FROM EDITOR’S DESK
Dear Niveshaks, Niveshak Volume IX This month we bring to you Race for the Summit – Vod an Idea as our special cover- ISSUE X age. The Telecom Sector of India is creating buzz after buzz in the markets of the Na- October 2016 tion and the World of Finance. With the merger of Reliance Communications with Aircel and inception of Reliance Jio, it’s the turn of Idea and Vodafone to upsurge the thrill in the Telecom Sector of the Country with an estimated $23 billion merger between the two heavyweights of the Industry. However, even with the merger, one of Faculty Chairman their major shortcomings will be the lack of the optical-fibre reach to the customers. Prof. P. Saravanan Hence, how does this merger unfold for the telecom giants is yet to be seen! The government recently launched a very ambitious Direct Tax Dispute Resolution Scheme in the budget 2016-17. However, the scheme failed miserably garnering just THE TEAM around Rs.1,200 crore as compared to around 2.6 lakh pending tax cases that have close to Rs.5.16 lakh crore locked in. None of the high-profile retrospective tax cases Akshay Kaushal that involved firms like Vodafone & Cairn Energy opted to settle under this scheme. Anand Mittal Emphasizing on infrastructure development, India is also seeking a funding amounting to around $2 billion from the NDB (New Development Bank) for its Arjun Bhargava infrastructure projects and has urged the multi-national bank for a faster disburse- Dhruvika Chawalla ment of loans, as per a statement released by our Finance Minister, Mr. Arun Jaitley. Girraj Goyal On the magazine front, the Article of the Month talks about the revolution of impact investing in India. Impact Investing has witnessed an unprecedented rise since 2007 Pratibha Sapra and is expected to continue for the times to come. However, the responsibility to Sankeerth Bondugula drive change for social betterment cannot be left on the shoulders of the government Saurabh Gupta alone. The corporate houses need to be equally responsible if we want to make an impact at the bottom of the pyramid in the coming years. In the FinSight, the author Vinay Gundecha aims to discuss one the most important question of our time, ‘Is there any alternative to the China model of growth for India?’ With the global economy going through a massive transition, the world’s eyes are set on the BRIC and MINT countries, waiting All images, design and art- for them to emerge as the new economic superpowers. However, with China slowing work are copyright of IIM Shil- down and India showing no supernormal growth as expected from it, the economists long Finance Club and industrialists are cogitating over and over again, as to what is in store for India after all. In the FinGyaan section, the author talks about the harmful effects of low Finance Club interest rates on an economy. The author starts by asking a few simple questions; Indian Institute of Manage- How low is low? What is low for a mature and developed economy and what is the ment definition of low for an emerging economy? Then he moves on to discuss the impact Shillong of low interest rates on banks, financial institutions and markets. The classroom section talks about Purchasing Power Parity (PPP) which is an indicator of the value of currency. It will help the readers in developing a perspective by explaining the www.iims-niveshak.com concept as well as its practical application. Finally, we would like to thank our readers for their immense support and encour- agement. You remain our prime motivating factor that keeps our spirits high and gives us the vigour and vitality to keep working hard. We hope you had a great month and wish you the best for the new one.
With all your blessings Stay Invested! Team Niveshak
Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever. CONTENTS Niveshak Times Cover Story 04 The Month That Was
Equity Research 10 Infosys Ltd.
Article of the month 12 Investing for more than just money 15 Race for the Summit: Vod an Idea
FinGyaan 19 Negative Effects of low interest rates on the economy
FinFame 23 Naina Lal Kidwai: A dealmaker FinView in India 30 Eric Leurquin, Professor at Ish- ec Brussels Management School FinSight 26 Is there any alternative to the China model of Growth in India? Classroom 31 Purchasing Power Parity 4 NIVESHAK www.iims-niveshak.com The Niveshak Times
Tax dispute scheme able to garner only existing market rates, and may also facili- Rs.1200 crore, receives a tepid response tate further rate cuts by commercial banks, The tax dispute resolution scheme intro- something which was not being seen lately duced by the government with an ambitious due to the absence of policy rate-cuts by The Month That Was outlook failed to achieve its intended objec- the RBI. tive, with the scheme garnering just around Market analysts and experts expect the Rs.1,200 crore. None of the high-profile RBI to further hold the policy rates in its retrospective tax cases that involved firms quarterly monetary policy review which is like Vodafone & Cairn Energy opted to settle scheduled to be held on April 6th. RBI, in its under this scheme. last policy review in February had changed Finance Minister Arun Jaitley had announced its stance from accommodative to neutral, the Direct Tax Dispute Resolution Scheme in citing persistent inflationary pressure. With the budget 2016-17. The scheme was intend- this latest reduction in the interest rate, the ed to not only settle disputes concerning PPF rate has come down to 7.9% whereas retrospective taxes, but also bring to an end the interest rate for a one-year time-deposit around 2.6 lakh pending tax cases that have has come down to 6.9%. close to Rs 5.16 lakh crore locked in. The government had announced its inten- The scheme provided waiver of interest & tion to review small savings interest rates penalties if the principal amount involved every quarter instead of doing it annually in tax cases was paid. It opened on June 1, last year itself, and these reviews were said 2016, and closed January 31, 2017 after an to be based on the yields of government extension on the end date was given. None bonds of the previous three months. of the firms which were involved in cases This linking of the interest rates applicable pertaining to retrospective tax came forward on small-savings schemes to the yields of to settle their respective disputes by paying government bonds would, in all probabil- the principal amount under the provisions of ity, act as an incentive for the commercial the scheme. banks to pass on the benefits of the policy The government through this scheme was rate-cuts to the general public through hoping to settle the major retrospective tax lower lending rates on their loans. Banks cases which the Vodafone Group & Cairn En- have lately been blaming the high cost of ergy of UK are currently facing. The govern- deposits for their high short-term interest ment also expected about a-third of certain rates, and have been citing this as a reason other tax disputes that are currently going on that prohibits them from passing on the to be settled under this scheme as well. benefits of any policy rate-cuts to the bor- The ambitious scheme introduced by the rowers. government during last year provided for waiving of interest & penalty for retrospec- Exim Bank likely to raise $3 billion from tive tax cases if the companies under ques- overseas markets tion withdrew all of the appeals that they had The Export Import Bank of India (Exim against the government across all judicial Bank) is planning to raise up to $3 billion forums. from the overseas markets during this fiscal, as per a statement by the bank’s official. Plausible Rate cuts by banks on account of Exim Bank is known to borrow money from lower interest rates on small savings schemes overseas resources, depending on the mar- Recently, the government announced inter- ket conditions. est rate cuts on major small saving schemes The Bank funds the long-term projects such as PPF, Kisan Vikas Patra & Sukanya spanning Africa, SAARC countries and www.iims-niveshak.com NIVESHAK 5
The Niveshak Times Month That WasThe
and some countries in the far-east. Out of statement released by our Finance Minis- its total funding every year, half goes to the ter, Mr. Arun Jaitley. He also stated that the African nations. The bank cites Bangladesh, NDB – an organization which was set up by Sri Lanka, Nepal and Myanmar as another the BRICS nations around two years ago strong areas for funding in the Indian -- ´must be alive to the role envisioned for neighborhood. it by its founders´, and that India still has a The bank has lately been trying to promote huge unmet need for infrastructure invest- Indian investors to do business in Africa in ment, which is estimated to be around Rs the sectors of power, renewable energy, 43 lakh crore for the next five years. railways, roads and agriculture. The estimated unmet demand for invest- ment in infrastructure projects in emerg- Government planning to change the se- ing markets and developing economies curity marks of banknotes once every 3-4 is pegged at over $1 trillion a year by the years World Bank. These nations need to carry As a measure to check counterfeiting of out this huge investment in a sustainable notes, the government is planning to manner. The already established Multilat- change certain security features of higher eral Development Banks are now struggling denomination notes (Rs 2,000 and Rs 500) with capital constraints, and are unable to once in every 3-4 years in accordance with meet the financing challenge faced by the the existing global standards. developing nations. A bank like the NDB is The move is certainly welcome, especially- expected to fill that gap. The huge invest- after the recent recovery of a large amount ment required by these nations should be of fake Indian currency notes in last four carried out in a sustainable manner. months after demonetisation. The issue was discussed at a high-level DBS expects the Indian Economy to grow at meeting that was attended by senior of- 7.6% next year ficials from the ministries of Finance and DBS maintains a positive outlook for In- Home, including Union Home Secretary. dia's GDP growth, expecting it to pick up Supporting the move, the Home Ministry again to 7.6% in the next year supported by officials said that the practice of changing improving consumption, better monsoon security features of currency notes with this season, higher spending from the public frequency is followed by most of the devel- sector, and better growth in its exports, oped countries and hence, it is imperative as per a DBS report. Further, the global for India to follow this policy as well. agency said that the ongoing reforms by The new notes introduced post the demon- the Modi Government will strengthen the etisation move had no additional security growth productivity, and the country's GDP features and the security features that they will also benefit from the favorable demo- had were very similar to those in the old Rs graphic dividend. The report also cited the 1,000 and Rs 500 notes. example of the GST, saying that the Goods and Services Tax which is expected to be India seeking a $2 billion funding from the rolled out in July 2017 is a significant re- New Development Bank form which would have long-term benefits India is seeking a funding amounting to despite a brief drag on growth right after its around $2 billion from the NDB (New De- launch. velopment Bank) for its infrastructure proj- ects and has urged the multi-national bank for a faster disbursement of loans, as per a www.iims-niveshak.com 6 Market Snapshot
Market Snapshot 29800.00 7,000 BSE DII FII 6,000 29600.00 5,000
29400.00 4,000
3,000 29200.00 2,000 BSE 29000.00 1,000
28800.00 0
-1,000 FII, DII Net turnover (in Rs.Crores) 28600.00 -2,000 01/03/2017 02/03/2017 03/03/2017 06/03/2017 07/03/2017 08/03/2017 09/03/2017 10/03/2017 14/03/2017 15/03/2017 16/03/2017 17/03/2017 20/03/2017 24/03/2017 27/03/2017 28/03/2017 28400.00 21/03/2017 22/03/2017 23/03/2017 -3,000
Source: www.bseindia.com www.nseindia.com MARKET CAP (IN RS. CR) LENDING / DEPOSIT BSE Mkt. Cap 12154525.46 RATES Source: www.bseindia.com Base rate 9.25%-9.65% Deposit rate 6.50% - 7.00%
CURRENCY RATES RESERVE INR / 1 USD 64.72 RATIOS INR / 1 Euro 69.13 CRR 4.00% INR / 100 Jap. YEN 57.91 SLR 20.50% INR / 1 Pound Sterling 80.81
INR/1 USD Euro/1 USD GBP/1 USD JPY/1 USD SGD/1 USD POLICY RATES 0.00% Bank Rate 6.75% -0.50% Repo rate 6.25%
-1.00% Reverse Repo rate 5.75%
-1.50%
-2.00% Source: www.bseindia.com
-2.50% Date as on March 31st -3.00%
-3.50% www.iims-niveshak.com 7 Market Snapshot Market Snapshot Cover Story
BSE Index Open Close % change Sensex 28743 29620 3.05 MIDCAP 13552 14097 4.02 Smallcap 13691 14434 5.43 AUTO 21486 22013 2.45 BANKEX 23482 24421 4.00 CD 13779 15257 10.73 CG 15333 16446 7.26 FMCG 8800 9270 5.35 Healthcare 15385 15312 -0.47 IT 10376 10336 -0.10 METAL 11893 11804 -0.74 OIL&GAS 13534 13564 0.22 POWER 2196 2274 3.58 PSU 8464 8597 1.56 REALTY 1495 1600 7.02 TECK 5765 5771 0.11 % CHANGE % Change
TECK, 0.11% Smallcap, 5.43% REALTY, 7.02% PSU, 1.56% POWER, 3.58% OIL&GAS, 0.22% MIDCAP, 4.02% METAL, -0.74% 1 IT, -0.10% Healthcare, -0.47% FMCG, 5.35% Consumer Capital Goods, Durables, 10.73% 7.26% BANKEX, 4.00% AUTO, 2.45% Sensex, 3.05% Niveshak Investment Fund Done on 30/6/14 Information Technology(10.78%) Bank (7.69%) Infosys HCL Tech. TCS HDFC Bank Wg: 3.14% Wg: 4.03% Wg: 3.60% Wg: 7.69% Gain: 25.95% Gain : 16.90% Gain : -1.32% Gain: 56.48% FMCG(22.12%) Britannia Colgate HUL ITC Wg: 7.01% Wg: 5.56% Wg: 4.31% Wg: 5.23% Gain: 235.10% Gain : 30.13% Gain: 29.46% Gain: 22.35% Auto (8.37%) Misc. (12.70%)
Tata Motors Amara Raja Godrej Consm. Titan Company Wg: 4.42% Wg: 3.95% Wg: 7.91% Wg: 4.78% Gain: 3.88% Gain: 23.88% Gain: 90.70% Gain: 23.37% Pharmaceuticals Chemicals (8.68%) (8.25%)
Dr Reddy’s Labs Lupin Asian Paints Wg: 3.12% Wg: 5.56% Wg: 8.25% Gain: -8.84% Gain : 25.18% Gain: 70.71%
Textile Midcap Stocks (15.36%) (6.07%) Kalpataru Bharat Forge Natco Pharma Page Indus. Power Wg: 4.32% Wg: 6.27% Wg: 6.07% Wg: 4.77% Gain: 13.03% Gain: 65.34% Gain : 39.28% Gain: 23.64% Performance Evaluation As on 31st March 2016 March Performance of Niveshak Investment Performance of Niveshak Investment Fund since Inception Fund 185 103 175 102.5 102 165 101.5 101 155
100.5 145 100 99.5 135 99 125 98.5 98 115 97.5 105
95
01-Mar-17 03-Mar-17 05-Mar-17 07-Mar-17 09-Mar-17 11-Mar-17 13-Mar-17 15-Mar-17 17-Mar-17 19-Mar-17 21-Mar-17 23-Mar-17 25-Mar-17 27-Mar-17 29-Mar-17 31-Mar-17 1/30/2014 9/23/2014 5/14/2015 12/28/2015 8/11/2016 3/14/2017
Scaled Sensex Scaled NIF Sensex Scaled values Portfolio Scaled Values Value Scaled to 100
Opening Portfolio Value : 10,00,000 Risk Measures: Current Portfolio Value : 15,42,206 Standard Deviation : 14.42 (Sensex 14.30) Change in Portfolio Value : 37.98% Sharpe Ratio : 1.017 (Sensex : 0.862) Change in Sensex : 44.51% Cash Remaining: 58,400
Comments on NIF’s Performance & Way Ahead: Indian stock markets have generated highest return against global equities market so far in calendar 2017, thanks to wonderful performance in March, with SENSEX rising by 3.05% during the month. NIFTY 50 also crossed the landmark of 9,000 and closed at 9,135 by the end of the month. The major contribution of the upswing in the market is BJP win in Uttar Pradesh by huge margin that has led to positive sentiments and a belief that the incumbent will push for major reforms. Secondly, a more clear roadmap on GST is introduced with States and Centre agreeing on the major policies. It is still interesting to see whether the July 1 date will be met. NIF performed in similar lines with SENSEX and increased by 2.77% during the month. The major winners were FMCG stocks with Colgate-Palmolive increasing more than 10%; ITC and HUL with 7% and 5% jump respectively. Midcap stocks – Kalpataru Power and Natco Pharma also performed well with 12.76% and 5.5% increase. Equity Research report: Infosys Ltd.
Equity Research Report – Infosys Limited Date: 31st March 2017 Rating Matrix Basic Information
Rating Buy Ticker (BSE) 500209 Target Rs. 1234 Ticker (NSE) Infy Current Market price Rs. 1020 Sector IT Potential Upside (1-Year) 10.5% M- Cap ₹ 225456 Cr. Infosys Limited (formerly known as Infosys Technologies Limited) is an Indian multinational corporation that provides business consulting, information technology and outsourcing services. It is headquartered in Bengaluru, India. It is the second-largest Indian IT services company by revenues and market capitalization and the largest employer of employees with H-1B visa professionals in the United States. Infosys is the first Indian Company which is listed on NASDAQ. Mr. Narayan Murthy, the co founder of the company was referred as father of Indian IT industry by TIME magazine for his contributions towards outsourcing in India. Company Company Background He served as CEO of the company for more than 20 years. In year 2016, Infosys acquired 142 new clients in both domestic and foreign market including Paytm, Deutsche Bank which helped company in posting revenues over $ 10 billion mark Infosys Limited is engaged in consulting, technology, outsourcing and next-generation services. The Company, along with its subsidiaries, provides business information technology services comprising application development and maintenance, independent validation, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; consulting and systems integration services comprising consulting, enterprise solutions, systems integration and advanced technologies; products, business platforms and solutions to accelerate intellectual property-led innovation, including Finacle, its banking solution, and offerings in the areas of Analytics, Cloud and Digital Transformation. Its segments are Financial Services and Insurance (FSI), Manufacturing and Hi-tech (MFG &
Business Description Hi-TECH), Energy & utilities, Communication and Services (ECS), Retail, Consumer packaged goods and Logistics (RCL), and Life Sciences and Healthcare (LSH). As per latest filing with BSE, Infosys board consist of 10 members , Shareholding Pattern (%) (As per BSE) two of whom are executive director while the remaining eight are independent directors, constituting 80% of board’s strength- more than what is required by companies act, 2013 and listing regulation Dec - 16’ Sep – 16’ Mar – 16’ of SEBI. Two out of ten board members or 20% of the board Promoter 12.75 12.75 12.75 members are women. In Infosys, every independent director is nominated as chairperson of each of the boards committees, Public 86.76 86.76 86.76 namely, Audit Committee, Nomination & Remuneration Committee, finance and investment and Corporate Social Responsibility (‘CSR’) Others 0.49 0.49 0.49 Corporate Governance Committee, risk and strategy committee, Stakeholders’ Relationship Committee. Total 100.00 100.00 100.00 Infosys enjoys a strong reputation and brand in the market as financle hold almost 60% of the market share. It also rides on long standing relationship with large organisations and strong client retention as market saw 96% of repeat business in year 2016 for Infosys. However, their success largely depend on their management team and talent pool they acquire. Infosys attracts highly qualified tech professionals from top colleges of India which have deep industry knowledge and expertise in technology. Further, software computing technology are transforming business fundamental of every industry around the world in a very profound manner. Innovations in various services and products over the last few years have helped Infosys increase traction in the economy. The continuous reduction in hardware cost, the explosion of network bandwidth, advance technologies and technology enabled services are fuelling rapid digitisation of business information and processes. Government of India push toward Digital India, automation and smart cities has created Growth Drivers Growth opportunities in domestic market. Further, hardware business is showing remarkable growth. It has immense potential to build business around mobile software. However, The recent internal management tussles have brought the company to the limelight indicating a cold war between the founders of the company the now CEO, Vishal Sikka over some pay related issues which could damages profitability of the firm. Adverse regulatory developments around current H-1B visa regime can further hit future prospect of the company. Technical Analysis Rating Def. Comparable Valuation Industry Figure Date: 31 ReportEquity Research 20.0% 40.0% 20.0% 40.0% 60.0% previous estimated valuation weighted We undervalued CMP The limited Though revenues Visa annualized returns over holding period holding over returns annualized SELL period holding over returns annualized NEUTRAL: stock If is expected deliver to( period holding over returns annualized BUY 0.0% 0.0% to to next its support of alsoIf gives it 935.level a decisive first support level of 960. This can make the stock reset reset stock the make can This 960. of level support first RSI is at is showing and is at RSI 40 downwarda journey ahead. term support levels. It has given weekly closing below closing weekly has given It levels. support term Stock is trading below all important moving averages averages moving all important below trading is Stock The stock is technically The stock is technically weak very long and is testing closing closing then below 935stock will fall further 909. to have which further adds which the the in to weakness stock. : stock If is expected to deliver more than 10% fundamental : If stock is expected to deliver less than ( than less deliver tostock expectedis If : norms HCL Tech HCL TCS MACD also shows a a MACD also shows downward journey ahead. of st IT INR has 2016 . 2016 years calculated of March at industry Starting average are . the ROE 1020 a an ROA low implemented, growth average company value - 2015 as - 2015 FY Beta is Peer Comparison Peer Comparison the of 17 very on rate DCF, , stock’s stands of Tech Mahindra Infosys of growth 31 in dynamic 16 . . st 69 2014 2014 the However, Forward then % – March , intrinsic , at with which North Bharti Airtel Limited Limited Airtel Bharti in INR it in revenues will a 2017 2013 nature 2013 1234 is if PE American WACC value adversely consistent proposed - , )10% )10% and the Wipro and but based have of - 2012 )10% )10% 2012 Relative stock - given Infosys region 10 10% 10% affect been H with on . 3 - 1 % is B a a . . Discounted
Relative Valuation Relative Industry Competition PE PE exercises enjoys Due Buyer dependent Infosys Supplier competition the Off Threat product dynamic Since Threat also competitors Infosys Industry is end Forward Method Valuation low - shore to to to Cash Flows Cash incumbent . power the deliver high of of end remains superior Power Rivalry being pressure New Substitutes Valuation Summary faces and presence on technology competition solutions in for – peculiarity cost the High Entry uncertain, – client – high a Value/Share Low . firm fierce market High effective bargaining service and 1193 1550 – . . 960 – acquisition Hence, Medium High is in environment low of . threat competition the likely any services industry cost supplier’s Weight IT products 0.33 0.33 0.33 position of and sector, to locations substitutes retention intensify is is power Value for buyer 1234 Fair Fair from very and not its of 12 NIVESHAK Cover Story Article of the Month
Investing For More Than Just Money
Anoop Prakash IIM Shillong Global warming, economic inequality, build return. corruption, women safety and food insecurity Considering the two aspects of their are just some of the globally known causes investment, viz. making a difference and that has sparked a change in the way we generating a return, are both never a given. live and think. Advertisements are globally How much return you make will depend on the moving to spreading messages and changing conditions of the market and the comparative perspectives as a way to sell their product performance of your investment vehicle; and ideas, something that catches more however, the part of making a societal impact eyeballs from publicity rather than paid is less dependent on market circumstances and airtime. And similarly so, investors apart from is more rooted in the fundamental principles, targeting a financial return are also keen to ethos, vision, and mission of a company one see their money make an “impact” as they see desires to commit their money into, making themselves as socially responsive millennials it something that can be expected with more making a difference to society as they seek to certainty than estimating financial return.
MARCH 2017 NIVESHAK 13 Article of the Month
The Growth of Impact Investing at an average of nearly ten years, much higher Equity Research Cover Story The responsibility to drive change for social than venture capital and private equity funds. betterment cannot be left on the shoulders of The Indian Revolution the government alone. It is impractical to have A high number of individuals and families in a system where corporate houses are left to India reside in rural areas, with lack of adequacy drive a double-digit growth in sales and profits towards financial support. Farmers and small while leaving the government to clean up the businessmen in these areas are troubled with mess left behind by way of pollution, poverty heavy costs of borrowing from local money and negative influence created as a by-product lenders as they have no support from the of achieving numerical gains. The cost to clean formal banking system and have no security to the mess left behind far outperforms the offer. While cost of borrowing range anywhere
cost to avoid creating it in the first place, the between 36%-60% a year, the average Indian burden of which falls on every taxpayer. It was investor finds it hard to find opportunities to the same fundamentals that led to the advent invest with double digit returns. The solution, of corporate social responsibility, now at an social investing start-ups which connect the earlier stage in the monetary flow. Investors two imbalanced sides. Popularly called “Impact believe that businesses run on sustainable Partners”, social investment sites are setup to pillars strengthen the triple bottom as a allow investors to help the needy by pooling stronger foundation in a VUCA world. small amounts (as low as INR 100) from a wide The Audience base of investors. With collective investing Impact Investing has witnessed an and technology, these organizations are unprecedented rise since 2007 and is expected helping the needy have access to reasonable to continue for the times to come. The costs of borrowing while meeting the social investor regime has trickled down from big expectations of investors. Remember, these institutional investors and venture capitalists are investments and not donations, a welcome through to mutual funds and which has now change in money transfer. entered the retail investment space. The As per the Impact Investors Council, an industry biggest impact has come about for those body that has been established to strengthen seeking capital. Millennials aiming to be future the significance of impact investing in India, entrepreneurs and businessmen are forced to there are 30+ active impact investors in India assign increasing weights to the change their that have invested a cumulative $1.6 billion ideas carry in addition to the financial return in approximately 300+ enterprises and funds that they could sell their investors upon. The across a range of industries such as financial investment horizon targeted is one the longest inclusion, agribusiness, healthcare, education,
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG 14 NIVESHAK
Mandala Apparels - strives to promote clean energy etc. The total invested amount environment-friendly and fair trading practices positions India as one of the largest impact by ethical sourcing from local organic cotton investment destinations in the world. Some farmers examples include: The Future • D.Light - design and sell high-quality, affordable, and innovative solar-powered It is widely accepted that how the world consumer products for families without access chooses to invest for the next decade will Cover Story to reliable electricity determine how the world will look for the Article of the Month next century. It is therefore, more important
• Drishti - quality, affordable eye care than over, to give global issues and societal services covering primary and secondary eye change its due weightage in determining care in underserved markets one’s portfolio of investments. Investments • Equitas - a successful Microfinance on social issues are not targeted at the cost of Institution that makes finance available to its making profits on one’s investment, it is meant clients at a reasonable cost in a transparent to look beyond quantitative data and analyse manner the impact of where the money is headed. • Hippocampus Learning Centre - Remember, the cost of prevention is far lesser education centres which offer kindergarten than that involved to cure the problem. The and afterschool primary education programs problem of climate change is irreversible and for children in rural India no number can be derived to bear this cost. • Mahila Housing Trust - works to increase Analyse completely before you employ your household-level access to water and sanitation savings! in urban slums
MARCH 2017 NIVESHAK 15 Cover Story
Race for the Summit – Vod an Idea Arjun Bhargava IIM Shillong
The Telecom Sector of India is creating buzz One would witness more consolidations after buzz in the markets of the Nation and by stalwarts of the industry in the form of the World of Finance. With the merger of acquisitions and mergers in future. Reliance Communications with Aircel and inception of Reliance Jio, it’s the turn of Synergy Effect Idea and Vodafone to upsurge the thrill in Post the merger, Vodafone and Idea initially the Telecom Sector of the Country with an ranked second and third, are placed at the estimated $23 billion merger between the summit toppling Bharti Airtel from the two heavyweights of the Industry. apex to the second position in the Telecom The Vodafone-Idea merger will mandate Sector. The merged entity would account the emergence of a Telecom giant which will for a subscriber base of approximately 39 have varied implications on the industry, crores significantly higher than the Airtel’s competition, price wars, services, staff, 27 and Jio’s present number of 7.2 crores. and most importantly on the customers. The revenue market share of the merged
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 16 NIVESHAK
entity is expected to be close to 40 percent Short Term and Long Term Effects in comparison to Airtel’s 32 percent. Reliance Jio entered the market with a strategy that not only brought about dissatisfaction amongst the bigger players but also gave rise to price wars. Jio offered free calling services to its customers for a Cover Story total period of six months with 4G Internet speed at minimal rates. The Vodafone-Idea merger is expected to take the price wars to a battle which shall be fought three- way amongst the merged entity, Airtel and Reliance Jio. The Reliance Communication which itself is in talks of a merger with Tata Further benefits include the increase in the Teleservices and Aircel might add to the EBITDA margins as opposed to the earlier kitty soon; the competition from Reliance figure of 30 percent for both the companies, Communication is expected to be short- far lesser than Airtel Limited’s and Reliance lived, though. Jio Infocomm Limited’s targeted margin With the companies consolidating, of 40 percent and 50 percent respectively, increasing numbers of mergers and benefits to the tune of Rs. 13,400 crore and acquisitions in the industry, price wars will annual savings (including operating costs be short-lived phenomena. Eventually, the and capital expenditure) worth Rs. 14,000 prices are bound to increase with fewer crore by the fourth year. The net present companies in the market. The technology value of the entire savings amounts to Rs. shall improve, customer experience would 70,000 crore ($10.5 billion). be enhanced, and better services will The success will largely attribute to the prevail. Eventually, the customer will be the synergy effect brought about by the king either way. merger between Idea Cellular Limited and Vodafone India Limited as a result of Industry Analysis post the Vodafone-Idea combining their operations. The merger merger has in turn brought about windfall gains for The consolidation of companies in both companies and establishing a strong the Telecom sector is expected to do foothold for them in the Telecom Industry. wonders for the firms as the debt-ridden industry would advance towards better financial records, bringing about stability in businesses and thereby begetting sustainability of the companies. The merger is expected to result in the duplication of resources at various levels of the company. The salubrious update is that both the CEO of Vodafone, Vittorio Colao and the Chairman of Aditya Birla Group, KM Birla, have denied talks of the
MARCH 2017 NIVESHAK 17 layoff of employees since they believe the superiorly positioned to retain its market expanding opportunities shall ensure the share. Cover Story existence of work and jobs of employees to As per Altamount Capital Management stay at all levels in the business. market expert on equity Prakash Diwan, “If The merger of Idea and Vodafone would the merger talks materialize, it would now significantly reduce the burden of the be extremely difficult for Reliance Jio to financial issues faced by either company in fight Bharti Airtel. Reliance Jio will weaken.” the past. It is expected to engender heavy The announcement of the news affected cash flows for the merged institution, the stocks of Bharti Airtel as they soared ameliorate the quality of services, enhance 14.39 per cent to Rs 370 on BSE and ended customer experience and satisfaction while at Rs 347.65 on BSE, up 7.48 percent. The pleasing the shareholders as well. shares of Bharti Infratel wilted 7.07 percent
Effect of Merger on the Industry to Rs 328.75. “Shares of Bharti Infratel A lot of Industry experts have a keen eye fell because the overlapping tenancy of on the Vodafone-Idea merger since the Vodafone and Idea will come to an end due valuation post the merger of the two to synergy. They both were using Bharti stalwarts would set the benchmark of the Infratel towers,” Diwan said. Industry. All other telecom companies would henceforth be valued on the same The Idea Cellular shares peaked as high basis thus bringing unanimity and parity as 11% but settled at Rs97.60 on the BSE, to the field of Telecom Valuations. Also, crashing 9.55%, while the Sensex declined the merger would benefit Airtel to stay 0.44%. The depression in the share value of competitive in turbulent markets and be Idea took place due to unconfirmed reports
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 18 NIVESHAK which claimed that the share prices of Idea year, the shares of Vodafone will dilute, and post-merger would descend in comparison both Idea and Vodafone will have equal to their present price. power and rights on the voting platform within the company. Vodafone and Idea’s Holdings within the One of the major shortcomings of the Merged Entity Vodafone-Idea merger will be the lack of Cover Story The merger is deemed to complete the optical-fibre reach to the customers. within a period of 24 months, subject to With the surge in bandwidth capacity after consent from shareholders, creditors, stock the merger and ever increasing speed of exchanges, SEBI, Competition Commission internet facilities within the country, the of India and the Telecom Department. As lack of an optical-fibre network is bound advocated by Mr. Colao and Mr. Kumar to hurt the service facility provided by the Mangalam Birla, a ‘partnership of equals.’ Vodafone will be the leading partner with a 45.1% stake initially after transferring 4.9% to the Aditya Birla Group for Rs. 3,874 crore. The Aditya Birla group will be the owner of a 26% stake and has the right to acquire 9.5% stake from Vodafone post the merger to abide by the philosophy, ‘partnership of equals.’ It is agreed upon in the merger that Idea will have an equal shareholding as Vodafone on the number of shares held by both the parties. If the equal distribution of shares does not transpire by the end of the fourth
MARCH 2017 NIVESHAK 19 Cover Story FinGyaan
Negative Effects of low Interest Rates on an Econ- omy
Arnab Surai IIT KHARAGPUR
“It is not because of the benevolence of population (in many of the advanced & the baker that we eat fresh bread every emerging economies) - to enlist a few. morning but because of his desire to make Governments across nations are facing a money”. – Dr Raghuram Rajan. seemingly insurmountable challenge of How true are these words from the James stimulating economic growth, fuelling Bond of the banking sector. In the greed demand and increasing consumption to increase credit growth, banks and fi- levels. These governments, along with their nancial institutions tend to lower rates of central banks, have attempted to resolve interest. Government also steps in, often this problem by adapting several mea- pressurised by the deadly nexus of politi- sures. One of them has been the lowering cal and heavyweight corporate lobbying. of interest rates in order to increase credit The global economy, post the Financial availability and hence infuse growth in Crisis (2008-09), has witnessed a tepid their respective economies. This measure growth. This phenomenon can be attrib- has been incorporated by several nations uted to myriad factors: lack of productiv- with some of them – Denmark, Sweden, ity, repercussions of Brexit, slowdown in Switzerland and Japan, taking the interest
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 20 NIVESHAK proach of lowering interest rates to stimulate ic growth. growth has been partially successful in some Interest rates and default risk cases, unsuccessful though, in most. High interest rates mean high opportunity cost of money (both for banks and borrowers), so The naïve thinks that low interest rates are very banks and financial institutions evaluate borrow- good, as growth would increase, stalled projects ers’ credentials strictly & properly before lending, would start rolling and unemployment would also firms with low commercial viability of a proj- FinGyaan ect are wary of investing, so default risk is less.
Cover Story reduce. In order to focus on quick short term growth, long term growth sustainability is lost. Low interest rates encourage banks and corpo- Let us see how that happens by asking a few rates to take more risks due to high liquidity and questions which would be answered as we pro- chances of default increases. ceed. How low is low? What is low for a mature It also encourages individual consumers to make and developed economy and what is the defini- high value purchases like apartments and real tion of low for an emerging economy? estates, even when they are not capable of doing An emerging economy will have a higher de- so, increasing the likelihood of default. mand for goods and services, a higher return on Interest rates and incentive to invest vs. consume investments than a mature economy, so demand The adverse long-term impact of very low inter- for funds are also high in such a scenario. This est rates is on the incentive for individuals to leads to a higher cost of capital, also known as save. Keeping the interest rates low has pushed interest rates. In contrast, interest rates tend to the returns on normal savings and deposit ac- be lower for a mature economy, which just needs counts close to zero after adjustment for infla- to maintain a certain sustainable rate of eco- tion. High interest rates encourage consumers nomic activity and growth. So an interest rate of to save and invest more, as consumers tend to 4.5% might be low for an emerging economy like earn a high return on investments. Low interest India and Brazil, but for US, a rate of 3.5% may be rates lead to consumption driven economy. This called high rate of interest. sends a very wrong signal to the younger gen- Earlier, when the global economy was not too eration which needs to save more for retirement, much interlinked and effect of globalization not as they are likely to live longer than their previ- much pronounced, rippling effects of economic ous generations. Low saving could also constrain data were not found across countries and con- productive investments. The government – quite tinents, and were limited to domestic economy. rightly – believes we need to invest more in However, with high speed and real time informa- infrastructure and other wealth-creating capital tion flow, the effects of global economic data are projects. But this programme of investment and felt worldwide and almost instantly. infrastructure development cannot be financed Effect on banks and financial institutions sustainably unless there is a flow of savings to The biggest casualties of the fall in interest rates fund it. are banks. Falling rates squeeze banks income Low interest rate and funds crunch in developed because they make money on the spread be- economies tween the interest charged for loans and pay- A differential of interest rates between devel- ments made to customers on deposits. When oped (low interest rates) and developing econo- people can't earn attractive interest income on mies (high interest rates) lead to fund inflow into their money in savings accounts and term depos- emerging economies (as investments) in order its, they either use their money to pay off debt or to earn more return on corporate and govern- invest in assets like real estate, gold and stocks. ment bonds, bank term deposits, leading to weak This means banks lose deposits. When interest economic activities in a matured economy. This rates are abnormally low, banks don't have a high leads to job losses and unemployment, contrary deposit base, so they only loan to borrowers with to popular belief that low interest rates leads to the highest credit ratings and substantial assets enhanced economic activities. to collateralize those loans, losing out other op- Real vs. nominal rates and inflation portunities. Credit growth falls. Small players find Low interest rates leads to high liquidity and it difficult to raise debt capital via loans, hamper- availability of more funds in an economy. While
MARCH 2017 NIVESHAK 21 er amount of funds keep chasing limited assets, elsewhere. Such rates punish long term investors leading to demand supply mismatch and artifi- saving for retirement alike, by generating very cially pushing up prices resulting in high infla- low or negative real rates of return in the long Cover Story FinGyaan tion. run, who tend to invest in government bonds, (1+nominal interest rate) = (1+real interest rates) pension schemes etc. (1+inflation) Effect on currency markets as nominal rates fall, inflation rises leading to fur- Low interest rates have an adverse effect on cur- ther lowering of real interest rates, causing real rency markets, leading to low inflow or potential rates to hover around zero or even negative real net outflow of dollars (from FIIs), leading to cur- interest rates in extreme cases. This also creates a rency devaluation, trade deficit. Also, tendency case for preponing future consumption to pres- to save in the country of low interest rate is low, ent date, in items like cars electronic goods and as it generates low return. This makes outflow other objects fuelling consumption, hampering of funds, devaluating the currency and making investments. imports costlier. Just the opposite effect happen in case of exports, exports become more attrac- tive and rewarding. The net effect of both these Effect on central banks phenomena tries to balance out each other, and It is true that central banks set interest rates, but quantity of exports/imports determine best suit a much of it is guided by general macro- eco- for the economy. nomic conditions prevailing in domestic and Liquidity trap world economy. When the economy is in a bad A liquidity trap happens when interest rates are shape and is gasping for breath (funds), a clas- so low that they don't serve the normal func- sical approach popular among central banks is tion of spurring the economy to growth. People to lower rate of interest. But if interest rates are do not get the incentives to invest in regular already low, it leaves very less room for central financial instruments like banks, bonds and other banks to further lower rates and provide the fixed income securities, and instead the fund much needed stimulus for growth. So low inter- goes to assets like real estate, gold, stock markets est rates lead to less power for central banks to and paying off already taken debts. This is done take corrective actions in case of downturn by in anticipation of higher returns and to hedge further lowering of rates. against low interest rates. It leads to unusu- Market volatility ally high asset prices, stock market boom and a Borrowing costs tend to rise in a healthy econ- potential bubble. This means money doesn't flow omy, reflecting growing demand for money through the economic system. When that hap- among consumers and businesses and bolster- pens, funds are not put to their proper use, what ing the profits of banks and other financial firms. they are supposedly for and productivity falls, Low interest rates signal the opposite. unemployment rises. Any stock-market selloff can be taken as a signal When this bubble bursts, there is a huge loss of that most of the gains of low rates have been investments which is detrimental to the econo- harvested, and time is right for rate hikes. In a my. With more money chasing fixed amount of situation of sustained long period of low interest resources, prices tend to rise in medium term, rates, it is difficult to distinguish between risky leading to abnormally high inflation for a sus- and non-risky asset classes and projects, and this tained period of time later. results in market volatility. Low innovation Low interest rates affecting pension and insur- Low interest rates might make a firm postpone ance funds investment decisions to increase productivity Low rates are a bane to pension funds and insur- to retire current debt, if cost of current debt is ers, which hold long-term assets to pay future higher than cost of raising fresh investments to claims, by making those claims larger in present- increase productivity. value terms than they were when so-called The cost of production mainly comes from two discount rates were higher. So insurance pre- major areas, cost of funds and the technology of miums and pension deductions rise, leading to production used. If cost of funds is less, total cost
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 22 NIVESHAK
centive to improve their technology and invest in R&D, which has a huge opportunity cost and negative implication to the economy as a whole in the long run. However, if interest rates are high, firms and manufacturing units are under pressure to innovate and switch to improved FinGyaan technology that leads to lower production cost Cover Story and enhanced productivity, reduced unemploy- ment and higher standard of living. Conclusion Low and negative interest rates are decidedly poor choices compared to the plethora of other growth-inducing measures. For every decision there is a cost of opportunity to be paid and an opportunity cost to be forgone. Policy decisions should not be based on mere myopic views, but should ensure that present generation does well without compromising the opportunities of future generations. It remains to be seen how negative interest rates will affect the global economy and for how long will they continue to exist and create headlines. Some factors like low oil prices have provided a cushion period before the major economies of the world are pushed into a disinflationary or worse, deflationary trend. If and when that happens, it would only be a matter of time before the developing economies, which are highly linked to the developed world, are caught in the storm as well. It will be a vicious spiral down the hill from there.
It is imperative to note that freedom of spend- ing needs to be backed by adequate laws which ensure that desire for making profits does not transform into greed for making profits – at any cost. An excess of anything is undesirable, and needs to be checked before it gets out of hand. There is no magic wand that can solve the prob- lem of sluggish growth. It has to come from the governments, central banks, banks, the industry and the public working together. And really, there is either working together or working against each other.
MARCH 2017 NIVESHAK 23 FinFame
Naina Lal Kidwai: A dealmaker in India Pratibha Sapra IIM Shillong
Long before the expression ‘deal maker’ became decided to join the corporate sector early ordinary in India, Naina Lal Kidwai, retired in life. As a student, she used to be the class country head of HSBC, was one of the biggest topper and was also the class captain, house deal makers in the country. She was also one captain and head girl. Since her passion lied in of the first women to enter the formerly male Mathematics and Accountancy, she pursued dominated field of investment banking. In the Bachelor’s degree in Economics at the Lady book titled ‘30 Women in Power’, the chapter Shri Ram College, Delhi University and was on her is titled “The first Lady”. Rightly so, as she also in the leadership position as the president has many firsts to her name. “When I embarked of the student union of the college. She also on this journey, I didn’t think women would be studied chartered accountancy was among where we are today. It is very gratifying,” she the first three women to be chosen as articled says. clerk by Price Waterhouse Cooper in 1977. She went on to pursue Strategy and Finance from Early Life and Career Harvard Business School and in 1982, became the first Indian woman to be an alumnus of the Naina was born to a homemaker mother university. The years at Harvard, Kidwai says, and a father who was the chief executive altered her world view and greatly influenced of a leading insurance company, and had her leadership style.
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG 24 NIVESHAK
Naina was offered a position with ANZ Grindlays Women at Work Bank after finishing MBA. Within a span of few In a recent statement, Naina said. “I believe years, she rose to the position of Head of the that challenging periods in society usually Western Region. In 1989, Naina had become the shift the spotlight to women. During World Country Head for Foreign Investment Banking, War II, women stepped out of their homes to being the youngest person to hold this position keep the factories humming and the economy ever. Under her leadership, the NRI investments
FinFame running. This has been the case every time, with ANZ Grindlays tripled. In 1991, she moved and the latest economic challenge has been on to Retail Banking to explore new avenues. no different. No economy can thrive or even survive by ignoring the contributions of Challenges faced women”. The ‘first lady’ also had to face many challenges She is strongly in favor of inspiring women to reach these heights in her career. She was to participate in the “Lean In” movement, the first woman in her family to work. She says, started by Facebook COO, Sheryl Sandberg. “I come from a very conventional north Indian She requests women to follow their ambitions family. But my parents had aspirations for their rather than surrendering to self-doubt as children, and because I didn’t have a brother well as the pressure from society to restrict those aspirations were transferred to me and my themselves to household. A mother herself, sister.” she empathizes with those who are told that Despite that, she often faced great pressure to they will not be able to balance between home and office, and says that it can be achieved give up. Her mother often asked her to quit. As said by Naina, “You constantly have people with time management. She fought her own telling you managing a home and a career is arguments with her mother, who had insisted really difficult, are you sure you want to do this? that she give up on her career while she was People tell me this all the time.” pregnant, “if I had stepped away, it would have reflected on all women. My whole experience After having her first child, she had even was to show how to do it”. planned to give up her professional career for family commitments. However, her father In all her senior positions, her first objectives encouraged her to continue. Three decades of involved assuring equal pay, equal respect, responsibilities in her high profile jobs required and the same quality of amenities and benefits her to travel across the globe, causing her to for female employees as enjoyed by male miss various important family occasions. With colleagues. support from everyone around, Naina was able to strike a balance between her professional and Awards and Accolades personal life. The many ‘firsts’ achieved by Naina in her life
MARCH 2017 NIVESHAK 25 have been nothing less than an achievement. in making poor women self-sufficient. To add to it, she has been awarded with various At 54, she says she feels as inspired as when prestigious awards. she started. “I thought 54 was an age when you FinFame For her praiseworthy work and her noteworthy get old, dull and retire. But I am nowhere near contribution to India’s banking and finance sector, she was awarded Padma Shri in 2007. She also received the ASSOCHAM Ladies League’s Delhi Women of the Decade Achievers Award 2013 for Excellence in Banking. Apart from the above, the repeated rankings in the top 50 businesswomen all over the globe by various agencies such as Fortune Global and Wall Street Journal talk of her inordinate capabilities.
Way Forward after HSBC At the end of 2015, Naina concluded her 13- year long stint with HSBC India. She is looking forward to working for herself, and splitting her time between commitments in the financial sector and social causes. She continues to serve certain other board positions like non-executive director on the board of Nestle. She is also the President of FICCI, for which she was the first woman to reach this position. There are three initiatives that she is closely involved with and wants to work on post retirement: Women’s empowerment, sanitation and water. She recently worked on a book aimed at women in the corporate sector. In FICCI, she started a Water Mission for which she has got support from the government. In the case of sanitation, she is working with NGOs like the Gates Foundation, Water.org among others, and also with several Indian NGOs who are engaged in the sector, besides other players. Apart from the above, she plans to spend more time with family, nature and books. She loves music and has also taken the Trinity College of Music exams till seventh grade.
Naina’s journey is proof that hard work is never overlooked and its fruits are sweet. She is married and has two children, and is a perfect example of a successful Indian business woman who is able to balance both work and family. She works closely with her husband, who is also the founder of an NGO called Grassroot Trading Network for Women, which is involved
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG Finsight 26 China Model Of Growth Of ForChina Model India? MARCH 2017 Is There Any Alternative ToAny Is There The There are anumberofreasons why India 2015) what Bank, isinstore for (World India. to asto 6.9%in2015,thequestionarises Today, withChina's growth having slowed growththe supernormal from expected it. alike,and industries showing nosigns of standing at 7.4%,frustrated economists withitsfiguredecade ending2010,India, ing anaverage of10.3%per year over the growth, withitsGDPgrowof double-digit superpowers. While Chinashowed aperiod for themto emerge asthenew economic on theBRICandMINTcountries, waiting massive transition, theworld's eyes are set With theglobaleconomy goingthrough a NIVESHAK - China's growth model, given themoniker 2013) developing astrong private sector. (Grinin, a slower approach openinguptrade while public sector. on theotherhand, India, had was fuelledthrough atightly controlled China where trade openedup, butgrowth liberalization. The in reform earlier started of boththeeconomies that gave way to evant, though,istheprotectionist nature sume, leadingto rapid growth. More rel populations ready to produce andcon ing theirfairshare ofproblems, have large another. countries, Both inspite ofhav and Chinaare pitted often againstone Sukriti&Sneha IIM A hmed abd - - - among individuals, sectors, andregions. within theChinesepopulation inequality of overall growth inGDP, there is significant spite the expense ofdomesticinclusion. In hasdriven economic growth,ports, but at The Chinesemodel, through itsfocus onex inclusionandinnovation.two keyaspects- needs to deviate from theChinese modelin However, modelofgrowth theIndian developing infrastructure. trade-related in improving easeofdoingbusinessand fromlearn theChinesemodel, particularly Having doeshave saidthat, India alotto did. have complete never monopolyonit. India highly protected financialsystem doesnot a convertible currency. Even China,withits different, beingfarmore openandhaving taken? Probably not. economyThe Indian is really want to follow thepath Chinahas thislight, doesIndia thequestionarises; In 2014) China to now rethink itsstrategy. (Gamble, UK before theirmeltdowns. This hasforced veloped nations, US,Japan,Korea and the levels thelevels almosttwice reached inde boom, andtheseinvestments hasreached to continue thisinvestmentnecessary returns. The trouble is, thecredit growth been wasted withnegative onprojects real industries. ments andstate-owned This has spending was channeledto localgovern ofChina,massive investmentmunist party able. influence Underheavy ofthe Com is, that at thispoint itdoesnotlooksustain The issuewith theChinesemodel, however, development. (Ramo, 2004) governmentthe authoritarian oneconomic was brought aboutthrough astronghold of encouraging foreign investment. All this ronment conducive to doingbusiness, thus regulations andpolicies, created anenvi logistical also, infrastructure. It through and invested and heavily inmanufacturing orientationThe model hadastrong export as theblueprint for emerging economies. ternative growth modelandwas touted Consensus","Beijing emerged astheal ©
FINANCE CLUB, MANAGEMENT INDIAN INSTITUTEOf SHILLONG ------will drive domesticconsumption. (Goldman that, over 5-10years,the category thenext (129million). category Mass Urban This is India's consuming population fallsinto the lion) and Wealthy (1.5million)categories, largely (156mil fallsinto Middle theUrban Unlike China's consuming population that sumption over 20years. thenext butalsosignificantmarket domestic con notonlyfor amajorlabor an opportunity India's young, growing population provides Z-ers, and390millionGen lion Millennials native modelofgrowth. With over 440mil environments, would benefitfrom analter withitsdemographicIndia, andeconomic trends andprotectionist policies. economy vulnerable to globaleconomic 2015),thusleaving the Bank, GDP (World 22%of and ahighdependence onexports, tion, currently 50%ofGDP, (UNCTAD, 2015) This hasled to lower domesticconsump exports, isdriven byexports, imitation rather than The Chinesemodel, through itsfocus on ate from theChinesemodelisinnovation. The second area wherecandevi India environment.a volatile export driver for growth aswell asabuffer against canbeasignificant sumption withexports China. Thus balancingout domesticcon than that ofdeveloping economies suchas oped economies, itissignificantly higher While thisisnotashighthat ofdevel stands at 70%ofGDP(UNCTAD, 2015). India’s domesticconsumption currently food andground transportation. consumption includefresh andpackaged likelyto facesectors asignificant increase in facing businesses. (Zainulbhai,2007) The itadesirable for market consumer-making intheworldsumer market by 2025,thus largest thefifth con India to triple, making projections, householdincomes are likely growthIf continues inIndia aspercurrent the imminent demand. simultaneously growing to meet capacity jobs andinvestment ininfrastructure while growth inincome through thecreation of Sachs, 2016) Thus itisimperative to drive NIVESHAK ------
Finsight 27 Finsight 28 MARCH 2017 developed specifically to meettheneeds of consumption through goods andservices ously, innovation canstimulate domestic developed through innovation. Simultane products quality ofsuperior in theexport itcangaincompetitiveports, advantage with Chinaoncost whenitcomes to ex might notbeabletoWhile India compete tion. Innovation isthekeyto bothofthem. on theotherincrease domesticconsump On onehand, itmustexpand itsexports, order to drive down itscurrent trade deficit. needs to strategy adoptatwo-pronged in fault linesthat Chinaisfacingtoday. India modelagainstthemanyprotect theIndian growththe Indian model, one, which can This isgoingto beahugedifferentiator in environment. ASSOCHAM, 2015) (India, solutions suited economic to theIndian R&D andseeknewbusinessmodels strategy, understandlocalneeds, invest in need to makeinnovation central to their panded across corporates industries. Indian the innovation mindsetneedsto beex boom isalready heralding thischangebut focus onentrepreneurship andthestart-up USDeconomya 10trillion by 2034.India’s spike ingrowth that isneededto makeit on innovation attain the canhelpIndia spend of2.4%GDPby 2034andafocus Estimates suggestthat anincreased R&D the needsofIndia’s uniquedemography. of growth by leveraging andmeeting of living. Innovation canbeamajordriver economic growth andimproved standards Globally, afocus oninnovation hasdriven lems, inclusion. thushindering from developing solutionsto localprob Such anoutlookalsoprevents theeconomy in caseofadrop ininternational trade. tion. This once againcan prove disastrous is littleindigenousinnovation orcontribu multinational firms. (Kennedy, 2010) There are aresult ofeitherjointports ventures or nology, for example, over 85%ofitsex China’s contribution to information tech them outmore efficiently. at Whilelooking modelsalbeitchurning nologies orservice successful largely inadoptingforeign tech innovation. Chineseenterprises have been NIVESHAK ------spend of2.4%GDPby 2034andafocus Estimates suggestthat anincreased R&D the needsofIndia’s uniquedemography. of growth by leveraging andmeeting of living. Innovation canbeamajordriver economic growth andimproved standards Globally, afocus oninnovation hasdriven lems, inclusion. thushindering from developing solutionsto localprob Such anoutlookalsoprevents theeconomy in caseofadrop ininternational trade. tion. This once againcan prove disastrous is littleindigenousinnovation orcontribu multinational firms. (Kennedy, 2010) There are aresult ofeitherjointports ventures or nology, for example, over 85%ofitsex China’s contribution to information tech them outmore efficiently. at Whilelooking modelsalbeitchurning nologies orservice successful largely inadoptingforeign tech innovation. Chineseenterprises have been developed specifically to meettheneeds of consumption through goods andservices ously, innovation canstimulate domestic developed through innovation. Simultane products quality ofsuperior in theexport itcangaincompetitiveports, advantage with Chinaoncost whenitcomes to ex might notbeabletoWhile India compete tion. Innovation isthekeyto bothofthem. on theotherincrease domesticconsump On onehand, itmustexpand itsexports, order to drive down itscurrent trade deficit. needs to strategy adoptatwo-pronged in fault linesthat Chinaisfacingtoday. India modelagainstthemanyprotect theIndian growththe Indian model, one, which can This isgoingto beahugedifferentiator in environment. ASSOCHAM, 2015) (India, solutions suited economic to theIndian R&D andseeknewbusinessmodels strategy, understandlocalneeds, invest in need to makeinnovation central to their panded across corporates industries. Indian the innovation mindsetneedsto beex boom isalready heralding thischangebut focus onentrepreneurship andthestart-up USDeconomya 10trillion by 2034.India’s spike ingrowth that isneededto makeit on innovation attain the canhelpIndia ------burgeoning workforce willgrow theUrban ASSOCHAM, 2015) population. (India, The employment to thegrowing working million jobsneededeach year to provide andgenerate the12 new opportunities industries. These innovations willcreate how toand know drive innovation across possesstheflexibility preneurial startups, including bothlarge corporates andentre taining inthelongrun. The private sector, model for isthat itcanbeself-sus India A uniquefeature ofthisalternative growth ZINNOV ,2015) small andmediumbusinesses. (NASSCOM to $1900 millioninlogistics, andsupport and andmarketing million inadvertising to industries thetuneof$600 of ancillary offered includeincrease inFDI, growth promote start-ups. The addedadvantages but by nomeansisittheonlyincentive to jobs by 2020. benefit, This istheprimary they are projected to generate 250,000 required jobs. At thepresent rate ofgrowth, ing trends to generate intheirability the create more show jobs. promis Start-ups novation andinclusion,itisimperative to orderIn to successfully grow through in economic growth. for employment ofstartups and criticality governmentthe Indian hasunderstood the Indian history,for thefirsttimeinmodern Stand upIndia’India, that missionreflect innovation. Start-up The launchof'The the potential to enableinclusionthrough to awidermarket. This way, have start-ups edge andcompetencies them andbring mobilize India's vast indigenousknowl the board. Aculture ofinnovation canalso also improving standard oflivingacross sion, education, andemployment, while infrastructure, healthcare, financialinclu solutions inproblematic suchas sectors are attemptingThese start-ups to provide tech-innovation related globally. start-ups thirdof innovation in ranking withIndia isalreadysector benefitingfrom a wave culture.be seeninIndia's start-up This A positive step canalready inthisdirection consumer.the Indian ©
FINANCE CLUB, MANAGEMENT INDIAN INSTITUTEOf SHILLONG ------creating ofsustainablegrowth. acycle way for substantial domesticconsumption, anddriveMass upincomes thuspaving the NIVESHAK
Finsight 29 30 NIVESHAK
ERIC LEURQUIN
Professor at Ichec Brussels Management School FinView Cover Story
1. European Union celebrates its 60th an- which is currently Eurosceptic and thus a dif- niversary, and has been a very successful inte- ficult case. gration plan thus far. What do see in store for 5. As a European Union member, what European Union in the coming years? role do you think EU should play to counter the Ans: The EU will further enlarge, mostly to effect of Trump? the countries in the Balkans, and also maybe to Ans: The EU remains an ally of the US, who- Scotland. The EU will further deepen the coop- soever may hold the President’s office. eration among these 30+ countries. 6. How do you think the Refugee Crises 2. With the formal exit of Britain, an- has affected European Countries, in retrospect, nounced to take place from March 29th, what could it be handled any better? effect would it have on the European Stock Ans: In my own, humble opinion, we should Markets? have forced Assad to leave, in order to avoid Ans: No short term effect, of course. As a the current Syrian war. But we all know that reminder, these (efficient) stock markets have he has a powerful ally, which is not interested known about Brexit for a while now, so the all in promoting democracy in Syria. That is how that has to be incorporated has been incorpo- I feel we could have done towards mitigating rated into the markets. the crisis which looms that nation now. A long term effect could come later if the outcome of the BREXIT negotiations is neg- ative for the UK, you would see a drop at the London stock exchange in that case. Another possible outcome is a win-win scenario, which would be positive for both UK share and other EU stocks.
3. How do you see the Euro faring in the currency markets when BREXIT is formally initi- ated on March 29th? Ans: The fate of the Euro is quite indepen- dent of the BREXIT and the fate of the Pound.
4. What burden will Germany and France have to share in the European Union due to BREXIT? Ans: All remaining countries will have to pay a bit more to the EU budget, including Germa- ny and France. In terms of leadership, the BREX- IT will make it easier for Germany and France to try to lead the EU. but as usual, they will have to enlist the support of others, including Poland, MARCH 2017 Purchasing Power Parity CLASSROOM FinFunda of the Month Vinay IIM Shillong
absence of any transaction cost all goods should have the same price in any country. This also means that if inflation affects prices in one nation then exchange Mr. Fin! Recently I read about rate for that country will also be affected. Purchasing Power Parity. Could you please Any comparison between 2 countries must be explain what does it mean? adjusted for parity. GDP and other indicators are Hey, Sam! Purchasing Power Parity, better often represented in PPP-adjusted terms. Most widely known as PPP is an indicator of the value of currency. used parity adjustment is Geary-Khamis dollar (also It is used to measure productivity and living standards known as the international dollar). in respective countries. PPP compares various Insightful! Can we simplify this measure? country’s currencies through a concept called ‘Basket Calculating entire basket of goods seems a challenging of Goods.’ task! ‘Basket of goods’ include a fixed set of Indeed! The Economist simplified this index by commodities. It consists vast array of goods that introducing Big Mac index. This index test law of one affect the daily life of ordinary man. price using prices of MacDonald’s Big Mac burger across 2 countries. This index uses standardized good to compare. All other products in the basket can have different varieties like different varieties of grains across the globe. Hence Big Mac index is a standardized and simplified form of PPP measurement.
Sweet! How was PPP introduced and how does it impact us now? PPP idea originated in the 16th century, and a current concept was developed in 1918 by Gustav Cassel. This approach was based upon ‘law of one price’ which says that in ANNOUNCEMENTS
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