The Reflection of Management FINANCE | GENERAL MANAGEMENT | HUMAN RESOURCE | MARKETING | HEALTHCARE | OPERATIONS | SYSTEMS
AA Students’ InitiativeInitiative Student’s
Pratibimb | November 2011 | 1
Volume II, Issue V
A Monthly e-Magazine
T. A. Pai Management Institute Manipal, Karnataka
About TAPMI T.A. Pai Management Institute (TAPMI) is a premier management institute situated in Manipal and is well known for its academic rigor & faculty-student interaction. The Institute has been recently ranked amongst top 1 per cent of B-schools in India & 4th in the South Zone by The Week Magazine. Founded by the visionary, Late Shri. T. A. Pai, TAPMIâ€™s mission is to provide much needed impetus to the task of building professional management capability in the country. In the process, it has also played a role in strengthening the existing educational and health infrastructure of Manipal.
Mission We are committed to excellence in post-graduate management education, research, and practice by nurturing and developing global wealth creators and leaders. We shall continually benchmark ourselves against the best in class institutions. We shall foster continuous learning and reflection, achievement-orientation, creative interdependence and respect for diversity with a holistic concern for ethics, environment, and society.
Recent Update TAPMI has been conferred with Best Academic Input (Syllabus) in Finance among B-Schools across India. The award will be presented at the 19th Dewang Mehta Business School Award, Mumbai. The Award is supported by Ms. Shaila MehtaDirector, Onward Foundation for Dewang Mehta awards. The Chairman of the Jury is Dr. Prasad Medury, Partner, Amrop International and the Patron is Mr. Harish Mehta, Chairman & Managing Director, Onward Technologies Ltd. Pratibimb | November 2011 | 2
About Pratibimb Pratibimb – The TAPMI’s e-Magazine - is the conglomeration of the various specializations in MBA (Marketing, Finance, HR, Systems and Operations). It is primarily intended to provide insights into the plethora of knowledge that relate to the various departments of Management and to give an opportunity to the students of TAPMI and the best brains across country to exhibit their creative cells. The magazine also strives to bring expert inputs from industries, thereby bringing the academia and industry together. Pratibimb the e-Magazine of TAPMI had its first issue in December 2010. The issue comprised of an interview of denoted writer Ms. Rashmi Bansal along with a series of articles by students and industry experts like MadhuSudan Rao (AVPDelivery, Mahindra Satyam) & Ed Cohen who is a global leader and chief learning officer who led Booz Allen Hamilton & Satyam Computer Services to the first rank globally for learning & development . It also included a hugely successful and engrossing game for finance geeks called “Beat the Market” to bring out the application based knowledge of students by providing them the platform where they were expected to predict the stock prices of two selected stocks on a future date. The magazine is primarily intended for the development of all around management knowledge by providing unbiased critical insights into the modern developments. TAPMI believes that learning is a continuous process and is not limited to the four walls of the classroom. This viewpoint is further enhanced through Pratibimb wherein students manage and contribute to create a refreshing learning environment outside the classrooms which eventually leads to a holistic development process. The magazine provides a competitive platform and opportunity to the students where they can compete with the best brains of the country. The magazine also provides a platform for prominent industry stalwarts to communicate their views and learning about and from the recent developments from their respective fields of business which in turn helps to create a collaborative learning base for its readers. Pratibimb is committed in continuing this initiative by bringing in continuous improvement in the magazine by including quality articles related to various management issues and eventually creating a more engaging relationship with its readers by providing them a platform to showcase their talent. We invite all the best brains across country to be part of this initiative and help us take this to the next level.
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I am pleased to state that the team members of PRATIBIMB have continued their sincere efforts to bring out this seventh issue in November 2011. The previous six issues had a number of management articles written by students of various B-Schools and also from students and faculty of TAPMI. This student magazine is also accessed and appreciated by our alumni and industry and business readers. The magazine provides a platform for our students to use their creativity, imagination and language skills to reflect upon various management areas i.e. operations, marketing, system, HR, finance and entrepreneurship as well as in areas of their interest. It also fosters research culture among students. Research orientation and sharpening analytical mind are crucial for their academic orientation. Generally literary work, research article writing and publication should become part of students’ learning goals while they are in the campus. This would perhaps sow seeds for pursuit for academic career by a few management students after their initial experience in industry and business. It has been observed that on comparison with fast developing country i.e., China in Asia, the focus on research and publishing from Indian students and faculty in management journals and pursuit of Ph.D. programme in leading universities has been moderate in recent past. This situation needs to be improved. To this extent our students and faculty can best express themselves about their creative thoughts, opinions, knowledge and interests by contributing to PRATIBIMB. Let PRATIBIMB grow in content and variety with thoughtful articles in months to come. I congratulate the persistence and continued efforts put in by the team members of PRATIBIMB for timely publishing this volume. I wish them higher performance, joy and success in their endeavor. Dr. A. S. Vasudev Rao
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Rohit Kumar, Chief-Editor Ramanuj Vidyanta, Editor-Branding Sarvesh Joshi, Editor-Creative Designer Sub-Editors
Dear Readers, We are pleased to release November issue of Pratibimb. The highlight of this issue is the interview with Mr. Benny Augustine, Director - Human Resources, Unisys India who shared his views on HR related issues with us. We are thankful to all the students from various colleges who put in great efforts in writing articles on various issues/topics and worked hard to send entries for “Beat The Market” and “Route To Market”. The articles have been selected by the Editorial Team whereas “Beat The Market” has been judged by Prof. Vrishali N Bhat and “Route To Market” has been judged by Prof. Vinod Madhavan. We thank judges for their precious time. We also thank all those who helped us in improving Pratibimb through their feedbacks. We would like to take this opportunity to extend our gratitude to all faculties and students at TAPMI for their continued support, guidance, motivation and inspiration to take Pratibimb to the next level. Please continue to send in your valuable suggestions / feedbacks at firstname.lastname@example.org so that we can make improvements in the coming issues. Happy Reading!!
Rohit Kumar Pratibimb | November 2011 | 5
Abhishek Anupam Abhishek Dubey Bijoy Alokkan Kapil Saraswat Manish Mishra Pranaynehru T Shivesh Sinha Sriparna Neogi Sushmit Sinha Vandana Soni
Prof. Chowdari Prasad, Dean (Planning & Development), TAPMI
Dr. Jaba M. Gupta, Associate Professor and Chairperson - eGPX, TAPMI
Special Thanks Mr. Benny Augustine Director - Human Resources, Unisys India Prof. Vrishali N Bhat, TAPMI Prof. Vinod Madhavan, TAPMI Alumni Affairs Committee, TAPMI
contents Are Indian Stock Markets held to ransom by Foreign Investors?
Akash Jauhari | Karan Verma, IMT-Ghaziabad
European Debt Crisis: The Current Situation, its consequences & the way ahead
Deepak Panwar, FMS Delhi
Implementation Issues in Infrastructure Sector In India
Jigyasa Nabh | Yukti Gupta, NMIMS
Interview with Mr. Benny Augustine
Director, Human Resources â€” Unisys India
Is Africa the new market for the future?
Shaikh Ashfaque Kasim, JBIMS Mumbai
Social Networking: Adding new dimension to HRM
Sauvik Sarkhel, XIM Bhubaneswar
World of Stealth Advertising!
Sumedha Sobti, IIM Kozhikode
Global Financial Instability Nishaat Farheen | Pooja Lunia, TAPMI Manipal
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Are Indian Stock Markets held to ransom by Foreign Investors? by Akash Jauhari | Karan Verma, IMT-Ghaziabad
Introduction On October 18th 2010, the Indian investors and analysts witnessed the issue of an IPO, which defied all existing parameters of the Indian Stock Market. It was the IPO of the state owned enterprise Coal India ltd. which got subscribed over 15 times, raising a capital to the tune of Rs 150 billion, through aggressive applications from both institutional and non institutional investors. The startling reality that came to the fore was that out of 770 applicants in the institutional segment, 600 were Foreign Institutional Investors (FIIs), which would mean that after allotment of shares, FIIs would be sitting on a whopping cash balance of $ 26 billion. The sheer volume of FIIs stake which not only gave sleepless nights to brokers across the nation, but also stamped the authority of foreign investors in contemporary security markets. This is the tale of the Indian Stock Markets, which see-saw between quantifiable fundamentals and volatile sentiments, and tread on a tight rope stretched between the very opportunistic FIIs at one end and the ever cautious yet so vulnerable domestic investors on the other. The great Indian growth story has always been an eye-candy for the Pratibimb | November 2011 | 7
foreign investors. The 1991 Liberalisation was the first step, and the subsequent relaxation of cap on foreign investments in 2005 set the floodgates open. In no time, the FIIs transformed into a major player accounting for over 21% share of the markets. FIIs inducing instability to Stock Markets Many experts consider FIIs to be "Fair Weather Friends", who come in hordes when there is money to be made and leave abruptly at the first sign of impending trouble in the host country, thereby inducing undesirable risk and uncertainty into markets. This is evident from FII behaviour in the last eighteen months. Better fundamentals of Indian economy as compared to the western economies, attracted and prompted FIIs to invest aggressively here, raising the total to a astronomical figure of $ 20 billion. This almost singlehandedly took the Sensex to the 20,000 mark again. However, in November 2010, few local factors like inflation, lower IIP and internal politics resulted in a major square off of FII positions in no time, thereby pushing the market into a sluggish and corrective mode. There are other disturbing instances when the FIIs
triggered a blood bath at Dalal Street. On 16th Oct, 2007 Finance Minister Mr. P. Chidambaram made a statement expressing his apprehensions over the usage of offshore derivative instrument: P-notes, through which FIIs made about 60% of their investment in India. Little did the market analysts or the Finance Minister realise that this seemingly ordinary statement would have the potential to inflict a deadly free fall of the market indices. The markets crashed by a staggering 9% within few hours, registering one of the biggest absolute fall in Indian stock market history. The consequences were so severe that the markets had to be closed down for an hour and Mr. Chidambaram had to call a press conference to rephrase his statements. It was yet another rude shock to the domestic investors that woke them up to the rising dominance and influence of the FIIs on Indian Stock Markets.
causing volatility to Indian stock markets. The alternate hypothesis is that the FIIs simply react to existing situation in stock markets, possibly exacerbating it, rather than causing it. In simple words, this study is to test whether FIIs drive the Indian stock markets, or like other domestic investors, are just driven by it. The research is exploratory and causal in nature. A time frame of seventy eight months i.e. from Jan 2005 to Jun 2011 is considered. BSE 500 monthly average closing index value is taken as a proxy for stock markets in India and net FII flows to BSE for corresponding period is taken as representative for FII investment activities. Data
The Alternate View There is another set of experts who believe that FIIs are life blood for an emerging economy like India. They augment domestic saving without increasing foreign debt, provide vital liquidity to Indian companies to sustain growth, reduce cost of equity capital and help reduce deficit of Balance of payments (BOP). Also these experts believe that FIIs, like any other investors buy or sell according to prevailing sentiments in the market, rather than creating any sentiments that drive the markets. Hence there lies a conflict between the pros and cons of FIIs and the all important question regarding the role of FIIs in deciding the fate of our stock markets. Research Objective Through this research we make an effort to substantiate the influence of FIIâ€™s in inducing or Pratibimb | November 2011 | 8
sources include BSE India, SEBI and RBI websites. Granger Causality test is employed to attain the conclusion. Data analysis & Statistics From the above charts it is clear that net FII investments at BSE show a similar pattern to the BSE 500 index monthly average closings. The correlation coefficient between net FII inflow to BSE and change in BSE 500 index is 0.59, which shows a positive relation of moderate strength.
However, a positive correlation, in itself, does not imply causality. As both directions of causality are equally possible, auto regressions are run to test Granger test of causality between the two estimated variables. The estimated variables for further analysis are taken as – change in net FIIs over previous month figure (Y), and change in BSE 500 monthly average closings (X). The regression coefficient between Y and X is found out to be 0.37, and those between X & X lag, and Y & Y lag also being positive, 0.05 and 0.14 respectively. This brings us to second step of Granger causality analysis, which has two tests in itself. Test-I Ho: Monthly BSE 500 index change does not Granger causes monthly net FII’s flows to the Stock Net FII flows to BSE [In this autoregressive analysis, net FII flows are the dependent variable with its own lagged terms and lagged values of BSE 500 Index returns as the two independent variables in unrestricted equation]. Test-II Ho: Monthly Net FII’s flow does not Granger Cause monthly returns of BSE 500 index. [Here, BSE 500 Index return is the dependent variable with its own lagged terms and lagged values of net FII flow as the two independent variables in unrestricted equation].
Test II hypothesis that FIIs do not drive BSE 500 index is rejected both at 5% and 1% level of significance. Test I hypothesis, on other hand, is rejected only at 5% significance. However, comparison of the test results suggests that there is a stronger support for causality running from FII Pratibimb | November 2011 | 9
net flows to index returns and a milder evidence of reverse causality. Thus the study indicate that FII flows are more of a cause than an effect of stock market returns and fluctuations for the given time period. Conclusion and Recommendations The empirical study conducted for the time frame from Jan 2005 to Jun 2011, supports the “FII inducing volatility and driving the market indices” theory to a substantial level. Compared to security markets in developed economies, Indian markets being narrower and shallower, allows foreign investors with access to significant funds, to become the dominant player in determining the course of markets. Because of their over sensitive investment behaviour and herding nature, FIIs are capable of causing severe capital out flight abruptly, tumbling share prices in no time and making stock markets unstable and unpredictable. In the process, more often than not, the domestic individual investors are on the receiving end, losing their precious savings in such speculative trading. India as an emerging economic power needs formidable Domestic Institutional Investors which can pump in liquidity even during cash crunch circumstances thereby fuelling the development. With savings to the tune of roughly 35% of GDP, India can use this to its strength by formulating policies which ensure that domestic funds like Pension Funds, Provident Funds and other Large Corpus Funds have a greater exposure to the equity market. The foreign investment in India should be encouraged, but only from a strategic long term perspective. Derivative instruments which facilitate long term foreign investment with specified lock in periods should be introduced. Sustained long term foreign investments would not only contribute to India's growth but also help in curbing volatility, maintaining currency stability and creating environment for inclusive economic development.
European Debt Crisis: The Current Situation, its consequences & the way ahead
by Deepak Panwar, FMS Delhi
European Sovereign Debt Crisis is the current economic situation in which the entire Eurozone will not be able to pay its debt obligation, if the economic situation does not improve in the future. The issue regarding the Europe crisis talks about the 17 European countries which have common currency ‘Euro’. The seeds of Europe debt crisis which the world is facing today were sown way back in 1999 when the proposal for common currency ‘Euro’ for the trade benefit and inclusive economic growth of the entire Europe was implemented. Greece entered the Euro zone in October 2000 based on its economic compatible condition although even then Greece had a high budget deficit and it is still blamed for under reporting its critical figures in order to get in the Euro zone. In late 2000 due to financial crisis the
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Greece largest industries, tourism and shipping, were badly affected. The Greece had joined the group knowing that it would be easier for it to get the debt with a globally strong currency Euro. The Greeks continued lavish spending (events like Athens Olympic which are reported to cost Greece several times more than the estimated cost, public care) combined with long following trade deficits and large tax evading population lead the Greece budget deficit and public debt to rise to insurmountable amount. And now the deficit percentage and the debt to GDP ratio for the Greece are highest among all the European States. Adversaries like housing bubble in Spain and speculation by traders in Portugal leads to similar situations in these countries as well. These European peripheral countries (PIIGS) borrowed
enormous amount of debt in Euros and hence have huge sovereign debt obligations.
CONSEQUENCES: WORST CASE SCENARIOS IF GREECE DEFAULTS
For example, Greece has a total debt of $540 billion dollars, 125% of its GDP (Fig3). In order to raise money to pay its debt obligations, the Greece increased the interest rate on its bonds to 15% (Fig2).But because of the already piled up huge debt obligation, there is huge risk involved in investing in Greece sovereign bonds as they might default, therefore nobody is buying Greek bonds. Greece’s ten year bonds have been reduced to junk status by Moody’s which downgraded them to CA rating, just one rating above default. Other PIIGS economies are facing the similar problem .The markets expressed concerns over PIIGS ability to
The world around: All the major countries have provided enormous debt to Greece .If Greece defaults on its debt; this will have cascading effects on other economies. Most probably then other PIIGS economies will also default. The banks of those countries which have provided the debt to PIIGS will face tremendous liquidity crunch and the people will face huge credit crunch where they would not be able to borrow money. This would lead to low production, less development, reduced trade and a situation leading to global economic depression.
repay its debt which it has taken from stronger economies like Germany, France, UK, US and others. This creates another problem ‘the contagion effect’.
INDIA: India’s developing economy is dependent on FDI and FII. If Greece defaults on its debt all the liquidity in the region would vanish. All the companies and banks that have invested in these bonds would be in severe need of liquidity. In order to raise money, they will liquidate their stocks and securities in which they have invested in India and other markets around the world. All the stock markets would suffer heavily and the markets of the developing countries like us may crash. Indian companies that were seeking to raise money in foreign markets due to rise in interest rates in India will not be able to find any lender in international markets.
Fig. 3 shows the Debt/GDP ratio of PIIGS
THE WAY AHEAD Bailout: Though for now the Greece has been Pratibimb | November 2011 | 11
temporarily saved from defaulting through a bailout package of 109 Billion Euros or $155 Billion by EU and the IMF. They have provided them the soft loans at the relatively very low rate of 3.5% and with a term period of 15-30 years. But it is still not a permanent solution, Greece needs continuous flow of surplus funds to pay its debt obligations and EU members themselves are suffering from the contagion effect. Therefore, expectation of bailout funds from them does not seem to be a plausible solution. China: With a tremendous foreign reserve of $3.2 trillion, China may come into picture as its trade exports cover very large part of EU. And if the euro depreciates then it would affect the profit margins of China. China with its enormous foreign reserve can help Greece to pay its debt obligation and can get long term returns at high interest. Greece opting out of Euro zone: One of the most advised opinions for Greece is to opt out of EU and restart with its older domestic currency ‘Drachma’. With this it would be able to devalue
its currency and start doing the business with the other countries providing the products and services at cheap value because of its undervalued or depreciated currency. The sustained trade surplus and increased domestic consumption are the only plausible ways through which it can pay its debt obligation. Definitely, Greece carries only a part of the Europe debt and solving the Greece debt crisis will not be the answer for the entire Europe. But Greece has the highest debt to GDP ratio and is closest to default. Therefore solving the Greek Domino Effect would definitely bring confidence in the European economies and the way ahead for the Eurozone to look out for. Well, whatever the case may be and whatever the situation may arise in future, one can say with certainty that if EU occurs to exist, stricter regulations and better transparency will be placed and the stability norms will never be flouted.
Beat the Market As Jim Cramer, a former hedge fund manager, and a best-selling author put it, “As long as you enjoy investing, you'll be willing to do the homework and stay in the game… I mean I'm not smarter than the market, but I can recognize a good tape and a bad tape. I recognize when it's right and when it's wrong and that's what my strength is.” Stock markets have never been predictable, you may apply the best of logic and reasoning, but there could be a possibility that you may falter if the emotions of the investors take control. Beat the Market is a game designed to prove your mettle in stock market analysis. This time onwards, we will provide you the name of one listed company from NSE. You need to analyze stock movements of this company till 4 th Nov, 2011. On the basis of fundamental and technical analysis you need to give us your share price estimate of this stock as on 21 st Nov, 2011. Fundamental & Technical analysis will carry 70% weight while 30 % weight will be given to Accuracy of the estimated prices in the final score. The winning entry will receive a letter of appreciation and prize money of Rs. 1000 /Rules:
Company to be analyzed is JUBLFOOD
You may analyze in a team of not more than 2 members
The file should not be more than 7 pages long including cover page, the cover page should contain the team name, team members name, Institute name, contact number
File name should be BTM_<TEAM_NAME>_<INSTITUTE_NAME>
Upload entries at http://www.tapmi.edu.in/student-life/pratibimb/participants-submission by 8:59 am, 10th Nov, 2011
The winning entry of ‘Beat the Market’, October 2011 edition is of Shivaram Kulkarni from TAPMI, Manipal !! Congratulations!! We thank all the participants for their effort. The entries of this contest have been judged by Prof. Vrishali N Bhat, TAPMI.
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Implementation Issues In Infrastructure Projects
by Jigyasa Nabh | Yukti Gupta, NMIMS Mumbai.
As suggested by Prime Ministerâ€™s Economic Advisory Council, Indian economy is to grow at 8.6% in 2010-11. With the recent expansion in industry, commerce and per-capita income has led to spiraling demand for infrastructure services which is yet to be matched by a proportionate increase in supply of such services. The economic cost of insufficient infrastructure is enormous.
intervention, and change in technology. More implementation issues are discussed as follows. SELECTION OF CONTRACTORS The results of improper planning and monitoring may lead to execution delays, increasing project costs and even result in renegotiation. It also remains an essential duty of the government to award contracts to the eligible contractors. Proper evaluation of contractors on basis of full technical and financial analysis through submission of documents like request for qualification, request for proposal and project information memorandum should be done.
Traditionally, government owned enterprises have provided infrastructure services which have been disappointing: with limited increase in coverage, deficient quality of service and low operational efficiency. To avoid all this, private sector has shown participation to a huge extent. The contribution of the private sector in total infrastructure investment is For example: As expected to rise to Fig. 1 Growth in April 2011 (Source: Dept of Economic Affairs) in the case of 36% by the end of Chennaiâ€™s solid 11th plan (2007-2012). waste management, at the end of the first A lot of issues hamper the infrastructure sector concession period, a private consultant reright from development, construction to the tendered the contract and awarded the concession operation stage of the project. Big problem is the to a different firm. However, this transition very nature of the infrastructure projects which process was not planned or monitored well take years to start paying the benefits. The large enough and resulted in a period of time where gestation period opens enormous gateways for neither firm claimed responsibility for processing issues like inflation, bureaucracy, government Pratibimb | November 2011 | 13
the cityâ€™s waste, which in turn led to a piling up of garbage along the streets.
Rs 1000 crore project at Kandla port are awaiting environmental clearances.
Social issues like displacement of poor people, inequitable jobs and incomes and environmental degradation can result in implementation problems. Positive community participation plays a very important role especially in production of electricity through biogas plants. Also, there may be cases where intended users may resist tariff increases as a result of privatization.
The provisions of National Land Acquisition and Rehabilitation and Resettlement Bill, offers more benefits to Project Affected Parties in the form of mandatory employment provisions, subsistence and annuity based allowances etc. thus resulting in more complexities for the successful completion of projects.
For Example: In the case of Coimbatore bypass road, the government of Tamil Nadu has decided to toll a neighboring bridge and include the toll revenues as part of the financial equation for the bypass road project. However, users of the bridge were upset at a toll being charged for a facility that they had used for free previously, and refused to pay. VIABILITY GAP FUNDING Lack of viability gap funding for infrastructure projects, which are socially and economically viable but either carry a high risk or inadequate IRR, could terminate projects. According to the policy, upto 20% of financing needs of projects with high economic rate of return could be met with VGFs. For Example: The 22.5Km long proposed Mumbai Trans Harbor Link, costing over $1 billion is not feasible without at least 30 percent VGF. Similar is the case with large sections of national and state highways. ENVIRONMENTAL CLEARANCE Clearance by Ministry of Environment and Forests is required for submission of Environment Impact Assessment report by the EPC contractor. For example: In the ports sector, Rs 3600 crore container terminal project at Chennai; coal terminal and iron ore exports at Marmagao Port;
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For Example: Multi-modal International Hub Airport at Nagpur, envisaged as an international cargo and passenger airport in a multi-product special economic zone (SEZ), has not taken off yet due to issues related to compensation and funding of the PAPs. DEBT FINANCING The corporate debt market is highly undeveloped in India. Stringent regulatory norms and illiquid bond market forces the sponsors to turn to banks for funding. The tenor of available funds from the domestic market is typically short term of approximately 2-3 years whilst the funding is needed for a much larger duration resulting in Asset-Liability mismatch for the banks. Also, unavailability of long term funding can lead to larger repayments during initial years which adversely affect affordability of services. Infrastructure projects also pose risks in form of information asymmetry to project financers. For Example: In the case of Delhi Noida Toll Bridge project (1997), the initial traffic projections did not materialize leading to the debt re-structuring. Shortfalls in the returns from the project resulted in a corresponding increase in project cost. As a result, the initial capital cost of Rs. 408 crore, as determined by the concessionaire, had risen to Rs. 953 crore as on March 31, 2006.
FOREIGN EXCHANGE RISK
SUPPLY OF RESOURCES
Internal or external macroeconomic shocks such as the sharp devaluations in Mexico in 1994, Brazil in 1999, and Argentina in 2001— significantly undermined the financial equilibrium of firms that were borrowing money from US. Since revenue is collected in local currency but investments equity, and debt are usually in foreign currency such as U.S. dollars, it poses a threat to the financial viability.
One major operating risk in the power sector is the fuel supply risk. Hence, it is in best interest of the producer to negotiate satisfactory fuel supply agreements, which would also help in getting easy finance for its projects.
For example: Delhi-Gurgaon expressway’s finance was arranged by SREI International Finance Ltd. at an estimated costof Rs10bn. SREI's shareholders include the International Finance Corporation, Washington, (a World Bank Group Company), FMO (owned by the government of Netherlands) and DEG (owned by the German government. BUREAUCRACY GOVERNMENT
Public Sector always has an upper hand when it comes to evaluating the performance of Private contractor in a PPP. The private sector is often reluctant to engage with the public sector due to the fear that after the end of the ruling party’s term, a new government could renege on the contract, and that dispute resolution mechanisms are excessively bureaucratic and biased. For example, in a recent toll bridge project in Karur in Tamil Nadu, the new government cancelled the concession agreement on a flimsy pretext of a damaged approach road without compensating the concessionaire.
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For Example: The Mundra UMPP granted to Tata Power, is based on imported coal, of which a significant portion is likely to be sourced from Indonesian coal producers. The company is likely to allocate only a portion of the coal from those fields for Mundra, while the remaining coal is slated to come from similar deals that the firm is scouting for in Australia and South Africa to diversify the fuel risk. Besides above mentioned issues, there are a few more issues like obsolete technology, financial burden from the past, renegotiation, unreliable demand estimates, price cap regulation causing problems in achieving financial closures, lack of Government support during change in goal post etc. which can impede the implementation of the project. These implementation issues if dealt with proper monitoring and control can give a boom to the GDP of the country as it enters a high growth phase. Looking at the current scenario and future growth potential, we expect Indian Infrastructure Sector to outperform the trends in long term thereby providing excellent investment opportunities in the sector.
An Interview with Mr. Benny Augustine Director – Human Resources, Unisys India In this issue, we talk to Mr. Benny Augustine, Director - Human Resources, Unisys India. Mr. Benny Augustine has over 18 years of experience in leading Human resource function. During his interaction with Pratibimb, he shared his views and experiences on HR related issues with us. We are extremely thankful to him for his precious time. Mr. Benny Augustine in conversation with Pratibimb: Q1. How do you manage to retain the best employees given the high rate of attrition in the Indian IT sector? Ans: Employees leave the company for 3 major reasons: Compensation Growth Relationship with immediate supervisor or manager If the employee is assured of personal growth he would not leave the organisation. If the employee grows in the organization his salary increases automatically. But some employees may still leave due to other external factors such as relocating due to personal reasons like marriage or some choose to discontinue their job and choose an alternative career. Nonetheless so long as the job offers growth the employees will definitely continue with the company.
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Q2. Some companies have come up with a new policy where they are allowed to bring their personal laptops and flash drives to work. What is your take on this? Ans: Consumer technology has vastly changed the way we communicate and access information, allowing us to do it anywhere, anytime. Inevitably, we now expect this flexibility to extend to our work. Employees want to use the same powerful devices and applications in their professional and personal lives to stay connected and productive. The use of consumer-style technology in the workplace is increasing rapidly. This Consumerization of IT is more than simply allowing employees to use smartphones in the workplace or to bring their own personallypurchased PCs and devices to work, also known as “bring your own technology” (BYOT). Consumerisation also includes the use of applications such as Facebook, Twitter, wikis, blogs and other social media with consumer roots in the workplace for communicating and collaborating with colleagues, partners, citizens and customers. The Unisys Consumerization of IT study, conducted by IDC, looked at the trend from the point of view of both employees and employers from large organizations (94% with more than 1000 employees globally). It is based on two separate but related surveys across nine countries.
One surveyed more than 2600 employees and the other polled more than 560 executives and managers. The study found that employers recognize the potential of consumerization. However, they are aware also of the risks of allowing consumer-style technologies into their IT infrastructure but many are yet to take steps to proactively manage the phenomenon in their workplace. The use of consumer-style devices and applications in the enterprise can result in increased security risks if they are not managed appropriately. Enterprise IT departments need to pick up the pace in deployment and support for the new technologies, harness the power of applications, and do so with the same safeguards and reliability required for their existing missioncritical systems. If organizations are not aware of the technologies being used in their workplace and how their IT infrastructure is being used, they risk not having adequate security measures in place and not being able to provide adequate IT support for employees. There may also be legal issues created concerning employers’ rights to access business data on employee-owned devices and HR issues created concerning employees’ appropriate use of these technologies. It is important that employers get a lay of the land – find out what technologies are being used, and what employees want to use in order to be more productive. Evaluate those from both the technology and people perspectives. Then, go on to determine what technology would make the different roles in the workforce more productive. Work out how the organization can support the usage of the technology – the wider the range of technologies requiring support, the greater the strain on the IT department. From the people perspective, it is important to ensure that corporate policies cover warranties and insurance for employee-owned devices, company expectations with regards to access to and sharing of company data, and IT security requirements. Finally, educate employees to make sure they Pratibimb | November 2011 | 17
understand what is expected from them in terms of the use of the technologies and their behaviour. Q3. What are the kind of flexibilities provided to employees in Unisys in terms of job timing and durations? Ans: Unisys supports employees and facilitates work-from-home schemes and even provides parttime job opportunities. This is done such that the goals of the organisation and the needs of the employees are both met. Some employees are allowed to work 2-3 days a week and some work for fewer hours a day. Many of these are handled on a case to case basis depending on the job requirement and the employees’ comfort. But most of the jobs in Unisys are still done on a full time basis. Q4. When employees work from home, how do you motivate such workforce and make them believe that they are a part of the organisation? Ans: From a monthly update from the MD’s desk to department level newsletters, we have plenty of organizational communication directed at employees to keep them motivated and feel connected to the organisation. We have conference calls and managers contacting home-based employees on a regular basis. This helps the organisation in taking stock of the progress made and to resolve any existing issues. Add to that these employees are always welcome to come to office on a weekly basis and seek help if need be. Q5. You have had the experience of coordinating teams in Germany and Singapore. Did you find any difficulty in handling these teams when you were based out of India? Ans: Apart from some cultural shift there was not much change in the outlook of the employees towards work. We used to keep in touch with all the employees using telephone and video conferencing. So long as you are connected and provide support there is little that can go wrong. Q6. What is the one major challenge HRs in
Indian IT industry faces? Ans: The one main challenge the IT industry faces is getting the people with the right skills and retaining them. Q7. How do you encourage and nurture innovation in your organisation? Ans: The organisation as a whole has an open mind towards receiving and implanting innovative ideas. All suggestions are accepted and acknowledged. This nature has been woven into the company culture and anybody is welcome to share his/her opinion and ideas with their superiors. Employees can send a mail or can even go personally and talk to their managers. In fact, we have a dedicated portal where employees can officially submit their ideas about anything at all â€“ from facility improvement suggestions to business best practices. Q8. How do you ensure increased participation of employees in the organisation? Ans: This is an inherent part of the culture of an organisation. In Unisys, we have a recognition based culture where commitment is richly awarded. No culture can be built overnight. Providing learning opportunities and chalking out well defined goals for the employees help in improving employee participation in the growth of the company. Q9. There is a belief that increasing diversity in companies, by improving gender ratio, will help improve the functional effectiveness of the companies. What are your thoughts on this? Ans: Diversity is critical to bring in more creativity and innovation. Diversity is not restricted to just gender, having people with different backgrounds and point of views help improve the organisational thought process. Just as a salad with an assortment of vegetables looks and tastes more appealing, an organisation with rich diversity works with greater effectiveness.
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Q10. How do you instil ethical beliefs in your organisation? Ans: We have a strong ethics programme in our organisation. A mandatory online ethics training programme is implemented in Unisys. All new employees undergo this training programme during their induction phase and all employees are expected to take a refresher every year. In addition to all this, senior managers in Unisys always walk the talk. This brings in clarity and makes all the processes transparent. This instils the right attitude amongst employee towards work and nurtures healthy competition. Q11. What do you believe, will help a fresh MBA graduate to make it in the world of business? Ans: His/her understanding of the fundamentals should be sound and he/she should have the right attitude towards work. He/she should be flexible and should have an inclination towards learning and facing new challenges. He/she should be ready to take charge and be able to eventually lead a team.
Is Africa the new market for the future?
by Shaikh Ashfaque Kasim, JBIMS Mumbai
This is not the first time that Africa has been in the eye of the storm. The world once witnessed the wild scramble for colonial domination of Africa, by Europeans. Once they realized the immense opportunities offered by the vast resources (in the form of natural resources and manpower) available in Africa, it was viewed as a potential gold mine waiting for Europeans to tap into. History seems to repeat itself. Most people would frown at the idea of investing money on a business venture in Africa (excluding maybe South Africa and Egypt). The continent is riddled with problems that can break the back of anyone who has the audacity to enter this arena. UN High Commissioner for Human Rights Navi Pillay tells of her experiences of whole communities being annihilated by hatred. At other times it is in the avatar of a demon called inflation. Businessmen are waiting for Africa to be in an economic situation where there is sufficient number of economically viable consumers, when the economic situation of the country is conducive to new business development, when sufficient infrastructure support is provided by the state, etc. Countries like Egypt and South Africa are already at this stage and more are on their way to that position. But a large part of Africa is still a long way away from that stage. We can see the Pratibimb | November 2011 | 19
opportunities that are open to us presently in the development of Africa. We can sustainably cultivate our business goal simultaneously with the improvement of the African states. Any development in Africa can only be built on a foundation of political stability. That is a difficult task in itself, with the region facing abysmal social and economic divide, dysfunctional governance, and rampant corruption at both administrative and political levels and alienation of one indigenous tribe by another. The UN is the sole entity which is perfectly suited to lead this task by promoting human rights, development, peace and security by activities like setting up of democracy and an impartial legislative system. This task can be assisted to a large extent by private enterprises. For example, supply of voting machines, election management, infrastructure, development related consultancy and construction expertise, provision of education, etc are prime sectors which offer opportunities in sustainable development. The keyword here is â€œsustainabilityâ€?. These tasks should not be just about making money but also to uplift the entire society as a whole by the provision of employment opportunities to the local community. Basically what you need to do is to align your business goal with the betterment of the society.
Mother Nature has endowed Africa with an abundance of natural resources in the form of forests, wildlife, minerals and manpower. Access to these resources through partnerships with the African states supported by sustainable business models will significantly reduce the financial insecurity that most of the countries in Africa encounter today. But some countries in Africa have already gone down this road, for example, through extraction of crude oil. But their state has not improved much. This is due to the fact that those countries do not have any policy for mobilization of domestic and external financial resources to direct them towards domestic investments like infrastructure, education, etc and in turn build productive capacity. Other policy issues include dependence on a single source of income. This might be enough for short term growth, but economic diversification of the sources of growth and income should be the mantra for sustainable growth. This will help them to absorb the impact of shocks on their fiscal performance from external or internal factors. This will in turn open up more opportunities for business enterprises to pursue and also help the local population to earn a living across generations. Some of the other potential avenues for economic diversification are as following: • Infrastructure construction The government should reach out to the populace with the delivery of basic services such as health care, rural connectivity, drinking water supply, etc. The idea is to connect the people with the state. Once this happens there will be active community participation in the development process. This will provide opportunities to private construction companies provide employment to the local population and additionally reduce the lack of market access and supply side constraints which are limiting Africa’s export growth potential. • Tourism –The core issue here is the lack of a dedicated body with adequate monetary resources combined with poor infrastructure and under qualified staff. The direct and indirect laborPratibimb | November 2011 | 20
intensive nature of tourism should be used as a tool to address the problem of unemployment. The governments should bring in private sector involvement to bring in the necessary expertise and investments to effectively exploit this sector. • Agriculture – Majority of the poorest people in Africa live in rural areas. They depend on agriculture and related activities for their livelihood. Agencies like the UN International Fund for Agricultural Development (IFAD) are already helping this sector by financing agricultural development projects. But the involvement of private enterprises in growing, processing, packaging and transport will strengthen this sector even further. But control needs to be maintained by the governments to satisfy the domestic demand before exporting to foreign markets. Businesses like edible oil manufacture offer huge prospects in Africa. For example, India imports eight million tons of vegetable oils a year with crude palm oil alone making 6 million tons. This shows that there is a huge scope in markets like India. Multinationals have already shown big interest in this business. But Africa, I feel can be competitive in this sector having the advantage of its lower economics. But initial investment will be required to set up the necessary infrastructure • Energy – One of the core ingredients for any economy to grow is the availability of energy sources. But the investment requirement to boost energy infrastructure is so enormous and beyond the financing capacity of most African economies. This can be solved by regulation of the energy sector and encouraging private sector participation in the energy sector. African countries, blessed with sunlight all year round, can tap into solar power based free and clean energy to light up remote and isolated homes that have no link to their national electricity grid. This again opens up opportunities of promoting sustainable technologies in rural India to eradicate poverty through ventures along the lines of Selco in India by Dr. Harish Hande, Magsaysay Award (2011) Winner with the support of appropriate financing support.
• Education - Education has the power to transform society in a single generation. It provides the children with the protection that they need from poverty, exploitation and disease and give them the knowledge and skills and confidence to reach their full potential. Agencies like UNESCO and other private NGOs are running education programmes across Africa. Private Institutions can enhance this effort by supporting the state in setting up the required infrastructure. If private players are able to do a good job, there is no reason why the effort doesn’t get funded by the local government, humanitarian agencies or NGOs. But the question still remains why decades of Western aid have done little to ease the suffering in Africa? As I see the situation, financial aid has never been the problem. It is the mismanagement of the funds and the non-inclusion of the
sustainability factor who are the culprits. African countries should collaborate for a coordinated approach to monitoring based on mutual accountability between African countries, with the funds being distributed from a central committee of African nations. Multiple private players should be given the opportunity to compete with each other to win the contract for implementing the development projects based on a fair basis. Private players are much more suitably poised to effectively implement the project with its domain specific resources and expertise. Much work needs to be done to replicate an India or China in Africa. All the ingredients are there. All it now requires is the an effort in the right direction.
Inviting Articles We are inviting articles from all the B-schools of India. The articles can be on any field of business from Marketing, Finance, Operations, HR to Systems. You can send us articles on:
Recent developments or trends in any of these fields
Articles covering latest trends, innovative practices, strategies, etc. in the global perspective
We also invite articles on management thinker similar to the current section
Apart from above, creative works in relation to any of the fields will be equally appreciated
The best entry will receive a letter of appreciation and a cash prize of Rs 1000/-. The format of the file should be MS Word doc/docx. Articles should not be more than 2500 words. The last date of receiving all entries is 10th November, 2011. Please upload entries at http:// www.tapmi.edu.in/student-life/pratibimb/participants-submission with file name as BAC_<ARTICLE NAME>_<INSTITUTE> by 10th November, 2011. Best Article: Deepak Panwar, FMS Delhi Congratulations!! The winner will receive a cash prize of Rs. 1000 & a letter of appreciation.
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Mr. Jacob Jacob (PGDM 1994-1996) Alumnus of the Month â€“ November 2011 The Alumni Affairs Committee (AAC) is pleased to announce Mr. Jacob Jacob (PGDM 1994-96) as the Alumnus of the Month (AoM) for November 2011. Mr. Jacob is a seasoned HR professional with over 15 years of experience and his experience is varied across HR Consulting, International HR & Start Up HR. His core strengths lie in the areas of Change Management, Performance Management, Competency mapping & its applications, HR strategy & Organizational Design. He currently serves Apollo Hospitals Enterprises Ltd as their Chief People Officer. At Apollo Hospitals Enterprises Ltd., Mr. Jacob is striving to create a mechanism of robust service delivery in Healthcare through innovative and robust HR initiatives. Mr. Jacob has also worked with organizations such as Feedback Ventures, Emirates Airline in Dubai & Oberoi Realty. He has had good exposure in various areas within the domain of HR which include HR Strategy & Design, Organization Culture assessment & design of effective HR systems, Development & implementation of a Performance Management System, 360 Degree feedback design & implementation etc. Mr. Jacob holds a Bachelors degree in Business Management with specialization in personnel management from SDM College, Mangalore, prior to his PGDM at TAPMI. He has specialized in HR from TAPMI and joined Core Healthcare, Ahmadabad through campus placement. Mr. Jacob has spoken at various conferences and has presented various papers on topics such as connecting people & performance. He was recently recognized as one amongst the most powerful HR professionals in India by the World HR Congress and has also received the HR Leadership Award at the Asia Pacific Summit. On the personal front, Mr. Jacob likes travelling, watching movies and reading. Mr. Jacob fondly recalls a lot of kaleidoscopic memories of TAPMI which include the spot quizzes in QT which was never a favorite with him and the stress that it used to create and of course the wonderful hostel life. He recollects how active the hostel would become after 10 pm every night. The Alumni Affairs Committee wishes Mr. Jacob Jacob all the very best for his future endeavors. by Alumni Affairs Committee
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Social Networking: Adding new dimension to HRM
by Sauvik Sarkhel, XIMB Bhubaneswar
The advent of the social networking sites revolutionized the way the youth connected themselves with the whole world. These sites started with making their place in the world by making a place in the lives of the youngsters. But today they have come a long way and are not just restricted to providing a platform for the youngsters to make friends, share similar interests, or any such other activity, but they have also stated impinging with the employers across the globe. They are increasingly being used by HR managers for fulfilling several professional purposes such as recruitment, maintaining relationship with employees, and sharing knowledge etc. The use of social networking sites have become an integral part of the recruitment procedure by many HR managers. The employers make great use of these social networking sites for selecting the suitable candidate for their organization. The social networking sites provide a large number of options to chose from and also make the process easier and better. The companies predominately depend upon these social networking sites to hire IT/ITES professionals. They help them to find the right candidate/s based on their requirement of the skills as well as location. Many HR managers affirm the fact that these sites are extremely helpful when they are seeking for the talent outside their own country. It Pratibimb | November 2011 | 23
is a difficult task for an organization to find a candidate with a specific skill set for their office based in some other country, but the social networking sites work wonders for the employers in such situations by providing a platform to locate, judge and select the right candidate for the organization. The social networking sites are also helpful for the employers in reaching the people working at the middle and senior management level who have acquired a niche of skill set and are extremely proficient in their profession. Some employers might not be using the social networking sites considerably for the recruitment purpose, but they are using these sites to check the credibility of the candidates. They may confirm the basic things about the candidate through his profiles on such sites. Maintaining employee relationship The social networking sites enable the HR manager in developing a healthy relationship between the employees and the organization. The social networking sites work as a platform where employees can actively discuss about their experience with the organization. They may also talk about their expectations and/or grievances. The frequent feedback from the employees enables the HR
managers to discuss and mutually sort out many employee related issues. Sharing the knowledge The social networking sites not only help the HR managers to manage the functions inside their organization, but they also provide them a platform to interact with their counterparts across the globe. The HR managers actively participate in such discussions to share their knowledge as well as experience in their field of expertise. These sites are increasingly becoming popular among the HR managers to discuss the current events, trends, and innovations in the HR industry. The social networking sites are therefore, helping the HR industry to take a new shape by gaining contributions from the HR professionals across the globe. The other side of the coin Although the social networking sites are doing wonders for the HR industry but as there are two
sides of a coin, there are certain drawbacks as well of using this medium for the vital functions of the HR professionals. The biggest challenge for the HR managers lies in dealing with fake profiles which might mislead them and make the hiring procedure much more difficult. Sometimes employer may reject a potential candidate because of his profile which the candidate have made for maintaining personal relation but not professional. It is important for the employers to be careful while making use of the social networking sites for the recruitment purposes. What lies in the future? Social networking sites are keen on corporate world penetration and seem to be getting successful as well. The transformation is not happening with a great pace but the trend of usage of the social network media by the HR professionals is definitely going to stay and progress further because of the number of benefits it provides.
Route to Market The market has always been unpredictable for the companies. This holds more significance in the case of international brands trying to enter new emerging markets. Every brand wants to be recognized globally so that they can tap the new markets easily. The role of marketing managers in this age of globalization becomes more important in providing the companies with correct strategy to enter new market. We give our readers a platform to experience this challenge through “Route To Market”. The primary objective that the participant is expected to fulfill is to provide a “Market entry strategy” for an international brand/product into the Indian market. The overall strategy would be divided into three stages: Rules:
Brand for which entry strategy needs to be crafted is “V8 Natural Fruit Juice ”
Document size should not exceed 4 pages & a maximum of 2 members are allowed in a team
The participant is expected to justify his stand – point in each deliverable
Each stage should be clearly mentioned under sub – heading
Upload entries with file name as “RTM_<TEAM NAME>_<INSTITUTE NAME>” at http:// www.tapmi.edu.in/student-life/pratibimb/participants-submission by 11:59 pm, 10th Nov, 2011
The winner will receive a cash prize of Rs.1000 /-
Winning Entry of October Edition: “Team BIZWIZ” from ISB Hyderabad whose members are Piyush Bhandari and Gautam Gulati. Congratulations !! We thank all the participants for their effort. The entries for this contest have been judged by Prof. Vinod Madhavan, TAPMI.
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World of Stealth Advertising! by Sumedha Sobti, IIM Kozhikode
ment while casually watching the product. It also increases brand awareness if not brand liking. So the next time consumers step in a Rayban store to purchase a pair of glares, they might want to try Predator sunglasses adorned by Will Smith in ‘Men in Black’.
David Ogilvy rightly stated, “A good advertisement is one which sells the product without drawing attention to itself.” Every day a zillion commercials flash across our grey nodules, from advertisements to bill boards. Did you ever realize that you actually drink, eat, breathe advertisements while watching your favorite movie or playing your favorite game online! Let’s see what I mean with that. Well, when an advertisement takes a masquerading form of implicit/explicit representation of a brand name, logos or other trademark within media vehicles in order to increase consumer interest and instant recognition at the point of purchase, it is called product placement or stealth advertising. Clever marketing techniques come into picture when the marketers make sure viewers don’t switch channels during the long commercials. So the trick is to contextually fit the product seamlessly in the scene yet not making it the focus of attention. It is smoothly woven into the viewing experience. This predominantly means adding a sense of realism. The buzz that product placements create for consumers. Many reasons make product placement a better fit as compared to the usual long advertisements.
No interruptions make the viewing easy for viewers as they needn’t switch channels during their favorite TV soaps or during cricket matches. The product pragmatically blends in with the context most of the times. Sense of celebrity endorsement gives the viewers a sense of indulgence and involve-
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Subconsciously the product message seeps in and it is not filtered or weeded out by the viewer’s brain as in the case of usual advertisements which seem to be defensive as the viewer’s constantly change channel as and when advertisements crop up.
Product placement fitting in the context of advertisements. Video games like Crazy taxi have locations like KFC and Pizza Hut to drive to. Series like How I Met Your Mother show brand endorsements like Gucci and Louis Vuitton. Rolex, Seiko and Omega are the main watches sported in the James Bond movies. Logos of life insurance policies get displayed during the cricket matches. Various products ranging from electronics like mobile phones to laptops, from FMCG products to sportswear and the medium changes from video games to songs, reality shows to sport events, but TV programs and movies top the charts in product placement where there is interminable parade of designer label fashions. Consumer behavior and Semiotics Long advertisements are becoming extremely pervasive; consumers tend to block them out due to boredom. The subliminal perception affects the mind with stimulus that product placements create.
Implicit v/s Explicit product placement Implicit: The attributes of the product are not explicitly described. E.g. The movie ‘You’ve Got Mail’ shows Tom Hanks and Meg Ryan using Apple Powerbook to exchange mails. The movie Superman displays a Marlboro van in a backdrop.
Explicit: The attributes of the product are explicitly described. E.g. Oreo, America's Favorite Cookie would be shown in the popular TV show ‘Friends’ elaborating snacking-experience with friends.
With product placement, the traditional on-your-face-advertisements are being replaced by feel-goodfactor. One of the theories of product placement is Von Restorff effect/ Isolation effect which proposes that the more a particular product is seen, the more likely a consumer is to recall the product or brand while making purchases. Marketers work on the concept of Semiotics in order to create symbolic linkages from reel-life characters and products to real-life characters (i.e. consumers) and products.
Sensory Stimulus Sensory Receptors Exposure Attention Interpretation
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Well, I don't know about you, but each time while watching a movie, I see a Jimmy Choo pair, I hear my subliminal state saying 'Oh! My God!' So the next time you’re watching a movie, playing a game on X-
Box tilt sensor or you happen switch on your television to watch your favorite series, remember that later you might purchase what you see, and that my friend, thanks to product placement, could be attributed to ‘subliminal effect for impulse purchase!’
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Global Financial Instability
by Nishaat Farheen | Pooja Lunia, TAPMI, Manipal
Global Financial Instability Fears of a double dip recession are felt by everyone, even those who are not even aware of the reason behind the recession. Stock Markets of most of the countries have become more volatile indicating heightened awareness for global events. News papers show signs of global distress. But why is this happening? The US The subprime crisis which was a result of low regulation and uncontrolled authority given to banks to raise subprime house loans had send not only the US but the entire world into a gloomy recession. With the failure of Lehman Brothers on 15th September 2008, the concept of “too big to fail” is no more held true and the fear of default has gone deep within the minds of the people. In 2008, the US had bailed out financial institutions; which resulted in its total debt reaching its debt ceiling. But US needs debt to meet its fiscal deficit which has been increasing at an alarming rate because of its ongoing wars, high military expenses, high medical expenses etc. Had US not been able to take more debt to support its economy, the whole world’s economy would have slowed down. So in 2011 the US had increased its Pratibimb | November 2011 | 28
debt ceiling much to the relief of the global markets. As can be seen from Table1 below, the total debt as a percentage of GDP is around 93.2 % which is quite high. Amidst all these, the stock markets have been going up and down. The stock market even went down when the US announced “The Operation Twist” which was a measure to boost the economy by reducing the fiscal deficit. By conducting operation twist, the Fed wanted to reduce the long term interest rates so that it can reduce its interest expenses. But the short term rates were not increased because the US had already committed to keep it near zero. So, in effect the term structure was becoming flat. This will make it even harder for banks to make money. Recently, banks like Bank of America, Citigroup and Wells Fargo were downgraded because of increased risks and lower contagion effect. All these point to the fact that financial markets in the US are unstable and have lost confidence in the system. The European Countries The world had not even recovered, from the aftermath of the US Lehman Brothers crisis of 2008, that it was faced with yet another financial
turbulence of European debt. While the US was going through its own set of problems like ballooned debt, high unemployment and low growth rate, some European countries were on the
As can be seen from the table below, the debt as a percentage of the GDP is 142.8 % for Greece and as high as 220.3% for Japan. Japan has taken large debt to support reconstruction following the
Debt as a % of GDP 2000
Table 1 : Debt as a percentage of GDP for various countries earthquakes. The Emerging Market Economies
Source: Trading Economics.com verge of complete bankruptcy. Greece, Iceland, Spain, Portugal are some of the European countries which have huge sovereign debt which may lead to a default. Greece is on the verge of defaulting as it cannot take more debt to service its existing debt. So, to save Greece EU is formulating a financial package. Also, there is immense care taken so that other Euro zone countries do not fall apart and the EURO currency is sustainable. Pratibimb | November 2011 | 29
The emerging market economies are not insulated from these phenomena. Countries like India and China depend to a great extent on the US and the Europe for their imports and exports. Also, the economies of these countries are so interconnected, thanks to globalization, that a slowdown in one country can affect other countries as well. From the past few years data of World International Growth (refer to figure2), it can be seen that GDPs of all countries are closely correlated. Thus, if US or any European country suffers a crisis then the effect also gets transmitted to the emerging nations. But owing to the stronger growth prospects, growth rates of EMEs even after dipping will be higher than that of the developed economies and thus would continue to support the worldâ€™s GDP growth rate. Despite the slowdown in their economies, emerging markets would keep attracting funds from FIIs as they would be able
to generate higher returns on investments in such markets as compared to the developed markets. But EMEs are facing some new challenges like strong domestic demand, increased credit growth, high inflation and sudden capital outflows. Like
to raise funds even from other markets. Investorsâ€™ sentiments have been hurt worldwide. Capital investments has slowed down. Banks have become more skeptical about creditworthiness of borrowers because of uncertain economic conditions. So, even potential borrowers face difficulty in getting loans. Thus, the intermediation link between issuer and investor has weakened. All these have led to high global financial market instability as the market is not being able to perform its role of intermediary.
This will hamper the economic growth of countries and thus the entire world. Proper Fig. 2: Source: World economic outlook, 2011 of IMF intermediation leads to multiplying effect on the many other countries, they are also exposed to the economy leading to economic development. When risk of high oil prices which add to their worries. crisis occurs, financial intermediaries especially In the present scenario, though EMEs are better banks fail to do their job. off than their developed counterparts, but nonetheless they cannot run away from facing the Stabilization of Global Financial Markets same problems like developed nations in the To stabilize the financial markets around the future if the overheating continues in their world, the problems in US and Europe must be systems. resolved. In order to do that, steps should be taken to reduce the debt level of these nations as well as Financial Instability to service the existing debt. Following are some of Because of the above stated situations, we can say the recommended strategies that could help in that the global financial markets are faceing stabilization of the financial markets worldwide. tremendous pressure as the fear of defaulting runs Fiscal Consolidation high . What was before just a private phenomenon has High fiscal deficit has been observed as a common now become public with the rising need of bail out characteristic of all the economies under crisis. governments. As reported by IMF in its report of Interest payment towards the existing debt forms a Global Financial Instability, September 2011, the major portion of Government expenditure for debt credit risk from high-spread countries is estimated ridden countries. This can be seen from the data of to have had a direct impact of about â‚Ź300 billion Fiscal Deficit (as percentage of GDP) over the on banks in the European Union since the past few years. outbreak of the sovereign debt crisis in 2010. These risks got amplified due to interconnection between different markets. The banks are not able Pratibimb | November 2011 | 30
Fiscal consolidation refers to the cut down in government expenditures so that at least it can pay the interests on time and thus avoid any further
credit downgrading of itself. Integrated Solution As mentioned before that the countries are highly
them are exposed to different fund markets. Thus if a bank fails the whole economy poses the threat of slowdown. So, steps should be taken to isolate commercial banking from investment banking so
Fiscal Balance 2007-11
Source: Trading Economics.com inter linked, there arises the need for integrated solution which can perform actions in coherence and stabilize the whole financial system. A probable step for solving this problem can be formation of independent international regulatory body. It should be free from the political biases. It should reduce regulatory arbitrage and bring in better transparency. It should introduce uniform standards for different Rating Agencies. It should be authorized to regulate inflows and outflows across the globe and take necessary steps to avoid crisis as and when required. Enhancing Robustness of banks Banks are the most important inter linkage between the issuers and investors who perform the channeling of funds in appropriate manner. Banks are the first to get hit by any crisis as majority of Pratibimb | November 2011 | 31
as to protect the depositorsâ€™ money. Another step could be to put stringent regulations for maintaining apt capital adequacy ratio. This would include assigning proper risk weights to the assets by the regulators. Conclusion If suitable measures are not taken immediately, the world might get into another deep recession. And moreover, further destabilization of the whole global financial structure may take place. As per the IMF report on Global Financial Stability for Sep 2011, time is running out to tackle weaknesses in the global financial system.
Follow us on: Contact Us: email@example.com / firstname.lastname@example.org Team Pratibimb TAPMI Post Bag No. 9 Manipalâ€”576104 T- +91 7204494284 Pratibimb | November 2011 | 32