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INFINITIE Vol 6 Issue 1

INFINITIE Vol 6 Issue 1

MESSAGE FROM THE CONVENOR


Heartiest congratulations to all of you. With the release of
yet another edition of the magazine, we are getting bigger
and better and it gives me immense pleasure and satisfaction
to be the convenor of Street. In-FIN-NITIE has given me the
opportunity to work with the students and advance forth
with the common goal of learning and practising finance.
As always, In-FIN-NITIE brings you something new this
time around too. After a series of issues with identified
theme and articles related to that theme, the current issue
just gave the students to write about finance. Themes and
matching articles aside, this issue has a plethora of written
words by students about whatever caught their eye in the
field of finance.
I applaud the effort of Street for their unstinting efforts. I
hope they strive to take the magazine to greater heights, and
also hope that issue will entertain you and keep you engaged
about the recent happening is the world of finance. We look
forward for your comments and wish to bring out more
interesting issues in the future
Dr. M Venkateswarlu
Asst. Professor of Finance
NITIE

Patron

Prof. Ms. Karuna Jain


Director, NITIE

Convenor

Prof. M Venkateswarlu

Editorial Board





Abhiron Bhattacharya
Suvankar Sadhukhan
Siddharth Amitanshu
Manisha Nair
Tanaya Gaikwad
Arvinth D

Design Team
Suvankar Sadhukhan
Abhiron Bhattacharya

EDITORS NOTE
Our Prime Minister Mr. Narendra Modi famously said Make-InIndia is a Lions Step. Taking a cue from it, this edition of IN-FINNITIE brings to you the detailed analysis on the concept of Make
In India, which is in as a current trend. It also mentions about
the first edition of NITIE Post Budget Analysis, which gave the
audience a detailed understanding of the Union Budget 2015 and its
implications on the Indian economy.
In our quest to bring to our readers all the latest happenings in and
around the financial world, we dive in to other key topics like Basel
Capital Accord, Quantitative Easing, Repercussions of falling prices
of crude oil to the economic health of India, and Civil Aviation in
India. To know about the Banks and steps towards Indian Financial
Inclusion, dont forget to walk through our review of Indian banking
industry.
Following the trend, we were inundated with brilliant and exotic
articles that really made us toiled hard to find the best. We extend
our sincere gratitude to all the authors who burned the midnights
oil to write such exquisite articles. In our endeavour towards
continuous improvement we invite feedback and criticism at
street.nitie@gmail.com

INFINITIE Vol 6 Issue 1

INFINITIE Vol 6 Issue 1

IN-FIN-NITIE VOLUME 6 ISSUE 1


General and Rail Budget Synosis 1
Make in India- Zero Defect Zero Effect

A Tale of Three Currencies 8


The Basel Capital Accord

12

The Fama-French Three Factor Model

15

Reviving Civil Aviation in India

18

Street Wall

22

Indian Banking Industry

24

Payment Banks and Their Impact on Financial Inclusion

28

Repercussion of falling Crude Oil Prices to the Economic Health of India 32


Fin-Q-NITIE

35
1

INFINITIE Vol 6 Issue 1

INFINITIE Vol 6 Issue 1

Make In India- Zero Defect, Zero Effect

of the Industrial Revolution, which fueled the need


of the most precious resource of today i.e Oil. Thus
India which was once pioneer started lagging as it
tried to keep pace with other industrious nations and

Abhiron Bhattacharya(NITIE)

thus started importing oil. With the 20th century


globalisation was a central framework in which every
nation started rebuilding itself. India again found
itself in the forfront with IT services leading the pack
for revenue generation. In a way we have leap-frogged
from the first wave which is Agriculture onto the third
wave which is services.

The best time to plant a tree was 20 years


ago. The second best time is now
Chinese Proverb

The world is looking towards Asia for growth. I dont need to give an invitation; I just need to tell people the address of India PM Narendra Modi

The Indian manufacturing sector is a classic example


of an industry that has had great potential, but one that
has been systematically done in by political ineffectiveness, entrepreneurial myopia and sheer ignorance of
what it takes to succeed. Yet Manufacturing on the
other hand has remained where it is. We have not
really worked towards making manufacturing a strong
force in India. There Indian Governement has its
work cut out. On one end it has to improve industrial

of Guptas to the Mughal and finally today with less

The world economy is slowly recovering from from

it is to be seen if India can grasp the momentum and


an extended slowdown, with all the key economic step towards being a manufacturing based economy,
groups, including the USA, Euro area and BRICS, resulting in large scale employment and economic
expected to stage higher growths over the next few growth.
years. India is on the brink of a residual development,
ushered by an emphatic election win and coupled by
So where does Make in India fit in?
the falling oil prices. The overall outlook is positive,
with leaders across the industry expressing confidence If history is to be belived then India contributed around
in this economic revival. Thus in the scheme of things approximately 25 % of the world GDP. Though the
Make in India initiative not only provides a means sources of the information is somewhat doubtful, yet
for self sustainment but it actually projects India on the fact lies that India was once a country of granduer,
to the global scenario. At a juncture, when China is a place of high and mighty that the world looked
losing its hold as a global manufacturing destination, upon. As India moved from its illustrious golden age

Exhibit 1.1 | India's Position in Global Manufacturing GDP and Export Over the Last 20 Years
India share of global GDP
increased from 1.2 to 2.5%
over last 20 years



China

2.3
26.5

Germany, UK,
France, Italy

Japan

India

... and India's share of global


merchandise export also
increased from 0.5 to 1.7%








17.3

6.8

8 .5

3.1

25.5

24.9

24.4

United
States

than 5 % of world GDP, much is debated, yet the


fact remains that we had lost the plot somewhere.
Dominated by Agriculture in the 1950s India was
a self sufficient union where traders used to journet
for want of prosperity. But with the sudden outbreak

while share of global


manufacturing increased
from 0.9 to 2%

24.1

21.6

17.7

16.7

12.2

8 .5

8 .2

2.2

2.5

0.9

2009 2013

1993

1.2
1993

20.2

24.1

2.4
19.2

17.8

17.9

14.9

9.6

7.3

2.2

2.0

0.5

2009 2013

1993

12.5
27.6

9.5

Source: World Bank.


Note: Based on values in current USD.

The same bleak picture characterises the Indian export sectorand exports are, the best indicator of success for any manufacturing nation. Here, Indias performance has improved

pecially poor results over the past five years,


the mood in India across the broader industrial sector has started to shift over the past
six months, thanks to two factors.

9.7

11.5

8 .6

8 .6

21.0

17.8

4.7

4.5

1.3

1.7

2009 2013

Country

Thailand

Rank
(2015)

Rank
(2014)

26

28

Mexico

39

43

China

90

93

Russia

62

64

Brazil

120

India

Starting a business

158

Dealing with construction permits

184

Getting electricity

137

Registering property

121

Getting credit

36

Protecting minority investors

123

142

Rank
(2015)

Topic

140

Trend in
Rank
2014-15

Paying taxes

156

Trading across borders

126

Enforcing contracts

186

Resolving insolvency

137

Source: World Bank "Ease of doing business" report 2014 and 2015.

Cost to export

USD 1,170

USD 620

USD 615

USD 595

Bill of landing

Commercial invoice

Time to
export

Documentations
to export

Terminal handling receipts

Packing list

Foreign exchange control form

Technical standard certificate

Inspection report

Certificate of Origin

Customs export declaration

Contract

Station receipt

Customs clearance / technical control

Ports and terminal handling

Inland transportation and handling

Source: World Bank "Ease of doing business".


1Includes documents preparation, customer clearance and technical control, port and terminal handling, inland transportation and handling.

Sources: US Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG analysis; Press search.
Note: No difference assumed in other costs (for example, raw-material inputs, machine and tool depreciation); cost structure calculated as a
weighted average across all industries.
1 Average of top 25 countries

Rank not among Top 50


Sources: US Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG analysis.
1Includes a selection of economies ranked from 1 to 25 on total export size.
2EIU ranking based on ten separate criteria or categories covering the political environment, the macroeconomic environment, market
opportunities, policy toward free enterprise and competition, policy toward foreign investment, foreign trade and exchange controls, taxes,
financing, the labor market, and infrastructure.
3World Bank ease of doing business index.
4World Bank logistics performance index.
5Transparency International 2013 corruption perception index.

   

How is Make In India going to Impact


Globally?
The make in India website calls it a :
A MAJOR NEW NATIONAL PROGRAM. DESIGNED

Initiate labour reforms to


improve productivity

Apply policy levers to promote


strategic depth in select
sectors, develop clusters

Promote global access and


brand positioning of India inc

Ease of doing
business

Address key issues around set


up cost, approval and
clearances, access to credit

Create measures to attract


greater FDI and investments
administration, taxation

Achieve best in class business


ecosystem move beyond
'companies'

Infrastructure

Build basic transport, power


and other infrastructure

Drive investment led


infrastructure creation real
estate, industrial corridors,
export oriented infra

Develop smart cities and


global centres of industrial
excellence

INFINITIE Vol 6 Issue 1

TO
FACILITATE
INVESTMENT.
FOSTER The lack of them obviously increases the costs of
INNOVATION. ENHANCE SKILL DEVELOPMENT. production. In absence of electricity there is loss of
PROTECT INTELLECTUAL PROPERTY. AND production, or the alternative is to set up your own
Gain global
global
BUILD
BEST-IN-CLASS
MANUFACTURING
unit and incurClaim
more
costs on it. Some others depend
Revive manufacturing
competitiveness
leadership
INFRASTRUCTURE. THERES NEVER BEEN A on Diesel generator sets to run factories. The current
BETTER TIME TO
energy deficiency in
Exhibit 4.2 | India's Infrastructure Facilities a Key Cause of Concern for Businesses
MAKE IN INDIA
India is around 5 %
according to the Central
India's rank on Infrastructure has been
because of severe under penetration in most
deteriorating over the years
of the sectors
This means in pure
Energy Agency. Basically
classical
economics
apart from the west of the
there is going to be a
country and Gujarat in
demand and then there
particular all regions are
would be producers
energy deficient.
who
would
be
Water is another short
incentivized to supply
resource
and
the
goods and Services to
indiscriminate use of
meet that demand.
ground water and lack of
The global demand
perennial rivers especially
is increasing day by
in the Deccan is a major
day as we have started
issue as well.
consuming goods and    
services like never before. According to worldwatch. While India scores well on cost competitive- ness,
org there are 1.7 billion members of the consumer it is in some of these other factors that the country
classnearly half of them in the developing world. loses out. When compared on the basis of some of
In addition, there are
these non-cost parameters,
continents
that
are
India ranks poorly not only
developing, particularly
with respect to the developed
Africa, where the growth
economies, but most of the
of demand for goods
developing economies as
and services has been
well. Indias rank on ease
phenomenal in the last
of doing business, logistics
decade.
performance and corruption
Now
the
producer
perception
narrates
a
incentives can come from
sorry tale. Administrative
four factors
hassles form a key challenge
in
fostering
greater

Cheaper costs
manufacturing
and
industrial
of production &
growth. For instance, critical
Movement of goods
delays are faced due to issues

Ease of doing
in
seeking
construction
business
permits, utility connections

Market with
and credit approvals. Even as
the ability to pay that
India figures in the bottom
improves margin
half of the list of 175 countries

Finding the
on corruption perception, low
right skill set
judicial strength in India leads
to significant delays in the
Now these factor alone
settlement of court cases.
will expose the lack of
infrastructure in the country. Raw materials have to
Making Make In India a Reality
make their way into the factory and finished goods
have to move out. In the middle of this the processing (And) miles to go before I sleep, And miles to go
of materials into goods would take water, electricity,
before I sleep. Robert Frost
real estate, clinics and hospitals to support this facility.
Rank
(201415)

Rank
(201213)

Japan

11

Germany

US

12

15

China

46

48

Thailand

48

46

Brazil

76

70

India

87

84

Country

Installed Generating capacity per thousand people

Electricity

production, while at the other end it has to increase properly. A poorly marketed product is akin to a poorly
the branding and repositioning of India.According made product. And as the world continues to integrate
to a report by Mckinsey and Company, Indias we would see that new markets are hard to come by
manufacturing sector could touch US$ 1 trillion by and market share has to be taken at the expense of
2025. There is potential
other manufacturers.
Exhibit
4.3
|
Decreasing
Ease
of
Doing
Business
in
India
for the sector to account
for 25-30 per cent of
But, the real question is
India ranks 142 among 189 countries on
... especially due to difficult to enforce contracts /
ease of doing business
deal with construction permits and start a business
the countrys GDP and
whether India is truly
create up to 90 million
prepared for this. Archaic
domestic jobs, by 2025.
labor laws, Infrastructural
In India, the number
roadblocks,
FDI
of jobs in the sector has
restrictions,
unclear
also remained low over
taxation rules and land
the last twenty years,
acquisition make it tough
increasing only by 1.8%
to bet high on India.
per year from 37 and 53
For India to become a
million. This contrasts
global
manufacturing
with the services sector,
destination
structural
which has increased by Exhibit 4.4 | Complex and Costly Approval Process for Export Limiting "Make in India"
changes are required and
6.5% per year during the same period, growing its infrastructure has the biggest role to play. If one
share of Indias labour force from 22 to 31 percent and consisders the ease of doing business then India was
now accounting for 150 million jobs (compared to rated at 140 out of 189 countries. That fact gives a
approximately
80 million in 1993).
major indication of the incredicble face lift the country
Exhibit 2.3 | US, With Low Energy Cost and High Productivity Gains, is Catching Up With the East
on Cost
Thus
while India not only has to build its infrastructure
Shale gas boom and continued productivity increase has turned the tide in US' favour
to sustain its manufactring units but also position
change
US change
Key driver
itself
as nation
ofPeers
producting
withUS advantage
Zero Defect
('04 cable
'14)
('04
'14)
and more importantly Zero Effect. Flexible workforce
Wages
+27%
Moderate
increase / Decline
wages
Without
this rebranding
it+71%would be
difficult
toinsustain
Make
In
India
.
Today
a
lot
of
efforts
are
being
made
Absolute
+19%
+27%
Continued productivity growth
productivity
to sustain the supply side of things, but International
Strengthening
of other currencies
demand
for Indian
goods+7% is at an
all-time
low.withAny
Currency
Flat
respect to USD
visitor to an apparel retail outlet in US for example can
Shale gas boom
-25%
+98%
seeNatural-gas
and Egypt brand
costthe China, Thailand, Bangladesh
   
Flattening of natural gas demand
more than India. Even to the eyes of
its
citizens Indian
Deregulations and restructuring
Electricity
+30%
+75%
cost
Technological
advancements
made
goods or rather the Made in
India
brand has
taken a beating.
Now efforts should be made to market Make in India needs. Not only from the cabability point of view but
also from mindset that is stamped on the minds of
Exhibit 2.4 | India is Challenged by Secondary Factors
the Indian society.Further more one cannot just stop
Direct cost
Overall
relative to
business
Ease of doing
Logistics
Corruption
at Make in India in being the plateau of hope and
the India
environment
business
performance
perception
salvation for the economy, the ideology should be
Country
Delta
Rank
Rank
Rank
Rank
backed by everlasting products that promote Zero
57
142
54
94
India
-Defect and Zero Effect. Lets think about making
28
China
+10%
50
90
80
our product which has zero defect; so that it does not
Germany
+39%
12
14
1
12
come back (get rejected) from the world market and
US
+15%
7
7
9
19
zero effect so that the manufacturing does not have
an adverse effect on our environment was the moto
Japan
+27%
27
29
10
18
that was promoted by Mr. Narendra Modi.
34
26
35
Thailand
+4%
102

Government
policy and
reforms

India

173

China

8 48

Proportion of unpaved roadways

Road transport

INFINITIE Vol 6 Issue 1

Sources: World Economic Forum, BCG analysis

India

China

37.9

15.9

INFINITIE Vol 6 Issue 1

INFINITIE Vol 6 Issue 1

Exhibit 1.3 | Most Global Economies Expected to Grow Robustly Over the Next Several Years

Industrial Production growth has high correlation


Going into detail an overarching objective of this with FDI inflows. The effect of FDI on economic
campaign is to examine the notion of competitiveness development ranges from productivity increase to
from the perspective of a country, a region, a business enabling greater technology transfer. Higher FDI
and an individual. The roles of individual initiative, Exhibit 1.5 | Green Shoots?
business strategy and economic development policies Continuous increase of FDI since March 2014,
Increase in exports from India being
reaching levels beyond 2013's average
observed since April 2014
in maximizing productivity calls for recasting to
fully tap the dormant potentials for productivity
improvement & Environment Protection. Productivity
is the key to Prosperity, which in turn is an indicator
of a country's potential for economic growth in the
short to medium term.
  

 

4.8

6
4

3.3

2.8

2.1

2
0

1.5

1.9

1.7

1.9

1.7

1.8

2.4

1.9
0.4

-2

Mar13

Jun13



Sep13

Dec13

2.1

2.0

2.4

-0.1

Mar14

29.6

30

28 .1

24.8

25

27.3

26.2

26.8

28 .0 27.7

26.3 25.7 25.6


24.6

24.0 24.0 25.0

28 .9

26.5 27.0

20

Jun14

Mar13

Jun13

Sep13

Dec13

Mar14

Jun14

Continuous increase of industrial production since April 2014


5.6%

Productivity in its new manifestation, as a culture


of accepting and bringing about continuous
achievements incorporating environment concern is
an inescapable imperative. Environment protection is
the major challenge being faced by all the countries in
(including a visit to Japan, where the
0.4 and 5.6 percent since April 2014.
the world. No doubt, there has been unprecedented inflows are
central for India totween
transcend
from 5-7
government has committed to investments
FDI has increased from USD -0.1 billion in
in India of USD 35 billion, and to the US
March 2014 to USD 4.8 billion in June. Morepercent where
growth
to 10-12 percent
growth. India
Exhibit 3.4 | Manufacturing Sector Growth will Create Significant Employment Generation
a US-India business body has
over, since April 2014, manufacturing exports
committed to a USD 42 billion investment
from India have continuously exceeded excurrentlyin India
fares
poorly on FDIportwhen
compared its
over the next two to three years).
levels of 2013, with more than USD 26
billion worth of goods exported each month
~60 million additional jobs expected in manufacturing sector by 2030
global Aspeers.
On
a
per-capita
basis,
cumulative
FDI
a result, the mood and expectations of the (Exhibit 1.5).
manufacturing industry are steadily improvequity ing.
inflows
from
April
2000
to
April
India
CEOs are more
positive
than before,
as
While
optimism2014
is certainlyfor
high, there
is a
revealed through CII-BCG Manufacturing
long way to go before India can start to celeis just USD
183
compared
to
USD
2,017
and
USD
1,531
Leadership Survey 2014 (Exhibit 1.4). Markets brate. Specifically, no major changes have been
have started to rise in expectations of imannounced by the government apart from
for Mexico
and China
respectively.
But
thethethings
are
proved performance
in the sector,
and many
measures
to increase
efficiency of governindices that cover manufacturing companies
ment functions and the launch of a few mealookinghavehopeful
as the For
newsuresgovernment
started to rise now,
in value significantly.
aimed at increasing theinitiates
ease of doing
example, between April and October 2014,
business (save the increase in FDI cap in a few
effective
strategies
and
the
economy
looking
buyout,
the S&P BSE Consumer Durables index has
key sectors). Many of the fundamental factors
growth of 45 percent and the S&P
that have limited Indias growth in the past
there isrecorded
a Auto
poignant
sense
of growth
in FDI.
BSE
index growth of
10 percent.
persist. Labour
reforms are still badly needed,
3.9%

3.7%

2.8 %

0.8 %

-2.0%

Sep-13

Oct-13

-1.2%

Nov-13

0.4%

-0.2%




Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

5.9

4.3

1.5

 

50

+60 million

40

125
100

75
50

60

57

54

57

60

65

62

72

68

75

79

82

86

91

95

99

104

109

114

30
20
10

25

0
FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24 FY 25 FY 26 FY 27 FY 28 FY 29 FY 30

No. of Workers in Industry (millions) Actuals

Manufacturing GDP level Actuals

No. of Workers in Industry (millions) Target

Manufacturing GDP level Targets

Sources: Government of India, Ministry of Labour & Employment, RBI.


Note: 5% productivity increase.

such sectors could provide a significant


boost to Indian manufacturing activity.

Given the above factors, six interesting sec-

tors are likely


play a key role in
our
technological development
in todifferent
fields
whether
growth going forward:
Sectors
that could
benefit
from
global shifts:
it
be
in
the
agriculture,
industry
business
or
other
Globally, supply chains are being constantly re
formed with low-risk items continuing to be offIndia has been among the top three textile
service sectors but such
technological developments
shored (apparel, soft toys, furniture, etc.). While
and apparel exporting nations in the world
China has long been a beneficiary of such shifts, for the last three years. This position of adalong with them have,vantage
side
by side, brought about
India with her cost advantage could potentially
has been driven by a slew of factors,
also take advantage of these trends.
including Indias commanding position as the
the degradation of the
environment. Any kind of
Exhibit 3.5 | Revised Vision for Indian Manufacturing Sector
development could not be sustainable unless &
At aspirational 11% growth,
share in GDP cando
touch not
25% by 2030
until the development
activities
take care of
With a 5% productivity increase and a GDP growth rate of 7.5%
environmental protection.
The availability of labour (cost advantage, labour
availability, and engineering skills) continues to be a
core area of strength for India. Its also expect that Indias
raw material could be an additional area of strength
(cotton, steel, coal, down- stream petrochemicals are
materials where India has a potential advantage due to

   
surplus availability over the longer term). Industries
that leverage this surplus labour and availability of raw
materials are likely to be significant beneficiaries over
the next few years. Assuming a consistent productivity
increase of five percent year-on-year, a consistent ten
percent growth in manufacturing would yield an
additional 60 million jobs in the sector alone by 2030.
Metric

Revised vision for 2030


1011%

Manufacturing growth rate

Manufacturing performance has also started


looking up in many areas. Indias Index of Industrial Production (IIP) has experienced a
strong run in many of the recent months,
showing year-on-year growth levels of be-

Taking these cues into consideration


the
government
However, with
government
taking encouraging
first steps and the global economic mood imhas initiated various schemes proving,
in the
this is aUnion
time of great Budget
expectations.
2015.
Prominently
amongst
them
is
the
announcement
   
of customs duty cuts on 22 items that will make it
cheaper for Indian companies to import parts to
manufacture products. Jaitley also sought to facilitate
cheaper technology transfer to small businesses by
more than halving the rate of income tax on royalty
and fees for technical services to 10%. In order to
ensure adequate availability of skilled man-power to
achieve the objectives of Make in India initiatives, the
government plans to launch a National Skills Mission

21.625%

Share of Manufacturing in GDP

6078 million

Additional jobs created in Manufacturing

5.26.1%

Share of India in Global merchandise trade

power is in short supply and the countrys infrastructure falls short of expectations.

Sources: Government of India, Ministry of Labour & Employment, RBI, Press search, BCG analysis.

3.3

2.7

2.7

2.1

0.9

Germany

Euro zone

United States

ME, NA

Latin America

20102014

Emerging
Asia

China

Thus Its truly said

World

201420201

Change your thought and the world around


you changes

Source: Thomson Reuters datastream (IMF World Economic Outlook) / BCG analysis.
estimate.
1IMF

Exhibit 1.4 | Increased Optimism


Given the recent announcements and the government's intent to drive manufacturing growth, how do
you see the manufacturing sector growth in India over the next five years?
5.1%

8.1%

48 %

37%

Aug-14


 

150

2.1

1.7

3.4

3.1

3.0

34%

34%
11%

4%

Sources: Reserve Bank of India Database on Indian Economy; Central Statistics Office; BCG analysis.

175

6.5

6.4

-0.5%

Jan-14

better and more versatile environment? According to


management consulting firm McKinsey & Co, Indias
manufacturing sector could reach USD 1 trillion by
2025.
Thus its only our mind set or rather our inhibitions
for growth that shackles our progress. If we transgress
that thought and change then none in the world can
bind our progress.

8 .0

0.4%

-1.8 %

Dec-13

through the Skill Development and Entrepreneurship


Ministry. An eight member team has been specially
assigned to answer investor queries within 48 hours
and address key issues ranging from labour laws,
skill development and infrastructure. A single online
portal will be dedicated to remove all bottlenecks
for the investors, so that project clearances could be
issued in time. This is likely to eliminate unnecessary
rules and regulations, bring transparency, make the
government more responsive, accountable and fasttrack the economic transformation of India. Moreover
the government is keen for having a transparent and

<5%

57%

4%

79%

15%

7%

910%

6%

1015%

>15%




Do you see stronger growth over the next 5 years compared to last 5 years?
In your sector? (% change)
2.4%
1.7%

67%

In your company? (% change)

48%

60%

<3%

21%
21%
21%

1 to 3%

9%
8%

-1 to 1%

13%
13%
20%
10%
5%
0%

77%

2.6%
1.9%

2013 CEO survey responses

a policy that pushes all kinds of entrepreneurship


instead of emphasizing too much on manufacturing
. Only time will tell how much of these policies are
digitalised system for dealing. It is also pushing for implemented and what fate or struggles lies ahead
efforts to curb black money and other inefficient for the Indian nation.
2%
1%
1%

-1 to -3%
<-3%

1%
0%



2014 CEO survey responses

5.1%

: 2013 CEO survey average

8.1%

: 2014 CEO survey average

Source: CII-BCG Manufacturing Leadership Survey 2013, CII-BCG Manufacturing Leadership Survey 2014.


  

practises with policies like implementing GST etc.


Majorly the Governments initiative can be summed
under various heads as follows.

Conclusion

References

There was a time when it was said that India


imported from a small diode to a major submarine.
But gone are the days when India was looked at as
only a backoffice support center. With the rate the
Indians are progressing on their mental and financial
capabilities its inevitable that this country requires
a steady manufacturing backbone to fuel its growth
and build a more sustainable nation in near future.
Therefore what is needs is steadfast support and prime
opportunity. This could be achieved on the back of the
continually growing demand in the country and the
inclination of multinational corporations to establish
low-cost plants in India. Therefore the government
has to play a key stakeholder throughout the initiative
by instilling confidence and easing the nature of doing
business in India. As we tend to look forward into the
midst of future, we can be certain that a revolution lies
ahead.

http://indianexpress.com/article/business/businessothers/rbi-should-use-indian-paper-ink-to-printcurrency-pm-narendra-modi/
http://www.makeinindia.com
http://rbi.org.in/Scripts/PublicationReportDetails.
aspx?ID=784
http://www.equitymaster.com/
http://www.moneycontrol.com/
http://economictimes.indiatimes.com/
http://www.banking-business-review.com/
http://indiabudget.nic.in/
http://www.dinodiacapital.com/
http://www.rbi.org.in/scripts/bs_viewcontent.
aspx?Id=2619
http://www.researchandmarkets.com/
http://finance.yahoo.com/
http://www.moneyrediff.com
http://economictimes.indiatimes.com/news/

But do we really belive that our efforts will lead to a

Yet there will be skeptics on this issue like Raghuram


Rajan who feels that in order to boost manufacturing
Indian government would indulge in similar tactics
like currency devaluation, and keeping income levels
low, and artificially reducing costs to remain globally
competitive. Thus he articulate that We need to have

INFINITIE Vol 6 Issue 1

A Tale of three currencies

Ambikesh Mishra(VGSOM)
On

January 16, 2015 the Swiss National Bank


(SNB) shocked the world. It decided to remove the
cap on its currency. Minutes after the announcement
Euro instantaneously fell from 1.2 Swiss franc to
0.85 frank. Almost 30% depreciations, no less than a
horror for currency brokers.
A quick recap of what all these sophisticated phrases
mean and whats the fuss about them.
Switzerland is not part of the European Union and its
economy is considered very stable in the whole world.
You must have heard about the legendary banks of
Switzerland. Given its strong economy and tax haven
status Swiss franc (national currency of Switzerland)
is perceived as a safe investment and is the 5th most
traded currency in the world. Switzerland is an export
driven economy (heard about Swiss watches) so too
much fluctuation in currency exchange rate is bad for
its businesses.
After back to back recessions in European Union, in
2011 investors thought Euro is no longer as safe as it
used to be and began parking their cash in Switzerland.
This enormous amount of inflow of money pushed the
Swiss franc to rise which in turn made Swiss exports
expensive for outside consumers. Swiss companies
began facing declining revenues and in a major step
the SNB announced that it is putting a cap on Euro/
Swiss franc rate.
The next logical question is why investors were
choosing Swiss franc over other 4 major currencies
and how can a central bank put a cap on its currency
exchange rate since its free market driven? Lets take

these questions one by one.


Worlds most powerful currencies US Dollar, Euro,
Japanese Yen & Pound Sterling were all in a major
distress following the 2008 financial crisis and the
quantitative easing programs of their central banks, so
investors had all but one choice, Swiss franc. Lets
take on the second question now. SNB had put a
cap of 1.2 Euro on Swiss franc. In plain English it
means one Swiss franc can buy a maximum of 1.2
Euro and not more.
To enforce this cap SNB began printing Swiss
francs and buying Govt. bonds, thus flooded the
market with fresh liquidity and kept the exchange
rate within range. This made Swiss products
competitive in the international market. Over
the years SNB announced repeatedly that it will
continue to support this policy on Swiss franc
exchange rate. But it did not foresee European
crisis to last this long.
Fast forward 2015 and we have debt ridden Greece
and deflating Italian and France economies. To
increase the aggregate demand European Central
Bank (ECB) has no choice but to buy these
distressed debts and provide fresh liquidity in
European markets. If ECB prints more money
Euro would become cheaper against Swiss franc
and SNB would be forced to print Swiss francs
too.
So on January 16, 2015 SNB decided it can no
longer sustain the policy of capping Swiss franc
and announced that it will be allowed to appreciate
as per market forces. Naturally, people across the

INFINITIE Vol 6 Issue 1


currency broker warned its equity was wiped out,
globe rushed to their local banks to buy Swiss francs a U.K. retail broker entered insolvency and a New
and within minutes the Swiss franc rose 30%. So why Zealand foreign-exchange trading house failed after
is this a catastrophe since you and I dont see anyone the Swiss central bank stunned markets Thursday by
getting out of business nor anyone losing their job? triggering a massive rally in the franc.
Lets introduce the third currency of our story,
Potato today costs same as it did yesterday.
The answer is very intuitive yet mesmerizing, so Japanese Yen. Japan has been struggling with falling
fasten your seat belts because we are going to dive prices (called deflation in economics) for quite a few
into the world of currency trading now. Few amongst years now and Japanese Central Banks efforts of zero
us know that currency market is the biggest market of interest rates and fresh money into the market didnt
the world with more than $8 trillion trading every day. boost the consumer sentiments. Demand remains
Since currencies dont move more than a percent in a low in Japanese market. Japanese Central Banks
day, currency brokers borrow a lot of money (called appeal that it is committed to lift the inflation and that
leveraging) and place a bet against another currency people should go out and spend/invest their money in
the market hasnt got much audience yet. Now after
hoping to make some profit.
So if Joe had $1 million and short sells $100 million Swiss National Banks U-turn on its promise of Swiss
of Swiss franc (called margin trading) hoping that franc cap policy investors are even more skeptical
Swiss franc will become cheaper tomorrow by some about Central Banks promises.
percent and he would make a sizeable profit, he was In plain English this means that an average Japanese
in for a nightmare. As the SNB news broke out, Swiss believes cash in her mattress is more secure than cash
franc ran and suddenly became 30% expensive than in shares or bonds. It seems SNB has defused the
yesterday. Next morning Joe finds himself $29 million bazooka of Japanese Central Bank unintentionally.
in debt. And this is not just a hypothetical situation.
Wall Street Journal reported on Jan 16, A major U.S.

INFINITIE Vol 6 Issue 1

INFINITIE Vol 6 Issue 1

10

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INFINITIE Vol 6 Issue 1


(BIS) in the year 1988. The main objective of these
norms is to facilitate the development
and functioning of a strong, prudent
and resilient international banking
system.
The Basel I Capital Norms provided
guidelines on the of minimal capital
requirements for banks and primarily
focused on credit risk, which refers
to the risk that a borrower can default
on any type of debt by failing to
make the required payments. Every
asset in the banking system has
different credit risk levels attached.
For instance, loans that are secured
by a letter of credit are riskier than
a mortgage loan that is secured with
collateral. Thus, various assets need
to be measured and weighted with
their respective credit risk levels
and their summation is known as
the Risk Weighted Assets (RWA)
of a bank. The ratio between the
total capital of a bank and the RWA
is known as the Capital Adequacy
Ratio (CAR), the amount of capital
which banks should need to protect
depositors, especially during a crisis.
According to the Basel I norms,
this ratio needs to be maintained at
8%. Moreover, the assets have been

The Basel Capital Accord

Aishani Sharma(SIMS,Pune)

he Subprime crisis has put various global banking


institutions under the spot light for all the wrong
reasons. Can a challenging and stringent regulatory
framework be a cure for the same?
The rapid pace of globalisation over the past few
decades has resulted in the emergence of a highly
integrated, interdependent and complex global
financial system. This emphasizes the need for a
universally standardized regulatory framework which
can assist in regulating and channelizing the resources
of the global financial (banking) system in an efficient,
effective and equitable manner. Accordingly, the
Basel Capital Accord were introduced by the Basel
Committee on Banking Supervision (BCBS), under
the guidance of the Bank for International Settlements

categorised on the basis of different risk levels or


weights attached which are 0, 10, 20, 50 and up to
100%. However, a bank is also prone to two other
types of risks namely operational risks and market
risks. Operational risks arise from breakdowns in
internal procedures, people and systems and market
risks arise due to external factors like economic
situation, socio-political conditions, natural disasters,
etc. These were not considered during the formulation
of Basel I regulations. Moreover, the above mentioned
categorization of risks were found to be narrowly
classified defined for the complicated real business
world.
These issues combined with a limited global
participation (mainly from G-20 countries) hampered

12

INFINITIE Vol 6 Issue 1

the effectiveness of Basel I regulations, thereby


encouraging the Bank for International Settlements
(BIS) to include more countries and paving the way
for its successor the Basel II Norms.
The second set of the Basel regulations (2006),
integrated all applicable provisions of Basel I and
introduced certain amendments.The Basel II Norms
were based on 3 pillars.The First Pillar: Minimum
Capital Requirements; The Second Pillar: Supervisory
Review Process; The Third Pillar: Market Discipline.
The first pillar, the minimum capital requirements,
requires
banks
to cover credit,
market
and
operational risk.
Here, the capital of
a bank is divided
into three tiers.
Tier 1 Capital,
which
is
the
most liquid and
crucial component
mainly comprises
of
permanent
shareholders
equity
and
disclosed reserves.
The Tier 2 Capital is comparatively less liquid in
nature and includes undisclosed reserves, revaluation
reserves, general provisions and loan-loss reserves,
and hybrid capital (combination of debt and equity
instruments). The Tier 3 Capital includes loan
instruments which are of low priority.
Within the Capital Adequacy Ratio of 8%, highest
composition is of Tier 1, followed by Tier 2 and Tier

3. The whole rationale behind this classification was


to improve the quality of capital in banks. The second
pillar, the Supervisory Review process mainly aims at
ensuring proper supervisory processes that ensure the
effective implementation of the various regulations
through their own internal risk assessment processed.
The Third Pillar, Market Discipline, gives a set of
disclosure requirements that provide information on
the capital, risk exposures, risk assessment processes
& overall capital adequacy levels.
Unfortunately, the Basel II Norms were ineffective
in controlling the subprime
crisis
(2008).
Due
to
various
technical loopholes and
manipulations, there were
alarming
discperencies
between the reported
and actual capital levels
of banks. For example,
intangible assets like
goodwill, which have
minimal liquidity were
included in the calculation
of capital. Thus, when the
banking system was hit by
the crisis, the institutions
did not have adequate real capital to survive. The
lessons from this episode led to the formulation of the
Basel III Norms.
The Basel III capital accord was introduced in
the year 2010 and is expected to be implemented
completely by the year 2019. In order to make these
set of regulations more holistic and stringent than
its predecessors, the following new ratios have been

13

INFINITIE Vol 6 Issue 1

introduced:
1. Capital Conservation Buffer: Within the
CAR levels of 8%, this new buffer of 2.5% needs to
be maintained by banks which would help them to
absorb losses, especially in periods of tight liquidity
levels.
2. Countercyclical buffer: Along with the
capital conservation buffer, Basel III has introduced
a countercyclical capital buffer which ranges from
0 2.5%. This requirement is made for periods of
excessive credit growth and by triggering this ratio
the excess liquidity in the system can be optimized.
3. Liquidity Requirements:-For this requirement,
banks need to maintain two ratios namely the
Liquidity Coverage Ratio (LCR) and Net Stable
Funding Ratio (NSFR) at 100% levels. The LCR
requires institutions to hold a sufficient buffer of high
quality assets that can be converted into cash within
30 days. The NSFR requires institutions to have more
sources of stable funding such as retail deposits,
savings accounts rather than risky instruments like
certificate of deposits.
4. Leverage Ratio:-This ratio requires the Tier I
capital to represent at least 3% of total assets, in order
to prevent excessive build-up of leverages (amount of
debt) on banks.
On paper, the Basel Capital Accord appear to be well
drafted and prudent. Yet, the world has seen their
paralysed effectiveness in handling various financial
crisis. The actual effectiveness of the regulations

can only be appreciated with strict and timely


implementation by the respective Central Banks.
This need to go in hand in hand with the objective
of financial inclusiveness and not contradict this
function. For instance, Indian Public Sector Banks
need to raise INR2.2 to INR2.7 trillion, or US$26
to US$37 billion between FY 2015 and the full
implementation of Basel III in FY 2019. According to
an analysis by Firstpost, at least five banks have Tier1 capital adequacy less than 8 percent. This challenge
has been caused mainly due to high amount of NPAs.
But, can crucial, yet non-performing sectors like
agriculture be ignored by Government banks?
Every economy has certain sectors that can possess
high volatility and uncertainty (like the real estate
market) thereby making it crucial for regulators to
ensure that such sectors are specified and prohibitions
should be made to optimize (if not minimize) exposure
to the same. Strict penalties, at national/international
levels need to be imposed in cases of manipulative
non-compliance. In a nutshell, if the various global
and national macro-economic factors are considered,
the regulations are improvised continuously, enforced
diligently and are inclusive of higher number of
countries, the Basel Capital Accord can lead to the
formation of a healthy, wealthy, and progressive
banking system.

14

INFINITIE Vol 6 Issue 1

A Better Mouse Trap:


The Fama-French Three Factor Model

- Himani Anand (IIML)

Early 1990s- Fama and French concluded their


research. The newspapers were brimming with
headlines declaring, Beta is dead. Questions
were being raised on the credibility of established
financial models of asset pricing. The Capital Asset
Pricing Model (CAPM) was at stake. The model
that was built around how the expected return on
an asset is related to its beta was at the risk of being
damaged. What would happen next was the sole
concern of financial economists worldwide.
In an idealized framework for an open market place,
All the risky assets refer to tradable stocks that are
available to all. In addition, we have a risk-free
asset (for borrowing and/or lending in unlimited
quantities) with interest rate rf. It is assumed that all
information is available to all such as covariance,
variances, mean rates of return of stocks and the
likes. It is also assumed that everyone is a riskaverse rational investor who uses the same financial
engineering mean-variance portfolio theory from
Markowitz.
A little thought leads us to conclude that since
everyone has the same assets to choose from, the
same information about them, and the same decision
methods, everyone has a portfolio on the same
efficient frontier, and hence has a portfolio that is a
mixture of the risk-free asset and a unique efficient

fund F (of risky assets). In other words, everyone


sets up the same optimization problem, does the
same calculation, gets the same answer and chooses
a portfolio accordingly. This efficient fund used by
all is called the market portfolio and is denoted by
M. The market portfolio, M, as any other portfolio, is
described by portfolio weights.
The specific attribute of the market portfolio is that
the weight on a stock is the fraction of that stocks
market value relative to the total market value of all
stocks. How sensitive the returns on a particular stock
are to the returns on this market portfolio is given by
Beta. Therefore, 'Beta' is a measure of the volatility,
or systematic risk, of a security or a portfolio in
comparison to the market as a whole.
Every security commands a risk free interest rate to be
compensated for the time value of money involved.
Returns beyond these are dependent on the risk that
it carries. The total risk returns of a security carry can
be either systematic or unsystematic.
Systematic risk
It is the risk inherent to the entire market or an entire
market segment. Systematic risk, also known as
non-diversifiable risk, volatility or market risk,
affects the overall market, not just a particular stock
or industry. This type of risk is both unpredictable

15

INFINITIE Vol 6 Issue 1


and impossible to completely avoid. It cannot be
mitigated through diversification, only through
hedging or by using the right asset allocation
strategy. Inflation levels and interest rates all the
firms irrespective of the industry they operate in.
Unsystematic Risk
It refers to the company or industry specific hazard
that is inherent in each investment. The risk that

airline industry employees will go on strike,


and airline stock prices will suffer as a result, is
considered to be unsystematic risk. An investor
who owned nothing but airline stocks would face
a high level of unsystematic risk. By diversifying
his or her portfolio with unrelated holdings, such
as health-care stocks and retail stocks, the investor
would face less unsystematic risk.
Modern portfolio theory shows that specific risk
can be removed through diversification but even a
portfolio of all the shares in the stock market can't
eliminate the systematic risk. Therefore, when
calculating a deserved return, systematic risk is what
plagues investors most. CAPM, therefore, evolved
as a way to measure this systematic risk.
William Sharpe found that the return on an individual
stock, or a portfolio of stocks, should equal its cost
of capital. The standard formula remains the CAPM,
which describes the relationship between risk and
expected return.
The formula represented as:

risk premium is multiplied by a coefficient that Sharpe


called beta.
If a share price moves exactly in line with the market,
then the stocks beta is 1. A stock with a beta of 2
would rise by 20% if the market rose by 10%, and fall
by 20% if the market fell by 10%.
If the stock has a high positive :
It will have large price swings driven by the market
- It will increase the risk of the investors portfolio
(in fact, will make the entire market more risky- the
investor will demand a high return in compensation.
If the stock has a negative :
It moves against the market. The investor will accept
a lower return (in exchange for the risk reduction, and
return can be negative).
Financial economists Fischer Black, Michael C. Jensen
and Myron Scholes confirmed a linear relationship
between the financial returns of stock portfolios and
their betas. They studied the price movements of the
stocks on the New York Stock Exchange between
1931 and 1965 and presented results in their classic
1972 study titled
The Capital Asset Pricing Model: Some Empirical
Tests.

On the other hand, when professors Eugene Fama and


Kenneth French looked at share returns on the New
York Stock Exchange, the American Stock Exchange
and NASDAQ between 1963 and 1990, they found
that differences in betas over that lengthy period did
not explain the performance of different stocks. The
linear relationship between beta and individual stock
returns also breaks down over shorter periods of time.
These findings seem to suggest that CAPM may be

To the risk free rate is added a premium that equity


investors demand to compensate them for the extra
risk they accept. This equity market premium
consists of the expected return from the market as
a whole less the risk-free rate of return. The equity

16

INFINITIE Vol 6 Issue 1


wrong.

small stocks and the returns on a portfolio of large


stocks (SMB; Small minus Big)

Fama and French found that on average, a portfolios


beta is the reason for 70% of its actual stock returns.
Unsatisfied, they thought, rightly, that there was an
even better explanation. They discovered that figure
jumps to 95% with the combination of beta, size and
value.
Fama and French came up with a three-Factor Model,
which was an advancement of the Capital Asset Pricing
Model (CAPM). Beta was the brainchild of CAPM,
which was designed to determine a theoretically
appropriate required rate of return of any investment
.The following determinants were also sought to affect
the risk and returns on securities by the renowned
researchers:
Size The extra risk a small companys stocks carry
because of the higher cost of capital and greater
business risk have a bearing on their returns as
compared to high capitalization companies stocks. In
the long run, small-cap stocks have generated higher
returns than large-cap stocks; however, with the risk
that they carry.
Value Value stocks are companies that tend to have
lower earnings and low growth rates, lower prices
compared to their book value but high dividends.
In the long run, value stocks have generated higher
returns than growth stocks, which have higher stock
prices and earnings, albeit carry higher risk. Stocks
with high Book value to its market price ratio (BTM)
are value stocks.
If your portfolio holds all traded stocks in the weighted
proportion of the total market, thats the end of the
story. But, if your portfolio differs in its makeup in
average size or on the growth-value spectrum of the
market, then you will have a different result. There are
additional premiums for accepting a portfolio either
larger or smaller than the market, and/or with a tilt
toward growth or value different than the market. These
risks are sometimes called priced risk, because we can
identify additional return for accepting them. FamaFrench defined the size premium as the difference in
returns between the largest stocks and the smallest
stocks in the CRSP database. They defined the value
premium as the difference in returns between the
stocks with the highest Book to Market Ratios (BTM)
and the lowest BTM.
The models says that the expected return on the
portfolio in excess of the risk free return is explained
by the sensitivity of its return to three factors
(i) Excess return on broad market portfolio (Rm- Rf )
(ii) Difference between the return on a portfolio of

(iii) Difference between the return on a portfolio of


high book-to-market stocks and returns on a portfolio
of low book-to-market stocks (HML; High minus
Low)

It is majorly a sum of risk free return, market premium


(Beta), size premium, value premium and random
error. In a particular time frame, none of these market
factors is necessarily positive. However, over longer
periods the premiums are persistent and generous.
Value is more persistent than size but both are worthy
of the investors attention.
One of the strategic implications of CAPM is that
the ultimate equity portfolio (measured in terms
of maximum return per unit of risk) is the global
portfolio. In other words, equity investors should
strive to own a proportional share of all the worlds
traded stocks. Single factor models yield simple
solutions for the expected returns as the weighted
sum of their individual returns.
However, under the Three Factor Model, the result
isnt quite so tidy. Investors must now decide how
much of each of the three factors they are willing to
hold when they construct their portfolios. They must
manage the tradeoffs between the three factors to
suite their own appetite for the various risks.
Moreover, the trend also seems to be changing; the
investors can now build portfolios with expected
returns significantly higher than the global equity
portfolio. By identifying the true priced sources
of risk that generate returns, and managing their
exposure to fundamental risk factors through passive
structural portfolio engineering techniques they can
obtain these additional benefits at dramatically lower
costs.
They can be economically achieved by building a
portfolio of index funds that rely solely on exposure to
risk factors that over time have demonstrated persistent
strong positive premiums. This process takes a long
step forward in turning investment management from
voodoo science into a real discipline.

17

INFINITIE Vol 6 Issue 1

INFINITIE Vol 6 Issue 1


Increase in maintenance cost of planes (SpiceJet had
to keep separate spare part inventories for aircrafts
as they were using planes of different models)
All these are the individual reason for the failure of
these two airlines. Apart from these there are some
common reasons which caused these airlines to
operate under heavy losses. They are
Flawed government policy
Protectionist approach of government towards Air
India
High landing Fees at airports
Operating cost which are about 40% higher than
what airlines pay outside India
States levying individual taxes for Air Turbine
Fuel(ATF)

Reviving Civil Aviation In India

-Krishna Deshmukh
Introduction

Out of the total 1.2 billion people in India only 0.5%

people have travelled by air. This depicts enormous


growth potential for Indian aviation industry.
Presently Indian aviation sector is ninth largest in
the world and by 2020 it anticipated to become third
largest in the world and by 2030 largest market in the
world. But the path to become largest airline market
in the world is not easy with kingfisher grounded,
SpiceJet in huge debts and mounting losses on other

(JBIMS)

airlines emphasises the fact that something is wrong


in the industry.
International Air Transport Association (IATA) is
anticipating that Indias domestic air traffic would have
double-digit growth from 2012 but issues like national
and state policies, laws, regulation, air safety and
infrastructure are needed to be addressed to achieve
this feat. If we take a look at the current condition of
airlines it shows us that apart from indigo all other
airlines are performing poorly in India in spite of the
fact that fuel prices have lowered and civil aviation
sector has shown a growth of 13.8% in the last decade.

18

Samir Chincholikar
Reason for failure of Kingfisher airlines:
Overestimating
demand and focussing
on providing luxury
absence of long
serving MD or CEO
Lack of long term
strategy, frequent
changes from low cost
model to full service
carrier and vice-versa
Reasons for failure of
SpiceJet:
Discount fares, Flash
sales
Decision to operate in
Tier-II and Tier-III cities
Interference of family members in senior level
management

Factors affecting aviation growth in India


The factors that have affected the growth of Aviation
industry in the last decade are
1)

Punitive Taxation:

Indian domestic air


traffic has increased
from
48.66
lakh
passengers to 52.16
lakh
passengers
registering growth of
7.19 per cent, according
to data released by the
Directorate General of
Civil Aviation (DGCA).
Despite such a scenario
Indian airlines are
making huge losses.
Airlines operating in
India have to operate
with
highest
fuel
prices in the world. India imports large percentage
of Aviation Turbine Fuel (ATF) from foreign sources
and its prices are set up by government undertaking.

19

INFINITIE Vol 6 Issue 1


Under ineffective control of central government,
state surcharge varies from 4 to 30 per cent. Most of
the states tax heavily as they see it as easy source of
revenue by taxing organized sector rather than going
for individual defaulters. Also, 70 per cent operating
costs of airlines are dollar-based and continuous
fluctuation of rupee against dollar makes it difficult
for long term planning.

Government
policies:
2)

With the decline of


two largest carriers,
Kingfisher and SpiceJet,
within span of 3 years
shows serious structural
flows in the system. Most
of the key decisions taken
are arbitrary in nature.
Ministry of civil aviation
is weak and its policy
decisions are affected by
conflict of interest. In
case of Kingfisher, lessors
encountered stiff legal and
bureaucratic restriction
in recovering planes
because local airport
and tax authorities were
not paid by Kingfisher.
Government played mute
in this situation, and
hence financiers are now
demanding
premium
from loss making carriers.
Inadequacy of Director General of civil aviation
(DGCA) to keep a check on airlines and maintaining a
fair playing ground for private players has also affected
growth. The government has bailed out Air India
with the taxpayers money which has made Air India
immune to market ups and downs. Also, periodically
government has been raising charges on carriers and
passengers, as source of generating revenue.

INFINITIE Vol 6 Issue 1

Indian passengers are highly price sensitive once the


air fares are set low, it is very difficult for carriers to
increase fares as passengers easily switch to other Low
cost carriers.

4)

Infrastructure problems:

Indian aviation industry has woefully inadequate


infrastructure.
According
to
the Airports Authority of India
(AAI), 21 airports serve more
than a million passengers. Six
major airports, Mumbai, Delhi,
Chennai, Hyderabad, Kolkata
and Bangalore, dominate 70% of
domestic air traffic. Only 45 major
cities have direct air connectivity
and situation is worse in tier-II
and tier-III cities. With domestic
traffic increasing at exponential
rate, massive improvements and
modernization of the airports needs
to be accomplished within next few
years but the Airport authority of
India (AAI) has failed to develop
this low cost airport and they have
not opened them for development
by private players. Land acquisition
is also a big issue while going for
Greenfield projects.

5) Air Safety:

The
US
Federal
Aviation
Administration (FAA) had lowered
Indias aviation safety ranking from
category-I to category-II, finding regulatory oversight
inadequate. Planes of carriers like Air India and Jet
Airways providing services in US had been impeded.
Category-II ratings designate that country lacks
regulations necessary to oversee to carriers working
under the safety guidelines. DGCA has fared poorly
in matters of record keeping, inspection procedures,
technical expertise and training personnel. All
concerned authorities should work swiftly to change
3)Increased competition and Sticky prices: status from category-II to category-I, if failed there
would be restrictions on Indian carriers to operate
Indian aviation market is extremely competitive flights to international destinations.
in nature and airlines use fare wars and predatory
pricing from time to time to gain larger chunk of What can be done to revive Indian aviation
market share instead of focusing on profit shares. As a
industry?
result for most of the air-carriers, operating costs are
much more than the revenue generated by them. As 1)
Tax Reforms:

20

Fuel surcharge and sales tax levied on ATF, by state


government should be decreased. If ATF is included
in ATF then all states will have uniform taxation all
states which will help airline to operate in all states at
same cost. Also, reduction in taxes will bring down
fares and will certainly help in increasing air-traffic.
Tax incentives should be granted to private players
involved in work of modernization or development of
airport infrastructure projects.

efficiency in present systems by keeping them updated


with technology and imparting requisite trainings.

5)

Foreign Direct Investment (FDI):

Currently 49% FDI is allowed in local airlines which


should be further increased. Relaxing FDI will bring
much needed capital, proven practices and newer
technology adopted by successful airlines like Etihad,
Singapore airlines, which will in conclusion increase
2)
Role of Government:
profitability and efficiency of airlines industry.
Recently UAE-based Etihad Airlines has acquired
A national aviation policy should be drafted by stake in Jet Airways and AirAsia with Tata group
working co-ordinately with all ministries and levels has launched AirAsia India but the processing of the
of government which will facilitate growth. This will applications has been distressingly slow and marred
help in boosting confidence about Indian aviation in legal tangles with allegation of favouritism. Efforts
industry in light of failure of two large airlines like should be made to make sure that inflow of FDI is not
SpiceJet and Kingfisher, which once dominated caught in red tapes.
airlines sector. DGCA should investigate the matter of
Conclusion:
deep discounts and other fare war schemas used by
low cost airlines to attract passengers. Upgradation of
There is immense potential in Indian aviation sector as
Airport Authority of India (AAI) and Director General
aviation has not touched large portion of population
of Civil Aviation (DGCA) should be undertaken to
in India. But Hurdles like inadequate infrastructure,
match them with the standards of international flying
complicated regulations, safety issue, and high
regulators.
taxation which make it difficult for airlines to operate
profitably. In spite of its demerits there is a lot of
3)
Developing infrastructure:
potential in Indian aviation. It is time for industry
stakeholders to work conjointly with policy makers
Prime Minister Narendra Modi has promised to and come up with efficient and rational decisions that
develop 200 low cost airports in the coming 20 years.
Work should be started immediately. Infrastructure
development can be addressed effectively by
privatization or private-public partnership of smaller
airports. As per the recommendations of Mayaram
committee, 100 per cent FDI should be permitted
in airport development projects. For developing
Greenfield Projects, more comprehensive land
reform bill can be introduced, which will reduce
cumbersome task of land acquisition.

4)

Air Safety:

Federal Aviation Administration had downgraded


Indian air-safety rating from 1 to 2. Government has
already started working towards increasing safety
standards to international levels by establishing State
Safety Programme (SSP) along with a corresponding
Safety Management System (SMS), which ensures
that acceptable levels of safety for aviation operations
within the state are being set, measured and achieved,
and expressed in terms of safety performance
indicators and targets. Also, Government could
improve knowledge base of technical staff and improve

will shape the future of aviation sector in India

References:

1) http://dgca.nic.in/
2) http://www.ibef.org/industry/indian-aviation.
aspx
3 http://www.aai.aero/public_notices/aaisite_
test/main_new.jsp

21

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22

23

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significant portion of the Scheduled Banks. As of May
2014, 90 SCBs were operational in India. SCBs in India
are arranged into the five categories focused around
their proprietorship and/or their temperament of
operations.
State Bank of India and its six partners (barring State
Bank of Saurashtra, which has been combined with the
SBI with effect from August 13, 2008) are perceived as
a different class of SCBs. Nationalized & SBI and its
associates form Public sector banks in India.

INDIAN BANKING INDUSTRY


Rahul Sharma (Great Lakes Institute of Management)
Introduction

The Indian Banking industry was founded in the


eighteenth century and it
has come a long way since
then. Initially there were
small trading banks, involved
in basic fund management
activities.
Presidency
banks led the way in pre
independence era. Those
transformed into the Imperial
Bank of India and successively
into the State Bank of India.
Private proprietorship led
to focus towards public
ownership and responsibility
with nationalization in 1969
and 1980 which changed the
face of banking in India. The
Industry has lately moved
towards more prominent
liberalization. The whole
advancement
towards
evolution of banking industry
in India can be grouped into
four different stages.


Pre-Nationalization Phase which comprised
first stage (before 1955)

Second Stage of Nationalization and
Consolidation from 1955-1990

Third stage of Financial & Banking Sector
Reforms and Partial Liberalization (1990-2004)


Increased Liberalization from 2004
onwards fourth stage

Current Structure of Indian Banking Industry


Indian Banking Industry
can be broadly categorized
into
Scheduled
and
Unscheduled
Banks
with Scheduled banks
occupying major chunk
of it. Financially excluded
populations
banking
needs are catered to by
unorganized
entities
other than banks, such as,
money-lenders,
brokers
and home-grown bankers.

Scheduled Banks

A Scheduled bank is a
bank that is listed under
the second schedule of
the RBI Act, 1934. To be
incorporated under this
schedule of the RBI Act,
banks need to satisfy
certain conditions like
having a paid up capital
and reserve of at least 0.5 million and satisfying the
Reserve Bank about fair practices. Scheduled banks
are further ordered into commercial and cooperative
banks.
Scheduled Commercial Banks (SCBs)
Scheduled Commercial Banks (SCBs) represent a

24

had a CAGR of 11.1 per cent. It is anticipated that total


banking sector credit will grow at a CAGR of 18.1
per cent (in INR) and by 2017 touch US$ 2.4 trillion.
There was a significant growth experienced by private
lenders in credit cards and personal loan businesses

Regional Rural Banks (RRBs) were set up in


September 1975 so as to develop rural economy by
giving banking services in such regions by leveraging
their local positioning and strong resource base. Value
holding of RRBs is together held by three players: the
Central Government, the Sponsoring bank and the
respective State Government in the ratio of 50:35:15
in FY 14.

No. of Banks in India

Scheduled Cooperative Banks

Scheduled Cooperative Banks in India might be Around 27 nationalized banks, 19 private sector
majorly classified into urban credit cooperative banks, 32 foreign banks & various co-operative banks,
and rural credit cooperative banks. Rural credit regional rural banks are operating in India.
cooperative banks carry out long term and short term
lending. Credit cooperatives in many states have a
three level structure (primary, district and state level).

Best Performing banks in India Top 5

Non-Scheduled Banks
Non-Scheduled Banks additionally work in the
Indian banking industry, as Local Area Banks (LAB).
There are just 4 LABs working in India. These are
banks that were set up under the scheme declared
by the legislature of India in 1996, for the station of
new private banks of a local nature; with purview over
greatest of three bordering regions.

State Bank of India: SBI is the undisputed leader,

be it the scale of operations or financials. Its employee


base is nearly 3 lakh and it makes up approx. 20% of
the Indian banking sector. SBI has 17,000 + branches
and more than 27,000 ATMs. SBI manages more than
390 billion $ worth of assets.

ICICI Bank: Next is ICICI when it comes to assets

managed by the Bank. ICICI is actually ahead of SBI


Market size and growth
but behind HDFC according to the current market
cap. It has around 3540 branches, 11200 ATMs &
In FY 13, banking assets size in India summed up to over 82000 employees. It manages 99 billion $ worth
US$ 1.8 trillion. By FY 25, this size is expected to reach of assets.
US$ 28.5 trillion. Over the period FY 06-13, bank
deposits have grown at a compound annual growth
unjab National Bank: It is the third largest bank.
rate (CAGR) of 21.2 per cent. In FY 13, total deposits It has very low market capitalization compared to the
totaled US$ 1,274.3 billion.
assets it manages. It has over 5800 branches, 6000+
ATMs. The bank manages 90.9 billion $ worth of
Indian banks saw their revenue increase from US$ assets
11.8 billion in 2001 to US$ 46.9 billion by 2010. Profit
after tax also touched US$ 12 billion from US$ 1.4
ank of Baroda: It is the fourth largest bank in
billion over the period from 2001-2010.
terms of assets management. It is undervalued/
During the period FY 08-13, credit to housing sector priced according to market cap. It has more than 4200

25

INFINITIE Vol 6 Issue 1


branches and has 840 million $ of net profit. The bank for Indian Companies, 10% for NRIs or PIO, whereas
manages 73 billion $ worth of assets.
it stands at 20% for Public sector banks. These can be
altered by the Government with appropriate approvals.
DFC Bank: Number one according to market cap.
It stands at 5th position according to assets managed
Economic factors
by it. HDFC has more than 3200 branches, 12000
ATMs and $1.1 billion worth of net Profit. It manages Economic factors in the nation additionally impact
assets worth $66.7 billion.
the Banking Industry both positively or unfavorably.
Citibank is now the most profitable foreign creditor When the economy is fit as a fiddle in terms of high per
in India but in FY14 its earnings growth was muted; capita income, great agriculture harvest and controlled
inflation, banks have an edge as individuals have more
net profit increased only 6% to Rs.2, 893 crore.
Among private banks, the most profitable are ICICI, cash to put in banks. Also, in the times of financial
boom, more FDI is brought into country through
HDFC and Axis bank.
banking channels that really enhances business for
banks and the economy in general. However, in times
Macros affecting banking industry
of subsidence, banks face difficulties in recuperating
their cash, issuing fresh credit and net interest margin
Political factors
securities are lower as well.
These tell us about how much the government
Social factors
intervenes in the economy of a country. Examples
include tax policies, labor laws, environmental laws,
These include various social and cultural factors
trade restrictions, tariffs, political stability etc.
The major political factors that affect banking industry affecting banking industry in India
Home-grown lenders
in India are:
Before sophisticated banking came into picture, there

Governments regulation
were several money lenders from whom people used

Budgetary measures
to borrow money. They charged high interest rates

Limits on Foreign Direct Investments (FDI)
and also concept of mortgage was present. Evolution
of banks brought about attitude changes and people
Governments regulation
Banking sector in India is comparatively less affected started borrowing money from banks.
by governmental regulations due to robust policy Lifestyle:
framework set up by RBI. Government affects the Due to a rapid change in lifestyle of people, banking
banking sector through legislature and policy framing. industry is trying to match up with ever changing
Securitization act has helped banks against defaulting expectations by venturing into unique product
borrowers. Strict capital and liquidity prudential portfolios and better services. This has helped widen
regulations have helped the industry gain credibility. the service offerings by banks and leverage on
Government supports recapitalization of certain untapped potential.
banking Institutions by infusing money into them.

Budgetary measures

Population:

As population increased, banks opened more and


These measures lay down guidelines for banks to more branches to serve more people. The population
lend or accept deposits. The government can increase density is one of the major factors of opening up of a
such credits like farm credits, agriculture credits, new branch of a bank. This has helped industry grow
infrastructure credits (priority lending), smoother manifolds.
flow of credit to farmers and some waivers.

Literacy:

Limits on Foreign Direct Investments (FDI) Literacy plagues our country as we have very low
literacy rates compared to developed nations. This, on
and Foreign Institutional Investor (FII)

The insurance sector in India is yearning for one hand act as a block in transaction processes but
investments. Expansion is needed in many sectors. on the other hand leads to increase in trust on bank.
The government of India had approved the FDI cap
Technological factors
increase in insurance sector to 49% from 26% in
December 2014. FII limits are 24% of paid up capital

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INFINITIE Vol 6 Issue 1


Indian banking industry, today is the midst of an
IT upheaval. Information Technology (IT) has
fundamentally been adopted in Communication,

Environmental factors
Indian economy has been robust for some years now.
With change of power at central level and NaMos
effect, there is positivity in the general atmosphere. As
more investments come into India and service sector
grows, there will be more loan borrowing, savings etc.
from businesses who wish to make investments here
and subsequently more lending. This will positively
affect Indian banking industry.

Connectivity, and Business Process Reengineering


in banking industry. It empowers advanced item
improvement, better market foundation, execution of
dependable procedures for control of risks and helps
the monetary delegates to reach geologically distant
and diversified markets.
Technology has positively influenced these factors:
access to liquidity, change of benefits and checking
of risks. Further, IT has had a critical bearing on
the proficiency of cash, capital and external trade
markets. ATMs, mobile banking, credit cards etc. are
some examples.
Payment structures have been one of the most
positively affected by inflexion of IT. Systems like NDS
(Negotiated Dealing System), CFMS (Centralized
Funds Management System) for better subsidizes
administration by banks and SFMS (Structured
Financial Messaging Solution) for secure message
exchange have brought about a revolution.

Financials of some Indian Public Sector Banks

Legal Factors

Banking Regulation Act

This became operational in 1949 to give RBI power to


regulate, control and monitor the banks in India. This
made it mandatory for banks to obtain license from
RBI before opening branches and also each bank must
have a separate director.

RBIs intervention

References

RBI has the authority to intervene to stabilize rupee http://rbi.org.in/Scripts/PublicationReportDetails.


but will have to maintain reserve balances to avoid aspx?ID=784
periods of turbulence.
http://www.equitymaster.com/
http://www.moneycontrol.com/
http://www.banking-business-review.com/
http://indiabudget.nic.in/
http://www.dinodiacapital.com/
http://www.rbi.org.in/scripts/bs_viewcontent.
aspx?Id=2619
http://www.moneyrediff.com
http://www.icicibank.com/aboutus/about-us.page

27

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Introduction


Payment facilitators like One 97, Oxigen,

Large conglomerates like Aditya Birla Group,
Reliance Industries, Tech Mahindra, Videocon, Sun
Pharma

Scheduled Commercial Banks such as Kotak
Mahindra Bank, Axis Bank etc (interested in joint
ventures with promoter/promoter group)

Payment Bank - An idea conceived by RBI to deepen


Financial Inclusion

Nachiket Mor committee, was set up to examine


the challenges in financial inclusion and remittance
services. It had come to conclusion that there is an
ultimate need for a meaningful, time-bound financial
inclusion in India and there is a requirement for a new
institutional structure, since it has been estimated
that over 60% of the adult population, both in rural
and urban India, still has no access to basic banking
services and the existing banks cannot meet these
requirements
So the basic objective of coming up with payment
banks with stricter liquidity norms is to facilitate
financial inclusion and remittances

Rules & Regulations



Minimum paid-up equity capital of Rs 100
Crores. Minimum CAR of 15% is needed on risk
weighed assets. Once the net worth of Rs 500 Crore
is reached, it is mandatory to list the payment bank
within 3 years of its reaching the net worth.

Minimum initial contribution of the promoter
to the paid-up capital should be at least 40% for the
first 5 years.

A payment bank should maintain a minimum
leverage ratio of 3%.

Maximum 74% of foreign shareholding is
allowed and individual FII or FPI is restricted to
below 10%.

At least 25% of the physical access points
should be located in rural centers, preferably northeast, east and central regions.

Prudential and priority sector lending
requirements are not applicable, as there are no loans
present in the portfolio of a payment bank.

A minimum of 75% should be invested in
SLR eligible government securities or T-bills with up
to one year of maturity and a maximum of 25% can
be held in current and time fixed deposits with other
banks. Operations should be technology-driven from
the beginning

Overview of a Payment Bank


Key Objective

To expand financial inclusion by widening the


spread of payment services and deposits to lowincome households, small businesses, migrant
labor workforce, and other unorganized entities by
facilitating high volume, low value transactions in
deposits and payments/remittance services in an
environment that is highly secured and technology
driven.

Payment Banks and Their Impact on Indian Financial Inclusion

Services provided


A payment bank can accept demand
deposits, i.e., current and savings bank deposits
from individuals, small businesses and other entries.
Initially restricted to hold a maximum balance of Rs.
1 lakh per customer with simplified KYC norms

Can issue ATM/ debit cards/ PPIs, and offer
remittance services and internet and mobile banking
services. Cash outs
at other terminals
are allowed in
addition to other
channels

Can act as
a channel to accept
remittances to be
sent and to receive
remittances from
multiple
banks
under
RTGS/
NEFT/IMPS

It has the
permission
to

Abhishek Sharma
(IIFT Delhi)

handle cross-border remittance transactions in the


nature of personal payments/remittances on the
current account
It can act as a Business
Correspondent of another bank
and can undertake non-risk
sharing simple financial services
activities that do not require
any fund commitment, such as
distribution of Mutual Funds,
insurance products, pension
products, etc. and undertake
utility bill payments.
It cannot undertake lending
activities, issue credit cards,
accept NRI deposits and cannot
become a virtual bank or
branchless bank

28

Phani Tejaswi K
Eligible Promoters

PPI issuers, individuals/professionals, Non-Banking


Financial
Companies,
Business
Correspondents,
mobile telecom operators,
super market chains, real
sector
co-operatives,
a
scheduled commercial bank
with a maximum stake of
30%

Interested Promoters so
far


Telecom majors like
Vodafone, Bharti Airtel, Idea

Retailers like Futures
Group

29

Main challenges for a Payment Bank


A low margin
business
which
needs to adhere to
the stricter norms of
minimum 75% SLR
put in place.
No provision to
offer credit facility
and to earn loan
interest, due to which
the main revenue
source gets limited
to the transaction
fee charged on the
payments.

INFINITIE Vol 6 Issue 1



Challenge to expand the network to satisfy
the condition that at least 25% of the physical access
points should be in rural centers

Business viability will be a major challenge as
the targeted customers are from financially excluded
segments, in which the cost of acquisition is relatively
high whereas the ticket sizes are very small

Limited product portfolio compared to a
traditional bank due to which traditional banks will
have an edge in terms of liquidity

again in 2014 when Prime Minister Narendra Modi


announced Jan Dhan Yojana, a new financial inclusion
drive to provide financial services to unbanked/ under
banked population.
The ability of banks in making the drive a success
by enrolling targeted number people to the financial
system in a short span of time raises the question of
relevance of payment banks once the existing banks
implement it successfully by linking these bank
accounts with Aadhar Card.
The question becomes more important because, by
Business model of a Payment Bank at a glance the time payment banks operationalize, will there be
unbanked households around? However there are
many opinions in favor
Insufficient Financial
of payment banks.
Inclusion
1. It would be
Our country remains
easy for new banks
grossly
under-banked
to adopt superior
despite significant efforts
technologies and can
by the government to
reshape
franchise
further the financial
models by including
inclusion.
Some
of
Kirana stores. Kirana
the measures initiated
stores can serve as
like Self Help Group
fixed outlets for getting
bank linkages, Banking
savings and remittance
Correspondents,
small
services.
branches
deploying
2. As
already
electronic payments etc.
pointed
out,
the
have been brought forth
telecom
companies
in this arena.
have shown interest to
The penetration levels are
enter financial services.
very poor in India despite
They have already
all these measures. Out
of the Indian population of 1.2 billion, 40-50% of made recharge coupons available at kirana stores in
the people are actually eligible for opening a bank a cost-effective manner. Wallet services by telecom
account, but still unbanked (according to KPMG). companies though is a budding idea but have been
There are 937 million mobile subscribers in India, successfully in other countries like Kenya, Tanzania.
which outnumber the number of bank accounts, Telecom companies Safaricom and Vodacom earn
even after individuals with more than one mobile about 20% of their revenue from mobile payment
services
connection are accounted
Proven successes in other countries
Penetration of electronic payments (PoS and Cards)
has also been significantly low apart from the bank
accounts. The key reason for this scenario is lack of In countries like Kenya and Tanzania, where access
financially, and technologically viable business model to formal banking channels is limited, mobile-led
to serve the under banked and unbanked population. technology based platforms demonstrated in bringing
Business opportunity for telecom operators to capture the banking benefits to large sections of population.
the under-banked and unbanked customers who are M-Pesa was a big success in Africa. In Kenya too,
over $ 1 billion money transfers happen through
using their mobile network.
M-Pesa every month encompassing almost 13 million
customers.
Will it conflict with Jan Dhan Yojna?

Advantages and Recommendations

Indias drive to cover under banked population keeps


Payment Banks will have an edge to reach out
evolving with government and central bank taking 1.
initiatives in this regard. The landscape changed to the rural customers. They represent a unique case

30

INFINITIE Vol 6 Issue 1


where an access point, own access point or on others
network, is a more suitable metric to reach out to the
targeted customers in rural areas. Whereas traditional
banks have a mandate in terms of number of branches
in rural areas, which often end them up with huge
infrastructure requirements
2.
Payment Banks will use high-end technology
and infrastructure from the beginning. State-of-art
technology, for storage, networks and servers can be
deployed at ease to facilitate the requirements. This
is relatively easier to begin with for a payment bank,
which becomes very difficult for traditional banks
to scale up accordingly
throughout
their
networks
3. A
consumer
grievance cell is a must in a
payment bank. This leaves
them with a potential
to tap more customers
by offering customerfriendly
services
of
which addressing the
grievances and keeping
the customers wellinformed is of utmost
importance.
Flexible
grievance/query handling
through different means
like internet, mobile,
SMS, telephone call
etc depending on the
convenience
of
the
customers should be
enabled, which should
mainly target cutting down the number of physical
visits to the banks.
4.
An advantage to leverage the services of a
third party network provider and adopt technology to
expand the reach and enhance the quality of services
while lowering the cost of servicing is available with
payment bank, which has been relatively tougher and
remained a challenging area for traditional banks
5.
A provision for joint venture between a
promoter group and/or a bank enables all these
stakeholders to leverage each others strengths in
coming up with a viable and scalable business model
for payment banks. For example, a banks strengths
on liquidity, ATM infrastructure can be leveraged.
High-end technology enabling numerous payments
as ease, of PPI instruments can be used for mutual
advantage where as extensive mobile networks of
telecom operators can be used to tap the people using

the services of these mobile providers into patronizing


payment banks. In this way all individual USPs will
add together for ultimate benefit of the emerging
payment through collaborative model
6.
Road to be taken may seem unviable, but
it should not remain the road not taken. Viability
becomes a question as it has to offer deposits at
competitive rates, bears deposit insurance and earns
majorly from investing in government securities
alone. But Payment Banks can still succeed in this
area provided it, they are able to exploit low-cost
technology and high volume of transactions to ensure
that charges are reasonable, yet
profits are made (major source
of revenue is the transaction fee
charged on payments)
7. Customers
rate
convenience above the interest
rates on savings accounts.
Convenience may include more
access points, easier transactions
ie, no cap on number of
transactions and minimum
balance etc. Experts say this is
an area in which payment banks
can use technology to reduce
costs, while offering various
facilities to customers
8.
Provision to ensure
last-mile connectivity. These
payment banks have the
potential to reach out to the
customers rapidly in the future.
It may even be possible in the
future that your neighborhood
store may function as a payment bank
9.
Recommendation on initial targeted
customers: customers who use pre-paid cards for
paying utility bills or salaries to their staff. These will
be early adopters who will spread on the word-ofmouth. Facilities of payment banks should be clearly
communicated to the targeted audience through
effective advertising
10.
Recommendation on Future endeavors:
Payment bank can start off operations for small
payments. Once the Bharat Bill Payment System
(BBPS) is institutionalised, a possible link with it
can prove mutually beneficial. According to an RBI
estimate, during the year 2013, 30,800 million bills
amounting to 6.22 crores are generated in top 20
cities alone. The main long-term focus should be
concentrating not only on core activities but also the
adjacent activities.

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INFINITIE Vol 6 Issue 1

INFINITIE Vol 6 Issue 1

The Winning Article

Repercussions of Falling Prices of Crude Oil to


the Economic Health of India
Anindita Banerjee(GIM)

The Situation

At present, Brent crude oil prices have plummeted to


almost a 6-year low to trade at USD 57.52 per barrel
from their USD115/barrel peak in 2014 a dip of
almost 60%. This makes the crude oil price levels
similar to those last seen during times of the 2009
economic crisis, the worst economic crisis ever,
since the great depression of the 1930s. This figure,
on further introspection, can be seen to be closely

related to the signs of a positive turn-around in the


US economy i.e. the rising US greenback, & the
weakening on the Rouble in Russia. The insipid
economic growth in China, & in several European
countries, resulting in lower demand also seems to
play a significant character in this.
Reasons for Oil Price Plummation
The fall in the crude oil prices can be essentially traced
to an over-supply situation. Since 2008, the US has
added an extra 4 million barrels of crude oil per day in
the global market, which has turned it into one of the
largest importers of oil from being one of its largest

Spot price of Brent Crude, updated on January 23, 2015 (Joss Fong/Vox)

32

exporters in the past. At present, it employs around


USD 2 trillion in the shell-oil exploration business.
This has increased its crude oil production by almost
70% since 2008, the highest since the last 30 years.
In addition to this, the US
economy is showing major
signs of recovery. The US
dollar index was last quoted
at 91.11, the highest in
last 9 years. This stronger
index proves expensive
for investors who hold
oil to hedge against
inflation, causing them to
dump their positions to
cut losses. It also makes
dollar- denominated goods
expensive for holders
of other currencies, thus
further
diminishing
demand.
Another reason for this
price fall in the aftermath of the US oil production
boom & falling oil prices , is that the OPEC countries,
the worlds largest oil cartel, are reluctant to reduce
their own oil production .Saudi Arabia, which mainly
influences this cartel , apparently does not want to
repeat its mistake in the 1980s, when it cut production
to improve oil prices, but the move back-fired, when
non-OPEC producers increased their oil production
& captured a significant market share. Its other
objectives for not cutting supply could also include
hurting Russia & Irans oil incomes, & to make oil
exploration uncompetitive in the United States.
Estimated impact on India
The fall in global prices effectively represents a
kind of income transfer from oil exporters to oil
importers. Presently, crude oil consists of around
two-thirds, or 30% of all imports in India. Thus,
for the Indian economy, which is projected to grow
at a higher rate I 2015, this fall in oil prices could
not have come at a better time. A 1$ fall in price of
oil saves India around Rs.40 Billion. Thus, this oil
price decrease would help India manage its economy
better by improving macro-economic variables like
inflation, fiscal deficit & current account deficit. It has
been substantiated by a recent research report , that,
that a 10 percent decline in oil prices could reduce CPI
inflation by around 0.2 percent and push up the gross
domestic product (GDP) growth by 0.3 percent. Also,
it has been estimated by financial holdings company
Nomura that the $40 fall can potentially boost growth
by up to 0.4 percentage points to 6 per cent in the

current financial year. Since consumer prices will also


decrease, Nomura also estimates that WPI inflation
could slow by around 2 percentage points. It has also
added that Indias annual CAD could improve by up
to $36 billion from the
$40 fall.
In
another
added benefit,
as
consumers
would be able
to save on their
fuel costs, they
can use the
extra amount to
increase
their
consumption
levels
in
other
areas.
This
higher
consumption,
in addition to
lower
input
costs , could widen profit margins for businesses. This
would , in turn , revive output levels, revive stalled
projects or give rise to new ones, & thus generate
new jobs in the country. This will, I turn , allow the
RBI to adopt a growth centered approach towards its
monetary policy, through policy rate cuts, as it has
already done by reducing repo rate by 25 basis points,
& SLR by 50 basis points.
Also, one of the major advantages of this oil price
fall is that the centre can have substantial savings,
by cutting its fuel subsidy & increasing excise duty
on petrol & diesel. Officials say lower fuel subsidies
along with recent diesel tax hikes could together add
almost Rs 1.1 trillion ($18 billion) to the 2015/16
budget. The Modi- government can use this amount
to finance reform projects, & other infrastructure &
manufacturing activities.
The Confusion- Historical data states otherwise
It is surprising to note, that, an analysis of historical
global crude oil prices & Indias GDP revels quite the
opposite results. It shows that, Indias GDP growth
has risen every time crude prices have gone up and
vice versa.
Also, in a recent research report, Dhananjay Sinha
of brokerage firm Emkay, noted that the correlation
between crude price and Indias GDP growth and
corporate earnings is not negative but positive. This
essentially means that Indias GDP and corporate
profits will rise when crude oil prices decline.
The Headwinds- Repurcussions of falling oil prices
While the crude oil price fall is widely seen as a blessing

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INFINITIE Vol 6 Issue 1


for the Indian economy as it reduces the import bill
and helps to improve current account deficit. But,
the real result crude be
vastly different. Several
analysts
have
also
highlighted the potential
downsides
associated
with falling oil prices.
Although
inflation
is down, it is often
attributed to a base effect
that might go away in
the New Year. Inflation
expectations
among
households are still high,
as they are pessimistic
when it comes to
prices. Reserve Bank
Governor
Raghuram
Rajan became one of the
first worldwide to caution against the possibility of a
reversal in the downward trend in global crude and
prices rising on the back of geopolitical risks.
The lower demand that has given rise to low oil prices
can be attributed, as stated before, to a slowdown in the
economies of several European countries, & China.
Due to this slowdown, these countries are facing
increasing bankruptcies, & sovereign defaults. As
India is heavily dependent upon foreign institutional
investors (FIIs) and foreign direct investment (FDI)
inflows from these
countries, reduction
or
absence
of
funding of such
a high magnitude
could often prove
detrimental to its
economy. Also, if
oil prices continue
to fall, prices of oil
companies would
go haywire, causing
shutdown of many
oil projects.
Also, rural growth
might be badly hit. Weak prices in global markets
for agricultural commodities like cotton, rice and
soya bean imply that rural incomes are likely to be
either lower or flat this year. Also, since agricultural
workforce accounts for almost half of Indias
workforce, the lower demand could be detrimental
to the rural economy. Also, protein rich items, like
milk & pulses continue to experience inflationary

pressures.
Another fallout may be that a stronger dollar is

INFINITIE Vol 6 Issue 1

FIN-Q-NITIE
The Ullimate Quiz
1. .X received his PHD in economics from the University of Pennsylvania in 1964. His thesis was titled
"Variability of Demand Deposits". In 2002 he received Padma Vibhushan. He served as the governor
of Andhra Pradesh .He has also served as the governor of RBI. Identify X.

generally accompanies by weakening oil prices.


This might weaken rupee against the dollar that will
negatively affect WPI inflation. It is estimated that
every 10% depreciation in INR/USD would imply an
upside of 60-80bp on WPI inflation.
Again, a lower demand in the international market,
could not only affect Indias imports, but kits exports
as well. Every 10% decline in commodity prices
(CRB index) shaves off 600bp and 800bp from export
and import growth respectively,,Dhananjay Sinha
of brokerage firm Emkay
has said. But then a fall in
import has an additional
impact on exports. An
estimated 800 bps decline
in imports would mean an
additional 250 bps fall in
exports. For an average
15% decline in crude price
inFY15 (-2.5% YTD),
net savings on Oil & Gas
trade deficit would be just
USD5.4 bn, Sinha has
noted.
Lastly, a drop in oil prices
may result in loss of tax revenue & dividend payouts
by oil companies. The annual contribution of the
oil and gas sector to the government exchequer is
Rs 3lakh crore, & this might essentially offset the
benefits that the government gets by increasing the
excise duty on petrol & diesel.

34

2. This company was formed in 1850 as a temporary


solution to a bitter feud between two transportation
companies in New York. They decided to stop their
price war and found a new transportation company which would automatically dissolve in ten years.
After ten years, the company was making so much
money that the partners did not have the heart to
dissolve the company. Instead they sold off the assets
of the company and started a new company with
the same name. Which company are we referring to
here?
3. The Yakshini sculpture of RBI given in the above
pic depicts:
A.
Prosperity through work
B.
Prosperity through agriculture
C.
Prosperity through industrialization
D.
Prosperity through money
4. Which place holds most of Indias gold deposits?
A. Indore
B. Mumbai
C. Nagpur
D. Thiruvananthapuram
5. Which of the following international organizations has only countries with the highest Human
Development Index (HDI)?
A. G-8
B. G-77
C. OECD
D. G-20
6. The Finance Bill 2015-16 envisaged merging the
Forward market Commission with which of the
following?
A. RBI
B. SEBI
C. CCI
D.
Finance Commission
7. Which among the following is the only Indian
city that has been listed in the latest Global Financial

Centre Index?
A. Hydrabad
B. Mumbai
C. Bangalore
D. Kolkata
8. Which one of the following countries will hold the
presidency of the BRICS new development bank for
the first six years?
A. Brazil
B. South Africa
c. Russia
D. India
9. Once a budget has been presented in Parliament,
the Government has to get all money bills related to
Union Budget passed within
A. 60 days
B. 75 Days
C. 90 Days
D. 120 days
10. Which among the following banks has launched
the
Tatkal scheme that enables the people to transfer
money to their families in their native towns and
villages without opening an account?
A. State bank of India
B. Bank of India
C. Canara bank
D. Union Bank of India
11. Which stock exchange launched first carbon-based thematic index Carbonex?
A. MCX-SX
B. NSE
C. BSE
D. United Stock Exchange of India
12. He is referred as the Father of Index Fund investing who created the first S&P 500 Index fund. Identify this famous person?
A. John Bogle
B. Eugene Fama
C. Leo Melamad
D. Richard Sandor

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INFINITIE Vol 6 Issue 1

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