newsletter

From the Editors desk:

Dear readers,

This newsletter brings to you a ray of hope especially at the time when economy seems gloomy and regulators are head on heels to infuse confidence in investors. Here our writers contribute their ideas and possible solutions .

Plato rightly said: "Nothing in the affairs of men is worth of great anxiety"

and so is our aim to invoke you to think beyond the realms of finance and see the horizon way before others.

Happy reading!!!

Dated: 30th September ,2012 TH

E FI

NANC

IAL

BULL

ETIN

Introduction of credit default swaps in India

3

Indian forex reserve: Glorious asset or future liability?

5

Retrospective taxation-

Implications for India’s Growth

10

All is NOT well-An Asian

Perspective 14

Inclusive Growth– An Challenging opportunity

18

India 2012– Is India Headed towards another 1991

22

Economic Impact of Global Warming

31

Hedge Funds– A much needed stimulant

28

Winner for the Article of the month

35

Inside this Issue

Issue 1,Volume 16

This Newsletter is for internal use at IBS,Hyderabad only and not for sale

The Team:

Advisor:

Dr. V. NARENDRA

Faculty Coordinator:

Dr. S. VIJAYLAKSHMI

Student Coordinator:

ROSHNI NAIR

Editor & designer:

VIKAS SINGH

Contributors:

1. Neeraj Bharti

2. Mayank Jain

3. Nitin Bhat

4. Aditi Vidyarthi

5. Lakkshay Bussi

6. Ashish Jain

7. Shovik Kar

8. Jatin Kumar

9. Gurucharan

"Coming together is a beginning, staying together is progress, and working together is success."

by Henry Ford

THE FINAN CIAL BULLETIN

This Newsletter is for internal use at IBS,Hyderabad only and not for sale

“Learn from yesterday, live for today, hope for tomorrow.” – Albert Einstein

I ssue 1,V olume 16

After reviewing the final guidelines issued by RBI, it has been found that the regulatory

framework under which the CDS will operate in India is quite different from the one

followed globally. RBI has kept its main objective of developing the corporate bond

market through introduction of Credit Default Swaps in the market keeping in

consideration its role in 2008 financial crisis. We can see that RBI has only introduced CDS

among the various Credit Derivatives. This is purposed to avoid complexity at infancy

stage of the product. Following are the observations from the guidelines.

Firstly, the protection can be bought by only those who actually hold the bonds (except

for market makers). Naked CDS by users have been banned to avoid speculation in the

markets. Transfer of CDS by the buyer to a third party has also been kept under strict

view so as to ensure no possibility of naked CDS. Ensuring all that through strict audit

discipline (submission of auditor’s certificate) would be time consuming and lengthy that

can be a discouraging factor. I think at this nascent stage speculation is required not only

from market makers but also from users so as to make market more liquid and have

better pricing, as users are more updated about the financial health of the underlying

entity.

RBI has confined CDS to corporate bonds as underlying. It is a good measure initially to

provide thrust to the corporate bond market, which later on can be broadened to loans/

CPs/CDs etc. CDS on Obligations such as asset-backed securities/mortgage-backed

securities, convertible bonds and bonds with call/put options have not been permitted.

To make the CDS/corporate bond market more deep and vibrant such underlying must

also be introduced.

Unlisted but rated bonds or Unlisted/unrated bonds by SPVs of Infra Companies are

eligible for underlying obligation. It would help these companies to easily raise funds from

This Newsletter is for internal use at IBS,Hyderabad only and not for sale.

“Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.” – Tyler Durden

I ssue 1,V olume 16

the bond markets. Barring other unrated or unlisted bonds also defeats the purpose as

the bonds that are low rated and have high risk need to be promoted and sold in the

markets. These are the bonds that lack market. Not allowing CDS on that would hamper

their development and the entire development of the market.

The list of credit events is extensive and broadly covers the necessary triggers like

Bankruptcy, Failure to pay, Repudiation/moratorium, Obligation default, Restructuring

approved under BIFR and CDR mechanism. Standardization of the CDS contracts in terms

of coupon, coupon payment dates etc. has been asked for. Though this would ensure

liquidity in the market, but may lead to inflexibility for the protection buyers who may not

get a hedge as per their investment structure.

Settlement methodology mandated for users is physical where as for market makers it

can be cash or physical. This is good as it would avoid building of exposures higher than

the total bonds outstanding. RBI has specified risk capital charges for banks’/PDs’ bought

and sold CDS positions as per underlying bonds. The capital charges are rationally

assigned keeping into consideration asset and maturity mismatches. RBI has asked all

market makers to report their CDS trades in corporate bonds to CCIL trade repository CCIL

Online Reporting Engine. It is a good measure to avoid building of any huge gross

counterparty exposures among the participants.

So it is expected that currently the Indian CDS market will operate in a stricter

environment within a limited framework.

CONTRIBUTED BY:

NEERAJ BHARTI

MANAGER (MMGS-II), BANK OF INDIA


“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” – William Arthur Ward

I ssue 1,V olume 16

Today India’s Foreign Exchange Reserve worth around 290B$. It includes dollar, euro,

sterling and yen currency asset deposits, gold, special drawing rights and international

monetary fund reserve positions. These are the assets under RBI and are primarily used to

stabilize the fluctuations in Indian currency (Rupee) vs. dollar exchange rates and for

foreign payment obligations in order to maintain the country’s credit worthiness.

http://www.rbi.org.in/scripts/PublicationsView.aspx?id=14350

In past the major debate has been about the most appropriate amount a country needs

to hold in its forex reserve which is sufficient enough to fulfil country’s near term

payment obligations and simultaneously it incurs the least possible opportunity cost. In

1996 Dr. Rangrajan committee emphasized that emphasis should be on payment

obligations along with level of imports.

But we also need to consider the sources of this huge build up in Forex till date. It relates

to foreign currency accumulation in India and the major components of foreign currency

in India have been net FIIs, NRI deposits, remittances, net FDI and ECB while it is

decreased due to continuous current account deficits.

Foreign Institutional investors have been the major source of forex till date. High growth


“Everyone thinks of changing the world, but no one thinks of changing himself.” – Leo Tolstoy

I ssue 1,V olume 16

rate of Indian economy over developed economies and favourable policies by Indian

government to attract foreign capital in order to take care of rising current deficits has

prompted the foreign investors to invest a huge amount in the last decade. This

continuous source of investment helped India to take care of its current account deficit in

terms of foreign currency requirement and resulted in rupee appreciation and reserve

accumulation in the period of 2004-08.

Similarly FDI also contributed to forex reserve but its amount has been very less in

comparison to FII. After global recession although FII maintained a positive trend whereas

due to policy issues in India there has been a continuous negative trend in net FDI

investment.

http://country-stats.marketline.com/ViewResults.aspx http://country-stats.marketline.com/ViewResults.aspx

It is clearly visible through investors’ behavior that their motive to bring forex in India has

been to earn superior positive returns. FII’s motive has been short term return where as

FDI is possible only if investors will get a superior return for their investment in future.

Thus as already witnessed this source will bring substantial dollars in glorious periods but

in future if situation worsens it would result in possible capital flight. Even then FDI is

suitable for India’s growth perspective but there the major constraint has been poor

infrastructure and ambiguous policies.

India’s current account takes care of two major items, net of export and import and

remittances. India has been one of the largest remittance recipients from the workers


“A journey of a thousand miles begins with a single step.” – Lao-tzu

I ssue 1,V olume 16

primarily in Arab countries and USA. India received about 66B$ in remittances in year

2011. This amount has been continuously rising after 2000 and even was a major source

of foreign earnings for India at the time of recession. But it is very alarming that even

after a very sharp rise in remittances the total current account deficit is increasing at fast

pace.


India’s share in global trade is continuously increasing. After 1991 crisis Indian policy was

to boost export in order to build forex reserve. India’s immediate response was several

policy measures such as exports promotion zones like SEZ, tax incentives and export

promotional schemes. India also allowed the import of heavy machinery and technology

in order to boost productivity of Indian organizations and to make them able to compete

with foreign players. But in the present scenario India’s major export commodities

include engineering goods, petroleum products, pharmaceuticals, gems and jewellery,

textiles, agricultural products, iron ore and other minerals. Out of these commodities

substantial portion is of raw materials and low value products which are converted into

valuable products in foreign countries. Even today India imports advanced technology

materials like electronic goods, etc whereas China exports substantial amount of

electronic goods. India’s other import commodities include crude oil and related

products, machinery, gold and silver.


“Both optimists and pessimists contribute to our society. The optimist invents the airplane and the pessimist the parachute.” – Gil Stern

I ssue 1,V olume 16


Today although Indian exports worth around 300B$ but it is still less than imports of

about 450B$ and thus results in huge trade deficit. Another concern is that Indians

investment in gold, a non productive asset is continuously increasing due to continuous

slow-down. It is also expected that consumption of electronic goods (a major import

item) will be ten times in 2020 in comparison to that in 2010.

Finally we can consider India’s external debt. It is the part of the total debt that is owed to

creditors outside of India. It includes debt to government, corporations and households

by foreign creditors like ECB and NRI deposits. It is continuously increasing at a fast pace.

International investment position is a suitable indicator that reveals the value and the

composition of financial assets of residents of an economy and liabilities of residents of

an economy to non-residents. The difference between an economy's external financial

assets and liabilities is its net IIP.

Although ECBs offer attractive rates to Indian firms in comparison to lending by Indian

banks but the effective utilization of that is susceptible to macroeconomic factors. A

possible slow down and exchange rate risk can expose corporations’ inefficiencies in their

payments which in turn can deteriorate India’s creditworthiness. Similarly although

government offers attractive interest rates for NRI deposits but it earns very low interest

on forex reserves.

We can conclude that although India holds a substantial forex reserves as an asset but its


“Learn all you can from the mistakes of others. You won’t have time to make them all yourself.” – Alfred Sheinwold

I ssue 1,V olume 16

foundation is based on liabilities. To build a healthy reserve asset India needs to invest

the same through a separate fund to access advanced foreign technology to build

excellent infrastructure. It will attract more FDI and superior technology to promote

manufacturing for enhancing premium products export. This phenomenon will control

imports, increase Indian manufacturers’ competitiveness, reduce government

dependence on FII and NRI deposits and will enhance the healthy forex reserve.

CONTRIBUTED BY:

MAYANK JAIN

PGDM

MDI GURGAON


“Derivatives are financial weapons of mass destruction.” -Warren Buffett

I ssue 1,V olume 16

The audacious move on the part of the Finance Ministry to amend the Income Tax act,

with retrospective effect sent ripples not only through the Indian markets, but ended

up creating a sense of apprehension in foreign markets too, particularly the developed

ones. Their fear is not unwarranted, since the retrospective amendment could lead to

taxation of offshore transactions involving capital gains, from 1962 onwards! Almost

all these are cases in which financial transactions were routed to India through some

tax havens. Fresh in memory is the Vodafone case where the latter was asked to cough

up a massive US$2.2 billion in taxes for the capital gains made by acquiring the Indian

operations of Hutch. It’s not unknown that this decision was later turned down by the

Supreme Court, giving the much needed relief to Vodafone.

Apart from Vodafone, several other companies are caught in the crosshairs of the

Indian govt., namely SAB Miller, GE, Cadbury and Sanofi. All these companies are being

targeted for routing transactions through tax havens for tax saving purposes. From

Netherlands and Seychelles to the Bahamas and Mauritius, tax havens are preferred

because they levy low to nil tax on such financial transactions. Such havens are

generally preferred by Western investors to enter emerging markets like India, since

they do not have to pay taxes on capital gains. It is to be noted that this is a perfectly

legitimate method of investment and tends to benefit the investor as well as the

country where the money is being invested, in this case, India. Under the Double

Taxation Avoidance Agreement signed between India and Mauritius, investors routing

their transactions through Mauritius have to pay taxes on capital gains in their country

of domicile. All that is needed for domicile is an address and a Tax residency Certificate

from Mauritius. Since there is no tax in Mauritius, the gains escape tax altogether.

(PARIKH, 2012)

Post 1991, when the financial reforms opened up the Indian economy, Institutional

investors poured billions into the Indian markets by routing transactions through Tax


The cynic says, “One man can’t do anything”. I say, “Only one man can do anything.” - John W. Gardner

I ssue 1,V olume 16

Havens. Funds flowed, the economy flourished, no questions were raised then. Why

now? According to our erstwhile Finance Minister, the Vodafone case brought about a

realization, being that the Indian Income tax framework could be flexed to a point

where in a company like Vodafone could make millions in capital gains and escape

without having to pay as much as a single rupee as tax. Such transactions, as estimated

by the Finance Ministry, could have cost the exchequer a colossal INR 40,000 crore in

the form of taxes. By adding the retrospective element, the Finance ministry is of the

opinion that they can plug such routes of transactions and recover the taxes, which

could go a long way in bridging the widening fiscal deficit. (5.1% of GDP, 2011-12)

(PARIKH, 2012)

The retrospective law is coming as part of a bigger package, well known by the name

of General Anti Avoidance Rules. Going by these rules, companies can no longer save

taxes by routing funds through Tax Havens. These provisions would give unrestrained

powers to tax officials, allowing them to question any tax saving deal. (ET news

Bureau, 2012) Foreign institutional investors in particular were worried that their

investments routed through Mauritius could be denied tax benefits enjoyed by them

under the Indo-Mauritius tax treaty.

Should these laws be a cause of worry for the economy? Yes indeed, since our

economic wellbeing is dependent on the continuous and long term flow of FIIs. Ever

since the financial reforms, FIIs to the tune of $140 billion have found their way into

our economy. (Ref: Chart 1) A quick look at some financial facts tell us that 9 out of 10

FIIs investing in India come through Tax havens and about half of them come through

Mauritius. (PARIKH, 2012) With GAAR and the retrospective amendments being

proposed, it won’t be long before the streams of foreign funds begin to dry up. After

the announcements about the retrospective amendments were made during the

budget, FIIs clearly gave thumbs down to India. This was reflected in the fact that the

month of April saw a net FII inflow of mere $0.4 billion, while the month of May

experienced a net outflow of $ 8 billion. (CARE Ratings, 2012) Moreover, due to the

amendment in the IT act, India risks facing a bad international publicity it certainly can


“Sometimes when you innovate, you make mistakes. It is best to admit them quickly and get on with improving your other innovations.” – Steve Jobs

I ssue 1,V olume 16

do without right now. A messy arbitration invoked by Vodafone to protect its Indian

investments could send across the wrong message about India’s hostile behavior

towards foreign investors. (PARIKH, 2012)

With our GDP forecast hovering over 5.5-6%, fiscal deficit at 5.1% of GDP (biggest

among emerging markets), Current Account Deficit (CAD), again at record high levels

of 4.5%, GAAR and its retrospective implications can have an adverse effect on the

foreign capital inflows. (PARIKH, 2012) To add to our woes, Fitch Ratings and Standard

& Poor’s may strip India of its investment-grade credit rating, citing risks ranging from

the fiscal gap to the current-account deficit. Over the last 4 years, we have seen the

GDP slump by over 800 basis points, which reinforce the need for capital inflows to

sustain the growth momentum in our economy. The disinvestment plan was an utter

failure and there seem to be liquidity issues at the moment. With our economy not in

its best phase, it is better not to upset the already jittery foreign investors by creating

road blocks which impedes their investments. A sudden outflow of foreign funds in the

form of dollars would cause our markets to go into a tailspin and cause the rupee to

nose-dive further, making our imports costlier and worsening the CAD.

As of now, the proposal has been delayed by a year. But who is to say that once it

comes into effect, it will not discourage foreign investment? Typically, an intelligent

move now would be to seek the opinion of major stakeholders and financial

think-tanks, both national and international, to arrive at a consensus rather than blind

bureaucratic implementation of policies.


“The desire of knowledge, like the thirst for riches, increases ever with the acquisition of it”. – Laurence Stern

I ssue 1,V olume 16

Chart 1

Source: SEBI

CONTRIBUTED BY:

ADITI VIDYARTHI

SENIOR ASSOCIATE CONSULTANTS

INFOSYS

&

NITIN BHAT

SENIOR ASSOCIATE CONSULTANTS

INFOSYS


“The competitor to be feared is one who never bothers about you at all, but goes on making his own business better all the time.” – Henry Ford

I ssue 1,V olume 16

With Hongkong decreasing its forecasts of economic growth to 1-2% from 1-3% recently

and so the situation in China, Japan (0.3%) and India, the Asian tigers have started feeling

the effects of Global turmoil. Economies around the globe are going through some

turbulent times. A majority are facing unemployment problems, debt crisis, rising costs,

declining productivity, volatile markets and currencies and some are facing issues such as

rising average age of its citizens. Problems are never-ending and to add to it, rating

agencies around the globe add spark to fire. We talk of a globalized, rather a glocalized

world now-a-days. In such a situation, every economy gets connected to each other so

much so that it starts depending on others for its growth and development. The problem

is not being connected in an intricate network, but what exit strategies do our planners

have to prevent a catastrophic situation, is the need of the hour. USA and EU form the

two largest economies of the World and their problems are intertwined in nature. A

major blow from these regions, which are growing at a pace of snail, could severely blow

the financial and trade circuits of developing nations, which boldly recovered themselves

from the 2008 global crisis. According to a recent report by OECD, US along with Japan,

economies show a sign of fading growth and others such as India, China, Russia and Brazil

show a slowdown signal.

Fig. Growth slowing across Asia (Danske Bank) Fig. China slows down, but still stronger than others

(Reuters Ecowin)


“Success is often achieved by those who don’t know that failure is inevitable.” – Coco Chanel

I ssue 1,V olume 16

What if the major resilient economy such as China meets a contracting economy

situation? China’s central bank has cut key interest rates twice since June and reserve

ratio requirement 3 times in recent months to boost lending. Clearly such monetary

policy actions show how much pressure China is under.

Fig. Exports numbers (Danske Bank, Reuters)

The recent slump in exports from China, which is primarily due to weak demand signals

generated from the debt-laden economies and US austerity measures, has pinched the

World. Although China has built a huge middle-class consumer base that generates

enough demand for its products, but the recent inability of this section of consumers to

consume the finished goods has been seen as one of the reasons for a reduced growth

forecast. Other main reason was the stagnant spending on Infrastructure projects.

Infrastructure contributes around 12% towards China’s GDP and drives demand for

construction material, but the recent slump in sales of houses has affected the country as

a whole. China, world’s second largest economy, is probably the World’s largest

consumer of metals and thus creates a positive demand for raw materials and so the

developing and emerging markets depend upon it. Its main trading countries are the US,

EU, Australia, SE Asia, Africa, and Japan, from where it mainly imports metals,

construction materials, food etc. Indonesia and African countries will be hit if the

infrastructure doesn’t pick up in China since these countries are major exporter of metals

to China. China is one of the biggest customers of South Africa for coal, but if spending on

Infrastructure projects is not addressed at the earliest and if the consumer situation

doesn’t change, then even South Africa could be hit to a certain extent. China recently


“our most unhappy customers are your greatest source of learning.” – Bill Gates

I ssue 1,V olume 16

projected that its economy would be growing at around 7.5% in the coming FY13, which is

a setback from the double-digit growth that it enjoyed in the past. Though such a growth

is really impressive during current times when economies are on the brink of contraction

rather than expansion. It will be very interesting from here to see how the exports catch

up in the mid of fiscal and monetary policies.

Fig. Japan’s growth forecast (Source : Reuters EcoWin, Danske Bank)

Even the situation in east is not welcoming as North Korea asks China for economic help

as China is the main benefactor of North Korea, not to forget to mention here that N.K.’s

89% foreign trade is dependent upon China. In the land of rising sun, Japan, the positive

impact of reconstruction after the earthquake-Tsunami has waned and the problem of

fiscal consolidation still persists. As the govt. has still not taken any key fiscal decisions to

tighten the fiscal policies and address public debt issues, growth is all set to be in the

region of 1 % only in the coming quarters. BoJ (Bank of Japan) recently cut its production

assessments and said "The pick-up in exports has moderated, while production has been

relatively weak”. So with India already feeling the macroeconomic pressure and other

Asian biggies such as China, Japan, North Korea and SE Asia already hurt in this global

turmoil due to this highly inter-connected world, all one can do is to wait for highly

effective fiscal, monetary and trade policy decisions that would return the world order.

Now what about our very own India? As Morgan Stanley projects Indian economy to be

growing at around 5% in the coming FY citing low private investment and poor


“You only have to do a very few things right in your life so long as you don’t do too many things wrong.” – Warren Buffett

I ssue 1,V olume 16

government finances, “all is not well” here as well. With internal issues of Scams, political

weakness, policy delays etc coupled with a persistent inflation, high fiscal deficit, low

Forex reserves and weak Rupee, India is not looking in a good shape.

A major challenge for developing and emerging economies would be to design

macroeconomic policies along with ensuring a reduced risk to improve investor

confidence while balancing inflation, market volatility, energy prices, credit growth etc.

Governments must be cautious while subsidizing its companies so much so that the

subsidies should only be given to the most critical ones. Fiscal policy must consider the

damage due to subsidizing activities. Monetary policies must ensure that rising oil prices

don’t become an inflationary pressure. The need of the hour is to understand and

address fundamental problems through effective policy actions. Austerity measures alone

can’t solve these big economic issues.

CONTRIBUTED BY:

LAKKSHAY BUSSI

SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES

PUNE


“The only way around is through.” – Robert Frost

I ssue 1,V olume 16

“If those who are better off do not act in a more socially responsible manner, our

growth process may be at risk, our polity may become anarchic and our society may get

further divided. We cannot afford these luxuries.”

-PM Manmohan Singh

The Indian subcontinent, as an economy is one of contrasts. Growth has diverged across

regions, leaving behind the large populous states of North, Central and North East India.

Growth has not been creating enough good jobs that can provide stable earnings for

households to climb and stay out of poverty. In the agriculture sector, which employs

more than half of India’s workers, growth has been an anemic 2.5% in the year 2011-12.

Government reports for the past few years suggest how growth has left behind a certain

section of the population -- females, the 90 million tribal population, some SC groups,

religious minorities, etc.—which are lagging behind in job opportunities, earnings, and

human development. Underlying the above is the fact that our Public Services fail the

poor each time and are the weakest in the poorer states like Bihar and Orissa and then

there is a certain Kerela, a state that ranks No. 1 in almost all growth indicators like

Governance, health & education, infrastructure development, et al. The contrast is indeed

very stark.

The 11th Five Year Plan of India (2007-2012) and the recent World Economic Forum

(Davos, Switzerland, 2011) along with the above quote by Manmohan Singh are proof

enough to emphasize how India has been focusing on the agenda of Inclusive Growth for

quite some time now, but statistics remain unfavorable. The current Five Year Plan

focuses inclusive growth in social services, agriculture, industry, services and physical

infrastructure, but amidst the volley of high profile scams hitting our economy every now

and then (the recent one being Coalgate), and the labeling of our ministers as

‘underachiever’ by the international media (TIME magazine and the Washington post),

the issues of inclusion have taken a backseat currently at the risk of paying a huge cost in


“You must be the change you wish to see in the world.” – Mahatma Gandhi

I ssue 1,V olume 16

future.

It is crucial to mention the 5 elements/drivers of inclusive growth, namely, Poverty

Reduction and increase in quantity/quality of employment, Agricultural Development,

Social Sector Development, Reduction in regional disparities and Environment protection.

Each of these is discussed below.

The World Bank estimates show that 42% of Indian population is still below the $1.25

poverty line and 80% of the poor are from rural areas. Poverty is concentrated in few

states (Bihar, Uttar Pradesh and Madhya Pradesh and Orissa, Chattisgarh and Jharkhand)

and is concentrated among agricultural labourers, casual workers, Scheduled Castes and

Scheduled Tribes. The Arjun Sengupta Report shows more staggering results in this

context. The two-pronged approach of Growth and providing safety nets has made a

difference over the years but certain challenges remain. Say, for example, the Public

Distribution System (PDS) of providing subsidized food to BPL households needs more

transparency in terms of supply-chain management. Even the NREGA scheme needs to

deal with the issue of quality of employment and also social security in the unorganized

sector.

The agricultural sector has seen its fair share of deficits, namely, land and water

management deficit, investment, credit and Infrastructure deficit, research and extension

(technology) deficit, market deficit, institutions deficit and the education/skill deficit.

Here, education/skills are the main constraints. The government needs to promote the

rural non-farm sector of fruits and vegetables learning from China, Philippines and

Malaysia. Also, India leap-frogged from agriculture to services with less focus on

manufacturing while the late industrializing economies of Singapore, Hong Kong, S.Korea

and Taiwan (East Asian Miracle) vouched by their industrial growth and are today in the

league of developed economies, unlike India, even though we all started with our growth

process at the same point in time.

Amartya Sen in his book ‘Inequality Re-examined’ emphasizes the importance of social

sector as a driver of inclusive growth and states how Health and Education are the most


“Far and away the best prize that life offers is the chance to work hard at work worth doing.” – Theodore Roosevelt

I ssue 1,V olume 16

important factors to deal with in this respect. The slow progress can be attributed to

significant regional, social and gender disparities, low level and slow growth in public

expenditures, poor quality delivery systems and privatization of Health and Education

coupled with the ever deteriorating quality of Govt. provisioning. Some areas in India are

better provided in terms of health care vis-à-vis others. Say for example, even though

Kerela is not richer than any other state of India (infact it is slightly poor on the average),

it still has a very wide health care which should be a lesson for all the other states. Also,

the African-American population of USA even though many times richer than Kerela has

lower chances of survival to mature-ages. If Kerela can do it, so can the other states. Also

when it comes to health provision, the incentives have to be provided by public

discussion and criticism (as seen in case of the western success stories).

Accordingly, the banks and other financial institutions in the economy have a major role

to play in facilitating ‘Financial Inclusion’ which arguably is one of the most important

drivers of Inclusive growth. Savings, by their very nature should be channelized into

productive investments and this has not been happening in rural India. According to the

Rural Finance Access survey, 87% of the poorest households (marginal farmers) do not

have access to credit, around 47% don’t even have a bank account, the rich pay a

relatively low rate (33%), the poor pay rates of 104% and get only 8% of the credit.

Microfinance is a great step towards achieving this goal but over the years many corrupt

practices have seeped into these institutions and there is a need to place a regulator in

the microfinance space by the Central Government. Also the IT infrastructure can be

employed through the use of UID cards facilitating credit transfers (cash or otherwise)

into the BPL accounts.

At the risk of sounding philosophical, social exclusion is a challenge since the change in

the ideologies (super-structure theory of Karl Marx) of the excluded section of the society

might generate a ‘class struggle’ on their part and the conflict between Productive

Forces, Relations of Productive and the Super Structure might lead to the overthrow of

the reigning class. This Marxian concept though dates back to the era of Feudalism still

bears relevance in the Indian context, otherwise, how else will one describe the


“Whether you think you can or whether you think you can’t, you’re right! “– Henry Ford

I ssue 1,V olume 16

Anna Hazare revolution? Therefore, the political argument is that no government in a

democracy can afford to ignore the large sections of working and non-working

population.

All said and done, awareness needs to be generated among the masses regarding their

rights and duties towards one another and towards India as a nation. In this context, the

Media industry and the NGOs can play a significant role in bringing about this change by

striking a fine balance between business and journalism to support Inclusive Growth.

CONTRIBUTED BY:

ASHISH JAIN

WELINGKAR INSTITUTE OF MANAGEMENT,

MUMBAI


“The new source of power is not money in the hands of a few, but information in the hands of many.” – John Naisbitt

I ssue 1,V olume 16

India, world’s 8th largest & one of the fastest growing economies in the world, is in an

economic crisis. Affected by the slowdown in the US, potential financial meltdown in

the Eurozone and internal policy paralysis, India’s growth engine has hit a major

roadblock. The current economic crisis in India is very reminiscent of the 1991 crisis in

India which eventually led to the end of the license raj and beginning of economic

liberalization. While some argue that the current economic crisis is a repeat of the

1991 crisis, others put the counter argument that the today’s economy is very

structurally different from 1991.

The points of resemblance in relation to the macroeconomic indicators are

unmistakable.

1. The government borrowings for 1991 increased by 12 % annually while the

government borrowings have increased by 32 % in the last 5 years (Source: FICCI

Report).

2. Average increase in non-plan expenditure from 1981-90 was 20% while the

non-plan expenditure is rising by 30% at present (Source: FICCI Report).

3 Fiscal deficit shows a similar trend. The tax revenue as a percentage of GDP when

compared between 1990 and present is very comparable (Fig.1 and Fig.3).

Fig 1. Gross Fiscal, Gross Primary & Revenue Deficit as % of GDP


“Inflation is taxation without legislation.” -Milton Friedman

I ssue 1,V olume 16

(Source: RBI Database)

Fig 2. Current Account Deficit (% of GDP) Fig 3. Tax Revenue (% of GDP)

(Source: www.tradingeconomics.com)

4. The INR depreciation shows a remarkably familiar trend - just before the 1991

crisis and in the present situation. The data below shows the INR depreciation versus

the USD. From Jan 2011 to Jul 2012 the INR has depreciated by 21.7 % while the

INR , from Jan 1989 to Jul 1991, had depreciated by 23.5 % against USD

Fig 4. The USD-INR Exchange Rate for the two periods under consideration


“As sure as the spring will follow the winter, prosperity and economic growth will follow recession.”

-Bo Bennett

I ssue 1,V olume 16

Source: www.tradingeconomics.com) (

5. Even today India continues to battle high inflation. The inflation has been

consistently high over the last two decades as seen from the data below. The data below

shows the annual change in CPI which is hovering around the double-digit mark.

Fig 5. India Inflation Rate since 1989 – 2011 (based on CPI)

(Source: www.tradingeconomics.com)

The Other Side

Although there are stark similarities in the macroeconomic indicators, the Indian

economy has undergone many structural changes.


“Our incomes are like our shoes; if too small, they gall and pinch us; but if too large, they cause us to stumble and to trip”.

-John Locke

I ssue 1,V olume 16

6. The share of the service sector in the GDP has increased from 43.7 % in 1990-91 to

57 % in 2011-12. The variability of the service sector is far less than the agriculture and

the industry. The services sector boosts the exports and also the trade balance.

Agriculture tends to be dependent on rainfall, and deviation in the monsoons, as we

have seen this fiscal, has caused havoc with the agriculture-productivity.

7. Foreign exchange reserves are much larger in the present day versus the forex

reserves just before the 1991 crisis. High forex reserves serves two purposes –

The forex reserves are also stated in terms of months of import that it can fund. In

1990, Indian forex reserves were worth 1.8 months of imports while in the present

day scenario it is worth 8.7 months of imports.

High forex reserves serves as a protection against speculative attacks against a

currency.

Fig 6. Indian Forex Reserves from 1985-6 to 2010-11


8. The exchange rate is now market determined unlike in 1990-91. Thus the INR which

was overvalued in 1990-91 is an unlikely scenario in present day as the market

determines the exchange rate.

9. The external vulnerability indicators of the economy are better than those the 1991

crisis period. Debt/GDP ratio, Debt service ratio, short-term debt and concessional


Whether it’s Google or Apple or free software, we’ve got some fantastic competitors and it keeps us on our toes. – Bill Gates

I ssue 1,V olume 16

debt as a percentage of GDP are used to track external sector vulnerability. Foreign

inflow of funds is also a measure of estimating the external sector vulnerability. This

includes both FIIs and FDI.

Fig 7. External Sector Position since 1990 to 2011



I wasn’t satisfied just to earn a good living. I was looking to make a statement. – Donald Trump

I ssue 1,V olume 16

Conclusion

Even though the structural aspects of the economy may have changed, the challenges

for the policymakers have not subsided. The current economy poses major challenges

w.r.t managing fiscal deficit, taming inflation and boosting infrastructure spending and

corporate investment to sustain high growth. If fiscal deficit is not controlled,

government borrowing in international debt markets will get very costly. Owing to the

ballooning fiscal deficit, credit rating agencies had decided to downgrade India to junk

status and IMF showed severe concerns about India’s rising fiscal deficit. The recent

approval of FDI in multi-brand retail and aviation is a much needed reform. The hike of

diesel prices and cap on subsidized LPG will help rein in the growing fiscal deficit. This

portrayal of normalcy returning to the fiscal deficit to the rest of the world and will

help the govt. in borrowing at lesser rates. Also the government needs to stress on oil

& gas projects and infrastructure projects for sustaining growth. Unless the

infrastructure shows signs of improvement (indices like HSBC PMI and IIP) there is

hardly any scope for a substantial rate cut by RBI as it will fuel inflation (already stoked

by increased diesel prices).

CONTRIBUTED BY:

SHOVIK KAR

MDI, GURGAON

PGPM 2011-13


Why did I want to win? Because I didn’t want to lose! – Max Schmelling

I ssue 1,V olume 16

Hedge funds have always been a hot topic for debate amongst financial regulators

worldwide due to their highly risky and speculative nature. Even the country of its Origin

i.e. US is not able to give a precise definition of hedge funds; they have remained

undefined, unregulated and unregistered as per the federal laws. Amongst the various

kinds of funds catering to different strata of the society, hedge funds are specifically

designed to cater to HNI’s or institutional clients.

Hedge funds use a wide range of investment strategies to maximize their financial gains.

These funds use a plethora of investment strategies ranging from equity, fixed income,

commodity trading advisors, so on, depending upon the way they trade, risk management

and their involvement in the portfolio. These funds aim at achieving high returns

regardless of the underlying trends in the financial markets

Till just a few years ago, hedge funds were in their nascent stage in India in terms of an

efficient regulatory mechanism as well as market participation. Being a tightly regulated

market, it has failed to catch the attention of large investors and as a result, the entire

Indian hedge fund industry has been reserved at around 50-60 major funds. Lack of liquid

long/short hedge funds, nonflexible regulations for shorting stocks are just a few reasons

to be blamed for the repulsive nature of the investors. On the regulatory front, the

protectionist view of SEBI has limited the hedge funds’ leveraging power. Imposed

restrictions on the redemptions would not only masquerade a liquidity risk for a given

stock and the market, but it might adversely affect the investment climate. Conservative

norms such as mandatory registration and licensing regime goes to show an interim

approach where SEBI is more focused on tactical regulation in order to address imminent

issues. The need of the hour is of regulations which are holistic, proactive and account for

underlying investor’s incentives so that it can provide reasonable boundaries without

constricting creativity. Further, SEBI needs to develop a local expertise to regulate

complex or more systemic issues. These few loopholes in the structure are not doing any


“Winners take time to relish their work, knowing that scaling the mountain is what makes the view from the top so exhilarating.“– Denis Waitley

I ssue 1,V olume 16

good in molding a congenial environment for the wider range of investors.

On the encouraging side, gradual developments have started to offer the kind of

strategies that can attract big fishes in this industry. The Industry structure has undergone

a large scale metamorphosis where there is a greater diversity of strategic mandates as

compared to earlier times being dominated by equity-based funds. Changes such as the

evolution of short-selling laws over the last few years have helped to make India an

attractive region for hedge funds. Recent steps taken by SEBI of giving consent to seven

alternative investment funds to conduct business in the country has infused a sense of

optimism in Indian Markets.

No other hedge fund region in the world has undergone such a transition as India over

the last few years. Before 2004, there were only a handful of hedge funds investing in

India, and then the ‘Big Bang’ happened. Hedges started their mad rush for Indian gold.

Between 2005 and 2007 the industry grew at a break-neck pace with more than 100

percent increase in assets year-on-year.

But markets were badly hit by the financial crisis; strong inflows suddenly turned into

massive outflows and hefty profits became steep losses. In 2008 the assets under

management in Indian hedge funds saw a dip by more than 70 percent - with murky

returns of minus 50 percent.

Tackling the turmoil, Indian hedge funds came out with stronger fundamentals and today

they form as one of the most promising sectors of the global hedge funds industry.

In 2009, India was one of the best performing regions in the hedge fund world, delivering

excellent returns of 53.61 percent and in 2011 India continued to be in the healthy state

in terms of year-to-date returns. Currently, hedge funds manage around $4 billion

(around Rs. 20,600 crore) in India.

The Indian hedge fund industry continues to appeal, and as India’s economic fairy-tale

unfurls, the investors would certainly find Indian hedge funds providing diverse

investment options and excellent growth prospects. Moreover, few recent progressive


“Workshops and seminars are basically financial speed dating for clueless people.” -Doug Coupland

I ssue 1,V olume 16

events such as the launch of more nimble India-based hedge funds – predominantly from

Asia as opposed to the West – provide a positive outlook to the global investors.

On a whole, hedge funds are here to stay in India. Holding falsified notions against hedge

funds won’t do any good .The current scenario where India-focused hedge funds have

outperformed other emerging markets in Q1’2012. The biggest gains in EM hedge funds

were from funds investing in India, with the HFRX India Index gaining +18.8 percent

during the quarter, outperforming Indian equity markets by 600 bps. These astonishing

figures accentuate the fact that the hedge funds offers the best way to capitalize on the

exceptional growth opportunities that India has to offer.

No doubt there have been positive amendments offered in type of money coming in,

instruments traded and fund domiciles which offer the vital ingredients for hedging to

become a blooming yet sustainable story. But still it’s too early to say whether all these

changes are for the better.

Although this industry is still in its mushrooming stage, it has gone through a baptism of

fire and has already set some incredible trends which promise an out of the ordinary

perspective, and much more.

CONTRIBUTED BY:

JATIN KUMAR,

BATCH OF 2011-13,

DMS, IIT DELHI


“If you work just for money, you’ll never make it, but if you love what you’re doing and you always put the customer first, success will be yours. “– Ray Kroc

I ssue 1,V olume 16

An intrinsic calamity called Global warming is increasingly becoming viral across the world

through multiple means. This natural global peril has been supposedly expected to end up

in a severe glooming to the earth in the offing. No much solid preventive measures are

taken against this serious phenomenon anywhere. The prevalence of this geographical

climatic variance also menaces the variance in the economic climate of the globe to a

greater extent. This clearly depicts the direct relationship between these two

contemporary consequences.

The awareness of this issue is debile across the borders since people are still skeptic in

understanding the grievous factoid behind. They hardly empathize that terrible increase

in the average temperature of the earth’s surface from the recent past would end up in

extraordinary economic disorder in the near future. Also, no large scale studies have been

unleashed to emphasize the importance of this realization among the countries and the

common inhabitants. Some scary statistics have been emerging by certain scientists in the

recent years from various countries and many global scientific brains are still working in

determining the actual consequences hidden behind this deathly earthly happening.

Though the economic life of the world is relying upon multiple concerns of the sphere,

the substantial neurons for survival are generated by agriculture which is indeed the

anchor of economic ramification. The global warming has indirect harms to the

agriculture by gradually depreciating the arable lands and thereby overall food

productivity rate would end up in belittling throughout in the offing. Due to uneven

extreme climatic changes, the food production would be the severe victim throughout.

There will be a direct impact on timber and other value added wooden production due to

slowdown in the growth of the trees. The sequent consequence is obviously the fall in the

global exporting and importing of related market.

Scientists also keep stating that further increase in the global temperature would cause


“The behavior of any bureaucratic organization can best be understood by assuming that it is controlled by a secret cabal of its enemies.” ― Robert Conquest

I ssue 1,V olume 16

the excessive melting of ice blocks in the Polar Regions which would result in the terrible

increase of earth’s water level. Consequently, the coastal regions would undergo

complete diminution and catastrophe of people over there would likely to happen. Also,

marine lives would be descending to a greater extent which would end up in the decline

of fishing economy. On the other hand, certain other regions of the world would become

completely dry and water scarcity would reach its peak. Again, this would terribly affect

the livelihood of the people with severe aftermaths. Similar other effects in almost all

possible means to engender abysmal impacts on all businesses and investments across

the globe in all fields. These economic impacts would reverberate throughout the world.

Economists are getting into serious contemplations on this issue and landing up in

foreseeing jeopardizing effects to occur in the offing. They believe that this drastic change

in the global temperature will push the global GDP to fall down. They would indirectly

cause harm in the growth of global infrastructures. Energy and retail sectors would

happen to fall in vain. There are also possibilities of lack in the potential of human

resources across the world owing to their poor health and unexpected catastrophes.

Similar related disasters in all means will circuitously affect the global banking and

financial flow in heaps of sectors. All these effects would result in huge joblessness

globally. In fact, developing countries are more vulnerable to these imminent extreme

conditions than their developed counterparts due to serial trickling in their growth rate.

Preemptive measures are mandatorily needed to stay safer from the upcoming global

disorder.

This threatening global situation could even have the possibility to devastate future

economy and the entire forthcoming generation as well. So, people should never ever

consider it as a partisan issue by imbibing politics in it. With the help of United Nations, all

countries should work together in formulating the plans and strategies so as to minimize

these impacts of climatic disorders in affecting the economic clouds. Certain efficacious

initiatives like SEZ, insanitary restrictive industries in infrastructural arena should be

excessively encouraged globally to minimize the cosmic effects.


If you did not look after today’s business then you might as well forget about tomorrow. – Isaac Mophatlane

I ssue 1,V olume 16

Need of the hour is to reframe the economy holistically by sticking to the principles of the

ecology. All humans on earth are now supposedly cornered to agonize the effects of this

environmental perturbation over financial conglomerate. If no call is admitted even in

this high time, serious economic hitherto would buttress to its superlative shape. Also, it

is a potential fuss across the continents which should again be treated like any other

deathly dire epidemic disease of earth and collective contribution should be alarmed to

forgo the imminent historical economic recession.

Go Green in ecology and Get Sanity in Economy!

CONTRIBUTED BY:

GURUCHARAN RAGHUNATHAN

PGPM (1 YEAR)

VANGAURD BUSINESS SCHOOL, BANGALORE


To win without risk is to triumph without glory. – Pierre Corneille

I ssue 1,V olume 16

WINNER OF THE BEST ARTICLE FOR THE FINANCIAL BULLETIN -SEP2012

NEERAJ BHARTI

MANAGER (MMGS-II), BANK OF INDIA


“You can change only what people know, not what they do.” ― Scott Adams

I ssue 1,V olume 16


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I ssue 1,V olume 16

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