IIT Roorkee DoMination August 2012 by Zigu MBA

VOLUME-III ISSUE-04

NEWSLETTER FROM DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Europe Debt Derailment (28)

As If I’m Not Human (12)

AUGUST 2012

DOMINATION

Editorial ……………………………………………………… Dear Readers,

crisis, analyses the current sce-

scenario is one of immense po-

nario and talks about what the

tential, but is riddled with im-

behind our backs and the feel-

future

ing of independence in our

the

With the blistering heat

holds

store

for

pediments. This industry has

well

been identified as one of the

heart, we step into the season

the public in his article, “Europe

key drivers of India’s growth in

of rains.

As the monsoon

Debt Derailment: Daunting the

the near future. The article

showers wet the streets, we

Globe”. On the other hand,

‘Financing Infrastructure’ ex-

present to you DoMination to

Mr. Unnikrishnan, in his inter-

tensively covers the various

wet your minds with stimu-

esting article ‘Fast and Furious

risks involved in and the myriad

lating thoughts and ideas.

Retailing’, elucidates with ex-

financing options available for

This edition includes the

amples, the concepts of flash

infrastructure financing in In-

winning articles of ‘Abhivyakti’,

retail and presents several rea-

dia.

a National Level Article-Writing

sons of why it works the way it

Contest organized by Team

does.

governments

The guest alumnus for this month, Ms. Pooja Jeevagan

DoMination. From numerous

‘As if I’m not human’ dis-

is currently working as a con-

entries coming from various

cusses the sensitive topic of hu-

sultant with Deloitte Touche

premier B-Schools, Mr. Rajul

man rights’ violation across the

Tohmatsu in Hyderabad.

Agrawal from NITIE, Mumbai

globe. The author points out

We hope you enjoy this

and Mr. Unnikrishnan Nair

instances and ethical reactions

latest edition of Domination

from TAPMI, Manipal emerged

to these, as well as expounds

with a hot mug of coffee and

as the Winners.

certain trade measures to pre-

raindrops spattering your roof.

serve the sanctity of a human

Wishing you a joyful Monsoon

life.

and a very very Happy Inde-

Mr. Rajul attempts to illustrate the initial stirrings and causes of the European debt

The Indian infrastructure

pendence Day!!

rds a g e R tion a n i M o Team D

……………………………………………………… 02 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Contents Team DoMination

Aditi Joshi Anurag Agrawal Jubin Mohapatra Manav Kaushik

Still Young at 65

Fast & Furious Retailing

Pawan Upadhyay Ruchi Gupta Saumya Dani

Saumya Verma Sayantan Chattopadhyay Shibi Singh

Financing Infrastructure

Euro Debt Derailment

Design Team Anurag Agrawal Saumya Verma

Retrospection

As if I’m Not Human

Qutopia DEPARTMENT OF MANAGEMENT STUDIES INDIAN INSTITUTE OF TECHNOLOGY ROORKEE

Roorkee - 247 667, India Tel: +91-1332-285014, 285617 Fax: +91-1332-285565 Email: domination.doms.iitr@gmail.com Website: www.iitr.ac.in/departments/DM/Pages/Index.html

For private circulation only

23 Success Story

DoMS da Evince

……………………………………………………… 03 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Cover Story ………………………………………………………

Still Young At 65 65 years after independ-

As seen in figure above,

Madhya Pradesh and Raja-

ence, India is a young nation

India will have a huge share of

sthan) that will account for

with a large proportion of

people in the working age

more than 50% of the increase

working-age population. Arou-

group 15-59 in the years to

in India’s working population

nd 54% of India’s 1.2 billion

come. The TeamLease Indian

are the poorest four states of

people are under the age of 25.

Labor Report 2009 estimates

India based on per capita in-

Moreover, by 2020, the aver-

that 300 million will enter the

come as well as job potential.

age Indian will be only 29 years

labor force by 2025, and by

In 2012, the overall unemploy-

old, compared to 37 years in

then, 25% of the world’s work-

ment rate of the nation stood

China and US, 45 years in West

ers will be Indians. According to

at 3.8% while in rural and ur-

Europe and 48 years in Japan.

International Monetary Fund

ban areas it was 3.4% and 5%

(IMF), the demographic divi-

respectively. As reported by

dend of the country could add

CRISIL, if the current trends in

about 2 percentage points to

India’s labor participation and

India’s per capita GDP growth

unemployment rate continue,

over the next two decades.

about 423 million in India’s

Ironically, the four Indian states

working-age population will be

(i.e.

unemployed or unable to par-

Uttar

Pradesh,

Bihar,

04 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Still Young At 65 ……………………………………………………… participate in the job market by

decay of India's traditional

industrial society without ei-

2030.

arts, crafts and industries

ther, the rigors and inequalities

The responsibility for pro-

of capitalism, or violence of col-

“She is a myth and an

moting modern commerce

lectivist-communism. He had

idea, a dream and a vision, and

and industry came to be

opted for the middle path of

yet very real and present and

concentrated in the hands

development called a mixed

pervasive”, is how Jawaharlal

of certain classes in the ur-

economic system for India. The

Nehru saw India in all her pov-

ban areas, and up to the

first five year plan (1951-

erty and degradation. India’s

end of the nineteenth cen-

1956), prepared by the Plan-

growth story was relatively

tury the only major large-

ning Commission, gave priority

stagnant in the beginning. After

scale industries which had

to agriculture and irrigation

sometime, she suffered mam-

taken root in the country

and basic services like power

moth growth blockages and

were cotton and jute tex-

and transportation. The plan

then managed to turn all that

tiles.

proved to be successful. The

About 68 per cent of the

net domestic product increased

working population was en-

by 15%. The second five year

The objective of India’s

gaged in agriculture, about

plan (1956- 1961) was pre-

development strategy has been

14 per cent in industry

pared based on a theoretical

to establish a socialistic pattern

(large and small scale),

foundation given by Prof. Ma-

of society through economic

some 8 per cent in trade

halanobis.

growth with self-reliance, social

and transport and the re-

proposed to keep investment

justice and alleviation of pov-

maining 10 per cent in pro-

in production goods producing

erty. These objectives were to

fessions and services includ-

sector, i.e. heavy industries,

be achieved within a demo-

ing domestic service. Even

high in-order to catalyst growth

cratic framework using the

with this large proportion of

in national income. Also, the

mechanism of a mixed econo-

the population engaged in

Industrial Policy of 1956 gave

my where both public and pri-

agriculture, the country was

primacy to the role of the state

vate sectors co-exist. To plan

not self-sufficient in food

to assume a predominant and

the economic growth of India,

and raw materials for indus-

direct responsibility for indus-

Planning Commission was es-

try.

trial development.

India’s Growth Story

around in a short period of time.

tablished. The major challenges



Jawaharlal

Nehru

Prof. Mahalanobis

Although

the

Nehru-

faced by Independent India

viewed planning basically as a

Mahalanobis strategy was una-

were as follows:

means to enable an underde-

ble to meet its targets and ad-



Import of machine made

veloped agrarian economy like

dress the major issues- unem-

goods from abroad led to a

that of India to usher into an

ployment and poverty, it had a

05 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Still Young At 65 ……………………………………………………… profound impact on the eco-

In 1990-91 India suffered from

that Indian Government could

nomic development of India.

Balance of Payment crisis, the

hardly finance three weeks

Finally, in 1984, the Nehru-

mammoth growth blockages

worth of import. In course of

Mahalanobis strategy was re-

which lead to economic re-

time, RBI had to airlift 47 tons

jected and priority was given to

forms of 1991. This was the

of Gold to the Bank of England

village and cottage industries

turning point for India. Here is

& 20 tons of Gold to the Union

and natural mobilization of re-

how the crisis took place:

Bank of Switzer-land as collat-

sources thus increasing em-



The rising fiscal deficit and

eral for a loan of $600 million

ployment. Rajiv Gandhi, prime

gradually increasing over-

to wave off Balance of payment

minister of India from 1984 to

valuation contributed to the

crisis. In July 1991, a new ap-

1989, wanted India to make

rising imbalance

proach to economic develop-

Inadequate exchange rate

ment policy was devised by the

His visions lead to the follow-

adjustment in response to

P.V. Narasimha Rao Govern-

ing:

the external and domestic

ment. Following were some of



shocks

the measures taken:

Macro-economic problems



Currency was devalued

Idea of national highway

that had been building up



EXIM policy was revamped

system

over the decade – break-up



The policy regime for for-



Idea of tourism and shaping

of Soviet Union, Iraq invad-

eign investment was liberal-



India as a tourist destina-

ed Kuwait and set off oil

ized

tion

shock

rapid industrial development.

Promotion of Information 

Technology 



Began to dismantle license

In mid 1991, foreign reserves

raj

nearly depleted to the extent

Stakes in PSUs were divested



Banking & financial System

GDP growth rate of India from 1962 to 2011

06 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Still Young At 65 ……………………………………………………… reforms, Interest rates on

decade later, in 2001, Jim

exceed that of US sometime

Loans & Advances to be de-

O’Neil, a chief economist of

before 2020.

cided by Banks with RBI

Goldman Sachs coined the ac-

As a BRIC nation, India must

setting the floor price.

ronym BRIC, a group of four

ensure that her demographic

Full statutory power to SEBI

countries namely Brazil, Russia,

dividend doesn’t become a

& Capital market reforms.

India and China, in order to de-

nightmare and use the same to

The impact of the reforms of

scribe the largest of the world’s

elevate people from poverty

1991 can be gauged from the

developing economies. Gold-

and foster economic develop-

graph above. In 1991, India was

man Sachs predicted that com-

ment.

on the brink of bankruptcy. A

bined GDP of BRIC nations will



Article By -

Sayantan Chattopadhyay DoMS, IIT Roorkee sayantanuit@gmail.com

07 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Perspective ………………………………………………………

Fast and Furious Retailing Music can be download-

neither can your handsome

100 million footfalls every week

ed or bought from your nearest

boyfriend or doting husband

in just US, this shows the pow-

music shop and listened in the

stop you from checking out

er of retail business and an in-

best of music systems and yet

that new Lakme gloss. Such is

dicator of the volumes which

nothing can match the experi-

the power of the ‘touch and

has left Amazon and E-Bay gaz-

ence of being there in a live

feel’ shopping – regardless if

ing into the void promises of

performance by your favourite

it’s just to satisfy that burgeon-

the internet. However, in the

artiste, grooving with hundreds

ing curiosity of a new or a spe-

age on instant gratification

to the blaring speakers. No

cial product.

where 15 minutes of fame is all

matter how much you love that

Proof of how powerful

that you need and sadly is all

RX 100 bike, yet you would let

this is in terms of business is

what you get – ask our Prime

go of an opportunity to feel a

evident when we look at the

Minister that, it is evident that

Hayabusa. Even the most lov-

world’s largest public corpora-

the environment is not going to

ing girl friend can never stop a

tion in terms of revenue –

be leaving retailing untouched.

guy from checking out that new

Walmart – which incidentally is

With in numerous flash mobs

Mercedes model being dis-

also the biggest private em-

orchestrated every day, and

played in your nearest mall and

ployer in the world. With over

with retention and attention

08 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Fast and Furious Retailing

……………………………………………………… grabbing gimmicks getting in-

appearance in 1999, it had its

countries left right and centre.

flated in terms of their costs,

genesis in Vacant- a Los Ange-

Based on the primary psycho-

time has seen the evolution of

les based company’s attempts

logical factor of human curiosi-

the concept of POP-UP Retail

to replicate a phenomenon

ty, any object with a surprise

stores or otherwise known as

where customers used to line

element or a limited exposure

Flash Retail.

up to buy a limited edition

time is sure to catch the fancy

Target, Kate Spade, Guc-

product, and the shop closing

of the customers. This has been

ci, Louis Vuitton, Collete, Sam-

down once it was sold out, and

one primary reason why Cir-

sung, E-Bay, Levi Strauss and

then re-appearing only for an-

cuses and Operas and the

last but not the least Apple –

other assortment of similar

street plays still continue to ex-

these have been some of the

niche products. This concept

ist and songs like ‘D K Bose’ and

big names who have been tak-

was largely promoted in US by

‘Why this Kolaveri’ become

ing this concept and imple-

Target – Walmart’s nearest

more than just another song

menting it to successfully get a

competitor and now often re-

and an anthem for months.

more than fair share of the

ferred as the king of Pop-up

The next reason is the

consumer’s mind space. A pop

retail. With umpteenth such

cost factor – and with rising

– up retail space is a venue that

stores over the years, Target

cost and inflation and con-

is temporary and plays host to

has created such stores selling

tracting economies hitting the

different events over different

exclusive Isaac Mizrahi’s new

underbelly of almost all devel-

periods. The Pop-up shop is

women’s wear line of clothing

oped nations, this concept can

nothing, but the springing up of

to home accessories to the Pink

help the brands continue the

a space that exposes the cus-

Collection which was done to

connect with the consumers

tomer to a myriad of products

support the Breast Cancer Re-

minus the cost of a permanent

or services for a short period

search Foundation.

store and staff. Testing out

and disappears off to another

The

concept

even

newer products, and giving cus-

location or forth a new period.

though looks a bit jaded com-

tomers a taste of what’s in

From gallery like shopping

ing into today, is sure to make

store at their permanent loca-

spaces to one-off exhibitionist

a big comeback and is the best

tions, such temporary stores

themed flash stores, there has

solution for small business

yield significant footfalls. Any

been an increase in temporary

owners, niche segment players,

doubts about this can be safely

retail manifestations around

test new markets and revive

cast aside when we look at the

the world.

old brands and most important

brands which have used this –

It’s the duration and the

to cut corners in terms of costs

P & G and Apple have used this

surprise factor that makes this

especially with the fad of aus-

successfully in US, Australia

concept a clincher. Making its

terity catching the fancy of

and Canada and has been such

09 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Fast and Furious Retailing

……………………………………………………… a success, that it has warranted

services, making sure custom-

sales even without any huge

even Samsung to follow suit for

ers have their fair bit of sur-

marketing extravagance before

its Galaxy SIII in UK.

prise as well as driving the initi-

Kwality Walls decided to rede-

ative for their marketing part-

fine Ice- cream segment. There

concept,

ners. Initiative by E-Bay where-

have been umpteenth saree

thanks largely to the fact that

by a set of interior designers

sales that happen for a period

not only would they be able to

were supposed to furnish a

of a month bringing in hordes

create

sup-

New York penthouse using stuff

of customers, when big stores

but

obtained from E-Bay only was

fail to attract a fraction of the

would also be able to piquet

an attempt of branding E-Bay

same through the year. Lakme

enough customer experience

from a mere electronic flea

has been a pioneer of the Pop-

to pursue the product range

house to a fully fledged youth-

up retail culture in India, with

through alternate mediums like

ful modern retailer.

in numerous such stores in

Niche products will absolutely

the

porting

online

love

ambience

their

this

product

exclusive

stores,

India has had its share of

thereby maintaining the mar-

such stores but has never been

launch of new cosmetics and

gins and exclusivity.

considered under the purview

products and creating enough

Ice-

buzz for the customers to cre-

tal reasons with the reach of

creams have always been sold

ate the first burst of buyers.

social

location

in mobile vehicles in cities and

Sony, Nokia, Lipton, Maruti,

based services, Google and Fa-

towns for forever ages that we

Mercedes-Benz are other lead-

cebook are sure to push this

remember and it has been that

ing brands which have explored

strategy further with their re-

uncertainty in the availability of

this option to good advantage

spective ads and context based

ice creams that had driven

in driving home the customer

Couple these fundamenmedia

and

Pop-Up

marketing.

leading

malls

marking

the

10 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Fast and Furious Retailing

……………………………………………………… interaction for newly intro-

social media campaigns such

with potential customers. And

duced products. FlipKart and

stores can be a major boost for

for all those who continue to

niche

the customer acquisition needs

be sceptics of the concept –

Chumbak amongst others can

of online stores albeit at much

look at the reception for the

gain a lot of traction for their

lower cost when compared to

series called Sherlock – a mere

services and products by using

the ad campaigns on television

3 episode 2 season series on

this concept especially in the

and other media.

BBC Entertainment and our

Tier 2 and Tier 3 regions to

With ever evolving customer

very own IPL (though it comes

drive home their range of prod-

perceptions and tastes, Pop-Up

every year, it is still a single

ucts as well as promote the

stores are bound to be a trend

month

sense of belief in online shops

that will continue and evolve

and surprising have always had

which has been the primary

using the ever powerful social

an audience – otherwise the

factor for lack of interest and

media and marketers for the

world would have never seen

growth in e-commerce in India

slowing Brands can ignore this

affairs outside marriages.

against the projections. Cou-

only at their own peril of miss-

pled with Facebook and other

ing the point of connection

product

makers

extravaganza).

Short

Article By - Unnikrishnan Nair TAPMI, Manipal unnikrishnan.13@tapmi.edu.in

11 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Perspective ………………………………………………………

As If I’m Not A Human Introduction

economical rights, a lot of rules

ed in slavery. In many incidents

and regulations have been for-

workers find themselves in the

this world, he/she is gifted with

mulated.

middle of nowhere without be-

few rights as a token of being a

Human Rights Violations

ing paid their wages for months

human being which is popularly

across the World

and even years. Physical and

When a person enters

known as the Human Rights.

These rules were intro-

sexual violence were also not

These are applicable every-

duced to help people sustain a

where and are same for every-

better life but the mirror shows

Contract workers work-

one irrespective of the caste

a whole new world of truth.

ing in the construction sites in

and creed. Oldest records date

There are a lot of countries

Russia face horrible human

back to 1264, when privileges

where, within the organizations

right abuses. Rising personal

were given to the Jewish Mi-

workers face human rights vio-

grievances against the migrant

nority in Poland for protection

lations. To mention a few, let

workers inside the natives had

from any sort of discrimination.

us see a few incidents from a

motivated them to act even

Since then, a lot has changed.

few countries. Domestic work-

violently in a wide number of

To provide the people with

ers in Saudi Arabia face serious

cases. Passports have been

their basic rights, which may be

human rights violations which

snatched from many migrants

civil, political, cultural, social or

in the worst cases have result-

and are forced to do jobs in

very far.

12 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

As If I’m Not A Human

……………………………………………………… compulsion. They are treated

cause they know that even if

forced in 1996 as a response to

as convicts, confined to the

they fight the case, they have

the continued human rights

workplace and are also beaten.

to remain in the shelter homes

abuses by the government of

While in the part of the Gov-

for many years and the bottom

Burma. The law after being en-

ernment, it seems infeasible to

line is that they have to remain

forced restricted trade and

protect these workers from

away from their families for all

commerce with the person or

these unlawful activities.

these years.

the organization which was car-

Trade Related Measures for

rying out business with Myan-

Violations

mar. However, this law was

When it comes to sex trade, there are thousands of people who are affected by the

As a measure to protect

anti-prostitution policies in the

the people from human rights

United States. There, the sex

violation, certain countries in-

workers are treated as crimi-

troduced

restrictions

some way has also been done

nals and their civil and human

with the countries where actu-

to import hazardous products

rights are abused very brutally.

ally these violations occur. The-

like cigarettes, asbestos which

They are deprived of their

se restrictions may be intro-

are considered as very fatal for

rights to be protected from any

duced in certain type of goods

human

sort of discrimination, torture,

also whose production pro-

strictions protect the Right to

getting proper medical atten-

motes the rights’ violations. For

Health of the citizens of the

tion and most importantly the

example, the imports of goods

country which imposes the

right of being treated as equal.

produced

are

ban, thereby protecting their

In all the cases what it has been

banned in many countries as a

human rights. Each and every

seen in common is that rather

measure of protecting budding

country is entitled to enforce

than the abusers get punished

children from getting abused in

its own human rights obliga-

for what they have done, the

the society as well as the work-

tions. However, these should

people who were abused face

place. In the first place, child

comply with the WTO stand-

counter accusations of burgla-

labor is illegal and then their

ards and constant and thor-

ry, witchery etc. What to say

abuse is a very serious offense

ough monitoring needs to be

about the cases where those

to the law.

done in order to make sure

trade

children

considered as unconstitutional and was discontinued in 2000. Trade

restrictions

health.

These

re-

persons even end up in jail for

There can also be unilat-

rights are being protected in a

12-15 years of imprisonment

eral trade restrictions with cer-

and around 100-250 lashes. All

tain countries where abrupt

According to me, if we

these have forced them to

violation of rights’ occur. An

see on the basis of ethics, trade

withdraw their cases even if

example of such a restriction is

restrictions with all these coun-

they had a very firm case, be-

the Burma Law which was en-

tries where firm violations oc-

safer way.

13 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

As If I’m Not A Human

……………………………………………………… occur are justified. But when

deal…There is one and only one

basic rights rewarded to a citi-

we change our angle to the

social responsibility of busi-

zen by its country may it be civ-

economic viewpoint, these re-

ness…to increase its profits…

il, political, social or cultural. In

strictions not only harm the

without deception or fraud”. As

some direction, environmental

economy of the country with

a legal and ethical reaction to

protection is also one of the

whom the embargo has been

human rights violations, busi-

most important aspects of the

done but also the country

ness community should devote

human rights. Protecting a

which imposes the ban also

a reasonable amount of the

child from early enforcement

suffers more downward trend

company’s resources to public

to do labor helps safeguard his/

in the economy; than it actually

welfare, educational and phil-

her rights to be free and enjoy

helps in improving the condi-

anthropic purposes which not

his/her childhood while getting

tion of human rights’ viola-

only help in curbing these type

the best education facility. The

tions.

of violations in the community

country where a balance is

Ethical Reaction to Violations

but also helps in the growth of

maintained between the hu-

Every business community has

the business very smoothly.

man rights and business con-

a moral responsibility to pro-

Responsible code and conduct

ducts is sooner or later reward-

mote human rights. The Presi-

of the business should also be

ed with economic growth and

dent of United States of Ameri-

taken into consideration.

prosperity.

ca once said, “We demand that

Conclusion

business give people a square

Human rights are the most

Article By - Anurag Agrawal DoMS, IIT Roorkee anurag242@gmail.com

14 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Perspective ………………………………………………………

Financing Infrastructure: Revisiting the Sources In the last decade or so,

always underlined that infra-

ments. A hydropower project

India had witnessed an unpar-

structure is the key to growth

may take around 5 year to be

alleled growth across all sec-

of industry, trade, business as

constructed along with

tors. One of the key factors

well

economic

investment but once opera-

that have ensured rapid growth

growth and affluence of a na-

tional it could easily have a life

is the development of infra-

tion. In fact, infrastructure de-

as long as 100 years. Huge in-

structure. Rapid urbanization

velopment and investment has

vestment for long periods re-

has created a necessity of ma-

a straight bearing on the

sults in very high underlying

jor investments to create addi-

productivity

country.

risks. Factors such as environ-

tional residential and commer-

Moreover investment in infra-

mental surprises, demand un-

cial spaces, subways, metros,

structure sector is the key to

certainties, technology obsoles-

roads and railways. Also coun-

sustainable and comprehensive

cence etc. are responsible for

try’s growth depends on indus-

growth.

higher risk. Politics and policy

trial infrastructure comprising

Characteristics of Infrastruc-

related uncertainty is a key fac-

of telecom, power, aviation,

ture Projects

tor in this regard. These pro-

shipping,

communication

overall

Infrastructure

huge

projects

jects often have very low and

well as agriculture. Industry ex-

are characterized by elongated

fixed returns in association

perts and policy makers have

maturity and very large invest-

with the huge investments.

15 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Financing Infrastructure: Revisiting the Sources

……………………………………………………… Yields in these projects should

currency valuation changes al-

In the past, government

be measured in real terms as

so poses high risk. Timely com-

has taken the sole responsibil-

revenues generated are func-

pletion and environmental as-

ity of operations and mainte-

tion of concealed inflation.

pect poses a huge risk on these

nance of these projects. But

Risk in Infrastructure Projects

projects. Environmental norms

infeasibility in managing higher

The key characteristic of

as well as public acceptance

level of fiscal deficit in these

infrastructure projects is the

are very important factor in

ventures and considerations

high risk associated with them.

terms of successful completion

extrapolating that private play-

Based on past experiences

of any infrastructure projects.

er would prove cost efficient in

many risks could be foreseen in

Collection risk as well as wrong

terms of timely delivery of ser-

an infrastructure project. Most

prediction or assessment of

vices to population leads to en-

important of all is the risk asso-

traffic is also an important risk

couragement for participation

ciated with legal, political, ad-

associated with any infrastruc-

of private partnerships in infra-

ministrative and dispute resolu-

ture project. In fact all risk are

structure. The promotion of

tion policies. Economic and fi-

more or less interconnected

DFIs such as ICICI, IDBI etc.

nancial happenings in the busi-

and leads to late completion of

were steps to get private par-

ness environment pose risk on

project which results in huge

ticipation, but undercapitaliza-

unexpected increase in cost

capital loss and requirement of

tion and under profitability

and requirement of more in-

further funds other than pro-

have posed a doubt over them

vestment apart from forecast-

jected capital in the beginning.

to be viable alone.

ed amount. Moreover, market

Prevalent instruments for In-

The existing prevalent

risk comprising of business

frastructure projects and con-

financing modes are incapable

model, traffic evaluation and

straints related to them

of funding the required infra-

SOURCE OF FUNDS

COMMERCIAL BANKS INSURANCE Cos. NBCF(incl IIFCL) ECBs TOTAL DEBT FUNDS EQUITY (incl FDI) TOTAL

ESTIMATED REQUIREMENT AS PER EXISTING FUNDING PATTERN(in crore) 2,67,480

ESTIMATED AVAILABILITY AS PER TRENDS (in crore)

FUNDING GAP (in crore)

2,02,027

1,25,685

52,046 1,24,699 76,984 5,21,208

42,330 1,00,651 50,515 3,95,523

1,86,456 7,07,664

1,84,571 5,80,094

1,885 1,27,570

Table 1: Infrastructure finance required in 2010-11 & 2011-2012 (Source: Ministry of Finance, Government Of India)

16 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Financing Infrastructure: Revisiting the Sources

……………………………………………………… structure support need as evi-

affected infrastructure financ-

return is very low in compari-

dent in Figure 1. For Infrastruc-

ing as it demands for higher

son of huge investment and

ture, there has to be credit en-

risk premium because of risky

risky nature of project.

hancement, able of absorbing

nature of projects.

currency risk to one year’s for-

The

risk involved with the financing.

Equity financing through

ward cover, which results in

Commercial banks have

financial investors is required

inability to hedge long term

driven the increase in infra-

so that promoters’ risk capital

risks, poses a big challenge for

structure finance but a contin-

could be distributed among

using foreign investment. High

ued speedy expansion may not

other projects. But the rules for

stamp duty and bank’s inability

sell–down of equity are quite

to mobilize their fund easily

growing concentration of risks

inflexible and hence act as de-

due to low liquidity results in

resulting from maturity mis-

motivator for financial inves-

restricted use of unconditional

match because of long duration

tors who always love flexible

take out financing. Infrastruc-

projects from short duration

exit options. Full capital gain

ture financing also suffers due

bank liability. Also many banks

tax is charged on sales of unlist-

to underdeveloped bond mar-

are reaching their exposure

ed projects which leads to fur-

ket in India. Skewed interest

limit to infrastructure projects

ther reluctance of investors .

rates, lack of alternative inno-

as they involve substantial in-

Moreover the restricted ability

vative financing instruments,

vestments. Key restrictions in-

of insurance companies and

incompetent

clude minimum credit rating

pension funds in India leads to

settlement

for debt instruments and mini-

less attraction of foreign inves-

poor and prolonged enforce-

mum dividend payment record

tors as they also rely on domes-

ment of laws for even common

of seven years for equity. Due

tic investors to a large extent.

procedures leads to underde-

to their long construction peri-

Alternate

veloped bond market.

od they could never enjoy high

and constraints

sustainable

because

credit rating in initial years. In-

options

and

mechanism

with

In the Indian context, financing,

derivative markets, which are

surance companies financing

which is a combination of debt

very important for the role of

infrastructure

are

and equity , could attract inves-

transformation of risk, are less

themselves very risky in nature.

tors by reducing their risks. It is

developed due to many regula-

Moreover they prefer in in-

still not much explored in India

tory issues. Banks are still not

vesting publicly listed company

due to lack of adequate and

permitted to trade in equity

to fulfill their mandate prereq-

varied pool of projects. Moreo-

and commodities. Credit deriv-

uisite in infrastructure and so-

ver, interest rate caps on ECBs

atives are not allowed in Indian

cial sector. Moreover a restric-

are not sufficient to attract in-

market. Moreover strict con-

tive cap on interest rates has

vestors for riskier projects as

straints on banks in terms of

projects

Mezzanine

available

clearing

17 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Financing Infrastructure: Revisiting the Sources

……………………………………………………… trading in exchange rate deriv-

make diversification benefits

nanced with sub-ordinate

ative as well as lesser reach of

accessible to the lenders by re-

debt financing and interest

interest rate derivative due to

ducing the risk to a minimum

rate swaps.

regulatory policies make the

extent.

Policies at fault

conditions more complex in

Along with FLDGs, large

terms of using derivative as al-

projects should be broken into

policies are very much discour-

ternate instruments for funding

number of smaller projects and

aging for flow of capital in an

infrastructure

projects.

then funded by insurance com-

infrastructure project. A detail

Through the use of OTC deriva-

panies, banks etc. This will en-

study on these policies is very

tives, it could be possible for

sure the securitized instrument

much required as well as paral-

banks and insurance bodies to

to be of investment grade char-

lel solutions should be advised

design products which are tai-

acter and hence could be sub-

to government so that the in-

lored to the requisite of infra-

scribed by high risk averse

frastructure funding could be

structure projects and are prin-

lenders. Also in order to get

obtained from NRIs as well as

cipally capital efficient.

capitals for infrastructure pro-

foreign

First loss default guarantee

jects, the funds from insurance

overlapping in terms of regula-

funds (FLDGs) will prove a very

companies,

funds

tory bodies i.e. between RBI,

and pension funds should be

SEBI etc. has made the situa-

situations where government

freed.

tion more complex for inves-

seeks to function in its fiscal



Capital intensive projects

tors in Indian infrastructure

limit but the capital funds are

dealing with scarcity of re-

market. Even fiscal policies are

ample. FLDGs function on first

sources could have options

also not very encouraging for

loss basis and seek to provide

of multilateral financing and

foreign or even Indian investors

partial credit assurance to lend-

support from government.

in infrastructure projects. For

Projects having long gesta-

e.g. the Tax holidays under Sec-

specific. For example if it is a

tion periods with assets lia-

tion 80IA provides 100 % tax

16% FLDGs then first 16% loss

bility mismatch should be

deduction on profit from infra-

is absorbed by the fund. So in

financed with take out fi-

structure projects for 10 years

case of FLDGs government cap-

nance, long term borrowing

and 50% on next 5 years. Now

ital is secondary capital and it is

and securitization of receiv-

because of such huge invest-

believed that lender would be

ables.

ments, any infrastructure pro-

important

concept

ers. They are also non event

equally conscientious in order



Projects

provident

associated

Few

government

investors.

regulatory

Moreover

with

jects take at least 7-8 years be-

to maximize the return even on

multiple debt servicing obli-

fore starting to show profit. So,

availability of lower implicit

gations having high debt

this incentive is of almost no

capital. Moreover these FLDGs

equity ratio could be fi-

use for infrastructure financer.

18 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Financing Infrastructure: Revisiting the Sources

……………………………………………………… Conclusion

structure is an important and a

ment regulatory and fiscal poli-

The issues, policies as

key driver of India’s growth sto-

cies associated with these op-

well as funding options and

ry, it is necessary to give special

tions should be carefully evalu-

constraints in terms of Indian

attention to this sector. Current

ated to make the infrastructure

market discussed above in

funding options available are

market free flowing and attrac-

funding infrastructure should

insufficient and other options

tive for financial investors.

be studied in detail. As infra-

should be discovered. Govern-

Article By - Pawan Upadhyay Saumya Dani DoMS, IIT Rrorkee

19 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Chlorophyll

……………………………………………………… Its wise to learn, its GOD like to create

Retrospection It was the day when I sat to reflect, The what and why and how of my life It was the day when I finally realized, The worth of all situations that I’ve had to pass by No it wasn’t regret, to my surprise not even a sigh… It was the day when I closed my eyes to the world outside and indeed looked inside For I was not the person that I used to be, not even a distant image of the past me Nor was I completely different inside, coz fears and values within still remained high I wasn’t happy nor did I cry, it felt like something within had just denied The basic existence; as if the reflection in the mirror was not mine Then who was it, what had become of me? I left the quest unanswered; an unfinished business let it be…….

Poem By -

Juhi Gupta DoMS, IIT Roorkee juhigupta1908@gmail.com

20 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Qutopia ………………………………………………………

It’s Exquizite, Kills your Quriosity and adds to your Quizdom. Need we say more? ‘Qutopia’ – A Utopia of the

best Biz Quiz Tidbits to wreck your brains! Rush in your answers to domination.doms.iitr@gmail.com or anu-

rag242@gmail.com before 31st August, 2012. The winner will have their names published in the next issue. Also, person getting the highest score in the current quarter (Jul-Dec 2012) will get a gift voucher. Answers in the next issue of DoMination.

Section A (1 Point for each correct answer)

1) Which consumer electronics company has hired some 3 dozen former market executives of market leader in India in same category? 2) ______ airways posted a profit of ` 36 crore for the quarter ended in June 2012 after 5 successive quarters of losses. 3) Which state has got a ` 480 crore package for draught relief in August 2012? Section B (2 Point for each correct answer)

1) New “Leader of the House” in the Lok Sabha Mr._____________(name of person). He replaced Mr. _____________ . 2) Shooting events of London Olympics 2012 are taking place at ________________. It was built in the year ________.

21 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Qutopia ……………………………………………………… Section C (3 Point for each correct answer)

1) ‘Little Sun’ priced at $10, weighing 120gm is a ____________ specially designed for Indian market by _____________(country origin e.g. Swedish) artist _______________(name of person). 2) State Industry Minister _______________(name of person) had made request to _________ (company) chairman Mr.__________(name of person) to invest in their state as work culture is good there. Section D (4 Point for each correct answer)

1) _____________, the self-regulatory body of advertising industry has told consumer goods major _____________to stop mentioning __________ brand as ice-cream in certain advertisement. The complaint was registered by top ice-cream brand __________. 2) India has opened its doors to FDI for which country? It was the only country that was not allowed to invest in India after both _________ and __________(name of countries) had been dropped down from the negative list under the FEMA in the year 2006 and ________ respectively.

Answers to Mar’12 Qutopia Section B: Section A: 1. South Africa 1. Lack of Women in Boardroom 2. CRISIL 2. Real Madrid FC 3. Sale of Blood 3. 30,000 4. The Workfare Scheme 5. Losses increased from £1.1bn to £2bn Section C: 1. Facebook (Mark Zuckerburg was inspired by this Photo Address Book of Phillips Exeter Academy) Winner of Qutopia (March 2012) 1. Prateek Jain (Batch of 2008-10, DoMS IIT Roorkee) 2. Prashant Chaturvedi (Batch of 2007-09, DoMS IIT Roor-

22 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

DoMS-da-Evince Pooja Jeevagan is 2011 batch pass out of DoMS, IIT Roorkee and presently working as the Technology Risk Consultant of Retail Division in Deloitte Touche Tohmatsu

1. What are your roles and re-

2. How was your experience as

ables; and though copy pasting

sponsibilities

an Intern at RBI and how it

helps, it definitely doesn't end

Touche Tohmatsu?

different from Deloitte?

your work. You are always ex-

Response: Being a consultant

Response: The 8 weeks long

pected to walk an extra mile,

at Deloitte Touche Tohmatsu

experience as a RBI intern

put in a little more efforts. Oth-

mandates that you adopt to

made me understand the envi-

er than that, Deloitte being

three inevitable rules:

ronment in public offices. Eve-

spread across the continents



Communicate effectively

ryone around me was friendly,

gives you a valuable chance to



Look forward to face ambig-

in fact were sort of pampering

interact and learn from people

uous and unknown scenari-

me, considering I was one of

all over the world.

os and come up with solu-

the youngest person in that

3. What has been the most

tion

office. Contrary to popular be-

challenging role in your career

Last but not the least, en-

lief that public offices get emp-

sofar?

sure quality in even the tini-

ty post 5, I witnessed the sen-

Response: This one is a tough

est of the things you do, no

iors there sitting till post 7. All

one to answer considering eve-

matter

in all, it was a memorable expe-

ry day at Deloitte has brought

rience. However, I do regret

some new challenge. As my

the fact that as an intern at RBI,

senior manager once said, the

As a technology risk consultant

with no prior work experience,

morning he doesn't get a new

in audit advisory, we basically

the internship didn't really pre-

challenge and feels clueless, he

are a part of SOX engagements

pare me for the corporate life.

would understand it's his time

for Fortune 500 companies as

Working in Deloitte made me

to call quits from Deloitte; and

well as help the audit rely on

realize the difference between

he has been in Deloitte since

the IT infrastructure and syst-

college and office, deadlines

last 7 years (that's almost as

em supporting the client's finan

really meant deadlines; deliver-

long as Deloitte US-India has

cials.

ables had to be quality deliver-

been).



and

with

how

Deloitte

insignificant

inconsequential

seems.

23 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

DoMS-da-Evince

……………………………………………………… I have had a whole range of

On serious notes, DoMS

course be a part of this very

challenges in Deloitte, from

gave me a lot of new experi-

attending meetings at 12 in

ence, opportunities and expo-

I will always say, DoMS

night or at 7 in morning, to en-

sure. One thing I like the best

made me learn, in fact discov-

suring that I learn up some-

about my alma mater is the

er, a lot about myself...and

thing new in a day because the

fact that it has a small batch

that's one thing I will always be

project needs to be closed on a

strength. That ensure we all get

grateful

priority. There have been times

the wonderful chance to organ-

5. Any message for the read-

I have worked nonstop for 12

ize, manage and implement

ers, especially the current

hours at a stretch, and then

new ideas. It gave me ample of

batches

there were times I spent hours

opportunities to meet new

Response: I believe I am far too

in front of the laptop, trying to

people, to interact with others

young to really be spreading

make out what is to be done.

and gain confidence. I believe

out messages. Honestly, it's not

And since I said, every

the best a college can give you

even a year since I have left

situation feels like tougher than

is the confidence to take on the

college. So, I’m not really rich

the one before, I believe I

world, self-assurance that you

in terms of knowledge to im-

would say the present phase

can manage any situation and

part. All I would say is that

has been the most challenging;

actually work things in your fa-

don't dream of reaching to the

working for Indian clients on-

vour.

moons on the very first day;

magazine,

DoMination

for.

DoMS?

site, travelling endlessly with

DoMS made me believe

but do dream of reaching the

no well-made plans, interacting

that I can connect to people,

moon one day soon. And re-

with

understanding

right from making some really

member, the road to moon is

new business processes, and a

great friends at college, to in-

never smooth...there is a lot of

lot more. But then, it’s always

teracting with peers from other

darkness of night which is re-

good to have a challenging first

colleges

organizing

quired for the moon to shine,

year, it validates that you actu-

events. I for one couldn't have

and same way there would be

ally have had the opportunities

imagined myself as a member

a lot of times when you would

to learn a lot in the very first

of media cell considering the

feel like nothing is going right.

year.

fact that I like keeping to my-

Personally, even in last ten

4. How has DoMS, IIT Roorkee

self and am not much into

months, I have felt a lot many

contributed to your success?

speaking out aloud, but it was

times that I have messed eve-

Response: It definitely got me

DoMS to instil confidence in me

rything up...taken some real

into Deloitte, considering that

that not only can i be a part of

wrong decisions. But then,

this company never visited my

Media Cell, but actively handle

keep the hope alive, one day

B.Tech.Campus.

Admission Committee, and of

things would turn out to be

clients,

while

24 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

DoMS-da-Evince

……………………………………………………… perfect. Just give things your

hope. Moon after all has been

and there is no reason why it

best shot and never lose the

conquered by humans before,

can't be done by us!!

25 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Success Story ……………………………………………………… Wish..Click..Go... Deep Kalra CEO and Founder, Make

A decade ago, booking

My Trip

Mumbai Mall. The new busi-

solidating their position in the

accommodation

ness plan was jotted down on a

market as a brand, they fol-

was not a piece of cake. Inten-

paper napkin. Nurtured from

lowed their success in the India

sive online search followed by

the seed of a single great idea,

by launching the India opera-

conventional

booking

at a small office in Okhla Delhi,

tions in 2005.

involved

a pioneer in the OTA success

Since then, they have

sweating out in long queues,

story came into existence,

excelled in providing services in

was the only solution available.

MakeMyTrip.com.

not only air ticket category but

tickets

and

methods,

travel which

But Deep Kalra managed to

Founded in the year

also non air business. It aims to

2000, today MakeMyTrip has a

offer its customers a set of

turnover of 2,200 crore and a

travel services and products

Market Share of over 50%, thus

with domestic and internation-

also

making it the single most rec-

al airline tickets, hotel reserva-

worked at ABN Amro Bank and

ognised and trusted player in

tions, holiday packages, car

GE Money. Currently, Working

the OTA industry.

rentals, Indian railways tickets,

change

the

equations

and

sought a solution. He is an alumnus of IIM Ahmedabad.

has

as the Vice President, Business

During the inception of

domestic bus tickets and much

Development at GE Capital, he

the idea, when in 2000 the

more. It also offers a range of

got the opportunity to be

travel industry was still in nas-

products and services at rock

closely involved in the then

cent stage; Deep Kalra got signs

bottom

nascent internet industry in In-

of hope by growing business of

cutting-edge technology and

dia. But, Deep Kalra was always

IRCTC

websites

dedicated round-the-clock cus-

thinking about his entrepre-

which could not cater across all

tomer support. It is the best

neurial aspirations. His dream

the categories. Hence they

one-stop-travel-shop offering a

turned to reality after meeting

started their journey in the US

vast set of travel products and

a venture capitalist friend at a

India travel market. After con-

services in India for all the avid

and

other

prices

along

with

26 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Success Story ……………………………………………………… travellers who can plan their

for growth, success and chal-

two International offices in San

itinerary with a few mouse

lenges, coupled with undaunt-

Francisco and New York and

clicks. Recently, it has collabo-

ed support for creativity and

several franchise locations. It

rated with Paypal, an interna-

innovation.

went public in 2010 and the

tional payment gateway, to

Recently

MakeMyTrip

results were beyond their ex-

offer a faster and safer service

has started a new campaign of

pectations. They expected to

to its international customers.

‘Making a 100% promise’. This

raise about $70 million but had

Kalra says that innova-

campaign is backed by a lot of

more than $1 billion by the

tion and passion are his key

uncertainty among customers

close of the issue. As stated by

drivers. Constant innovation

regarding online booking of ho-

Kalra, it has been a fairytale be-

and passion for his venture

tels. Thus this campaign gives

ginning and a stupendous jour-

with a strong self-belief have

100% money back guarantee to

ney so far.

been his key motivators. Em-

the customers if they do not

"For me success begins

ployees are given the best

get what they see in the web-

with the inception of an idea

working environment by incor-

site. This advertising has fur-

and is only achieved once the

porating ‘Fun @ Work’. He

ther increased the trust of cus-

idea has been executed with

firmly believes that an organi-

tomers and hence increased

sheer passion and determina-

sation becomes distinct from

their loyalty base.

tion.” entrepreneur’s mantra

others by values such as com-

Presently,

for success.

pany beliefs, core values, zest

has 20 offices across India and

MakeMyTrip.com

Article By - Ruchi Gupta DoMS, IIT Roorkee ruchigupta.iitr@gmail.com

27 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Regardez I’economie ………………………………………………………

Europe Debt Derailment: Daunting the Globe ‘Crisis’, as the word

balances and the loss of faith of

tion. Moreover, it was easier

drops onto your ears, it instills

investors across the globe.

for developed countries to bor-

a sense of urgency and you

What happened?

row money. The members of

tend prepare yourself for all

In the early 21st century,

EU although signed the Maas-

those adjectives which will be

the world was experiencing a

tricht Treaty under which they

falling in next, akin to ‘mess’,

huge flow of cash on a global

were obliged to limit their defi-

‘instability’, ‘crunch’, ‘collapse’

scale, with most of the Europe-

cit spending, but countries like

and so on. That is what this

an countries slowly and steadi-

Greece and Italy were able to

prose is all about, where we

ly running into large deficits,

disguise their deficit through

are talking about a continent

while simultaneously the US

complex credit derivative struc-

having a population of more

financial system was gaining

tures. The net debt for EU has

than 730 million stuck in a mas-

rapid momentum, which fur-

reached to 89% while Greece

sive crisis owing to various

ther allowed banks to use their

alone faces a magnanimous net

causes such as high govern-

investor’s money shabbily in

debt of 173% in 2012 as com-

ment debt levels of various eu-

various sovereign and collateral

pared to about 90% in 1999.

ro-zone countries, inability to

bonds. The ease with which

The vicious cycle kept

alter monetary policies due to

credit was available through-

repeating, as the foreign in-

a common currency, trade im-

out, led to a financial globaliza-

flows

various

countries

28 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Europe Debt Derailment: Daunting the Globe

……………………………………………………… Country Ireland UK Spain France Germany Greece Italy

Government Debt + Banking System

43x 14x 11x 10x 9x 8.5x 7.5x

Although Low Value, but less export to import ratio as compared to others. Thus NEGETIVE CASH INFLOW

across Europe rose to almost 4-

After the agitation caused by

were sharp changes in ex-

5% of most of the country’s

the USA across the globe, what

change rates globally. High ex-

GDP which was a precursor,

the world least needed at this

change meant high invest-

but still was ignored. The na-

time was a Europe muddle,

ments and vice versa.

tional and local banks of coun-

which has left the common

The figures on the next page

tries like Greece, Italy and Por-

man to think of his future on

shows the current account of

tugal started expanding and

sale. The sudden collapse of

major

henceforth started growing at

the top banks of USA, like Leh-

Most of the countries initially

about 20% per year. They start-

man Brothers, Meriyll Lynch,

under-stated their accounts, to

ed giving loans to everyone,

Goldmann Sachs, caused ab-

save the fall in their credit

but when people they had giv-

rupt disruption of cash flow,

rating, but later when exposed

en loan to defaulted, they fell

affecting not only the financial

there was no escape.

off the edge. Their large deficit

systems globally, but even sec-

The crisis gained mo-

forced the Credit rating agen-

tors like manufacturing, insur-

mentum through 2000s, and

cies like Standard & Poor’s in

ance agencies, etc. which led to

today has reached catastrophic

the late 2008, to degrade their

a shrinkage of various other

levels, with Greece being the

ratings, which in turn terrified

economies. Moreover, as men-

first one among the EU coun-

the investors and they started

tioned before, the out-shooting

tries to be exposed in 2008. Ra-

pulling back their money or de-

of process caused by the inves-

ther

manded a higher interest rate

tors left the countries to starve.

(Portugal,

over sovereign bonds, which

Furthermore, the turmoil in Eu-

Spain) in correlation with the

left the countries in larger debt

rope has been continuously

Euro Crisis. Greece used its sov-

and hence aggravating the de-

costing the market in terms of

ereign fund to provide heavy

railment process.

volatility, as the market is on a

subsidiary in its social security

continuous jump or drop of as

program for citizens like early

high as 5%. Additionally, there

retirement,

How terrible is the mess?

European

today,

countries.

term

Ireland,

good

PIGS

Greece,

pensions,

29 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Europe Debt Derailment: Daunting the Globe

………………………………………………………

Source: Kyle Base of Human Capital Management

Government aided healthcare,

ticket to borrow foreign loans

of the biggest among the PIGS

education etc. This was further

to fund its economy’s growth.

in terms of GDP, was seen as a

accompanied with high tax eva-

The banks enacted by channel-

fruitful and safe investment,

sions, which forced the Greek

ing that money into property

but risky credit and public debt

Government, had to go on a

market, which later defaulted,

creation, has left Spain in con-

borrowing spree to finance its

forcing the Irish government to

siderable amount of debt. Situ-

expenditure.

take the blame which they

ation in Spain may further

Every country has its

could not afford to honor. The

worsen, if debts which are han-

own story of crisis, and so is

Celtic Tiger, a name given to

dled internally, default. A Spain

the case with Ireland, which

Ireland not long ago due to its

default would have even more

followed in next, as instead of

fast growing economy, cost in-

disastrous effects as a large

engaging itself social benefits,

vestor’s their confidence and

number of French, Italian and

it allowed its national banks to

money at the same time. Spain

British investors have lent mon-

do the trick by giving them a

on the other hands, being one

ey to Spain. This could lead to a

30 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Europe Debt Derailment: Daunting the Globe

……………………………………………………… Country

Bailout Package amount provided

Greece

€45 billion (23 April 2010)

Ireland

€67.5 billion (29 November 2010)

Portugal

€78 billion(16 May 2011)

Greece

€130 billion(October 2011)

Source: Eurostat

contagion effect, i.e., a default

include new property tax and

end companies, making them

in Spain would ultimately lead

lay off almost 30,000 civil serv-

pay more for their fortunes and

to a default in the France, Italy

ants on partial pay by the end

has simultaneously increased

and Great Britain. Portugal gov-

has

VAT to 7%. Romania and Neth-

ernment over the time has en-

trimmed off a big chunk of

erlands have similarly reduced

couraged over expenditure and

their

their governmental spending.

investments in public-private

amounting to 4bn Euros. Italy

The situation has been

partnerships, leading to a huge

has focused upon high tax rates

so critical that even Germany

bubble within their economy

such as sales tax and wealth tax

and UK which tend to be in

and hence the huge deficit.

to accommodate a savings of

somewhat better position have

worth 58.9bn Euros. Spain and

been forced to impose strong

The point of concern

this

year.

Ireland

domestic

spending

here lies in the

austerity

safety

where both plan to

net

being

measures,

provided by strong-

cut

10,000

er economies with-

490,000 government

in the Euro coun-

jobs respectively. And

tries, like Germany

that’s not it, most of

and France. Also

the

finally these coun-

France, Germany, UK,

tries are expected

etc., plan to increase

to tap IMF, the

retirement age of the

countries

and

lender of last resort.

Portugal have not been far be-

workers, in order to reduce the

Measures already in place:

hind as they have decided to

benefits they were liable to pay

In order to reduce defi-

make the rich suffer more by

otherwise. This action has been

cits to a maximum of 3% of the

imposing 5% pay cut on them.

widely unaccepted especially

GDP, the EU countries have al-

Additionally

by the people of France.

ready subjected their people

creased its tax on tobacco to

Austerity: Blessing in disguise?

with policies to burn their

28%. France has raised corpo-

The age of austerity introduced

pockets. Greece has decided to

rate tax by up to 5% for high

in exchange of the bailouts

Spain

has

in-

31 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Europe Debt Derailment: Daunting the Globe

……………………………………………………… offered by EU and IMF has ena-

be effective and are thus inevi-

for the EU-27 at the end of

bled the governments to entail

table.

2011.

huge

amount

The

strict

austerity

money

But here comes the

measures are expected to act

amounting to tens of billions of

cons. As witnessed in the past,

as a catalyst for the further un-

Euros and somewhat soften its

austerity measures have always

employment ascends. The aus-

debt problems. Additionally,

resulted in social unrest and so

terity measures have resulted

these measures are further re-

is the case here to, as people

in anemic growth of these

ducing the risk for ECB and IMF

are not willing to pay for the

countries with deep recession

of experiencing a cardiac arrest

mistakes done by their govern-

in sight which will adversely

due to the massive bailout

ments and banks. The reper-

affect

packages which they have been

cussions

profits, investments, etc. and

constantly filling the trenches

throughout as countries like

bury the countries under more

in the overall economy with.

Greece has been experiencing

and more debt. Amid the vor-

Greece, Italy and Portugal have

anti-austerity movements, such

tex, many analysts expect de-

already been supplied by the

as Indignant Citizens move-

flation which might take coun-

EU and IMF with bailout pack-

ment

with

tries into a liquidity trap forcing

ages of 110bn, 85bn and 78bn

peaceful

later

the central banks to charge at

Euros in 2010 respectively with

turned out to be violent killing

zero interest or even negative

many other countries in the

3 people until now. More than

interest for money. The Euro

European Union not far behind.

250,000 people demonstrated

which has been stable till now

Bailout packages of such

in London on 26 March which

with little fluctuations of 0.1

enormous amount can pull

was said to be city’s biggest

(exchange rate with respect to

countries like Germany, France,

protest since 2003 Iraq war.

USD), is not expected to remain

etc. in a deeper deficit down

Public anger has grown expo-

the same, with some fearing

the line, as till now they have

nentially, and people have

that

been a key source in fueling the

been losing faith in their re-

measures may lead to devalua-

rest of the economies in Eu-

spective government as unem-

tion of the currency in the near

rope.

austerity

ployment has been drastically

future.

measures have been and will

increasing which rose to 24%

Hence,

can

which

seen

started

means

but

production,

stringent

business

austerity

Percentage of people- Blooming, Besieged and Suffering (2011) Country UK France Germany Italy Poland Greece

Blooming 53 42 41 23 21 14

Besieged 43 54 52 73 62 62

Suffering 4 4 6 4 18 24

Source: Gallup

32 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

Europe Debt Derailment: Daunting the Globe

……………………………………………………… What else do we have?

integrity of European countries

What can be finally implied

Euro, which has been

and have drastic implications

out of all this?

the common link between all

throughout the world, exagger-

the EU countries, has been the

ating the financial crisis.

Austerity measures are inescapable, as the vicious

major setback for Europe dur-

In the late 2011, Greece

chain reaction which the coun-

ing this time of crisis. The hu-

tried to do something totally

tries are experiencing can’t be

mungous debt mountain of

different, by advising referen-

circumvented. The public has

Greece amounting to 340bn

dum to the people of Greece,

to bear the brunt for the mis-

Euro has alone been responsi-

but the idea itself was met with

takes committed by the gov-

ble to make the rest of the

outrage by various EU mem-

ernment in terms of investing

countries suffer. Thereby, one

bers, as they feared nil austeri-

in risky hedge funds, sovereign

of the alternatives is to allow

ty measures and hence further

and

Greece leave Euro and adopt

increase in the country’s debt.

overleveraging

its local currency, Greek drach-

The ECB has further taken vari-

boundaries. But at the same

ma which will badly affect the

ous measures like resting the

time, a public outcry and out-

nation in a short term span, as

debt to be paid by Greece and

rage in such a situation can par-

the currency might experience

Spain by up to 50%, increasing

alyze the system still further.

devaluation straight away, but

the loan payback time to

Hence, instead of taking drastic

might save other EU nations on

15years and so on. Simultane-

and abrupt measures, govern-

a longer run. The EU has a

ously, countries should focus

ments can involve their people

choice to let Greece and Italy

on imposing strict regulatory

in the healing process and act

(if required), to default and de-

measures and stern monetary

cooperatively.

clare bankruptcy, but at the

policies on their financial sys-

same time this might affect the

tem.

Article By -

collateral

bonds their

deficit

Rajul Agrawal NITIE, Mumbai rajul89@gmail.com

33 | DOMINATION, AUGUST 2012

DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

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