has failed 17 out of 24 times in achieving the disinvestment target falling short on average of about 40 percent. Previous governments failed to sell stakes because of poor market conditions as well as obstructions
Even the stock market is high on disinvestment terms of Government of India. BSE Sensex has gained nearly 7 percent after the victory of Narendra Modi where as BSE PSU index ha made a jump of nearly 35 percent. The Sensex crossed the the score 26000 and reached its peak of 26123.55 before closing at 26100.08 on 7th July, 2014. On the very day, Nifty also hit an all time high of 7,787 points. Further analysis on disinvestment policy followed by government shows that the target could have been set higher and as well as can be achieved given that the market are at a high. The current target of Rs. 584.3 billion which has been set above the previous governments target of 519.3 billion is still lower than the market buzz of Rs. 600 billion. This would not only provide a support SEBI's push for a minimum 25 percent public-holding in PSU but would also justify the RBI's report on decreasing the share of government stake in PSU bank to help increase in profitability. Even the ICRA (Indian Credit Rating Agency) suggested that with the upswinging of stocks, this can be the high time to bring down the 15 | A U G U S T 2 0 1 4
organisations. But after the results of 16th Lok Sabha Elections, market condition has improved. Now only time will tell whether the government succeeds in implementing the disinvestment strategies effectively and improve the economic structure that exists/ to overcome the fiscal deficit.
The Need for BRICS Bank
- Kartik Jariwala, K J Somaiya Institute of Management Studies and Research
900 million without safe drinking water. There is a need of over $1 trillion per year over and above the existing funds deployed. By 2020 the need for funds will double and this will be
governments but they will not be able to fund it completely without affecting their countryâ€˜s macroeconomic figures. It is well known that infrastructure development leads to increase in growth rate. Thus it becomes necessary Just after the FIFA World cup another major
for the world to come forward and provide
development was taking place in the Brazilian city of
infrastructure finance to low income and developing
Fortaleza. A Meeting of BRICS head of nation was
held and the meeting concluded with the decision to
In 1940â€˜s world found a way to do this by setting up
set up the BRICS development bank christened as New Development Bank (NDB).The NDB will be headquartered in Shanghai, China and it s first head will be an Indian. The first three principle directors will be from Russia, India and Brazil. The bank will have capital of $100 Billion with initial capital of $50 Billion contributed equally by each of the 5 nations. There will also be a $100 Billion Contingent Reserve Arrangement (CRA).
multilateral institutions like World Bank and IMF. But these were mostly meant for catering to infrastructure needs of the war torn Europe. The principal
institutions has been USA as dollar become the currency of exchange.. These institutions did help develop Europe but they were able to do it because Europe
liberalization and minimal government intervention.
The question arises why a need for another
Hence, the policy of these institutions has been
multilateral institution for financing infrastructure
designed to propagate the western ideology.
need. There are a number of reasons. The most apparent reason is the scarcity of finance for development of infrastructure in the under developed world. It is estimated that there are 1.4 billion people without electricity,2.6 billion without sanitation and 16 | A U G U S T 2 0 1 4
Today these institutions are seen as instruments of promoting western foreign policy. There are 3 main pillars on which these institutions have been formed macroeconomic discipline, opening up of trade and FDI and competitive markets. Here the assumptions is
that liberalization of trade and trusting the markets as
structure of these multilateral institutions. The west
being self correcting and self sustaining supported by
and especially USA is reluctant to let go of its voting
stable macro factors would ensure growth. This was a
rights in these institutions. The institutions must
flawed assumption. This is where these institutions fail and a need for a New Development Bank arises. The Bretton Woods institutions are based on what has been termed as Washington consensus which was meant to denote the ten rules based on which these institutions functioned. The Washington consensus has failed over the last 2 decades as is evident from the high growth success stories of countries like India and China. The IMF lays down constraints on emerging and developing countries which are pro cyclical and hence these countries suffer during global
reflect the current world economic order. The USA for the sake of having the veto is not willing to reduce its voting rights from 16.8 % thought the requirement
is of reduction by on 0.5 %. The proposal with the US It has also been observed that the rich poor divide in developing nations has increased in spite of the claim that these policies aim at reducing poverty. In fact in the countries which have followed the framework laid out by these institutions find themselves incapable of handling
congress is still pending since 2012. This reduction will still give US the veto rights as it can affect the supermajority required for passing critical policy within the IMF. It is also noteworthy that 10 countries out of a total of 188 control 52 % of voting rights in the IMF.
intervention as the policy maintains that the government should move away from market activities like subsidies which may create distortions in the economy. It is true that economic indicators do improve but these are compared inter country. For example per capita figures do improve but intra country
The developing countries like BRICS which account for 25% of the world GDP have voting rights which is less than 15%.The table 1 shows the voting right of each BRIC country. The Gil S Beltran in research paper for the The G24 Research program advocates the restructuring of the Bretton Woods Institution.
improvement. The New Development bank needs to
It is because of these reasons that CAF Corporacion
ensure that it does not propagate the Bretton Woods
culture where the policies are framed assuming one
Corporation) by Latin American Nations was set up.
size fits all.
But this institution is a regional bank and has capital
Another reason for setting up a new development bank is the long delayed reforms in the governance 17 | A U G U S T 2 0 1 4
limited to cater to Latin American countries. It has pain in capital of $ 3.6 billion. The financial times
work together with international, regional and national
infrastructure in an environmentally sustainable way which would ultimately result in economic and social development of the under developed and developing countries.
reported that World Bank provides less finding to these countries than CAF. This is mainly because of less restrictive regulations of CAF and its regional knowledge. The CAF approved loans worth $9.3 billion in 2012. Similarly the African Development bank which caters to African countries has a paid in capital of less than $5 billion dollars. The African region especially the sub-sahara
infrastructure financing in the world. Thus the regional banks do not have sufficient resources to meet the needs.The New Development Bank must partner with regional and national development banks as they are the best placed to help narrow the information asymmetry. The New Development Bank under the first presidency of India must ensure that the Durban Agreement does not become another Bretton Woods agreement and that it is not to compete here but to 18 | A U G U S T 2 0 1 4
Gems and Jewellery
- Alisha Singh, IBS Hyderabad
Gems and jewellery have been a prominent part of
The domestic gems and jewels market in the financial
many cultures and customs across the globe. Since
year 2012-13 stood at 40 billion USD and is expected
time immemorial people have been using gems and
to rise by 13% per annum to reach an expected target
jewellery in the form of gifts, investment purpose,
of 45 to 50 billion USD by the year 2015. The
ornaments and so forth. Moreover, it also symbolises
demand for gold ornaments is always on the rise
wealth in the society at any given point of time.
which constitutes more than 80% of the domestic
Gems and jewels have been an indispensable part of the Indian civilisation since its inception. However,
jewellery consumption along with other precious metals.
the industry gathered momentum during the post-
STRENGTHS of the Sector:
independence era and ever since there has been no
Advent of organised retail is boosting up the gems
looking back. In 1966-67, the export turnover of gems
and jewel industry in India:
and jewels industry in India was 220 million rupees constituting a mere 3% of the total merchandise exports which has now transformed to 15820.30 million rupees as of June 2014 making it a crucial foreign exchange earner of our country and also the backbone of our economy. This particular industry has caught the attention of the masses due to its talented craftsmen, its superior practices in cutting and polishing fine diamonds and precious stones and its cost-efficiencies. The two major segments of the industry are gold segment (covers around 80% of the jewellery market) and diamonds. India is one of the
The advent of organised retail seems to be a booster for the industry. The Indian retail industry has expanded drastically in major cities and metros and is expected to achieve a total retail market size of USD 750-850 billion by 2015 from the current size of USD 560 billion. Although, 85 to 90% of the industry is unorganised .i.e. (local shops) but with changing times there has been a significant change in the trends and behavioural patterns of the customers who have become more brand conscious of late. Organised retail players such as Tanishq, Geetanjali and various others
world‘s largest manufacturers of cut and polished
expect to grow rapidly in years to come.
Ease of access:
approximately 60% of the world‘s supply in terms of
India is the hub of gems and jewels. States of Gujarat,
value and 80% in terms of volume. The industry
Rajasthan take the lead when it comes to country‘s
contributes more than 14% towards the total export in
gold and rough diamond imports. Moreover, the
India and provides employment to 1.3 million people
advent of modern semi-automatic factories, laser
directly and indirectly. The global market for gems and jewellery is over USD 100 billion with major contribution
Thailand and USA. 19 | A U G U S T 2 0 1 4
cutting techniques and skilled manpower has become an indispensable asset for the industry.
WEAKNESSES of the Sector: Although, India has umpteen natural resources it lags behind when it comes to infrastructure. Its weak infrastructure has made it incapable to tap the potential resources and use it for the best possible purpose. Moreover, with respect to the rest of the world India is yet to prove its mettle when it comes to gems and jewels in term of recognised brands, technology and so forth as the competition in the market is fierce. OPPORTUNITIES in the Sector: India has immense potential to become the leader of gems and jewels industry of the world as it has umpteen numbers of natural resources which is spread across length and breadth of the country such as minerals, skilled craftsmen and so forth. Also, the government is constantly taking initiatives in terms of taxes, infrastructure, duties etc. It plans to promote India in a big way through Foreign Trade policy (2009-2014) which would take the industry to new heights. THREATS for the Sector: Lack of financial support:
which is directly proportional to the industry‘s growth. India lacks enough design development centres to provide feedback and to innovate latest designs to catch up with fashion needs of the foreign buyers which is a major cause to worry. Cut throat competition: India faces intense competition with respect to China, Thailand and other eastern and Asian countries due to cheap labour, strong infrastructure and a more welcoming government. Technology is another aspect where India lags behind. Apart from China, Israel and Belgium are other contenders who are emerging as diamond processing centres and are more stable as compared to India. Fluctuation in exchange rate: This
rupee/dollar exchange rate as it is an export/import industry. Any variation in the exchange rates causes an impact either positive or negative in the industry. Analysis through Porter’s Five Forces Model: Bargaining power of suppliers (Medium): India is the largest consumer of gold which has resulted in large bargaining power i.e. the suppliers
The industry faces crisis when it comes to acquiring loans from the bank. As the market mostly comprises of small players, the banks and other financial institutions are sceptical in providing loans which in return jeopardises the economic growth of the firm.
have an edge when it comes to pricing whereas the customer base for rough diamonds is very small in comparison with other countries resulting in mediocre level of bargaining power. Bargaining power of buyers (Low to Medium):
Changing customer preference: Bargaining power in gold industry is only limited to Since, the environment in which we reside is ever dynamic, keeping pace with the changing needs and patterns of the customers becomes pretty challenging 20 | A U G U S T 2 0 1 4
fabrication charges whereas its high in case of diamond cutting and polishing owing to the fact that
majority of the world‘s rough diamond production is
However, the USA and Japan registered a growth in
cut and polished in India.
sales during that period. In case of diamond sector
Inter firm rivalry (high):
India accounts for almost 50% of the supply in international market. It contributes nearly 55% of the
The Indian industry majorly comprises of unorganised sector employing around 1.5 million workers serving approximately around 0.2 million to the gold sector and over 8000 diamond jewellers. Hence, the rivalry is intense among the firms within the country and also rest of the world. Barriers to entry (Low): It is extremely easy and accessible to enter the Indian gems and jewels market due to the easy availability of skilled workforce and the ability to invest in advanced technology which results in low intensity for resistance.
world‘s net exports of cut and polished diamonds in value, 90% in terms of pieces and 80% in terms of carats. Every 11 of 12 diamonds sold around the globe are processed in India, irrespective of where these are mined. Hence, India as a country is slowly emerging as king of gems and jewels industry. Outlook: In a nutshell, It can be said that the Indian gems and jewellery market has a bright future owing to the increased focus of the world towards quality of gems and jewellery products and better purchasing power of the people in India. The industry survives on the
Threat of substitutes (Low):
supportive government policies, availability of skilled
Gold plays a pivotal role in India when it comes to
labour and strong demand from the domestic market.
savings, investment purpose, festivals, marriage and
However due to highly unorganised structure and
so forth. Hence, the chances of substituting gold with
intense competition among the players the margins
other substances are less. Same is applicable for
earned by the players are less. India is one of the
diamond owing to its purity. Hence, the industry is
emerging players in the Gems and Jewellery market
negligibly suffers from the threat of substitutes.
but in order to carve a niche for itself, it needs to
India’s Position from Global Perspective:
adapt itself well to the dynamic environment, changing lifestyles and expenditure pattern through
Globally, India recorded a hike in demand up to 37%
whereas China had recorded a hike of about 54% long
technology. In near future, gold jewellery demand is
ago. There was also noticeable increase in demand in
likely to witness consistent growth driven by evolving
other parts of the world such as Turkey and the
lifestyle, which also holds true for the diamond sector
Middle East region. At present, India and China are
to some extent. Hence, I would like to conclude on the
fierce competitors when it comes to the gold sector
note that ―All that glitters is GOLD‖.
whereas in diamond sector, the skyrocketing growth in the key developing markets of China and India slowed down in 2013 amid economic recession.
21 | A U G U S T 2 0 1 4
Article of the Month
Taming the Fiscal Beast
- Nutan Patnaik & Devatha Saikiran, XIMB Bhubaneswar
Many a balance of payment crisis has forced
nature of government firms. Government projects are
governments into austerity. However for the short
notorious for their high failure and delay rate,
term pain to translate into long term sustainable
obsolete bureaucratic decision making. They are
growth requires skilful handling by professionals to
facilitate this transition.
administratively difficult to halt .They also face the
US, Britain, Greece, Portugal, Poland and Cyprus are undertaking important fiscal squeeze measures. India
highest degree of organisational resistance to any change due to lenient labour laws.
is one major example of a government trying out a
The 3-Step Improvement Framework for Indian
landmark transition from a populist model to a frugal
model based on financial discipline. The current fiscal deficit situation threatens to collapse the economy and make the country vulnerable to reform mandates from International Organizations such as IMF, whose onesize-fits-all neo-liberal policies may cripple the country's economic freedom and eventually may not
We propose a broad 3-step framework to resolve inefficiencies afflicting the public sector, through a slew of policy changes. It will apply to broad range of public sector enterprises. This will be demonstrated by its application in providing consulting for one such enterprise, say Indian railways.
work out in the country's best interests. State owned Indian Railways typify the public sector. The government has to take care of three things. It has to increase its rather low revenue base, cut down on public expenditure and avoid exposure to shocks caused by fluctuations in global commodity prices. The government's revenue collections are low owing to low per capita income and low growth in business. To counter this, Goods and Services Tax is one measure that needs to be introduced soon, which will give a fillip to growth and reduce tax evasions. Exposure to shocks can be minimized by managing sovereign credit. However, the biggest contributor to the fiscal deficit is the huge public sector, a legacy of the socialist beginnings of the economy. The highly inefficient and bureaucratic public sector enterprises
It is the fourth largest in the world. It symbolizes democracy's triumph as the poorest Indian has become mobile. Yet, it is inefficient, corrupt, over manned and politicized. Analysts say some 70 million people travel every year without tickets, the manpower employed per kilometre is 7 times more than that in developed nations. Private companies would not dream of transporting goods by rail due to high tariffs and delays. Therefore, even petrol and diesel are inefficiently transported by road. Powerful unions resist any scaling down or modernization. Investment decisions are usually populist measures with little relevance to financial sustainability or consumer needs.
are weighed down by the burden of populism such as subsidies and other considerations unique to the
Let us now see how we can fit the above in our three pronged framework.
22 | A U G U S T 2 0 1 4
also account for 60% of annual subsidy of Rs. 26,000 crores. We suggest the subsidies must be phased out and railways be deregulated as much as possible. All the welfare activities and the social schemes of the government cross subsidized by income from the public sector units must rather be funded by taxes as it is done most of the developed nations. This can be achieved by introduction of Gross Service Tax which aims to prevent the tax leakages and also considerably increase the tax base. Step 2: Incentive Based System Step 1: Growth-Profit Duality
We think that Government can no more say it has no business being in business and profit motive and
Edith Penrose, the British economist, has explained in ‗The Theory of the Growth of the Firm‘ that profit and growth of an enterprise fuel each other in an infinite feedback loop. Profits would be desired for the sake of the firm itself and in order to make profit through more expansion. Thus, it is not hard to see that Indian public sector has completely deviated from the basic tenet of Growth-profit duality and this is a precursor to unsustainability in the long run. It must be minimized by maintaining that investments are not
motivation must be at the top of the agenda for public sector. It must ensure that all the employees not only work responsibly and efficiently but also gain prestige, personal satisfaction in the successful growth of the firm with which they are connected, more responsible and better paid positions, and wider scope for their ambitions and abilities. A carrot and stick approach must be adopted so the people responsible for running the PSUs are incentivized for their performance as well as penalized for their non-
made unless profits are made and profits made by the
performance. Whereas the ‗carrot‘ approach is easy to
enterprise are re-invested back in its growth.
apply, to show the ‗stick‘ means making changes in
The recent hike in railway fares coming after 11 years
the age old labour laws of India.
is a step in the right direction. For too long, the railways have incurred losses due unsustainable passenger and freight charges due to populist policies. However, the recent announcement of launch of bullet trains proves we have not learnt from our past mistakes. We belong to the school of thought that further investments in a system that is already reeling from huge losses will further bleed it. The railways
23 | A U G U S T 2 0 1 4
Applying the above solutions can solve most of the present day ills of Indian Railways as this leads to improved efficiency, performance and profits. All the stakeholders must work in synergy to achieve the desired results and this can be achieved by incentivizing the performance at all the levels.
benchmarks and giving adequate training to the stakeholders, leakages can be prevented and losses can be overcome. Conclusion: Most of the steps suggested above may seem simple but are taken for granted. These steps are critical and address the problem at the core of the public sector failure. Re-inventing the public sector is the need of the hour, and the key to fiscal consolidation.
Step 3: Learning Curve and adapting to Emerging Trends Any firm must dig its history to understand its core competencies and invest resources to consolidate them. Weaknesses can be overcome by disinvestment and privatization. But it must not lose out on the learning curve by blind disinvestment. Rather than trying to resuscitating the loss making activities that are not core competencies of a firm, outsourcing them must be considered wherever necessary. However, it must be borne it mind to not overdo it as getting rid of a problem is not equivalent to solving it and makebuy decisions must be made carefully. India had lost out during the industrialization era due to its failure to upgrade to latest technology in the textiles business. The same mistakes are being repeatedly made by not updating to the latest technology. The railways budget for the financial year invited private
partnership (PPP) model must breathe life into the functioning
inefficiencies. By employing cutting edge technology 24 | A U G U S T 2 0 1 4
TCS: The New Superstar of India Inc.
- Manjari, IBS Hyderabad
Since its start in the year 1968, Tata Consultancy
Analysts say that as companies grow too big in size
Services has come a long way. The company is a part
their growth slows down as they find fewer
of the Tata Group (1868), which is a global enterprise
opportunities. But why is the market still bullish on
headquartered in India, and comprises over 100
India's biggest outsourcer TCS, which pulled in
operating companies in seven business sectors:
annual revenues Rs. 81,809 crore in 2013-14 and has
over 3 lakh employees. They also believe TCS is well
engineering, materials, services, energy, consumer
on its way to reach a $100-billion market cap in the
products and chemicals. Tata companies have
next two years. "TCS has managed to maintain
operations in more than 100 countries across six
industry-leading growth; it can add to this through the
continents, and export products and services to over
inorganic route," said Raamdeo Agarwal, joint
150 countries. The revenue of Tata companies, taken
managing director, Motilal Oswal Financial Services.
together, was $103.27 billion (around Rs624,757 crore) in 2013-14, with 67.2 percent of this coming from businesses outside India. Tata companies employ over 581,470 people worldwide.
In an excerpt from WSJ, Mr. Chandrasekaran CEO and managing director said ―They question our ability because they think large is bad. But we believe we are not large. Instead, we have the scale.
TCS has firmly established itself as India's most-
When we have scale we make big bets on innovation
valued company. On July 27 2014, the Mumbai-
and future technologies. When our revenues were
based outsourcer added another feather to its cap as it
small, we didn't have the luxury to invest ahead of
became the first Indian company to surpass Rs. 5 lakh
time in multiple initiatives. If we organize ourselves
crore ($83 billion at 60 rupees=1 dollar) in market
in a way where each business unit can independently
capitalisation. TCS' nearest rival in terms of market
work on new ideas, we can be agile enough to
cap is state-run ONGC (Rs. 3.5 lakh crore). Reliance
leverage the scale.‖
Industries, India's biggest company by sales, ranks third by market cap (Rs. 3.3 lakh crore) currently. Its market cap is now the second-largest for an information-technology services company worldwide, behind only International Business Machines Corp.—and it's more than the combined value of next three Indian IT services companies - Infosys (Rs. 1.90 lakh crore), Wipro (Rs. 1.39 lakh crore) and HCL Tech (Rs. 1.07 lakh crore).
25 | A U G U S T 2 0 1 4
presence and our full range of global capabilities to serve the Japanese corporations effectively and accelerate our growth in the Japan marke and will help in expansion of TCS in Asian, Middle East , Latin America along with UK and US markets. Five forces of new technology - mobility, big data, social media, cloud computing and robotics has been implemented by TCS for sustaining and improved growth. Also it takes initiatives to train and develop Chart: TCS Vs. INFOSYS LTD
its employees as well as it give its leaders the autonomy to take decisions freely. Recently, it has announced that it is setting up the worldâ€˜s largest
In my opinion the growth in market cap of TCS is reflective of the firm's consistent performance over the past few years. The sharp fall in the rupee value
corporate learning and development center with a total capacity to train 15,000 professionals at one time and 50,000 professionals annually.
against the dollar, if had a great impact on the profit margins of Indian IT companies. Since TCS earn most
TCS has retained and grown its position through
of its revenue in dollars and expenditures are mostly in rupees, profit margins widen in line with the rupee depreciation. A keen focus on inorganic growth, an increasing proportion of infrastructure management services in revenue, effective employee resource management and advancement in technology have emerged as key differentiators. On the inorganic growth prospects of the company, Mr Mistry said acquisitions will depend on independent requirements in new geographies, adding that acquisition of Alti SA will help the company expand significantly in France. competitive positioning in the market , improved Mergers and aquistions are happening throughout the globe for TCS. Recently on April 21 2014- TCS, announced the formation of a Japan-focused entity
relationship with customers and expanding their presence in newer markets.
through the merger of its two Japanese arms with a 100 per cent subsidiary of Mitsubishi Corporation which expects to clock annual revenues of $600 million. It will now have the scale, strong local 26 | A U G U S T 2 0 1 4
The rise of Indian Economy is the story of the rise of Service Sector in India. Service sector in general and IT sector in particular has been the growth engine of
of the European countries are still staring at Sovereign Default.
unemployment figures in spite of the much debated Quantitative Easing. The Indian economy is also not immune to the happenings of the global Economy, and the economy suffered a lot because the demand for exports of Indian Goods and Services has gone down. Many Indian firms have struggled to find the momentum back that they got during boom years. In spite of all the challenges mentioned above, the increase in the market capitalization of TCS above Rs. 5 Lakh Crore is a remarkable feet. This incredible performance has given a boost to not only the IT sector but the economy as a whole when the investors all over the world looking towards India as one of the most promising destination for their money. The inflow of foreign capital in form of FIIs in the equity of TCS proves it beyond doubt that not only the domestic investors but the investors all over the world also have shown tremendous faith and promise in the the Indian Economy. The rise of IT sector has written a new story of Indian industry on the Global Scale. The Indian growth story has become synonymous with the growth and expansion of IT industry. TCS has led from front in establishing an institution that has worked towards developing an IT infrastructure that is unparalleled in the whole world. From an Indian firm, it has grown to the standards of a Global Giant. Recently, the jitters in the developing economies of Asia and Latin America has sent shock waves to the already suffering world economy, that has struggled to come out of the Great Recession of 2008-09. Most
27 | A U G U S T 2 0 1 4
Indian Global IT Giant. No doubt, that in near future, with its growth oriented policies and profit making tactics, Tata Consultancy Services has risen as the shining star of India Inc.
Fiscal Deficit and it’s Impact on Indian Economy
- Shikhar Sharma, IMT Ghaziabad
Fiscal deficit: An Overview In simple terms, Fiscal deficit is the difference between the government‘s expenditures and its revenues (excluding the money it has borrowed). The government generates its revenue from a variety of sources like Direct and Indirect taxes, PSU divestment etc. However, in a developing economy like India the revenue mostly fell short of the expenditure the government makes in terms of Government deficit is possibly the most dominating issue in the global financial markets these days.
subsidies for poor, defence spending and other planned expenditures.
Several major economies including US, UK, Spain
In broader terms, high government expenditure and
etc. have been reeling under huge deficits. The
lower revenues are the main causes of high deficits. If
situation in India is not very different. Looking at the
we particularly look at India, we would observe that
last 6 years, there has been a lot of hue and cry about
apart from the Planned and Defence expenditure;
India‘s ballooning Fiscal deficit and the urgent need
subsidies and interest cost form the major chunk of
of fiscal consolidation. Various rating agencies and
the expenditure. With the previous government‘s
International funding organizations including S&P,
stress on social schemes like MNREGA, Food
Fitch, IMF, ADB etc., have warned India of dire
consequences in case the rising deficit is not tamed.
Since these organizations of International stature
corresponding revenue stream coming in to balance it.
attach so much importance to Fiscal and Current
Also since the government mostly finances its deficit
account deficits; the toughest job of any Indian
through borrowings either from RBI or through
Finance Minister has been to bring the twin deficits
issuance of treasury bonds or through foreign markets,
under control, so as to avoid any rating downgrades.
the debt on the govt. increases. This in turn increases
In the current fiscal‘s financial budget, Mr. Arun
the rate of interest at which the govt. can borrow in
jaitley has laid down a fiscal consolidation plan with
the future. Thus, to finance huge deficits the
an aim to reduce the deficit to 3% by 2016-17.
government has to incur huge interest cost thereby
Let‘s now delve deeper into Fiscal deficit and its
worsening the fiscal deficit situation.
implications for India.
28 | A U G U S T 2 0 1 4
Fiscal deficit: Impact on Indian Economy Though a large fiscal deficit by itself is not bad, it can
of currency again leads to higher Current account deficit, thereby impacting the credit rating.
affect the country‘s economic growth adversely. A
Delay in fiscal consolidation does not reflect well on
government‘s economic management abilities. It also
leads to a cut
debt on its balance sheets, financing the interest burden leads to Crowding out of money from the system leaving businesses with less money. This in turn leads to fewer investments by the private sector
education, capital. Moreover, since the government has a lot of
thereby reducing growth in human and physical
inflation is a natural outcome of high fiscal deficit. Considering
government infused a lot of capital into the system to keep the growth on trajectory. The higher supply of money into the system resulted in inflation since the output was not able to keep pace with rising demand.
due to less the availability of capital, ultimately impacting country‘s job market and demand led
Fiscal Deficit: The Way Forward
The Finance ministry has been working on a fiscal
One of the major nightmares of any finance minister is Sovereign downgrades. Rating downgrades by International agencies like S&P, Moody‘s etc. tend to erode the investors‘ confidence, both domestic and foreign, in the economy. Downgrades leads to a ripple effect in the system whereby the business confidence deteriorates affecting FDI and FII inflows. Reduction in foreign inflows impacts our foreign currency reserves and results in depreciation of our currency. Since we are an import driven economy, depreciation
consolidation plan and has indicated its will to maintain a fiscal deficit of 4.1% for FY‘15, 3.6% in FY‘16 and 3% in FY‘17. As is evident from FY‘15 budget, the government has embarked on a path of fiscal consolidation and is trying to control its expenditure and improve its revenue. The government has taken steps to restrain its expenditure by just marginally increasing its expenses on subsidy by 2% and cutting down its expenditure on social services sector from Rs. 25438 Cr. (RE) To 25324 Cr. (BE). However,
29 | A U G U S T 2 0 1 4
implementing these steps. As is seen from the past
control its expenditure on food and fertiliser subsidy.
budgets as well, the government mostly overshoots
Also it needs to make sure that the present system becomes more efficient and there are no slippages so that the budgetary estimates of the expenditures are actually achieved. According to the latest available data, the fiscal deficit data at the end of the first quarter (2014) has reached 56.1% of the full year target mostly because of subdued revenues. Currently the task of controlling the fiscal deficit to 4.1% of GDP seems herculean; however letâ€˜s hope the government comes out clean on its promises to contain deficit.
the target it sets and this time too according to many analysts, the target is going to be breached. The government must think of a long term solution to contain Fiscal deficit which has been plaguing the country for past many years. The government needs to provide a much needed push to cash starved sectors like infrastructure, power etc., get consensus from various stakeholders on important bills like GST and should create policies that attract long term capital in the country which includes bringing in more clarity on Retrospective tax issue. According to the International Monetary Fund (IMF), "India's revenue-to-GDP ratio has fallen below its peers. The GST would be the most important reform, and would boost growth through the creation of a single Indian market". The government also needs to widen its tax base so that fiscal consolidation could be partly achieved through a higher tax-GDP ratio than merely through reduction in the expenditure-to-GDP ratio. On the expenses front, the government needs to 30 | A U G U S T 2 0 1 4
Flipkart: A Growth Story or a Ticking Time Bomb Shopping
- Sachi Kheskani, IBS Hyderabad
The concept of e-commerce is setting in at rapid pace
remarkable transition, right from a time when most of
in the psyche of the Indian consumer. In the metros,
shopping was done by males of the family or a seller
paucity of time is a big driver for online shopping. On
coming at your doorsteps to sell saree, to women
the other hand, accessibility to myriad products makes
carrying trolleys in malls. And now an era has begun
audiences from smaller towns and cities opt for the
where shopping is just a click away. "Flipkart " has
online route. There arises warehousing and stocking
now become a new verb which is yet to be added to
problems for physical distributors and retailers.
Sometimes, customers are unable to buy items
The Millenial generation has created
of their choice, thus
innovative businesses and Flipkart deserves a mention.
Flipkart, have defined the for
subsequent adoption of
e-commerce, thus, only
now it is a full fledged
seems rational. With
virtual mall where you can
several reputed brick-
add products to your wish
story is not just about astounding success and mind-
price comparison platform to
nascent idea to a 4,500-member company, the Flipkart
Internet users by 2014.
history, where it provided a
list if not buy for moment. From a two-member
India. Going back to its
Plan, pegged at $4.5
Binny Bansal co-founders of
amount of 4 lacs, Sachin and
Also the Government's
With a start up of a meagre
and-mortar retailers also offering online services, it seems natural the trend of shopping remotely will rise significantly.
numbing numbers. It is much more than that, it's
Recently, Flipkart is making news for quite a lot of
about redefining customer experience and breaking
reasons. Flipkart raised $1.78 billion since it started in
online shopping inertia. The customer satisfaction
2007, along with $1.57 billion over the past year. It
mantra it follows is "Don't count your customer
reported a loss of about five times more than previous
before they smile."
years as of 2013. These losses mainly accounted for
31 | A U G U S T 2 0 1 4
high expenditures on supply chain management,
since expenses shoot up. Flipkart‘s approach of
distribution and recruitment of employees.
bringing in a white label Chinese tablet may get the
Even though investors were shying from e-commerce, the company managed to raise capital. In the beginning of the year 2014, Flipkart crossed a $1 billion ingross merchandise value, after merging with a leading fashion portal Myntra. Also it had acquired letsbuy.com a leading electronics leader, in 2012 after
sales counters ticking but won‘t take it anywhere close to Amazon‘s Holy Grail of understanding the customer since the latter is easier to use. Amazon is looking at the Big Picture from where Flipkart won‘t be able to compete there for a while and will need far more than $1 billion.
which the latter ceased to exist. The after effects of
A strong back-end is a vital pre-requisite for an online
which were that Flipkart in March hit $1 billion in
business to survive, since once the customer
sales, a target which it achieved a year ahead of plan
completes her transaction, it's this back-end that
connects the dots. Flipkart began operations on the
consolidation. To take on rivals Amazon, another e-commerce company which has strong presence in India, has been discounting prices, launching next-day delivery, adding new product categories and embarking on a high-voltage advertisement campaign. Jeff Bezos, of Amazon has just announced to increase investment by 2 billion in India. The extra edge that Amazon has over Flipkart is its services are faster. Amazon has expanded its operations in many metros. Amazon and
consignment model, where goods were procured from suppliers on demand, based on the orders received through the website. However, eventually, the booksto-electronics e-shop adopted the warehouse model. The company has its own warehouses, and maintains its own inventory. Sales projection determines the inventory, and the available inventory accounts for the sales made; it's a self-feeding cycle of sorts. Such a model provides for better control over the entire logistics management piece.
Flipkart are competing in terms of attracting global
On the operational front, issues faced by the company
talent as well, but this move could be fatal for Flipkart
pertain to delay in deliveries, or faulty products. As a
32 | A U G U S T 2 0 1 4
customer-centric organisation, none of these issues
entity so far. Although profits after tax remain
can remain unresolved for long. Hence, Flipkart
negative, the company's valuation is soaring thanks to
stresses on customer service it aligns with the firm's
eager participation of these private equity players. The
philosophy of â€—making better our service promise'. So
acquisition of Letsbuy.com and Myntra signals
The next time you call Flipkart's customer service to
FlipKart's ambitions to capture the domestic online
change the delivery date or complain about a product,
market. A budding consumer class, coupled with a
the agent calming your frayed nerves could be Sachin
rise in web-literate population and zealous venture
Bansal, its founder and chief executive or any of the
capital funding may propel Flipkart to become India's
answer to Amazon.com!
The Road Ahead
Only those companies that can successfully engage
The three main ingredients to keep Flipkart striving are Innovation, customer satisfaction and Venture funding. Innovation is just one facet of the business universe. The premise of any business be it traditional or modern, rests on its ability to harness data, market
customers through novel ideas, quality products and flawless services will prosper. May be it is absolute genius, or simple common sense the e-retail hero has been able to accomplish all this during its formative years.
research hence becomes crucial for planning the
Flipkart as of now will live to tell the tale and venture
business's future course of action. This adds to the
â€—surprise and delight' factor for customers, because they're then treated to offers that are most suited and relevant to their preferences. Just like Flipkart has recently tied up with OLX for marketing purposes, we can expect Flipkart to outsource some of its internal activities such as its call center operations to experienced firms in the industry like Aegis. This will enable Flipkart to concentrate more on its core competencies. In E-commerce there is a lot of scope as well as is the risk of failure. A leading consulting firm named Technopak
economy at $600 million at present, with the potential to swell upto $70 billion by 2020. Flipkart is running the marathon with ample support from private equity players such as Accel Partners and Tiger Global, which have collectively invested $150 million in the 33 | A U G U S T 2 0 1 4
- Navjoth Sahu, IBS Hyderabad
Unique identification project was initially designed by
the Planning Commission, under the UPA regime of
biometric identification numbers to millions of
Indians, was then criticized by several Bharatiya
identification for each resident across the country and
Janata Party (BJP) leaders in the run-up to the
would be used primarily as the basis for efficient
national elections. Now that the BJP is in office,
delivery of welfare services. It would also act as a tool
analysts of high cadre have said that the new
for effective monitoring of various programs and
government has cleverly chosen ―pragmatism over
schemes of the Government. And that is how Aadhaar
politics‖ and has decided to maintain the system and
Card came into existence. But, from the day of
accelerate resident registration in its first budget in
initiation till date it been a major area of confusion to
order to provide sustainable effort in the upcoming
both the common people and majorly the less seeming
budgets. The new government has allocated nearly
concerned politicians. Aadhaar being a 12 digit
US$340 million to continue and extend with the
individual identification number issued by the Unique
registration process. After an examination last month,
Identification Authority of India on behalf of the
the national government concluded that many Indian
Government of India. Which was thought of serving
states had made significant headway with enrolling
as a proof of identity and address, anywhere in India.
residents in the Aadhaar system. As a result, Prime
Any individual, irrespective of age and gender, who is
Minister Narendra Modi along with Finance Minister
a resident in India and satisfies the verification
Arun Jaitley decided Aadhaar should in fact continue
process laid down by the UIDAI can enroll for
and not be merged with India‘s census database
Aadhaar. Basically introduced to eliminate the large
system , as previous press reports suggested would
number of duplicate and fake identities in government
occur. The government‘s objective for present is to
and private databases. According to the latest budget
enroll 100 million more residents with Aadhaar.
after an extensive review, India‘s new national elected
UIDAI has already enrolled about 700 million people
government has decided to retain and expand
and issued unique identification numbers to 650
Aadhaar, the world‘s largest biometric database. The
million. According to International Monetary Fund‘s
recently published report, ―Regional Outlook: Asia
Identification Authority of India (UIDAI), is currently
and Pacific‖, the group notes that the integration of
used to authenticate delivery of social services
direct cash transfer with Aadhaar will take time, but
including direct wage payments to bank accounts,
will ultimately help the Indian government save 0.5
natural gas subsidies to India‘s rural poor, and school
percent of the GDP. Reported by another news agency
attendance. The system, a landmark legacy project of
, the report specifically says that ―if the combination
India‘s long ruling Congress Party, also provides
of direct transfer and Aadhaar eliminates the
identification to people who do not have birth
estimated 15 percent leakage cited above for the
34 | A U G U S T 2 0 1 4
programmes being integrated, savings could total 0.5
decided to put pragmatism over politics after initially
percent of GDP in addition to the gains from the
appearing keen on purging the UPA's pet project that
better targeting of spending on the poor.‖ The report
aims to provide every Indian resident a 12-digit
also notes that by phasing out middlemen and
unique identity number. At a recent meeting, Prime
complex bureaucracies, the direct cash transfer
scheme will also drive costs down and improve the
representatives to link social-sector schemes with the
bottom line. Another market research on the Aadhaar
unique ID numbers for plugging leakages and
have something else to say it concludes that it is
increasing accountability of officials. Though there
poised for significant growth, thanks in part to the
are some great news for the people, as they are going
Aadhaar program and direct cash transfer scheme.
to be benefitted with major developments that are
There have been some issues of adoption however, for
going to be carved by the new present ruling
the UIDAI‘s Aadhaar cash transfer system, as several
government, there are issues like duplication or
bank in India have come out against a platform
making of fake Aadhaar cited at many locations all
created by the UIDAI which would see Aadhaar
over the country. There is another issue with the
numbers used to authentication ID before every
unavailability of the Aadhaar card as many don't
transaction regarding bank accounts receiving welfare
understand the importance of the enrollment where as
benefits. As we reported last month, 15% of
other believe it to another such identity linked to the
consumers have already provided their Aadhaar
government body. On one hand the government being
details to banks. At present according to reports
concerned over the raise in the gross domestic product
Aadhaar enrolment has now reached 286.66 million,
in the present monsoon less hit economy, on the
representing a significant jump, owed widely to the
contrary we find people being skeptical over the
launch of the UIDAI‘s direct transfer scheme
Congressified budget. Only time can say what was
launched early this year. This increase is good news to
stakeholders in the Aadhaar program, as in May 2012,
understanding the economy with more concerned
enrollment stood at only 4.76 million, significantly
looks, hoping that people did not made any mistake in
less than January for example, in which enrolment
giving power to a self oriented person who cited
stood at 24.79 million. Based on the country‘s 2012-
himself of many achievements for the prime minister
2013 Economic Survey, the second phase of the
candidacy. Another point is that the Aadhaar being
Aadhaar project aims to enroll 400 million residents
linked with the government is not linked to benefits to
by 2014. In a major breakthrough, The Centre has
the people as other all such identity do, giving us a
decided to name a new director general for Unique
question, If it is not linked with India‘s census
database system then what would be its future scope
Aadhaar, in yet another signal of its commitment to continue with the previous government's flagship programme. Government sources say the NDA has 35 | A U G U S T 2 0 1 4
of identification being a twelve digit number be?
Bringing Shadow Banks Out of Shadow
- Swati Gupta, Institute of Management Technology, Ghaziabad
An old adage goes,‖ An excess of mirth leads to tear‖.
Peoples Bank of China squeezed out the money
The fastest growing country has started showing slow
market by forcing the banks to follow regulated
growth and one of the reasons was the danger of the
lending and borrowing interest rates along with the
systematic credit risks arising due to the unregulated
rigid terms and conditions. The artificial rates
growth in the Shadow Banking sector.
designed by the Central Bank followed a lending rate
Shadow banking is worth more than $70 trillion all over the world. It comprises of Non-Bank Financial Intermediaries which provide similar services like traditional banking system but operates outside the regulated lending system. They create credit across the financial system which is more prone to default due to their risky portfolio. Shadow banking comprises of not only the risky investment products & lending between the individuals (securitized loans), but also the loan shark operations & pawn shops along with derivatives and securities lending. The main kind of shadow deposit is known as loosely bound Wealth management products (WMPs). These are high rate accounts which have yield much higher than the 3% interest yielding savings account. Certain trust companies also form these WMPs that the banks commercialise for a certain amount of fee.
of 4.2% or above and the borrowing rate of less than 6%. Traditional banks also check the portfolio of the customer thoroughly before imparting loans. There was huge need of commodities which included the base metals and the crude oil that required lot of financing. There were several Small and Medium Enterprises in the growth stage and required funds for further enhancement. However, due to the lower credit rating, they could not avail the loans from the traditional banks. This gave rise to the unstructured form of loans offered by Shadow Banking system where the loans were easily accessible to them, but at a higher interest rate; sometimes it even went as high as 20% per annum. Moreover, the banks of china have to maintain the Reserve Requirement ratio where in they have to maintain a reserve of 20% with the Central Bank. Unlike traditional banks, these rules do not apply to Shadow banking system. This increases
It is known to all that US suffered from liquidity crisis in 2008 due to the lack of liquidity in short term lending programme. The economists consider that Shadow Banking was one of the major reasons behind the losses in the subprime spread. This brought in a
their potential to create higher loan portfolio. Shadow banking system attracted more amounts of deposits from the more number of customers by giving them higher rate of return than the traditional banking system.
significant change in the economy of US which invariably affected the world and a global recession was declared. But it seems that China did not learn much from the incident.
But as the saying goes ―All that glitters is not gold‖. Although Shadow Banking has helped the SME sector to evolve, it has come with its own drawbacks. It increased the liquidity risk due to the increase in the
36 | A U G U S T 2 0 1 4
decade. This has not only led to asset deterioration, due to lower growth rate and increased opacity in shadow banking, but also devaluation of the stock market. China forms the ―Epicenter‖ of Shadow Banking that showed a growth of around 40% last year. It has added $12.5 trillion to its monetary stock which includes both public and private sector debts. It has become necessary to reduce the pace as it may affect the GDP growth rate of China and blow up sectors like real estate & constructions. Since China forms the default rate of the customers. This was majorly because of the lack of background check and unawareness about the credit capacity of the customer. They also took inadequate collateral (if any) which was insufficient to offset the loan in case of any default. Banks, at the same time, tried to compete with the Shadow Banking system by increasing the exposure of the loan but due to slow deposit growth rate the liquidity decreased further. This has led to suboptimal allocation of funds, which is the means to evaluate the growing operations in China.
World‘s second largest economy, this can have a detrimental effect on other countries too. There can be two solutions, i.e., by either plugging the regulatory rate or by allowing the traditional banks manage their cost of funds according to the market forces. Moreover, the traditional banks can promote better deposit and insurance policies which can create loans eventually. It is necessary to keep an offset between the Shadow banking system and the Traditional Banking system as increase in the latter can lead to slow growth and economic slowdown but increase in the former can bring in huge amount of systematic
The financial system considers that shadow banking
risk. Thus, if the People‘s Bank of China will not use
activity poses these systematic risks. Volatility
right tools at the right time, the future can be worse.
Institute at the NYU Stern School has calculated that
China possesses the highest level of SRisk of around €460 billion, which is three times greater than the USA. With the exception of Bank of China, it has been observed that all the banks of China have shown a notable increase in the perceived Systematic Risk in
The traditional and the Shadow banking system of India are also interlinked in India. However, India has a much better and stronger structure for maintaining its finance but it is still far from being perfect.
the past six months. Increase of SRisk of €7.5 billion
Reserve Bank of India should maintain the liquidity of
or 18.2%, followed by increase of SRisk of €5.3
banks appropriately in order to avoid high systematic
billion, or 10.3% in the Agricultural Bank of China, the country was facing this huge threat after almost a 37 | A U G U S T 2 0 1 4
risk due to increase in leverage condition.
Microsoft: Creating a Leaner Organization
- Priyanka Malik, IBS Hyderabad
integration & strategic alignment. Although Microsoft isn‘t a pioneer in workforce realignment &big giants like IBM, HP & Intel have also laid-off around 3-5% of their workforce but the figure of 14% has actually astonished the world. Microsoft is in a race with the mammoths Apple & Google & has been seeking to meld its hardware & software business into a cohesive package. The impact of the acquisition & layoffs was very quick as can be seen from the rise in share prices of Microsoft by 3% accounting for a total increase of 18% since the Bill Gates quoted ―Microsoft is not about greed. It‘s about innovation & fairness. Founded in 1975, MICROSOFT is the worldwide leader in software, services &solutions that help people & businesses realize their full potential. Recent appointment of Satya Nadella as the CEO of the company was the start of Microsoft moving in a new direction. Acquiring Nokia‘s devices & services business was a step in the same direction. It‘s a strong step to realize the dream of ‗mobile first‘ & ‗cloud
beginning of the year. Also the company takes into account the pretax charges of $1.1-$1.6 billion over the next four quarters. In the hope of a bright future the company plans to capture the market by replacing Nokia X products with Lumia products running windows. It‘s a way to build an affordable smart-phone space & Windows Universal Apps. Also, to win the higher price tier the innovative
Microsoft‘s digital work &digital life experience.
first‘ world. At Nokia the goal was to provide a successful The situation of employees was no less than the oxymoron ‗joyful trouble‘ as, soon after acquiring Nokia it announced the downsizing. Laying off 18,000 employees or 14 % of the work force over the next year is the deepest job cut ever in the history of Microsoft .After acquisition of Nokia the head count was pushed to 127,000 from 99,000.About 12,500 layoffs will come from eliminating overlaps with the Nokia unit. The layoff is the basis of two outcomeswork simplification & Nokia Devices & Services
hardware which is taken a step forward by Microsoft as it intends to delight the customer by their services & application provided by hardware of their own. Lumia 930, Lumia 1520 & other innovative products would be launched soon for the same. It also plans to offer Nokia, MixRadio as a third party service. It‘s almost impossible to think of a company that has managed to build a successful platform while simultaneously competing with its own licensees. Failure of giants like Apple with Mac & the Newton,
38 | A U G U S T 2 0 1 4
improving the agility of work force,
simplification. In accordance with ‗Microsoft‘, the company has decided to have few managerial levels. It will eliminate roles in several departments & will also add Palm with Palm OS & Nokia with Symbian suggests the same. Since, Microsoft is lightening the same pathway it is to face inevitable complications in the near future. Hence, the strategic planning of Nadella might have a lot to offer. But the situation sticks to either of the extremes for sure. Amidst the race against several giants, the question arises that is this ―lean & mean‖ approach, to achieve the goal of becoming a productivity & platform
roles in the required areas. The company makes it a point to intimate the employees to be laid- off with a prior notice period. Severance & related benefits would be offered accounting to a total amount of $750-$800 million. Also it would provide the employees with the help of job transition. Henceforth, laying- off 14% of its workforce isn‘t that great a scenario from the social point of view but its efforts to restore the dignity of their employees for the
contribution they made to the organization can‘t be
There can‘t be a direct; assertive answer to the
question as it has got both the social & organizational aspect attached to it. Organizations become the foundation for the society to progress but the situations like layoffs are equivalent to a push towards the downfall. It will not only render a huge chunk of people jobless but also, mount the pressure to earn bread & butter, raise their families & to restore their self esteem. It actually shatters the self confidence of the people which adds on to decrease the productivity of the dismissed people. Organizational point of view states that realignment of workforce is very essential not only to cut down the additional cost but also to clear the bloated work 39 | A U G U S T 2 0 1 4
Changing Face of Manufacturing and Agricultural Sector - Ravi Kant, IMT Hyderabad
implemented, things started to rebound in the Indian Economy. The year 2001-2008 was considered as the golden period for India as it was growing at 8-9% annually where Service Sector contributed 52% to the GDP growth but simultaneously Agriculture Sector and the Manufacturing Sector showed non-impressive growth. With the inception of the US Recession, the
1. Boosting Manufacturing Sector – Indian Manufacturers are performing below their potential since the reforms. The Manufacturing contribution to GDP as can be seen from the below graph that has been hovering around 14-16% and then from the financial year 2011-12 it has been showing a decelerating effect leading our Economy towards lower phase of the business cycle.
party was actually over. Our economy was enveloped with many problems. Inflation, lower GDP, increasing CAD, growing inequality, poor performance by the infrastructure sector and its related sectors have created sluggishness in the economy. All these led to sharp depreciation to the Indian Rupee that was making headlines in every newspaper and TV News Channel which had further halted our Indian Economy. Most of the problems encountered by the Indian Economy above are the result of Policy Paralysis of the UPA Government. In the General Election 2014, UPA Government lost the battle to Narendra Modi led NDA Government bringing the ‗Gujarat Model of Development‘ for India. The Union Budget 2014-15 has paid special emphasis for the revival of the investment and entrepreneurial climate of India. Gita Gopinath, Economics Professor, Harvard University told to Mint, “India is likely to grow at 6% in 2014-15 and if the Government delivers on its promise of good governance, growth can return to 7-8%.” What could be the Engine for Growth of the Indian Economy – 40 | A U G U S T 2 0 1 4
manufacturing sector as it has huge potential to create jobs for India‘s huge labor-force, cushioning India from the effects of downturn in the Economy and helping Indian Economy in lowering CAD by manufacturing goods which are inelastic in nature and has a world demand for it. Although in the year 2011, “National Manufacturing Policy” was enforced with the aim of accelerating the share of GDP to 25% within a decade and creating 100 million jobs but looking at the trend of its (Manufacturing Sector) performance in the above graph since 2011, things
seems mirage to achieve the vision of ‗National
showed an intention to introduce GST by the next
Manufacturing Policy‘. There are various issues in
financial year that will help businesses to deal with
Manufacturing Sector of India which needs to be
tax compliance in an easy manner. Infact, there was a
redressed as soon as possible like labor-related issues,
study conducted by ‗National Council of Applied
complex and cumbersome regulatory framework,
Economic Research‘ which says that introduction of
multiple land acquisition policies and environmental
GST will bring estimated gains of 0.9% to 1.7% of
clearances which creates bottlenecks for this sector to
GDP for the Economy and similar gains for
grow and flourish. Although, Goldar (2013) believes
Manufacturing and other sectors. Further, this budget
that the ratio of students to population has been
has also addressed the issue of skills in the
increasing from 20.5% in 1993-94 to 24.3% in 2004-
Manufacturing Sector. ‗Skill India‘ will be launched
05 to 26.6% in 2009-10 which is a welcoming sign for
to skill the youth that will make them employable and
National Manufacturing Policy but simultaneously he
ignite entrepreneurial skills in them. But the budget
is also pessimistic as the study conducted by ICRA
has not addressed the issues of environmental
Management Consultancy Services Ltd. for the FICCI
clearances and other issues which need to be
suggested that only 25% would be college educated
addressed in the next Union Budget for the thriving
and highly skilled labor among the targeted 500
million skilled labor by 2022 (a vision of the UPA Government). Policy‘
2. Creating Breakthrough in Agriculture -
India is an agrarian Economy. This is the only Sector which employs 54.6% of total population of the
country (Source: Centre for Budget and Governance The Union Budget 2014-15 have recognized the fact that there is a need to revive growth in the
Accountability). But Post-reform, as the time passed, this sector is encountering delinquency and disdain. Himanshu (2008) says that the crisis in Indian agriculture has been brewing up ever since 1996-97. Paul Sharma (2007) believes that the main reason for downward shift in agricultural growth is declining investment agriculture),
inefficiency of institutions in providing the inputs and services (inclusive of rural credit and extension). In the below graph, we can see that in the financial year 2010, marginal growth did picked up but the number hovered around 13-14% till financial year 2013-14. The growth is stagnant in this Sector from the last two Manufacturing
41 | A U G U S T 2 0 1 4
financial years at 13.94% which is less than
prime issues related to Agriculture especially Climate
Change and address those in near future for the proper
Agriculture has tremendous potential in reviving the Economy and helping India in curbing poverty. In the year 2007, Waynad, a district in Kerala had been struggling with poverty and lower prices as a result of which the productivity of these farmers decreased. The entry of Reliance Fresh brought new hopes to them which had helped these farmers to uplift themselves from Poverty. Reliance Fresh directly came to these farmers, bought the agricultural goods from them with better prices and weakened the hold of middle-men. Such an example shows that other than Government, private sectors can easily contribute in curbing poverty with the help of Agriculture by linking producers of this Sector to the Market. Government should encourage private players to invest in agriculture by creating business opportunity in this Sector. Agriculture Sector also acts as a source of raw material for other sectors to function.
growth and survival of all the stakeholders in this Sector. Conclusion Given the time constraint, Government did tried its level best to address the key issues that had been haunting India for many months. India will grow if it constructs policies which are productive in nature with no policy paralysis, proper monitoring of the use of funds, social welfare schemes are not corroded with corruption, no more scams which happened under UPA Government, speedy implementation of all the policies, and clearing bottlenecks that is plaguing different sectors of the Indian Economy. As Mr. Kaushik Basu, Senior Vice-President and Chief Economist at ‗The World Bank‘ said, “Trust, Honesty, Integrity and Contracts are four pillars of a successful Economy.” We have also seen that it is too risky to depend on one sector as an engine of growth
Although, the Union Budget 2014-15 has proposed to
and the repercussion of that has already been felt with
establish Agriculture and Horticulture Research
the rate our Economy was performing post-US-
Institutes, creation of Infrastructure fund, creation of
recession. Hence it is very important that Government
Long-term Rural Credit Fund with NABARD,
should equally concentrate on Agriculture and
intention of bringing Second Green Revolution, etc,
Manufacturing Sector which has tremendous potential
there has been no budget allocation been made for
to revolutionize our Economy that can give challenge
ensuring Income Security for farmers given the fact
to hegemony existing in the Global Economy.
that there has been announcement by the Indian Metrological Department that because of El Nino effect, there is an expectation of shortage of rainfall this year. Climate change is a big issue in this Sector that has also been mentioned in Mr. Jaitley‘s budget speech 2014-15 but little has been done this year to address this issue. Hence Government should take 42 | A U G U S T 2 0 1 4
Impact of Change in FDI Caps
- Rahul Mishra, IBS Hyderabad
The recent Indian Budget proposed an increase in the
individuals. This will also encourage individuals to go
FDI cap from 26% to 49% in the insurance sector
for more long-term savings plans (including insurance
which is taken up as a welcome move by the industry
plans), that will provide funds for long term
and should bring in the much required long-term
capital for the insurance sector. It will also bring in domain capital which is of critical importance in this phase of growth of life insurance industry. It is being said that 49 per cent FDI will be allowed only in cases where management control remains with Indian promoters. Also, it will be allowed only through the approval route, which means, the Foreign Investment Promotion Board (FIPB) must allow it; but, FDI up to
Insurance Amendment Bill will be taken up by the parliament for consideration which is a positive step as laws which are outdated should be revised and implemented but, that too should be done as soon as possible. Government wants to ensure that insurance reaches poor people. It is a positive step considering the fact that India is underinsured and underpenetrated but, one needs to watch out how it is going to be done.
26 per cent, however, will be allowed through the automatic route, requiring no FIPB.
Insurance being a Capital intensive industry, the hike would provide a significant opportunity for greater
The 49 per cent FDI will be a composite cap, which means foreign capital can flow in either as direct investment or via the portfolio route, or as a combination of both. As per SEBI rules, portfolio investment cannot be more than 24 per cent in a listed
penetration as well as product innovation suiting the needs of a larger number of the population. The rapid growth is expected in the health insurance segment since the penetration of health insurance is extremely low and healthcare expenditure continues to go up.
company, on the other hand, this can be raised up to the limit set for the sector after getting shareholder approval. Once change in FDI cap for Insurance sector is approved by Parliament, it will have direct impact on the pension sector. Since, Pension Act clearly prescribes that FDI limit would be at par with the insurance sector,this means FDI in pension will also be 49 per cent.
Currently the Life Insurance penetration is low at 3.96 percent and this change in FDI to 49% is likely to supply the needed capital to grow insurance business in India and help boost the Insurance penetration. Since, its opening up in 2000, the number of players in the insurance sector has gone up from seven to 53 as on March 31, 2014, operating in the life, non-life, and re-insurance segments. The government's move
On the personal tax front, the increase in personal Income Tax limit from 2 lakh to Rs 2.5 lakh and
will also be a boost to the existing insurers, who are desperately looking for funds to expand.
increase in threshold of exemption under 80C investment cap from Rs 1 lakh to Rs 1.5 lakh will put more disposable income in the hands of the
governmentâ€˜s policy of allowing 49%
FDI in the
defence sector. Whether this will accelerate the 43 | A U G U S T 2 0 1 4
process of giving the control to domestic players of
Group, Larsen & Toubro, Mahindra & Mahindra and
the defence sector and create the way to greater self-
Ashok Leyland manufacture locally. Over 70 per cent
reliance, or whether it will compromise India‘s
of the defence equipment needs are met through
national security, remains to be seen.
imports. A large number of the smaller Indian
India currently imports 70% of its defence equipment. Given this worrying and entirely undesirable statistic, it is expected that the increase in FDI from 26% to 49% shall help bridge the gap. Earlier this year, it was reported that the Army is terribly short of ammunition with barely 50% of the required war wastage reserves. This basically meant that India can barely last
companies are unable to compete with foreign companies when it comes to pricing and technological capabilities. But things are likely to change going forward with the government coming out with the defence procurement policy last year which laid emphasis on indigenous development and self reliance in defence production.
fortnight in a war before it runs out of ammunition.
To sum it up, we can say that there is no short-cut to
Stories like these reinforce the idea that defence
obtain technology, but, doing it on your own. Foreign
manufacturing and production in India are in need of
companies will hand us over only dated technology,
a boost and that it is high time that India starts
which would anyway be available in the open market.
creating or at least tries for a strong supply line for its
The government has done the right thing in restricting
FDI in defence to 49%. It must instead encourage the
The hike will allow foreign players to enter the Indian market, and with their entry the DRDO and Public Sector Undertaking (PSU) companies that hitherto enjoyed a monopoly in the Indian domestic defence sector will be on their toes. The influx of foreign players may lead the DRDO to have a greater impetus to perform, in order to retain its exalted status in the Indian defence research and development sector. This is probably the only way that the cause of developing purely ‗indigenous‘ technology can be furthered. Is the hike in FDI would affect India‘s relations with its neighbors‘? The answer is ―No‖, it will not, because, for starters, the FDI to flow in would take time. Thus, it does not create any immediate crisis. To tell about the current scenario; the role of the private sector is still very small in India's defence sector. Only a few large players such as the Tata 44 | A U G U S T 2 0 1 4
local private sector to partner with government research bodies like DRDO.
Fiscal Consolidation in India
- Apoorva Anusha, IBS Hyderabad
To come with his decision of urgent need to generate
at 4.1% and saw the fiscal deficit for next year at
3.6% and down to 3% in 2016-17.
expenditure on subsidies as it‘s a major portion of government expenditure and has witnessed major expansion in the recent past. Of the overall subsidies, the subsidy on petroleum, fertilizer and food make up
It was planned in 2012-13 to contain subsidies within 2% of the GDP. But due to the depreciation of rupee value and increase in oil prices in international market the subsidies are subjected to rise to 2.6% of GDP.
more than 90%. A subsidy amount or deficit is always presented in This is nothing but the FISCAL CONSOLIDATION which means creation of strategies that are aimed at minimizing
aggregation of more debt. The goal of fiscal
relation with GDP because GDP means the national income and may be it subsidy, deficit or any other economic expenditure it will be in context to the total earning of a country.
consolidation in any setting is to improve financial stability by creating a more desirable financial position.
In this budget the government has increased subsidies on foods as it‘s the assumption that even with the reduced budgetary allocation it is possible to leverage
It focuses on eliminating debt carried by the jurisdiction but it can also be made practical by the efforts of business or even by reducing the debts of households
full benefits by proper targeting of subsidies. This level of correction is not only desirable to ensure the right environment for economic growth buts it is also achievable.
generation of new indebtedness. This means doing everything to fix the fiscal deficit problem in its root and preventing it from occurring in future.
In the budget speech, early, Mr. Jeitley said that the country would stick to previous government‘s fiscal deficit target of 4.1% of the GDP year ending March
There are several ways, depending upon the situation, which
expenditure and increasing the government revenue in diminution of fiscal deficit of the country. It can be done by cutting down the subsidies or stop the leakages in it. Reforming the tax structure will also
2015 and later he said that it stood 4.5% in the passing reference. Its very much possible that finance minister might have misspoken. This statement is not going to affect the stock market but this contradiction has created confusion in the minds of the traders as the export and import is affected.
help in increasing the revenue over expenditure. Inflation pressure is expected to crucify. Activities The union budget 2014-15 contains policy to curtail down the fiscal deficit because the finance minister himself feels the need to reduce the expenditure. He announced the he was retaining the fiscal deficit target 45 | A U G U S T 2 0 1 4
remain substantially below potential output in advanced economies, where it is often close to or
somewhat below potential in emerging market and
There was a report given by International Monetary
Fund which stated that the authorities have committed
In year 2003-04 the financial deficit of the country was 10% of GDP which was virtually at the same level as it was in 1991, when India plunged in to crises. The fiscal situation was going out of hand, expenditure was going up where the productiveness of revenue was very low. What so ever was the reason but an immediate action was compelled to be taken to bring it down. In the year 2003-04 the revenue was Rs2.63 trillion were as the total interest payment due was Rs3.91 trillion, which was the case of internal debt trap. For this in the year 2003 fiscal responsibility and budget management act was
for fiscal consolidation by meeting the budget deficit target of 2012-13 despite the slowing economy. The Indian government has taken a notable step by representing the largest food security program in the world which involves the distribution of subsidised grain to two third of Indiaâ€˜s population that is 1.2 billion people. For this fiscal year 2014-15 in addition to the announced methods to rationalise non planned expenditure they target is expected to be met by acquiring agencies to give up un-utilized spending allocation rather than releasing further budgeted amount to these agencies.
passed. The FRBM act 2003 is an act of the
The recently-passed Food Security Actâ€”which aims
parliament of India to institutionalise financial
to provide subsidized rice, wheat and coarse cereals to
discipline, reduce Indiaâ€˜s fiscal deficit, and improve
67% of the population is expected to add significantly
to the fiscal subsidy burden going forward . The
management of the public funds by moving towards a
efforts should be made to convert these subsidies to a
balanced budget. The act provided that the central
system of targeted, as early as possible.
government shall not borrow funds from the RBI except under exceptional circumstances where there is temporary shortage of cash in particular financial year. The main purpose was to eliminate revenue deficit of the country and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008, but due to financial crises in 2007 it was postponed in 2009. The commodity prices in U.S Dollar terms are projected to ease a bit further partially reflecting the path implied by commodity future price. For some specific case of oil prices, forecasts differ depending on the underlying approach. Due to this the fiscal deficit of 10% of GDP in 2003-04 came down to 6.6% in 2009-10. 46 | A U G U S T 2 0 1 4
According to me a growing fiscal deficit leaves a limited monitory space for lowering interest rates to stimulate private investment and growth. When there is a high fiscal deficit it tends to heighten inflation which reduces the monitory policy stimulus and increases the risk of external sector which leads to muffling
employment. Talking about the external sector perspective, global trade volume growth has slowed substantially in the adjustment after the global financial crisis of 2007-09.
The Stock Market Boom
- Ripu Daman Tandon, IBS Hyderabad
The stock markets have shown a pleasant sight to the confidence of the global investors, especially after the recession in 2008, though, in the period of 2010, the global economy seemed to be in the middle of worlds of austerity and stimulus. It was a year where emerging economies in close proximity to China were in place of the Worldâ€˜s best global indexes (Philippines, Thailand and Peru). On the other hand, due to the European debt crisis, worst performing equity markets was in place by the major markets of Europe (Greece, Spain and Italy). In 2012, the market capitalization rate had recovered with a growth rate of 15.1%. This was the period when the growth in the Americas was mainly driven by US exchanges that increased by 19% while in Canada witnessed growth slightly less than 8%. However, the world economy continued to face subdued growth till the year 2013. As per World Federation
Highlights 2013, the global market capitalization continued to increase significantly with a 17.4% growth rate at US $64 trillion. While the growth rate of 22% was witnessed in the Americas and EAME (Europe, Africa and Middle East), the growth rate was slightly lesser in the Asia-Pacific region at 7%. The total number of IPOâ€˜s increased by 2% globally and also the investment flows were increased by 34% in the year 2013. It was a year, where Global average value of trades rose by 7%.
47 | A U G U S T 2 0 1 4
The Indian business optimism has been the highest since 2010. With a change in policy makers and a stable government, the investorâ€˜s confidence levels have received a boost. The International Monetary Fund has retained the forecast of the growth rate of 5.4% for the Indian Economy in 2015 and stronger for the next year at 6.4%. After recovering in 2009-10 and 2010-11, the Gross Domestic Product (GDP) slowed down to decadeâ€˜s low of 4.5% in the year 2012-13.
As per the measures taken by the new
government, could improve the investment climate and improve governance and push growth to 7-8% in the coming years. Few of the biggest challenges that the current government faces are to revive business sentiments among the investors, restoration of macroeconomic balance and enhancing efficiency. The
disinvestments plans from few of the state run firms and that is likely to time the Indiaâ€˜s ballooning fiscal deficit and giving a boost to the economic growth. Even though with the mixed responses towards the budget 2014, the FII (Foreign Institutional Investors) are still betting on the long-term India story.
48 | A U G U S T 2 0 1 4
Out of the Box
Populism Breaking Our Economy
- Sainath Zunjurwad, Sydenham Institute of Management Studies, Research and Entrepreneurship Education, Mumbai
doctrine that appeals to the interests and conceptions (such as fears) of the general people, especially contrasting those interests with the interests of the elite.‖ When you consider this definition, one is tempted to side with it, after all the current world is championing Democracy. And what is democracy but a populist notion? But the issue is not so superficial. For, though in a democracy the people‘s ultimate right is
interpreting how it is asserted. The most obvious ones being the parliamentary or the presidential systems. The other side of the story is that populism exists in India is a country as diverse as it gets. There is a place for every sort of ‗ism‘ under the Indian sun. The Left, the Right, the Socialist, the Communist, and the Democrat everybody has a little piece of heaven in this country. Populism! The crowning jewel among them all (the evilest one, if you will), surely won‘t be far away?
democracies as well as the myriads of dictatorships and socialist and communist set ups. Conclusion? Populism is pervasive. From the right to the left, across the entire political spectrum it thrives. The first question is –―Is it good or bad?‖ For its advocates populism has obvious benefits, but then so does its opponents cite equally obvious harms. The issue is
Let us get down to the brass tacks . What is populism?
thorny one. However the consensus is on the side of
According to the dictionary, ―Populism is a political
49 | A U G U S T 2 0 1 4
protests. The tempo starts increasing
increasingly cornered. The prudent in the government advocate
opening the tap full throttle and shower the nation with subsidies, import quotas and Populism takes many forms in a state. But its most
other freebies that the government can ill afford. The
noteworthy manifestation can be seen in the economic
struggle mounts, and little by little the prudent are
policies of the state. That is where the state holds
edged out. The government gives in, and does all it
unparalleled authority and power. The government of
must not do. It borrows from international markets at
the day is always interested in painting a rosy picture
increasing cost, and a time comes when the
of the economy. More so in an election year. The
government‘s finances spiral out control, as was seen
economy goes through cyclic phases – expansion,
in the 1991 economic crisis of ―Balance of
peak, recession, and trough. This is well established.
Payments‖. This is populism at its best (or is it the
An expansion must follow a trough, it‘s an economic
worst?). This has been seen all over the world. It
certainty. However, the durations and intensities of
breaks the backbone of the economy. And when you
these phases are not so easily predicted. And even if
don‘t have a Man Mohan Singh to bail you out, its
they could be, the pain of going through a recession
impacts reverberate across decades.
cannot still be eliminated. The boom times bring out the ‗good‘ in people, the recessions the worst. How can a government scrape through a recessionary or inflationary period, when emotions are running high? It has few avenues for exploration. It is constrained when it comes to managing the government‘s account. The receipts are drying up, but its payments are not, in fact they are soaring. With domestic funds becoming scarce, it has to do a fine balancing act between its ‗credit‘ and ‗debit‘ accounts. People start feeling the pinch and the unease starts building up in the country. There are indications of, early signs of mounting 50 | A U G U S T 2 0 1 4
When successive Railways ministers do not increase rail fares for more than 20 years, under intense pressure from the public and others, they are creating a price distortion. The money, if it doesn‘t come directly from the pockets of the commuters, comes from the government treasury, hence indirectly from the taxes paid by these same commuters. The full price has to be paid. One way or the other. There are no free lunches. What‘s the upshot? With money barely to prop up the Railways, there is nothing left for the development and integration of modern technology into the services. The service remains the
same, and continues to deteriorate. The life of the
word) the domestic industry forever. It need to buck
commuter ultimately becomes tragic. He has to pay
up and compete with the global companies. The
the price. It is the failure of the ‗representatives‘ who
customers aren‘t forced to pay higher prices,
were elected to safeguard people‘s interests, who give
in to populism, which does no good to anyone and
technology and efficiency. Everybody wins. If you are
ends up hurting everybody. Whereas if these foolish
sick, you need to swallow the bitter pill, to get better.
price control decisions had not been taken, and the price had been allowed to increase gradually (naturally) over the span of 20 years, its effects would have been tolerable for the general public, and there would not have been such a hue and cry over the 100% fare raise (Mumbai locals) as was seen a month or so back. The minister unfortunately had to again roll back the fare raises, with Vidhansabha elections
This populism is a manifestation of the human weakness-impatience and an inability to accept the inevitable pain. When we indulge in populism, we do not circumvent the pain, we merely succeed in delaying it. Today‘s problems become tomorrow‘sbut the intensity rises exponentially as we balk at facing the devil today. Future generations are left to pick up the pieces.
looming in several important, large states. Again, a classic case of populism. Inability to withstand public pressure. However, he did push through 14% price
This is a political hot potato. One thing, however, is crystal clear. Populism is inescapable. When you come to think of it, populism is just a form. It is a
rise, thank god for these small mercies.
representation of, manifestation of human frailty. To This analogy can be extended to almost all industries and sectors. The government imposes price ceilings and floors, Minimum Support Price, import duties and quotas, trade restrictions, ill-advised subsidies. Some of these are certainly necessary, justified and help prop up our still embryonic industries. This is the necessary evil, when pandering to the populists is not the wrong way. But good intentions seldom translate into good results. Solid understanding of the needs of the economy, the willpower to stand up to public pressure and push through the right reforms are needed to contain the repercussions of this ‗necessary evil‘. This is where the leaders‘ mettle is tested. Reforms in taxation; defense, insurance, retail, capital markets, financial sector and other industries are long overdue.
inevitable. You cannot ‗protect‘ (if that‘s the right 51 | A U G U S T 2 0 1 4
forego long run benefits, in pursuit of momentary happiness. It is as old as the hills. We have to live with it, and make peace with it, we can strive to contain it. It will rear its ugly head time and again, but we must prevent it.
- Sameena Usman, IBS Hyderabad
Let‘s have a peek at our ‗hawayi adda friends‘! To be
increased payments for fuel and aircraft rentals) are
precise, the Indian airways sector is having a roller
placing further pressure on margins. As a result, the
coaster ride with a set of highs and lows. Do you want
nation‘s airlines are seeing a sharp increase in their
the bad or the good first?!! Well, let‘s save the treat
cost base at a time when yield and unit revenue
for the last and let‘s have a look at the bad first, or the
growth is pressured.
so called losses in the aviation sector of our country.
Jet airways is attempting to rectify this situation
The losses in the aviation industry reflect not only
through a number of measures such as entering into
issues at the individual carriers but some fundamental
sale and leaseback agreements to reduce debt and
and structural challenges in the Indian aviation sector.
interest costs, restructuring their operations and also,
Despite the growth in the domestic market for air
removing their investments from non-core assets. It
travel, the India's airline industry has failed to
set out a three-year restructuring plan focusing on
cutting down costs and enhancing efficiency. In an
All the major carriers, except few, are making considerable losses, let us cite the example of our very own Jet Airways Ltd , the country's No. 2 airline by market share, also partly owned by the Gulf carrier Etihad Airways.
attempt to turn around its fortunes, it also named Cramer Ball as its fourth chief executive within the span of a year, pending legal documentation. It has no intentions as of now to raise equity and most of its future fund-raising would be in debt, despite the mounting losses.
Abu Dhabi's Etihad, is the first foreign airline to invest in an Indian carrier when it bought a 24 percent stake in Jet last year for around $330 million.
Thus the road to recovery for the nation‘s airline will definitely not be a cake walk, with the heavily indebted
Contrary to its posh exterior history & outlook, Jet airways is actually currently looking at selling planes and restructuring its debts in order to terminate the losses that have been eating off of its profits.
considerable losses in the last couple of years. But the officials at both Etihad and Jet are optimistic about their heavy efforts and the airline is also reported to have mentioned that it would expand its international
The main reasons for failing to captivate profits are
operations, which are currently profitable, to 63
fuelled by these vital factors such as:-high jet fuel
percent of its business by 2016.
costs (crude oil price constitutes around 40-50% of
Hence the jet airways has it‘s ―wings crossed‖ for a
airline operating costs) compounded by heavy
positive recovery, so let‘s give it a high five in its
taxation, inefficient infrastructure and an inability to
attempt to FlYiNg High !!!...
raise fares in a highly competitive market. In addition, rising debt levels and a depreciating rupee (leading to
Now, moving on to a brighter prospect, Air India‘s alliance with Star Alliance!
52 | A U G U S T 2 0 1 4
Moving onto the statistical details, Star Alliance accounts for about a total share of 13 % of India's aviation market. The inclusion of Air India in the alliance will take this share upto about 30 %. Air India officials mentioned that the carrier, with over 400 daily flights to more than 50 domestic and 33 international destinations, hoped to earn a 5-6 percent jump in revenues in the current year itself. So friends, pack your bags & get ready to reap the benefits of Air India‘s star alliance in your next travel trip !. Before moving on to the other stars of Indian air, let‘s have a sneak peek into what the government is up to regarding the aviation sector rules . Two years short of a decade and a real bumpy venture
The first thing that strikes our mind when we see the
before reputed carrier Air India finally gets to join
words ‗‘air‘‘ & ‗‘government‘‘ together is the ‗‘5/20
Star Alliance, the world's largest airline accord. The
‗‘ rule!...so what exactly is this 5/20 rule ?
60 crore fliers of the world's fifth largest aviation
Well, an Indian carrier must be five years old and
market will now gain better global connectivity and
have a fleet of at least 20 planes to fly abroad.
access. But in view of the benefit for various new airline start Air India now gets to share its flying miles and will
ups, a proposal for a new rule has been requested
also enjoy the luxury of the entry into some of the
which states that an Indian carrier, including a start-
world‘s finest airport lounges of the 27 member
up ,would only require the Directorate General of
carriers of the star alliance. Other added advantages,
Civil Aviation's (DGCA) nod to fly abroad.
specially pertaining to passenger convenience include
But the government is sceptical about it and more
single-ticket travel throughout the globe with far less
importantly the federation of Indian airlines has
transit time and no ‗‘waiting hours‘‘- a phrase dreaded
opposed this new rule stating that all the older airlines
by almost anyone who knows the abcd of air travel.
have in the process of fulfilling their obligation
Air India will also be offering through check-in to the
final destination, i.e. passengers can travel without
operations, it would be unacceptable or injust for the
having to pick checked-in baggage and check them in again at transit airports.
53 | A U G U S T 2 0 1 4
government to now consider revising the policy by the removal of the 5/20 rule in order to benefit the
slowly deviated its operations from the major city routes such as Delhi and Mumbai into smaller cities with a growing middle class and a proportionate wealth growth. 70% of their capacity on routes has been shifted to cities such as Srinagar, Pune, Goa, Nagpur and Patna, which are the strongest non-metro catchment areas. We now hit on to Air Asia, which has yet again been awarded the worldâ€˜s best low cost airlines in the 2014 world airline awards. The airline in India is operated as a joint venture between Tata sons and Air Asia. A tie up with Tata is actually beneficial for Air Asia since the Tataâ€˜s are well acquainted with the Indian market. Though known for its low cost fares and a consistent growth in the passenger kilometre revenue, Air Asia has faced quite a lot of criticism in terms of low on time performance (OTP) i.e. delayed service ,in layman terms, which has hit as low as below 80% and even below 69% in few carriers. So that basically was a gist of our aviation sector which seems to have a well grinded mixture of both international airlines' joint ventures which are under consideration and approval. Having not much clue about the consequence of this 5/20 dilemma, letâ€˜s now move onto an airlines which is just one plane short of this 5/20 rule, the GoAir airlines!- the country's tiniest low-cost carrier has been slowly eating off big pies of the market share, making huge profits meanwhile. GoAir gained a market share of 10.1% in June, compared to 9.8% in May. This has been achieved as a result of the carrier focusing on non-metro routes apart from the already established metro routes. It has 54 | A U G U S T 2 0 1 4
negative and positive aspects as well!
Impact of the Israel- Gaza Conflict
- Srishti Karmakar, IBS Hyderabad
In April 2014 US-initiated peace talk on the
carrying out welfare work among Palestinians and
Palestinian issue failed. In the June, Hamas and Fatah
gaining popularity, Hamas was involved in violent
reconciled and formed a unity government, ending
strikes against Israelis. After this victory, a conflict
eight years of conflict. Israel saw this unity between
broke out between Fateh and Hamas leading to the
the two major Palestinian factions as a threat.
ouster of the Fatah from Gaza. Hamas became Gaza‘s
Meanwhile, three young Israeli men were kidnapped
ruling party. After Hamas victory in Gaza, Israel
and killed by a West Bank Palestinian family. Israel
imposed a land, air and sea blockade in 2007,
claimed this was Hama‘s work, although Hamas
controlling the flow of the essentials and regulating
denied it. Israel carried out mass arrest of Palestinian
entry and exit of Palestinian workers. Export of
and ratcheted up pressure. Hamas responded with
produce was stopped and electricity supply cut. Gaza
rockets. At least 754 rockets have already hit Israel.
went into poverty due to the blockade. It became
Israel got the pretext to strike back. Till August 1,
largely dependent on international aid channelized
2014, more than 1500 Palestinian, Israeli soldiers
through UN and smuggling through tunnels. But the
three civilians have died and 8200 injured. On the 1st
UN aid also had to be cleared by Israel and about
of this month, a tense ceasefire had been imposed in
$100 million worth of aid is blocked because of 10
Gaza after Israel and Hamas agreed to a 72-hours
month delay in clearance by Israel, according to a
pause in their three week conflict. But the truce
recent UN statement. Angered at the blockade, Hamas
brokered by the US and UN was breached within two
began to fire rockets at Israel regularly. The Israel
hour and shelling resumed in the battered Gaza. The
retaliated and attacked Gaza.
death toll in Gaza had touched the 1500 mark making it the deadliest Israeli assault since its 1967 occupation of Palestinian territories. Nearly one fourth of Gaza‘s 1.8 million people are now displaced and Israel has control over about 44% of Gaza‘s area.
The war raged for the past two weeks have had economic cost for both Israel and Gaza. 0.2% of GDP is the estimated fiscal cost incurred by Israel and if the conflict continues for long then this percentage will increase further. The tourism industry and small-sized
Under the 1993 Oslo Accords between the Palestine
firm of Israel will be adversely affected if the conflict
Liberalization Organization (PLO) and Israel, a
Palestinian National Authority(PNA) was set up to govern Palestinian areas of West Bank and Gaza. In 2005 Israel withdrew its forces and settler from Gaza. In 2006, the first Palestinian government was elected. While the main Palestinian group Fateh won in West Bank, radical Islamic Hamas won in Gaza. Hama had its origins in Egypt‘s Muslim Brotherhood. While 55 | A U G U S T 2 0 1 4
The Bank of Israel cut the benchmark interest rate for August by 0.25 percentage point to 0.50%, citing slow inflation in June and weakness in export in the world economy. Export, a cornerstone of Israel‘s economy, declined 9% in the second quarter, he bank said. All of this data is from before the recent conflict began.
The conflict has mainly affected tourism and private
fourth largest exporter of arms in the world. On
consumption, according to Israeli economists. Events
August 1st US stock market saw a decline due to the
of similar magnitude in the past decade had a
large sell off. This was due to the uncertainty in the
moderate macroeconomic impact, up to about 0.5% of
market partially added by the violence between Israel
GDP. Before the conflict the central bank was
and Gaza. US had also opened up its secretive
expecting GDP to expand to 2.9% in 2014.
stockpile of arms and ammunition located within
Israeli economy has shrugged off the increased political risk, as evidenced by resiliency in the international bond market, the stock market and the
Israel to replenish their firepower after 24 days of land sea and water strikes. This has added fuel to the much needed fuel in US economy.
foreign exchange business. The war has small impact.
The effect of this conflict will be on the industries and
It can have a permanent impact if it happens at a time
exports, mainly. Major goods exported by Israel are
the economy is depressed but Israeli economy is not
depressed. The ultimate effect depends on how long
this is going to last.
The previous conflicts had only modest and temporary economic impact as the country has significant shock absorbers. Those include a current account surplus which it produced offshore natural gas and used it to displace imported crude oil in its electricity sector. But this war in particular in 23 years has seen a potential threat on the centre of the economic activity including the airport. On July 25th US flights resumed to Israel after US Federal Aviation
military equipment, machinery
equipment, cut diamonds and jewelry, agricultural products and foodstuffs, chemicals, textiles and apparel. But the major price rise may be seen in diamond and jewelry as Israel is one of the world's three major centers for polished diamonds, alongside Belgium and India. In case of Gaza it exports are 2% of what they had before the blockade and they are dependent on the economy of smuggling through the tunnels which Israel has started destroying.
Administration lifted a ban imposed when a rocket
It all depends on how long this episode of conflict
landed near Tel Aviv airport.
lasts. As these events have been happening in
US have a major role in this conflict. Apart from peace talk that US initiated peace, it sends aid to Israel and also ammunition for defense. Israel is the single largest recipient of US assistance having received over $121 billion since its formation in 1948. Of this $70 billion is pure military assistance. In 2014 the US has provided for $3.1 billion assistance and $504 million for research and development of various anti missile system. Israel itself has now become the 56 | A U G U S T 2 0 1 4
irregular intervals like in 2012 and before that in 2008, the economy has become resistant to the changes caused and can immediately adjust to it.
Vriddhi Researchâ€™s Corner
Company in Focus: Allahabad Bank
- Anurag Jain, IBS Hyderabad
Industry- Banking Market Price- Rs. 120 Market Cap (Rs. Cr.)- 6,600
Key Strengths of the Banking Sector India is considered to be among the top economies in the world, with tremendous potential for its banking sector. The last decade witnessed a significant upsurge in transactions through ATMs, as well as in internet and mobile banking services.
Allahabad bank is established in April, 24 1865 at Allahabad.
The country's banking industry is set for a greater
quartered at Kolkata having a employee base of
transformation, with the Indian Parliament passing the
around 25000. Allahabad bank is present in all kinds
Banking Laws (Amendment) Bill in 2012, the
of banking services and it is growing tremendously
landscape of the sector has duly changed. The bill
under the leadership of Mr. Rakesh sethi.
allows the Reserve Bank of India (RBI) to make final
Share Holding Pattern of Allahabad Bank:
guidelines on issuing new licenses, which would lead to a greater number of banks in the country. The style
Allahabad bank has more than 70% holding of
of operation is also slowly evolving with the
Government of India. As per new budget guidelines
integration of modern technology in the banking
for capital requirements of Public sector bank
Government could dilute stakes and more liquidity in the stock we could see in the stock.
Opportunities in the Banking Sector: Advances of Allahabad Bank: In the next 5-10 years, the sector is expected to create two million new jobs driven by the efforts of the RBI
Allahabad bank has largest exposure in agriculture
and the Government of India to expand financial
sector so with elnino is major cause of concern for the
services into rural areas. Two new banks have already
Allahabad bank. But CMD has assured against such
received licences from the government (IDFC and
risk and said bank is having strong balance sheet. In
Bandhan Financial Services), and the RBI's new
the quarter results we have also seen the impact there
norms will offer incentives to banks to spot bad loans
was very high provisions against substandard and
and take necessary recourse to curb the practices of
losses assets. That is why Allahabad bank net profit
down by73% on year on year basis.
History of Allahabad Bank:
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But as stressed assets from balance sheet of Allahabad bank get reduced we could see good days ahead for Allahabad bank. Cost of borrowings of Allahabad Bank: Cost of deposit for Allahabad bank is as per industry
Bank Name IDBI Bank Union Bank Uco Bank Oriental Bank Central Bank IOB Allahabad Bank
P\E 10.54 6.37 7.16 7.46 0 21.57 5.03
P\Bv 0.54 0.7 0.98 0.67 0.88 0.55 0.4
standard of around 7.5% and Net interest margin is comparable to its peers of around 2.6%. But Allahabad bank has to be more competitive in his NIM so that he could touch private sector banks NIM which is around 3-3.5%. Economic Reason to Buy this Stock in Your Portfolio• It is expected that economic cycle has turn around and credit growth is expected in the economy. • With the technology intervention in the banking industry now NPA are considered to be recognised fastly and in psb like this could gain tremendously. • As we are entering again growth phase NPA cycle will bottom down and banking stock is expected to boom. • Graphs are showing that they are forming support level at around 120 levels and resistance is around 150 levels • Bollinger band is also showing that it is right time to enter the stock. From the relative valuation we could see that – • Allahabad bank is highly undervalued. And It needs proper correction of the stock price. • Its p/bv is showing it is cheapest stocks in its peers.
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Final Recommendation: I recommend to BUY the stock with target price at INR 150 for short time period and target price of INR 250 for longer term perspective.
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We at FinStreet present to the August 2014 edition of The IBS Times. This Special Edition of The IBS Times covers analysis on several contem...
Published on Aug 8, 2014
We at FinStreet present to the August 2014 edition of The IBS Times. This Special Edition of The IBS Times covers analysis on several contem...