INDIAN ECONOMY Bottoming Out?

The Global AnAlyst | MaY 2014 1

FOOD PROCESSINGGame for Growth?

THE RUPEE REBOUND Is the Rally for Real?

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THE DEBILITATING EFFECT OFInflation on Investments

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INDIAN ECONOMYBottoming Out?

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May 2014 vol. 3 | no.5Sensex on Song!

Stock markets are on song, literally, as bulls seem to be on a rampage, firing on all cylinders in anticipation of formation of a strong government at the centre. The 30-scrip Sensex which flirted with 22,000 in late March has continued its upward march with many market

pundits predicting that it won’t be surprising to see it even cross 24,000! However, amidst all the hypes, it is difficult to figure out how the market momentum could be maintained amid a lackluster economy. The economic growth has dramatically decelerated in the last several quarters. And it’s hard to predict whether it’s hit bottom yet. In fact, the economy has struggled to grow past the 5 per cent mark. Though there have been a streak of reforms, piecemeal though, which, however, did not prove to be strong enough to lift the economy out of its deep slumber. The economic growth, in fact, has failed to sustain after growing in almost double digits during 2010-11. Besides the slow pace of economic reforms, weak consumer demand coupled with sluggish foreign investments too has severely hurt growth in Asia’s third largest economy. The continuing slump in industrial sector, particularly, capital and consumer goods, continue to pose significant challenges to the government and the policymakers. India’s index of industrial production (IIP) in February’14 contracted at -1.9 per cent, against an expansion of 0.8 per cent month-on-month, pulled down by the worst slump in manufacturing sector, which recorded a de-growth at -3.7 per cent. The weaknesses in in capital goods which shrank at –17.4 per cent versus -4.2 per cent (month-on-month) and consumer durables that declined at -9.3 per cent have only added to the concerns over an early revival in the economy. What further adds to the pessimism is the surge in the trade deficit which hit a five-month high in March, triggered by second successive month of fall in merchandise exports. “Both consumer demand and investment conditions seem to be weakening, thereby further dampening the outlook for manufacturing,” remarked Arbind Prasad, Director General of FICCI. According to him, “Revival of manufacturing growth requires some bold reforms in the area of the business regulatory environment which should be the focus and priority for the (new) government.” A Reuters report commented, “Investment malaise lies at the heart of India’s prolonged economic slowdown”, adding, “Capital investment contributes nearly 35 per cent to the economy, but it barely grew in the fiscal year that ended in March as delays in clearances and funding issues grounded many infrastructure projects.” Besides, headwinds such as anticipation of a possible acceleration in tapering by the US Fed towards the end of the current calendar year, sluggish global growth, and geo-political tensions in parts of Europe and Asia pose significant challenges to the domestic economic revival. Nevertheless, as the entire nation watches with bated breath for the election results, let’s hope that the economy bounces back and that India’s growth story, despite the recent slowdown, regains sheen.

Could Economy too follow the Suit?

The Global AnAlyst | MaY 20144

LEADERSPEAK

With positive signals emanating from the global economy, which finds a resonance in our improved export performance and is causing our current account deficit (CAD) to decline, we believe that the slowdown in the domestic economy may have bottomed out in the second quarter and the trend could reverse henceforth.- Chandrajit Banerjee, Director General, CII

Fuelled by rapid globalization, world commerce has expanded at an average of twice the rate of global economic growth over the past three decades. But after collapsing in 2009 in the wake of the financial crisis, trade growth has been more anaemic.

- Roberto Azevêdo, Director-General, WTO

We are pretty optimistic about growth over the medium term...we are bullish about India over the medium term given the favorable demographics you have got. Bringing inflation down is really important. Both Finance Ministry and central bank are doing a great job in controlling inflation.

- Thomas J Richardson, Senior Resident Representative in New Delhi, IMF

The Indian market has to do a lot more (with) startups, create that entrepreneurial spirit at a faster scale. I am committed to India, but it has not taken off in terms of IP generated anywhere like China or Israel.- John Chambers, CEO, Cisco

In recent years, countries such as Brazil, China, Turkey, India and South Africa have notably cut their reliance on “hard” currency debt, according to IMF data. This has not spared these countries from volatility, however. On the contrary, when speculation erupted last summer about US monetary tightening, debt prices fell sharply in places such as India, Turkey and Brazil.

- Gillian Tett, a British author and award-winning journalist at the Financial

Times

The worst may be over, but prospects for a durable and sustained global recovery hinge on whether national governments demonstrate their commitment to substantive structural reforms. - Eswar Prasad, Economist & Senior Fellow, Brookings Institution

China’s currency could turn out to be the trigger in the same way that US subprime mortgages touched off the global financial crisis. Much like subprime lending in the US, the size of the problem is clouded in uncertainty.- Diana Choyleva, Head of Macroeconomic Research, Lombard Street Research



Economy is witnessing signs of stabilization, with growth bottoming out, inflation coming under control and improving current account deficit. Against these positive developments, Indian economy is back on the radar. Recovery may not be spectacular, but it has picked up, and the calendar year 2014 would be better than 2013. INTERVIEWS 30 & 31

INTERVIEWS 30 & 31

COVER STORY

INDIAN ECONOMY - Bottoming Out?..........27

C O N T E N T S

BANKING SECTOR

14 MONETARY POLICY - A Welcome, Refreshing Approach

Amidst not so stable political scenario in view, RBI took a mid-path of wait and watch, keeping in hold any change in major rates and ratios for the next review, by which time the uncertainties of the Poll Season will be over.

44 BASEL III in India - (Delayed Implemenation) A Boon for Banks?

While the relaxation in the implementation time would provide banks with a year more to raise their capital to high quality capital base to comply with the stringent Basel III guidelines, it would allow them to operate them at low levels and quality of capital at the time the asset quality is deteriorating and a quality capital base is much needed.

46 BASEL III in India - The Tardy Burden

The ensuing years shall witness congestion though not at the same intensity as capital buffer for systemic importance and capital conservation kicks in.

CURRENCY MARKETS

17 THE RUPEE REBOUND - Is the Rally for Real?

In From being on a journey down the hill, the rupee has been on a roll, of late. What has helped rupee make a strong recovery after dangerously flirting with a level of Rs.70 a dollar barely a few months ago? Is the rally sustainable?

Structural reform is needed in political discourse to articulate an idea of India which is not imprisoned either in some false romantic view of the past when there was no India or in some future utopia or prosperity which can be achieved without engaging in rational disputation over distributive conflict amongst citizens.- Shanti P. Chakravarty, Professor of Economics, Bangor Business

School, Bangor University, UK

The economy may indeed strengthen from here. But there are also areas where deterioration could occur. The obvious one is that the stock market is overvalued and should fall. Another prominent possibility is renewed erosion in the balance of payments.- Derek M. Scissors, Resident Scholar, American Enterprise Institute

(AEI), US


SPOTLIGHT (PERSONAL FINANCE) 22 THE DEBILITATING EFFECT OF INFLATION ON INVESTMENTS

Almost always we make investment decisions based on absolute performance rather than inflation adjusted performance. Without considering the effect of inflation, the investment performance can look really dramatic. However, this approach can have very costly consequences in terms of our wealth and overall financial well-being.

36 IN CONVERSATION - AIR COSTA

This new member of India’s air carrier industry is now in the process of connect to second and third-tier cities like Vijayawada, Vishakhapatnam, Madurai, Coimbatore, Pune and Goa to Tier I cities like Hyderabad, Chennai & Bangalore. As part of its long-term commitment, the six-month-old airline recently placed an order for 50 aircraft even as the sector is struggling.tc. In a free-wheeling discussion with The Global ANALYST, Ramesh Lingamaneni, Chairman, AIR COSTA talks about the key drivers that led to the formation of Air Costa, its business model, market penetration strategies, etc.

REALTY SECTOR

40 RETAIL REAL ESTATE - Awaiting an Upswing

For the next 3-4 quarters, growth of rentals and capital values in retail will largely remain stagnant. This is because no major foreign retailer has initiated the procedure for investments into India so far. If they do so post-elections, it will fructify into real demand only in 2015.

AGRICULTURE - Interview

48 Food Processing Sector - Game for Growth?

Food processing sector is definitely a game for growth. But developmentof the food processing sector in India crucially depends on the state governments effectively using the programs and promotions designed at the central level, says Suresh Chandra Babu, Senior Research Fellow International Food Policy Research Institute, US.

INTERNATIONAL

51 TURKEY - Battling Slowdown!

While battling its current intractable slowdown is certainly an uphill task, It is time the country talked Turkey and corrected its structural imbalances, stabilized its political unrest, provided healthy governance, increased its focus on manufacturing and exports and strengthened its fiscal and monetary policies to spruce up its economy, else the Turkey story would continue to be tortuous.

REGULARS 03 Editorial 09 Decoding Data 56 Bookshelf

04 Leaderspeak 10 In-Depth ANALYST 58 Business Quiz

08 Digital ANALYST 54 Viewpoint

May 2014 Vol. 3 | No.5


Taiwan’s leading smartphone maker HTC has introduced HTC One M8 in India at a whopping Rs. 49,900. The One M8 is the successor to the

award-winning model HTC One M7. HTC One M8, however, scores over its predecessor in terms of all the three areas, viz., hardware, software, and design. The M8 comes with an all-metal uni-body design. However, the smartphone also has curved edges and offers much better grip. M8 sports a 5-inch full HD display with corning gorilla glass 3 for protection. The smartphone runs on Android 4.4 OS with an all-new Sense 6 user interface. On the hardware front, the M8 comes loaded with Qualcomm Snapdragon 801 processor, 2GB RAM and 16GB storage (expandable). On the camera front, the HTC One M8 sports Ultrapixel Duo camera.

One of the things which gives something a quality feel is how dense it is. While the phone industry as followed the mantra of light being good, it’s not about the weight but how you use it. Something with a heft feels like a quality item: it’s why a Zippo lighter feels better than a Cricket. At 146 x 71 x 9mm and 160 grams, the HTC One feels great. Putting it in a plastic case makes it feel cheaper and less dense.

First Impression: HTC One M8 Smartphone Debuts at Rs. 49,900

Asus Fonepad 7 Dual SIM Tablet

The Asus Fonepad 7 Dual SIM tablet has arrived in India and it seems all set

to give some tough competition to a lot of dual SIM voice calling slates which fall in the affordable category. It employs a set of advanced features and specifications and has been loaded with all the components that you may need in a tab.Those who are planning to purchase the Asus Fonepad 7 Dual SIM slate can look forward to a 7-inch IPS touchscreen with a WXGA resolution and LED backlighting. A 1.2MP 720p webcam has been provided so you can engage in video conferencing and even capture selfies. And

digital analyst

for all your other photography needs, the company has provided a 5MP 1080p snapper. It is based on the Android Jelly Bean 4.3 OS and hopefully, an update to the KitKat OS is in the offing. Unlike its single SIM counterpart which makes the most of a 1.6GHz SoC,

the device in question goes for the dual core Intel Atom Z2520 processor that ticks at a speed of 1.2GHz. And 1GB of RAM has been tossed into the mix to help the chip maintain smooth multitasking and navigation. Cost. Rs.12,999.


India: Economic Snapshot

dEcodinG Data

Developed and Emerging Markets - Purchasing Managers Index (PMI) Output/Business Activity Index

Emerging Markets - Purchasing Managers Index (PMI) (manufacturing & services)


IN-DEPTH / Corporate India’s Credit Quality

Credit Quality Pressures Bottoming OutBut Improvement will be Gradual due to Fragile Economic RecoveryCorporate India’s credit quality is on course for recovery, albeit gradually, in 2014-15 (refers to financial year, April 1 to March 31). CRISIL believes the credit ratio – the ratio of rating upgrades to downgrades – may recover from the low levels seen last fiscal as pressure on profitability and demand eases. Nevertheless, the overall credit quality will be far from buoyant in the near term, given the fragile economic growth and limited scope for reduction in interest rates.

The credit ratio, at 0.79 times in 2013-14, has remained weak for two years now as downgrades outnumbered CRISIL

downgraded ratings of 1,165 firms and upgraded those of 921 in the last fiscal. Around 90 per cent of the downgrades was on account of slowing demand, tight liquid-ity, and stretched working capital cycles. Companies innvestment-linked sectors such as power, construction, engineering and capital goods, and transport had more downgrades than firms in other sectors. More than a third of the upgrades was on account of company-specific factors such as sustained track record of timely debt servicing and stronger-than-expected capital structure. Another third of upgrades was driven by improved business condi-tions for firms in sectors—such as packaged foods, textiles and agricultural products—that have linkages with exports, agriculture, and non-discretionary consumer segments.CRISIL’s analysis indicates that firms with better profitability and low leverage have survived the downturn in economy well. Firms with a return on capital employed (RoCE) of more than 15 per cent saw 58 per cent more upgrades than downgrades. Similarly, upgrades outnumbered downgrades by 30 per cent for firms

with low leverage — those with a ratio of debt to earnings before interest, tax, depreciation and amortization (debt/ EBIDTA) of less than 3 times.CRISIL believes that corporate credit quality will improve as GDP growth touches 6 per cent in 2014-15 from sub-5 per cent levels seen in the last two fiscals. The credit ratio will, however, remain below 1 time in the near term.Significant improvement in credit ratio is possible only if there is strong and sustainable recovery in investment as well as in consump-tion demand. The underlying as-sumptions for any improvement in credit quality are progressive poli-cies and continuity in reforms. The degree of economic recovery, avail-ability of liquidity, performance of monsoon, continued recovery in export markets, the outcome of the forthcoming general elections, and success in deleveraging the balance sheets through sale of assets will all be critical for India’s corporates.

Outstanding ratings more than double in three yearsCRISIL’s portfolio of outstanding ratings has expanded substantially in recent years, to over 13,000 rat-ings as on March 31, 2014, from 6200 ratings three years ago, and around 400 ratings as on March 31, 2008. The expansion of the rated portfolio has been accompanied by changes in CRISIL’s rating distribu-tion, with an increasing number of ratings being assigned at the lower

end of the rating scale. In recent years, more than 75 per cent of ratings have been at either ‘CRISIL BB’ or lower. This has resulted in the median rating being stable at ‘CRISIL BB’ category since March 2011, unlike in March 2008, when it was at ‘CRISIL AA’ (refer to CRI-SIL’s Rating Distribution chart).

Credit quality pressures continued in 2013-14; demand slowdown, tight liquidity and high interest rates impacted corporatesDowngrades continued to outnum-ber upgrades during 2013-14, re-flecting unrelenting pressure on the credit quality of corporate India. Sluggish demand, tight liquidity and high interest rates were the primary reasons for the weak credit quality. The credit ratio (0.79 times for 2013-14) has remained below 1 time over the past two years, indi-cating the difficult credit environ-ment. However, the credit ratio is marginally better than in 2012-13, when it was at 0.62 times.CRISIL’s credit ratio frequently exhibits a correlation with eco-nomic indicators such as the index of industrial production (IIP) and gross domestic product (GDP). Weak GDP growth, accompanied by zero growth in IIP has resulted in the credit ratio staying below one time during 2013-14 CRISIL believes that the credit ratio may improve marginally on the back of stronger demand and profitability in 2014-15. However, the improve-ment will be restricted to firms


Source: CRISIL

11

with low leverage levels and pru-dent working capital management. CRISIL expects the credit ratio to remain below 1 time on account of fragile economic recovery over the near term.

Profitability to improve margin-ally, supported by higher capacity utilisationCRISIL’s analysis of the aggregate financial performance of listed companies indicates the following: The net profit margin (NPM) of 4021 companies in the S&P CNX 500 Index has begun to improve over the previous two quarters.The NPM has improved over the last two quarters and has reached 9.0 per cent in the third quarter (Q3) of 2013-14. CRISIL believes that the NPM of Indian companies will improve marginally in 2014-15 on account of stable commod-ity prices and improved capacity utilization, although high interest rates will continue to constrain profitability.Liquidity remains weak in 2013-14; interest rates to remain highWeak liquidity contributed to more than 50 per cent of downgrades during 2013-14. During the year, the Reserve Bank of India (RBI) revisited its liquidity and monetary policy in response to changes in the macroeconomic environment. RBI’s measures during Q2 2013-14—cap-ping the access of banks to systemic liquidity, and mandating a higher minimum daily cash reserve re-quirement—caused interest rates to increase again, tightening liquidity. However, the policy-induced tight liquidity eased considerably in Oc-tober 2013 with monetary measures returning to normal, and exchange rates regaining a measure of stabil-ity. The banks’ credit growth (year-on-year) declined to 14.7 per cent as on March 7, 2014 from 17.8 per cent as on September 6, 2013. The sharp uptick in the credit growth during quarter through September 2013 was on account of higher cost of non-bank funds, leading to cor-porates resorting to cheaper bank

credit. Credit quality to improve in 2014-15, as pressure on profitability and demand eases India’s economy grew at an estimated 4.9 per cent in 2013-14; the pace of growth was low despite the low base of the previous year. Agriculture and exports wit-nessed strong growth while industry growth declined. Manufacturing growth was pulled down due to low domestic demand and a near-stand-still in investments—the manufactur-ing sector experienced contraction in 2013-14 for the first time since 1991-92. Investment demand was weak due to low domestic demand, slow pace of policy reforms, and political uncertainties prior to elections.However, the pressures on demand and profitability are expected to abate in 2014-15, driven primarily by higher GDP growth of 6 per cent (as against less than 5 per cent over the last two years). The growth in GDP will be driven by implementation of stalled projects, debottlenecking in the mining sector, and some recov-ery in industry on the back of higher demand in the global markets.The global economy is expected to revive, with higher growth rates of 2.8 per cent and 2.3 per cent in 2014 for US and UK, respectively, up from 1.9 per cent and 1.5 per cent in 2013. The economy in the Eurozone ap-pears set for gradual recovery from the standstill of the past two years. Growth in these markets is expected to enhance the fortunes of export-linked sectors such as information technology (IT) and pharmaceuti-cals. We also expect some rebound in services growth, led by higher exports and the positive spillover

from improvement in industry. However, recovery will be fragile and dependent on factors such as sustainable recovery in demand, and continuity in policy and reforms.

OutlookCRISIL believes that 2014-15 will bring some respite to India’s corporates. Corporate credit quality appears set for improvement, with the economy likely to grow at 6 per cent, unlike in the past two years, when it grew at less than 5 per cent. However, the improvement will be restricted to companies operating in sectors that are less capital intensive. Profitability should see marginal growth on the back of stable commodity prices and improved capacity utilization.Nevertheless, despite a marginal improvement in credit ratio, the credit quality trends will be far from buoyant in 2014-15, given the slow economic growth and high interest rates. Downgrades will continue to outnumber downgrades in the near term. CRISIL believes that any sig-nificant improvement in credit quality is possible only if there is strong and sustained recovery in demand. Liquidity, performance of monsoon, the outcome of the forthcoming general elections and success in deleveraging the bal-ance sheets through sale of assets will remain key monitorables during 2014-15.

CRISIL’s Rating Distribution


IN-DEPTH / BUSINESS INSIGHTS

Core Inflation - Remains a Concern for RBI

The latest central bank’s bi-monthly monetary policy statement did not spring up any surprises on the rate front but has left many

bankers with concerns about the months to come. Although the central bank left key repo rate unchanged at 8 per cent but flagged off concerns on real GDP growth being 5-6 per cent but downside risks were more from government’s estimate of 5.5 per cent. Core inflation which measures prices for products such as metals, cement, iron, chemicals, textiles and transport machinery (account for about half of the basket used to calculate country’s benchmark wholesale price index), remained relatively stable. Recently, prices of these products have risen recently, adding to the already-high cost of food, a result of an inefficient supply chain between farmers and consumers, and expensive imported fuel. The rise has surprised the RBI and many economists as country’s slowing economy should mean core inflation remains subdued. Economic growth is currently below 6 per cent, much lower than 9 per cent rates seen in recent years. Like many other emerging market economies, Indian economy has often been subject to some supply shock or the other. It is currently experiencing high and persistent inflation. Inflation at above 8 per cent over last one and a half years has been one of the most persistent in the post-reform period. Although inflation prevailing now is generalized, it was triggered by supply side shocks, which in some form or the other have continued to persist, albeit with different intensity.According to latest government figures, core inflation rose to 5.6 per cent in September 2013 from 5.0 per cent at the end of March 2014, even as the headline wholesale inflation rate stayed relatively stable around 7.5 per cent levels during the period. Robert Prior-Wandesforde, economist, Credit Suisse, says the RBI is right to be concerned as these prices are increasing even though local industrial production is weak and international commodity prices have softened, reducing the cost of imported fuel. The central bank is of the view that a sustained moderation in inflation will only be possible if the government tackles structural issues like the inefficient farm supply chain and high wages.

World Economic Recovery Strengthens, But Risks Remain

The recovery in the leading economies is strengthening but concerted action by govern-ments is needed to rebuild lost dynamism, ac-

cording to the latest Brookings Institution-Financial Times Tracking Index. With the upturn in advanced economies gathering momentum, and emerging markets cooling off after an awful shock early in the year, global growth is steady, but the near-term prospects of a rapid acceleration remain small.Accordingly, the Tiger indexes (Tracking Indexes for the Global Economic Recovery - combines measures of economic activity, financial variables and indica-tors of confidence) shows that the global economy is back on an even keel but remains bereft of a strong wind to fill its sails, opines Prof. Easwar Prasad of Brookings Institution.In the beginning of 2014 overall level of the growth index dipped from levels reached at the end of last year but remains well above the scores in 2011 and 2012. Indicators of the strength of the recovery in real output for advanced economies are now consid-erably stronger than for emerging markets, sug-gesting that their recovery is more likely to endure. Confidence indicators are back to pre-crisis levels, as indicated by buoyancy in many global stock mar-kets. The turbulence experienced by emerging mar-kets in recent months appears to have eased off. But many of these economies are in a holding pattern, with a significant reform push needed to get growth back on track.However, the signals from the Tiger index strikes with that of Christine Lagarde, Managing Director, IMF. He said last week that the “global economy is turning the corner of the Great Recession, although overall growth remains too slow and weak”. The recent concluded Group of 20 finance ministers meet in Washington declared that leading economies will have to move faster in implementing structural reforms, including trade liberalization, sufficiently powerful to raise global growth forecasts by 2 per cent by 2018.Meanwhile, the IMF has added geopolitical concerns to its list of potential vulnerabilities that might throw the global economy disoriented this year. IMF’s other main worries are low inflation, particularly in the Eurozone, and the potential for monetary policy normalization in rich countries to hit poorer coun-tries hard.

Core Inflation - Remain Sticky TIGER - Core Indexes - January 2003 - March 2014


IMF Warns on Global Financial Risk

Even after six years, the repercussions of the subprime crisis (which crumpled the US and EU) are still challenging the global economy. In

the Global Financial and Stability report, the Interna-tional Monetary Fund (IMF) revealed that gains had been made to repair budgets in advanced economies and to shore up banking systems. But governments remain highly in debt and emerging economies are starting to pile up risky deficits. Besides, banks in Europe are still weak and new risks are cropping up in finance due to the long period of easy-money from the US and European central banks. In the meantime, emerging-market economies including India are facing pressure as the US tight-ens policy, draining investment and raising debt costs. The IMF said that much of that debt is owed to overseas investors. The share of corporate debt owed to non-residents is now above 25 per cent in countries including India and Turkey, making them more vulnerable to currency fluctuations. Jose Vinals, IMF financial counselor and director of its Monetary and Capital Markets Department, opine that global financial stability is improving; we have begun to turn the corner, but it is too early to declare victory. He further adds, generally speak-ing, good policies have placed the US, Europe and emerging economies in the right direction. But each faces its own challenges that need close monitoring and management. Economists at IMF highlighted the trouble spots on the financial horizon, noting the potential for growth to slow and interest rates to rise. As that happens, they estimated that problematic corporate loans could increase by as much as $750 billion and many companies may be pushed into default. That situation would hurt global investors, particularly mutual funds in the US. The international body echoed concerns already voiced by American regu-lators. As both have noted, large asset-management companies like Fidelity and Pimco, which eagerly bought these securities in favorable financial condi-tions, may have trouble selling them when interest rates begin to rise.

A Stain on Asia’s Growth Story

The slowing Chinese economy poses significant risk to the global growth, comments CNN, the world’s leading media group. The worry

stems from the fact that a slowdown in China could force Beijing to put vital reforms on hold, it said. A winter malaise has become something of a pattern for China’s economy in recent years, with slower growth in January, February and March gradually giving way to a stronger performance, helped by stimulative government policies, it opined. And the trend this year is no different: the massive factory sector has slowed dramatically and the real estate market is showing signs of weakness. Industrial production, retail sales, and investment growth have all disappointed. The sluggish start has led many economists to downgrade their forecasts, and some think Beijing may not be able to meet its 7.5 per cent GDP growth target for 2014, a report on money.CNN.com observed.In the past, policymakers might have responded by pushing cheap credit into the economy and pursu-ing other quick fixes to boost growth. But Beijing has started a series of market-oriented reforms that include a crackdown on the shadow banking sector and runaway local government debt. Another sugar high of easy credit would endanger those initiatives, it fears. Market participants believe growth will be allowed to slow.In a sign that policymakers might seek to exhaust other options before pursuing major stimulus mea-sures, Premier Li Keqiang indicated this month that Beijing is placing less emphasis on hitting a specific GDP target - a measurement long used to gauge the performance of local and provincial officials. “We are not preoccupied with GDP growth,” Li said during China’s annual parliamentary meetings. “A bit higher or a bit lower, we have a level of tolerance here.”The slowdown in China, once a red-hot economy, has already had commodity bears out in open. “The slowdown has already led to a steep decline in the price of copper and iron ore, raw materials that China gobbles up during periods of rapid growth,” the report from CNN says.


The First Bi-monthly Monetary Policy Statement, 2014-15 announced on April 1, 2014, by RBI

Governor Dr. Raghuram Rajan, on the face of it, did not contain many surprises.The opening paragraph in the press release of April 1, 2014, relating to Monetary and Liquidity Measures read asunder:“On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent;Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL); andIncrease the liquidity provided under 7-day and 14-day term repos from 0.5 per cent of NDTL of the banking system to 0.75 per cent, and decrease the liquidity provided under overnight repos under the LAF from 0.5 per cent of bank-wise NDTL to 0.25 per cent with immediate effect.Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the bank rate at 9.0 per cent.This may give an impression that keeping the not so stable political scenario in view, RBI took a mid-path of wait and watch, keeping in hold any change in major rates and ratios for the next review, by which time the uncertainties of the Poll Season will be over. But such an approach is not there in the tradition of this institution and a detailed reading of the policy document will reveal that

for RBI, it is business as usual and long term objectives and expectations are clearly spelt out in the document. Perhaps, the observations “Looking ahead, the effectiveness of monetary policy in bringing down inflation pressures and anchoring inflation expectations could be undermined by supply constraints in the economy, particularly in the food and infrastructure sectors. Food price pressures, upward revisions in the MSPs and rapid wage increases are

leading to a wage-price spiral. Without policy efforts to unlock the tightening supply constraints and bring enduring improvements in productivity and competitiveness, growth could weaken even further and inflationary strains could re-emerge.” made by his predecessor while presenting the first Monetary Policy Statement during 2013-14 may be fresh in Dr. Raghuram Rajan’s mind. Still, the statement makes the following commitment, though accompanied with certain riders:

MONETARY POLICYA Welcome, Refreshing Approach

Amidst not so stable political scenario in view, RBI took a mid-path of wait and watch, keeping in hold any change in major rates and ratios for the next review, by which time the uncertainties of the Poll Season will be over, says M G Warrier, Former General Manager, Reserve Bank of India, Mumbai.

BANKING SECTOR Monetary Policy


“The Reserve Bank’s policy stance will be firmly focused on keeping the economy on a disinflationary glide path that is intended to hit 8 per cent CPI inflation by January 2015 and 6 per cent by January 2016. At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy. Furthermore, if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture. Contingent upon the desired inflation outcome, real GDP growth is projected to pick up from a little below 5 per cent in 2013-14 to a range of 5 to 6 per cent in 2014-15 albeit with downside risks to the central estimate of 5.5 per cent.” The transparency in the central bank’s policy statements gradually introduced during

the last two decades and almost perfected by the previous Governor Dr. Subbarao, has made the job of economists to analyse their content and explain to us where things are going wrong somewhat easy. The problem that remains is that those in charge of fiscal policy have other preoccupations and are not in a mood to listen to the ‘laments’ from the Mint Road or the sound advice from the economists. In the recent past, finance ministry and analysts have been showing impatience over the consequences of the slow pace at which the impact of interventions by RBI is percolating to the ground level. Partly the relative ineffectiveness of monetary policy is attributable to the absence of adequate fiscal policy support. Perhaps, long term solution to this lie in speeding up the review and revision of the RBI Act envisaged in the preamble of the Act itself (The

preamble said: “But whereas it is expedient to make temporary provision on the basis of the existing monetary system, and to leave the question of the monetary standard best suited to India to be considered when the international monetary position has become sufficiently clear and stable to make it possible to frame permanent measures;….”). Several initiatives taken by the Reserve Bank in this direction have not been successful in the past. Suffice to say, even the share capital of RBI remains at Rs.5 crore while the transfer of surplus income from the central bank to GOI each year runs to thousands of crores! Till such time the compulsions of coalition politics keep them in a tight spot, the next best option before the North Block is to respect and keep intact the traditions in the relationship between the Reserve Bank of India and central government built up and evolved through the efforts of eminent Governors and efficient finance ministers during the second half of last century.Prem Shankar Jha, veteran journalist, writing in a mainstream newspaper on RBI’s monetary policy responsibility during 2012 made the following concluding observations:“The government has done a great deal to assuage the RBI’s legitimate fear of a huge fiscal deficit, and should commit itself to doing even more in the coming months. But the RBI must take its assurances on trust, for it can make the next cuts only after industry and employment begin to grow and spending power starts to rise once more. Dr. Manmohan Singh needs to make this clear to the RBI governor and remind him forcefully, as he reminded his predecessor Y.V Reddy when the latter was reluctant to bring down interest

BANKING SECTOR Monetary Policy


rates even after the onset of global recession in August 2008, that when push comes to shove it is the RBI governor who holds his post at the government’s pleasure and not the other way round.”This was not the first time a newspaper article went out of the way to provide scaffolding for an otherwise weak policy stance of government. But the signals here are loud and clear. About the concluding observation, I had commented that “This will definitely shake up Dr. Subbarao who may run to Delhi to apologise for whatever he has done since he took over as RBI Governor and will definitely take a dictation of what he should announce on October 30, if Delhi doesn’t ask him to make the announcement earlier!” Remembered this in the context of media gossip about a change of guard at Mint Street post-2014 Election on the basis of instigated comments by usually ‘open-minded’ politicians and analysts published in the media on April 5, 2014. Let us leave it at that for now.In effect, for quite some time now, we have a ‘caged’ Monetary Policy. Top echelons in government, by habit, pre-empt any manoeuvrability available to RBI Governor, by explicitly stating the direction and extent

of relaxation in monetary policy, well before the announcement. During the initial weeks after Dr Rajan took over as Governor, there was perceivable change for the better. That was short-lived, though.Last year, while airing his policy concerns specifically about managing inflation, RBI Governor Dr Subbarao had stressed the need for synchronization between monetary and fiscal policies. He also mentioned that in a poor country like India, the RBI has many responsibilities as well and it is not proper for it to focus only on inflation. This plain-speak should have been seen as an expression of his expectations about supportive measures from those in charge of fiscal policy and an indirect admission of the limitations of central bank’s policy intermediation in an environment influenced by external compulsions. This,

for obvious reasons, did not happen, as the Centre is itself helplessly tied up in the cobwebs of coalition politics. In the national interest, whosoever comes as the next Finance Minister, through supportive fiscal policy should prepare a fertile ground for an effective monetary policy to fructify. Independent of fiscal policy, RBI will not be able to achieve any perceivable results. In the last two years — we have seen the helplessness of the central bank. Beyond the mandated responsibilities of a central bank, RBI has been instrumental in bringing about improvements in the areas of institution building in the financial sector, financial inclusion, gold and wealth management (as part of its forex reserve management), revival of grass-root rural financial institutions like cooperatives and balanced economic development across regions by ensuring an appropriate realignment of the outreach of institutional infrastructure using financial sector reforms as a tool. Any move to weaken RBI, by enforcing ‘ownership’ rights by GOI or pressurizing the institution to deviate from its well-founded policy perspectives using external compulsions will be detrimental to the health of the financial sector and therefore impair economic development.

In the national interest, whosoever comes as the next Finance Minister, through supportive fiscal policy, should prepare a fertile ground for an effective monetary policy to fructify. Independent of fiscal policy, RBI will not be able to achieve any perceivable results. In the last two years - we have seen the helplessness of the central bank.

Monetary Policy

Projection of CPI Inflation (y-0-y) for 2014-15


Is the Rally for Real?THE RUPEE REBOUND

From being on a journey down the hill, the rupee has been on a roll, of late. What has helped rupee make a strong recovery after dangerously flirting with a level of Rs.70 a dollar barely a few months ago? Is the rally sustainable?- R S Raghavan, ACA & CAIIB, Former AGM (PSU Bank), Bangalore.

Rupee was equal to a dollar at the time of independence in 1947 and rupee was significantly depreciated to

the extent of 65 or 66 in August 2013, with the major contributors, in the past six decades, being import of Petroleum products and Gold metal. Despite crossing the threshold figure of 60 and fluctuating beyond that, dollar exchange rate relentlessly moved against rupee without retirement. In May 11, Rupee was around 45 against dollar and crossed the psychological barrier of 50 later and remained above that almost entirely in 2012, followed by its peak in mid- 2013. There is nothing magical about the figure of 60, akin to Senior Citizen concept, or for that matter even 70, but it reflects on the economy badly, when not checked properly. A free fall of currency is a challenge not normally faced during good years of economic indicators. Economic conditions in early nineties, when Liberalization, Privatization and Globalization (LPG) opened up and policy stance, during the pre-gulf crises era, were different than what is prevailing now, the forex reserves were merely $3 billion and the same now hovers around $300, which is nearly 100 times and not just 100 per cent. In 2003-07,

Monetary Policy

when credit off take was driven by high growth witnessed in private sector, Rupee appreciation was significant. Thus, reason for continued fall in rupee against dollar could be traced to the low level of credit creation reflected in poor GDP/Credit Deposit Ratio of banks. During the major part of 2013-14, Rupee depreciated, Gross Domestic Product (GDP) declined and Current Account Deficit (CAD) initially widened. The root causes for the Rupee and CAD not matching much with the monetary policy, but with the real sector economy, is the government was not successful in ensuring manufacturing sector growth significantly in alignment with the service sector in Finance and IT fields. Owing to misplaced priorities by those in power and business developments in India were focused where the returns were quick, viz. in financial and service industry. In this, capital outflow would also be quick when the confidence level tapers off. As at the end of last Friday of March 2014, while the exchange rate settled down at Rs. 60.10 per dollar, the exchange reserve stood at $303 billion.

Rupee Reverberation Exchange Rate is the price of a currency expressed in terms of another currency and Floating and Pegged modes are used to

determine a currency’s exchange rate. In the former, government make changes to its national economic policies, directly or indirectly affecting the exchange rate, in the pegged exchange rate system, government sets/maintains the exchange rate, with no daily swing. In this, the central bank needs to have large forex reserves for mitigating changes in the supply and demand proportion. If anyone poses a question as to whether the exchange rate prevailing now would stabilize and reflects the real exchange rate, the answer may not be forthcoming. The exchange rate does not reflect the real value. The Real Effective Exchange Rate (REER) is actually a measure of the trade weighted average exchange rate of the rupee against the basket of currencies, duly factoring the inflation differentials of the respective countries

CURRENCY MARKETS


through an index number with reference to some base year. This is akin to Inflation Indexed cost arrived at for the capital gain tax. The real parity of Rupee against dollar, after factoring the inflation, may be 50 or so and till recently, the nervous Rupee was the worst performed currency in the Asian group, as it fell against all major currencies. When the Rupee falls, share prices also tumble, investment cycles are disrupted, demand for gold increases, government fiscal deficits rise and all of these ultimately culminate in higher cost of living.India was not alone in the decline of the currency rate, as in the emerging markets currencies such as South African Rand, Malaysian Ringgit, Indonesian Rupiah, inter-alia, have also shown similar diminishing value. But the main issue for India is the huge current account deficit, which needs to be met in an orderly manner. Falling rupee and rising CAD are the symptoms of the decline in manufacturing growth in India, but like missing the wood for tree, they were mistaken for disease. It would take a considerably time before the rupee regains its ideal strength, in the course of time, as the extent of reserve requirements to meet ever growing import needs is on the rise like a moving target.

Exchange Rate ImplicationsCurrency is often taken, by the international market, as one of the nation’s vital barometer in economic trade prosperity status. Falling rupee affects many during its journey and more so in the spectrum of costlier products, rise in fuel bills, higher cost for students pursuing courses in abroad, expensive foreign holiday trip, escalated medical treatment outside India, steeper interest rate. On the whole, it is bad times ahead for the economy. Balance of payments, external debt and inflation are the three main causes known as Trinity Tri-lemma for

the ballooning exchange rate and depreciation in the related Indian Rupee. Among the trinity, the weakness of rupee against dollar could be traced mainly to the widening deficit. When the value of imports over exports is on the rise, demand for foreign currency increases, thereby weakening the domestic currency. This deficit was the main cause for the diminution in the value of rupee.In India while Imports increased, owing to mainly crude oil and gold, exports from India did not match to that extent of supporting to meet that much value of Import, resulting in concrete trade deficit, reflected in adverse balance of payments. This is the prime cause for free fall of rupee. India handled and managed this shortfall in BOP through the flows in capital account movement of funds, which also shrunk as there was exodus of foreign funds out of Indian Debt as well as Equity markets. Inflation rates also played its role in the exchange rate movement as the former eroded the purchasing power that one currency could fetch against another currency. Apart from inflation, which is too many demands chasing too few commodities, external debt which is the net money owed by Indian individuals as well as entities, inclusive of government and those abroad, had a solid bearing on the rupee as Indian government and

corporate access funds abroad, following the opening up of economy in the free market set up. Added to this, quite a good number of Indians take up higher education abroad, necessitating borrowing arrangements to meet the cost. These aggregate to a substantial quantum of external debt getting magnified through exchange rate. All of such things in totality exert heavy pressure on the rupee against dollar, both in near and long terms. In this messy affair of amplified foreign economy, it is the students and the general populace who are most affected as these people do not have any hedging mechanism for the currency upward movement risk being witnessed. When the exchange rate is on the rise, value of foreign remittance being sent by persons working abroad gets multiplied for every dollar. But the other side is that foreign residents touring India would pay a few dollars less for their vacation trip, than when the rate was better. Further, stock markets have also reacted badly. But attempts are being made to decouple the stock markets from the forex markets, which of late seemed to break loose from the clutches of the rupee. Obviously, Rupee’s tumble makes exports more affordable. If exporters have sellers advantage, they make money. On the contrary, if they are dictated with price, same gets bargained down. The long term impact of rupee face value is the inducement to produce more in India. Due to nearly 25 per cent dip in exchange rate, imports have become expensive and hence it may make more sense to produce in India and export by capitalizing the prevailing situation. When country is facing crises situation on more than one front, viz. exchange rate, inflation, CAD, adverse balance of payment, etc., both RBI and Finance Ministry should openly discuss and arrive at a consensus for a workable

The Rupee Rebound

R S Raghavan


solution, without making any differences between them as obvious to the outside world. Boosting exports, dependent on Europe for CAD may be a good theoretical concept. Ground reality of rupee slide is due to huge Current Account Deficit, caused by primarily large value of import of capital goods besides import of oil, fuel and gold. Adding fuel to fire, incentives were given for the exports, thereby depriving of revenue to government exchequer. The double edged sword of tax cut induced capital goods import of huge value totally wiped out the CAD surplus and was allowed to run in deficit mode for a considerably long time, impacting the rupee. Adding further ghee to the leaping fire, additional 1.50 lakhs crore expenditure on the Food Security bill was proposed.

Remedial Measures Policy makers appear to have misread the symptoms as disease itself. Unless there is sufficient flow of foreign exchange funds, the days ahead will be a difficult one. High CAD, with loose capital control in a free economy is bad. Perhaps a closed economy, even if mismanaged, may appear to be a better measure. Large amount of overseas capital was used to close down the yawning CAD, resulting in poor exports coupled with growing import requirements. Improvement in CAD deficit and increasing overseas funds flow through borrowings, Non-Resident Deposits in banks, FIIs etc., have now changed the trend in the exchange rate. Reserve Bank of India has taken a number of steps, summarized below, to stem the rising depreciation in Rupee against the dollar, notwithstanding the limited ability to intervene by selling dollars to calm down the market, as this may only lead to depletion of foreign exchange without a significant impact on the currency.

• SpecialEconomicZonestoseek permission from RBI for holding forex for more than 9 or 12 months earnings, as against the unlimited period for converting their foreign exchange earnings. • Extensionofthe$10MillionScheme for the External Commercial Borrowing through which repayment of all Term Loans with residual maturity of five years or more can be resorted. This repayment needs to come from foreign exchange earning of their overseas units.• Restrictionsgraduatingto banning of the import of medallions/gold, which is considered to be both precious and auspicious in the Indian set up. • FCNRDepositInterestratewas raised and overseas capital outflow through Overseas Direct Investment (ODI) remittances by companies and Individuals have been clamped.• SecurityExchangeBoardof India (SEBI) auctioned government bonds to augment the efforts of RBI and GOI, in arresting the declining trend in the rupee. All these promised increase in the flow of liquidity and foreign exchange and arrested the depreciating rupee.In all fairness, it can be said that the vision and mission of RBI held in good stead against the onslaught of world financial crises witnessed some time back, notwithstanding the fact that in India, at times political administration overpowered the economic management. Similar to the measures taken during the 1997 Asian Financial crises, now also RBI went to the Monetary Policy tool to strengthen the currency. But statements such as “we have no target”, “Rupee must find its own level against the dollar”, etc., were repeated more than once by the authorities concerned in power. According to RBI, Rupee weakened/depreciated

owing to global factors, on which neither the Government nor RBI had any sort of control. To push economic growth while arresting the slide of rupee is actually a tricky situation as stabilizing Rupee may require raising interest rate which could severely impact economic growth. Cutting down in wasteful credit or schemes and government expenditure would pave way for growth/productivity, no matter how well informed these schemes are. In order to check speculation on Rupee, since mid-2013, RBI has been acting tough and taking measures to push the interest rates and drain liquidity. The Rupee battle or for that matter Rupee war being fought through multi-pronged attack has raised some issues for the broader economy. Measure to control capital outflow met with the opposite effect as foreign investors panicked. Limitations of monetary policy in the global economy are being felt in a telling manner. In Indian political and governance scenario, periodical monetary policy initiatives have certain limitations as the components of production such as material, labor, capital and land were fraught with operational risk and also mis-governance, as could be made out from a number of scams emanating even from the government side. All said and done, both RBI and the Government lost sleep over the downward movement of exchange rate and it is quite different from the stock market price movement. However, expertize in both domestic and international economics of the present Governor of RBI would definitely stand in good stead, as the nation progresses with new set up of government at the center. Too much cannot be read over the views of analysts and economists, whose vision is short sighted to judge policy matters and often tries to link correlation

The Rupee Rebound


with the quick-silver share market responses. If Government is hard pressed for currency, it can go in for barter system instead of currency payment mechanism. Ideally RBI should leverage the present positive situation and potential growth oriented expected business scenario, by buying dollar and improve its Forex Reserves. This would also protect the potential Rupee decline from the present “Rupee Rebound” in the immediate short term period.

The Midas Touch Stemmed from the RBI perceived threat of inflation that held back RBI from reducing policy rates there is apparent disconnect between RBI and Government on strategies, if not on the objectives. If RBI makes an attempt to be independent of Finance Ministry and reduce latter’s influence on the central bank, it was disliked by the powers that be. In fact it was made obvious in the statement that “the Government is prepared to walk alone to push growth”. But RBI did not want to sacrifice inflation objectives for the sake of being in line with the thinking of Finance Ministry. Government appears to have felt that RBI has kept interest rate very high and is not willing to reduce which might have brought economic growth or activity to a standstill. Handling higher interest rate to boost economic growth may weaken Rupee causing spiraling and multiple effects, indicating that the government may ultimately be willing to heed to the advice of economist, it might not be eager to hear, considering the fact that the present chief of RBI is familiar with the dynamics of global economics and financial systems. In the background of the non-too coordinated way of functioning between the Finance Ministry and RBI Governor, the present Chief with a long tenure needs to have a firm government support

so that he is not destined to have the post of RBI Head as his Waterloo. Traditionally, the new Governor always had to face some or the other challenges or crisis, when he assumes office as the Numero Uno of central bank. The immediate predecessor had global financial crises triggered by Lehman Brothers in 2008, quite unexpectedly and now it is internal with CAD/BOP, Exchange Rate and Inflation, known as the “Trinity Tri-lemma”. Announcement of the incumbent Finance Minister P Chidambaram on 19th March 2014 that he would not contest election in 2014 and perhaps has no plans to contest again ever, perhaps triggered positively in the forex market, as it strengthened continuously since then and hit eight months high in March 14. The rally in rupee is seen as reflective of weakening gold prices, both significantly and rapidly. Good quantum of foreign portfolio inflows helped the Rupee strengthen beyond the psychological benchmark of 60. The Dollar Rupee outlook appears to be positive in the short term and bullish in the medium term. It is expected to revolve around 55 during the early part of 14-15 and may even touch a high of 50 or so if the electorate gives a firm verdict with strong leader. With large foreign fund flow, there is no better economic indicator than exchange rate. Rupees surge is coupled well with swelling forex reserves to over USD 300 and also fall in gold prices.While taking charge, the internationally respected Economist backed by a brilliant academic track record with financial pedigree and worldwide exposure, Raghuram Rajan cautiously knit a safety net by saying that he had no “magic wand” to handle the dollar crises, though, with an expectation of Midas Touch, he is now given the immediate target of achieving low inflation rate and bring down

the exchange rate to at least below 50, by fixing the Fault Lines, in which name he has authored a book. He has produced results and the rate improved to below 60. Alan Greenspan, who crossed sword with Raghuram Rajan in 2005 on the then impending world financial crises that ultimately opened up in 2008, was proved wrong. Rather, Rajan was proved right on the prediction of unfavorable financial scenario developing, though he was shouted down.

Outlook Available resources should be utilized primarily for the wholesome growth in manufacturing of goods required for building blocks of economy. This coupled with domestic consumption should always be encouraged so as to ensure that capital circulates and remain within the country to ensure qualitative growth, paving way for quantitative increase, even if it is happening slowly. India took pride in boasting that it was not unduly affected by the 2008 world financial crises, thanks to the strong RBI policy stance. But the headlong nose dive of rupee against dollar in 2013-14 proved that something wrong fundamentally and economic platform was not strong enough for a strong Rupee rebound. However, it is a good sign that the trade deficit has shown considerable improvement during the nine months period from July 2013, in the FY 2013-14. What lies ahead and what would be the likely trend can be gauged only after June 2014, when the new government occupies the seat comfortably and confidently, in a stable manner and not out of fearful partner coalition pulling the policy matters in varying directions and dragging the implementation process of decisions by the hung government.

The Rupee Rebound


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THE DEBILITATING EFFECT OF

INFLATION ON INVESTMENTSAlmost always we make investment decisions based on absolute performance rather than inflation adjusted performance. Without considering the effect of inflation, the investment performance can look really dramatic. However, this approach can have very costly consequences in terms of our wealth and overall financial well-being, says M.R. Raghu, CFA FRM, Senior Vice President & Head of Research, Kuwait Financial Centre (Markaz), Middle East.

S P O T L I G H T

The author thanks Karthik Ramesh and Rajesh Dheenathayalan for assistance.


The table below reflects the complete picture across time and investment category. Let us analyze by investment category. At this stage, it may be worthwhile to explain what is nominal and real. Nominal rate of return is the absolute rate before adjusting it for inflation. Real rate of return is the performance after adjusting for inflation. For example, during the last five years fixed deposits have returned an annualized return of 8 per cent while inflation was also running at more or less same speed causing the real rate of return to be nil.

Fixed Deposits• If you are a fan of fixed

deposits, think again. Most of us, deal with bank fixed deposits without realizing the meagre return (after inflation) that it offers. It has failed to produce any reasonable real rate of return in any time period.

The Debilitating Effect of Inflation on Investments

Rs. 1 lakh invested in Equities 25 years ago will now be worth Rs.47

lakhs before inflation and Rs. 7.6 lakhs after inflation!• Rs. 1 Lakh invested in Gold

15 years ago will now be worth Rs. 6.7 lakhs before inflation and Rs. 2.7 lakhs after inflation!

• Rs. 1 Lakh invested in Fixed Deposits 10 years ago will now be worth Rs. 2 lakhs before inflation and Rs. 1 lakh after inflation!

• What Rs. 6,700 could buy in 1980, you will now need Rs.1 lakh for the same!

Almost always we make in-vestment decisions based on absolute performance rather

than inflation adjusted perfor-mance. In my humble opinion, this approach can have very costly consequences in terms of our wealth and overall financial well-being.Without considering the effect of inflation, the investment performance can look really dramatic. For example, Rs. 1 lakh invested in 1979 in equi-ties can now be worth Rs. 1.88 crores! But when adjusted for inflation it is worth only Rs. 12.6 lakhs, still better than other investments like gold and fixed deposits. Also, inflation creates more havoc in the long run than in the short run as it is a steady and silent killer. For example, if you have invested Rs. 1 lakh in a fixed deposit in 1979, it is now worth Rs. 15.5 lakhs. But when adjusted for inflation, it is worth only Rs. 1 lakh! In other words, for 34 long years your investment worth has remained unchanged.

Rs. 1,00,000 Invested at the Beginning

PeriodFD Gold Equities

Before Inflation

After Infla-tion

Before Inflation

After Infla-tion

Before Inflation After Infla-tion

Last 5 years 1,47,235 99,752 2,94,228 1,99,339 1,20,398 81,570 Last 10 years 1,98,796 1,01,247 5,51,594 2,80,927 6,17,744 3,14,617 Last 15 years 2,85,880 1,14,495 6,76,582 2,70,971 4,83,817 1,93,769 Last 25 years 7,72,004 1,23,984 9,54,283 1,53,258 47,32,412 7,60,025 Last 34 years 15,50,213 1,03,978 37,17,171 2,49,322 1,88,35,000 12,63,323

Compounded Annual Returns

Period

FD (%) Gold (%) Equities (%)Nominal Real Nominal Real Nominal Real

Last 5 years 804.4 0.0 24.1 14.8 3.8 -4.0Last 10 years 711.3 0.1 18.6 10.9 20.0 12.1Last 15 years 7.3 0.9 13.6 6.9 11.1 4.5Last 25 years 8.5 0.9 9.4 1.7 16.7 8.5Last 34 years 8.4 0.1 11.2 2.7 16.7 7.7

Source: RBI, BSE, and other sources. All data for period ending 31st March 2013.



FDs - Rs. 1,00,000 Invested at the Beginning

GOLD - Rs. 1,00,000 Invested at the Beginning

While banks have benefit-ted by the fixed deposits as they make nice spreads (the difference between lending rates and deposit rates), the investors have not made any returns since inflation eats away all the returns leaving nothing on the table. When-ever inflation increases in the economy, the RBI uses interest rates as a tool to contain the inflation (though I am not sure how effective that strategy is so far). In other words, when inflation increases, interest rates also increase thereby technically protecting the real rate of

return. However, as data shows, inflation seems to have had the upper hand resulting in the dismal per-formance of fixed deposit. Over the long-run, a 0 per cent real rate of return can hurt seriously.

GoldYour wife’s obsession with gold after all is not a bad idea! Gold has always produced good real rate of return across all time periods unlike fixed deposits. Gold seems to be having a gala time of late (during the last 5 years) compared to say last 25 years or 34 years. Gold has

generated nearly 25 per cent nominal returns annualized (before inflation) and 15 per cent real return (after inflation) during the last five years mak-ing it as the best performing investment. It also had a nice run when seen from a ten year context with inflation adjusted annualized returns at nearly 11 per cent. However, in the long run (25 years and 34 years), its real return (inflation adjusted) seems to be moderate but still better than fixed deposits. The recent good performance of gold in the last five years could be more due to global financial



Equities - Rs. 1,00,000 Invested at the Beginning

Welcome to the World of Finance!On a side note, while inflation is certainly not benefitting investors, it is benefiting insurance companies in terms of launching products. Recently Aviva launched “Family Income Builder” scheme which states as under:“You would be surprised to know that the cost of living has doubled in the last 12 years, and this trend is expected to continue. Are you sure that your savings are also growing at a similar pace? Presenting Aviva Family Income Builder - a life insurance plan that doubles your money. Pay an annual Premium for 12 years and get double of what you have paid every year, for the next 12 years, guaranteed”Simply put, what they are saying is that they will double your money in 12 years! A back of the envelop calculation says that the annualized return of such a proposition is just 6 per cent, far lower than the fixed deposit returns that you get in banks! The catch is not in doubling, it’s how soon you double. Welcome to the world of finance!

crisis and its aftermath all across the world. So long as global un-certainty persists, we can expect gold run to continue.EquitiesIndian Equities by far has the best story to narrate, especially in the medium to the long-term.

In the short-term, (last 5 years), the equity performance is nega-tive after adjusting for inflation but this is only expected given the volatility with which this asset class evolves in the short term. As said before, the global financial crisis has a direct bear-ing on the performance of equi-

ties and hence it is no surprise that its performance has been lack lustre. However, if you can muster some patience, it is by far the best hedge against infla-tion. It produced a real return of 8.5 per cent annualized in the last 25 years compared to 1.7 per cent for gold and 0.9 per cent for fixed deposits. The same trend can be observed for the last 34 years where it produced a real return of 7.7 per cent compared to 2.7 per cent for gold and 0.1 per cent for fixed deposits. It is thus clear that if we can have a time frame of 10 years+ then we can expect equities to protect us from the inflation beast. In the absence of treasury inflation protected securities (TIPS) as it exists in US, the only place to hide against inflation seems to be equities. Though there is no statistic to back the claim, I also feel Real estate doing a good job of protecting value against inflation.

Trends and Challenges

There are 3 trends that are worth noting from a lifestyle point of view:

• Youwilllivelongerthanyouthink-more importantly your


Indian Inflation-Proof BondsRBI recently launched Inflation Indexed National Savings Securities (Cumulative) for retail investors in slabs of INR 5,000 and maximum value capped at INR 500,000. While the offer for subscription is open to HUF’s, charitable institutions and Universities; NRI’s aren’t allowed to invest. The Inflation-proof bonds would be issued at par. The bonds would bear an interest rate mark up of 1.5 per cent (p.a) over the inflation rate computed with respect to final combined Consumer Price Index (CPI) (base, 2010 =100). Final combined CPI would be used with a 3-month lag and the interest rate would be reset every 6-months. Coupons from the bond are compounded half-yearly and paid at end of 10 years.The Inflation-proof bond instrument has no special tax advantages and the interest income would be taxed as per the individual’s tax slab. They are neither tradable in secondary market; though they could be used as collateral to avail loans.Premature redemption is allowed only after 3 years for ordinary investors and one year for senior citizens (above 65 yrs) but then you stand to lose 50 per cent of last payable coupon.Following the tepid initial response from the public, the initial deadline was extended from 31, Dec 2013 to 31, March 2014. CPI-based inflation stood at 8.1 per cent (YoY basis) as of Feb, 2014.

Ajai Kumar Agarwal takes over as National President of PRCI

India’s one of the biggest Public Relations (PR) Professionals Apex body, Public Relations Council of India (PRCI) announced that Ajai Kumar Agarwal will be the new National President for PRCI for the year 2014-17. The National Ex-ecutive Body of PRCI which control and gives directions to all the 23 Chapters of PRCI spread over the length and breadth of the country under the supervision of National Governing Council made an an-

nouncement at a just concluded 8th PRCI Global Conclave in Mumbai. PRCI is a national body of Public Relations professionals, Corporate Communications, Advertising, Me-dia Consultants and Academia. It has 7000 members under 23 Chap-ters spread all over the country. Ajai Agarwal assumes charge espe-cially when Social Media, Digital World is changing the landscape of Public Relations. What it means to today's PR Practitioners is to pos-ses the necessary knowledge and skills to thrive.

Ajai Agarwal, currently working with Central Bank of India as Head-Maketing for the States of AP & Karnataka, has served in many positions in PRCI earlier. Before his elevation as President, he was President elect National Executive. He was the Hyderabad Chapter President.

wife will live longer than you (based on life expectancy)

• Yourinvestmentwillpro-duce lower returns as you age yielding lower income and

• Yourcostoflivingwillincrease more than what you estimate

The power of inflation prob-ably comes in directly in the last trend i.e., cost of living and to an extent in the second trend where after inflation the net returns will be lower. The final outcome of these 3 important trends is that you will experience a lower standard of living in retirement.

How to beat it?

• Focusonhealth-don’tjustbe content with maintenance. Spend money on building a healthier body.

• Developaninvestmentstrat-egy that is inflation proof (and fixed deposit is certainly not one of them).

• Worklonger-moveyourretirement age from 65 to say 70 or even 75.



C O V E R S T O R Y

Bottoming Out?

Economy is witnessing signs of stabilization, with growth bottoming out, inflation coming under control and improving current account deficit. Against these positive developments, Indian economy is back on the radar. Recovery may not be spectacular, but it has picked up, and the calendar year 2014 would be better than 2013.

INDIAN ECONOMY


The economy of India is the 10th largest in the world by nominal GDP and the 3rd largest by

purchasing power parity (PPP). The country is one of the G-20 major economies and a member of BRICS. On a per capita income basis, India ranked 141st by nominal GDP and 130th by GDP (PPP) in 2012, according to the IMF. India is the 19th largest exporter and the 10th largest importer in the world.

Economy on the verge of Bot-toming outOn 28 August 2013 the Indian rupee hit an all-time low of 68.80 against the US dollar. In order to control the fall in rupee, the government introduced capital controls on outward investment by both corporate and individu-als. India’s GDP grew by 9.3 per cent in 2010–11; thus, the growth rate has nearly halved in just three years. GDP growth rose marginally to 4.8 per cent during the quarter through March 2013, from about 4.7 per cent in the previous quarter. “Stars are beginning to align in our favor. India is back on the radar. Recovery may not be spectacular, but it has picked up, and calendar (year) 2014 would be better than 2013,” said Abheek Barua, Chief Economist, HDFC Bank, crediting the government with “structures set up to push projects”.According to advanced estimates released by the Central Statistics Office (CSO), GDP growth for 2013-14 is estimated at 4.9 per cent as compared to the growth rate of 4.5 per cent in 2012-13. Ac-cording to Moody’s, the Econom-ic Growth Rate of India would be

5.5 per cent in 2014-15.The latest estimate of 4.9 per cent for 2013-14 implies that the pace of economic expansion improved in the second half, given that GDP grew 4.6 per cent in the April-September period.For 2013-14, the CSO has project-ed a growth rate of 4.6 per cent in agriculture and allied sectors, up from 1.4 per cent a year earlier.Manufacturing, however, is ex-pected to register a contraction of 0.2 per cent in this financial year compared with growth of 1.1 per cent in the previous year.

Concrete Signs of Economy Bot-toming out

Encouraging signs that the Econ-omy Bottoming out can be seen:-

1. Economy is witnessing signs of stabilization, with growth bot-toming out, and inflation coming under control and CAD improv-ing.

2. Government’s effort to kick start the investment cycle and corporate deleveraging, which is under way, point at gradual improvement in loan growth and better asset quality.

3. Indicating signs of economic revival, the CII Business Confi-dence Index (BCI) rose sharply to 54.9 during the October-Decem-ber period of fiscal year 2013-14

(FY14), from 45.7 in the previous quarter.

4. Overall tourist arrivals up by close to 12 per cent in 2013 from 2012. Domestic tourist arrivals up by 12.47 per cent in 2013 as compared to figures from 2012.

5. India has made huge progress in terms of increasing primary education attendance rate and expanding literacy to ap-proximately three-fourths of the population. India’s literacy rate had grown from 52.2 per cent in 1991 to 74.04 per cent in 2011. The right to education at elementary level has been made one of the fundamental rights under the eighty-sixth Amendment of 2002, and legislation has been enacted to further the objective of provid-ing free education to all children. However, the literacy rate of 74 per cent is still lower than the worldwide average and the country suffers from a high drop-out rate. (Further, there exists a severe disparity in literacy rates and educational opportunities between males and females, ur-ban and rural areas, and among different social groups.)

6. Agriculture and allied sectors like forestry, logging and fish-ing accounted for 17 per cent of the GDP in 2012, employed 51 per cent of the total workforce, and despite a steady decline of its share in the GDP, is still the largest economic sector and a significant piece of the overall socio-economic development of India.

7. Credit growth has picked up, exports have clocked double-digit growth for three months running, and industrial production has at least been positive in recent months (During the year 2012-13).

8. “India’s best monsoon in 15 years is expected to lay the foun-dation for an accelerated recov-

CA. Rajkumar S. AdukiaB.Com (Hons), FCA, ACS, CMA, LLB, MBA, Dip IFRS (UK), DLL & LW, DIPR

Partner, Adukia & Associates, [email protected]

Indian Economy Bottoming Out?


ery in the rural economy, which accounts for 56 per cent of India’s total income and 64 per cent of total expenditure,” Deutsche Bank said in a report .

Higher rural incomes should translate into better demand for consumer goods, both fast-mov-ing consumer goods (FMCGs) and durables, and two-wheelers.

Inflation

Just when investors were becom-ing optimistic about the Indian economy – and its markets – it

looks like inflation is ticking up and industrial production has gone into decline.

The inflation rate in India was recorded at 8.10 per cent in Feb-ruary of 2014. Inflation Rate in India is reported by the Ministry of Commerce and Industry, In-dia. The Wholesale Price inflation rate data is available at Producer Prices Change. Inflation Rate in India averaged 9.76 per cent from 2012 until 2014, reaching an all-time high of 11.16 per cent in November of 2013 and a record low of 7.55 per cent in January of 2012. Historically, the wholesale price index (WPI) has been the main measure of inflation in In-dia. However, in 2013, the gover-nor of The Reserve Bank of India Raghuram Rajan had announced that the consumer price index is a better measure of inflation.

India Consumer Inflation edges down in February, 2014

Indian annual inflation rate slowed to a 25-month low of 8.1 per cent in February of 2014. Provisional figures showed prices of vegetables eased the most on the year.

Food prices decelerated to an an-nual 8.57 per cent, down from 9.9 per cent in the previous month. Fruit cost recorded the high-est growth rate (15.79 per cent versus 15.66 per cent in January), followed by vegetables (14.04 per cent versus 21.91 per cent in January). Sugar cost fell 5.48 per cent on the year and oils and fats dropped 1.17 per cent.

Prices of clothing and footwear

Indian Economy Bottoming Out?Inflaiton Rate (Annual chane on Consumer Price Index)

Immediate tasks before the government so as to lift the economy out of over a year – long sluggishnessThe government’s strategy of fiscal consolidation has repeat-edly gone off course since 2008 due to a series of unfavorable developments. Faced with prospects of a sovereign rate cut and the crowding out of private investments in the economy, the government has undertaken a series of reforms, including fuel subsidies and rail fares, starting in September 2012. While cuts in expenditure due to the reforms have helped the government report better-than-expected fiscal performance, as suggested by the recent revisions, the deficit is still wide enough to weigh on investors’ confidence. Further, fiscal consolidation by the gov-ernment, if it happens, may impact expense quality and result in necessary expenditure being deferred, adversely impacting long-term growth prospects. Following immediate actions to be taken by Government:

• Needed to have the current account deficit under control.

• Need better fiscal management.

• Need to get the private sector opened up.

• The implementation of the direct taxes code – a tax on income - and goods and services tax would also be crucial.

• The reorientation of fiscal policies should be internationally coordinated and aligned with structural policies that support direct job creation.

• The monetary policies be better coordinated internationally and regulatory reforms of financial sectors be accelerated in order to stem exchange rate and capital flow volatility, which pose risks to the economic prospects of developing countries.

• There is also a need to secure sufficient development assistance to help the poorest nations accelerate progress towards poverty reduction goals and invest in sustainable development.

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“Structural reform is needed in political

discourse to articulate an idea of India which is

not imprisoned either in some false romantic

view of the past when there was no India or in

some future utopia or prosperity which can be

achieved without engaging in rational disputation

over distributive conflict amongst citizens.”- Prof. Shanti P. Chakravarty, Professor of Economics, Bangor Business School,

Bangor University, UK.

Is the economy on the verge of bottoming out?Yes, because the political vacuum has allowed competent technocratic elite, personified by the likes of the RBI governor, to assume greater power in direct-ing medium term economic policy.

Are there any concrete signs of the same?Foreign investors are beginning to show interest, and the rupee has firmed.

However, things on inflation front do not seem so optimistic?Inflation, per se, is not the issue. One needs to take a view of what it signifies. To the extent that inflation was an indica-tor of markets attempting to mediate distributive conflict in society because government was in a state of paralysis, it was a bad omen. Policy paralysis, at least for the medium term, was addressed by the appointment of a central bank governor who enjoys credibility.

Though inflation has been easing off, of late, the situation remains far from being comfortable. What’s your opinion?

The political will is not clear. Indian political parties are suspi-cious of the market not because markets sometimes fail to deliver but because social outcome of successful market economies is not compatible with the narra-tive of identity impoverishing political discourse in India. The BJP combines market-friendly announcements with market-incompatible Hindutva nonsense. Congress talks about inclusive growth but it is unclear about growth.

What would be the immediate tasks before the government so as to lift the economy out of over a year-long sluggishness?Decide on priorities and com-municating them in a credible manner. For example, if the BJP should come to power, it has to signal to national and interna-tional investors whether it is able to sacrifice pet projects designed to flex muscle against neighbors to embrace expenditure on the construction of infra-structure and investment in human capital when a decision has to be made on competing demands on gov-ernment expenditure. If a Congress-led government is again to return to power, it has to signal preparedness to go to

mid-term polls if policy is held hostage by mercurial leaders of regional warlords.

“India’s outlook depends on its ability to successfully implement structural reforms and spark stronger growth.” Pl. elucidate Structural reform is needed in political discourse to articulate an idea of India which is not imprisoned either in some false romantic view of the past when there was no India or in some future utopia or prosperity which can be achieved without engag-ing in rational disputation over distributive conflict amongst citizens.

OutlookIndia has suffered from policy paralysis entailed in the particu-lar manner in which the UPA government was held together in the second period. However, policy paralysis is not inevitable in coalition politics which only entails compromises to articulate an encompassing interest. Compromises are essen-tial because India is too diverse a country to be ruled by a dictator without rendering the country ungovernable through conflict. The incoming government must take heed.



“The economy may indeed strengthen from here. But there are also areas where deterioration could occur. The obvious one is that the stock market is overvalued and should fall. Another prominent possibility is renewed erosion in the balance of payments.”

- Derek M. Scissors, Resident Scholar,

American Enterprise Institute (AEI), where he

studies Asian economic issues and trends.

Is the economy on the verge of bottoming out?Not necessarily. The economy may indeed strengthen from here. But there are also areas where deterioration could occur. The obvious one is that the stock market is overvalued and should fall. Another prominent possi-bility is renewed erosion in the balance of payments.

Are there any concrete signs of the same?After a sustained period of infla-tion, when base prices for some items have become quite high, it is hard to be optimistic. Six per cent inflation would have been quite acceptable 4 years ago when prices were lower. Now consumers may feel stretched to the breaking point. The infla-tion target should probably be more like 3 per cent for several

years, to restore buying power. And that is a very difficult goal to reach.

However, things on inflation front do not seem so optimistic?The sluggishness has been far longer than a year. The immedi-ate task is the GST. No money needs to be spent and growth will be boosted, more so if many states join and fewer exemptions in coverage are allowed. Longer term tasks involve the labor and land markets.

Though inflation has been easing off, of late, the situation remains far from being comfortable. What’s your opinion?

After a sustained period of inflation, when base prices for some items have become quite high, it is hard to be optimistic. Six per cent inflation would have

been quite acceptable 4 years ago when prices were lower. Now consumers may feel stretched to the breaking point. The inflation target should probably be more like 3 per cent for several years, to restore buying power. And that is a very difficult goal to reach.

What would be the immediate tasks before the government so as to lift the economy out of over a year-long sluggishness?The sluggishness has been far longer than a year. The immedi-ate task is the GST. No money needs to be spent and growth will be boosted, more so if many states join and fewer exemptions in coverage are allowed. Longer term tasks involve the labor and land markets.“India’s outlook depends on its ability to successfully implement structural reforms and spark stronger growth.” Pl. elucidateStructural reforms, certainly. But stronger growth in what? GDP does not indicate prosper-ity. What India needs is stronger growth in crop yields, in labor force participation, and in the return on capital. That’s where reforms should be targeted. The GDP chase is a painful mistake.

Is the Indian Economy Bottoming Out?



grew slightly by 0.04 per cent to 9.22 per cent and prices of fuel and light slowed to 6.13 per cent from 6.54 per cent in January 2014.

Provisional annual inflation rates for rural and urban areas in Feb-ruary are 8.51 per cent and 7.55 per cent, respectively.

Inflation front do not seem optimistic

From an Economy’s point of view, a moderately positive infla-tion is considered as good as it shows that there is more demand of a given product than the num-ber of units produced, and hence its implied that number of people who can afford the product at

the prevailing price or at slightly higher price. This in turn signifies that the Economy is prospering and income levels of the people are increasing. So it denotes that there is a scope for potential sellers in the Economy and such an Economy is considered as a healthy one.

A negative inflation on the other hand signifies that there are not enough buyers for a product and the income level of people is de-creasing and there is not enough scope for potential sellers in that Economy. So it presents a picture that the Economy is ailing.

This is a reason that most of the economists and policy makers

favor high growth with high inflation.

Falling Inflation Eases Pressure on Consumers

Labor says the government would be “out of touch” to tell people that the cost of living crisis is over. Labor has seized on the drop in living standards as evidence that the recovery is not being felt by most families. The economy is turning a corner, but the recovery is in its early stages and risks remain. The only way to deliver a sustained improve-ment in living standards is to tackle the economy’s problems head on and deliver a recovery that works for all.

The economy seems to have bottomed out, even though economic revival is contingent upon kick starting of the investment cycle (expected from the second half of the current fiscal). Sher Sinha Mehta, Senior Macroeconomist (Specialist in Macroeco-nomic Monitoring), Short Run Macroeconomics, New Delhi.

The Indian economy has been languishing and facing a parlous economic backdrop for quite some time, as is

evident from seven consecutive quarters of GDP growth below 5 per cent and the decade low GDP growth of 4.5 per cent in fiscal 2012-2013. Such highly distressing growth figures are reflective of the protracted economic slowdown witnessed by Asia’s third largest economy and portend continued sluggish economic growth in fis-cal 2013-2014. However, fortu-nately, due to a few emerging signs (though not concrete), duly supported by a significant im-provement in key macroeconomic fundamentals recently (that have stoked expectations of an econom-ic rebound), the economy seems

to have bottomed out in the last fiscal and hence economic activ-ity is unlikely to decelerate any further in 2014-2015 (unless there is an uncertain electoral verdict, which prevents the formation of a strong and stable government at the centre).

Recent data relating to growth of Index of Industrial Production (IIP) and the eight industry core sector, uptick in manufacturing PMI, gradual recovery of global economy, improving consumer confidence, marginal rise in busi-ness confidence, positive expecta-tions with reference to corporate earnings and the soaring Indian stock market are possibly among the most important emerging signs of the economy having bottomed out, though, currently, there aren’t really any concrete

signs of an imminent economic recovery with the continued con-traction in activity in the services sector (which accounts for over 60 per cent of the economy) act-ing as a drag on the economy.

It takes time to ‘kick start’ the investment cycle (which in turn affects economic activity with a lag) and significantly enhance business and consumer con-fidence. Further, due to key factors such as the existence of substantial weakness in domestic demand (consumer and invest-ment demand), gradual pace of global economy recovery, various supply side constraints (infra-structure bottlenecks, etc.) that confront the economy, upside risks to inflation (as stated above) and consequently the unlikeli-hood of RBI lowering interest

Reasons why economic recovery is likely to be slow or very gradual



rates to stimulate aggregate demand and output (at least until the third quarter of this fiscal), pressure on government for fiscal consolidation and to lower the fiscal deficit, highly leveraged corporate balance sheets, moun-tain of bad debts in the Indian banking sector, significant cycli-cal downturn in the manufactur-ing sector and potential risks to agriculture output this year due to vagaries of weather. Having stated the above, it might be pertinent to note that India is predominantly domestically driven. Therefore it’s imperative for the government to ensure that investment expenditure (in particular) and consumer spend-ing take off in the short run (this fiscal), gather momentum in the medium run (next fiscal) and increase on a sustainable basis in the long run (and aggressively push exports, as the global econ-omy is gradually recovering - the Indian economy seems closely linked with the global economic cycle), in order for the economy to gradually recover (from a pro-tracted economic slowdown) in this fiscal, gain momentum (and emerge from its sluggishness) in the next fiscal and grow rapidly in the long run respectively.

It might be noted that kick start-ing the investment cycle is not only an imperative for a robust and sustained expansion in output, but also to help keep the current account deficit and fiscal deficit at a prudent level on a sustained basis.

To achieve the above, an inte-grated approach comprising of immediate government policy measures or actions to initi-ate economic recovery (which usually affect the economy with a lag), continued emphasis on soundness of six key macroeco-nomic stability indicators and implementation of structural reforms need to be simultane-ously pursued.

Provided below are some of the

most important immediate tasks, policy actions and structural reforms that need to be under-taken by the next government.

A) Revival of investment cycle: For a gradual and sustained economic recovery and growth, revival of the investment cycle should be the immediate and continued task of the govern-ment. For which, it must first and foremost focus on boosting busi-ness confidence, by undertaking the following tasks with utmost urgency:

Reorient Government Expen-diture towards infrastructure projects (an imperative for sustained revival of investments) and human capital investments, rather than on subsidies – food, fuel and fertilizer (unproductive expenditure) and populist wel-fare schemes (such as Mahatma Gandhi National Rural Employ-ment Guarantee Scheme that only land up raising rural wages, without any commensurate increase in agriculture produc-tion and productivity and hence prove to be inflationary).

Focus immediately on urban infrastructure projects and other similar projects where land ac-quisition is not an issue.

Ensure policy certainty and continuity

Undertake fiscal consolidation and gradually reduce fiscal deficit to enhance the availability of loan able funds to the private sector and lower their cost of borrowing, which in turn will stimulate investment activity.

Create mechanisms such as single window clearances to ensure expeditious approval of massive number of projects stuck in the pipe line due to red tape and regulatory burdens, particu-larly at the state level in a time bound manner.

Open up the coal sector in India to the private sector to signifi-cantly enhance domestic coal pro-

duction for power generation (in particular), which is essential for rapid growth of infrastructure, manufacturing and various other sectors and hence sustainable growth of the Indian economy and to curtail India’s significant coal imports. Such a reform would significantly reduce power costs and contribute substantially to economic growth.

Address serious problems in the power sector, such as land ac-quisition and obtaining environ-mental clearances that seriously inhibit the growth of this sector in India and resolve fuel sup-ply issues with reference to the power sector.

Revamp or remove the plethora of laws that stifle ease of doing business in this country, address the tardy approval process for infrastructure projects and inef-ficiencies in the implementation of infrastructure projects such as overrun of costs and time in the execution of such projects, problems with land acquisition, environmental clearances and issues pertaining to financial closure etc., Further, ensure macroeconomic stability, as high and volatile inflation and high interest rates deter investment and growth of this sector.

Attract substantial FDI in the infrastructure sector, particu-larly in power generation and transport, as the Indian economy faces gargantuan infrastructure (mainly in power, transport, telecommunications and water) shortages and bottlenecks that are coming in the way of sus-tained revival of investments in India (and hence faster economic growth) and also increase the cost of doing business.

Encourage reforms to sig-nificantly enhance the long term debt funding options for infrastructure projects (which currently are limited) by ways such as deepening of the corpo-rate debt market and making it



easier for investors (domestic and foreign) to invest in a wide range of long term corporate debt instruments and facilitating sub-stantial increase in investment of domestic pension and insurance funds in the infrastructure sector (currently, a substantial portion of these funds are invested in government securities).

Increase the share of high tech goods and merchandise exports in the composition of exports, by attempting to attract substantial domestic and foreign investment in the capital goods industry and expand its base, which should positively impact the stability of the rupee and current account balance in the long run.

B) Boost consumer confidence: since the protracted economic slowdown is primarily due to weakness in domestic demand and consumer spending accounts for around 55-57 per cent of GDP on the demand side, the immedi-ate task of the government is to take steps to enhance consumer confidence, in addition to reviv-ing the investment cycle through aforesaid measures. For which, taming of inflation (and inflation-ary expectations), particularly food inflation, and undertaking policy initiatives to improve the economic outlook (that affects employment prospects and wage growth) is of paramount impor-tance, as inflation and economic outlook affect some of the key drivers of consumer spending: current and expected real dispos-able income, cost of credit and wealth.

To tame inflation (and inflation-ary expectations) and usher in a more optimistic economic outlook (and hence enhance consumer confidence and spend-ing), the government should emphasize continued soundness of macroeconomic stability indi-cators, undertake policy actions and reforms pertaining to revival

of the investment cycle, lower the fiscal deficit and undertake key reforms to lower food inflation.

C) Fiscal deficit: take tough policy decisions for fiscal consoli-dation and pruning of the fiscal deficit (not easy, due to the Food Security Bill), but not capital expenditure, in a concerted or phased manner to 3 per cent of GDP (over the next 2-3 years) through phased reduction of fertilizer and fuel subsidy and increasing tax revenues.

Lowering the fiscal deficit is an imperative for five reasons: First, a higher fiscal deficit has negative consequences for business confi-dence and consumer confidence, as it adversely affects macroeco-nomic stability because it leads to higher inflation (that inhibits the ability of the central bank to reduce interest rates to stimulate consumer and investment de-mand) and spills over to a higher current account deficit; Second, reduction of the fiscal deficit is an imperative, as it would lower cost of doing business for domestic firms and also enhance export competitiveness, due to its beneficial effect on inflation, interest rates, exchange rates and taxes.; Third, a lower fiscal defi-cit, by dampening inflationary pressures, will encourage higher saving by the private sector in the form of financial savings, which is an imperative for revival and growth of investments and hence GDP on a sustained basis, and for the sustainability of the current account deficit. Fourth, a lower fiscal deficit will substan-tially reduce the ‘crowding’ out of private investment and help revive the investment cycle – the key to economic recovery. Fifth, a lower fiscal deficit will make the Indian economy less vulnerable to shocks than most emerging markets are vulnerable to and give more room for monetary policy accommodation.

D) Seek coordination of mon-etary and fiscal policy to keep inflation in check, as high and volatile inflation makes firms more uncertain about returns on investments, leads to higher cost of borrowing which tends to dampen investment activity and deters domestic financial savings (an increase in domestic financial savings is critical for a revival of the saving-investment cycle and for a sustained upswing in investment activity), prevent downward pressure on the rupee and to put the economy on a path of sustained economic recovery and growth in the medium and long run.

Such coordination is also abso-lutely essential to ensure contin-uation of macroeconomic stabil-ity and for sound macroeconomic management.

It might be noted that such coordination would imply taking decisive steps or policy initia-tives for fiscal consolidation and reducing the fiscal deficit which may hurt growth in the short run, yet it will give a marked boost to business confidence, consumer confidence and investor confi-dence, and lower government borrowing from the market, which will only lead to higher and sustainable investment, con-sumer spending and economic growth in the medium term and the long term.

In essence, it is highly recom-mended that fiscal policy be conducted in such a manner, so as to not undo the beneficial effect of superlative monetary policy management (by the RBI) on inflation (inflationary expecta-tions), stability of the rupee, cur-rent account deficit and foreign exchange reserves, for macroeco-nomic stability boosts consumer confidence, business confidence and investor confidence, which in turn has a positive effect on economic growth after a lag. This,



in my estimation, is among one of the immediate tasks of the new government.

E) Current account deficit: the government should as a matter of priority aggressively push ex-ports to benefit from the gradual global economic recovery that is currently taking place, lower the fiscal deficit and try to revive the investment cycle, in order to keep the current account deficit at a prudent level, which will foster exchange rate and macroeconom-ic stability.

The aforesaid measures will en-able India to have a low and sus-tainable current account deficit and will also help keep inflation in check, foster economic growth and employment and reduce India’s vulnerability to external shocks.

F) Food inflation: the govern-ment should take expeditious and decisive steps to lower food inflation (in order to lower over-all inflation and inflationary ex-pectations) on a sustainable basis, as rising food inflation eventually feeds into wage inflation and the wider economy) and constrains the RBI’s ability to lower inter-est rates to stimulate aggregate demand and output.

To lower food inflation, the gov-ernment should seriously con-sider scrapping APMC act and establish markets where farmers and retailers can interact directly and there is fair and free competi-tion, which would result in food prices coming down in a mean-ingful manner (though this step can be politically very difficult to take), particularly of perishables such as vegetables.

Further, the government should take decisive policy measures to encourage substantial investment in the logistics of distribution, such as cold storage facilities and godowns, and transport, that will prevent massive wastage of per-ishable products and enable such

produce to reach distant markets, which will alleviate shortages and dampen food prices signifi-cantly. Moreover, only a moder-ate or muted rise in MSP should be permitted by the government, rather than marked increases in the same and substantial public investment should be undertaken in agricultural infrastructure that will lower the cost of agriculture raw materials (and hence lead to lower food production costs) and enhance food supply to cater to increasing demand for the same.

Other important measures that the government should seriously pursue to effectively combat food inflation are setting up of a price stabilization fund and attracting substantial foreign direct invest-ment in agriculture to enhance productivity, supply of agricul-ture output and lower cost of agricultural raw materials.

G) Public sector disinvest-ments: as a matter of urgency, the government should expeditiously push through the disinvestment process and take tough policy decisions to significantly reduce its share holding in public sector units and use the proceeds only for the purpose of public invest-ment in infrastructure – which will boost business sentiments/confidence and encourage firms to invest.

H) Manufacturing sector: one of the immediate tasks of the government should be to give a

tremendous thrust to the manu-facturing sector (which accounts for only around 16 per cent of GDP) though expeditious and effective implementation of the national manufacturing policy, for sustainable economic growth, tackling the chronic unemploy-ment problem in India, vastly enhancing manufacturing exports and attracting higher foreign direct investment in this sector.

To effectively implement the national manufacturing policy, the government has to under-take structural reforms and policy measures to tackle key issues, such as rigid labor laws (that come in the way of labor productivity and termination of employment), difficulties in land acquisition, poor infrastructure (such as lack of sound transport (particularly road) infrastructure, unreliable power supply etc.), non-implementation of GST etc. on an urgent basis. India has the potential to become a manufac-turing powerhouse, due to factors such as the high potential of the domestic market(rapid rise of the middle class) and cost competi-tiveness.

I) Financial stability: according to the latest IMF Global Finan-cial Stability Report (April 2014) the debt-equity ratio of India’s non financial corporate sector is disconcertingly high at 83 per cent, which essentially means that corporate debt in India is too high and therefore, the immedi-ate task of the government is to kick-start the investment cycle (and hence economic revival and growth) and at the same time keep inflation in check, to enable corporate India to repay their gargantuan debts and keep debt-equity ratios at a more sustain-able level, in order to ensure that financial stability is not endan-gered, particularly in an era of volatile capital flows and increas-ing economic interdependence between countries.

Sher Sinha Mehta



In Conversation


India’s newest carrier, Air Costa, is an arm of real estate company, LEPL Group. It has services to cities including Ahmedabad, Bangalore, Chennai, Hyderabad, Coimbatore, Jaipur, Vijayawada

and Vishakhapatnam. This new member of India’s air carrier industry is now in the process of connect to second and third-tier cities like Vijayawada, Vishakhapatnam, Madurai, Pune and Goa to Tier I cities like Hyderabad, Chennai & Bangalore. As part of its long-term commitment, the six-month-old airline recently placed an order for 50 aircraft even as the sector is struggling.What makes this new player see a bright future when many other regional airlines like MDLR, Jagson, Kingfisher and Star Aviation could not start or sustain operation amidst a combination of low seat factor, high fuel costs and a general economic malaise? In a free-wheeling discussion with The Global ANALYST, Ramesh Lingamaneni, Chairman, AIR COSTA talks about the key drivers that led to the formation of Air Costa, its business model, market penetration strategies, etc.Edited excerpts:


What were the driving forces be-hind the LEPL Group’s diversifica-tion into aviation business?LEPL Group is transforming the quality of life of the society at large and was widely diversified into Infrastructure (commercial & residential), Renewable energy (solar & wind power), Educa-tion, Healthcare and Aviation. Air Costa commenced scheduled services in October 2013.Firstly I would like to share with you there is a strategic fit between Air Costa and the other portfolio of our parent company which is interested in developing tier II and III infrastructure. On the business side, we find that the Air travel is expected to grow steadily and that there is a rapid development in traffic between metros and non-metros due to urbanization of tier II and III towns. We would like to tap into this promising market. Today, we find Government policies are favorable towards civil avia-tion market as it is considered one of the major drivers of our economy..

How do you describe your airline’s business model?Our strategy is to connect Tier II and III cities with existing Metros. These routes compliment our aircraft’s strengths as many of these routes are long and thin. However, we also want to capital-ise on the growth that is happen-ing in the Indian aviation market through many government initia-tives. We plan to expand our fleet to 20 aircraft by FY 18. From 2018, we will see our new E2 Jets join-ing us at the rate of four per year.

What efforts you’ve been making to enhance visibility of your brand? Also, kindly tell us about your mar-ket penetration strategy?As a new entrance, we offered inaugural offers. We are reaching our target audience through sales & marketing exercises. Our asset is our people & aircraft. We have identified the business routes

and have planned day-return flights for them. Our business travelers are very happy with our Economy plus offering. Due to the strategic fit between our aircrafts and the routes we are able to offer competitive rates to our guests.The airline offers several industry firsts like no middle seats, econ-omy plus class, more leg rooms, etc., which is almost unheard of in the industry characterized by cut-throat competition. What enables the airline to stay com-petitive despite offering these passenger-friendly measures?Our all Embraer fleet comprises of two Embraer E-170s in two class configuration with 60 Economy & 7 Economy plus and E-190s in a single cabin configu-ration with 112 seats. The aircraft are highly efficient with spacious seats and best in-class leg room.

Our passengers can travel with the hassle free “Middle seat” and enjoy the luxury of a wider aisle with a larger view. No middle seat on our Embraer E Jets is Air Costa’s USP. Our passengers were totally impressed with Economy & Economy plus cabin exits in E-170s and move forward with all economy configurations in E-190s. The three major criteria’s for any successful airline are:• Reliability• On time performance• ComfortPassengers who fly on air costa definitely come back to us. Yes we are passenger friendly. Our long term vision is to be one of the preferred carriers in our country. As our catch phrase says - “Happy Flying”, we want to make flying a Happy Experience,

“Happy Flying”, we want to make flying a Happy Experience, not just in-terms of our service, convenience and flexibility but by providing affordable pricing in the routes that we plan to operate. Ramesh Lingamaneni, Chairman, AIR COSTA


not just in-terms of our service, convenience and flexibility but by providing affordable pricing on the routes that we plan to operate.

Product Features

• Spacious seat with best in class leg room

• Spacious seat with best in class leg room

• Hassle free “No middle seat”• Reduced travel time• Same day return flights• Quieter Cabin• Large windows and wider aisle• Reliable and easy maintenance• Efficient long haul capacity• Better connectivity for tier II and

III cities• Convenient timing for both

business and leisure traveler• First flight of the day advantage• Better turbulence handling

So far, the airline has focused on serving only the limited routes, primarily in south India. What’s behind this move? We are presently a Regional Operator. Our fleet needs to be a minimum five aircraft to apply for Pan India permission. We plan to receive our Pan India Permit before this year runs out. The airline plans to link under-served/unserved markets with more direct flights, increasing frequencies and routes.Unlike other airlines which have their hubs at major cities such as Delhi and Hyderabad, Air Costa whas chosen to operate out of a relatively much smaller airport. What is the reason behind it? We are headquartered in Vijay-awada. Our main operating base is Chennai and the maintenance base is in Vijayawada. Since

southern regional metros like Bangalore, Chennai and Hyder-abad are hubs for many manufac-turing companies, Our research and analysis conveyed us there is wide scope of Trade, Commerce & Industrial development in Tier II & Tier III cities, which was lacking air connectivity.

In an industry where pricing war is the norm, how does Air Costa plan to sustain while offering improved services that at eye-popping prices (at least that is what the pricing plans on the airline’s official web-site suggest)?Air Costa’s strategy is to con-nect Tier-II & III cities to existing Tier – I cities which are purely underserved. Most of the cities we fly are under this category and our equipment (E-170s & E-190s) aptly fit to our routes. As we move forward, we intend to consolidate our network; this will automatically enhance our con-nectivity. Our equipment permits us to fly Tier II & III cities since the routes are long and thin. Pric-ing war is currently driving by few airlines that have commonal-ity in their equipment with high cost of operations.

Do you also have plans to expand your services to new destinations/airports in the country? Also, when do you plan to go national (so as to have a pan India presence)?Yes, we recently connected Vishakhapatnam (effective 30th March) and Coimbatore (effective 1st May). We have plans to con-nect new destinations like Madu-rai and Pune. We plan to get Pan India Permit before this year.

What’s your outlook on the com-petitive scenario in the industry and the growth rate, going ahead?The overall outlook for Indian aviation was positive. As per regional prospects, Indian avia-tion was good and still has more potential to connect the Tier II & Tier III cities.


RETAIL REAL ESTATE Awaiting an Upswing

For the next 3-4 quarters, growth of rentals and capital values in retail will largely remain stagnant. This is because no major foreign retailer has initiated the procedure for investments into India so far. If they do so post-elections, it will fructify into real demand only in 2015.

- Ashutosh Limaye, Head – Research & REIS, JLL India.

Over the last 6-8 quarters, the retail sector in India has been subject to immense pressures from a slowing economy, stagnancy in jobs and incomes, and lack of stimulus from government policies.

REALTY SECTOR


Retail Real Estate

More recently, India’s quarterly GDP consistently fell short of the 5.0 per cent y/y growth mark, which was the average growth re-corded for the last financial year FY2012-13. For FY2013-14, the economic growth rate is expected to come in at less than that ob-served in the previous year.Private consumption expendi-ture, which is a critical compo-nent accounting for over 60 per cent of India’s GDP, saw a growth slump, recording not more than 3.0 per cent y/y growth in the re-cent four quarters. Lack of confi-dence among the consuming class due to compromised job pros-pects and income growth has led a rising proportion of income go-ing towards secure savings rather than consumption spending. High inflation and borrowing rates fur-ther derailed hopes of an early re-covery. Moderated consumption spending and high inflation has had a direct impact on the retail sector, whose growth momentum has been falling sharply.

Lack of Policy Stimulus & De-mand-Centric Mall Develop-mentMall space absorption continued to remain weak in 2013 from the

low levels observed in 2012 across the leading seven cities of India. Factors that were responsible were a poor policy framework and the lack of new mall construc-tion. In the last 6-8 quarters, retail has been subject to difficulties on the policy front, as progress on re-tail sector FDI hung in the balance. While the ruling government was in favor of liberal reforms in FDI policy, stiff opposition from other political parties gave foreign re-tailers reason to remain cautious. Also, with the upcoming elections threatening to overthrow the cur-rent ruling alliance, withholding investment decisions retailers was probably the best option available to retailers at this time.While the external environment plays a huge role in demand for retail space, supply is an impor-tant consideration too. Premium fashion brands that enter India have had difficulties in finding quality mall space. Major Tier I cities of Delhi-NCR, Mumbai and Bangalore witnessed a fall in

supply of quality malls as devel-opers responded to the current situation by holding on to project completions. Retailers responded by either looking for spaces in quality high streets or by delay-ing entry completely.Chennai was an exception to this trend observed in 2013. New mall completions came at regular intervals throughout the year, mostly in growing subur-ban locations that ensured prices and/or rentals were affordable to retailers. The city witnessed a relatively sharp fall in rentals and prices. Therefore, Chennai performed well amongst all lead-ing cities in India in terms of ab-sorption of space as new retailers stepped up occupancy of quality mall space at relatively cheaper prices and in new locations.

Retail Sector in Transition - Developers Must Gear UpIndia’s retail landscape has been witnessing a trend change over the last few years. In the past, val-ue-based retailers were the most sought-after, but many premium brands have found favor among consumers in recent times. Retail-ers such as Shoppers Stop, Trent Retail and Indian Terrain ben-efited from their premium brand positioning, which gave them an edge over brands that primarily target the value-based consumer segment.This trend is further reflected in the performance of international retailers who have recently for-ayed into India. Brands such as Zara, Marks & Spencers, Benet-ton and Tommy Hilfiger posted a healthy jump in their year-on-year revenues, and therefore have ambitious expansion plans for India. These international players have bucked the general trend by offering stylish designs at rea-sonable prices. These four global brands collectively achieved sales that equalled the apparel sales

Ashutosh Limaye


of established department store chains such as Shoppers Stop and Lifestyle International.

Demand Transition and Stable Rents Likely to Induce DemandRental and capital value growths were largely flat in the leading seven cities during 2013. Mumbai witnessed marginally better ap-preciation in rentals and prices for retail real estate assets. Two fac-tors were responsible for this:1. As retailers found the market challenging in terms of revenue generation across the country, their focus was concentrated on larger metros such as Mumbai and Delhi. This is reflected in the moderate fall in vacancy levels in these two cities, as against a rise in vacancy in the other cities dur-ing 2013

2. Construction of new malls in Mumbai has been slow over the last 6-8 quarters, thereby limiting supply. Thus, while a weak senti-ment did not allow demand and prices to accelerate sharply, limit-ed supply forced a cap on correc-tion to a bare minimum.Absolute vacancy rate continues to remain significantly higher in Delhi and Mumbai when com-

pared to other cities, largely be-cause of excess supply getting built over the last few years. The cities where vacancy rates in-creased during the year (over 2012) were Hyderabad, Pune, Bangalore and Kolkata. Hyder-abad and Kolkata saw better ab-sorption levels than in 2013, but witnessed a sharp rise in mall supply that led to a rise in vacant stock. In Bangalore and Pune, a combination of fall in absorption and a sharp increase in mall space led to a rise in vacant units.For the next 3-4 quarters, growth of rentals and capital values in retail will largely remain stag-nant. This is because no major foreign retailer has initiated the procedure for investments into India so far. If they do so post-elections, it will fructify into real demand only in 2015. Also, 2014 is likely to witness moderate mall completions in major cities, which will increase supply to some ex-tent. With absorption projected to grow moderately, the additional supplies will result in stagnant/marginal growth of rentals and capital values.Going forward in 2014, the gen-eral elections and political agenda of the new government will set the mood for the near-to-medium-term. The industry depends on the new government to provide a hindrance-free operating environ-ment for the new government that will hopefully be unequivocally pro-reform.

Retail Real Estate


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Established on 17th May 1930, the BIS (Bank for International Settlements, Basel, Swit-zerland) is the world’s

oldest international financial organization and serves central banks in their pursuit of mon-etary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.The Basel Committee on Banking Supervision (BCBS) of the BIS is the primary global standard-set-ter for the prudential regulation of banks and provides a forum for cooperation on banking su-pervisory matters. The Commit-tee formulates supervisory stan-dards and guidelines to promote

global financial stability. The Reserve Bank of India being a member of the BIS, issues the guidelines for Implementation of Basel Norms.

Deferment in ImplementationThe Reserve Bank of India on 27th March extended the transitional period for implementation of Basel III Capital Regulations in India to March 31, 2019 from the earlier date of March 31, 2018, thus bring-ing it closer to the internationally agreed date of January 1, 2019.As seen in the timeline schedules tables, the implementation of CCB would now start from March 31, 2016 instead of the previously scheduled March 31, 2015 and the full implementation would now be done in March 2019 instead of March 2018. This being the second extension after the relaxing of the time from the previously planned 2017 to 2018.

BASEL III (Delayed implementation)

A BOON FOR BANKS?While the relaxation in the implementation time would provide banks with a year more to raise their capital to high quality capital base to comply with the stringent Basel III guidelines, it would allow them to operate them at low levels and quality of capital at the time the asset quality is deteriorating and a quality capital base is much needed.

BANKING SECTOR

1998 BASEL I Enforced by law in the Group of Ten (G-10) countries.

2001 BASEL II Later developed with the intent to supersede the Basel I accords. Criticized by some for allowing banks to take on additional types of risk, which was considered part of the cause of the US sub-prime financial crisis of 2008.

2010 BASEL III Later developed in response to the financial cri-sis; supposed to strengthen bank capital require-ments by increasing bank liquidity and decreas-ing bank leverage.

BASEL ACCORD (set of minimum capital requirements for banks)


Minimum Capital Ratios April 1, 2013

March 31, 2014

March 31, 2015

March 31, 2016

March 31, 2017

March 31, 2018

March 31, 2019

Minimum Common Equity Tier 1 4.5 5 5.5 5.5 5.5 5.5 5.5Capital Conservation Buffer - - - 0.625 1.25 1.875 2.5Minimum CET1+ CCB 4.5 5 5.5 6.125 6.75 7.375 8Minimum Tier 1 Capital 6 6.5 7 7 7 7 7Minimum Total Capital* 9 9 9 9 9 9 9Minimum Total Capital +CCB 9 9 9 9.625 10.25 10.875 11.5Phase-in of all deductions from CET1 (in %) #

20 40 60 80 100 100 100

* The difference between the minimum total capital requirement of 9 per cent and the Tier 1 requirement can be met with Tier 2 and higher forms of capital;# the same transition approach will apply to deductions from Additional Tier 1 and Tier 2 capital

Transitional Arrangements - Scheduled Commercial Banks (Excluding LABs and RRBs) (% of RWAs)

ImpactBasel III norms envisage increase in capital and liquidity require-ments for banks. The delayed implementation means that the capital base required to be employed by these banks will now be less than what it would have been if the implementation wasn’t delayed.While the private sector banks are in a better position to meet the requirements than state-run ones, the Public Sector Banks will have to rely on a combination of government capital infusion and equity markets to support their capitalization.In the post- global crisis period, the Indian banking system, has suffered growing impairment of asset quality and would continue for the period to come. Gross NPAs of 38 listed banks that an-nounced earnings for the Decem-ber 2013 quarter rose 40 per cent to Rs. 1.75 trillion from Rs. 1.25 trillion in the year-ago period.With this background, while the relaxation in the implementation time would provide banks with a year more to raise their capital to high quality capital base to com-ply with the stringent Basel III guidelines, it would allow them to operate them at low levels and quality of capital at the time the asset quality is deteriorating and a quality capital base is much needed.

CA. Rishabh R. AdukiaB.Com, ACA, ACS, LLB, CFP

Advisor, Meridien Business Consultants, [email protected]

Other Views Basel III Accord requires banks to maintain 4.5 per cent Common Equity while being prudent the RBI guidelines require 5.5 per cent. Similarly the Tier 1 Capital requirement by RBI guidelines is 7 per cent of Risk Weighted Assets as against the 6 per cent minimum as per the Basel III Accord of the BCBS and Mini-mum Total Capital is 9 per cent as against 8 per cent. The accords are also based on mathematically complex models focusing on risk weighted formulas.The increase in capital and liquid-ity requirements under Basel III guidelines may severely restrict access to credit due to reduced lending. This eventually may have a negative impact on the GDP growth in the short term.

Basel III

“Basel III” is a comprehensive set of reform measures, developed by the Basel Committee on Banking Super-vision, to strengthen the regulation, supervision and risk management of the banking sector.

These measures aim to:

• improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source.

• improve risk management and governance.

• strengthen banks’ transparency and disclosures.

The reforms target:

• bank-level, or microprudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress.

• macroprudential, system wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time.

These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system

wide shocks. Courtesy: BIS.org

A Boon for Banks


BASEL III in India BANKING SECTOR

The Tardy BurdenThe ensuing years shall witness congestion though not at the same intensity as capital buffer for systemic importance and capital conservation kicks in, says Abhisek Mukherjee, FRM, CAIIB.

The Basel III reforms package has been implement-ed in India from 1st April, 2013. The main

objectives of the introduction of the Basel III norms include strengthening capital and liquid-ity regulations with a goal of pro-moting a more resilient banking sector. The other objective was to address the two dimensions of systemic risks – Pro-cyclical-ity (through Counter-cyclical Capital buffer) and Inter-linkages (through Capital buffers for Sys-temically Important Banks). • The Capital reforms focused

on the quality, quantity, con-sistency and transparency. This is supplemented by a non-risk ratio in the form of Leverage ratio (Leverage Ratio is the ratio of Tier I Capital to Gross Exposures).

• Benchmarks for ascertain-ing liquidity health of a firm have been put in place.

• Others elements related to addressing systemic risk, interconnectedness and procyclicality are proposed to be rolled out as part of the reform package (Cur-

rently, draft guidelines of the regulator have been issued and final guidelines are yet to come).

Several Stringencies and Bot-tle-necksThe Basel III capital requirements in India are more stringent than the original Basel recommenda-tions. The minimum total capital requirement in our country is 11.5 per cent (expressed as per-centage of Risk weighted Assets) against the Basel prescribed floor of 10.5 per cent. Similarly, the regulatory floor for Leverage Ra-tio in India is 4.5 per cent against the Basel prescribed minimum of 3 per cent. Majority of Capital Instruments issued prior to Basel III roll-out

did not have the Loss Absorp-tion features embedded in them and are subject to progressive discounting towards recognizing them in Cooke Ratio (Capital to Risk weighted Asset Ratio) Con-tingent convertible Capital In-struments under Additional Tier I and Tier II with loss absorption features like principal loss ab-sorption, likely coupon non-pay-ment etc., are at nascent stage in India and as such there is limited investors’ appetite. Domestic markets are not developed and prices are on higher side to attract investors. Further, Additional Tier I Instruments are likely to re-ceive rating of few notches below their Long Term Issuer Ratings due to higher inherent risk which may deter risk-averse investors.


Return on Equity of state-run Banks is dwindling, making such investments further less attrac-tive. The recent restrictions of RBI allowing only permanent write-down of Additional Tier I are also stringent and will add to the woes. Raising Basel III bonds from the international markets is equally daunting as Sovereign rating of the country is at “BBB-“, one of the lowest rungs among the investment grade awarded by major rating agencies. Foreign investors will have to be appro-priately compensated through risk premium, thus escalating the weighted average cost of capital. Several factors affecting Indian bank’s bottom-line (and in turn capacity for internal generation of Common Equity) include infrastructure lending, financing Government sponsored schemes, meeting targets for priority sec-tors, financial inclusion etc., only to name a few. Fairly low yields in such avenues coupled with rising provisions for stressed as-sets are constricting their interest margins. Increase in the Base Rate for lend-ing is not a fruitful proposition as of now as though acute asset quality pressures have started receding, yet leverage levels in

major sectors have stayed el-evated. Increase in lending rates may push the corporates to more defaults and banking system may witness spurt of bad loans. Hence, though there has been increase in repo rate in the yester quarters, yet state-run banks could not transmit the same to borrowers. Headroom to raise equity for Indian Public Sector banks are also limited as ownership of Government of India in state-run banks cannot go below 51 per cent. With budgetary allocations for capital infusion in banks decreased from Rs. 14,000 crores (in FY 2013-14) to Rs. 11,200 crores (in FY 2014-15), sufficient infusion from Government also appears bleak. Most banks are vying to shore up its equity base and cost of equity capital is going to escalate substantially. RBI’s go-ahead to private sector players will further stiffen the competition and banks will have to bear the brunt of higher capital cost.

Recent Endeavours of PSBsDespite cost prohibition, Bank of India is planning to foray into international markets for raising dollar denominated bonds. This may test the overseas investors’ sentiments and may also pave

the way by setting up some sort of benchmark for pricing for such products for other Indian banks. SBI, the country’s largest lender is gearing up for offering Employees’ Stock Option Plan (ESOP) which will help bolster-ing its capital base.

Regulators Oversight The transition period for Basel III implementation has been extended up to March 2019 (erstwhile scheduled to be fully implemented by March 2018). The one-year deferral has been a welcome move and it is hoped to provide some breather to Banks to mop up capital and remain afloat. RBI has introduced a tran-sitional arrangement for Point of Non-viability of Additional Tier I hybrid instruments too. Recently, Basel Committee on Banking Supervision has revised opera-tional guidelines for computation of Leverage Ratio. The use of Standardized Credit Conversion factors while arriving at exposure for Leverage Ratio, deduction of cash margin from the exposure of derivatives and other revisions are likely to be adopted in India as well and will help banks hav-ing some respite vis-à-vis regula-tory leverage floor.

And the Odyssey ContinuesThe ensuing years shall witness congestion though not at the same intensity as capital buf-fer for systemic importance and capital conservation kicks in. Unlike Tier II, Additional Tier I instruments cannot be sold to Retail investors and as such pen-sion funds, insurance companies and institutional investors will have to subscribe to the bank’s issuance in the long run. Synergy among major regulators is the need of the hour and it remains to see what regulatory innova-tions are in the offing to meet the challenges.

Overview of the Revised Basel III Leverage Ratio

The Tardy Burden


FOOD PROCESSING SECTOR

AGRICULTURE

Game for Growth?Food processing sector is definitely a game for growth. But development of the food processing sector in India crucially depends on the state governments effectively using the programs and promotions designed at the central level.

- Suresh Chandra Babu, Senior Research Fellow International Food Policy Research Institute & former Research Economist, Cornell University, New York, US.

The Food Processing Sector in India is said to be set for a new phase of growth. What is your view?Food processing sector has a huge potential in India. We have not even touched to tip of the iceberg in reaching this potential. Full po-tential of food processing cannot however, be achieved unless we make conscious investment in de-veloping specific value chains that can lend themselves to value ad-dition and processing both for the local and international markets. Strategic investments to increase the productivity of the farmers of high value crops and bringing the farmers together to contrib-

ute to specific commodity and processing chains are important. However, with the increased in-vestments in the roads in the last 10 years there seems to be an op-portunity to bring the commodi-ties for increasing processing on a zonal basis.The next revolution in the food and agriculture sector has to come from processing of high value commodities and processing them. However, there is a large disconnect between what can be achieved and what is currently happening in the food processing sector. This is partly due to the piece meal approach the govern-ment of India had taken to the

development of the processing sector. There needs to be a policy environment that is consistent and specific strategies developed for targeting specific regions which have comparative advan-tage in growing commodities for further processing. Starting new organizations in the form of com-modity boards has been a popular way to improve processing sector in developing countries. How-ever, poor infrastructure such as roads, feeder roads, storage fa-cilities, cold storage structure and interrupted supply of electricity continue to be major stumbling blocks for the development of the processing sector.


FOOD PROCESSING SECTOR In addition, the renewed empha-ses on the processing sector need to recognize the importance of investment by the private sector both local and through the foreign direct investment. The demand for processed commodities is growing within India but the in-dustry has not been able to fully capture this opportunity and meet this demand.

What are the growth opportuni-ties that lie ahead?India has one of the fastest grow-ing middle income households who are willing to spend more for the time they can save through the use of processing food particular-ly when the processing industry could provide more options in terms of choice and nutrition and health. Conscious of the health status and with increasing inci-dence of non-communicable dis-eases, even poor are going back to the coarse cereals rich in fiber – such as sorghum and millets. However, processing sector has not been quick enough to capital-ize on this. This is partly because the inability of the private sector to predict the policy stand of the government and poor communi-cation of the policies and inter-vention programs to the private investors. The promotion of food processing sector has its core several benefits to the society. Currently up to 25 to 30 per cent of the crops harvest-ed are wasted in poor storage and in transportation. Adding value to the crops in the form of increas-ing the storage life and adding quality by fortifying them could generate employment and bring additional income to the farming community. Yet due to implemen-tation challenges and poor gover-nance, several of the promotional schemes do not seem to reach the intended beneficiaries.

What measures are needed to

capitalize on the same?Organizing farmers to produce high quality produces is the first step. In the absence of functions public extension system there is a need for the private sector to invest in mobilizing the farmers. Connecting farmers to processing industries through contracts that are mutually respected is para-mount. In the absence of fair judiciary system the contract farming has come under stress and the trust between farmers and the value chain operators have been broken in many instances. This becomes a major impediment for the devel-opment of the food processing in-dustry if the suppliers do not trust the processors and vice versa.Encouraging young entrepre-neurs to invest in processing in-dustries through joint ventures with processing companies form the East Asian countries such as Thailand and Vietnam can help in bringing the processing industries quickly up to the international standards. Research development in the food processing sector has low relevance to the growing de-mand for the processing foods. Much of what is done that is rele-vant as part of research and devel-opment in food processing stays in the laboratory. This is partly because; although food processing research insti-tutes have developed several technologies they have not been

picked up well by the processing industry.

How geared is India?India is very behind in processing even compared to smaller coun-tries like Thailand and Sri Lanka. The extent of processing of Fruits & Vegetables, poultry, and marine products are all less than 20 per cent. Milk is processed at a higher level but still the role of modern dairy is less than 20 per cent. Pro-duction of processed foods could be a highly profitable industry adding value to these commodi-ties and reducing the wastage. In-dia is not geared and not too well. Encouraging collaboration with well-established global food pro-cessors will help in the speedy development of the Indian food processing sector. We have better cars to drive now compared to 30 years ago, when we had to only rely on two to three locally manu-factured cars and a large segment of the population was not able to afford cars. Now we have variety of car brands to choose from and at the same time the local indus-tries have improved in the pro-ductivity and innovation. What stops us from making a sim-ilar move in the food processing sector is the inefficient bureaucrat-ic system that stifles the time and energy of those who are willing to invest in the food processing sector. Infant industry argument does not apply to food process-ing sector either. We need foreign direct invest and technology that could be borrowed to improve the shelf life of the products.

What are the major constraints and what remedial measures need to be taken by the govern-ment?The government of India has tak-en several innovative programs to promote the food processing sec-tor. However, several challenges continue to confront the develop-

Suresh Chandra Babu

Food Processing Sector


ment of the food processing sec-tor. First, the infrastructure in the form of good connectivity to mar-kets, market information, and oth-er physical infrastructure such as electricity continues to be a chal-lenge in many parts of rural India. The ability to compete in the inter-national markets with processed foods and at the domestic level is compromised by the inadequate quality control and quality test-ing facilities. The organization of the farmers to come together and increase the efficiency of the val-ue chains have only happened in handful of commodities and also in isolated areas. Agricultural research has also not been adequately focused on the development to the specific varieties of the crops that have traits that increases the processing without compromising the taste and quality. Related to this con-straint is the lack of raw materials for processing in much of the year as most of the high value fruits and vegetables are seasonal. Crop improvement research is needed to produce commodities that can be grown throughout the year. Due to high cost of storing the cost of inventory is also high and poor shelf life of the processed product also make it difficult to make the processing industry profitable. The cost of processing and taxa-tion associated with it works against the development of pro-cessing industries for several com-modities. Due to high cost of pro-duction the price of the processed foods are also high reducing the affordability of the processed foods. In addition, the traditional food habits and the preference for the fresh foods also limit the de-mand for the processed goods. Yet several promotional programs of the government have to be rec-ognized. The food processing sector has been delicensed for some time ex-

cept for the alcoholic beverages. It is included in the list of prior-ity lending sectors. It has an au-tomatic route on 100 per cent for-eign direct investment. The excise duty has been waived and there is income tax holiday for fruits and vegetable processing. The cus-toms duty has been reduced from 20 to 10 per cent on the freezer vans. Agro processing zones such as Food Park Scheme can further help in the development of the processing sector. There has also been progress in the provision of common facili-ties like cold storage, food testing effluent treatment plant, power, and water supply. Yet the devel-opment of the sector is lagging be-hind its potential. These measures need to be evaluated for their benefits and costs. Such evalua-tion could reveal the knowledge gaps and how further policy and program changes could be made to meet the current needs for pro-cessing foods. Identify the regions and ecological zones and develop them for processing sector. Maha-grapes is a good example. But ex-amples of this nature are few and far in between.

Do you think there is immense potential for inviting FDI in the sector?Of course there is potential. However, there is fear among the society towards having for-eign entities investing in the food processing sector. Much of this is unfounded. While there has been collaboration in other sectors such as manufacturing and automobile industries which have shown suc-cessful results, there is no reason

to believe inviting FDI in food processing industries could bring disaster to the farmers. Political will and leadership is needed for encouraging foreign companies to invest with the lo-cal entrepreneurs to develop the food processing sector. To be sure the government has been provid-ing several incentives for local in-vestments through infrastructure development schemes. There has also been an effort to upgrade the technology and establishment of modern food processing in-dustries. Schemes for the human resource development, quality assurance, research and develop-ment, codex and bar coding are in place. However, they have not ef-fective in reaching the right type of investors due to bureaucratic and governance hurdles.

OutlookFood processing sector is defi-nitely a game for growth. But de-velopment of the food processing sector in India crucially depends on the state governments effec-tively using the programs and promotions designed at the cen-tral level. Some states have been proactive in this while the others have not been able to make use of this provision. However, State level strategies are needed to iden-tify the opportunities for process-ing foods in various agroecologi-cal zones that will help not only the farmers growing high value crops but also the consumers who can benefit for high quality nutri-tional food for healthy living at an affordable price. We have a long way to go but the opportunities are immense in this sector.

Food Processing Sector

The ability to compete in the international markets with processed foods and at the domestic level is compromised by the inadequate quality control and quality testing facilities.


TURKEY

INTERNATIONAL

Battling Slowdown!While battling its current intractable slowdown is certainly an uphill task, It is time the country talked Turkey and corrected its structural imbalances, stabilized its political unrest, provided healthy governance, increased its focus on manufacturing and exports and strengthened its fiscal and monetary policies to spruce up its economy, else the Turkey story would continue to be tortuous, says Hyma Goparaju, Managing Director, Indigen Technologies (P) Ltd.

The 2008 financial crisis that had spread like wild fire all over the globe gobbled many an economy waiting to go bust.

However, a few resilient econo-mies, many of them belonging to the nascent emerging nations’ group showed character. Coun-tries like India, Brazil and most importantly Turkey weathered the crisis smoothly, stamping the arrival of the group of emerging economies on the global finan-cial landscape. Nevertheless, the joyride has been short-lived with their growth rates plunging to new lows post touching all time peaks, sending caution signals on the sustainability of the growth of these economies.

Turkey’s Emerging Problems After having clocked an average of 4 per cent growth rate for many years, Turkey’s GDP growth rate raced to a handsome 8 per cent, recording the highest in the entire Europe during 2010-11. The soar-ing rate however, began to slip in the last two years raising ques-tions of the country’s and many others in the group of the BRIITS (Brazil, Russia, India, Indonesia, Turkey and South Africa) econo-mies’ ability to maintain promis-ing growth levels and continue to contribute to the global economy. The IMF also added to Turkey’s woes when it stated that the coun-try’s economy has been charting an unsustainable growth path.The country’s $800 billion econo-

my is currently running a CAD of $65 billion at 8 per cent of its GDP, a far cry from the desirable 2.5 per cent, which is also responsible for dragging the country’s status down to being the most vulner-able emerging economy. As if it were not enough, Turkey’s central bank‘s forex reserves stand at $35 billion and its public and private debt total up to a whopping $168 billion (roughly 5 times its forex reserves). Its currency the Turk-ish Lira is down at an all-time low of 15 per cent against the dollar. In a desperate firefighting com-bat, the country sold a $1.5 billion bond maturing in 2045 recently, an incident which indeed sounds a loud alarm on the state of affairs of an ambitious economy zoom-ing ahead to break into the list of top ten economies by 2023 from its current position of sixteenth. What went wrong with Turkey? Are there serious structural flaws in its fiscal and monetary blue-print that need immediate correc-tions? Could there be lessons for other emerging economies from

Turkey’s mishap? These are some of the questions that come to the mind of any serious economist watching closely the develop-ments in emerging economies of the BRICS and the BRIITS groups.

A Wobbling Economic BasementA country whose mainstay was once agriculture, Turkey has in recent times leapfrogged to grab-bing a share in the global trade and has actively pursued banking and financial services like never before with services sector now sitting snugly with a lion’s share in the country’s economy pie, at 60 per cent. However, banking in-dustry is fraught with quite many risks as most Turkish banks are co-owned by banks from the EU zone. Moreover, the boom post 2008 in Turkey happened because of foreign funded construction activity which also led to house prices shooting to more than 50 per cent. Also since 2003, Turkey’s GDP and per capita income raised three fold. In the aftermath of the 2008 crisis


that had unfolded in the US send-ing tremors across economies far and wide, investors began to look for more stable economies that had remained immune to the fi-nancial meltdown and emerging economies showed promise. With near zero rates prevailing in the US and other developed countries affected by the crisis, investors be-gan to park their money in emerg-ing economies like India, Brazil and Turkey. Turkey received a large portion of hot money which suddenly increased the liquidity of the banking and financial sec-tors prompting lending to other sectors thereby propelling mas-sive economic activity. However, Turkey has certain fun-damental flaws in its economic structure. A good democracy pro-viding steady jobs with a throb-bing welfare plan reduced the propensity for saving in the coun-try as a result of which Turkey’s domestic savings are quite mea-ger. Adding to it, Turkey, with a weak manufacturing base and ex-tensive import of energy require-ments, relies too much on outside funding.When the Federal Reserve an-nounced its QE taper plans, emerging markets had to bear the brunt of backlash from investors who began to flee to the US and other developed economies with their hot money. This phenome-non, a déjà vu of sorts, repeats the melee of the Asian crisis which witnessed panic flight of capital leaving the East Asian economies high and dry. The IMF had then bailed out South Korea, Japan and Indonesia and Turkey is begin-ning to display similar symptoms. The Turkish Lira has suffered a bloodbath in the last two years falling up to 15 per cent against the US Dollar. Many economies have suffered currency devalua-tion in the last decade including India in the last one year. Such a situation is not necessarily a cause for concern as devaluation of a currency brings with it a host of other benefits like increase in ex-port revenues which help a coun-try in correcting its CAD and as-

sists in restoring its currency to its normal value which shoots up the confidence of an economy in the international markets.In the last one year, India has been able to contain its CAD for the same reason apart from im-plementation of other stringent measures like gold import curbs. Japan has begun to reap the bene-fits of Abenomics under which the yen was devalued to bolster ex-port revenues. China has always benefitted from a devalued yuan. South Korea too gained by the de-valuation of the Won during the Asian crisis and was successful in turning around one of its worst economic tides to its advantage. However, the same story might not get repeated in Turkey’s case as the country relies massively on imported raw material for its manufacturing sector which off-sets most of its revenue earned by exporting the finished goods, more so during the present condi-tions of devaluation. It also has an adverse effect on its CAD which could go up further in the back-drop of weak savings. To add to the woes of crippling domestic savings, many residents of Turkey have been converting their liras into dollars to ensure safety of their money which fur-ther weakens the lira and erodes the lira base. The central bank in such a situation cannot risk depre-ciating the lira further because of a ballooned external debt and in-creased risk of default. Turkey has surely got trapped into a vicious economic cycle and would require a herculean strategy to break it.

Central Banking Woes To curb the Lira, the CBRT (Cen-tral Bank of the Republic of Tur-key) in January this year doubled the rate of interest to 14 per cent from the existing 7.75 per cent to arrest the sudden flight of short term money. While this step could be considered a blitz move to con-tain the drying up of capital, the ramifications of the hike could be serious. A deposit hike rate is usually followed by an increase in the borrowing rate too which

has now gone up from the exist-ing 3.5 per cent to 8 per cent. This rise cripples economic activity as many businesses could suffer while raising funds and paying back loans at high rates thus slow-ing down the momentum in an already sluggish economy.The CBRT also has the reputa-tion of taking such steps in an unplanned manner, an antithesis of what a central bank of a nation must be doing. Apart from send-ing confusing signals to the do-mestic banks in the country, the CBRT is also at a risk of putting the entire country’s economy at threat by resorting to advocating such monetary policies.

Dipping FortunesIn the last one year or so emerging economies have been exposing many of their structural weak-nesses and policy lapses. Having traversed the trajectory of speedy growth during 2003-08, the emerging economies lived up to their enormous potential in terms of scaling up of economic activi-ties and increasing consumption pattern that have helped in at-tracting many greenfield foreign investments. Turkey has however, had more of brownfield invest-ments specifically focused on the banking sector, causing dents in capital investments to other areas. Another major issue with emerg-ing economies has been handling chasmic CADs created as a result of rapid growth and dependence on imports for energy and manu-facturing requirements and Tur-key was not far behind.In December 2013, Moody’s re-vised Turkey’s rating to Baa3 under the External Vulnerabil-ity Indicator, which measures a country’s short-term foreign debt obligation as a proportion of for-eign exchange reserves, which is the highest for Turkey. With CAD at around 8 per cent of its GDP, Turkey’s expected financial needs stand at an alarming 25 per cent of its GDP which has led to the hit on its credit worthiness.While arresting a widening CAD is a challenge in itself, it is equal-

Turkey


ly important to note that the top five global economies running current account surpluses are ei-ther manufacturing powerhouses or are rich in oil resources. Most emerging economies except Rus-sia and China, that have been run-ning a current account surplus have demonstrated high amount of vulnerability, risking reducing ratings and low borrowing cre-dence. High dependence on the financial performance of devel-oped superpowers like the US has been crippling them of growing and expanding their economies organically.Globalization threw open a vista of opportunities for the develop-ing countries. However, along with riding the global crest came the perils in the form of sudden crises, the tremors of one of which, the 2008 crisis were felt by India too. However, India took some stringent measures like curtailing CAD to arrest the spillover of the slowdown and bolstering growth levels at around 5 per cent, which many economies like Russia and Brazil too were unable to. Yet, In-dia continues to remain “fragile” along with other economies like Brazil, Indonesia, Thailand, South Africa and of course Turkey for the very reason of reliance on ex-ternal funding. Emerging econo-mies are excessively dependent on the developed economies for their sustenance and during ev-ery downturn, their incremental capital output ratio (ICOR) spikes up. While exports are essential for every economy, equally essential is the need to bootstrap itself, to shield itself from any further ex-ternal downturn, which is a huge challenge for the emerging econo-mies more so for countries like Turkey that are heavily reliant on exports and external funding.A transcontinental nation, part of Turkey lying in Europe is known as Thrace while a larger portion of the country lying in Asia is called Anatolia or Asia Minor. Turkey has been lobbying hard to become an official member of the EU while countries like Ger-many which have already borne the burden of Cyprus and Greece

want to restrict the membership to a ‘privileged partner’ instead. The current economic imbroglio of Turkey could certainly pose to be a hindrance for Turkey to gain an accession into the EU which is just regaining its ground post the Euro crisis.According to Emerging Markets’ analyst Ruchir Sharma, historical-ly, nations with a credit of 5 per cent of GDP or greater for more than five straight years have run into financial trouble. Turkey ac-cording to him is in such a danger zone. Greece is another country which charted the same path. Ac-cording to economists from Bar-clay, Turkey needs over $200 bil-lion credit to rescue itself else it risks an IMF bailout.The Russian-Ukrainian crisis adds to the piling pessimism toward the emerging economies and Tur-key should ensure all steps are taken lest it should become the first domino to fall off and trig-ger the rapid descent of the other emerging economies.However, it is not all over yet. De-spite all the lows Turkey has seen in the last few years, the country has certain inherent strengths demonstrated by the fact that the country’s economy grew so rap-idly to becoming an $800 billion economy, of the size of a Canada or a Spain. To quickly arrest a top out, Turkey needs to tap its exist-ing treasure troves. One example of which is the country’s tour-ism industry which grew from a $4 billion in 1992 to $26 billion in 2013 with around 38 million tour-ists visiting the country in 2013 alone and promises more allure. Turkey, because of its strategic lo-cation and breathtaking locales is a big draw for many a tourist as it has a great eclectic mix to offer.

This is a unique land where the three continents of Asia, Europe and Africa meet, where the east meets the west, where modern-ism co-exists with the traditional and where the past fuses with the present making Turkey all the more exotic and wondrous. Tur-key is the sixth most popular tour-ism destination in the world and has the potential to go further up the ladder.A snapshot view of the revenues from the export and tourism seg-ments show tremendous scope for the tourism sector of the coun-try and if tapped in a meticulous manner, it could become a grosser for the emerging economy bat-tling a slowdown at the current 2.5 per cent rate of growth.In the past few years, Turkey has been straddled with a volatile political situation that has recast the face of a secular democratic republic to a restless and unstable façade which has certainly been one of the main causes for the pullout of investments and the country with all its political and economic vicissitudes has become a sitting duck for backlash from global investors and economists, who only have done a volte-face from an economy that had once attracted global businesses with its magnetic pull. While battling its current intractable slowdown is certainly an uphill task, It is time the country talked Turkey and corrected its structural imbalanc-es, stabilized its political unrest, provided healthy governance, in-creased its focus on manufactur-ing and exports and strengthened its fiscal and monetary policies to spruce up its economy, else the Turkey story would continue to be tortuous.

2013* 2014 2015 2016GDP (Billion $, Current Prices) 820 867 928 996GDP Per Capita ($) 10,782 11,277 11,927 12,670Real GDP Growth 4.0 4.0 5.0 5.0Unemployment Rate (%) 9.7 9.4 9.2 8.9Tourism Income (Billion $) 32.8 31.0 32.0 34.5Current Account Balance (Billion $) -65.0 -55.5 -55.0 -55.0Current Account Balance / GDP (%) -7.9 -6.4 -5.9 -5.5

Economic Targests - 2014-16

*Actual

Turkey

Source: Ministry of Economy, Republic of Turkey


India, the world’s fourth-largest energy consumer, is in the process to overtake China in the next decade as the primary source of growth in global energy demand. However, to ensure energy security, India must overcome a number of challenges to meet its rising energy demand and sustain economic growth, says Mohan Menon.

ENERGY SECURITYSteps Towards Ensuring on-demand Power Supply

On-demand PowerOn-demand power from the grid calls for reliabil-ity in the electricity supply and delivery industry. Supply-side reliability could be achieved through contracted access to long-term and medium term resources, balanced by short-term contracts to meet imbalances. Growth of long term supply sources within the country has significantly slowed down despite substantial private sector participation. Changing goalposts for environmental clearances, uncertain fuel availability, weak financial position of distribution utilities (who are the bulk buyers) and the huge uncertainties involved in competitively bid 25 year power purchase agreements (PPAs) have made project financing very difficult. Besides an increasing effort to source electricity from neighboring countries (hydro power from Bhutan on a concrete basis and from Nepal on a rhetori-cal basis!), there is also effort being made to source fuel from abroad for electricity generation (through multiple agency uncoordinated coal imports from Indonesia, Australia, Southern Africa and planned pipeline gas imports from Turkmenistan & Iran).

Energy security for India is sub-stantially electricity security. Except largely for domestic cooking, road transportation, some part of industrial heating and railway traction, electricity is urban and industrial India’s primary source of energy. India has an installed grid-con-

nected power generation capacity of about 2,40,000 MW. Prevalent peak demand is currently said to be of the order of 1,35,000 MW of which about 96 per cent is met (Central Electricity Authority data – Feb’ 2014). Therefore, on-demand power should appar-ently not be too difficult. However, the physical reality appears to be different.Consumers belonging to the commercial, industrial & urban domestic categories try to achieve on-demand power by backing-up grid supply either with battery storage coupled with inverters or with diesel generating sets. Rural consumers rarely have such ‘luxuries’. While diesel sets are a very expen-sive alternative, inverters are viable only if grid non-availability is limited to just a few hours a day.

VIEWPOINT

The author is a power sector professional with more than three decades of experience in the Indian bulk electricity sector, including leading companies like NTPC, PTC India and Zeus Inframanagement.


Energy Scurity

Ensuring Energy Security Security of both availability and pricing of energy is now being strengthened through development of distributed sources of generation like solar photo-voltaic, wind, biomass and biogas. While rooftop solar PV is picking up in India, there are new issues that have arisen internationally due to the re-duced usage of the grid-network when solar panels generate enough power locally during the day. Arizona has already implemented an additional user charge on consumers for grid-redundancy caused by rooftop solar and Germany is legislating a similar charge.Access to electricity from non-proximate resources for bridging short-term demand-supply gaps calls for efficient short-term access to transmission path-ways, something that continues to be very difficult. Despite legal provisions for ‘open access’ to trans-mission & distribution pathways that would enable consumers to purchase power from anywhere, regulators have tended to protect the incumbent distribution utilities rather than the power-deprived consumer. Reliability at the retail level further entails well maintained distribution assets, including wires, transformers, switching devices and meters. Effec-tive balancing of demand & supply at an optimal cost also requires an efficient commercial mecha-nism at both bulk and retail levels. This will enable cost recovery and generation of signals that can in-centivize investment in fresh and/or more efficient supply and delivery resources. Such signals can pinpoint higher demand based on location, time of use, class of consumer, voltage level etc.

Need Multiple Distributors To make balancing of demand and supply effective, it is also necessary for the retail electricity distribu-tion network to be moderniZed in its operation. While this is possible even in a regulated cost-plus model, it has increasingly been seen in the western world that competition amongst multiple distribu-tors is essential. This calls for separation of electric-ity distribution into two distinct businesses, one operating the ‘wires’ or ‘carrier’ business compris-ing physical assets like cables, overhead wires, transformers, switching devices & meters, and the other operating the ‘content’ business of supplying electricity over these wires. While ‘wires’ would be a regulated cost-plus monopoly business to avoid asset duplication, supply of retail electricity would see multiple competing operators based on differen-tiated purchase and sales strategies.

A partial step in this direction, already rolled out in some cities of India, is the franchisee model where a private party uses the government utility’s distribu-tion assets on a fee-based model and is further incentiviZed through better commercial management and customer service. This has reduced technical and commercial losses in many areas and

reduced the disincentive to distribution entities that are reluctant to purchase additional bulk power be-cause more supply means more commercial losses.On-demand electricity and energy security there-fore calls for: • better forecasting of demand with increasing

granularity, supported by commercial mecha-nisms that generate clear signals for investment in supply as well as delivery resources;

• putting the onus on electricity regulators to focus on not just ‘low’ tariffs but also on penaliZing distribution entities for failure to supply;

• a problem-solving approach to issues that arise from the need for environment protection, rights of people affected by project develop-ment, ease of access for fuel supply and recur-ring challenges in long-term contracts;

• a more co-ordinated approach towards procure-ment of bulk electricity as well as fuel from foreign sources;

• changes in the approach to transmission plan-ning to accommodate distributed generation;

• competition in retail supply with efficiently managed common delivery infrastructure, to incentivize better customer service on the one hand and catalyze procurement of additional long-term, medium-term and emergency sup-plies from bulk assets as well as from distrib-uted generation.

Internationally, there is already a move to shift decision making to intelligent systems based on inter-connected devices that include equipment at the customer’s location that are constantly fed with demand data as well as price and availability of various supply resources. These intelligent systems are being designed to store and analyze supply and demand data, make predictions based on patterns, automatically place orders for electricity from com-peting sources and then switch on or switch off ma-chines and appliances based on price, availability and usage flexibility. What we need is perhaps truly a ‘Rise of the Machines’ and the use of consumer power to constantly guide their design!

Mohan Menon


Breaking BanksThe Innovators, Rogues, and Strategists Rebooting Banking

As the disruption in the banking industry goes well beyond new mobile apps and the closing of branches, there is no better tour guide than Brett King. In his newest book, Brett brings together a great array of global leaders who share their views on new channels, technology, innovations,

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The book contains a unique collection of interviews take from across the global Financial Services Technology (or FinTech) domain detailing the stories, case studies, start-ups, and emerging trends that will define this disruption.

Features the author’s catalogued interviews with experts across the globe, focusing on the disruptive technologies, platforms and behaviors that are threating the traditional industry approach to banking and financial services

Topics of interest covered include Bitcoin’s disruptive attack on currencies, P2P Lending, Social Media, the Neo-Banks reinventing the basic day-to-day checking account, global solutions for the unbanked and underbanked, through to changing consumer behavior

Breaking Banks is the only record of its kind detailing the massive and dramatic shift occurring in the financial services space today.

About the AuthorBRETT KING is widely considered the foremost global expert on retail banking innovation. He achieved international acclaim for his bestselling book BANK 2.0 , which topped category lists in the UK, USA, Germany, Japan, Canada, France, Russia, and Asia. King is the founder and CEO of Moven, a retail mobile service money service, and hosts the BREAKING BANKS Radio Show. He was voted American Banker ’s Top Innovator of the Year in 2012.

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Capital in the Twenty-First CenturyWhat are the grand dynamics that drive the accumulation and distribution of capital? Questions about the long-term evolution of inequality, the concentration of wealth, and the prospects for economic growth lie at the heart of political economy. But satisfactory answers have been hard to find for lack of adequate data and clear guiding theories. In Capital in the Twenty-First Century, Thomas Piketty analyzes a unique collection of data from twenty countries, ranging as far back as the eighteenth century, to uncover key economic and social patterns. His findings will transform debate and set the agenda for the next generation of thought about wealth and inequality.Piketty shows that modern economic growth and the diffusion of knowledge have allowed us to avoid inequalities on the apocalyptic scale predicted by Karl Marx. But we have not modified the deep structures of capital and inequality as much as we thought in the optimistic decades following World War II. The main driver of inequality--the tendency of returns on capital to exceed the rate of economic growth--today threatens to generate extreme inequalities that stir discontent and undermine democratic values. But economic trends are not acts of God. Political action has curbed dangerous inequalities in the past, Piketty says, and may do so again.A work of extraordinary ambition, originality, and rigor, Capital in the Twenty-First Century reorients our understanding of economic history and confronts us with sobering lessons for today.

About the AuthorThomas Piketty is a French economist who specializes in the study of economic inequality. He has remained director of studies at the École des hautes études en sciences sociales (EHESS), is now the Associate Chair at the Paris School of Economics, and the author of Capital in the Twenty-First Century (2014).


Flash Boys: A Wall Street Revolt

Flash Boys is about a small group of Wall Street guys who figure out that the U.S. stock market has been rigged for the benefit of insiders and that, post–financial crisis, the markets have become not more free but less, and more controlled by the big Wall Street banks.

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The characters in Flash Boys are fabulous, each completely different from what you think of when you think “Wall Street guy.” Several have walked away from jobs in the financial sector that paid them millions of dollars a year. From their new vantage point they investigate the big banks, the world’s stock exchanges, and high-frequency trading firms as they have never been investigated, and expose the many strange new ways that Wall Street generates profits.

The light that Lewis shines into the darkest corners of the financial world may not be good for your blood pressure, because if you have any contact with the market, even a retirement account, this story is happening to you. But in the end, Flash Boys is an uplifting read. Here are people who have somehow preserved a moral sense in an environment where you don’t get paid for that; they have perceived an institutionalized injustice and are willing to go to war to fix it.

About the AuthorMichael Lewis, the author of Boomerang, Liar’s Poker, The New New Thing, Moneyball, The Blind Side, Panic, Home Game and The Big Short, among other works, lives in Berkeley, California, with his wife, Tabitha Soren, and their three children.

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W. W. Norton & Company Real Estate Finance in India

A Realistic book on Indian Realty

The book offers a concise yet comprehensive understanding of real estate finance in India. The central themes of this book are functioning, instruments, and decision analysis related to home loans and residential mortgage banking. These themes are also extended to commercial real estate borrowing and secondary markets.The chapters are organized to offer practically useful and theoretically sound knowledge of real estate finance. Realistic scenarios, examples, expert opinions, illustrations, and, most importantly, hands-on financial exercises are extensively used to offer a concrete knowledge of the intricacies of real estate finance. The book systematically progresses from basic financial concepts to more complex discussions (such as exotic home loan types and their analysis).Beyond solved examples, the book also offers practice problems with answers so that a reader understands the financial instruments. PowerPoint presentations for the various chapters will be useful for instructors. Real estate investors (institutional or individuals), academics, students, professionals, and generalist real estate enthusiasts will find the book useful for their learning and real-life applications. A must for real estate enthusiasts and real estate professionals in India who aim to understand the concepts in real estate and define an approach for their business. Real Estate in India is in its early form, a book of this nature will definitely bridge the gap that currently exists in this industry in terms of the processes being followed and the standards setup by mature markets

About the Author

Prashant Das, Ph.D., is an assistant professor of real estate finance at Ecole hôtelière de Lausanne (EHL) in Switzerland where he teaches MBA and BBA-level courses and conducts real estate research. He is a founding partner of realism.IN (Realism Real Estate Consultancy Pvt. Ltd), an India-focused real estate research and consulting firm. Divyanshu Sharma is a founding partner at realism.IN.

Release Date: February, 2014

Paperback Rs.995 (372 pages)

SAGE

Bookshelf


q.1 She is known as the queen of health care in India. Her responsibilities include managing 45 hospitals, 51 clinics and 400 pharmacies. Listed among the 25 most power-ful business women of India by Business Today magazine, she is the eldest daughter of Pratap Reddy the founder of Apollo group. She joined Apollo Group as Joint Managing Director in 1989. Her excellence in implementing the projects made Apollo the Asia’s Number 1 Health care Center. Who is she? Ans. Preetha Reddy. q.2 This brand - • It is positioned as a premium

‘lifestyle’ mineral water brand• Untouched and unprocessed mineral water sourced

from the Himalaya• It is being sold through over 2000 outlets

across India • It’s being promoted through a joint venture

with PepsiCo India, called NourishCo Beverages

Ans. “Live Natural” from the house of Tata Global Beverages.q.3 After recruiting and training 45,000 women to distrib-ute Unilever products in rural Indian villages, Hindustan Unilever’s Project Shakti program began recruiting its first men a few years ago. This followed a successful pilot in the state of Odisha in 2010, with the introduc-tion of men on bicycles. What the FMCG gi-ant calls these men?Ans.‘shaktimaans’.q.4 In the early 1940s, an elf-like cartoon figure made his appearance in magazine advertising for Coca-Cola. The cola major had been struggling to convince people not to use the words Coca-Cola and Coke interchangeably. The issue had arisen as the word Coke had literally become the unofficial nickname of the company. At the time, the Com-pany discouraged use of “Coke,” but people continued to use the name. The Company finally accepted it and in June 1941, the abbreviation “Coke” was used for the first time in magazine ads. A campaign began to connect the names “Coke” and “Co-ca-Cola” -- with this fictional character as its primary image. Identify it?Ans. Sprite Boy (also, Sprite).q.5 What is the full form of DoCoMo?Ans. Do Communications Over the Mobile network. q.6 In 2011, this Italian company won the prestigious fi-nancial report Oscar or, the Oscar di Bilancio in the year 2011. It is Italy’s largest manufacturer of scooters with a market share of over 35 per cent in 2011. It announced its reentry into Indian market at the 2012 the world’s most famous and best-selling scooter, is making its debut on the

Indian market at the Auto Expo show in Delhi, Asia’s largest automobile and motorcycle exhibition and one of the world’s most important motor shows. Identify this company?Ans. The Piaggio Group.q.7 Every day is Environment Day at this Indian firm, which claims itself to be one of the top green firms in the country. A practical example that made every-one sit up and take notice is the com-pany’s policy to discourage working on Saturdays at the corporate office. Lights are also switched off during the day with the entire office depending on sunlight. Identify this firm?Ans. Tata Metaliks Limited (TML).q.8 Rohit Surfactants Pri-vate Limited (RSPL Limited) is a Rs. 2000 crore diversi-fied conglomerate with interests spread across sectors such as FMCG, Footwear, Wind energy, Dairy Products etc. The company’s some of the popular brands include Venus bath soap, Red Mischief, Xpert Dishwash bar. However, it is this brand that has made it a household name in India. Identify it. Also, name the founders of this company?Ans. Murli Dhar, Executive Chairman (Ghadi detergent).q.9 He is the founder Chairman & Managing Director of DTDC Courier & Cargo Ltd. He is the pioneer of franchi-see business model in the courier industry. With his able leadership DTDC is in to 20th year of operations in In-dia and established itself as 0ne of the leading companies in India. He has suc-cessfully established the international business and has presence in over 240 global destinations. Who is he?

Ans. Subhasish Chakraborty.q.10 In 1963, this global snack food giant began using the slogan “Betcha Can’t Eat Just One” in its advertis-ing for Lay’s potato chips. Two years later comedian Bert Lahr began appearing in ads in which he attempt-ed--always unsuccessfully--to eat just one Lay’s chip. Identify the company?Ans. Frito-Lay. In 1961, H.W. Lay and the Frito Company merged to form Frito Lay, Inc. In June 1965 Frito-Lay merged with Pepsi-Cola Company to form PepsiCo, Inc., with Frito-Lay becom-ing an independently operated division of the new company.

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RNI No. APENG/2012/47303 - Postal Regn. No. HD/1175/2013-15. Posting date on 1st & 2nd of every month, May 2014.

Date of Publication - 30th of every previous month

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INDIAN ECONOMY Bottoming Out?

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