FINly | Finstreet’s Fortnightly Magazine K. J. Somaiya Institute of Management Studies and Research
18 Mar 2013
India’s growth in manufacturing
India is likely to become the fifthlargest manufacturing nation if it is able to increase the share of manufacturing in GDP to 25% as per a study by Boston Consultancy Group. The National Manufacturing Policy sees India's manufacturing sector to increase to 25% share of GDP from the current level of 15% by 2022. That will help India come in comparable terms with its global peers.
HEADLINES
Budget Proposals implementation to be fast tracked
Finance Minister , Palaniappan Chidambaram is fast pushing to prepare a road map to implement the Budget proposals. Key road maps being laid down include those for setting up a women’s bank by November (with six branches in six regions), coming out with safe harbor rules by April, bringing tax notifications by the end of this month and disinvestment of three public sector companies this month and one in April. Work on the Direct Taxes Code (DTC) Bill has been fast tracked to get it tabled in the current session of Parliament. The insurance and pension Bills would also be pushed for passage in this session of Parliament.
RBI likely to cut rates in mid quarter review The Reserve Bank of India is likely to cut key policy rates by 0.25% in its mid-quarter review on March 19. Global investment banking majors expect a rate cut by RBI owing to declining core inflation levels and sluggish growth trends. Global banking giants HSBC, Standard Chartered, Citigroup, Barclays and Credit Suisse expect RBI to slash the repo. The factors that are likely to act in favour of a slash in rate cuts include a lesser February trade deficit, a slowdown in GDP growth to decade-low levels, and a fall in core inflation to below 4% for the first time since April, 2010.
India – an attractive destination for M&A ?
Favorable demographics and growth opportunities are likely to make India an attractive destination for merger and acquisition activities. Some of the key sectors to aid this include consumer goods and pharmaceuticals. According to global consultancy Ernst & Young the country is becoming a more attractive destination with reforms coming through.
The insurance and pension Bills would also be pushed for passage in this session of Parliament. The finance minister aims to conclude negotiations on the Goods and Services Tax by MayJune. The finance ministry is also
considering rationalizing withholding tax for foreign investors in various instruments and doing away with sub-limits on investments. Sebi, along with the Insurance Regulatory and Development Authority and the Reserve Bank of India, would also take follow-up actions on the Budget announcements.
50K Cr projects to be cleared coming fiscal
Foreign investment in India would get a boost once the new Cabinet Committee on Investment (CCI) starts clearing projects to the tune of Rs 50,000 crore in the next fiscal year. The clearances will also give an impetus to the infrastructure projects. Department of Economic Affairs foresees many projects coming on stream in the next fiscal. CCI approvals would be for total investments of about Rs 50,000 crore by March end. The government has constituted a CCI, under Prime Minister Manmohan Singh, to accord fast track clearances to high-end projects for their time-bound implementation.
FINly | Finstreet’s Fortnightly Magazine K. J. Somaiya Institute of Management Studies and Research
Did You Know?
18 Mar 2013
1) The first stock exchange can be traced back to Antwerp, Belgium in 1460. 2) The oldest component company of the Dow Jones Industrial Average is General Electric, which was
added on November 7, 1907. 3) The weight of a standard gold bar is approximately 400 ounces, or 27.5 pounds. 4) The largest lottery jackpot in U.S. history was $656 million for a Mega Millions tickets in March 2012.
There were three winners, and the total cash payout was $474 million. 5) George Washington, Abraham Lincoln, Andrew Jackson – most of the paper currency features these U.S.
presidents. There are only two exceptions: Alexander Hamilton is on the $10 bill and Benjamin Franklin is on the $100. 6) As of 2010 it costs the U.S. Mint 1.79 cents to make a penny.
7) The New York Stock Exchange was born on May 17, 1792 with the signing of the Buttonwood Agreement. The agreement, which laid out trading rules and regulations, was signed by 24 stock brokers underneath a buttonwood tree. The entire contract was only two sentences in length.
The Little Things Forex Reserves: $ 290.35 billion in the week ended March 15 Brent Crude: $109.26 as on March 17, 2013 Contact Us: Mail Us At finstreet.simsr@gmail.com Visit Us At http://finstreet.weebly.com
Sensex: 19,427.56 as on March 15 Gold Rs. 26863.89 as on March 15 Exchange Rate: Rs. 54.06963/USD as on March 15
FINly | Finstreet’s Fortnightly Magazine K. J. Somaiya Institute of Management Studies and Research
18 Mar 2013
China’s Low Cost Manufacturing - A thing of the past ? Authored by: Shivani Ghildiyal PGDM-B
Image Source: CBS News
China, World’s second largest Economy and the leading contender for being the leading economy by 2020 is undergoing a prominent transition. Cheap labour has been one of the biggest reasons behind its growth over past 2 decades, apart from FDI Liberalization and tax exemption for MNC’s. However, over past 4-5 years, the minimum wage levels were increased by an average of 20%. Wages in privately owned companies in China are expected to rise 17% annually in the next 3 years. Let us investigate some causes and effects of this transformation. Causes Contact Us: Mail Us At finstreet.simsr@gmail.com Visit Us At http://finstreet.weebly.com Like Us At https://www.facebook.com/ TeamFinstreet
1) The cost of living in major cities in China, like Beijing and Shanghai is rising, making it mandatory to increase incomes earned by the people. Shanghai is placed beside New York in a global cost of living index. And the trend indicates further rise. 2) Chinese Government introduced tax cuts in rural areas, making it more expensive for rural population to move to coastal areas, where industries are located. Demand Supply gap leading to rising wages. 3) China’s ageing population and rising education level poses another challenge for the manufacturing sector. The Companies find it difficult to get workers at the same terms and policies as earlier generation.
FINly | Finstreet’s Fortnightly Magazine K. J. Somaiya Institute of Management Studies and Research
18 Mar 2013
China’s Low Cost Manufacturing - A thing of the past ?
Effects inside and outside China1) Reduced FDI Inflow – In 2012, the FDI inflow into China fell for the first time after year 2009 global financial crisis. There was fall of 3.7% as compared to 2011. This will also be an opportunity for other developing countries to attract investments from MNCs. FDI in Thailand grew by about 63% and in Indonesia grew by 27%. Also, China’s FDI outflow is expected to exceed the inflow for the first time in 2013. However, because of the well developed infrastructure and presence of huge number of industries, it is expected to continue to be one of the most significant industrial centres for more years to come. This is one example where relative stability of FDI over FII will be beneficial for China. Huge market is another big reason why many companies would still prefer to stay in China. 2) Industrial Competitiveness – The manufacturers are expected to become more committed to quality and productivity. From 2005 to2007, China's labor productivity grew at an annual rate of 10%, while real wages grew at 11%. Companies will be biased towards hiring skilled labour and purchase automation technology. 3) Rising Household Income- Household income is expected to double in next 5 years, according to studies. However, this rise should be constituted not only by wage-rise but also due to non-wage sources such as investments.
4) Impact on Interest rates- Wage inflation may lead to higher interest rates in the near future and relax upward pressure on the yuan's exchange rate. It will reduce the need to adjust the value of the yuan in the near term. With domestic demand dominating foreign demand, China will have a more balanced economy, making it comparatively resilient to economic downturns around the world.
5) Lewis Turning Point- It’s a phenomena developed for Developing countries. A country has agricultural as well as Industrial sector. Industrial sector is the main driver of economic development and it draws unlimited labour from the agricultural sector. The agricultural labour accepts low wages and migrates to industrial sector. This results in a lot of profits to industrial sector. A stage is Contact Us: reached when no more labour is available to industrial sector from the agricultural Mail Us At sector and industrial sector wages begin to rise or industrial progress slows down. finstreet.simsr@gmail.com South Korea and Taiwan saw Lewis turning point in 1980s and decided to completely transform into industrial nations. China is a much larger country than South Visit Us At Korea and Taiwan and will take time to fully transform. http://finstreet.weebly.com Like Us At https://www.facebook.com/ TeamFinstreet
FINly | Finstreet’s Fortnightly Magazine K. J. Somaiya Institute of Management Studies and Research
18 Mar 2013
China’s Low Cost Manufacturing - A thing of the past ?
6) Workforce shortage eased due to Economic slowdown- Due to economic slowdown both globally as well as in China, the workforce shortage has eased slightly. Some of the manufacturing firms have stalled production on a temporary basis. Close 20% of the enterprises in Wenzhou have stopped production. 7) Inflation Effects- At the time of Lewis turning point in both South Korea and Taiwan, the inflation was high. However, China's rising wages will have a less significant impact on inflation. This is because China’s inflation is governed more by the external demand and it is an export oriented economy. 8) Intensity of effect of Direct Labour Costs- Direct Labour costs constitute higher contribution in Sourcing and Making. Hence these decisions will be great significance. Also, experts believe that the greatest impact will be on High technology industries. If the minimum wage increase is 30 %, margins for companies with a strong manufacturing base in China (that is, 30-100 % production in China) are expected to decrease just 1-5 %. This is because labor costs represent a small portion of the MNC price for these firms. 9) Backshoring /Onshoring – A great number of US and UK based companies have started shifting back to their home country. Manufacturers have also started moving to other low cost countries like Singapore, Vietnam. However, it should be noted that even though China’s wages have grown faster than in many other low-cost countries, its hourly wage rates are still more competitive than those in the developed world. 10) Impact on India- Rising wages in China will not necessarily lead to large scale shifting base to India or other low cost manufacturing countries as manufacturing units do have an option of shifting to China’s inland provinces, where the costs are lower. Also, labour wages are not the only factor which makes China more favourable than India. In the global competitiveness report by the World Economic Forum, China beats India on almost all parameters. Even though the legacy of China’s low cost efficient manufacturing cannot be undone for quite a long time, all further decisions should be taken with great consideration of the impact. This is because, the macroeconomic environment is highly fragile and the interconnectedness of the economies makes it even more important to implement any change with great caution.
Contact Us: Mail Us At finstreet.simsr@gmail.com Visit Us At http://finstreet.weebly.com Like Us At https://www.facebook.com/ TeamFinstreet Image Source: Bureau of Labour Statistics, International Monetary Fund