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8/6/2019 Arthneeti Finance Newsletter June 2011
1/33
ydenham Institute of Management Studies Research &
ntrepreneurship Education
SIMSREE Finance Forum Initiative | June 2011Arthneeti
Special Feature: Mr. Bharat
Sampat, CFO & EVP, DCB
Meeting Infrastructure Needs
of Indian Economy
Interview with Mr. Sujan Hajra,
Chief Economist, Anandrathi
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eDITORSvIEWThe world economic outlook has been shadowed by rising debt problems in the Euro
region and with the contagion expected to affect the other PIIGS nations as well.
There are also concerns about United States unsustainable fiscal deficits, which is oneof the greatest challenges it faces. The US problems have been further aggravated with
the unresolved debate on debt-ceiling creating an impression of US default on public
debt.
Back home, the Indian economy grew by 8.5 percent in FY2011, which is lower than
expected but better than the global growth standards. In the backdrop of higher
inflationary pressures in the system, RBI continued its monetary tightening measures
because of the high domestic inflation which is much above the comfort zone. It
increased the repo rate & reverse repo for the tenth time by 25 bps to 7.5% & 6.5%respectively. The monsoons are expected to be good which would taper down the food
prices and moderate the inflation within RBI limit. Other emerging economies such as
China and Brazil have also been battling inflation for the past one year.
In this issue, we have interviewed a prominent banker and an economist on the
banking scenario and economic outlook respectively. The issue brings to you some
more interesting topics relating to infrastructure development in India, the Pharma
sector and Brazilian economy.
As part of our forum activity, we were fortunate to have Mr. Sunit Joshi, EVP & Head-
Capital Markets Group, SBI Capitals on campus for an insightful session on Capital
markets.
We do look forward to views and suggestion from the readers to help us improvise the
content of the Newsletter and make it more relevant and informative.
Hope you enjoy reading.
Gopidalai Muralidhar Rao(Editor-Arthneeti)
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CONTENTS
Special FeatureAn Interview with Mr. Bharat Sampat
CFO & EVPDevelopment Credit Bank (DCB)
Expert TalkAn Interview with Mr. Sujan HajraChief Economist & Co-Head-ResearchAnandrathi Financial Services
The SIMSREE Street
Economy Analysis
- BrazilMeeting the Infrastructure Needs of
Indian Economy
Sectoral View: Pharmaceuticals
Macr-O-nomics
Lessons On Finance
Personality To Emulate
Finance-Q ?
4
8
13
17
20
23
2530
31
32
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things now stand, most of the existing banks could meet
any reasonable increase in this hurdle without a stretch.
Q: There are quite a large number of Public Sector
banks (PSBs) with presence across India. Do you
think there is a need for consolidation in PSBs?
A: Firstly, each PSB has its own flavor and within State
Bank of India (SBI) group, subsidiaries have their own
flavor and focus areas. For example, Canara Bank is
different from SBI, which is again different from Punjab
National Bank (PNB). They have different targets and they
operate in different areas. They may be present across the
country but they have their own focus, but I do see a need
to consolidate in that sense. Government has significant
ownership but not complete ownership. Hence, it is not
like merging two wholly owned subsidiaries into one
company. Whether it would bring in economies of scale, I
think pursuit of balance sheet size is not somethingabsolutely a must. In fact banks which have become the
biggest banks have gone through stresses and strains. If
you look at Royal Bank of Scotland (RBS) or Citibank,
both had their own share of stresses and strains. In late
90s, some Japanese banks were used to be in top ten banks
in terms of size around the world, but today they dont
exist on that list anymore. Now, China is reaching that
place, but where are Japanese banks now. So, it is not only
size which gives you advantage. Larger deals can be run by
Indian banks on a syndication basis with the exposure
shared. I dont think mergers are necessary for thatpurpose.
Q: Aftermath the financial crisis, risk management
has been a priority. Basel Committee on Banking &
Supervision (BCBS) has recently proposed the new
Basel III norms. How would this affect the Indian
banks?
A: In India the Capital Adequacy Rate (CAR) stands at a
strong 13.4%+ levels. There are also other risks which are
not measured by the balance sheet by Basel II norms. So,
Basel III norms would pave way for better risk
management. Banks, in general should be able to make the
transition given that our CAR stands well above the
requirement by Basel Committee. Capitalisation levels are
strong in Indian banking industry. We would have to
eventually move to Basel III, which is inevitable and I
dont see any problem to it. You cant play in an
international market unless you are also streamlined with
the regulatory regime over there. If you declare your
capital adequacy as per Basel II and if the world has
moved onto Basel III standards, then how will they value
your credit worthiness? So, yes Basel III will come in and
RBI has already been taking steps on that front.
Q: How can Banks play an active role in
strengthening the Bond market?
A: I think there has been intermediation of routing
wholesale bonds through mutual funds for example. That
route has been to some extent restricted and curtailed by
RBI. Traditionally banks have offered good fixed deposit
rates and vis-a-vis the riskiness of the bonds there was to
some extent an aversion to bonds in retail investor
community. However if you see recently, L&T Finance as
of this week and Sundaram Finance came out with some
Rs. 1000 crores bond issue. Sundaram issue has been
oversubscribed 8 times in the first day. There is asignificant appetite decent corporate bond. Price
differentiation will also then start emerging and yield curve
could be more effectively embedded into the banking
system if we have a deep corporate bond market. So yes, it
is required but it would take time before it develops. For
an emerging economy which aspires to be a developed
economy needs to have a deep corporate bond market in
place.
Q: What has been the significant change in the global
banking system post the financial crisis?
A: Bigger Is Better no more holds good. There is less
emphasis on pursuit of higher market share and bigger
balance sheet size. Bigger banks face continuous scrutiny
from regulators on their liquidity, capitalisation levels and
corporate governance practices. Proposed Basel III
implementation will further strengthen the bank balance
sheets. Emerging markets have become the new growth
engines of the world economy and this provides a unique
opportunity for banks of these countries to grow rapidly.
Q: How much would the depressed US economy &
Euro crisis affect the Indian growth story?
A: Muted US economy and Euro crisis would result in
greater capital flows into high growth emerging markets
like India in terms of FIIs and FDIs. Economies of skill
and scale offered by Indian economy make India attractive
as a quality low cost production destination for many
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sectors. Emerging middle class drives increasing demand
for goods and services in sectors like FMCG, Two-
wheelers, Consumer durables, etc. Similarly, expected
infrastructure spend would drive demand for commodities
and industrial goods. This makes India, an attractive
destination as manufacturing hub for all industries. Lastly,
this also results in reverse bran drain or at least diminished
outflow of talent from India. This provides a ready talent
pool for domestic and international investors.
Q: DCB has been present in some states and other
major cities in India. So, is this a strategic decision to
expand in selected regions across India?
A: As far as DCB is considered, we are majorly present
across 56 branches of the total branches in Gujarat,
Maharashtra & Andhra Pradesh. On the other hand we are
present in major cities such as Delhi (7 branches), Kolkata
(3 branches), Chennai (2 branches) and Bangalore (4). Asfar as providing services to customers and reaching our
customers, we have tied up with couple of banks to enable
our customers get access to our services. For example we
have tied up with other institutions across 500 locations
for payment services. So, as far as services to customers
are concerned, those are equivalent to any bank with
national presence. As far as geographic presence is
concerned, we would prefer to work in clusters, deepen
our relations with customers in existing clusters and then
reach out to newer areas. Recently, we have received fresh
licenses in cities where we arent present. We got licensesin Noida, Ludhiana, Lucknow, Jaipur, Vijayawada and
Kochi and also received four more licenses for operations
in the developmental areas (2 licenses in MP, 2 licenses in
Orissa), which is for financial inclusion purpose. We are
looking at expanding our presence across the country.
Q: Nowadays, we find large Universal Banks offering
all types of financial services. So, are there any plans
for DCB to expand its financial services offerings in
near future?
A: I think universal banking position is possible at a point
wherein you have achieved a critical size. At this size, DCB
would not be looking to offering those services as we do
not want to get into this area now and in future, we dont
know. But what I would also like to say that, it is not
necessary that each bank has to be universal. One of the
most successful finance companies (HDFC) in India is not
a universal bank. It has its focus on housing mortgage.
Even Sriram Transport Finance Co. has emerged
successful by focusing on one segment. Each has its own
space and one has to play according to its strengths and
weaknesses.
Q: What are DCBs growth strategies in the years
ahead?
A: DCBs focus is on building low cost deposit franchise
with strong capital position. We have a strong focus on
retail CASA (Current & Savings Accounts) balances and
retail Term Deposits. On the asset side, we want a
balanced growth in advances which are secured and
repriceable. Our chosen areas of growth are Retail
Mortgages, Micro SME (businesses with turnover up to
Rs. 10 crores) and SME (businesses with turnover up to
Rs. 100 crores). We have a significant presence in Mid-
Corporate space. Agri & Inclusive Banking (AIB) helps us
achieve priority sector targets and promotes inclusivebanking.
Q: Is DCB looking forward to expansions through
M&As in India?
A: In near future, inorganic growth is not being pursued
by us.
Q: Do you think the Indian government is going slow
on financial reforms, critical to sustainability of
Indias growth?
A: I think a lot of work continues to happen at the
governments end. It is just that these structural reforms
needs lot of doing before the reforms becomes visible. I
am sure at the government level; huge amount of work is
going on. We would see the results coming out in future
sooner or later.
Q: RBI & Indian government have been targeting to
reach out to the unbanked population across India.
How according to you can Banks play a more active
role in financial inclusion?
A: Banks have a vital role to play to achieve the financial
inclusion objective in the country. Through expansion of
rural network, extension of no frills banking, micro-credit,
extension of banking facility through business
correspondent (BCs) model etc, we can achieve further
development of banking services in the untapped regions.
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Q: There has been a lot of interest being shown by
Banks & Telecom companies to enter into Mobile
Banking (SBI & Airtel JV, ICICI Bank & Vodafone
JV). Is DCB also looking into offering similar kind of
services through this platform?
A: Mobile banking has huge potential in India. We are
exploring that market and we have got some start towards
it and I think all banks will eventually enter into this space,
which is the future market for all banks. We already have a
product in Mobile Banking, but on a very small scale.
Q: Business Correspondents (BCs) Model is being
explored by various Banks. How do you view the
scope of such Model in bridging the gap between
banks and unbanked population?
A: We have seen several banks have launched it. People
have made a start and are offering the services. We alsohad a look at some, but what we want is to work through
the entire model before we enter into it. But, this can be an
effective model to spread banking into the masses.
Q: Where is the next phase of growth expected for the
Indian banking sector?
A: Presently the economic growth is weighed down by
inflation and high interest rates. Both are expected to ease
up towards the end of this year with inflation falling to
6.5% p.a. Even 6.5% is a very high number in itself. Goingforward, key growth drivers would be economic reforms
and infrastructure. There is no alternative option to
reforms as this would remove obstacles. On supply side,
development of infrastructure is only way the friction in
mobility of goods, services and factors of production can
be reduced which in turn would help impact inflation in
long run. This should help return Indian economy to
higher growth trajectory. As a thumb rule, banking sector
expands at a rate three times the GDP growth rate.
Q: How do you view the present global economic
scenario with negative cues coming from US, Japan
and European economies?
A: US have been under stress for quite some time. Euro
region has been facing serious challenges due to what is
happening in Greece. Yes, Japan is facing a problem
because of the natural calamity. The global growth would
be slow for the next few years. But globally, capital is still
intact and it would seek returns and if these economies are
not prospering then it would seek returns where there is
growth. This is where emerging markets like India would
win. We should be ready to attract it. An economy would
never go on a linear path, it experiences Ups & Downs,
but what you got to look is the secular trend.
Q: How should students prepare to make a career in
the field of Banking & Finance? What according to
you are the attributes required to be a successful
banker?
A: It is essential to have a strong grounding in Financial
Management and Economics. Financial management for
taking micro decisions, where the decisions come to your
table and Economics to understand strategically where
things are moving towards - macro picture. The interplay
of the markets can be understood only when you
understand economics, which is very important. Financialmanagement helps you to assess what is working for you
and what isnt working for you in the micro sense. It is
also very important to keep up with the events happening
in financial services world.
Reading of books like Liars Poker by Michael Lewis; Too
Big to Fail by Andrew Ross Sorkin; Barbarians at the Gate
by Bryan Burrough & John Helyar; One Up on Wall
Streets by Peter Lynch; The Money Guide by Paul
Erdman, etc gives a good practical insight into the world
of Banking & Finance. The books which have been
mentioned have their own significance, because it givesyou an all-round view of the financial industry. Usually
what you study is theory but in practice various important
aspects needs to be considered. Liars Poker, very famous
book- gives you deep insights into the practical working of
the debt markets, Too Big to Fail would help you
understand what has changed post the Lehmann brothers
(crisis), Barbarians at the Gate would give you some
insights about how do the Mergers & Acquisitions market
work, Leveraged Buyouts (LBOs), Management Buyouts
(MBOs) and consolidation issues; One Upon Wall Street
would help you understand how does the mutual fund
industry works and the fifth book The Money Guide
which is a non friction book helps you understand the
linkages between the markets - financial markets which
exists. I feel if you put all these as a sort of curriculum, you
would come up with more practical insights that would
help you develop an all round abilities in financial field.
By Gopidalai Muralidhar Rao, MMS 2010-2012
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Q: Economies especially emerging economies
have been facing Inflationary pressures. Is there
any global perspective or is it something
fundamentally wrong with inflation in India?
A: I think, it is a bit of this and bit of that. If you see
inflation dynamics in India, Wholesale Price Index (WPI)
is taken as the headline inflation which includes 4 major
components. One is the food component, which is
predominantly domestic because India doesnt eitherexport or import any major quantity. So, there the kind of
food inflation which we are expecting is basically
influenced by the domestic factors. The second
component is Non-Food Primary, which basically includes
cotton, jute, oil seeds etc. Here, the international
component exists. For example, if you look at the cotton
prices in India, today inflation is almost 100 %. So there is
an international component to that. The third segment is
Fuel, Electricity & all. The fuel prices, of course, a
significant amount has international linkage. All the
petroleum products are affected by the internationaltrends. Since, 1/3rd of the petroleum products are
decontrolled in India this directly passes through to end
users. Other things which are controlled in particular
Diesel, LPG and Kerosene there is some amount of lag
passthrough. So there the international impact is pretty
significant. The biggest segment with significant
international impact comes from the manufacturing
product prices. Almost 65% of Indias WPI weightage is
for manufacturing products especially the engineering
products and all. Manufacturing products are highly
internationally traded. The part of high inflation which istaking place in India now is a domestic phenomenon. The
lack of investment in agriculture, high dependence on rains
is the major factors leading to the current inflationary
pressures. On the other hand, internationally transmitted
component particularly fuel and manufacturing have also a
significant effect on prices and commodities are also being
affected from international prices.
Q: To what extent would RBI raise rates andwhat is the comfort zone for RBI?
A: RBI in the medium term would expect to see inflation
at a range of 4 to 5 % and in the long term below 4 %.
That doesnt necessarily mean that RBI would keep on
raising rates until inflation settles at the targeted levels. RBI
as you know is doing the tightening for more than 12
months and the major impact of policy tightening and
inflation happens with a lag of almost 18 months. RBI
would now start expecting the impact of its past tightening
measures on the overall inflation situation. So my sense is
that, RBI is pretty close to the end of policy tightening
cycle, though we would expect inflation to correct in the
second half of the current year.
Q: According to you, what measures can RBI
take to control inflation?
A: RBIs control is only on monetary policy and to some
extent on foreign exchange policies. RBI at this moment
has nothing more than monetary policy tools to controlinflation.
Q: How to manage the growth versus Inflation
scenario in India?
A: In the short term, there is always a trade-off between
growth and inflation. Basically, you need to understand
how the monetary policy tightening impacts inflation.
Monetary tightening, if it is transmitted, increases the
market interest rate. If market interest rate increases, that
affects the interest sensitive part of the spending which
basically includes investments and leveraged consumption.
So, to bring down inflation through monetary policy, you
necessarily have to do demand compression which means
lower growth. But the fact of the matter is that over a
longer period of time, high inflation is amicable to growth.
In the short term, there may be tradeoff between inflation
and growth but in the long term moderate and stable
inflationary environment actually promotes higher growth.
Mr. Sujan HajraChief Economist &Co-Head-ResearchAnandrathi FinancialServices
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So, in the long term there is no trade off, but in the short
term there is tradeoff. And there is a literature on sacrifice
ratio-how much change or reduction in inflation rate
results in how much loss of growth. So basically in short
term you have to satisfy growth to controlling inflation,
but it is likely to be inducing long term higher growth.
Q: Our Finance Minister has projected that fiscaldeficit would come down to 4.6% in FY12. Do
you think this is achievable given the government
finances going haywire?
A:The funds available to the government last fiscal from
3G & BWA was close to 1.05 lakh crores, but a significant
part of the amount has been carried forward to this fiscal
year i.e..approx 30,000 crores. So actually there is a positive
externality in that way. We are talking about fiscal deficit as
a percentage of GDP and you basically need to understand
that the denominator is also increasing. So, if your realgrowth assumed is 8 % and inflation is at about 8 % so
roughly speaking, you are talking about 16 % growth in the
denominator. So, that in itself brings down fiscal deficit. If
you look at the indicators as of now such as Tax
commission and everything, they are ahead of the budget
target. From that aspect, I dont see any significant
slippage from the fiscal deficit perspective. Even if there is
a slippage, it wont be significant. It would be well below
5%, may be something around 4.8% if there is any
slippage.
Q: The FY11 4th quarter GDP has declined to
7.8% and there are also signs of Industrial
slowdown by recent data. Do you see slowdown
in Indian economy?
A: To the contrary, I believe that from November 2010,
there has been significant buoyancy in the industrial
production. We need to understand the relation of FY11s
data particularly IIP & GDP against the previous financial
year i.e...FY10 was an abnormal year. In the first half ofthe financial year FY10, there was a subdued growth and
in the second half there has been significant buoyancy. The
base for last year (FY11) is FY10. So when you started in
the year FY11, your industrial production was in high
teens and in course of the year growth started faltering
mostly because of the asymmetrical base effect. What
happens is that actually, if you look at the IIP, the index
shows a no change between the periods April 2010 to
November 2010. It remained flat, while the growth rate
fluctuated between high teens and low single digit numbers
simply because of the asynchronized base. But
internationally you look at growth more as a seasonally
adjusted 3 months over 3 months moving average. If we
take this method, we see that after November, there has
been significant pick up in industrial growth from a (-) 8%,
the growth has become to (+) 8%, so there is a delta of
16% points. So, in that sense I dont subscribe to the view
that there is any serious slowdown in industrial production
in the second half. Similarly, one can also look at the GDP
numbers. In the (1st Half) FY12, you would see subdued
numbers because of the high base of the (1st Half) FY11.
Similarly, in the (2nd Half) FY12 we would see a
significant pickup in growth. It is more of a base effect
rather than any slowdown or pickup.
Q: Standard & Poor (S&P) has recently warned
US about downgrading its economy ratings. Doyou think there are chances of US defaulting?
A: US technically cant default because it has unlimited
power to print money. Its like India has internal debt and
government cant default on internal debt because at the
end of the day they have recourse to the printing press.
But yes, fiscal issue is a major problem not only in US, but
also in Europe particularly in PIIGS economies. So, this is
something that would dominate the economic
developments for the times to come. There is already a
school of thought which is predicting that the next crisis
would happen in government debt. This is a serious issue
and the international community has been looking at it,
otherwise this can result in a prolong period of low
growth.
Q: US have reached its debt ceiling. The
president and congress are at loggerheads to
raise the limit. So, how do you see these
developments?
A: As far as the fiscal reforms are considered, the congress
and president are at loggerheads. This in actually could be
a blessing in disguise because US economy has not
completely recovered from the global financial crisis,
which now you are calling as the great recession of 2008. It
may be too early for the government to take up further
fiscal reforms because the quantitative easing (QE2) has
just ended and if the government starts doing fiscal
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each year between 2000 and 2008 India had a current
account surplus. Now, gold from where I see is an asset
rather than a good. So it should ideally be a capital account
entry rather than current account entry. But internationally
gold is not taken as an asset for balance of payments
calculation. It doesnt impact other countries much
because the amount isnt very large, but India being a
major importer it has a large impact. From this
perspective, I think the nature of CAD in India is grossly
misunderstood. Secondly, if you look at the funding of
Indias current account deficit, more often than not the
role of portfolio flows which is pretty volatile is not more
than 30% on an average. Other kind of flows which India
receives includes FDIs, ECBs, Banking capital, NRI
deposits and external assistance. All those aspects also play
an important role. So, I dont think from the sustainability
of current account position, it is really an issue. Economic
theory suggests that if a country is in a growth phase, that
country should actually maintain a current account deficit.Basically, at the end of the day return on capital in that
country is much higher than the rest of the world. So,
economic theory suggests India should have current
account deficit.
Q: Will the problems in Japan further increase
after the natural calamity and nuclear disaster?
Do you feel any positive signs from Japans
perspective?
A: Japan obviously, what we have seen is the Lost
Decade in the 90s for certain policy mistakes. Over and
above that what we have seen in Japan is that Japan is the
most negatively impacted nation by population ageing and
issues associated with that. Japan is technically into
recession. As per US definition, 2 quarters of negative
growth is recession and Japan obviously is under recession.
But, the immediate positive effect would be reconstruction
because of the destruction by a series of natural calamities
and nuclear disasters. This should actually push Japanese
economy upwards, but at any case the potential growth for Japan is not high and Japan has to deal with public debt
problem. But since, most of the public debt in Japan is
domestically held; they have some amount of comfort
factor. But definitely Japan is withstanding problems since
90s and that is still persisting. Beyond the reconstruction
Japan has serious issues which have to be addressed.
Q: Indian government has been slow on reforms.
Do you think this would stifle growth in near
future?
A: If you look at corporate debt market, government has
actually increased the limit from USD 10 billion to USD
20 billion and now to USD 40 billion. Government is
actually bending backwards to attract fund flowparticularly for infrastructure funding. I think thats one
area where government has done a lot. The issue here is
more of regulatory delays which are happening whether to
start a mine and land acquisition has become a serious
issue. All these challenges we have to address. Otherwise
we would stifle growth very significantly.
Q: What are the key Lessons learnt from the
financial crisis?
A:What you have seen in the last crisis, the central reasons
of the crisis has been the mispricing of risk. That has
happened because there wasnt appropriate mechanism -
regulatory or supervisory mechanism. There was some
kind of regulatory arbitrage which has allowed this kind of
event to happen. We have seen that by nationalising the
private debt, we have come out of the crisis. So actually
the public sector has taken the burden on its balance sheet.
Every time we have seen that the resolution of one crisis
has actually set in the seeds for the next crisis starting from
the investment crisis in US or the dotcom bubble. All
these things increasingly have set up the seeds for the next
crisis. Public finance particularly in the developed nations
is a major risk area going forward. So in that sense there is
obviously large level of regulatory forbearance which has
led to the current crisis. Even now, we are mispricing risk
and arent properly pricing the sovereign risk, which is an
issue. We have of course learnt the price paid for allowing
an institution to be too big to fail. Bank for International
Settlements (BIS) recent initiative says that the systemically
important financial institutions must have a better capital
adequacy ratio. Those are the kind of steps taken tosafeguard as there is nothing called a full proof system and
mostly it is learning by doing. Prior to the crisis, many of
them knew that the housing sector in US had problems
and issues, but not much concern was raised then. So long
you are making money as a financial institution; you have
to go with the model. So, thats the problem of capitalistic
system under which we work.
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Q: What are the key challenges that India need to
address to achieve the double-digit growth?
A: India has always grown at a high pace and the growth in
investment has been high. For India to achieve double
digit growth, the investment rate should be significantly
high. If you take the incremental capital output ratio of
something around 3.5 to achieve 10% growth, you need a30% investment, for a capital output ratio of 4, u need a
40% investment. From that perspective, high investment
requires high domestic savings. Otherwise you would be
overly dependent upon foreign capital. Basically
investment in infrastructure is critical for India to grow
going forward. For that we need lot of reforms across
various sectors. For example, the land acquisition reforms,
issues related to mining sector and procedural delays have
to be addressed. Apart from that for funding
infrastructure, you need a vibrant debt market. So the
reforms in the debt market are very important. In 1990s when the government has initiated reforms, the
assumption was that the government should withdraw
from the productive activities and private sector would
play a major part instead of government. This has
happened in the manufacturing sector to some extent and
to some extent in infrastructure but this didnt happen in
the context of agriculture. Now, it is clearly accepted that
private and public can be substitutes in industry and to
some extent in infrastructure, but they are complementary
in agriculture. If and only if government invests in a large
irrigation project, private investments would flow to
support the project. So my sense is that investment in
agriculture and improving productivity in agriculture is
very important. Otherwise you would face high food
inflation and thereby wage inflation. Thats another issue
government needs to address. Thirdly, government has to
take care of the financial position. We have to reduce the
fiscal deficit. Basically, today if we look at government
expenditure, 70% is committed expenditure. It either goes
for paying the salaries of the government servants, or it
goes into debt servicing or it goes into politically sensitive
subsisidies. So, if 70% expenditure is committed
expenditure then how much discretionary spending
amount is left with the government for vital investments?
This issue also needs to be addressed. So, these I would
say are the 3 major challenges for India Sustaining high
investment growth in infrastructure including agriculture,
increasing agricultural productivity and reforms in public
finances.
Q: What are the key takeaways for a student from
the crisis?
A: It is very important to understand the business cycle
and phase of business cycle where you are. You are now
experiencing the crisis period as a student. You should
understand the logic of business cycle and you should not
interpret everything linearly. So if inflation is 5 %yesterday, 6% the next day, 7 % the other day, then you
shouldnt necessarily draw a line that it would go to 9%.
One needs to understand that it is also cyclical. You should
also understand that there is a non-linearity in it. It would
top up and it would go down. So understanding business
cycles is very important for you as students. One needs to
be aware of the events happening around and needs to
assess why things are changing. You shouldnt try to be
conformist. Just because people are telling you that FY12
growth would be lower than FY11, you shouldnt believe
that. At the end of the day you would be paid for yourlogic no matter in which profession you are. So long you
have logic, it would be fine and logically you should try to
understand rather than following anybody. Economics and
finance are very innovative subjects; you try to understand
for yourselves.
By Gopidalai Muralidhar Rao, MMS 2010-2012 &Sangeet Srichandan, PGDBM 2010-2012
It is very important to
understand the business
cycle and phase of
business cycle where you
are. Understanding the
business cycle is very
important for you as a
student
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Vodafone & Essar To End Their Partnership Vodafone, the worlds biggest
mobile phone company by
revenues and Indias No. 3 mobile
operator, agreed to end its
partnership with Essar. It has
offered $5 billion for buying 33%
stake of Ruias in the company. The
exit transaction will be in two part i.e... 22% Put or Sell
Option for Essar worth $3.8 billion and 11% Call or Buy
option for Vodafone worth $1.2 billion. The transaction isassumed to be completed by November. After this
transaction Vodafone may launch its IPO.
Indias Largest Debt Raised By HindalcoHindalco raised Rs 7875 crore
in debt for a greenfield smelter
plant at Mahan, Madhya
Pradesh. This is Indias largest
debt raising exercise till now.
Hindalco has raised the loan
from a syndicate of 31 banks on
a floating rate basis for a tenor
of 12.75 years. The Mahan project will have an annual
capacity of 3,59,000 tonnes of aluminium smelter and also
includes a 900 MW captive thermal power plant.
Relief For The BanksBanks will be exempted from paying service tax on foreign
exchange transactions entered into with other lenders. The
transaction with the customer will be charged a nominal sum
of 0.-0.5 % of the transaction amount.
Wipro Buys SAIC Unit In USWipro technologies, Indias third largest exporter of software
services has acquired the oil and gas
IT practice of US headquartered
Science Applications International
Corp. (SAIC) for $150 million. The
acquisition is mainly done to bring
back the growth on track. Wipro
lagged in the previous quarter as compared to its competitor
because of wrong anticipation of recovery in US and Europ
Wipro has done lot of changes in management to bring bac
the growth in its favor.
Exports Cross $200 Billion MarkIn the first 1
months of 2010-1
backed on th
demands from U
and other marketIndias export wa
$208.2 billion. Th
imports for the sam
11 months grew 18% to $305.3 billion over the year ago fo
the same period.
Rabobank Gets The Banking LicenseRBI gives its green signal t
Rabobank, a bank based i
Netherland, for the full-fledge
banking operations in Indi
Rabobank was a promoter in Ye
bank but it had sold its 11% stake
months ago. According to India
banking regulations, foreign bank holding more than 5%
equity in any Indian bank can not apply to open branches i
India. The bank also runs non-banking financial compan
under the name of Rabo India Finance Ltd which lends t
food and agricultural businesses and renewable energ
companies.
Pratip Chaudhuri appointed SBIs New ChairmanState Bank of India, the country
biggest lender, got a new chairman
Pratip Chaudhuri will take place o
O P Bhatt who retired on 31
March after a five year stint wit
SBI.
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Unilever & P&G Fined By European CommissionUnilever and Procter & Gamble have
to pay a fine of $457 million to
European commission as they were
indulged in illegal practice. Unilever,
P&G and Henkel were charged for
fixing up the prices of detergents in 8
countries over a period of 3 years. The price-fixing is illegal asit kills the competition and considered as anti-competitive
strategy. Henkel was not fined because it was the first
company to provide evidence to regulators.
Aditya Birla Group Acquires Domsjo FabrikerAditya Birla Group, a Mumbai based conglomerate acquired
Sweden based pulp maker Domsjo Fabriker for $340 million.
This acquisition shows the intent of Birla group to grow the
fibre business globally.
Muthoot Finance IPO OversubscribedMuthoot Finance, Indias largest gold
loan company, has seen its 900 crore
IPO drew bids for at least 25 times
the share on offer. The offer was
oversubscribed because of investors
expectation which they saw during
Manappuram, rival of Muthoot
financ, IPO launch. Manappuram share price has doubled in
few months.
Johnson & Johnson To Acquire Synthes Johnson & Johnson, a
US based health group,
is all set to buy Swiss
medical device maker
Synthes Inc for $21.6
billion. This deal will be the largest buy ever by Johnson &
Johnson. The acquisition is done to boost its orthopaedic
business. The acquisition process is expected to be over in the
first half of 2012.
US Credit Rating Downgraded By Standard & PoorStandard & Poors
downgraded the outlook for
the United Statess AAA
credit rating to negative
because it believes there are
risk U.S. policymakers may
not reach agreement on
how to address the countrys long-term fiscal pressures.
K V Kamath To Be New Chairman Of InfosysInfosys appointed K V Kamath as the new chairman in plac
of its founder N R Narayna Murthy. The job of new chairma
is to draw a succession plan for the exit of all founders an
appointment of youn
professionals to run th
company. K V Kamath has th
expertise to perform this job ahe did the similar thing whe
he was the chairman of Indias largest private bank ICICI. A
lot of restructuring at top management level is expected in th
tenure of new chairman.
Airtel To Raise $1 BillionBharti Airtel is all set to raise $
billion through a global bon
issue. The raised money will b
utilized to repay the debts whic
were taken during the acquisitioof Zain telecom. The issue will b
in the form of debentures and wi
have tenure of 10 years.
RBI Raises Repo Rates By 50 Basis PointsRBI increased the repo rate by 5
basis points to 7.25% in a
aggressive move to tame inflation
The move indicates RBIs priority t
control inflation to comfortab
levels.
Apple Topples Google As Most Valued BrandApple Inc maker of iPhone, iPad an
iMac overtook search engine gian
Google as worlds most valuab
brand. Apple is valued at $153
billion whereas Google is valued a
$111.5 billion. IBM, McDonanlds Corp and Microsoft com
at 3rd, 4th and 5th most valued brands in the world.
Adani Group Buys Coal Port In Australia Adani Enterprises, a group that ru
the countrys biggest private por
acquires the Abbot Point Coal termin
in Australia for $2 billion. Th
acquisition is groups 3rd oversea
acquisition in last 9 months. With th
deal Adani Enterprise has become the largest Indian investo
in Australia.
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MSREE Finance Forum Arthneeti 20
implemented. The newly elected government under the
presidency of Dilma Rousseff will have a tough time in
meeting the aspirations and demands of an overheated
economy, specially doing that with a ten party collation
government will be a tough task. The priorities of the
current leadership should be in bringing fiscal
consolidation and improving the social fabric of the
economy with introduction of pro-poor policies on the
lines of its existing bolsa familia program and national bio-
diesel program. It would be interesting to see how the
government reacts to the challenges, considering that both
the objectives are contrary to each other.
Its quite unlikely that if you had told me 10 years ago
that I would buy the Brazilian Real, I would have thought
you were crazy. In the last five years -the Brazilian
currency in terms of the American currency, hasdoubled. This is what Warren Buffet had said, when he
was questioned about Brazil as an investment destination.
The South American power house was widely believed to
be the first country to come out of the economic
downturn. It was in 2008 that Fitch and S&P upgraded the
Brazilian economy from speculative to investment grade.
According to Baker and McKenzie Brazil will continue to
enjoy a steady FDI inflow, however, the government needs
to reconsider its taxation policy on FDIs and FIIs. In 2009
Brazil became oil self-sufficient and it does not need a
huge chunk of the oil it has (worlds largest oceanic oilfields is in Brazil), the government can attract loads of
foreign currency by exporting this oil. With the world cup
and Olympics not far away the Brazilian government is
expected to invest nearly USD 93 billion. This investment
will certainly give a boost to the economy in terms of
employment and infrastructure development. PWC, in its
report on emerging economies, has predicted that Brazil
by 2050 would be as large an economy as Japan. Having a
look at the different sectors of the economy gives us an
idea as to why people expect Brazil to be the next big
thing. The major ongoing steel projects and the newmining code and the governments plan of investing USD
40billion to reduce the housing deficit, would certainly
foster the economy. In 2010 itself Brazil saw a spike of
23% in assets under management, the private-equity firms
controlled had business worth $36 billion, the primary
reason behind these developments is a maturing capital
market, several IPOs and the support of the government.
Despite all these in 2010 the World Banks Doing
Business Survey had stated that it took 120 days to start a
business in Brazil, far above the regional average of 45.5
days. The challenge for the newly elected government
would be to curb the rising inflation without adversely
affecting the investment scenario of the country.
Drafting an effective monetary policy is the tricky answerto most critical question for developing economies, how to
maintain a sustainable growth keeping inflation under
control? Current ICPA inflation index of 6.77% (May
2011) has crossed the upper limit of the target range (4.5%
+/-2%) estimated by the Brazilian Central Bank (BCB) for
H2 2011.
Inflation & Unemployment Rate
Year Inflation Unemployment
2003 10.4% 12.3%2004 6.2% 11.5%
2005 5.1% 9.8%
2006 4.2% 9.3%
2007 3.6% 8.7%
2008 5.7% 7.9%
2009 4.3% 8.1%
2010 5.9% 7.4%
2011 *5.7% *7.2%
So far in current fiscal year policy makers have raisedbenchmark interest rates twice but the lagged effect of this
is expected in third and fourth quarters. Current lending
rate (Selic) of 12.25% (as revised on June 8, 2011) vis--vis
10.75 % (January, 2011) shows the urgency of the issue.
This has got clear response from the market as Bovespa
(Sao Paulo exchange) has dropped by 12% since January,
2011.The confliction and dilemma of fiscal and monetary
policies will keep Banco Central Do Brazil (Brazils central
bank) and government under continuous watch. Though,
announcement of a 50 billion Reais ($30 billion) cut in
spending and increase in interest rate, similar steps areexpected in near terms. Finally the pressing question for
Brazil is; how long can it restrict spending when large
international events like the FIFA World cup (2014) and
the Summer Olympic Games (2016) are around the
corner?
Investment
Monetary Policy
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Despite bright economic prospects, most emerging Asian
countries such as China, India, Indonesia and other
Association of Southeast Asian Nations (ASEAN) continue
to suffer from underdeveloped infrastructure. Increased
emphasis is being laid on infrastructure investment and
development to stabilize a shaky platform of growth. Of
these countries, the two that are projected to dominate this
sector are China and India. Indian economy has undergone
fundamental changes over the last decade. Growth in
investor interest is driven by strong economic growth,
low interest rates, rising foreign exchange reserves,
quality and cost competitiveness and encouraging
Government policy-making. The strong levels of economic
growth achieved in India in recent years have led to an
expansion of industry, commerce and per-capita income.
This in turn has fuelled demand for infrastructure and
utilities including energy, transportation, telecom, water
supply and other urban infrastructure. In comparison to
emerging markets, Indias investment expenditure in
infrastructure over the next decade will account for 28% of
the total planned investment expenditure by emerging
markets. So, this makes India, the second biggest
destination after China for infrastructure spend in the
emerging markets, making it an attractive venue for privatesector investments.
(Source: Mckinsey)
The Planning Commission estimates investments in
infrastructure projects in India will be more than $1100
billion over 2010-11 to 2016-17, an amount higher than its
real GDP in 2009-10. The investment in infrastructure in
India has increased from 4.9% of the gross domestic
product (GDP) in 2002-03 to 7.18% in 2008-09. It is
expected to increase to 8.37% in the final year of the 11th
Plan and likely to touch 10% of GDP in the 12th Five
Year Plan (2012-2017). With the increasing investment,
the share of private sector in the total investment on
infrastructure has increased rapidly. The contribution of
private sector in total infrastructure investment in each of
the first two years of 11th Plan (2007-2012) was around
34%. This is higher than the 11th Plan target of 30%, and
25% achieved in 10th Plan period. It is expected to rise to
36% by end of 11th Plan and 50% during the 12th Plan
(2012-2017).
A comparison between India and China shows that the
Gross Capital Formation as a percentage of GDP is only
32 percent in the case of India compared to 42 percent for
china, with a greater part of the differential arising in the
infrastructure and real estate sector. Further, total funds
available for the 12th Plan are expected to be
approximately 31 percent short of the INR 4,100,000 Crore
targets, translating into a funding gap of almost INR 1,
273,000 Crores for the Plan period. The gap in
infrastructure is costing India between 1.5-2 per cent of
GDP growth every year. This shows the tremendous
opportunity that India provides in terms of Infrastructure
for both domestic as well as International financiers.
Source: Planning Commission [1: Anticipated Spend, 2: Projected Spend]
49%
28%
7%
2%
2% 2%
10%
100 Percent=INR 220 Lakh Crores
China
India
Russia
Mexico
Brazil
Indonesia
Other
Meeting Indian
Infrastructure Needs
Infrastructure Spending In Emerging Markets
(2008-2017)
Infrastructure Plan for XIth & XIIth Plan
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PPPs is the way forward and
government is increasingly looking at
using the public private partnership
(PPP) model to fund infrastructure
projects. PPPs are essentially win-win
solutions that seek to draw on the strengths of bothsectors. Thus, the efficiencies of the private sector can
ensure better deliveries of public infrastructure like roads,
bridges, water supply and sewerage projects, ports and
airports, etc. The presence of the public sector ensures
certain concessions, and mitigation of some of the risks.
Thus, the combined capital and intellectual resources of the
public and private sectors can result in better, more
efficient services, without raising taxes for the public.
Indian Government has taken
several steps to spur growth in the
infrastructure sector following the
economic reforms.
A specialized financial intermediary
for infrastructure was incorporated in 1997 called IDFC
(Infrastructure Development Financial Corporation).
Following the conversion of the erstwhile development
financial institutions (DFIs) into commercial banks
namely, IDBI Bank and ICICI Bank infrastructure
projects faced the problem of securing long term debt.
In order to mitigate this problem of long term borrowings,
the Indian government has set up Indian Infrastructure
Finance Corporation Ltd (IIFCL), to secure long term debt
for infrastructure projects. IIFCL has the ability to borrow
up to $2.32 billion that will be guaranteed by the
government.
The Union Budget 2010 has allowed tax deduction on
investment in Infrastructure bonds till Rs, 20,000 forindividual investors. This move had increased the
attractiveness of infrastructure bonds for individuals and
would help raise debt capital required for infrastructure
investments.
Over the past few years various investment funds have
committed themselves towards the infrastructure sector in
India, but still there is a huge gap of funding which can be
met by proper and timely implementation of policies by the
Indian government to facilitate the flow of investments
towards this direction.
The government should consider a series of policy
measures to remove these barriers and steer more capital
into Indias infrastructure sector by ensuring flows from
existing sources of capital and allow new investor groups to
enter infrastructure sector.
The presence of a strong debt market
leads to development of an alternative
source of funding and reduces the
pressure on banking sector for credit
growth. Developing a robust bond
market will help channel more funds
into infrastructure.
From examples seen in the United States with Municipal
bonds and Malaysia with infrastructure bonds, bond
markets have played an important role in channeling capital
into infrastructure. Unfortunately, the bond market
penetration in India is currently only 2 percent of the GDP
significantly lower than other developing countries like
China (8 percent) and Malaysia (15 percent).
The government should make continued efforts to grant
further access to the bond market for FIIs on an ongoingbasis. The present limit of $10 billion for government
securities, $15 billion for corporate bonds and $25 billion
for long-term corporate bonds (for infrastructure) should
be enhanced in order to ensure adequate liquidity is
available in the debt markets. Efforts should be made allow
institutions (including banks) to offer credit enhancement/
guarantees to bond issuances in the onshore market by
companies engaged in infrastructure projects/
infrastructure finance companies. Interest rate futures
markets should be developed. Poor and lengthy
enforcement laws relating to default proceedings, and
limited participation by domestic institutional investors
should be removed. Besides, the regulations regarding
securitization also need to be changed to make it more
attractive to the players. Therefore, its high time the
appropriate measures to provide thrust to the debt market,
which would be a significant step to boost infrastructure
investments in future.
Public-Private Partnerships (PPPs)
Indian Governments Approach
Fostering Infrastructure Development
Develop Robust Debt Market
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International experience suggests that domestic
institutional investors play a key role in making the markets
more resilient, while participation by foreign players makes
the market more liquid. In several Latin American
countries- Chile and Mexico, the growth of domesticpension funds and insurance companies played an
important role. There is a need to liberalise investment
guidelines for insurance companies and provident and
pension funds, as well as the sectoral, single party and
group exposure limits of banks and insurance companies so
they can invest in or lend to high quality infrastructure
Special Purpose Vehicles (SPVs).
The New Pension System (NPS), which was expanded to
include unorganized sector workers in 2009 has enormous
potential to mobilize long-term savings, but is still in itsinfancy. The proposed Insurance Bill amendment, which
proposes raising foreign ownership limit in insurance
companies from 26 to 49 per cent, should help attract large
foreign players into the market. Also further flexibility in
investment norms could help in enlargement of the
support base for equity and bond market. While the
Government has recognized the importance of the issue,
the pace of reforms and establishment of an institutional
framework has been slow in comparison to what has been
achieved by competing economies. Indias savings rate
stands at around 36 percent and in order to meet hugemagnum of investments, efficient channelizing of the
relatively high domestic savings would be required.
Apart from institutional funds,
infrastructure projects today
also use external commercial
borrowings (ECBs) to raise
resources. But there is a cap on
the amount of ECBs that can beraised currently. In a recent move, the government of India
(GoI) has raised the cumulative ECB cap by $ 10 billion to
$ 30 billion. With demand for funds far exceeding supply,
there needs to be further hike in the limits of borrowing.
Hybrid funding instruments such as Convertible
Debentures, FCCBs, warrants etc, have recently witnessed
a number of regulatory changes. There is a need to widen
the net further and look for more creative solutions for
funding.
Government should encourage Banks and specialised
Infrastructure NBFCs to raise long-term infrastructurebonds free of Statutory Liquidity ratio (SLR) and Cash
Reserve Ratio (CRR) requirements for a longer term period
(10 to 20 years), specifically for infrastructure.
Although it will be important to resolve financial issues,
there is a need to attend to non-financial concerns as well,
in order to encourage timely and long-term investments in
infrastructure. The most pressing non-financial concerns
include - simplifying project clearance mechanisms,implementing projects on time, and strengthening the
contractual framework. Allaying these concerns will reduce
the risk and increase the comfort level of financers.
With a $ 1 trillion investments expected over the XIIth
Plan period, there is a need for a Regulator. The
government could establish a distinct regulator to address
the concerns of the infrastructure industry.
India has a long way to
go given the lack of
adequate infrastructure
across cities, towns and
rural areas. The
potential solutions
would help enhance
timely flow of funds to support the debt requirements of
infrastructure projects. Lot of opportunities exists for both
domestic and international players to tap. The policyactions taken by the government towards infrastructure
sector would determine the fate of Indias growth over the
next few decades.
Liberalise Investment Guidelines for
Domestic Institutional Investors (DIIs)
Regulator for Infrastructure Sector
ECB Source of Financing
Infrastructure Focus Bonds
Simplifying Project Clearance Mechanism
Outlook
By Smruti Ashar, MMS 2010-2012
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Base Rate (9.25% - 10%)
Savings Bank Rate (4%)
Deposit Rate (8.25% - 9.10%)
Bank Rate (6%)
Repo Rate (7.50%)
Reverse Repo Rate (6.50%)
Lending / Deposit Rates
Policy Rates
Macr - O - nomicsCategory/
Index Open High Low
Current
Value
Previous
Close
Broad
SENSEX 18,694.19 18,936.43 18,513.22 18,561.92 18,618.20
MIDCAP 7,014.77 7,053.88 6,995.45 7,006.75 7,014.58
SMLCAP 8,359.93 8,403.04 8,354.11 8,363.22 8,356.39
BSE-100 9,803.17 9,877.10 9,718.41 9,740.64 9,767.42
BSE-200 2,318.19 2,336.40 2,302.55 2,307.37 2,313.23
BSE-500 7,303.53 7,345.21 7,247.69 7,261.52 7,277.46
Sectoral
IT 5,867.22 5,924.55 5,837.91 5,856.64 5,835.19
POWER 2,599.58 2,616.37 2,586.33 2,597.20 2,596.17
TECH 3,587.93 3,615.64 3,563.33 3,570.90 3,570.11
CG 13,778.50 13,843.26 13,674.49 13,739.69 13,738.37
OIL&GAS 9,211.39 9,211.39 9,097.19 9,121.12 9,130.46
HC 6,550.79 6,566.20 6,503.56 6,518.25 6,532.54
CD 6,902.34 6,946.38 6,869.35 6,886.48 6,902.34
BANKEX 12,910.58 13,465.21 12,699.61 12,846.94 12,879.34
FMCG 4,068.40 4,079.99 4,034.79 4,039.31 4,056.41
PSU 8,644.81 8,658.03 8,530.51 8,541.96 8,587.43
REALTY 2,208.93 2,239.44 2,174.64 2,186.65 2,198.46
AUTO 9,034.39 9,064.82 8,949.56 8,993.51 9,047.06
METAL 14,733.00 14,885.81 14,574.29 14,610.04 14,735.26(Source: Reuters & ET as on 17th July 2011)
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The global pharmaceutical market is undergoing rapid
transformation. As blockbuster drugs come off patent, there
are fewer new products in the pipeline to replace them. This is
due to declining R&D productivity and rising regulatory costs.
Global Pharma multinational corporations are looking at new
growth drivers such as the Indian domestic market to
capitalise on the growing opportunity. Emerging markets will
be the next major growth drivers for the global Pharma
industry, with more than 40% of incremental growth in the
industry coming from emerging economies in the next
decade.
Indias domestic Pharma market valued at approximately
US$12 billion in 2010 showed a strong growth of 21.3% for
the twelve months ending September 2010. The domestic
market is estimated to touch US$20 billion by 2015, making
India an attractive destination for clinical trials for global
giants.
(Source: McKinsey)
One of the reasons behind this expected growth rate is tha
Indias pharmaceutical industry has a favorable macr
environment.
The Indian economy has rebounded from the glob
economic downturn, with real gross domestic product (GDP
growth reaching 9.66% in 2010.
The Indian middle class is also expanding rapidly, wi
affordability of medicines increasing, and an increase
percentage of disposable income being spent on healthcare.
The government has made public healthcare one of its to
priorities by launching policies and programmes that ar
aimed at making healthcare more affordable and accessibl
especially in rural markets.
The industry is witnessing trends such as acquisition
increased investments, deeper penetration into tier I to tier V
and rural markets, growth in insurance coverage an
innovation in healthcare delivery. Taken together, these trend
are leading to increased affordability of services to patien
and access to quality medical care.
Sectoral View
Indian Pharma Sector
Overview
Top 15 Pharmaceuticals Markets, 2015 (US$ Billions) Indian Pharma Sectors SWOT Analysis
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At the moment, approximately 90% of Indias pharmaceutical
market is made up of branded generics. This segment will
grow at a CAGR of 15% - 20% for the next five years.
Generic generics and patented products contributions to the
market as a whole is currently very low. By 2020 though,
patented drug sales are expected to increase, owing to an
improvement in the implementation of patent laws and
spread of health insurance. The OTC segment is expected to
be a strong growth driver for the industry.
The Indian Pharma market is largely dominated by branded
generics. This segment contributes around 90% of total sales,
and represents one of the key strengths of the market,
encompassing the OTC segment as well. Only about 10% of
the market constitutes commodity generics sold through
institutional sales and innovator products. The branded
generics segment is expected to grow at a CAGR of 15% -20% for the next decade.
The prescription products that are either novel dosage forms
of off-patent products produced by a manufacturer that is not
the originator of the molecule or a molecule copy of an off-
patent product with a trade name .In India, any non-
patented molecule with a brand name other than the
innovators name is termed as a branded generic. In the
global context, substitution when an innovator product goes
off-patent - is the key driver for generics. In India, its about
driving a difference using the core equity of a brand, over a
competitors product.
A generic drug is the bio-equivalent version of a brand name
drug. Currently, the market share of generic generics is very
low. The reasons being:
1. Lack of generic generics regulations and guidelines for theestablishment of bio-equivalence, for example the
Abbreviated New Drug Application (ANDA) guidelines
that exist in the U.S.
2. Doctor comfort derived from prescribing medications othe basis of brand name.
Generic programme in India is the government run Ja
Aushadi. This programme provides no-name generic drugs a
subsidized prices in 24-hour pharmacies that are located a
over the country.
OTC Drugs means drugs legally allowed to be sold Over th
Counter by pharmacists, i.e. without the prescription of
Registered Medical Practitioner. Although the phrase OTC
has no legal recognition in India, all the drugs not included i
the list of prescription-only drugs are considered to b
nonprescription drugs (or OTC drugs).
The OTC segment has been identified as one of the potenti
growth drivers for the Indian Pharma industry, as the sale o
OTC drugs in India has been increasing over the years.
Key Growth Drivers For OTC Segment
Wider Distribution Channel: Companies can sell theirproducts outside of pharmacies, for example in post-offices
and department stores.
Direct To Customer Advertisements: The governmentallows public advertising of these products, giving drug
makers greater freedom to use more creative methods while
marketing their products.
Increased Consumer Awareness: There is an increasedreliance on self-medication as public awareness of common
ailments goes up.
Low Price Controls: Other than acetylsalicylic acid andephedrine and its salts, very few of the OTC active ingredien
fall under the current DPCO price controls.
The market size for patented drugs as of today is very sma
Only about 1-2% of the market is made up of patented drug
which are being sold by multinational innovators. There ar
multiple Indian companies that have drugs in the pipelin
with a greater focus on R&D, but estimates suggest that
would be at least 7 to 10 years before these begin to have
serious impact on the industry. Industry experts believe th
the current size of the patented drug market is estimated a
US$120-130 million. Due to weak patent laws in the past, an
multiple, cheap generic versions of drugs present in th
market, multinational players were hesitant to introduce the
patented products. In the future, with growing affordability,
Indian Pharma Market Segmentation
Branded Generics
Over The Counter (OTC) Products
Generic Generics
Patented Products
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The global pharmaceutical industry is changing. The
pharmaceutical business model is witnessing a paradigm shift
from a fully integrated company structure towards a future
where companies use a wide range of outsourcing,
partnership initiatives and other contractual and relationship
arrangements to create networks of collaboration and
discovery. This evolution in Pharma business models has
enormous repercussions for the Indian pharmaceutical sector,
and related sectors like biotechnology. Indian companies now
have an unprecedented opportunity to partner with global
players across a wide range of activities, from contract
manufacturing and
licensing arrangements,
to franchising and
Joint venture
opportunities.
Export-oriented
business CRAMS:
Outsourcing has been
the traditional method
of doing business with
Indian companies.
Historically, the focus
for the pharmaceutical
industry has been on
lower value adds
manufacturing activitiessuch as APIs and
generics, and India
continues to play an
important role in these
segments. In recent
years, Indias Pharma
companies have also
begun to move up the value chain. Foreign companies are
now increasingly tapping Indias growing research skills in
addition to its manufacturing skills.
Licensing: Multinationals are also striking licensing
agreements to get a share of the Indian pie. Most
developmental costs are borne by the licensor in licensing
arrangements, resulting in the licensee paying a high unit cost
and having little control over manufacture. However,
licensing can be effectively used to establish a common
platform in order to gain rapid in-market acceptance and
create a complete therapy range through arrangements such as
cross-licensing.
Franchising: Indias retailing industry also offers hug
opportunities for foreign companies to either set up their ow
retail franchisee or enter into collaboration with existin
players. Franchising arrangements can leverage on purchasin
power from the franchisor buying in large quantities an
passing down savings to franchisees. Continued busines
support from the franchisor such as technology, product
training and marketing is an added advantage.
Joint Ventures: Joint ventures (JVs) are becoming a mor
prevalent option for companies looking to capitalise on th
opportunities presente
in India. Foreig
companies ar
increasingly looking
local partners to wor
with in order to increastheir presence in Indi
Domestic partners brin
together extensive loc
expertise due to the
familiarity with th
business environmen
knowledge support an
the networke
capabilities of othe
local pharmaceutic
companies. Thesadvantages, along wit
low production cost
skilled labor and faste
drug development ca
be productively utilise
by wester
pharmaceutic
companies coming into India.
Partially or Wholly owned subsidiaries: Som
multinational companies have also increased their stake i
their Indian subsidiaries to take advantage of the Ind
opportunity. Unlike in some other sectors, fully owne
subsidiaries in the pharmaceutical industry offer little risk i
terms of sharing critical data and competitive advantage, a
most are subject to strong control by the parent company
Pharmaceutical companies willing to have wholly owne
operations in India can gain value from being present acros
the value chain, from drug discovery to clinical trials throug
to manufacturing. Other benefits may include tax advantages
Business Models
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The Central Drug Standard Control Organisation(CDSCO), which falls under the purview of the Ministry
of Health and Family Welfare, is the primary regulatory
body in India.
The Drug Controller General of India (DCGI) presidesover the CDSCO and is in charge of the approval of
licenses for drugs at both the central and state levels.
In January 2005, India introduced the product patentregime in accordance with the TRIPS agreement with an
amendment to the Indian Patents Act. Further, in 2008,
the introduction of the Drugs and Cosmetics
(Amendment) Act 2008 put forth stringent penalties and
imprisonment
Intellectual Property Rights (IPR), patented productlaunches should increase 2008, the introduction of theDrugs and Cosmetics (Amendment) Act 2008 put forth
stringent penalties and imprisonment.
FDI of up to 100 per cent in drugs and pharmaceuticals ispermitted through the automatic route. For licensable
drugs and pharmaceuticals manufactured by recombinant
DNA technology and specific cell/tissue-targeted
formulations, FDI requires prior government approval.
The GoI plans to set up a pharmacopeia commission tosupport ayurveda, yoga and naturopathy, unani,
siddhaand homoeopathy (AYUSH) through guidelines
laid down in the review of the Eleventh Plan.As stated on the National Pharmaceutical Pricing Authority
(NPPA) website, the NPPA is responsible for fixing and
controlling the prices of 76 bulk drugs under the Essential
Commodities Act.
The Department of Pharmaceuticals was formed on July 2,2008, under the Ministry of Chemicals and Fertilisers with
the objective of focusing on the development of the
pharmaceutical sector in the country and to regulate
various activities related to the pricing and availability of
medicines at affordable prices, R&D, the protection of
intellectual property (IP) rights and international
commitments related to the pharmaceutical sector.
The GoI has been actively supporting the industry withvarious measures. It is embarking on a major multi-billion
dollar initiative, with 50 per cent public funding through a
PPP model, to harness Indias innovation capability.
Policy & Regulatory Framework
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With the new patent regulations the industry expects to see a
major structural shift with the entry of foreign
pharmaceutical manufacturers. There is a high level of market
fragmentation. As per ORG IMS Rankings, the top 4
companies Cipla, GSK Pharma, Abbott Healthcare (erstwhile
division of Piramal Healthcare) and Sun Pharma have
maintained their respective positions over the last four years.
Unlisted players like Mankind Pharma and Alkem have
consolidated their last year's positions at No 5 and No. 6,
respectively. Lupin, which is at No. 7 for the second
consecutive year, was earlier at 6th and 5th positions in 2008
and 2009, respectively. Abbott and Zydus Cadila are again
shuttling between 8th and 9th positions. Ahmedabad-based
Intas, another unlisted company, has made its entry into the
league of top ten companies.
Rank Company Year
endedMay2011
Rank Company Year
endedMay2011
1 Cipla 11.3 6 Alkem 17.6
2 GSKPharma
10 7 Lupin 12.5
3 AbbottHealthcare
7.4 8 Abbott 24.6
4 SunPharma
15.5 9 ZydusCadila
15.3
5 Mankind 27.2 10 Intas 30.2
Industry Consolidation
Merger activity has been intense within the industry in the
last decade. Analysts believe that three firms;
GlaxoSmithKline, Bristol-Myers Squibb and Merck are likely
candidates to be directly involved in the next round of
industry consolidation.
Science and Innovation
Over the last decade the knowledge base of thepharmaceutical sciences has changed dramatically and
continues to change rapidly. As new technologies and bodies
of scientific knowledge emerge, whole new set of
opportunities and threats are being introduced. Over the last
decade, we have seen this happen as companies that were not
very effective in research and new product development were
acquired.
Increased Competition
The industry has seen a legion of new market entrant
increased competition among key players and industry
consolidation. Competitive advantage within the industry is
being constantly redefined and to maintain their presence
key industry players are being forced to revamp their
organisational structure, overcome huge barriers in R&D andclinical trials.
Changing Consumer Profile
Consumers are now better informed and there are
expectations on the industry to show that their products
deliver better health and greater economic value. In the past
decades governments were either the sole or major
purchasers but the current trend shows that healthcare
industry is now driven by insurance companies and
individuals. The increasing price sensitivity of the consumer
and financial muscle of health insurance companies is forcingfirms in the industry to cut product