View
218
Download
1
Embed Size (px)
DESCRIPTION
This Quarterly Issue of IIFT's Business & Finance magazine. This is the Budgetary edition
Citation preview
InFINeeti | Budget Issue | March 2014
InFINeeti | Budget Issue | March 2014
InFINeeti | Budget Issue | March 2014
Dear Friends,
Greeting from Team InFINeeti…
It has indeed being an interesting year till now! With election results to be declared in the latter half of May, we enter the finan
cial year with high hopes and expectations. Our usual budgetary edition has been modified to give special emphasis on the Interim
budget, so presented by the outgoing Finance Minister- Mr P Chidambaram. We will be discussing on how relevant an interim
budget is and its implications on the future proceedings. Let us have a peek into the topics we have covered in this edition.
The recent phenomenon of Bitcoins has taken the world for a surprise. Does it have the potential to change the way we deal with
currency or is it just another bubble, waiting for getting burst?
It has been an active time in the World of Mergers & Acquisitions! With the Facebook-WhatsApp deal creating a lot of buzz, back
home, we recently saw Sun Pharma acquiring Ranbaxy- in a $4 billion deal which would make them the 5th largest drug maker in
the world!
The world has always followed the U.S economy closely. Over the years, things have drastically changed, and we will be providing
an analysis on the American Economy from 2014’s perspective.
Inflation has persistently been high from quite some time now and it has eroded the savings at a much faster rate than people
thought it would. So, in order to find ways to protect the savings of common man we have explored the option of inflation in
dexed bonds. We have presented an expert view on this topic.
Education is the burning issue in India right now. There is a visible skills gap seen on the front of primary and secondary education.
In this edition we have presented a comprehensive analysis of The Education Sector.
Also, more than five years have gone by since the financial crisis. So, we have presented the analysis of its implications and what
are the learning’s and takeaways from the crisis- which we should keep in mind to avoid a similar situation in the future.
We have also looked at Argentina’s economic problem from a historical perspective as well as its current problem on the currency
front and tried to understand the Argentine economy in a holistic way.
Besides the insightful articles, the edition also features regular columns like FIN Trivia, FIN-lingos and News Chronicles.
When we will meet for the next time a lot would have changed. A new government would have been formed, a full budget would
have been presented and we would cover all of it in our next edition.
Till then we hope that you will enjoy reading this interim budget edition. Wishing you a very Prosperous and a Happy New FISCAL
Year!
Happy Reading!!!
FROM THE EDITOR’S DESK 3
InFINeeti | Budget Issue | March 2014
CONTENTS 2 CONTENTS 4
>>> Page 8 >>> Page 26 >>> Page 35
America recovers :
A comprehensive analysis of effects of recovery in America
5
Five years of finan-cial crisis: Learning's and Takea-ways
8
Faculty speak— inflation index bonds in India : Recent perspective of IIBs
19
Top events of 2014: Review of important events of 2014
25
Facebook-WhatsApp deal :
Analysis of FB-WhatsApp deal. Whether it is justified at $19 billion or not
26
COVER
STORY
ANALYSIS OF THE
INTERIM BUDGET
“Has it provided the right prescription needed for the ail-
ing economy”
14 The bitcoin bubble:
Contains analysis of
whether bitcoin has a fu-
ture as a alternative to
currencies
32
FIN Trivia
Fin lingos 12
News chronicles 37
39
Sector analysis : education sector
An Analysis of India’s Education sector
35
Regulars
Argentine paradox :
An economic timeline
and the way forward
29
InFINeeti | Budget Issue | March 2014
5
INTRODUCTION
As much the economies of the world bore fruits of the increasing
globalisation and inter-linking of the world economies, so much
have they suffered. The financial crisis of 2008 had a grave im
pact on the economies of the world, most of which haven’t yet
recovered fully from the effects of it. America is at the nucleus of
globalisation. If America defaults, the world economy goes for a
toss. This has been a statistically verified phenomenon and eve
ryone felt the tremors post the financial crisis of 2008. But an
other dimension which has emerged lately out of the recent
recovery of US is that if America recovers from the cold, the
world sneezes frantically. Let’s explore this statement and see
how the economic recovery of US off late has been affecting the
economies of other countries.
EFFECTS OF US RECOVERY
US accounted for ~13% of the world’s imports in 2012. America
also ranks second in world’s exports, accounting for 8.56% of the
world’s total exports next only to China which accounts for
11.35% of world’s imports. However, the main figure for our
concern is US imports. US is the largest importer in the world.
Let’s take a look at some of the figures of US imports over the
last 3 months of US recovery (Oct’13 – Dec’13). Total imports
recorded an 11.3% drop between October 2013 and December
2013.
Many factors have contributed to this reduction in imports by
US. One of the most important factors is US dependence on en
ergy resources. Shale gas resources have reduced the energy
requirements for US and hence the fund freed up from import of
crude oil and gas can now be utilised to give a thrust to the local
manufacturing industries. This is making US more of a competi
tor rather than a consumer of imported goods. The new-look
America is focused on greater demand and production at home
and taps more of its own energy, paring the need to buy over
seas.
A 1 percentage point pickup in US GDP growth typically meant a
0.4 point spillover for the rest of the world. These statistics
alone indicate to loss in world GDP is America’s gain.
Another major reason leading to a slowdown is the withdrawing
of monetary stimulus by the US FED on accounts of the picking
up of the US economy and as a consequence of which currency
depreciation of other developing countries. FII investors have
started taking out money they had invested in the emerging
economies resulting into depreciation in currency for these
countries.
Many Asian countries during this period of post FY2008 till date
had increased their External Commercial Borrowings due to
cheaper interest rates in the developed economies especially
the United States. Hence, many Indian conglomerates found it
favourable to raise loans in US rather than domestically. Now,
when US gets back on the track to recovery, US currency will
appreciate which could very well mean an increase in dollar de-
WHEN AMERICA SNEEZES; THE WORLD CATCHES A COLD.
IT’S A THING OF THE PAST. NOW “THE WORLD CATCHES A COLD
WHEN AMERICA RECOVERS FROM IT”.
BY-GAUTAM BABBAR
IIFT, DELHI
Oct-13 Nov-13 Dec-13
World 2118,27,33 1934,99,556 1873,02,60
India 38,42,865 29,67,370 31,36,656
China 437,35,242 417,72,404 390,81,551
Japan 121,56,430 119,37,880 115,42,915
Germany 111,40,064 105,99,657 97,17,847
US Imports from different countries
Source : Trademaps
InFINeeti | Budget Issue | March 2014
6
nominated interest payments to US thus, leading to lower reali
sations in profit for Indian or Asian companies at large.
EFFECT OF US RECOVERY ON EQUITY MARKETS
Let’s now take a look at the effect of US recovery on equity mar
kets of mainly the developing economies. Indian equity market
indexes have had a positive correlation with the FII inflows.
The given table shows the net FII inflow in the past 1 year and
the graph shows the performance of BSE Sensex over the same
duration. We can clearly see that the negative inflow during the
months of Jun-13, Jul’13 and Aug’13 clearly led to fall in BSE
Sensex whereas positive inflows during the latter part of the year
have raised the index. Thus, strengthening US equity markets
will lead to greater investments in US due to increase in returns
and shielding from currency exchange rate fluctuations. This
would clearly mean a weakening equity markets of developing
countries.
However, different side of the coin is if America recovers, the
spending power of middle class consumers will rise due to an
increase in employment. The effect of this would be more im
ports for the American economy which would lead to a gain in
world’s GDP. For India in particular, US is one country with
whom we have had a trade surplus in the past and continue to
enjoy it. Increasing demand among US consumers will lead to an
increase in India’s exports thus leading to an improvement in
Current Account Deficit as well as a favourable Rupee against
Dollar.
The net effect can only be determined by the Growing invest
ments in US economy vis-à-vis growth in imports from other
countries. The trade ratio for America if decreases, and the do
mestic demand is met by domestic production, American econo
my will reduce its dependence on the foreign markets.
Month Net Investment(Cr)
Jan-14 714.3
Feb-14 1,404.30
Mar-14 20,077.20
Dec-13 16,085.80
Nov-13 8,116.10
Oct-13 15,706.20
Sep-13 13,057.80
Aug-13 -5,922.50
Jul-13 -6,253.30
Jun-13 -11,026.90
May-13 22,168.60
Apr-13 5,414.10
Mar-13 9,124.30
InFINeeti | Budget Issue | March 2014
This will definitely give a boost to the domestic industry and
would result in a favourable Return on total assets (RoTA).
Domestic firms rather than going for acquisitions or subsidiaries
abroad will prefer investing locally resulting in a net increase in
FDI inflow as compared to previous years. A lot depends on the
policies drafted by the US government to boost the domestic
industry in the past. For example, we saw in Obama administra
tion, the tax cuts being given to firms which had their operations
in US and increase taxes to firms outsourcing their operations.
This led to many countries suffering due to decreased outsourc
ing by US companies.
CONCLUSION
Analysing both the scenarios, we can safely assume that the net
effect on the world economy might be detrimental but surely
would not lead to another parallel crisis. The world does not
have to worry so much about it in the near future!
7
InFINeeti | Budget Issue | March 2014
ABSTRACT
This article maps the 2008 financial crisis in terms of its causes,
effects and recent regulatory interventions that it has entailed.
Looking at these aspects, we gain insights into five key learnings
from the crisis that involve incentive dynamics, policy, regula
tion, risks, and globalisation.
INTRODUCTION
The events leading up to the fall of Lehman Brothers show us
how over-speculation in financial markets, combined with be
havioural failings like risk-taking, greed of individuals and of be
hemoth financial institutions, amplified by confusing overlaps
and perilous gaps in regulation, globalisation and inter-linkages
among economies, have led to one of the greatest financial cri
sis of all times.
Almost over five years after the crisis, we have ample opportuni
ty to look at what can we learn from it and what should be our
takeaways for the future. However, let us first take a broader
view into what led to the credit crisis and what were its implica
tions. This is an important step which will help us in identifying
red flags in the system, and ensuring that these are prevented in
the future.
The lull before the storm – the universal principle of
cause and effect
We are aware that the 2008 financial crisis was exemplified by
the fall of Lehman Brothers, housing bubble burst in the US
while many banks and financial institutions went bankrupt.
However, these were just effects of causes that had been in the
making for years.
Expansionary monitory policy and capital market regulation:
Federal bank reduced the interest rates drastically after dotcom
crash to boost the economy; it had come down to 1% in 2004.
This made the credit cheaper, hence, led to creation of securi
ties based on sub-prime mortgages. These sub-prime securities
had high interest rates, higher risks and lesser supervision. Vari
ous institutions like Fannie Mae and Freddie Mac opened up to
sell these securities. Muni and Kothari (2006) report that the
proportion of full documentation loans declined from 81 per
cent in 2002 to 69 percent in 2005. Hence, the investments in
these securities increased and this process slowly led to this
bubble.
In the regulatory environment, one of the major changes was
the replacement of Glass-Steagall Act of 1933 by the Gramm-
Leach-Biley Act of 1999, which allowed banks to offer commer
cial , investment banking and insurance services under one intu
ition.
MAPPING THE FINANCIAL CRISIS :
LEARNING’S & TAKEAWAYS
-By Anuradha Dhote & Usha Bhakuni
IIM, Kozhikode
8
InFINeeti | Budget Issue | March 2014
This created complex financial instruments and led to greater
interdependency in the market. The American Dream Down
Payment Act of 2003 allowed $200mn to be paid annually as
assistance to low income people and increase the loan limit for
the first time house buyers. While these acts were meant to
make it easier for people to own homes, it led banks to extend
loans to people with less credit-worthiness. The BASEL II Stand
ards of 2004 reduced the capital adequacy ratio requirements
for banks, which enhanced the risk taking behaviour. Also, the
hedge funds were made self-regulated by the Securities and
Exchange Commission (SEC) and there was no restriction on the
amount of money that these could borrow.
While government policies and regulations created a platform
for the crisis, the high executive compensations and financial
innovations were the individual and organizational incentives
that set the wheel rolling. Executive incentive schemes may
award bonuses in the short-term, which emphasize immediate
revenue-generation and eventually, lead executives to ignore
risks that become apparent only later. The securitization of sub-
prime mortgages, and the “financial alchemy”, that was used
by Lehman Brothers and other investment banks to project
themselves to be financially healthy - contributed in the build-
up to the crisis. We saw increased financial leverage of banks,
mostly consisting of bad assets pile up and bad credit. The pan
icked depositors withdrew money in huge volumes, further
leading to a liquidity crunch in the system.
CHANGES IN FINANCIAL INDUSTRY AND REGULA TORY
LANDSCAPE
There has been significant discussion over causes and learning
from the crisis, and various government interventions have
been introduced, that range from bailouts that prevent a col
lapse of the financial system in the short term, to international
conferences and regulatory interventions that aim towards
preventing such crisis in the long term.
The $700 billion troubled assets release program (TARP) that
offered to buy mortgage backed securities (CMOs) and equity
from the banks in order to increase their lending power and
Quantitative Easing stimulus that purchased $85 Billion of fixed
income securities per month. These measures spark a rally in
financial markets and higher money supply drives the growth
engine, but these are hardly sustainable in the long term.
An ongoing set of reforms aimed towards addressing regulatory
system’s weaknesses that caused the crisis include a set of new
banking standards, the so-called Basel III framework which rais
es minimum capital requirement for the banks, gives a wider
risk coverage and a counter cyclical buffer to limit excessive
credit growth. The Dodd-Frank Wall Street Reform and Con
sumer Protection Act established government agencies like
Financial Stability Oversight Council, which monitors perfor
mance of companies in order to prevent a large scale economic
crisis, while Consumer Financial Protection Bureau (CFPB)
9
InFINeeti | Budget Issue | March 2014
10
prevents predatory mortgage lending. Each country and area
has also initiated reworking of its legislative framework for fi
nancial activities, for e.g. setting up of institutions which moni
tor systemic risk.
LEARNING FROM THE CRISIS - AND WHAT REMAINS
UNADDRESSED?
Let us try to dig a level deeper and conceptualize some com
mon themes around the crisis. This will help us in identifying
the threads and unaddressed issues that that run between vari
ous causes and implications of the crisis.
Banks re-packaged risk from sub-prime mortgages into instru
ments called collateralized debt obligations (CDOs), which were
marketed to investors as high yielding bond investments. The
credit rating agencies failed to take notice and gave these in
vestments a high rating in exchange for a fee from the banks.
The incorrect application of these products led to the crisis.
While traditionally, risks are diversified, selling these risks to
hedge funds consolidated the risk. As such, the 2008 financial
crisis also have valuable risk management perspectives.
Organizations are aware that they can win business from com
peting organizations by condoning misrepresentation of repu
tation and documents of prospective clients. While commis
sions to agents are paid upfront, the managers feel that they
are compromising short term revenue of the firm by not being
a party to questionable deals. This creates a chain of incentive
conflicts in the financial and regulatory system. Such inceptive
conflicts lead to greater moral hazards. Investor education,
transparency, and information asymmetry in financial transac
tions also have a major role to play. So, what has been our
learning from this crisis?
Lesson one: Lack of regulation and over-regulation need to give
way for smarter and dynamic regulation. The financial crisis
makes a legitimate case for tighter norms that reduce regulato
ry arbitrage. However, financial regulation also imposes costs
on the economy and may exacerbate the effects of the crisis.
Hence, we need a dynamic approach to regulation that stands
ground, especially when markets fail.
Lesson two: Dealing with creation of crisis management and
resolution mechanism, especially for large banks that pose sys-
temic risk. This step is crucial to address failure of banks classi
fied as “Too Big To Fail” (TBFT). The government bails out these
banks as because of their sheet size, they pose a systemic risk
for the entire financial system. However, bailing out such banks
InFINeeti | Budget Issue | March 2014
will only create more moral hazard as creditors and owners of
these banks will have no incentives to avoid excessive risk tak
ing.
Lesson three: Incentives trump regulation. Interest conflicts
should be resolved and incentives that support systemic stabil
ity, discourage excessive risk taking and lessen moral hazard,
should be encouraged.
Lesson four: Past does not predict the future. Why did large
financial institutions bet so heavily on rising prices in the real
estate market? Treasury secretary Hank Paulson said that they
looked at data since 1945, and concluded that house prices
couldn’t go down. Traditional, backward looking risk measures
based on returns from spreadsheet averages failed to predict
the crisis. Typically crises happen in times of economic boom,
coupled with regulatory oversight and with everyone willing to
jump on bandwagon, fuelling the trend and hoping to jump off
before the bubble burst.
Lesson five: Don’t turn back on globalisation. Financial and
trade links between global economies led to the spread of the
crisis across borders, however, it wasn’t a root cause for the
same. What is entails is global standardisation of accounting
standards, stronger nationa and sectoral regulators and inter
national cooperation.
OPPORTUNITY AMIDST DIFFICULTY
More than five years after the crisis, it is important that we
learn from the past and work towards better policy implica
tions, regulatory interventions, and changes in the way a finan
cial system operates, so that crises of such a scale could be pre
vented in the future. The 2008 financial crisis has given all
stakeholders, including governments, regulators, financial insti
tutions and investors an opportunity to rethink the idea of capi
tal markets. It is time that we make the most of it.
11
InFINeeti | Budget Issue | March 2014
12
AC-DC Option
A derivative that gives an inves
tor the right - but not the obliga
tion - to buy (call) or sell (put) a security at a certain
price (strike), and in which the investor makes the buy
or sell decision at a specific time after the option is in
force, rather than at the time of purchase. The AC-DC
option is basically an option, which on a future date can
become a call or put option at the buyer's discretion.
Abusive tax shelters
An investment scheme that
claims to reduce income tax with
out changing the value of the us
er's income or assets. Abusive tax
shelters serve no economic purpose other than lower
ing the federal or state tax owed when filing. Often,
these schemes channel funds through trusts or partner
ships to avoid taxation.
Accounting Hall Of Fame
A prominent award in the field of
accounting. The Accounting Hall of Fame was started by
Ohio State University in 1950. The award is highly selec
tive, and is given only to very prominent accountants
who have made "lasting contributions to the field."
Balloon Option
An option contract where the
strike price increases significantly
after the underlying asset's price reaches a predeter
mined threshold. A balloon option increases the in
vestor's leverage on the underlying asset
Killer Bees
The merger and acquisition boom of the
late 1980s forced companies to develop
strategies to thwart would-be takeovers.
Killer bees, named for the insect that ag
gressively swarms and overpowers its victims with hun
dreds of stings, act aggressively on behalf of a firm that
is under the threat of an unfriendly or hostile takeover.
The killer bee may employ tactics such as making the
target company less attractive or more difficult to ac
quire.
Kiwi Bond
Retail stock offered directly to the public
and available only to New Zealand resi
dents. Application forms and investment statements
are available from the new Zealand Debt Management
Office (NZDMO) Registry, as well as some registered
banks, NZX firms, NZX brokers, chartered accountant,
solicitors, investment advisors and investment brokers.
Pirate Bank
A type of offshore savings account used
by a wealthy individual to hide assets,
typically to evade taxes and/or commit
illegal acts such as money laundering. A pirate bank is
different from a traditional offshore account in that it
uses advanced technology to make it more difficult to
track down the account. The account may also be un
numbered and have a chain of ownership that is diffi
cult to trace.
Fin Lingo
InFINeeti | Budget Issue | March 2014
Saber Currency
A proposed Brazilian currency that
would be handed out by the Min
istry of Education to 7-year-olds to
be redeemed only for university
tuition. Saber currency is a complementary currency
that was proposed by Bernard Lietaer to help Brazilian
schools offer more educational opportunities, regard
less of a lack of available funds. A type of educational
voucher, the Saber is intended to facilitate more learn
ing opportunities for a larger number of students, with
out adding any new financial pressures to the economy.
The planned Saber currency has three capacities:
The Ministry of Education allocates Sabers to the
youngest students (for example, 7-year-olds) in
schools in economically disadvantaged areas. The
young students must choose an older student (10
years old, for instance) as a mentor, and pays the
mentor with the Sabers. The 10-year-old then does
the same, finding an older student to mentor him
or her. Down the line, 17 year olds will have collect
ed the Sabers to be used towards university tuition.
Redeemed Sabers are reallocated to young stu
dents.
Children or adults who help elderly or handicapped
individuals can also earn Sabers.
Certain laborers could elect to be paid in the stand
ard pay for the job, or at a reduced pay plus addi
tional Sabers, an incentive for parents of children
planning on attending university
Wall of Worry
The financial markets' periodic tendency to surmount a
host of negative factors and keep ascending. Wall of
worry is generally used in connection with the stock
markets, referring to their resilience when running into
a temporary stumbling block, rather than a permanent
impediment to a market advance.
Ghosting
An illegal practice whereby two or more
market makers collectively attempt to
influence and change the price of a
stock. Ghosting is used by corrupt companies to affect
stock prices so they can profit from the price move
ment.
Dash-to-Trash
When investors flock to a class of securi
ties or other assets, bidding up prices to
beyond what can be justified by valuation
or other fundamental measures. While the
dash-to-trash effect can occur within any type of securi
ty, the phrase is typically used to describe low-quality
stocks and high-yield bonds, both of which can be sub
ject to periods of overbuying in the markets.
Fin Lingo
13
InFINeeti | Budget Issue | March 2014
COVER STORY 14
ANALYSIS OF THE
INTERIM BUDGET
“Has it provided the right pre-scription needed for the ailing
Indian economy?”
InFINeeti | Budget Issue | March 2014
COVER STORY 15
WHAT IS INTERIM BUDGET?
The budget of a government that is going through a transition
period is known as national interim budget. Practice of inter
im budget is very common in most of the democracies, since
the fiscal priorities of coming government may differ from
the existing government, the duration of the budget is cut
shot and a new budget is created afterwards. The duration of
interim budget may spread up to one month, one quarter or
more, depending upon the length of the transition period
required by the new and old government, but the duration
cannot exceed the upper cap of one year. This budget is cre
ated out of necessity, so that government can function during
the transition period.CD Deshmukh on February 29, 1952
presented the first interim budget of independent India.
WHAT IS VOTE ON ACCOUNT?
According to the Article 266 of the Indian Constitution “to
draw money from the consolidated fund of India, govern
ment requires parliamentary approval” and article 144(3)
states that “withdrawal of funds from consolidated fund re
quires enactment of law and this should be done through an
appropriation bill”. The process of presenting the budget,
discussing it, presenting the finance bill and appropriation bill
requires long time. To address this, a provision has been
made in the constitution which empowers Lok Sabha to make
grants in advance through ‘Vote on account’. In a normal year
‘Vote on account’ is taken for two months which allows the
government to spend the one sixth of the total planned ex
penditure of the fiscal year. However in election years the
duration of the ‘Vote on account’ may increase. First VOA in
India was presented in year 1952-53. Since then there are 12
in total VOAs have been presented; six by the outgoing gov
ernment(In remaining 6 cases government decided to go for
election immediately after or before the end of financial
year) and six by the new government as they did not have
enough time to present a full budget.
DIFFERENCE BETWEEN VOTE ON ACCOUNT AND BUDGET
The main different between the Vote on account and Budget
is, VOA deals only with the expenditure side of the govern
ment, on the other hand a budget deals with both expendi
ture and revenue collection side of the government.
VOA cannot alter the structure of direct taxes as this requires
parliamentary approval through finance bill. The government
in its interim budget may alter indirect tax structures without
parliamentary approval, through a notification. In 2004, just
before the dissolution of National Democratic alliance,
BY– ROSHAN KHATRI
-IIFT, KOLKATA
InFINeeti | Budget Issue | March 2014
COVER STORY
finance minister Jaswant Singh announced series of indirect tax
cuts on the eve of VOA. In case of normal union budget govern
ment can alter both direct and indirect tax structure.
SIGNIFICANCE OF VOTE ON ACCOUNT
The technical significance of VOA is; current government
gets access to funds before the full budget is passed. In the
election year it signifies that it is the prerogative of newly elect
ed government to prioritize its earning and spending, and it
cannot be burdened by the previous government’s expendi
ture.
Many experts look Vote on account as an election rhetoric.
The government through VOA highlights its achievements just
ahead of elections, as the voter reward the work done by gov
ernment in the first four years.
INDIA VOTE-ON-ACCOUNT/INTERIM BUDGET 2014
On February 17, 2014 incumbent finance minister
Palaniappan Chidambaram presented the interim budget for
fiscal year 2014-15. It was his 9th such exercise, just one short of
the magic number of ten budgets presented by Morarji Desai.
On expected lines, Finance minister discussed about the
achievement of his government over the last two terms, and
there was no change in the direct tax structure. Apart from
counting the achievements of his government in his speech; he
also discussed (in great details) about the issues concerning the
growth of Indian economy such as infrastructure, manufactur
ing, power, foreign trade and foreign direct investment. Below
are the key highlights on the score card of the government and
interim budget.
ECONOMIC INDICATORS
GDP Growth likely to be less than 5 percent in 2013-14: The
financial year started with decadal low growth rate of 4.5 per
cent in Q1 2014.Growth rate improved in the second half of the
year with improving macroeconomic factors such as easing in
flation, increasing exports and decreasing current account defi
cit. Some announcement such as curbing the gold import, re
laxed external commercial borrowing norms and increased FDI
in sectors such as Insurance, Aviation and Retail also had some
positive impact. The major concern was lack of change in the
credit ratings despite slew of reforms announced by the gov
ernment. The reformed announced by the government were
insufficient to bring the Indian growth story back to the 8 per
cent growth trajectory. High interest rates (despite of easing
inflation), depreciating currency, uncertainty pertaining to the
result of the general election have derailed the recovery of the
Indian economy.
SECTORAL GROWTH: Different sectors of the Indian economy
presented a mix bag of performance. Agriculture sector outper
formed the growth in Q2 2014 with record growth of 4.7 per
cent pertaining to good monsoon .Manufacturing sector growth
contracted in Q1 2014 because of very high interest rates and
low investment. Service sector maintained its growth rate of
6.6 percent in Q1 2014, while it decelerated in Q2 2014 be
cause of slow demand in social and personal services.
INDIRECT TAX PROPOSALS: On the expected lines, finance min
ister announced some changes in the indirect tax such as excise
and customs.
EXCISE: Largely the excise duties remained same; however
there are some changes which will benefit the common man.
Excise duty on equipment, appliances and machineries
has been reduced from 12 per cent to 10 per cent. This
will benefit consumer durable segment such as CD, DVD,
washing machine personal computer set top box and
capital goods such as electric motors, printing devices
and generators. The concession will be available from
17th Feb 2014 to 30th June 2014
Imported cellphones and smart phones now cost more.
According to the revised duty structure all imported
handsets will attract duty of 6 per cent. Earlier the duty
was calculated on recommended selling price (RSP). For
RSP greater than 2000, excise duty was six percent and
for RSP below 2000 it was only one percent.
Depending upon the nature and configuration of the motor
vehicle the excise duty has been reduced, this reduction varies
16
InFINeeti | Budget Issue | March 2014
COVER STORY 17
from 3 to 6 percent. Refer the table below.
CUSTOMS AND SERVICE TAX: Service tax remained unchanged
at 12 percent. There are some minor changes in the basic cus
tom duties (BCD).BCD on import of non-edible grade industrial
oil used in soaps manufacturing and fatty alcohol and acid man
ufacturing has been reduced to 7.5 percent from existing 10 to
20 percent.
AAM AADMI AND INTERIM BUDGET: Like any other budget
announcement, common man had lots of expectation from the
interim budget. Being election budget expectations were even
higher. Let us evaluate the gain and loss of the common man.
EDUCATION LOAN: Student who took education loans before
March 31, 2009 and owed interest on it have reasons to cheer.
Interest on their loans it till December 31, 2013 has been waived
by the government. Government has set aside sum of $419 mil
lion for this scheme and this is going to benefit around 90000
students.
VEHICLES: Finance minister addressed the concern of both auto
mobile sector and growing numbers of vehicle owners. Reduc
tion in the excise duty on car, scooters, trucks, motorcycles and
sport utility vehicles is a much needed relief to the ailing auto
sector of the country. Reduced excise duty will indeed benefit
the new buyers.
CELL PHONES: The revised duty structure is a mix bag. On one
hand this will increase the cost of imported hand sets and on the
other hand it will provide much needed boost to the domestic
mobile manufacturing industry. This move will encourage large
multinationals to think about India as potential manufacturing
InFINeeti | Budget Issue | March 2014
COVER STORY
destination.
DEFENSE PERSONNEL: Contrary to the opinions, finance minis
ter raised the outlay by 10% percent to $36 billion. Government
addressed the much awaited “One-rank one pension” clause.
The defense personnel will now get the pension on the basis of
their ranks at the time of retirement, regardless of time of re
tirement. The increase allocation will be spent of modernization
of army and pension disbursement.
FINAL WORDS: Known for his political and financial acumen,
finance minister Palaniappan Chidambaram presented a bal
anced interim budget. He successfully balanced the pressure of
election budget and concerns of fiscal consolidation. Unlike
2009 budget, he avoided big soaps to voters and at the same
time he lured the first time voters by education loan interest
waiver (as the number of first time voters is highest in this gen
eral election). To address the concern of the slowing growth
rate, India needs balanced and growth promising union budgets
in coming years. The responsibility lies on the shoulders of up
coming government to continue the path of fiscal consolidation
and promote growth prone policies.
Goods Existing Excise Duty Proposed Excise Duty
Motor vehicles of engine capacity exceeding
1500 cc, popularly known as SUVs including
utility vehicles. 30 per cent 24 per cent
Small cars, Motor Cycle, Scooters, commer
cial vehicles, trailers 12 per cent 8 per cent
Large segment car 27 per cent 24 per cent
Mid segment car 24 per cent 20 per cent
Hybrid Motor Vehicle 12 per cent 8 per cent
Three wheeled vehicles for transport of not
more than seven persons 12 per cent 8 per cent
18
InFINeeti | Budget Issue | March 2014
INTRDUCTION
RBI has been talking about introducing Inflation Indexed Bonds
(IIBs) in India for quite some time now. An earlier version called
Capital Indexed Bond with original maturity of 5 years with in
dexation of capital only was issued in 1997. Since then, no fur
ther issue of inflation-protected government debt has been
made in India. However, an initiative was taken by the RBI and/
or Ministry of Finance by way of a discussion paper for re-
introducing IIBs in 2004. It was understood that the authorities
decided against such a move, and if the proof of pudding is in
eating, the pudding was never served on the table (till date).
After India witnessed a phase of unusually high inflation over
the last few years (along with slowing growth) that succeeded a
period of about five years of unusually high growth rates (2003 –
08), the media have reported several statements of intent by
RBI officials to issue inflation-indexed government bond (IIGB) in
India in recent past. This is also in line with global experience of
the last sixty-odd years wherein most countries (including the
UK) have introduced IIGB for the first time following period(s) of
high inflation.
STRUCTURE OF AN IIB
An IIB links the payment of either interest, or principal, or both
to a pre-determined index of inflation while determining the
nominal cash flows to the holders of such bonds. If both coupon
(interest) and principal are indexed, or if only coupon is indexed,
a real rate of return (real coupon) is announced (or determined
INFLATION INDEXED BONDS
IN INDIA : RECENT PERSPEC-
TIVE
BY– TRIPTENDU PRAKASH-
GHOSH
ASSISTANT PROFESSOR, IIFT
19
InFINeeti | Budget Issue | March 2014
through auction) at the time of issue, and investors receive cou
pons calculated as the real rate plus the reported (known) infla
tion of immediate preceding period, while the principal gets
notionally increased by the rate of inflation (in case principal is
also indexed). The indexed principal is returned to the bond-
holder at the time of maturity. It is also possible to have an IIB
with indexation of principal only, in which case the announced
coupon determines the fixed interest payment to the holders
during the tenure of the bond, with protection of real purchase
price (or face value).
IIBS IN OTHER COUNTRIES
In modern times, Finland introduced inflation indexed bonds for
the first time in 1945. High-inflation Latin American countries
introduced such bonds in the 1960s. Among the more developed
countries, UK introduced government IIBs in 1981 (though non-
tradable IIBs for retail investors were issued since 1975), with US
being the latest entrant in this arena in 1997 (see table).
TABLE: INTRODUCTION OF IIBS ACROSS THE WORLD
CAN NON-GOVERNMENT PLAYERS ISSUE IIBS?
Though there have been instances of IIBs issued by private play
ers in the past, most such issues had prices of specific commodi
ties or services (like oil, metals, electricity) as the basis for index
ation (instead of an overall price index – wholesale or retail).
This is precisely because the revenue of a commodity-firm is tied
to the price of that commodity (or service), enabling it to service
a higher interest/ capital outgo when commodity prices rise.
Such a firm is obviously not in a position to issue an IIB indexed
to an overall price index simply because it doesn’t have any con
trol over the prices of a vast range of products. Only the govern
ment (including the monetary and fiscal authorities) has control
ling power over inflation. Thus the sovereign government of a
country alone is in a position to issue IIBs with indexation tied to
an overall price index.
INDEXATION LAG – CANADA MODEL
UK launched its first issue of inflation-indexed public debt in
1981, with an indexation lag of eight months – 2 months for
reporting lag and six months for institutional lag. Reporting lag
refers to the time gap between when price data are collected
from markets (say June 15) and when the same is made public
(August 15, if lag is 2 months). Structural or institutional lag re
fers to the lag arising out of the practical requirement that trad
ers must know on or before an interest-payment (IP) date what
will be the exact compensation (calculation of accrued interest
and/or indexed principal) for any of the trading days till the next
IP date. Since most govt. debt pays interest semi-annually, this
lag is usually six months.
Canada came out with an alternative structure of indexation
resulting into a shorter (3M) lag in 1991. This has since become
the standard across countries, with UK debt management office
(DMO) shifting to this model in July 2005. Currently, most coun
tries issuing IIGB follow this model.
CHOICE OF INFLATION INDEX
Issuers of IIB will attempt to match assets with liabilities. That’s
why a private player cannot issue IIB tied to an overall price in
dex. A Sovereign Government is in a position to issue IIGBs
Country Year of Introduction
Finland 1945
Israel 1955
Iceland 1955
Brazil 1964
Chile 1966
Colombia 1967
Argentina 1972
UK 1981
Australia 1985
Mexico 1989
Canada 1991
Sweden 1994
New Zealand 1995
US 1997
20
InFINeeti | Budget Issue | March 2014
tied to an overall price index due to two factors. First, its tax
revenues are also tied to overall prices (through direct and indi
rect taxes). Second, the government (combination of fiscal and
monetary authorities) has (at least some) power to control over
all inflation.
On the other hand, more investors will buy such bonds the more
the price index chosen match with inflation of the basket of
products they consume. That’s why most countries have chosen
indices of consumer or retail prices as the basis of inflation in
dexation for the IIGBs, even when the bonds are auctioned to
institutional investors. Wholesale prices involve a shorter re
porting lag than retail/ consumer prices in India. However, if
wholesale prices are chosen as basis for an IIB, only supply side
will be taken care of. It is everybody’s knowledge that retail pric
es consistently diverge from wholesale prices in India.
BENEFITS OF IIGBS
There exist at least two benefits to a sovereign government issu
ing IIGB. First, while the yield of a nominal coupon bond is deter
mined through an auction process, the bidders (investors) factor
in an expected inflation into the yield they demand. Investors
are also aware that actual inflation may differ from the expected
inflation, and they seek a premium for this risk. Inflation indexed
bond precisely avoid this risk premium. John Y. Campbell and
Robert J. Shiller estimated the size of this risk premium to be
about 50 basis points for the US economy (before US introduced
IIGB). Size of this risk premium is most likely to be higher in In
dia, as inflation volatility in India is much higher than that of the
US. Thus, IIGB is likely to reduce the cost of government borrow
ing by at least 50 basis points (bips).
Second, almost all countries that issue IIGB also issue nominal
bonds. Yields on both types of bonds are determined through
auction. A simple comparison of market-determined auction
yields on the two types of bonds will help the government
(monetary and fiscal) authorities to reliably estimate the infla
tion expectation of economic agents, which is not possible in the
absence of any issuance of IIGB. Being able to obtain accurate
estimates of inflation expectations of economic agents on a con
tinuous basis is a great advantage for both the monetary and
fiscal authorities, sharply enhancing the efficacy of their respec
tive policy instruments.
From the point of view of investors, IIB offers a near perfect
hedge against inflation, inducing greater flow of savings into
financial assets (IIBs), and thereby at least partially reducing de
mand for gold especially in times of high inflation, when real
rates offered by nominal bonds (and bank FDs) turn negative..
IIGBS AND TAXATION ISSUES
Taxation of indexed interest makes post-tax yield uncertain – in
fact it re-introduces the inflation risk. For a person facing 30%
21
InFINeeti | Budget Issue | March 2014
22
% tax bracket, with real return of 4% and inflation of 11%
(nominal return 15%), the post-tax yield will be 10.5%
(=0.7*15%), thereby making the total nominal yield lower by 50
basis points lower than the rate of inflation (i.e., ─0.5% real rate
of return). However, if the actual inflation turns out to be 7%
instead, the post-tax yield (30% bracket) will be 7.7% (=
0.7*11%), making realized real yield of 0.7% (rather than 4% real
coupon on the IIB in this example). Thus, not only the inflation
uncertainty is re-introduced back due to taxation of interest in
case of IIGBs, the realized real yield can be negative for investors
in highest tax brackets especially during times of high inflation.
This implies that IIGBs are likely to be more attractive to individ
ual investors in the zero or lower tax brackets, as well as institu
tional investors (e.g., pension funds) which enjoy special tax ex
emption on interest income from such bonds by virtue of the
nature of their business.
Most countries treat increase in principal due to inflation as tax
able income, apart from the indexed interest. This is in line with
the principle of taxing interest income of a conventional bond
and taxing capital gains. However, to what extent the increase in
capital (face value) due to inflation indexation should be consid
ered as capital gains for taxation purpose is doubtful, simply be
cause such capital gains are not real.
Besides, chances of IIGBs reducing gold demand in India are ra
ther small since post-tax yield is not only uncertain, but even
may turn negative in real terms. It is only from the nil or low-tax
bracket population that demand for gold may come down, un
less a tax-free investment limit specifically for IIGBs is introduced
for individuals across income categories (beyond the Rs. 1 lakh
limit).
LIQUIDITY OF IIGB
Secondary market liquidity of IIBs/IIGBs is very poor across coun
tries with decades of experience of this instrument. This is not
surprising. Investors who buy this instrument need inflation pro
tection, whether on asset side or liability side. They are not in
terested in trading gains. Hence, secondary market liquidity of
IIGB will be poor in India, and that should not be construed as a
criticism against IIGB.
PRODUCT DESIGN OF IIGB IN INDIA
RBI has launched two types of IIGBs in 2013 – one for the institu
tional investors, and the other for the retail investors. Here the
product design of the latter will be discussed.
The IIGB for the retail investors has been christened “Inflation-
Indexed National Saving Securities – Cumulative” (IINSS-C). The
interest rate on these bonds will be linked to the consumer price
inflation (CPI). The real component is fixed at 1.5%, and interest
will be computed on half-yearly basis. The bond will not pay any
annual or half-yearly interest, and the entire interest earned by
the bond during its tenure will be paid on maturity. The tenure
of the bond is 10 years, with senior citizens allowed to redeem
the bond after one year, and others after 3 years. In case of early
redemption, investors will be charged a penalty (equal to half of
the coupon payable for the last-half year). Such early redemp
tion is allowed only on coupon payment dates.
The bond is distributed through State Bank of India (along with
its associate banks), all Nationalized banks, three private sector
banks (HDFC Bank, Axis Bank & ICICI Bank), and Stock Holding
Corporation of India. RBI will act as the central depository for the
bond, and the investor will be issued a certificate of holding.
LUKEWARM RESPONSE
While launching the bond in December 2013 (for the retail inves
tors), RBI in consultation with the Government of India, specified
that the bond would remain open for subscription between 23rd
December and 31st December, 2013. By the end of December,
the subscription period was extended to 31st March 2014. It is
clear the response was far less than what was expected at the
time of the launch of the product.
InFINeeti | Budget Issue | March 2014
Not only the subscription period, RBI has also allowed a commis
sion of 0.5% to the banks selling the bond (to the retail inves
tors) in around middle of March 2014. This is in addition to 1%
handling commission that the banks were allowed to begin with.
Finally, on 26th March 2014, RBI has increased the limit of invest
ment by individual investors (including HUF etc.) from Rs. 5 lakh
to Rs. 10 lakh.
All these modifications are clear indication of a near complete
absence of investor interest in the bond.
WHY THE BOND HAS FAILED SO FAR?
In the absence of readily available statistics, one can make some
logical guess about the factors behind such poor investor re
sponse, especially during a period which has witnessed high and
persistent consumer price inflation over years together.
First, distribution is likely to be a factor. A quick search on the
websites (on March 27, 2014) of a few public sector and the
three private sector banks (which are mandated to sell the bond)
reveals an interesting facet. The private sector banks are retail
ing the bond from selected branches (e.g., HDFC bank from 1381
out of 3062 branches, Axis Bank from 219 out of 2225 branches,
ICICI Bank from 1232 out of 3100 branches), while most of the
public sector branches are selling the bond from all branches (a
notable exception is the Corporation Bank, which is selling the
bond from 55 out of 1707 branches). Thus, it appears that the
problem is not due to lack of geographical reach.
\However, the problem is probably due to lack of promotion. A
search into the websites of a few public sector banks reveals
that for most, the information about IINSS-C is very difficult to
find, and for others the information is simply not available. For
all the three private sector banks, information about the instru
ment is easily available (from the Investment section).
Second, the instrument has not been widely publicized in the
media (print or broadcast) by the RBI or Government. Neither
there has been much promotion in the vernacular media. Only a
few articles in the financial press is almost all that have come
through the press. The banks are unlikely to be interested in
promoting the product, in lieu of marketing their own deposit
schemes, in spite of the 1.5% commission. This is simply because
banks will earn about 3% (the net interest margin) of every ru
pee of additional deposits. Consequently, lack of awareness
about the product among the mass along with absence of sales
pitch and effort by banks to sell IINSS-C is very likely be a major
factor.
Third, one aspect of the product design has certainly put off a
significant segment. The retired people without a formal pension
plan would have been the most important target group for such
an instrument from the point of view of old-age income security.
It is inflation that is the biggest enemy to retired people who are
forced to depend on a constant interest income for 15 – 20 years
after retirement. Consequently, the purchasing power of the
post-retirement income comes down with every point of infla
tion each year. An inflation-protected bond is like a god-sent gift
to this class of citizens. But the IINSS-C plans to pay the interest
at the end of the tenure (10 years). No retired person would be
interested in this. Even very few working people will be interest
ed to lock-in the money for 10 years. In fact, a window for sec
ondary market trading could have made the situation better.
This leaves us with the working age population. This population
category is more interested to grow their savings corpus than
protecting the purchasing power of their savings. Regular inter
est payment might have still evinced some interest among them,
because such a bond (with regular interest payment) would have
at least maintained the purchasing power of that portion of their
income that is spent on consumption basket. The cumulative
option has knocked off the segment.
23
InFINeeti | Budget Issue | March 2014
24
A more important factor for the working population is the re
quirement to walk into the branch of a bank to buy this bond.
Had it been available for purchase online through demat ac
counts (the way equities and corporate bonds are purchased and
sold), RBI could have still sold more of these bonds.
Fourth, IINSS-C does not provide indexation benefit to the princi
pal. Consequently, this portion, when received on maturity, will
have a far lower purchasing power. Similar bonds issued by the
US treasury (Treasury Inflation Protected Securities or TIPS) pay
interest on a regular (half-yearly) basis at a fixed rate, but on a
principal that is indexed to inflation. This serves the purpose of
protecting the real value of the principal. This has the additional
possible advantage in India (if allowed by income tax rules) that
real taxable capital gain due to indexation will be nil. This will
also broadly nullify the adverse effects (risks) arising out of taxa
bility of inflation-indexed bonds discussed earlier.
RECOMMENDATION
In the light of the above discussion, the recommendations that
follow are:
The bond should be available round the year, on-tap basis,
with annual limit on individual purchase (as is the case now)
The bond should pay regular half-yearly (indexed) interest
to the investors
Investor should be able to buy this bond online (RBI may
have to involve mutual fund distributors, demat account service
providers, on-line trading platforms, and so on, and design a
mechanism) so that people can buy the bond online
RBI should allow the ability to sell the bond before maturity
to anybody other than the government; this will infuse liquidity,
and will make the bond more attractive to the investors, and a
secondary market may develop.
RBI and the Government of India may think of adopting the US
TIPS model for indexation of capital (along with suitable modifi
cation in taxation rules).
InFINeeti | Budget Issue | March 2014
25
TOP FINANCIAL HAPPENINGS OF 2014
1 Rupee ends below 60/$ after 8 months on 28th March, 2014
2 RBI extends Basel III Capital deadline to March 2019
3 CAD narrowed to $26.9 billion (3.1% of GDP) from $37.9 billion (4.5% of GDP) in the first half of 2012-13
4 SEBI tightens leash on Sahara Group– Subrata Roy jailed for failing to refund Rs 20,000 crore to
investors
5 Facebook acquires Whatsapp for USD 19 million
6 Janet Yellen took over from Ben Bernanke as the new US fed chief
InFINeeti | Budget Issue | March 2014
INTRODUCTION
Iceland, Large Hadron Collider, Hubble Space Telescope, London
Olympics , US Ford Aircraft Carrier. What is the significance of
the above mentioned in the context of discussion. Think for a
minute!!!!.
All of the above are valued much lower than the Facebook
WhatsApp deal. Coco Chanel a famous French designer once
said ““The best things in life are free. The second best things
are very, very expensive.” If you look at the social media cartel,
firms like Facebook, twitter offer their services(their USP) for
free but are the highest valued firms in the world both in mone
tary and usage terms(second best option if you are a competi
tor). With WhatsApp jumping onto this bandwagon we have a
social media behemoth netting a fast-growing, international
user base in the burgeoning global-messaging market, where it
was a marginal player until now. No wonder Zuckerberg had the
chutzpah of acquiring someone who as tech experts say “was
eating his lunch”.
In order to have an unbiased analysis of whether this is a pru
dent or a naïve investment we look at the major stakeholders
and view the deal from their perspectives. By doing so we get a
fair idea of how this deal will affect Facebook, WhatsApp and
more importantly the end user.
THE FACEBOOK PERSPECTIVE: For Facebook this acquisition
makes sense for several strategic reasons, first is opportunities;
Facebook would be able to tap fast growing emerging markets
like Asia, LATAM, Africa where WhatsApp has huge penetration.
Through this, Facebook would be able to diversify its revenue
sources away from US and Canada which now accounts for
nearly 50%.
Secondly after the emergence of messaging apps, especially
WhatsApp, the engagement rate of Facebook started to decline
rapidly. It currently stands at 70% for WhatsApp on a daily basis,
while it’s around 60% for Facebook. This mainly we feel is be
cause of privacy related concerns that users had. Facebook has
effectively plugged the gap with this acquisition.
Third would be that WhatsApp comes with a revenue model
that’s very different from Facebook. Facebook would not toy
around with that model, rather would experiment the same
model for its other ventures.
VALUATION OF WATSAPP-FACEBOOK DEAL FOR $19 BILLION : IS IT
JUSTIFIED?
BY– PRATHEEK PS & ABHIJIT MITRA
FROM– TAPMI
26
InFINeeti | Budget Issue | March 2014
WHATSAPP PERSPECTIVE: Here we feel that WhatsApp can rap
idly move into the voice space by the technological prowess and
the amount of capital that Facebook can use. Presently,
WhatsApp’s discrete growth in connecting consumers on data
networks has not been fully scrutinized and screened by regula
tory bodies internationally. Now with FB's staggering acquisition,
WhatsApp could be now thrown into the spotlight and would
open a few questions on data sharing and its carriage across
networks.
INVESTOR PERSPECTIVE: While the only ever acknowledged
funding to WhatsApp was the $8 million series-A funding led by
Sequoia Capital, not many know the overall funding did add up
to $1.3 billion over the years again led by Sequoia through series
of investments. Corresponding to a stake about 20% in
WhatsApp this is worth $6.4 billion today; which corresponds to
5X return on investment in the company.
However there is a more sinister and ironical angle to this whole
episode. About 10 years back in 2004 Zuckerberg was talking to
venture capitalists about raising money for his new firm Wire
hog. When Sequoia reached out to him, Zuckerberg rejected
their investment on the advice of his friend Sean Parker who had
a bad experience with Sequoia for his startup Plaxo. After all this
was a matter of bad blood.
But it didn’t end there. Zuckerberg being the guy he was inten
tionally turned up late for the meeting with Sequoia in Pajamas
armed with a Powerpoint Deck titled “The Top Ten Reasons You
Should Not Invest”. Of Course Sequoia did not invest in either
Wirehog or Facebook. How ironical would it then be to see the
same firm make a fortune on the Facebook WhatsApp deal for
its Investment?
USER PERSPECTIVE: Although it is a bit early to gauge the impact
of this acquisition, the fact remains that WhatsApp users will
become a part of Facebook whether they like it or not. The is
sue for the 450million WhatsApp users goes well beyond adver
tising. Privacy concerns loom at large over the sharing of their
online conversations and multimedia with Facebook; which in
itself is not a good Samaritan of User Privacy (based on its Histo
ry)
But then this is not Facebook’s first acquisition. In the past it had
acquired Instagram. Similar concerns were raised at that time
too; but Facebook, true to its promise, kept Instagram inde
pendent from Facebook. Such is the independence that the only
way to tell Instagram belongs to the social network is to visit its
help pages.
THE FINANCIAL PERSPECTIVE: IN a lot of ways Facebook has
always emulated Google’s business model, may it be in finding
new streams for revenue generations(e.g.: mobile) or tapping
existing resources for revenue generation (e.g.: focused adver
tising). However unlike Google which achieved a cumulative
eight year CAGR of 30% after its IPO(Facebook’s being 12.5%),
Facebook shares dropped by 43% after its IPO in 2012 from $38
to $18. Hence in order to emulate Google’s growth model Face
book share price must increase from $38 to $302 by 2020.
27
InFINeeti | Budget Issue | March 2014
Assuming that Facebook net profit margins remain the same
at 27%, its revenue must grow from $3.7 billion to $107 bil
lion in 8yrs period.
Regarding its acquisition WhatsApp has about 450 million
users—paying .99 cents per app install, it’s already got $445
million in gross revenue. So Facebook paid 42x total reve
nues. That’s extremely high, but uncommon in the tech
space, where revenues can grow at a high year-over-year rate
for some time. For instance, Facebook itself saw ad revenues
grow by 70% last quarter. A 70% CAGR growth rate sustained
over two years would mean WhatsApp will get annual reve
nues of $715 million in 2016. It would still take Facebook
roughly 27 years for revenues to match its investment—
longer to get its money back.
Another way of looking at this is to then see if we get our
investment back sooner. WhatsApp saw an exponential
growth rate in the past year, effectively doubling its installa
tion base from early 2013 to today. Assuming WhatsApp
grows to have 1 billion users worldwide in five years lets as
sign a dollar value to each user. Every year Facebook in its
annual report, gives an annual revenue per user (ARPU) fig
ure which calculates how much revenue they get per user on
average. Worldwide, Facebook’s ARPU was averaging around
$8.5 in 2013 and grew 39% year over year. Pessimistically
assuming it grows by 10% year over year, we’ll get to $13.8 in
5 years. Annualizing it by multiplying it with user base we get
a revenue figure $13.8 billion.
So given all these perspectives, is the deal still irrational? The
answer is no, not at all! Facebook cannot risk WhatsApp's
450m monthly and 315m daily active users falling into the
hands of a competitor, such as Google. WhatsApp is growing
faster than Facebook, adding more than 1 million users per
day catering to wide range of customers. What makes the
deal even sweeter is the operational efficiency of WhatsApp
and its lean structure. It employs 55 people and hasn’t spent
a penny on advertising.
Businesses now are leveraging on WhatsApp for sales, cus
tomer service, client relationship and internal communica
tion. Therefore, as a separate entity, WhatsApp has a lot of
profitable relevance to companies and brands. Say suppose
WhatsApp decides to open a brand channel and integrate it
with Facebook fan page, this would open up a whole new
tailored communication channel for brands to reach out to
fans on their mobile devices; meaning companies can market
their brands, display promos and even use it as a channel for
customer service with a click of a button. This opens up a new
revenue channel for WhatsApp.
CONCLUSION
Concluding our view, though our forecasts may project a de
layed payback period for Facebook on their investment, the
qualitative view presents significant benefits to Facebook in
the future. All of this will depend on whether Zuckerberg de
cides to keep WhatsApp a separate entity like Instagram and
conform to the initial vision of WhatsApp founders (Jan Kuom
and Brian Acton) which was so strikingly pinned onto their
workstation. “No ads! No Games! No Gimmicks!”.
28
InFINeeti | Budget Issue | March 2014
INTRODUCTION
Argentine economy is in trouble – again. Argentine Peso fell 12%
in a day to 7.8825 per U.S. dollar on 23rd January as Argentina’s
central bank withdrew efforts to support the currency. This was
the biggest decline the currency had seen since its devaluation
in 2002. In fact, it has recently been the worst performing cur
rency in the developing world, having fallen by over 24% since
the appointment of Axel Kicillof as the Minister of Economy in
November last year. The foreign currency reserves have fallen
by more than 30% YoY to $27.85billion which is alarmingly low
for a $475billion economy. Prices have soared sharply with infla
tion rising to 28% for the month of December, according to pri
vate economists. Note that the previous official index which
showed inflation to be 10.9% for the same month had already
lost its relevance since the government’s intervention in 2007
and has been replaced by a new Consumer Price Index unveiled
by the government on February 20.
Though the currency has stabilized since February’s first week,
the investor and consumer sentiments are running low. But how
did it come to this? Yes, there are external factors like US Fed’s
tapering of the monetary stimulus and fears of a slowdown in
China which have taken their toll on other emerging markets
too but what has pushed Argentina to the brink of a balance of
payment crisis is the economic mismanagement of the past cen
tury. But this looming crisis is not a rare oddity for Argentina. A
cursory glance at the economic history of Argentina reveals that
the country has probably seen more economic crises than most.
In fact, since 1975, the country has spent more years in a state
of economic turmoil than in a state of relative prosperity. Ar-
gentina’s unique condition as a country which achieved ad-
vanced development in the early 20th century but experienced
a reversal has been widely studied and even has a term coined
for it – “Argentine Paradox”.
ARGENTINE PARADOX : AN ECONOM-
IC TIMELINE AND THE WAY FOR-
WARD
-By Ashutosh Agarwal
- IIFT, Delhi
Figure 1: ARS/USD
29
InFINeeti | Budget Issue | March 2014
A CENTURY OF ECONOMIC TURMOIL
Argentina, which is traditionally a commodity export driven
economy, was one of the wealthiest countries at the beginning
of 20th century with only 6 countries in the world having a high
er per capita GDP. In 1909, per capita income in Argentina was
1.5 times of that in Italy, 2.8 times of that in Japan, and almost
500% of that in neighbouring Brazil.
By the end of the century, its per capita income was about half
of that of Italy or Japan.
The first major crisis occurred in 1890 with the collapse of Ar
gentina’s banking system. However, the economy was back on
track by 1903 and in 1906 the country re-entered the interna
tional bond market. The crisis also served in fostering the rise of
industry. With the beginning of World War I, Argentina again
entered into recession and during the course of the war foreign
investment dried out as Great Britain amassed heavy debt which
had investments of more than 150m pounds in Argentina in
1890. Exports reduced drastically as the Great Britain imposed
restrictions on import of frozen beef which was a major export
of Argentina. The country escaped the Great Depression rather
unscathed with unemployment remaining below 10%. This was
largely due to the abandonment of gold standard and subse
quent devaluation of Peso which kept Argentina’s exports com
petitive. Post Great Depression, the Argentine governments
intensified the policy of import substitution industrialization
which had been in effect since the beginning of the 19th centu
ry.
The Peronist era witnessed increased government intervention
and protectionism leading to stagnation of agricultural produc
tion and trade. High levels of public spending funded by infla
tionary taxes led to inflation. The extent of intervention can be
gauged from the fact that the government went as far as setting
the prices and menu for restaurants in 1947. The 1950s saw
slight opening up of markets for international trade by means of
trade agreements with Britain, Soviet Union and Chile and policy
shift from industry to agriculture to revive the competitive ad
vantage in commodities. But the growth rate remained much
lower than the rest of the world. The wage spiral pushed aver
age inflation up to 30% during early 60s. The respite came with
a coup in June 1966 which put Adalbert Kreigert Vasena in
charge of the Economy Ministry. Under him, the GDP growth
averaged 5.2% while the inflation came down to 7.6% by 1969.
Also, the protectionist trade policy saw a reversal and the cur
rency was devalued by 30% to make exports competitive. But
with removal of Kreiger in 1970, the economic conditions deteri
orated and a wage-price spiral lead to an uncontrolled rise in
inflation.
The period between 1975 and 1990 was an era of hyperinflation
in Argentina. The inflation averaged 300% per year during 1975-
1990 and the real per capita income fell by more than 20%. The
complete loss of control on wages led to the failure of all
attempts to curb inflation. The budget deficit grew to 16% of
GDP in 1989. The breakthrough of reform came in 1991 under
Economy Minister Domingo Cavallo who pegged Peso to Dollar
under a currency board mechanism. The inflation came down
and GDP rose gradually until the contagion effect from Mexican
Peso crisis of 1994 pushed Argentina into recession yet again.
This was followed by the economic crisis of 1999-2002 caused
Figure 2: GDP per capita of Argentina (% of US)
30
InFINeeti | Budget Issue | March 2014
31
by appreciation of US dollar to which peso was pegged and de
valuation of Brazilian Real. By the end of crisis, Argentine econo
my had shrunk by 20% and 54.3% of the population was living
below the poverty line.
THE SITUATION TODAY
After defaulting on its debt in 2001, the Argentine economy has
seen a relative recovery since 2002 riding on the back of a boom
in commodity prices especially soybeans and soybean oil. How
ever, the debt has piled up again due to deficit financing and the
foreign capital is flowing out because of loss of investor confi
dence due to government policies such as price controls and
nationalization without compensation. Expectation of a slow
down in China which will affect the demand of commodities has
also added to the woes. With only $30bn of reserves and in
creasing demand for dollars even in the local market, Argentina
had no option but to devalue the peso and some analysts are of
the view that the currency may be devalued by a further 50% by
the end of 2014. This will only worsen the inflation which is al
ready around 28%. Argentina’s dollar denominated bonds too
have plunged 8.2% this year and spread between yields on Ar
gentine bonds and US Treasuries has surged to 975 basis points.
THE WAY FORWARD
The first thing that the Argentine government needs to do is to
acknowledge its role in making things as they are instead of
blaming banks and “greedy capitalists” for its woes. Getting the
economy out of the turmoil caused largely by a century of misdi
rected policies calls for drastic measures. One such measure can
be to allow the Peso to float freely. It will be a major shock ini
tially as the currency may fall as low as 14 per dollar (according
to some analysts), but it will give Argentina the independence to
pursue its own monetary policy with free flow of capital. The
black market rates of dollar are already hovering around 13 per
dollar and a floating currency at the same rate will only add to
the government’s credibility which will result in inflow of capital
apart from making the exports more competitive. An independ
ent monetary policy will also allow Argentina to boost interest
rates to stem outflows.
Curbing inflation is probably the biggest challenge of all and it
can only be done through a credible central monetary authority.
The credibility of central bank will depend on whether it’ll be
able to keep the expected inflation targets realistic and achieve
them. Having faced censure from IMF in 2013 for low quality
data, the new CPI is a positive step towards building confidence
in government reported data, though some economists still
don’t agree that the new index shows the true picture. A strong
monetary authority will also help the country in negotiating with
its debtors better.
Finally, the country needs to make major changes in its trade
policy and capital restrictions. Fortunately for Argentina, its en
trepreneurial sector continues to demonstrate a great ability to
innovate and succeed. Google made Buenos Aires its Latin
American headquarters precisely because of the strength and
innovation of Argentina’s software industry. This strength
should be leveraged by the government to bring in more FDI
and increasing exports. This can be done by implementing fa
vourable policies and providing incentives conducive to invest
ment in the software industry in the country. Also, there is a
need for disinvestment in sectors like oil and energy to pay off
the towering foreign debt just like the privatisation of pension
industry which yielded $29b to the government in 2008.
InFINeeti | Budget Issue | March 2014
32
INTRODUCTION
From barter to banknotes to bitcoin, our medium of exchange is
taking a major shift from tangible currency to virtual one. Bitcoin
is the new kid on the currency block which started merely five
years ago by a person under a pseudonym Satoshi Nakamoto.
Since its inception this volatile digital currency Bitcoin has
caught the fancies of common mass. Revered by computer pro
grammers and censured by economists in equal breath, bitcoin
demands further investigation into validity of its application.
FORMATION OF BUBBLE:
The success story of bitcoin and analysing the formation of this
bubble is very significant since the 2008 financial crisis which
witnessed a similar scenario. Bitcoin is continuously expanding.
Investors/Speculators are putting their money into this digital
currency which is not issued by a central bank, but is rather
made up of cryptographic software and supported by a peer to
peer network similarly in nature to BitTorrent and Skype.
THE BITCOIN BUBBLE : WILL IT FINALLY BURST OR DOES IT HAVE THE POTENTIAL TO PROVIDE AN ALTERNATIVE TO THE GLOBAL CURRENCY?
BY– Anirudh Harsinghaney
& Gaurav Vivek Arora
IMI-Delhi
InFINeeti | Budget Issue | March 2014
33
The wild fluctuations in the price of the bitcoin have made it a
favourite among the economists who think it as another bubble
– that is a special kind of mania which the people are investing in
expectation of immediate appreciation. The following graph
shows the wild gyrations in the prices of bitcoins in a two year
span from 2012 to 2014.
According to Jean – Paul – Rodrigue, a Ph.D. professor at Hofstra
University, following graph defines the stages of an investment
bubble. Now compare this graph with the data from Splitcoin a
leading bit coin exchange.
From the comparison of the above two graphs, it seems we have
come up to “new paradigm” stage and that investment in many
bitcoin companies like Coinbase, Splitcoin is a testament to that
fact. Similarly, we can see a “return to normal peak” as well. But,
so far all we have seen is capitulation and despair stages of Ro
drigues model a mountain from the fear caused due to Mt. Gox’s
meltdown.
Bitcoin has always been prone to fluctuation in its price through
out its brief history. From being priced less than $15 in January
2013, it zoomed to $1000 in November 2013 and then plummet
ed to $260 after the Mt. Gox meltdown (popular bitcoin ex
change in Japan).
“BITCOIN IS EVIL “
Nobel Prize winning economist and New York Times writer Paul
Krugman has termed the bitcoin as “evil”. According to him for a
currency to be successful, it must both be a medium of exchange
and should have a store of value. He thinks that bitcoin cannot
be used as a medium of currency but it’s the second aspect, the
store of value, where proponents of bitcoin differ from econo
mist around the world. Krugman asserts that for value to be
attached to a currency there should be some central authority
backing it up just like the Federal Reserve does for the Dollars or
in case of gold something which can be converted into some
other form say jewellery and still be valuable. Bitcoin neither has
a central authority nor an intrinsic value associated with it and
hence Krugman predicts that bitcoin is at death’s door. On the
other, the supporters of bitcoin argue that since computer pro
grammers can change the price of materials and value associated
with them, bitcoin does not need to have a stable value associat
ed with it. But the risk of using bitcons for the purpose of busi
ness is huge because of the volatility inherent to the bitcoins. For
a commodity trader a huge depreciation in the value of a bitcoin
can make him virtually penniless and vice versa, a huge apprecia
tion can make him as rich as Croesus.
SAFETY ISSUES
The Mt. Gox debacle is not the first issue of theft of bitcoins. It is
just one event in a series of safety issues that has plagued the
bitcoins ever since its inception.
InFINeeti | Budget Issue | March 2014
34
bitcoins ever since its inception.Mt Gox ,the now erstwhile larg
est bitcoin exchange lost 8,50,000 due to hacking out of which
7,50,000 were of users. This has been followed by Flexcoin,
which announced itself as the “first bitcoin bank” when launched
in 2011.Flexcoin closed down in early March when it found out
the theft of 896 bitcoins worth close to $6, 00,000. Silk Road 2.0 ,
a black market drug trading site reported the stealing of 4744
bitcoins worth $2.4 million. The thefts are mostly due to a phe
nomenon called ‘transaction malleability’ wherein a hacker can
repeatedly withdraw coins from the system until it becomes
completely empty. This flaw in bitcoin protocol enables the hack
er to hide the transaction ID .These stolen bitcoins are then
transferred to an escrow account where they are safely stored.
So what do we do now? Do we just think of bitcoin of being in its
infancy and forget about these thefts? Well, according to Micky
Malka, board member of the Bitcoin Foundation, no one should
be investing an amount that they cannot afford to lose.
WILL THE BUBBLE BURST ?
It can be dangerously easy to dismiss the bitcoin phenomenon as
another bubble waiting to burst. With everyone from Nobel Lau
reates to traders washing their hands away from this virtual cur
rency, it becomes very easy to overlook it. A virtual currency
invented in 2008 , that sees its total value multiply fivefold to
reach 10 billion simply begs for the word ‘bubble”. Many people
compare bitcoin to the “tulipmania” of the 17th century to estab
lish the fact that it is indeed a bubble. But most of these argu
ments seem to be a part of the hyperbole surrounding bitcoin.
What we tend to forget is that bitcoin is only 5 years into its in
ception. It is bound to take time to stabilize and establish its cre
dentials as an alternate form of currency. What is does is – it
allows for individuals and organizations to do business without
the interference of the state. The sudden increase in the price of
bitcoin to $1000 in November, 2013 did raise lot of eyebrows
and makes the bitcoin overvalued.
Also initially , there used to be quite a phenomenal concentra
tion of bitcoins in hands of a few, but this scenario is rapidly
changing. Within 3 months in January, 0.5 million more coins
have moved down in to the general circulation. This deconsolida
tion of ownership goes against Robert J. Shiller’s “Central Prob
lem Thesis” which said that bitcoin is nothing but a speculative
bubble without any utility.
We should think of it as an equivalent to Netscape browser. In
1998 the browser space was dominated by Netscape and now
anyone knows about it. Nevertheless , browsers are still in use.
Likewise even if Bitcoin Bubble burns out, it will definitely ce
ment the concept of crypto currency in the world. Don’t know
how Adam Smith would have reacted to this new concept? May
be another book would have sufficed.
EPILOGUE
Bitcoin has become a fascinating free market experiment and
could rival the traditional currencies all around the globe. If that
happens, there will be more informed and constructive discus
sions on volatility. But for now, the talks on volatility are just a
cliché which is being overused in the realms of crypto-currency.
Bitcoin may be at the present a flash in the virtual pan but it
holds great significance symbolically. Castigating it is very easy
but dealing with it and resolving the issues that is hard, and nec
essary.
InFINeeti | Budget Issue | March 2014
35
OVERVIEW
In 2012, with a recorded population of 1.22 billion, more than
50% of India’s population was below the age of 25. Of this popu
lation about 30% is in the age bracket of 0-14 years, which is the
size of the segment that will be seeking higher education in the
next decade. India in the past decade has positioned itself in the
world as a knowledge-based economy, churning out bright and
educated professionals. Hence it is no wonder that the Educa
tion Sector has grown in leaps and bounds over the last decade.
However, there are gaping pitfalls in the Indian Education sys
tem.
STRUCTURE OF INDIAN HIGHER EDUCATION SECTOR
According to a report by Deloitte, the Indian Higher Education
Sector can be broadly divided into 4 segments:-
GROWTH DRIVERS
Indian Higher Education Sector is the third largest in the world
in terms of enrollments after China and US. Factors leading to
the growth of the sector are:-
Growing Indian middle class
Increasing Disposable Income
Services Sector’s increasing contribution to the GDP re
quires educated manpower
Reforms to the Education Bill is giving a push to the sec
tor
12th Five Year Plan targets an expenditure of INR 1107
billion on higher education
100% FDI allowed through automatic route
CHALLENGES IN THE SECTOR
ACCESS – In the past years there has been significant pro
gress in the primary education segment in India. How
ever, the number of students who remain in the educa
tion system till higher education is alarmingly low. The
Gross Enrollment Ratio (GER) in India is about 15%
which is far behind the figures in developed nations.
Disparity is GER across states and communities are as
SECTOR ANALYSIS : A COMPREHENSIVE
ANALYSIS OF EDUCATION SECTOR
-By Abhinav Gupta & Debleena Banerjee
IIFT, Kolkata
InFINeeti | Budget Issue | March 2014
below:-
State Disparity — 47.9% in Delhi vs 9% in Assam
Urban vs Rural Disparity — 30% in urban areas vs 11.1%
in rural areas
Community Disparity —14.8% for OBCs, 11.6% for SCs,
7.7% for STs and 9.6% for Muslims
Gender Disparity — 15.2% for females vs19% for males
With increasing output from the primary education, the demand
for higher education is on the rise. The supply for the same falls
short miserably and the government resource allocation is in
sufficient to meet its own targets, thereby creating a huge scope
for private participation.
QUALITY – Education is a holistic process and hence the
quality aspect of it encompasses everything from content
to infrastructure. This is one of the foremost challenges
faced by the sector as very few institutes of higher edu
cation in India are at par with global excellence. Criticized
on grounds of outdated course curriculum, lack of tech
nology-enabled delivery of content, poor infrastructural
facilities, faculty shortages, lack of industry interaction,
low employability quotient and negligence towards re
search, the sector has a lot to improve on quality.
OPPORTUNITIES
India presently has 11 million students in the higher education
system. This figure is a mere 11% of the 17-23 year old popula
tion. The government’s target of 21% by 2017 is still short of
world average. Indian society bestows a premium on knowledge
and its acquisition. Consequently, spending on education is the
3rd largest expense for an average middle class household after
food and groceries. However, there is a glaring deficit in the
supply of quality education. Only 1 in 150 applicants gets into an
elite institution such as an IIM. On the other hand, it has been
reported that 450,000 Indian students spend about 13 billion
USD, annually, in acquiring education overseas.
The Government’s resource allocation to bridge this gap is still
inadequate despite raising the allocation in the Eleventh five
year plan (2007-2012) almost nine fold to $18.8 billion from
$2.1 billion in the Tenth five year plan. This leaves ample scope
for participation by private players. The government has also
allowed 100% FDI in this sector to promote foreign investments
in this sector. The major bottleneck to foreign participation so
far has been the “not-for-profit principle”. However, this is only
a hindrance in setting up educational institutions in the regulat
ed sector where institutions have to be registered with bodies
such as UGC, AICTE etc. as the case may be. The unregulated
sector is a very different story. Institutions in this sector can be
registered as private/public companies that can legitimately
distribute dividends. This sector includes institutes which pro
vide innovative services to educational institutes like schools,
colleges etc. These services may include language training, tuto-
Formal Education Technical &
Professional Education
Skill Development Vocational Training
Composition Universities
Colleges
Polytechnics
Engineering colleges
ManagementSchools
Law, Medical, Pharmacy
ITIs
ITCs
Private Skill Develop
ment Centers
Finishing schools
English training
Air hostess
Academies
Key Regulators UGC
State Govt.
IGNOU
AICTE
Bar Council of India
Medical Council of India
ICAI
DGET for ITIs/ITCs
Unregulated for oth
ers
No regulator
36
InFINeeti | Budget Issue | March 2014
37
rials, content provision, corporate trainings etc. As long as these
institutions do not award degrees, they can be incorporated as
companies. We have seen the emergence of players like Edu
comp solutions in this sector. Besides the unregulated sector,
there are also opportunities for foreign players in the regulated
sector as they may tie-up with Indian universities, technical in
stitutes and colleges and provide course content or even a for
eign degree (with affiliation to a local university).
the ratio of government schools to total number of schools in
the country as corporates are showing a growing interest in the
primary and secondary education sector. “Not for Profit”, quo
tas on student intake and complex regulatory frameworks is
internal weaknesses that the sector is grappling with. However,
the huge demand and potential present in the sector will surely
attract private capital, which shall take Indian Education at par
with its global counterparts.
The government is actively considering participation of the pri
vate & foreign sector via the PPP model. The various models
possible under this scheme are summarized here:
CONCLUSION
India has unsaturated demand for quality education and this is
not limited to the higher education sector. There is a decline in
Model à Basic Infrastructure Outsourcing Equity/Hybrid Reverse Outsourcing
Infrastructure In-
vestment
Private sector Private sector Private + Govern
ment
Government
Operations and
Management
Government - makes
annualized payment
to private investor
Private sector – re
ceived payments from
the government for
specific services
Private sector Private sector
InFINeeti | Budget Issue | March 2014
MARKETS IN THE TIME OF ELECTIONS
The Lok Sabha elections euphoria grips the Indian stock market
and seems to have spread to the mid-cap space. While the pack
was lagging the blue-chip Sensex since mid-February, hopes
that the BJP-led National Democratic Alliance is likely to steer
the poll tally have pushed the mid-cap index to match the BSE
Sensex returns.
According to Deutsche Bank, mid-cap stocks tend to rally sharp
ly when economic growth is expected to be at an inflection
point.The brokerage says that while the jury is still out on the
pace of economic recovery, the mid-cap rally is likely to extend
further, given that growth has bottomed out, currency has sta
bilised and the twin deficits have shown a marked improve
ment.
TIME IS MONEY - BASEL III DEADLINE EXTENSION AND PSU
BANKS GAIN
After RBI extended the deadline for meeting the Basel III norms
by a year to March 31, 2019, shares of PSU banks rallied on the
bourses.
According to experts, its harder for PSU banks trying to raise
capital to meet the Basel III norms. "The key issue with SOE
(PSU) banks over the next 2-3 years is likely to be lack of capital.
The starting point of tier 1 ratios is well below our view of
steady state tier 1 for SOE banks under Basel 3 (above 10%),"
Morgan Stanley said in a report.
State Bank of India (2.96%), United Bank of India (3.41%), Pun-
jab National Bank (4.14%), Bank of Baroda (2.33%) were trad
ing higher on the BSE at 1.15 pm IST.
ACTIONS MAY BE TAKEN IF INFORMATION NOT SHARED
Risk of Switzerland being labelled a tax-non-cooperating juris
diction and of subjecting all payments from India to that coun
try to a 30% withholding tax . Worried over Switzerland's un
willingness to share tax information, finance minister P Chidam
baram has threatened action against the European nation un
der Indian law.
38
InFINeeti | Budget Issue | March 2014
39
“In the event of continued denial of access to vital information
under the Double Tax Avoidance Convention, India may be con
strained to actively consider the options available under our
domestic laws,” Chidambaram said in the letter.
$5 BILLION OVER CARD SWIPE FEES, WAL-MART SUES VISA
INC
Visa Inc. was sued by Wal-Mart Stores Inc this week for $5 bil
lion, for charging excessively high card swipe fees, several
months after the retailer opted out of a class action settlement
between merchants and Visa and MasterCard Inc.
SPORTS AND MONEY - ITS BIG MONEY
While Multi Screen Media, the host broadcaster for Indian
Premier League (IPL), could turn out to be the biggest loser if
IPL7 is scrapped since it was hoping to earn close to Rs 1,000
crore in advertising revenues, the Board of Control for Cricket
in India (BCCI) stands to lose Rs 150 crore as do sponsors. The
fate of the tournament hangs in balance with the Supreme
Court proposing on Thursday that Chennai Super Kings (CSK)
and Rajasthan Royals(RR) be suspended; without Mahendra
Singh Dhoni, the tournament will lose much of its appeal
RE HIT 59.94/$
The rupee breached its crucial resistance level of 60 per dollar
for the first time in eight months on the back of strong dollar
inflows on 28th March, 2013 .
The Indian unit touched an eighth-month high of 59.94 in trade.
However, the upside in the rupee may be capped due to month
-end demand from importers.
RBI LIKELY TO KEEP RATES UNCHANGED IN MONETARY POLICY
The Reserve Bank of India (RBI) is likely to keep interest rate
unchanged in the upcoming annual monetary policy on April 1
as the retail inflation is yet to show definite signs of modera
tion.
In its third quarter review of monetary policy, the Reserve Bank
of India (RBI) in January raised the key repo rate by 0.25 per
cent to 8 per cent in a bid to curb inflation.
Although inflation has eased both in terms of consumer price
index and food, the RBI would look at other factors including
the exchange rate, HSBC country head Naina Lal Kidwai said.
InFINeeti | Budget Issue | March 2014
40
Bill Gates told his Harvard University professors that
he would be a millionaire by age 30. He became a bil
lionaire at age 31 .
Three of the world's 50 largest economies don’t have a
dedicated exchange-traded fund (ETF) listed on a U.S.
exchange: Iran, Saudi Arabia and Pakistan.
The average credit card holder has 3.5 credit cards, ac
cording to the Federal Reserve. Credit cards were not
always made of plastic. There have been credit tokens
made from metal coins, metal plates, and celluloid, met
al, fiber, and paper cards.
Bread,” the slang word for money, comes from an old
Cockney rhyme, “Give me your money. Give me your
bread and honey.”
The first Indian commercial bank which was wholly
owned and managed by Indians
-Central Bank of India
InFINeeti | Budget Issue | March 2014
At the end of 2011, three companies had total
debt loads of more than $500 billion: JPMorgan
Chase ($684 billion), Bank of America Corp. ($622
billion) and Citigroup ($560 billion).
The first Indian bank to have been started solely
with Indian capital-Punjab National Bank
Legendary investor Warren Buffett bought a 40-
acre farm at age 14 with $1,200 in savings from
delivering newspapers
In 1984, MasterCard® was the first to use a holo
gram on its cards to deter fraud
If each currency note printed in the U.S. were laid
end to end, the bills would stretch around the
earth’s equator 24 times
The first bank to be managed entirely by women?
First Woman’s Bank of Tennessee, founded in
1919. Unfortunately, its founder, Brenda Vineyard
Runyon, was unable to secure a successor after
her health began to fail and it was eventually ab
sorbed by First Trust and Savings Bank of Clarks
ville in 1926
Manmohan Singh is the only Prime Minister of
India to have held the post of governor of RBI
41
InFINeeti | Budget Issue | March 2014
MEET THE TEAM 42 CREDITS
EDITORIAL TEAM
Ankit Tiwari
Ashutosh Deshpande
Sanket Tandon
Sobhit Agarwal
FEEDBACK/QUERIES
Published by students of
Indian Institute of For-
eign Trade
New Delhi | Kolkata
ALL RIGHTS RESERVED
ANKIT TIWARI is a software engineer and comes with
a prior work experience in Infosys Limited . He in
tends to specialize in Finance & Marketing. He
wants to pursue his career in Banking industry. Addi
tionally, he is an avid reader, likes writing in his spare
time , loves reading newspaper and also loves play
ing and watching Cricket .
ASHUTOSH DESHPANDE has completed his graduation
in Computer Engineering from Mumbai University,
post which he has worked with Mahindra Holidays.
The author has inclinations towards Finance and
Strategy. The author, an avid writer, has written for
various blogs, football sites and magazines on topics
ranging from Politics, Current Affairs to European
Football.
SANKET TANDON is a software engineer and has
prior work experience with Infosys Limited. He in
tends to specialize in Finance and wants to pursue
his career in the same domain. He is an ardent Man
chester United fan. Apart from following football he
likes to read and travel in his spare time
SOBHIT AGARWAL has completed his B.tech in Elec
tronics and Communication engineering from NIT
Surat in year 2012. Before joining IIFT ,he worked as
Marketing Manager at Endeavor Careers Pvt. Ltd.
for 12 months. Moreover , he has a keen interest in
finance and wants to pursue a career in the same
domain.
InFINeeti | Budget Issue | March 2014
Contact Team InFINeeti: [email protected] | [email protected]
Published by Indian Institute of Foreign Trade, New Delhi and Kolkata
All Rights Reserved