Download Niveshak Mar 2017 PDF

FROM EDITOR’S DESK
Niveshak
Volume IX
ISSUE X
October 2016
Faculty Chairman
Prof. P. Saravanan
THE TEAM
Akshay Kaushal
Anand Mittal
Arjun Bhargava
Dhruvika Chawalla
Girraj Goyal
Pratibha Sapra
Sankeerth Bondugula
Saurabh Gupta
Vinay Gundecha
All images, design and artwork are copyright of IIM Shillong Finance Club
Finance Club
Indian Institute of Management
Shillong
www.iims-niveshak.com
Dear Niveshaks,
This month we bring to you Race for the Summit – Vod an Idea as our special coverage. The Telecom Sector of India is creating buzz after buzz in the markets of the Nation 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
their major shortcomings will be the lack of the optical-fibre reach to the customers.
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
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
that involved firms like Vodafone & Cairn Energy opted to settle under this scheme.
Emphasizing on infrastructure development, India is also seeking a funding
amounting to around $2 billion from the NDB (New Development Bank) for its
infrastructure projects and has urged the multi-national bank for a faster disbursement of loans, as per a statement released by our Finance Minister, Mr. Arun Jaitley.
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
and is expected to continue for the times to come. However, the responsibility to
drive change for social betterment cannot be left on the shoulders of the government
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
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
for them to emerge as the new economic superpowers. However, with China slowing
down and India showing no supernormal growth as expected from it, the economists
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
interest rates on an economy. The author starts by asking a few simple questions;
How low is low? What is low for a mature and developed economy and what is the
definition of low for an emerging economy? Then he moves on to discuss the impact
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
concept as well as its practical application.
Finally, we would like to thank our readers for their immense support and encouragement. 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
04 The Month That Was
Cover Story
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
in India
FinView
30 Eric Leurquin, Professor at Ishec Brussels Management School
FinSight
26 Is there any alternative to the
China model of Growth in India?
Classroom
31 Purchasing Power Parity
The Month That Was
4
NIVESHAK
www.iims-niveshak.com
The Niveshak Times
Tax dispute scheme able to garner only
Rs.1200 crore, receives a tepid response
The tax dispute resolution scheme introduced by the government with an ambitious
outlook failed to achieve its intended objective, with the scheme garnering just around
Rs.1,200 crore. None of the high-profile
retrospective tax cases that involved firms
like Vodafone & Cairn Energy opted to settle
under this scheme.
Finance Minister Arun Jaitley had announced
the Direct Tax Dispute Resolution Scheme in
the budget 2016-17. The scheme was intended to not only settle disputes concerning
retrospective taxes, but also bring to an end
around 2.6 lakh pending tax cases that have
close to Rs 5.16 lakh crore locked in.
The scheme provided waiver of interest &
penalties if the principal amount involved
in tax cases was paid. It opened on June 1,
2016, and closed January 31, 2017 after an
extension on the end date was given. None
of the firms which were involved in cases
pertaining to retrospective tax came forward
to settle their respective disputes by paying
the principal amount under the provisions of
the scheme.
The government through this scheme was
hoping to settle the major retrospective tax
cases which the Vodafone Group & Cairn Energy of UK are currently facing. The government also expected about a-third of certain
other tax disputes that are currently going on
to be settled under this scheme as well.
The ambitious scheme introduced by the
government during last year provided for
waiving of interest & penalty for retrospective tax cases if the companies under question withdrew all of the appeals that they had
against the government across all judicial
forums.
Plausible Rate cuts by banks on account of
lower interest rates on small savings schemes
Recently, the government announced interest rate cuts on major small saving schemes
such as PPF, Kisan Vikas Patra & Sukanya
existing market rates, and may also facilitate further rate cuts by commercial banks,
something which was not being seen lately
due to the absence of policy rate-cuts by
the RBI.
Market analysts and experts expect the
RBI to further hold the policy rates in its
quarterly monetary policy review which is
scheduled to be held on April 6th. RBI, in its
last policy review in February had changed
its stance from accommodative to neutral,
citing persistent inflationary pressure. With
this latest reduction in the interest rate, the
PPF rate has come down to 7.9% whereas
the interest rate for a one-year time-deposit
has come down to 6.9%.
The government had announced its intention to review small savings interest rates
every quarter instead of doing it annually
last year itself, and these reviews were said
to be based on the yields of government
bonds of the previous three months.
This linking of the interest rates applicable
on small-savings schemes to the yields of
government bonds would, in all probability, act as an incentive for the commercial
banks to pass on the benefits of the policy
rate-cuts to the general public through
lower lending rates on their loans. Banks
have lately been blaming the high cost of
deposits for their high short-term interest
rates, and have been citing this as a reason
that prohibits them from passing on the
benefits of any policy rate-cuts to the borrowers.
Exim Bank likely to raise $3 billion from
overseas markets
The Export Import Bank of India (Exim
Bank) is planning to raise up to $3 billion
from the overseas markets during this fiscal,
as per a statement by the bank’s official.
Exim Bank is known to borrow money from
overseas resources, depending on the market conditions.
The Bank funds the long-term projects
spanning Africa, SAARC countries and
www.iims-niveshak.com
NIVESHAK
and some countries in the far-east. Out of
its total funding every year, half goes to the
African nations. The bank cites Bangladesh,
Sri Lanka, Nepal and Myanmar as another
strong areas for funding in the Indian
neighborhood.
The bank has lately been trying to promote
Indian investors to do business in Africa in
the sectors of power, renewable energy,
railways, roads and agriculture.
Government planning to change the security marks of banknotes once every 3-4
years
As a measure to check counterfeiting of
notes, the government is planning to
change certain security features of higher
denomination notes (Rs 2,000 and Rs 500)
once in every 3-4 years in accordance with
the existing global standards.
The move is certainly welcome, especiallyafter the recent recovery of a large amount
of fake Indian currency notes in last four
months after demonetisation.
The issue was discussed at a high-level
meeting that was attended by senior officials from the ministries of Finance and
Home, including Union Home Secretary.
Supporting the move, the Home Ministry
officials said that the practice of changing
security features of currency notes with this
frequency is followed by most of the developed countries and hence, it is imperative
for India to follow this policy as well.
The new notes introduced post the demonetisation move had no additional security
features and the security features that they
had were very similar to those in the old Rs
1,000 and Rs 500 notes.
India seeking a $2 billion funding from the
New Development Bank
India is seeking a funding amounting to
around $2 billion from the NDB (New Development Bank) for its infrastructure projects and has urged the multi-national bank
for a faster disbursement of loans, as per a
statement released by our Finance Minister, Mr. Arun Jaitley. He also stated that the
NDB – an organization which was set up by
the BRICS nations around two years ago
-- ´must be alive to the role envisioned for
it by its founders´, and that India still has a
huge unmet need for infrastructure investment, which is estimated to be around Rs
43 lakh crore for the next five years.
The estimated unmet demand for investment in infrastructure projects in emerging markets and developing economies
is pegged at over $1 trillion a year by the
World Bank. These nations need to carry
out this huge investment in a sustainable
manner. The already established Multilateral Development Banks are now struggling
with capital constraints, and are unable to
meet the financing challenge faced by the
developing nations. A bank like the NDB is
expected to fill that gap. The huge investment required by these nations should be
carried out in a sustainable manner.
DBS expects the Indian Economy to grow at
7.6% next year
DBS maintains a positive outlook for India's GDP growth, expecting it to pick up
again to 7.6% in the next year supported by
improving consumption, better monsoon
season, higher spending from the public
sector, and better growth in its exports,
as per a DBS report. Further, the global
agency said that the ongoing reforms by
the Modi Government will strengthen the
growth productivity, and the country's GDP
will also benefit from the favorable demographic dividend. The report also cited the
example of the GST, saying that the Goods
and Services Tax which is expected to be
rolled out in July 2017 is a significant reform which would have long-term benefits
despite a brief drag on growth right after its
launch.
The Month That Was
The Niveshak Times
5
www.iims-niveshak.com
6
29800.00
7,000
BSE
DII
FII
6,000
29600.00
5,000
29400.00
4,000
3,000
BSE
29200.00
2,000
29000.00
1,000
0
28800.00
-1,000
28600.00
-2,000
28/03/2017
27/03/2017
24/03/2017
23/03/2017
22/03/2017
21/03/2017
20/03/2017
17/03/2017
16/03/2017
15/03/2017
14/03/2017
10/03/2017
09/03/2017
08/03/2017
07/03/2017
06/03/2017
03/03/2017
02/03/2017
01/03/2017
28400.00
FII, DII Net turnover (in Rs. Crores)
Market Snapshot
Market Snapshot
-3,000
Source: www.bseindia.com
www.nseindia.com
MARKET CAP (IN RS. CR)
BSE Mkt. Cap
12154525.46
Source: www.bseindia.com
CURRENCY RATES
INR / 1 USD
INR / 1 Euro
INR / 100 Jap. YEN
INR / 1 Pound Sterling
0.00%
-0.50%
-1.00%
INR/1 USD
Euro/1 USD
GBP/1 USD
64.72
69.13
57.91
80.81
JPY/1 USD
SGD/1 USD
LENDING / DEPOSIT
RATES
Base rate
Deposit rate
9.25%-9.65%
6.50% - 7.00%
RESERVE
RATIOS
CRR
SLR
4.00%
20.50%
POLICY RATES
Bank Rate
Repo rate
Reverse Repo rate
6.75%
6.25%
5.75%
-1.50%
-2.00%
Source: www.bseindia.com
-2.50%
-3.00%
-3.50%
Date as on March 31st
7
www.iims-niveshak.com
BSE
Index
Open
Close
% change
Sensex
MIDCAP
Smallcap
AUTO
BANKEX CD
CG
FMCG
Healthcare
IT
METAL
OIL&GAS
POWER
PSU
REALTY
TECK
28743
13552
13691
21486
23482
13779
15333
8800
15385
10376
11893
13534
2196
8464
1495
5765
29620
14097
14434
22013
24421
15257
16446
9270
15312
10336
11804
13564
2274
8597
1600
5771
3.05
4.02
5.43
2.45
4.00
10.73
7.26
5.35
-0.47
-0.10
-0.74
0.22
3.58
1.56
7.02
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%
BANKEX, 4.00%
AUTO, 2.45%
Sensex, 3.05%
Consumer
Durables,
10.73%
Capital Goods,
7.26%
Market
CoverSnapshot
Story
Market Snapshot
Niveshak Investment Fund
Done on 30/6/14
Information Technology(10.78%)
HCL Tech.
Infosys
TCS
Wg: 4.03%
Gain : 16.90%
Wg: 3.14%
Gain: 25.95%
Wg: 3.60%
Gain : -1.32%
FMCG(22.12%)
Colgate
HUL
Britannia
Wg: 5.56%
Gain : 30.13%
Wg: 7.01%
Gain: 235.10%
Wg: 4.31%
Gain: 29.46%
Amara Raja
Wg: 3.95%
Gain: 23.88%
Godrej Consm.
Wg: 7.91%
Gain: 90.70%
Lupin
Wg: 5.56%
Gain : 25.18%
Midcap Stocks (15.36%)
Bharat Forge
Wg: 4.32%
Gain: 13.03%
Kalpataru
Power
Wg: 4.77%
Gain: 23.64%
ITC
Wg: 5.23%
Gain: 22.35%
Titan Company
Wg: 4.78%
Gain: 23.37%
Chemicals
(8.25%)
Pharmaceuticals
(8.68%)
Dr Reddy’s Labs
Wg: 3.12%
Gain: -8.84%
HDFC Bank
Wg: 7.69%
Gain: 56.48%
Misc. (12.70%)
Auto (8.37%)
Tata Motors
Wg: 4.42%
Gain: 3.88%
Bank (7.69%)
Natco Pharma
Wg: 6.27%
Gain: 65.34%
Asian Paints
Wg: 8.25%
Gain: 70.71%
Textile
(6.07%)
Page Indus.
Wg: 6.07%
Gain : 39.28%
Performance Evaluation
As on 31st March 2016
103
March Performance of Niveshak Investment
Fund
185
Performance of Niveshak Investment Fund since Inception
175
102.5
102
165
101.5
101
155
100.5
145
100
135
99.5
99
125
98.5
115
98
Scaled Sensex
31-Mar-17
29-Mar-17
27-Mar-17
25-Mar-17
23-Mar-17
21-Mar-17
19-Mar-17
17-Mar-17
15-Mar-17
13-Mar-17
11-Mar-17
09-Mar-17
07-Mar-17
05-Mar-17
03-Mar-17
01-Mar-17
97.5
Scaled NIF
Opening Portfolio Value : 10,00,000
Current Portfolio Value : 15,42,206
Change in Portfolio Value : 37.98%
Change in Sensex : 44.51%
105
95
1/30/2014
9/23/2014
5/14/2015
Sensex Scaled values
12/28/2015
8/11/2016
3/14/2017
Portfolio Scaled Values
Value Scaled to 100
Risk Measures:
Standard Deviation : 14.42 (Sensex 14.30)
Sharpe Ratio : 1.017 (Sensex : 0.862)
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
Buy
Ticker (BSE)
500209
Target
Current Market price
Rs. 1234
Rs. 1020
Ticker (NSE)
Infy
Sector
IT
Potential Upside (1-Year)
10.5%
M- Cap
₹ 225456 Cr.
Growth Drivers
Corporate Governance
Business Description
Company
Background
Rating
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.
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 &
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
Dec - 16’ Sep – 16’ Mar – 16’
than what is required by companies act, 2013 and listing regulation
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,
Others
0.49
0.49
0.49
finance and investment and Corporate Social Responsibility (‘CSR’)
Committee, risk and strategy committee, Stakeholders’ Relationship
Total
100.00
100.00
100.00
Committee.
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
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.
Equity Research Report – Bharti Airtel Limited
Date: 31st March
60.0%
Industry Rivalry – High
Infosys faces fierce competition from
competitors for client acquisition and retention
also to deliver cost effective services
ROE- Peer Comparison
40.0%
0.0%
2016
2015
2014
2013
2012
ROA-Peer Comparison
40.0%
20.0%
0.0%
2016
Technical Analysis
Rating Def.
Comparable Valuation
TCS
HCL Tech
2015
2014
Infosys
Tech Mahindra
2013
2012
Wipro
We have calculated the stock’s intrinsic value based on a
weighted average of DCF, Forward PE and Relative
valuation. Starting FY17, growth in revenues have been
estimated at an average of 16%, which is consistent with
previous years growth rate. However, if proposed H-1B
Visa norms are implemented, then it will adversely affect
revenues of the company in the North American region.
Though IT industry is very dynamic in nature but Infosys
limited has a low Beta of .69, with a WACC of 10.3%.
The fundamental value stands at INR 1234 and given a
CMP of INR 1020 as on 31st March 2017, the stock is
undervalued.
BUY: If stock is expected to deliver more than 10%
annualized returns over holding period
NEUTRAL: If stock is expected to deliver (-)10% - 10%
annualized returns over holding period
SELL: If stock is expected to deliver less than (-)10%
annualized returns over holding period
The stock is technically very weak and is testing long
term support levels. It has given weekly closing below
first support level of 960. This can make the stock reset
to its next support level of 935. If it also gives a decisive
closing below 935 then stock will fall further to 909.
Stock is trading below all important moving averages
which further adds to the weakness in the stock.
RSI is at 40 and is showing a downward journey ahead.
MACD also shows a downward journey ahead.
Industry Competition
Industry Figure
20.0%
Buyer power – High
Due to high competition in the IT sector, buyer
enjoys superior bargaining position and
exercises pressure.
Threat of Substitutes – High
Since the technology environment is very
dynamic and uncertain, threat of substitutes
product remains high.
Threat of New Entry – Medium
Off-shore presence and low cost locations of
the incumbent firm is likely to intensify
competition in the market.
Supplier Power – Low
Infosys being a service industry is not
dependent on peculiarity of any products for its
end to end solutions. Hence, supplier’s power
is low.
Valuation Summary
Method
Value/Share Weight
Discounted Cash Flows
1550
0.33
Relative Valuation
Forward
PE Valuation
960
0.33
1193
0.33
Fair
Value
1234
12
Article
of the
Month
Cover
Story
NIVESHAK
Investing For More Than
Just Money
AnoopPrakash
Global warming, economic inequality,
corruption, women safety and food insecurity
are just some of the globally known causes
that has sparked a change in the way we
live and think. Advertisements are globally
moving to spreading messages and changing
perspectives as a way to sell their product
and ideas, something that catches more
eyeballs from publicity rather than paid
airtime. And similarly so, investors apart from
targeting a financial return are also keen to
see their money make an “impact” as they see
themselves as socially responsive millennials
making a difference to society as they seek to
MARCH 2017
IIM Shillong
build return.
Considering the two aspects of their
investment, viz. making a difference and
generating a return, are both never a given.
How much return you make will depend on the
conditions of the market and the comparative
performance of your investment vehicle;
however, the part of making a societal impact
is less dependent on market circumstances and
is more rooted in the fundamental principles,
ethos, vision, and mission of a company one
desires to commit their money into, making
it something that can be expected with more
certainty than estimating financial return.
NIVESHAK
at an average of nearly ten years, much higher
than venture capital and private equity funds.
The Indian Revolution
A high number of individuals and families in
India reside in rural areas, with lack of adequacy
towards financial support. Farmers and small
businessmen in these areas are troubled with
heavy costs of borrowing from local money
lenders as they have no support from the
formal banking system and have no security to
offer. While cost of borrowing range anywhere
cost to avoid creating it in the first place, the
burden of which falls on every taxpayer. It was
the same fundamentals that led to the advent
of corporate social responsibility, now at an
earlier stage in the monetary flow. Investors
believe that businesses run on sustainable
pillars strengthen the triple bottom as a
stronger foundation in a VUCA world.
The Audience
Impact Investing has witnessed an
unprecedented rise since 2007 and is expected
to continue for the times to come. The
investor regime has trickled down from big
institutional investors and venture capitalists
through to mutual funds and which has now
entered the retail investment space. The
biggest impact has come about for those
seeking capital. Millennials aiming to be future
entrepreneurs and businessmen are forced to
assign increasing weights to the change their
ideas carry in addition to the financial return
that they could sell their investors upon. The
investment horizon targeted is one the longest
between 36%-60% a year, the average Indian
investor finds it hard to find opportunities to
invest with double digit returns. The solution,
social investing start-ups which connect the
two imbalanced sides. Popularly called “Impact
Partners”, social investment sites are setup to
allow investors to help the needy by pooling
small amounts (as low as INR 100) from a wide
base of investors. With collective investing
and technology, these organizations are
helping the needy have access to reasonable
costs of borrowing while meeting the social
expectations of investors. Remember, these
are investments and not donations, a welcome
change in money transfer.
As per the Impact Investors Council, an industry
body that has been established to strengthen
the significance of impact investing in India,
there are 30+ active impact investors in India
that have invested a cumulative $1.6 billion
in approximately 300+ enterprises and funds
across a range of industries such as financial
inclusion, agribusiness, healthcare, education,
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
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The Growth of Impact Investing
The responsibility to drive change for social
betterment cannot be left on the shoulders of
the government alone. It is impractical to have
a system where corporate houses are left to
drive a double-digit growth in sales and profits
while leaving the government to clean up the
mess left behind by way of pollution, poverty
and negative influence created as a by-product
of achieving numerical gains. The cost to clean
the mess left behind far outperforms the
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clean energy etc. The total invested amount
positions India as one of the largest impact
investment destinations in the world. Some
examples include:
•
D.Light - design and sell high-quality,
affordable, and innovative solar-powered
consumer products for families without access
to reliable electricity
Mandala Apparels - strives to promote
environment-friendly and fair trading practices
by ethical sourcing from local organic cotton
farmers
The Future
It is widely accepted that how the world
chooses to invest for the next decade will
determine how the world will look for the
next century. It is therefore, more important
•
Drishti - quality, affordable eye care
services covering primary and secondary eye
care in underserved markets
•
Equitas - a successful Microfinance
Institution that makes finance available to its
clients at a reasonable cost in a transparent
manner
•
Hippocampus Learning Centre education centres which offer kindergarten
and afterschool primary education programs
for children in rural India
•
Mahila Housing Trust - works to increase
household-level access to water and sanitation
in urban slums
than over, to give global issues and societal
change its due weightage in determining
one’s portfolio of investments. Investments
on social issues are not targeted at the cost of
making profits on one’s investment, it is meant
to look beyond quantitative data and analyse
the impact of where the money is headed.
Remember, the cost of prevention is far lesser
than that involved to cure the problem. The
problem of climate change is irreversible and
no number can be derived to bear this cost.
Analyse completely before you employ your
savings!
MARCH 2017
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Cover Story
Race for the Summit – Vod an
Idea
ArjunBhargava
The Telecom Sector of India is creating buzz
after buzz in the markets of the Nation 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.
The Vodafone-Idea merger will mandate
the emergence of a Telecom giant which will
have varied implications on the industry,
competition, price wars, services, staff,
and most importantly on the customers.
IIM Shillong
One would witness more consolidations
by stalwarts of the industry in the form of
acquisitions and mergers in future.
Synergy Effect
Post the merger, Vodafone and Idea initially
ranked second and third, are placed at the
summit toppling Bharti Airtel from the
apex to the second position in the Telecom
Sector. The merged entity would account
for a subscriber base of approximately 39
crores significantly higher than the Airtel’s
27 and Jio’s present number of 7.2 crores.
The revenue market share of the merged
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entity is expected to be close to 40 percent
in comparison to Airtel’s 32 percent.
Further benefits include the increase in the
EBITDA margins as opposed to the earlier
figure of 30 percent for both the companies,
far lesser than Airtel Limited’s and Reliance
Jio Infocomm Limited’s targeted margin
of 40 percent and 50 percent respectively,
benefits to the tune of Rs. 13,400 crore and
annual savings (including operating costs
and capital expenditure) worth Rs. 14,000
crore by the fourth year. The net present
value of the entire savings amounts to Rs.
70,000 crore ($10.5 billion).
The success will largely attribute to the
synergy effect brought about by the
merger between Idea Cellular Limited
and Vodafone India Limited as a result of
combining their operations. The merger
has in turn brought about windfall gains for
both companies and establishing a strong
foothold for them in the Telecom Industry.
MARCH 2017
Short Term and Long Term Effects
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
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 threeway amongst the merged entity, Airtel and
Reliance Jio. The Reliance Communication
which itself is in talks of a merger with Tata
Teleservices and Aircel might add to the
kitty soon; the competition from Reliance
Communication is expected to be shortlived, though.
With the companies consolidating,
increasing numbers of mergers and
acquisitions in the industry, price wars will
be short-lived phenomena. Eventually, the
prices are bound to increase with fewer
companies in the market. The technology
shall improve, customer experience would
be enhanced, and better services will
prevail. Eventually, the customer will be the
king either way.
Industry Analysis post the Vodafone-Idea
merger
The consolidation of companies in
the Telecom sector is expected to do
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
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The merger of Idea and Vodafone would
significantly reduce the burden of the
financial issues faced by either company in
the past. It is expected to engender heavy
cash flows for the merged institution,
ameliorate the quality of services, enhance
customer experience and satisfaction while
pleasing the shareholders as well.
Effect of Merger on the Industry
A lot of Industry experts have a keen eye
on the Vodafone-Idea merger since the
valuation post the merger of the two
stalwarts would set the benchmark of the
Industry. All other telecom companies
would henceforth be valued on the same
basis thus bringing unanimity and parity
to the field of Telecom Valuations. Also,
the merger would benefit Airtel to stay
competitive in turbulent markets and be
superiorly positioned to retain its market
share.
As per Altamount Capital Management
market expert on equity Prakash Diwan, “If
the merger talks materialize, it would now
be extremely difficult for Reliance Jio to
fight Bharti Airtel. Reliance Jio will weaken.”
The announcement of the news affected
the stocks of Bharti Airtel as they soared
14.39 per cent to Rs 370 on BSE and ended
at Rs 347.65 on BSE, up 7.48 percent. The
shares of Bharti Infratel wilted 7.07 percent
to Rs 328.75. “Shares of Bharti Infratel
fell because the overlapping tenancy of
Vodafone and Idea will come to an end due
to synergy. They both were using Bharti
Infratel towers,” Diwan said.
The Idea Cellular shares peaked as high
as 11% but settled at Rs97.60 on the BSE,
crashing 9.55%, while the Sensex declined
0.44%. The depression in the share value of
Idea took place due to unconfirmed reports
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
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layoff of employees since they believe the
expanding opportunities shall ensure the
existence of work and jobs of employees to
stay at all levels in the business.
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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
Vodafone-Idea merger will be the lack of
Merged Entity
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
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19
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Negative Effects of low Interest Rates on an Economy
ArnabSurai
“It is not because of the benevolence of
the baker that we eat fresh bread every
morning but because of his desire to make
money”. – Dr Raghuram Rajan.
How true are these words from the James
Bond of the banking sector. In the greed
to increase credit growth, banks and financial institutions tend to lower rates of
interest. Government also steps in, often
pressurised by the deadly nexus of political and heavyweight corporate lobbying.
The global economy, post the Financial
Crisis (2008-09), has witnessed a tepid
growth. This phenomenon can be attributed to myriad factors: lack of productivity, repercussions of Brexit, slowdown in
IIT KHARAGPUR
population (in many of the advanced &
emerging economies) - to enlist a few.
Governments across nations are facing a
seemingly insurmountable challenge of
stimulating economic growth, fuelling
demand and increasing consumption
levels. These governments, along with their
central banks, have attempted to resolve
this problem by adapting several measures. One of them has been the lowering
of interest rates in order to increase credit
availability and hence infuse growth in
their respective economies. This measure
has been incorporated by several nations
with some of them – Denmark, Sweden,
Switzerland and Japan, taking the interest
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NIVESHAK
proach of lowering interest rates to stimulate
growth has been partially successful in some
cases, unsuccessful though, in most.
The naïve thinks that low interest rates are very
good, as growth would increase, stalled projects
would start rolling and unemployment would
reduce. In order to focus on quick short term
growth, long term growth sustainability is lost.
Let us see how that happens by asking a few
questions which would be answered as we proceed. How low is low? What is low for a mature
and developed economy and what is the definition of low for an emerging economy?
An emerging economy will have a higher demand for goods and services, a higher return on
investments than a mature economy, so demand
for funds are also high in such a scenario. This
leads to a higher cost of capital, also known as
interest rates. In contrast, interest rates tend to
be lower for a mature economy, which just needs
to maintain a certain sustainable rate of economic activity and growth. So an interest rate of
4.5% might be low for an emerging economy like
India and Brazil, but for US, a rate of 3.5% may be
called high rate of interest.
Earlier, when the global economy was not too
much interlinked and effect of globalization not
much pronounced, rippling effects of economic
data were not found across countries and continents, and were limited to domestic economy.
However, with high speed and real time information flow, the effects of global economic data are
felt worldwide and almost instantly.
Effect on banks and financial institutions
The biggest casualties of the fall in interest rates
are banks. Falling rates squeeze banks income
because they make money on the spread between the interest charged for loans and payments made to customers on deposits. When
people can't earn attractive interest income on
their money in savings accounts and term deposits, they either use their money to pay off debt or
invest in assets like real estate, gold and stocks.
This means banks lose deposits. When interest
rates are abnormally low, banks don't have a high
deposit base, so they only loan to borrowers with
the highest credit ratings and substantial assets
to collateralize those loans, losing out other opportunities. Credit growth falls. Small players find
it difficult to raise debt capital via loans, hamper-
MARCH 2017
ic growth.
Interest rates and default risk
High interest rates mean high opportunity cost
of money (both for banks and borrowers), so
banks and financial institutions evaluate borrowers’ credentials strictly & properly before lending,
also firms with low commercial viability of a project are wary of investing, so default risk is less.
Low interest rates encourage banks and corporates to take more risks due to high liquidity and
chances of default increases.
It also encourages individual consumers to make
high value purchases like apartments and real
estates, even when they are not capable of doing
so, increasing the likelihood of default.
Interest rates and incentive to invest vs. consume
The adverse long-term impact of very low interest rates is on the incentive for individuals to
save. Keeping the interest rates low has pushed
the returns on normal savings and deposit accounts close to zero after adjustment for inflation. High interest rates encourage consumers
to save and invest more, as consumers tend to
earn a high return on investments. Low interest
rates lead to consumption driven economy. This
sends a very wrong signal to the younger generation which needs to save more for retirement,
as they are likely to live longer than their previous generations. Low saving could also constrain
productive investments. The government – quite
rightly – believes we need to invest more in
infrastructure and other wealth-creating capital
projects. But this programme of investment and
infrastructure development cannot be financed
sustainably unless there is a flow of savings to
fund it.
Low interest rate and funds crunch in developed
economies
A differential of interest rates between developed (low interest rates) and developing economies (high interest rates) lead to fund inflow into
emerging economies (as investments) in order
to earn more return on corporate and government bonds, bank term deposits, leading to weak
economic activities in a matured economy. This
leads to job losses and unemployment, contrary
to popular belief that low interest rates leads to
enhanced economic activities.
Real vs. nominal rates and inflation
Low interest rates leads to high liquidity and
availability of more funds in an economy. While
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Effect on central banks
It is true that central banks set interest rates, but
a much of it is guided by general macro- economic conditions prevailing in domestic and
world economy. When the economy is in a bad
shape and is gasping for breath (funds), a classical approach popular among central banks is
to lower rate of interest. But if interest rates are
already low, it leaves very less room for central
banks to further lower rates and provide the
much needed stimulus for growth. So low interest rates lead to less power for central banks to
take corrective actions in case of downturn by
further lowering of rates.
Market volatility
Borrowing costs tend to rise in a healthy economy, reflecting growing demand for money
among consumers and businesses and bolstering the profits of banks and other financial firms.
Low interest rates signal the opposite.
Any stock-market selloff can be taken as a signal
that most of the gains of low rates have been
harvested, and time is right for rate hikes. In a
situation of sustained long period of low interest
rates, it is difficult to distinguish between risky
and non-risky asset classes and projects, and this
results in market volatility.
Low interest rates affecting pension and insurance funds
Low rates are a bane to pension funds and insurers, which hold long-term assets to pay future
claims, by making those claims larger in presentvalue terms than they were when so-called
discount rates were higher. So insurance premiums and pension deductions rise, leading to
elsewhere. Such rates punish long term investors
saving for retirement alike, by generating very
low or negative real rates of return in the long
run, who tend to invest in government bonds,
pension schemes etc.
Effect on currency markets
Low interest rates have an adverse effect on currency markets, leading to low inflow or potential
net outflow of dollars (from FIIs), leading to currency devaluation, trade deficit. Also, tendency
to save in the country of low interest rate is low,
as it generates low return. This makes outflow
of funds, devaluating the currency and making
imports costlier. Just the opposite effect happen
in case of exports, exports become more attractive and rewarding. The net effect of both these
phenomena tries to balance out each other, and
quantity of exports/imports determine best suit
for the economy.
Liquidity trap
A liquidity trap happens when interest rates are
so low that they don't serve the normal function of spurring the economy to growth. People
do not get the incentives to invest in regular
financial instruments like banks, bonds and other
fixed income securities, and instead the fund
goes to assets like real estate, gold, stock markets
and paying off already taken debts. This is done
in anticipation of higher returns and to hedge
against low interest rates. It leads to unusually high asset prices, stock market boom and a
potential bubble. This means money doesn't flow
through the economic system. When that happens, funds are not put to their proper use, what
they are supposedly for and productivity falls,
unemployment rises.
When this bubble bursts, there is a huge loss of
investments which is detrimental to the economy. With more money chasing fixed amount of
resources, prices tend to rise in medium term,
leading to abnormally high inflation for a sustained period of time later.
Low innovation
Low interest rates might make a firm postpone
investment decisions to increase productivity
to retire current debt, if cost of current debt is
higher than cost of raising fresh investments to
increase productivity.
The cost of production mainly comes from two
major areas, cost of funds and the technology of
production used. If cost of funds is less, total cost
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er amount of funds keep chasing limited assets,
leading to demand supply mismatch and artificially pushing up prices resulting in high inflation.
(1+nominal interest rate) = (1+real interest rates)
(1+inflation)
as nominal rates fall, inflation rises leading to further lowering of real interest rates, causing real
rates to hover around zero or even negative real
interest rates in extreme cases. This also creates a
case for preponing future consumption to present date, in items like cars electronic goods and
other objects fuelling consumption, hampering
investments.
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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
technology that leads to lower production cost
and enhanced productivity, reduced unemployment 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 spending 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 problem 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.
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23
FinFame
Naina Lal Kidwai: A dealmaker in
India
Pratibha Sapra
IIM Shillong
Long before the expression‘deal maker’became
ordinary in India, Naina Lal Kidwai, retired
country head of HSBC, was one of the biggest
deal makers in the country. She was also one
of the first women to enter the formerly male
dominated field of investment banking. In the
book titled ‘30 Women in Power’, the chapter
on her is titled “The first Lady”. Rightly so, as she
has many firsts to her name. “When I embarked
on this journey, I didn’t think women would be
where we are today. It is very gratifying,” she
says.
Early Life and Career
Naina was born to a homemaker mother
and a father who was the chief executive
of a leading insurance company, and had
decided to join the corporate sector early
in life. As a student, she used to be the class
topper and was also the class captain, house
captain and head girl. Since her passion lied in
Mathematics and Accountancy, she pursued
Bachelor’s degree in Economics at the Lady
Shri Ram College, Delhi University and was
also in the leadership position as the president
of the student union of the college. She also
studied chartered accountancy was among
the first three women to be chosen as articled
clerk by Price Waterhouse Cooper in 1977. She
went on to pursue Strategy and Finance from
Harvard Business School and in 1982, became
the first Indian woman to be an alumnus of the
university. The years at Harvard, Kidwai says,
altered her world view and greatly influenced
her leadership style.
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Naina was offered a position with ANZ Grindlays
Bank after finishing MBA. Within a span of few
years, she rose to the position of Head of the
Western Region. In 1989, Naina had become the
Country Head for Foreign Investment Banking,
being the youngest person to hold this position
ever. Under her leadership, the NRI investments
with ANZ Grindlays tripled. In 1991, she moved
on to Retail Banking to explore new avenues.
Women at Work
In a recent statement, Naina said. “I believe
that challenging periods in society usually
shift the spotlight to women. During World
War II, women stepped out of their homes to
keep the factories humming and the economy
running. This has been the case every time,
and the latest economic challenge has been
no different. No economy can thrive or even
survive by ignoring the contributions of
women”.
She is strongly in favor of inspiring women
to participate in the “Lean In” movement,
started by Facebook COO, Sheryl Sandberg.
She requests women to follow their ambitions
rather than surrendering to self-doubt as
well as the pressure from society to restrict
themselves to household. A mother herself,
she empathizes with those who are told that
they will not be able to balance between home
and office, and says that it can be achieved
with time management. She fought her own
arguments with her mother, who had insisted
that she give up on her career while she was
pregnant, “if I had stepped away, it would have
reflected on all women. My whole experience
was to show how to do it”.
In all her senior positions, her first objectives
involved assuring equal pay, equal respect,
and the same quality of amenities and benefits
for female employees as enjoyed by male
colleagues.
Challenges faced
The ‘first lady’ also had to face many challenges
to reach these heights in her career. She was
the first woman in her family to work. She says,
“I come from a very conventional north Indian
family. But my parents had aspirations for their
children, and because I didn’t have a brother
those aspirations were transferred to me and my
sister.”
Despite that, she often faced great pressure to
give up. Her mother often asked her to quit.
As said by Naina, “You constantly have people
telling you managing a home and a career is
really difficult, are you sure you want to do this?
People tell me this all the time.”
After having her first child, she had even
planned to give up her professional career
for family commitments. However, her father
encouraged her to continue. Three decades of
responsibilities in her high profile jobs required
her to travel across the globe, causing her to
miss various important family occasions. With
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
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in making poor women self-sufficient.
At 54, she says she feels as inspired as when
she started. “I thought 54 was an age when you
get old, dull and retire. But I am nowhere near
Way Forward after HSBC
At the end of 2015, Naina concluded her 13year 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
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have been nothing less than an achievement.
To add to it, she has been awarded with various
prestigious awards.
For her praiseworthy work and her noteworthy
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.
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Finsight
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Is There Any Alternative To The
China Model Of Growth For India?
Sukriti & Sneha
IIM Ahmedabad
With the global economy going through a
massive transition, the world's eyes are set
on the BRIC and MINT countries, waiting
for them to emerge as the new economic
superpowers. While China showed a period
of double-digit growth, with its GDP growing an average of 10.3% per year over the
decade ending 2010, India, with its figure
standing at 7.4%, frustrated economists
and industries alike, showing no signs of
the supernormal growth expected from it.
Today, with China's growth having slowed
to 6.9% in 2015, the question arises as to
what is in store for India. (World Bank, 2015)
and China are often pitted against one
another. Both countries, in spite of having their fair share of problems, have large
populations ready to produce and consume, leading to rapid growth. More relevant, though, is the protectionist nature
of both the economies that gave way to
liberalization. The reform started earlier in
China where trade opened up, but growth
was fuelled through a tightly controlled
public sector. India, on the other hand, had
a slower approach opening up trade while
developing a strong private sector. (Grinin,
2013)
There are a number of reasons why India
China's growth model, given the moniker
MARCH 2017
"Beijing Consensus", emerged as the alternative growth model and was touted
as the blueprint for emerging economies.
The model had a strong export orientation
and invested heavily in manufacturing and
logistical infrastructure. It also, through
regulations and policies, created an environment conducive to doing business, thus
encouraging foreign investment. All this
was brought about through a stronghold of
the authoritarian government on economic
development. (Ramo, 2004)
The issue with the Chinese model, however,
is, that at this point it does not look sustainable. Under heavy influence of the Communist party of China, massive investment
spending was channeled to local governments and state-owned industries. This has
been wasted on projects with negative real
returns. The trouble is, the credit growth
necessary to continue this investment
boom, and these investments has reached
levels almost twice the levels reached in developed nations, US, Japan, Korea and the
UK before their meltdowns. This has forced
China to now rethink its strategy. (Gamble,
2014)
In this light, the question arises; does India
really want to follow the path China has
taken? Probably not. The Indian economy is
different, being far more open and having
a convertible currency. Even China, with its
highly protected financial system does not
have complete monopoly on it. India never
did.
Having said that, India does have a lot to
learn from the Chinese model, particularly
in improving ease of doing business and
developing trade-related infrastructure.
However, the Indian model of growth
needs to deviate from the Chinese model in
two key aspects- inclusion and innovation.
The Chinese model, through its focus on exports, has driven economic growth, but at
the expense of domestic inclusion. In spite
of overall growth in GDP, there is significant
inequality within the Chinese population
among individuals, sectors, and regions.
This has led to lower domestic consumption, currently 50% of GDP, (UNCTAD, 2015)
and a high dependence on exports, 22% of
GDP (World Bank, 2015), thus leaving the
economy vulnerable to global economic
trends and protectionist policies.
India, with its demographic and economic
environments, would benefit from an alternative model of growth. With over 440 million Millennials and 390 million Gen Z-ers,
India's young, growing population provides
an opportunity not only for a major labor
market but also significant domestic consumption over the next 20 years.
Unlike China's consuming population that
largely falls into the Urban Middle (156 million) and Wealthy (1.5 million) categories,
India's consuming population falls into the
Urban Mass category (129 million). This is
the category that, over the next 5-10 years,
will drive domestic consumption. (Goldman
Sachs, 2016) Thus it is imperative to drive
growth in income through the creation of
jobs and investment in infrastructure while
simultaneously growing capacity to meet
the imminent demand.
If growth in India continues as per current
projections, household incomes are likely
to triple, making India the fifth largest consumer market in the world by 2025, thus
making it a desirable market for consumerfacing businesses. (Zainulbhai, 2007) The
sectors likely to face a significant increase in
consumption include fresh and packaged
food and ground transportation.
India’s domestic consumption currently
stands at 70% of GDP (UNCTAD, 2015).
While this is not as high as that of developed economies, it is significantly higher
than that of developing economies such as
China. Thus balancing out domestic consumption with exports can be a significant
driver for growth as well as a buffer against
a volatile export environment.
The second area where India can deviate from the Chinese model is innovation.
The Chinese model, through its focus on
exports, is driven by imitation rather than
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
27
Finsight
NIVESHAK
Finsight
28
NIVESHAK
innovation. Chinese enterprises have been
successful largely in adopting foreign technologies or service models albeit churning
them out more efficiently. While looking at
China’s contribution to information technology, for example, over 85% of its exports are a result of either joint ventures or
multinational firms. (Kennedy, 2010) There
is little indigenous innovation or contribution. This once again can prove disastrous
in case of a drop in international trade.
Such an outlook also prevents the economy
from developing solutions to local problems, thus hindering inclusion.
innovation. Chinese enterprises have been
successful largely in adopting foreign technologies or service models albeit churning
them out more efficiently. While looking at
China’s contribution to information technology, for example, over 85% of its exports are a result of either joint ventures or
multinational firms. (Kennedy, 2010) There
is little indigenous innovation or contribution. This once again can prove disastrous
in case of a drop in international trade.
Such an outlook also prevents the economy
from developing solutions to local problems, thus hindering inclusion.
Globally, a focus on innovation has driven
economic growth and improved standards
of living. Innovation can be a major driver
of growth by leveraging and meeting
the needs of India’s unique demography.
Estimates suggest that an increased R&D
spend of 2.4% of GDP by 2034 and a focus
on innovation can help India attain the
spike in growth that is needed to make it
a 10 trillion USD economy by 2034. India’s
focus on entrepreneurship and the start-up
boom is already heralding this change but
the innovation mindset needs to be expanded across industries. Indian corporates
need to make innovation central to their
strategy, understand local needs, invest in
R&D and seek new business models and
solutions suited to the Indian economic
environment. (India, ASSOCHAM, 2015)
Globally, a focus on innovation has driven
economic growth and improved standards
of living. Innovation can be a major driver
of growth by leveraging and meeting
the needs of India’s unique demography.
Estimates suggest that an increased R&D
spend of 2.4% of GDP by 2034 and a focus
on innovation can help India attain the
spike in growth that is needed to make it
a 10 trillion USD economy by 2034. India’s
focus on entrepreneurship and the start-up
boom is already heralding this change but
the innovation mindset needs to be expanded across industries. Indian corporates
need to make innovation central to their
strategy, understand local needs, invest in
R&D and seek new business models and
solutions suited to the Indian economic
environment. (India, ASSOCHAM, 2015)
This is going to be a huge differentiator in
the Indian growth model, one, which can
protect the Indian model against the many
fault lines that China is facing today. India
needs to adopt a two-pronged strategy in
order to drive down its current trade deficit.
On one hand, it must expand its exports,
on the other increase domestic consumption. Innovation is the key to both of them.
While India might not be able to compete
with China on cost when it comes to exports, it can gain competitive advantage
in the export of superior quality products
developed through innovation. Simultaneously, innovation can stimulate domestic
consumption through goods and services
developed specifically to meet the needs of
This is going to be a huge differentiator in
the Indian growth model, one, which can
protect the Indian model against the many
fault lines that China is facing today. India
needs to adopt a two-pronged strategy in
order to drive down its current trade deficit.
On one hand, it must expand its exports,
on the other increase domestic consumption. Innovation is the key to both of them.
While India might not be able to compete
with China on cost when it comes to exports, it can gain competitive advantage
in the export of superior quality products
developed through innovation. Simultaneously, innovation can stimulate domestic
consumption through goods and services
developed specifically to meet the needs of
MARCH 2017
NIVESHAK
A positive step in this direction can already
be seen in India's start-up culture. This
sector is already benefiting from a wave
of innovation with India ranking third in
tech-innovation related start-ups globally.
These start-ups are attempting to provide
solutions in problematic sectors such as
infrastructure, healthcare, financial inclusion, education, and employment, while
also improving standard of living across
the board. A culture of innovation can also
mobilize India's vast indigenous knowledge and competencies and bring them
to a wider market. This way, start-ups have
the potential to enable inclusion through
innovation. The launch of 'The Start-up
India, Stand up India’ mission reflect that
for the first time in modern Indian history,
the Indian government has understood the
criticality of startups for employment and
economic growth.
Mass and drive up incomes thus paving the
way for substantial domestic consumption,
creating a cycle of sustainable growth.
In order to successfully grow through innovation and inclusion, it is imperative to
create more jobs. Start-ups show promising trends in their ability to generate the
required jobs. At the present rate of growth,
they are projected to generate 250,000
jobs by 2020. This is the primary benefit,
but by no means is it the only incentive to
promote start-ups. The added advantages
offered include increase in FDI, growth
of ancillary industries to the tune of $600
million in advertising and marketing and
$1900 million in logistics, and support to
small and medium businesses. (NASSCOM
ZINNOV , 2015)
A unique feature of this alternative growth
model for India is that it can be self-sustaining in the long run. The private sector,
including both large corporates and entrepreneurial startups, possess the flexibility
and know how to drive innovation across
industries. These innovations will create
new opportunities and generate the 12
million jobs needed each year to provide
employment to the growing working
population. (India, ASSOCHAM, 2015) The
burgeoning workforce will grow the Urban
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
Finsight
the Indian consumer.
29
30
NIVESHAK
FinView
Cover
Story
ERIC LEURQUIN
Professor at Ichec Brussels Management School
1.
European Union celebrates its 60th anniversary, and has been a very successful integration plan thus far. What do see in store for
European Union in the coming years?
Ans: The EU will further enlarge, mostly to
the countries in the Balkans, and also maybe to
Scotland. The EU will further deepen the cooperation among these 30+ countries.
2.
With the formal exit of Britain, announced to take place from March 29th, what
effect would it have on the European Stock
Markets?
Ans: No short term effect, of course. As a
reminder, these (efficient) stock markets have
known about Brexit for a while now, so the all
that has to be incorporated has been incorporated into the markets.
A long term effect could come later if
the outcome of the BREXIT negotiations is negative 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 initiated on March 29th?
Ans: The fate of the Euro is quite independent 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 Germany and France. In terms of leadership, the BREXIT 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
which is currently Eurosceptic and thus a difficult case.
5.
As a European Union member, what
role do you think EU should play to counter the
effect of Trump?
Ans: The EU remains an ally of the US, whosoever may hold the President’s office.
6.
How do you think the Refugee Crises
has affected European Countries, in retrospect,
could it be handled any better?
Ans: In my own, humble opinion, we should
have forced Assad to leave, in order to avoid
the current Syrian war. But we all know that
he has a powerful ally, which is not interested
in promoting democracy in Syria. That is how
I feel we could have done towards mitigating
the crisis which looms that nation now.
CLASSROOM
Purchasing Power Parity
FinFunda
of the
Month
Mr. Fin! Recently I read about
Purchasing Power Parity. Could you please
explain what does it mean?
Hey, Sam! Purchasing Power Parity, better
known as PPP is an indicator of the value of currency.
It is used to measure productivity and living standards
in respective countries. PPP compares various
country’s currencies through a concept called ‘Basket
of Goods.’
‘Basket of goods’ include a fixed set of
commodities. It consists vast array of goods that
affect the daily life of ordinary man.
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
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
rate for that country will also be affected.
Any comparison between 2 countries must be
adjusted for parity. GDP and other indicators are
often represented in PPP-adjusted terms. Most widely
used parity adjustment is Geary-Khamis dollar (also
known as the international dollar).
Insightful! Can we simplify this measure?
Calculating entire basket of goods seems a challenging
task!
Indeed! The Economist simplified this index by
introducing Big Mac index. This index test law of one
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.
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