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PEDOPHILIA SCANDAL
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PROF. LUIGI ZINGALES BOOTH SCHOOL OF BUSINESS

I NDIA S MOST INFLUENTIAL BUSINESS & ECONOMY MAGAZINE

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10 WAYS TO SAVE THE INDIAN ECONOMY

EDITORIAL

S U TA N U G U R U : F R O M T H E M A N A G I N G E D I T O R ' S D E S K

HOW DR. MANMOHAN SINGH BEATS V.P. SINGH HANDS DOWN...

t was really a no contest till recently. The late V.P. Singh was the undisputed winner of this trophy. He also remains the classic example of a middle class hero who became a middle class villain. Till he became the Prime Minister, V.P. Singh was the anti-corruption crusader and messiah who rode on the infamy of the Bofors scam. Of course, Indians soon realised that pious crusaders do not always become good leaders. Mercifully, his tenure did not last long enough for V.P. Singh to inflict irreparable damage to India. I used the words till recently because there was some lingering, forlorn hope that the current Prime Minister would at least do something that would enable V.P. Singh to retain the crown. But then, forlorn hopes always remain hopeless. I realised this when I read newspaper stories about how a Supreme Court Bench has yet again criticised the PMO. This time, the rap on the knuckles is because the Prime Minister has failed to convene a meeting of the Cauvery River Authority despite reminders. Allow me to use the words of the Bench: What do you mean by this? It is shocking that you require the consent of all the states even for a date of a meeting? Is the PM to see his convenience or the convenience of the members? It is surprising that the PMO is asking the convenience of everybody before fixing the meeting. Just imagine. The Prime Minister is the head of the Cauvery River Authority set up to tackle the often ugly dispute between Tamil Nadu and Karnataka over the sharing of Cauvery waters. What conclusion can you draw from the fact that he is not able to set up a meeting with some chief ministers? Either he is truly helpless and powerless, or he is indifferent and callous. Either ways, it bodes ill for India. This incident and the rap on the knuckles by the Supreme Court is not front page news. Nor will it lead our television anchors to froth at the mouth. Yet, in a small but very significant way, it reflects the disappointment and disaster that Dr. Manmohan Singh has been. In 2009, he was a true blue middle class hero because the Congress won virtually all urban seats in the Lok Sabha elections, including seven out of seven in Delhi. Today, that halo has been torn to shreds. Of course, the middle class Indian is very fickle and unreliable. And later historians might have more charitable things to say about the tenure of Manmohan Singh. The

more charitable may say that Indians expected too much from him and hence the disappointment and anger. But for me, there are some crucial reasons why Dr. Manmohan Singh has become the worst Prime Minister India has ever had. The most important reason is that he has presided over an insidious process that has transformed India into a total banana republic. Nothing has been left untouched in this era of loot and plunder; nothing is sacrosanct. Just a few examples will suffice, though the tales of crony capitalism written in his tenure would fill up entire books. BSNL and Air India have been systematically run to the ground and destroyed through incomprehensible policies and decisions. I am not saying that the Prime Minister personally took the conspiracy call to do this. That is childish. But the fact is that private sector players have immensely benefited from the troubles of these two public sector giants. And I wont be surprised if as the cacophony over Air India gathers momentum the two are eventually privatised at throwaway prices, their assets and value eroded deliberately. It is in this era of Dr. Manmohan Singh that India has thrown up more dollar billionaires than even China. It is during his tenure that crony capitalism has become de facto policy. Let me quote a few lines from the book Breakout Nations written by Ruchir Sharma to illustrate what has happened under Dr Singh: Crony capitalism is a cancer that undermines competition and

Business & Economy

slows economic growth. That is why the United States confronted the problem and moved to take down the robber barons... The Dow index of the top thirty US industrial companies is in constant flux and, on average, replaces half its members every fifteen years. Indias market used to generate heavy turnover too, but in late 2011, twenty seven 90 percent of the top thirty companies tracked by the benchmark Sensex index were holdovers 2006. Back in 2006, the comparable figure was just 68 percent... Nine out of the top ten Indian billionaires on the Forbes 2010 are holdovers from the 2006 list, while the 2006 list had only five holdovers. As of today, many of Indias super rich still inspire national pride, not resentment, and they can travel the country with no fear for their safety; but this genial state of affairs can change quickly. In effect, India has become a true banana republic where the ruling religion is crony capitalism and the ruling chant is scam. This is astonishing because the UPA regime never fails to remind all of us that its heart beats genuinely and passionately for the aam aadmi. Just one more example to conclude this observation. You might recall how the then Governor of Andhra Pradesh and veteran Congress leader N.D. Tiwari was seen frolicking with nubile nymphets. Do you know how this scandalous footage found its way into the media? The brothel owner who allegedly supplied the girls to Tiwari wanted revenge. Why? Because N.D. Tiwari had not kept his promise of getting a few mining licenses for her! Mera Bharat Mahan! The second reason why Dr. Singh has been such a monumental failure is his inability or unwillingness or both to move even an inch ahead on administrative reforms. Back in 2004 when he was appointed Prime Minister, Dr. Singh had singled out administrative reforms as his most important priority. And why not? Governance in India is in an appalling state because the entire administrative framework

In 2009, Indias Prime Minister Dr. Manmohan Singh was a true blue middle class hero. Today, that halo has been torn to shreds

(L) Dr. Manmohan Singh: The 13th (and current) Prime Minister of India; (R) (Late) Vishwanath Pratap Singh: Seventh (former) Prime Minister of India

has virtually collapsed. There is simply no accountability and both the tehsildar and the secretary level IAS officer treat the citizens as subjects to be lorded over. Our sister publication The Sunday Indian has done a story on how the IAS lobby has stolen the country. One would have thought that Dr. Singh would be well acquainted with the perils of Indian bureaucracy since he was himself a bureaucrat for most of his adult and working life. But in the last eight years, he has not lifted a finger to make even small, cosmetic changes to Indias rotting steel frame. The consequence has been brutal and devastating: the quality of governance is at an all time low and Indias record in delivering health, education and sanitation is actually worse than ever before. He has been unable or unwilling to even prevent bureaucrats holding sensitive posts to retire and take plum private sector assignments in a brazen defiance of norms and law. The third and most devastating failure in fact, the key reason behind all other failures has been his inability or unwillingness or both, to display some spine. So pathetic has been his track record in this regard that his personal reputation as a man of integrity has become a joke. The charitable would say that our current regime of coalition politics does not allow a Prime Minister all the power that he should have because allies dictate terms. True. In the NDA regime, Suresh Prabhu was widely acknowledged as a brilliant Power Minister. Yet, Prime Minister Atal Bihari Vajpayee was helpless when Shiv Sena decided that Suresh Prabhu must be sacked. Despite such compulsions, Vajpayee had a clear run this far and no further approach. And even troublesome allies knew that and respected his authority. Can anyone say that about Dr. Singh? The other charitable thing we say about him is that real power resides with Sonia Gandhi and Dr. Singh is actually doing the best he can of a difficult job. That is bunkum. Sonia Gandhi is a very intelligent and astute politician. There is no way she would have asked for the head of Dr. Singh if he had put his foot down on at least some crucial issues. It is not Sonia Gandhi who has made Dr. Singh a puppet; it is Dr. Singh who has become a puppet and eventually and inevitably the lamest of lame ducks. Lets all anxiously wait for 2014 for this agony to be over. It is Indias misfortune that 2014 still looks very, very far away.

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September 2012

CONTENTS

September 2012

INDIAS MOST INFLUENTIAL BUSINESS AND ECONOMY MAGAZINE

Volume 7 Issue XII, SEPTEMBER 2012

EDITORIAL & RESEARCH EDITOR-IN-CHIEF: Arindam Chaudhuri GROUP EDITORIAL DIRECTOR: A. Sandeep MANAGING EDITOR: Sutanu Guru JOINT EDITORS: Virat Bahri, Steven Philip Warner CHIEF EXECUTIVE OFFICER: Deepak Kaistha EDITOR ECONOMIC AFFAIRS: Prasoon Majumdar FEATURES EDITOR: Prashanto Banerji ASSOCIATE EDITOR (Copy): Sanjay Kumar SENIOR EDITORS: Deepak Ranjan Patra, Manish K. Pandey ASSISTANT EDITORS: Indira Parthasarathy BUREAU CHIEF (Mumbai): Mona Mehta SPECIAL CORRESPONDENTS: Amir Moin, Parimal Peeyush PRINCIPAL CORRESPONDENTS: Spriha Srivastava, Sray Agarwal, Akram Hoque, Onkar Pandey, Deepti Singh EDITORIAL COORDINATOR: Angshuman Paul CHIEF CONSULTING EDITOR: Malay Chaudhuri CORRESPONDENTS: Niharika Patra, Anirudh Raheja, Ravi Inder Singh, Haroon Reshi (Srinagar), Sayan Ghosh, RESEARCH TEAM: Deepanshu Taumar, Ashish Kumar, Latika Sharma DESIGN GROUP DESIGN DIRECTOR: Satyajit Datta SR. ART DIRECTOR: Siddharth Kapil DEPUTY ART DIRECTOR: Priyankar Bhargava SENIOR DESIGNER: Hitesh Mehta SENIOR INFOGRAPHIST: Kuldeep Singh SENIOR ILLUSTRATOR: Shantanu Mitra ILLUSTRATOR: S. K. Panduranga IMAGE EDITOR: Vinay Kamboj PHOTOGRAPHY GROUP PHOTO EDITOR: Ranjan Basu CHIEF PHOTOGRAPHER: Sujan Singh PHOTOGRAPHER: Sanjay Solanki, Mukunda De, Vikram Kumar, Rangnath Tiwari, Subhash Chopra, Naveen Sharma CHIEF PHOTO COORDINATOR: Varun Pal Singh SENIOR PHOTO RESEARCHER: Sanjay Kumar, Ashutosh Vig PRODUCTION PRODUCTION MANAGER: Gurudas Mallik Thakur PRODUCTION SUPERVISOR: Digember Singh, Satbir Chauhan, Soumyajeet Gupta, Dipak Basak, Mukesh Jha, N. Ekantha Lingam, Deep Narain MARKETING Pushkar Nanda, Rajat Sogani, Ravi Babu, Sumit Raina, Guljar Singh, Rishi Kapoor, Sunil Kumar, Bhaskar Mojumdar CIRCULATION REGIONAL HEADS: Swaroop Saha, Bhupinder Bisht, Kunj Bihari Joshi, Venkat Narasimman, Joydeep Ganguly, Gopal Singh SALES MANAGER: Manoj, Rizvi, Parameshwara, Shihabuddin B&E ONLINE CHIEF WEB DESIGNER: Neel Verma WEB DEVELOPER: Raj Saikia
Printed and Published by Ashok Bose on behalf of Planman Media Pvt. Ltd. Published from: 9, First Floor, SCO-34, Sector-11, Panchkula-134 112 (Haryana) Printed at: M. P. Printers, B-220, Phase-II, NOIDA-201 305, Joint Editors: Virat Bahri, Steven Philip Warner For advertisement, feedback and other queries write to publisher@businessandeconomy.org For subscription contact at: 0120-4170111, 4170192 email: subscriptions.planmanmedia@gmail.com, subscriptions@planmanmedia.com For editorial queries: editor@businessandeconomy.org Editorial Ofce: Planman Media Pvt. Ltd., 48, Community Centre, Naraina Vihar Industrial Area, Phase-1, New Delhi-110028 Visit us at: www.businessandeconomy.org The Joint Editors Virat Bahri, Steven Philip Warner are GID & CULT responsible for the selection of news under PRB Act. Entire SUPPLEMENTS content copyright ARE BEING 2007 by Planman Media Pvt. Ltd.. All rights reserved DISTRIBUTED FREE throughout the world. Reproduction or translation in any OF COST WITH language in whole or in part without permission is prohibited. THIS ISSUE OF THE The publisher assumes no responsibility for the return of the MAGAZINE unsolicited material or for material lost or damaged in transit. IN SELECTED All disputes are subject to exclusive jurisdiction of competent CITIES courts and forums in Delhi or New Delhi.

FROM THE MANAGING EDITORs DESK HOW DR. MANMOHAN SINGH BEATS VP SINGH HANDS DOWN LETTERS TO THE EDITOR B&E THIS MONTH B&E INDICATORS B&E INFOGRAPHICS SCRUTINY STRATAGEM Signs of a long impending transition FINANCE RIP: Fannie Mae, Freddie Mac, 2012 B-SCHOOL COLUMN Prof. William W. George, Harvard Business School B-SCHOOL COLUMN Prof. Luigi Zingales, Booth School of Business B&E FEATURE ICICI Bank: When silence says it all NATIONAL FOCUS Why fuel guzzlers are turning friends CORPORATE FOCUS Can Samsung keep its edge in smartphones? HIPSHOT Manoj Bhargava, Richest Indian Billionaire in US REVISITING HISTORY India after Bihar famine POLICY SPECIAL STORY UPA government: Caught in CAGmire PROJECT SYNDICATE Ma Jian, Author, Beijing Coma

COVER STORY

BUSINESS ECONOMY

8 14 20 22 24 30

10 WAYS TO SAVE THE INDIAN ECONOMY

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B&E CORPORATION Why everybody at SpiceJet loves Neil Raymond?

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SPECIAL FEATURE TRAI: A woeful downslide?

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POLICY LEAD A weak power sector: Whats the cure?

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POLICY VIEWPOINT Will price control make medicines accessible?
Cover Design: Satyajit Datta

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LETTERS TO THE EDITOR

New genre magazine

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CHINA UNPLUGGED

NOMY HEADED? ndings WHgERE IS THE DRAGON ECO ndings from ICMR d primary research Alon with on-groun

ARINDAM CHAUDHURI
Hony. Director, IIPM Think Tank

Every issue of Business & Economy magazine is a great compilation of thoughtful and analytical stories. Pick up any of the issues in the recent past, and one can clearly nd out that the magazine is informative and helps the readers in forming a rened perspective about various sectors. Fortunately, I got a chance to go through the latest issue on China Unplugged as well. In terms of quality, a gamut of issues were covered with an interesting presentation style. The magazine seems to be strongly focussed on quick supply of knowledge and an ease in understanding complex business situations. I have gone through various issues in the past and would say that its a new genre magazine growing by the hour. It nicely encapsulates current issues and brings out the true essence of the story. I wish that your journey touches new heights with every issue. Best of luck!

Vijay Jindal Chairman & MD, SVP Group

Knowledge pool Once you start ipping through the magazine, one may nd that its a pool of knowledge. My favourite is the policy section where its a trend to critically analyse the situation spanning across different sectors in India. Stories on slum development, MGNREGS, illegal mining and Draft Water Policy 2012 are just a few that I would like to name from the lot that make you think out of the box. I also like the Scrutiny section as it also follows a somewhat

similar trend. The magazine is captivating with some books reviews and columns from international leaders making it an even more interesting read. The sector story on ports also deserves a mention in this letter for the insider on the situation of Indian ports. I habitually go through many magazines, but Business & Economy is a class apart. Well done team.
Sanjay Ghoshal Director, Avenir Business Solutions

On a constant rise There has been a constant rise in the efforts of the journalists at Planman Media. The quality of analysis and information about contemporary issues

makes B&E stand apart from the crowd. I am always left amazed by the variety of topics that you choose to discuss and the intensity with which they are highlighted . While supplements like BFM have some great cover stories too, GID has also been doing a commendable job in turning up with some outstanding work, deserving a genuine applause. Keep it up. Ankur Gupta,
Joint Managing Director, Ashiana Housing Ltd.

Please send your feedback to: editor@planmanmedia.com or SMS it to +91-9818101234 For advertising related queries, Contact: publisher@planmanmedia.com

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LETTERS TO THE EDITOR

Its a powerful magazine Business & Economy is a perfect magazine in terms of world class stories. Be it international or national issues, both are covered with felicity. While the Stratagem section has a crystal clear view of what the companies are actually facing and their plans for the future with detailed analyses, B&E this month provides information in a nutshell. The range of articles is such that it gives both micro and macroeconomic outlooks to the reader and this spans the entire package for each and every story. In fact, the cover stories are gradually becoming phenomenal and denitely adding value to regular readers. The stories like the one on recent union problems at the Maruti plant, the sector story on ports and also the policy story on illegal mining clearly depict that its a powerful magazine, and in a way, an opinion builder as well. But you have been clearly missing out on movements in the retail, media and education sectors and I would like to see a quick response to my point. Overall, the magazine is a treat to read.
Love Khosla Managing Director, Elvy Lifestyle

issue, the magazine becomes more interactive and its analytical style of supporting gures and charts turns it more reader friendly. Its the right mix of regulatory analysis and knowledge updation. The corporation and sector stories are a continuous source of gathering information. The edit team ensures that its efforts for the stories make them interesting for the readers. The Scrutiny section always offers new perspectives for both national and international issues. Also, the editorials are always enlightening and present a different POV. I always prefer to have the magazine in a hardcopy, but since I am a frequent traveller, it would be nice if the website of B&E is updated on a regular basis. Advit Sahdev
CEO & Founder, ODigMa

Something special Right from the cover to the last page, there is something special about B&E. Recent cover stories were really full of intellect and I really loved going through them. The content of the magazine provides a great deal of knowledge about the latest trends and issues about the business arena. All the stories are equally exciting and keep me glued to the magazine. Various interviews that are published are also a great treat to read. I wish you all the luck in your future endeavours. Vivek Khosla Gurgaon +9198999626XX Holistic coverage Your magazine Business & Economy has been able to deliver lively business stories issue after issue and I have eventually become a fan of this endeavour. I am reading this magazine for quite a long time now and am impressed by the simplicity with which it conveys the exciting happenings of business world. I especially liked the Volkswagen story, on how it is targeting the Indian market for expansion. The special coverage in the last issue on China was truly holistic. Anuj Nayyar Navi Mumbai +9194053177XX Convincing perspective Im an MBA student and for someone like me, the magazine is a real source of knowledge. This magazine tells me how to put theories into practice. I especially like the interviews of industry experts and marketing gurus, which are really proving to be a great learning for me. Being a prudent reader myself, I appreciate the analysis done by you as none of the facts that you write are baseless and thus the articles become convincing. Shikha Joshi Ludhiana +91981593247XX

Reader friendly presentation Business & Economy is an exceptional magazine. It is certainly an eye opener in terms of analysing the strategies of the companies. It nicely manages to discuss contemporary and critical issues alike. It enhances ones ability do a comparative analysis of competition in a particular sector. The magazine has been streamlined with relevant information in each story. With each

Articulate & accurate The magazine offers true justice to the sectors covered and also to the insiders stories since they are really insightful. While the use of rich language sets it apart on the stands, the covers, too, are eye catching among the clutter of magazines available on stands. The magazine is articulate, accurate and has spectacular interviews of the industry professionals with analytical inputs of analysts from various agencies. The team depicts a great spirit of journalism and does a laudable job by presenting stories that not only enlighten the readers but also encourage them to know more about what is happening around them. It would be great if you give your viewpoint on analysing the slowdown that the world is facing and how India will be impacted by the same. Good job team & way to go! Sunil Raina
Chief Marketing Officer LAVA International Ltd.

10 Business & Economy

LETTERS TO THE EDITOR

Lucid & yet effective I nd Business & Economy to be a reliable and genuine source of information. Though one needs to wait longer than it was earlier, but the way in which the design and analysis of the business stories is donemakes it worthwhile. It not only provides a bird-eye view on an array of latest business and economic events but also broadens the horizon of knowledge and learning. Its simple, lucid and yet effective writing style makes it easy to understand. The precise and perspective-oriented content helps one to imbibe complex topics effortlessly. Though I dont see much of telecom and FMCG sectors in the magazine, I take this opportunity to congratulate the entire B&E team for their sincere efforts and wish them good luck.
Nimish Kumar Senior Business Manager MediaCom

set by itself in analysing various aspects of the business environment. It is an engrossing magazine, with some ne sections like Revisiting history and Scrutiny. Special mention for the Revisiting history stories on Rajiv Gandhi and Saddam Hussein as they were eye openers and had a very detailed analysis. The magazine is impressive. Keep it up! Joy Deb Adhikari
Manging Director DASYS Pvt. Ltd

Comprehensive The consistent efforts of Business & Economy magazine in laying an emphasis on international issues, despite being an India-centric magazine, deserve appreciation. The magazine is comprehensive and rarely deviates from the high standards that have been

Credible The rst impression that the magazine sends out with its cover is just brilliant. The content is impeccable and the standards have been on the rise for a very long time now. It is always loaded with interesting stories like Naresh Goyals turnaround plans for Jet Airways and Volkswagen leveraging Indias plans to be a global leader. The effort of coordinating columns from the professors of top B-schools around the world deserves appreciation. Your cover stories like joint studies with international professors, Indias most protable companies, and the leadership issue with none other than Mr. Narayana Murthy were a delight to read. The magazine holds great credibility with the readers. Best of luck for the future. Ekta Saraswat
Senior Analyst Copal Patners

Analytical bend Once you start going through Business & Economy magazine, you will become habitual to it in no time. The initiative that Prof. Arindam Chaudhuri has taken in enlightening the world is truly showing its mark with its analytical bend and resourceful interpretation of contemporary business world activities. I have been following the magazine for a long time now, and could say that sectors like auto and IT are being covered generously in the package every month. Though viewing the oil sector and heavy industries from your viewpoint would be a boon for avid readers like me; for now I would like to say, keep up the spirit. Harman Chadha Noida +9192504576XX Marvellous covers Wow! This was my rst reaction when I just nished the cover story China Unplugged and it compelled me to scribble down this appreciation then and there only. I went through the Tuck Business School joint study as well and would say that both of them were a class apart in their own terms. Every month B&E turns up with a marvellous corporation story loaded with facts & gures. In all, this monthly affair is worth a read. Ankita Mathur Panipat +9193556476XX Well conceptualized I would like to say thanks to the edit team of B&E magazine. The cover stories in every issue are just awesome and sector stories on ports and auto are exemplary. The issue is very well conceptualized every month with the supplements like GID & BFM supporting it in every sense. A superb effort in terms of quality and quantity. Ritesh Aggarwal Delhi +9195826042XX

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THIS MONTH

Tim Cook CEO, Apple, can now focus further on innovation as he can stay assured about innovations not being copied

A P P L E V S S A M S U N G : PAT E N T I N F R I N G E M E N T

Apple draws blood, Samsung gets a licking

t was one of Steve Jobs pet peeves. He often complained that Samsung had blatantly copied Apples iPhone design in its Galaxy range, and Android too was a rip-off of its iOS platform. Jobs outrage at rivals lack of respect for Apples intellectual property often boiled over. I am ready to wage a thermonuclear war against Google, he is believed to have said. Eventually, the end to the vexatious problem of Apples patent infringements by rivals seems to be in sight. On August 24 Apple finally scored a major legal win over Samsung in a patents lawsuit filed in a US court of law. A U.S. district court jury in San Jose, which was presided over by a South Korean American judge Lucy Koh, decided that Samsung was guilty of copying key features of the Apples iPhone and iPad devices. The court awarded Apple $1.051 billion in damages (Apple had demanded $2.5 billion in damages). Buoyed by the verdict, Apple is moving

rapidly to press for a ban on eight models of Samsung, which are still in the market. The verdict has broader ramifications: it will help strengthen Apples share of the exploding mobile computing market. For many the Apple-Samsung lawsuit was widely seen as a proxy fight between Apple and Googles Android platform, since Samsung is the largest Android handset maker. Samsung is expected to appeal the jurys verdict, but its not clear how strong a case Samsung will be able to mount, given the overwhelming legal victory for Apple. Apple saw its shares climb 2% to a record high of $675 in post-verdict early trade. Samsung shares tumbled 7.5% wiping off $12 billion in value. Interestingly, Nokia saw a 10% jump in its stocks, and others like RIM and Microsoft too gained. These players own and run their own operating systems, which are different from both the iOS and Android.

14 Business & Economy

News & Analysis

HP: TURNAROUND EFFORTS

RUSSIA: WTO ENTRY

Can cost cutting help HPs comeback?

ollowing a third quarterly loss of $8.9 billion for the 2012 fiscal, Hewlett-Packard, the Palo Alto, California-based computer giant is desperately looking to effect a turnaround. CEO Meg Whitman has set in motion the restructuring process, which includes cutting 27,000 employees or 8% of its global workforce by 2014. The move comes in the wake of a challenging business scenario which saw HP face up to a failed tablet launch apart from chronic reverses suffered by its PC unit. Whitman, who succeeded the ineffectual Leo Apotheker as president and CEO last September, has vowed to turn HP around but has consistently warned that the process could take years. The downsizing at HP Meg Whitman is expected to generate anCEO, HP nualized savings of $3-3.5 billion for the company. As for its financial performance, the company has showed a profit of $1 per share, slightly better than expected, while revenues were below the forecast at $29.7 billion, a year-to-year drop of 5%. During the quarter, the company has taken important steps to focus on strategic priorities, manage costs, drive organizational change, and improve the balance sheet.

Russian market opens up for business & trade

ith Russia joining the World Trade Organisation, many countries are looking to tap this new opportunity to expand their business in the country. Russia was the last major economy outside the trade group, and joining the WTO is expected to be a boon for Russian consumers and businesses. Exporting companies in Europe, Asia Dmitry Medvedev and the United States have Prime Minister, Russia been eagerly awaiting access to a population of 142 million people with growing incomes and an expanding middle class. The World Bank estimates that the WTO membership will add 3 percentage points to Russias GDP once new tariffs are put in place. Across all sectors of the economy, Russia will lower import tariffs to 7%, from about 15% currently, for the 155 countries in the WTO. However, American companies may even face higher Russian tariffs because the USA does not have normal trade relation status with Russia. That status is important since the WTO requires that any country that seeks to benefit from it must apply the same trade rules to all member countries. Major American exporters to Russia are worried about the impact on their business due to Congressional inaction on this issue.

HPs share price

At an all time low over the past year
HP share In $

Russias foreign trade

Natural resources help the country strike a positive trade balance
3 30 2 28 2 26 2 24 2 22 2 20 1 18 1 16 40 3 30 2 20 1 10 0 2006
Source: Central bank of Russia Trade Balance Exports Imports In $

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B&E THIS MONTH

National

C O A L B L O C K S : U N FA I R A L L O C AT I O N

Coalgate ruckus in Parliament

Manmohan Singh Prime Minister, India

day after the Samajwadi Party supremo Mulayam Singh Yadav met leaders of CPI, CPM and TDP seeking an investigation in the coal allocation issue under the supervision of an apex court judge, the parties collectively protested in Parliament over the allocation of coal blocks. Leaders of all these parties are outraged by Prime Minister Manmohan Singhs comments over the issue and are seeking action against the companies that were allegedly given favoured deals in the allocation of captive coal blocks. Manmohan Singh had earlier rejected the CAGs observations calling them misleading and flawed. The coalgate issue came into light

when a recent CAG report stated that between 2005 and 2009, nearly 150 coal fields were allocated to private and state-run firms without any transparency and objectivity in their auction bidding process. The BJP as the main opposition party has been demanding the PMs resignation over the issue. While facing harsh criticism from the opposition, Singh has urged the BJP to discuss the issue in Parliament without disrupting its proceedings. The CAG has pegged the loss over coal allocations to a whopping Rs.1.86 trillion, which the BJP says has been incurred due to the backhand and arbitrary deals undertaken by the UPA government.

R B I : B A N K S R E C A P I TA L I S AT I O N

Roadmap to Basel-III norms

uantifying the cost of implementing the Basel-III norms for banks, the Reserve Bank of India has estimated the recapitalization requirements of the banking system at Rs.1,750 billion. The central bank, while releasing its annual report for the fiscal year 2012, said that though implementation of the Basel-III norms would be challenging, it is manageable. At present, at the system level, banks in India are adequately capitalised, and so the transition to Basel III is expected to be smooth, though careful capital planning would be required by banks in view of substantially higher equity requirement in capital. Basel III is the new international regulatory framework designed to correct the deficiencies in regulation that led to the global financial crisis of 2008. It seeks higher capi-

tal adequacy ratio to meet any financial exigency. According to the RBI, public sector banks which control nearly 70% of the banking operations in the country would collectively require equity upto Rs.1,500 billion while the private sector banks would need Rs.250 billion in common equity capital. In terms of non-equity capital, Rs.2,650-2,750 billion will be required by the state-run banks, while the private lenders need Rs.500-600 billion. The aforesaid amount is based on assumptions like a 20% jump in every banks risk weighted average every year and normal internal accruals. Aimed at reducing the risks of financial destabilization, RBI issued the guidelines for the implementa-

D. Subbarao Governer, RBI

tion of the Basel-III norms in May 2012. Starting March 2013, banks will begin implementing the guidelines, which will be completed by March 2018. The RBI has also asked banks to keep capital 1% above what has been prescribed by the Basel committee. As per the report, irrespective of their ownership patterns, RBI is committed towards developing a level playing regime for all banks.

16 Business & Economy

B&E THIS MONTH

National

RANBAXY: F DA D E C R E E

B H A R T I WA L M A R T : F D I V I O L A T I O N

Drugs off the shelf

Wholesaler in breach of FDI rules?

merican retail giant Wal-Mart and its Indian joint venture partner Bharti Enterprises have been accused of alleged violation of multi-brand trade norms in a public interest litigation filed before the Delhi High Court. Currently, FDI is not allowed in multi-brand retail. The issue has been tak- Raj Jain CEO, Bharti-Walmart en up by a bench of acting Chief Justice A.K. Sikri and Justice Anil Kumar who have issued notices to the Centre and the firms on a PIL filed by scientist and environmental activist Vandana Shiva. The court has posted the matter for hearing on September 26. The PIL blames Bharti Walmart for illegally carrying out multi-brand retail trade inspite of being permitted only to carry out wholesale cash and carry trade in the country. Cash and carry is a form of trade in which goods are sold from a wholesale warehouse to retailers and customers settle the invoice on the spot and carry the goods away themselves. Currently, Bharti-Walmart runs 17 cash-andcarry stores in India, where 100% FDI is permitted. Bharti Retail, a wholly-owned subsidiary of Bharti Enterprises, operates 187 neighbourhood stores under the Easyday brand.

Arun Sawhney CEO, Ranbaxy

n an attempt to optimize its product portfolio, Ranbaxy Laboratories has withdrawn 27 generic drugs from the U.S. market. The company claims that these drugs were of negligible commercial value and withdrawal of these drugs will help the company to focus resources on other applications that are of greater importance and value to the US business and healthcare system. However, as per the information available on the website of the U.S. Government Printing Office, these drugs have been withdrawn under a consent decree of permanent injunction filed on January 26, 2012. It means that Ranbaxy can never again submit another application to the FDA for these withdrawn drug products and must never transfer these ANDAs to a third party. The decree was filed by Ranbaxy as part of its settlement with the American authorities regarding a ban on certain manufacturing plants operated by the company in India.

DLF: FINANCIAL RESTRUCTURING

Keen on selling non-core assets

n a bid to restore its capital structure, DLF has decided to reduce its net debt by Rs.50 billion by the end of FY13. The company currently has a debt of over Rs.250 billion, which is putting a huge interest burden on its balance sheet. To reduce debt, DLF is shedding off its non-core business and getting back on the path of financial consolidation. The company recently sold an 18-acre prime land parcel in Mumbais Lower Parel to Lodha Developers for Rs.27 billion. Another important property, Aman Resorts, is awaiting an appropriate Kushal Pal Singh buyer. The company had to adopt this massive change Chairman, DLF in its overall strategy after the 2008 credit crisis. At that point in time, DLF had big plans to become the countrys largest hospitality chain in collaboration with the Hilton Group. The companys debt then was under Rs.100 billion. While the company has denied that it is selling its assets at a lower valuation in a hurry to get its books in order, at least the current deal values are indicating the same. The debate between whether to expand or to hold the ground is an eternal one but in the case of DLF it seems that the company has failed to act on its strategic priorities. That is why when everyone had doubts about going for breakneck expansion DLF chose the path of rapid growth through external borrowings. And now when the time is not right for selling off precious assets, it is trying to reverse its earlier strategy.

18 Business & Economy

INDICATORS

1.9%
Bombay stock exchange: Risk averse investors have stayed away from the market in tough times.

Is the total retail participation in the Indian stock market. This is in total contrast with more than 30% participation witnessed in the U.S, and about 12% in China.
Institutional investments
300 200
(Rs. billion)

Slow down in foreign funds On account of poor fundamentals, FIIs sold shares worth 9.8 billion rupees, while DIIs sold shares worth Rs.6.4 billion during the first quarter of the current fiscal. However, situation improved a bit in Q2. Till July 23, 2012, FIIs had reinvested Rs.78 billion in the stock market. Exchange value of the Indian rupee also stablised against dollar. Nevertheless, markets remain volatile due to the existing uncertainty about the future course of economy. Is another rate cut round the corner? Since Q1, FY13, RBI has eased its monetary policy. Simultaneous open market operations by the governing body have improved the liquidity scenario. As a result, the call money rates are on decline. In addition, liquidity infusion to the banking system through Liquidity Adjustment Facility has also gone down. Under the present demand-supply situation, India Inc. may soon expect another cut in interest rates. Market sentiments adding volatility to G-sec yields Expectations of an interest rate cut and concerns of weakening industrial and export growth brought G-sec yields down in the first half of the first quarter. However, S&Ps revision of Indias long term rating outlook to negative pushed yields upwards. Declining crude prices, general risk aversion and purchase of securities through OMO also affected yields in the second half of the quarter. If the environment of uncertainty does not get cleared soon, yields may go further up soon. Markets struggling with volume Volumes in the foreign exchange as well as stock markets have been on a continuous down slide since March 2012. A huge fall in the exchange rate of domestic currency against all major global currencies, especially dollar, and poor returns at the stock market kept traders and investors in check. However, speculators did not let the market to go dry as short selling, both in currencies and stocks could be seen full swing.

FII Investment

Mutual Fund Investment t

Average BSE Sensex

17,933 16,949

100 0
Apr-10 Apr-11 Apr-12 Jun-10 Jun-11 Aug-10 Aug-11 Jun-12
CD WAEIR

Oct-10

Dec-10

Feb-11

Oct-11

Movements in the money market rates

13% 12% 11% 10% 9% 8% 7% 6% Jan11 an11 11
Repo rate MSF rate Call money rate CP WADR

M 11 May11

Dec-11

Feb-12

-100

Jun12 J 12

Movements in G-sec yields

9.00 8.80
Yield in %

30 Mar12

30 Apr12

29 Jun 12

27 jul12

CD WAEIR

8.60 8.40 8.20 8.00 7.80 0 2 4 6

Term in years

8 10 12 14 16 18 20 22 24 26 28

Financial market Average daily volume

COM. PAPER (RS. BN) MAR-12 APR-12 MAY-12 JUN-12 JUL-12(P) 911.9 1310.0 1498.0 1258.1 BOND MARKET CORP G-SEC BOND (RS. (RS. BN) BN) 98.6 26.1 141.1 20.0 151.8 17.5 257.6 29.5 28.8 FOREX INTERBANK ($ MN) 20.6 23.1 20.9 8.4 STOCK MARKET (RS. BN) 151.9 120.1 117.3 117.1 112.8

20 Business & Economy

Source: RBI

GSIC

B&E INDICATORS

Indias foreign exchange reserves

Foreign exchange reserves and constituent components ($ million)
Item As on August 17, 2012 Week* March 2012* December 2011*

Quarterly movement of NYSE

New York Stock Exchange
8,200 8,000 7,800 7,600 7,400 7,200 7,000 6,800

Total reserves a. Foreign currency assets b. Gold c. SDRs** d. Reserve position in the IMF

288,919.4 256,656.8 25,714.7 4,356.6 2,191.3

(250.5) (263.0 *) 8.3 4.2

(5,478.1)
(3,411.9) (1,308.4) (112.7) (645.1)

(7,769.3) (6,276.50) (905.60) (72.40) (514.8)

7,292.23
Jun 1, 2012

7966.24
August 30, 2012

Source: RBI Weekly Statistical Supplement; * Displays only the absolute variation over the period; **Special Drawing Rights

FII transactions in Indian markets

Buying and selling in Indian equity and debt markets by FIIs ($ million)
Reporting Date Total for August Total for 2012 Grand Total till August 31, 2012 Equity Debt Equity Debt Equity Debt Gross purchases 481.36 118.14 4,201.4 1,375.07 52,747.84 8,799.18 Gross sales 373.32 115.49 3,570.7 1,129.9 47,673.25 7,346.67 Net investment 108.04 2.65 630.7 245.17 5,074.59 1,452.51

Quarterly movement of Nikkei

Tokyo Stock Exchange
9,400 9,200 9,000 8,800 8,600 8,400 8,200 8,000 7,800

8 440 25 8,440.25
Jun 1, 2012

8983 78 8983.78
August 30, 2012

Source: SEBI; All gures till July 31, 2012; No. of Registered FIIs: 1,757; Sub-accounts: 6,343

Quarterly movement of gold

Daily future prices (London, $ per ounce)
1,800 1,750 1,700 1,650

Quarterly movement of silver

Daily future prices (London, $ per ounce)
40 38 36 34 32

Quarterly movement of DJIA

Dow Jones Industrial Average
13,400 13,200 13,000 12,800 12,600

1,660.00

30.66

1,600 1,550 1,500 1,450

30 28

1606.00
Jun 1, 2012 August 30, 2012

26 24

28.38
Jun 1, 2012 August 30, 2012

12,400 12,200 12,000 11,800

12,118.57 12 118 57
Jun 1, 2012

13 000 71 13,000.71
August 30, 2012

Quarterly movement of currencies

Comparative rupee exchange rate
100

Quarterly movement of crude oil

International Future NYMEX ($ )
120

90

GBP 86.03 71.29 YEN EURO EURO USD USD

87.95

95.8
110 100

Quarterly movement of BSE Sensex

Bombay Stock Exchange
18,500 18,000

80

17490.81

71.04
90

70

69.13
60

69.65
80

17,500 Graphics: Kuldeep Singh 17,000 16,500

50

55.91

55.72

70

16,000

84.31
40 60

15,500

15,965.16
Jun 1, 2012 August 30, 2012

Jun 1, 2012

August 30, 2012

Jun 1, 2012

August 30, 2012

15,000

September 2012 21

B&E INFOGRAPHICS

GSIC

GLOBAL ECONOMIC SLOWDOWN: US-EUROPE

Can US stay insulated?

IT WAS AMERICA WHICH BROUGHT A GREAT RECESSION BACK IN 2008. THIS TIME, IT IS EUROPEAN SLOWDOWN WHICH IS HURTING AMERICA BADLY. HOWEVER HARD AMERICA TRIES TO DE-COUPLE ITS ECONOMY FROM THE AILING EUROZONE, THE ILL EFFECTS OF THE SLOWDOWN IN THE EUROPE WILL BE TRANSMITTED TO AMERICA VIA TRADE, BANKING AND MULTINATIONAL OPERATIONS. HOWEVER, IT DEFINITELY HAS A FEW LESSONS TO LEARN.
BY ASHISH KUMAR

GDP growth rates: US & Eurozone (% change y-o-y )

US economy closely follows the trend with Eurozone GDP growth since late 2008
4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 U.S. Euro Zone

Will European crisis hit US? Eurozone economy is on a down slide since 2010. In Q1 FY13, real growth in the region fell by 0.1% y-o-y. Greece, Italy, Spain, and Portugal were the worst affected EU members. Rise in the benchmark interest rates in Europe further fuelled the problems in Q2. Since then the US and Eurozone economies have shown as high as 89% correlation. Thus it was expected that the US economy is bound to bear the heat of economic meltdown in Eurozone. However, so far in the US GDP has registered approximately 1.7% yearly growth in Q2 as compared to the prior estimates of 1.5%. The increase in GDP was driven mostly by exports. But, fall in investments by businesses in the US is a concern for the economy and this may slowdown the recovery rate.

Source: Organization for Economic Cooperation and Development

US exports to Europe (% change y-o-y )

Much above the lows of 2009 but winds have again turned southwards in 2012.
40 30 20 10 00 -10 -20 -30 1998 998 2002 2006 2010

US exports take a hit in Europe Slowdown in consumer as well as industrial demand in the Europe is hurting US exports to the region. About 25% of the total US exports are to Europe. Hence, any negative news on the economic front from Europe is certain to hit US exports in a real bad manner. Between February and April this year, US exports to Europe contracted 18.4%. As new orders from Europe dried, manufacturing in the US fell drastically during the above mentioned period. To deal with the situation US now needs to try out everything to reduce their dependence on the Eurozone. Meanwhile, exporters from US seem to be working on the same as trade decit with non-European countries narrowed to $42.9 billion in June from $48 billion a month earlier.

Source: U.S. Department of Commerce

22 Business & Economy

US economy

Eurozone investment in the US ($ bn, 12 month moving totals)

European assets in the US have been falling steadily between 2010 and 2012
100 50 0 -50 0 -100 0 -150 -200 0 2002 2004 2006 2008 2010 2012

Pull out of euro investors Non-availability of credit from domestic banks has forced many European companies to sell off their assets in the US. As a result, the European investments in the US are at their lowest since the beginning of nancial crisis in 2008. Moreover, as European companies liquidate their assets in the US to take care of their funding needs back home, US loses a major chunk of foreign capital inow. This is not only affecting quick recovery of the US economy, but also is dragging asset prices down for lack of demand, that used get corporate support funded by overseas investors. Hence, US federal is not left with many choices but to introduce multiple rounds of quantitive easing to add some impetus to the economic recovery. Overseas profits shrink In Q1, FY,13 prots of US corporations declined by $6.8 billion as compared to the preceeding quarter. While prots from domestic businesses increased by $41.7 billion, prots from overseas operations squeezed by $48.1 billion. Without a doubt, it is euro-effect thats trpubling USA Inc. This may prompt US based companies to try their hand at cost cutting. Any such attempt may help companies to increase their margins, but this may also result in companies handing over more pink slips to their employees. That for sure will not be a good situation for US, which is already facing a serious challenge in terms of high unemployment. However, cost cutting has become inevitable, thus the situation needs to be managed carefully US Inc. saving for the rainy day Considering the present economic conditions and the risk oozing from the European mrket, US Inc. has become too very conservative at this moment. The non-nancial corporation cash holdings in the US are on its all time high a clear indication that businesses are not very keen on investing as they remain uncertain about the future returns. Similarly, cash holdings by US commercial banks have risen by $129.9 billion or about 8% up since the beginning of 2012. Cash as a share of total assets of these commercial banks has grown by 59 basis points to 13.4% during the period. Reason, fear of upcoming recession. As analysts feel, such speculations may bring a recession, well before its due time.

Source: U.S. Department of Treasury

US corporate prots (QoQ change, in $ billion)

For the rst time in the last 13 quarters, prots are in negative
250 200 150 100 50 0 -50 2009
Source: Bureau of Economic Analysis

2010

2011

2012

Non-nancial corp. cash holding

Companies are prefering higher cash position
14% % 12% % 10% % 8% % 6% % 4% % 2% 0% 1998
Source: Federal reserve board

Commercial bank cash holding

Banks cash holding is on rise
16% 14% % 12% % 10% % 8% % 6% % 4% % 2% %

2012

0% 2007

2012

September 2012 23

Graphics: Kuldeep Singh

SCRUTINY
FA C E B O O K : A R A D I C A L I N V E S T M E N T S T R AT E G Y F O R M A R K

IIPM THINK TANK

Zuck, buy-back your shares!

Facebook shares are trading at less than 50% of their IPO value, and the street seems to have just about given up on the IPO. While Zuckerberg made some money by selling his stock initially, he can make a bigger killing by buying back Facebooks shares from the market at the current dismally low prices
Mark Zukerberg, the Founder and CEO of Facebook, is facing the ak from the street as his IPO has proved to be a damp squib and there is a big question mark on Facebooks sustainability

IN THIS SECTION
ZUCK, BUY-BACK YOUR SHARES!

24
NO MORE THE GOOD GUY

25
WHOLL PROTECT THEM?

26
MIND YOUR LANGUAGE

27

acebook is still a success story, but the gross underperformance of its shares post the much hyped IPO has certainly raised some eyebrows. Investor concerns seem to override their enthusiasm for the worlds most popular social network. Facebook, which was initially valued at $100 billion commands a far humbler m-cap of $41.03 billion as on August 27. The share stood at $19.15 on this day compared to the launch price of $41. Investors are worried about the sustainability of social networking companies. The revenue tap is still not in the best of health with brands unsure about how to leverage these sites. A recent research by O&M and Ipsos covering 153 executives across A-PAC highlights that 66% of executives polled considered social networking sites to be great for buzz building (just 20% in India). However, only 2.6% considered them great for brand building. Facebook, which reported a loss of $743 million for Q2, 2012, has to really look for ways to change perceptions on that front. Co-founder Dustin Moskovitz sold 450,000 Class A shares in three days.

Three top executives Director of Platform Partnerships Ethan Beard, Director of Platform Marketing, Katie Mitic and Mobile Platform Marketing Manager Jonathan Matus have announced their resignations; indicating a major crisis of confidence across the board. Although, Mark has made a lot of money with the IPO (he sold 30.2 million shares at $37.58 per share in May 2012), his wealth has shrunk drastically. Considering he owns around 503.6 million shares as per estimates (including stock options), his net worth as on September 4, 2012 stands at just $9.64 billion. But he also has a great chance to make more money by buying back shares at the current prices, especially if he is certain of the company returning to its promised aura. This will also enable him to retain his vice-like grip over Facebook. To top it all, by betting on Facebook again, he could lead from the front and demonstrate his confidence in the company he founded. And if he really buys-back, you know which magazine he reads...

Akram Hoque

24 Business & Economy

International

E . C O L I : H U M A N T H R E AT

No more the good guy

E. coli is now declared a human hazard as scientists are observing a discomting link to bowel & colon cancer. The world must act.
eware! E. coli is a dire human threat now. Research done by medical scientists in Britain has revealed that the primary cause of one of the most common cancers is the E. coli virus. As a matter of fact, Escherichia coli (commonly known as E. coli) happens to be the most studied organism in the world. It is a very complex group of gut bacteria thats found in all warm-blooded animals including humans. The general theory and empirical evidence till date postulated that the bacterium was mostly harmless. This bacterium has even been deemed in some past studies as being essential for the survival of human beings and cattle as it helps to digest food. But recently, medical tests have revealed that E. coli might be the main cause of bowel/colorectal cancer (a disease which claims 600,000 plus lives a year, as per WHOs International Agency for Research on Cancer). Tests have indicated that E. coli bacteria are more prevalent among bowel cancer patients than E. Colis carcinootherwise. A germ genic effects are being the root cause being studied by scientists of cancer may seem uncommon. However, it is not totally out-of-place, as it has been proved beyond doubt that there are living viruses that cause cervical cancer and bacteria that lead to stomach cancer. E. coli reportedly has genes that are poisonous and lead to DNA damage that is common in cancer. However, it is not a sureshot cause of food poisoning and can remain dormant in the bowels with no ill effects. But the recurrence is high in patients. This is reflected in a study published in Journal Science. A sample size of 21 taken

from bowel cancer patients revealed that two thirds of them were carriers of this bug; whereas among healthy individuals, that rate is just one-fifth. Experiments on these lines are carried out extensively on mice. They also show that bowel cancers are much more frequent when the bacteria with a particularly DNA damaging pks gene is present in the body. It is also suspected by researchers that E. coli is a carrier of colon cancer,

and its involvement is deeper than previously thought. Professor Jonathan Rhodes of Liverpool University is studying this with keen interest, and opines from his own analysis, The bottomline message is that there seems to be a strong association between a type of E. coli and the development of colon cancer. And given that this type of E. coli is specifically able to damage DNA and inflict the sort of damage you get in a cancer, it is very likely that it has a causative role, at least in some patients.

The mystery, however, persists with respect to the exact causes of an E. coli infection in human beings. Researchers at the Liverpool University are in a joint mission with the University of North Carolina to decipher this puzzle. However there doesnt seem to be any clear cut trend line; not only on the causes of the infection but also on why certain E. coli bacteria are carcinogenic while the others arent. Presumably, even its harmless strain that affects the gut can cause cancer if it is inflamed. Professor Christian Jobin of the University of North Carolina intoned his views Theyre not exactly your flagship disease-causing bacteria. They wear a different mask. They wear the badguy mask now. This is because people with swollen bowels are at much greater risk to develop cancer as compared to people having healthy stomachs. It was previously believed that molecules produced by immune cells in the gut cause damage to the DNA, but now scientists are quite convinced that the bacteria is the real cause. And since the ill effects of this bacteria and are still under study, a vaccine doesnt exist for it yet. However, according to Professor Rhodes, the discovery is possible sooner than we think. It is next in line to the HPV vaccines that have been recently developed to combat the cervical cancer causing virus. Though it has not yet announced as an epidemic. its high time the medical community responds to the wake up call. Without the slightest iota of doubt, E. coli is a human threat! There have already been some tragic casualties exemplar being the deaths of 18 people in Walkerton. Another E. coli strain has had negative effects on the health front for thousands in Germany, and it has claimed 16 lives already. Developed nations like US, UK, France and Germany have taken it up on priority, but the rest are still on the sidelines. Before many lives are lost, the UN should at least take the initiative to declare it as a threat and incite a call to action. Sayan Ghosh
Septenber 2012 25

IIPM THINK TANK

Scrutiny

D I S C R I M I N AT I O N : R E L I G I O U S M I N O R I T I E S

Wholl protect them?

Minorities, irrespective of nation, region and society, are discriminated against globally. And this attitude is the ultimate enemy of peace

An angry group of protesters agitating over preserving their rights and urging for help

inorities (be they ethnic, religious or racial) are defined by anthropologists like Charles Wagley and Marvin Harris as having five inherent characteristics. The most important is arguably the powerlessness of these minority groups. In spite of demonstrations by the minorities being so widely prevalent across the world, they are known to be engineered by the system (or state) in most countries to be discriminated economically, socially and culturally. The pitiable situation of Hindus in Pakistan, who face constant threats, forced conversions and marriages of women, has been the subject of much controversy recently as some families travelled to India to seek safety. Alarmingly, a report by the Sustainable Development Policy Institute of Islamabad reveals, Four primary themes that emerge most strongly as constituting the bulk of the curricula and textbooks are that Pakistan is for Muslims alone; Islamiat is to be

forcibly taught to all the students, whatever their faith, including compulsory reading of Quran; the ideology of Pakistan (sic) is to be internalised as faith, and hate be created against Hindus and India; and students are to be urged to take the path of Jehad and Shahadat. Though India has far better textbook credentials, Muslims here have also been unable to benefit from Indias economic success. They are largely associated with poverty, unemployment and illiteracy. In the 2001 census, against the backdrop of a national average literacy level of 65.1%, Muslims were confined to 59.1%, compared to 80.5% for Hindus. Their share in salaried jobs is as low as 13% compared to 25% for Hindus. This is compounded by poor representation of Muslims in police and paramilitary forces, which is less than 3%, even though they constitute 13% of Indias population. The Sachar Commission Report further states

that Muslims have to face lack of basic infrastructures like sanitation, roads and schools. In US, large scale suppression of African Americans and Hispanics has contributed to their frustration and a stalemate on racism issues. Around 21% of Whites have a bachelors degree compared to 13.6% Blacks and 9.4% Hispanics, while 8.4% of Whites secured a Masters degree with Blacks and Hispanics lagging with 4.9% and 2.9% respectively. In professional degrees too, 3.1% of Whites hold them compared to 1.3% of Blacks and 1.0% of Hispanics (2008 figures). Unemployment among Blacks is much worse than Whites during the current recession. China is no exception. The separatist Uighurs (Muslims) have been voicing their concerns on economic discrimination and cultural suppression for a long time against Chinese authorities. The Chinese have retained an agenda to neutralize the Uighurs (they blame Uighurs of resorting to terror tactics) with an iron fist. Amnesty International has also chided the Chinese for years of neglect in the region where money was spread too thinly compared to eastern China. In Britain foreign trash signifies Blacks & Asians. Coloured people are 26 times more probable to be stopped & searched by the police. Blacks are twice as unlikely to be educated and employed as Whites. The colored are multiple times likelier to go to jail than Whites for the same crime and are more likely to serve a longer term. Although most civilized countries have a framework in place to fight the issue the inherent xenophobia on the ground prevents it as a government is a representation of its people. In democracies, they are often paid lip service in elections and face disappointment later. Clearly, if progressive societies have to guard themselves against future unrest and social tensions, they must collectively work towards upliftment of minorities and truly treat them as equal stakeholders in progress. Sayan Ghosh

26 Business & Economy

National

INTERNET CENSORSHIP: FOR GOOD

Mind your language

Indias recent move to ban some Twitter and Facebook accounts to stop hate agenda might be a bark up the wrong tree, but still uses a valid rule
any would see the Indian governments recent decision to ban (and later unban) almost 309 URLs of Facebook, YouTube, Twitter et al in the wake of the unfortunate Assam riots as a blatant violation of the freedom of speech ideology. Undoubtedly, the move by the Indian government which now stands more or less revoked was nothing but a knee-jerk and shortsighted reaction to contain a rapidly snowballing situation; almost akin to a doctor telling a cancer patient that the best way to cure the disease is to not talk about it to anybody else. Yes, clearly, the Indian government wound itself up trying to first identify which pages were encouraging hate speech, then trying to force foreign based social media sites to block these identified pages, then trying to justify the move to critical commentators and media. Criticise the government as one may for not understanding the real reason for riots but what is quite clear in the midst of all this brouhaha

is that the government was legally right in moving against various hate promoting sites. These steps by the government have invited huge criticism from every section of society; but the very intention of the government seems quite clear and unquestionable. India has never witnessed a situation where social media is being misused in such a condemnable manner. Regular hate speech can have a long term effect on sections of the society that are on the web and create negativity in their subconscious mind. Undoubtedly, the government has taken these steps a bit late in the day, but it has the legal authority and duty to censor content, which might be detrimental to communal harmony. Not only India; the governments of many nations like United States of America, Australia and England have tak- Sachin Pilot and Kapil Sibal may have en similar actions erred on the side of but its a sign in the past to con- caution;things to come of good that US-based social trol violent and media sites will bend hate oriented to Indian orders

speech on the web. In US, the House of Representatives recently introduced the Rogue Websites Bill that has been supported by many in the house, even though it would force the Service Providers to create a list of banned websites and prevent users of those websites from accessing them. This bill is a version of the Theft of Intellectual Property Act or Protect IP Act introduced in the US Senate earlier. Minister of State for Communications and IT Sachin Pilot recently said, India has been pushing for global internet governance at the level of the UN so that control of social media would rest in the hands of UN and its member nations. But currently, only China supports India on this. In fact, the UN Human Rights Council in Geneva passed its first resolution on Internet freedom with a message for all nations to support individual and human rights online in July. Undoubtedly, freedom of expression is critical, but as is the case with the hate messages spread after the Assam riots, a line has to be drawn somewhere. Cyber security has remained an area of huge concern for India. Mobiles have penetrated wide and deep in the Indian market, and the rapid rise of smartphones in particular indicates how spreading the right or wrong message has become so much easier. A mobile analytics research firm Flurry has concluded that smartphone adoption today is ten times faster as compared to the PC era in the 1980s. India saw a 171% growth in the number of active smartphone devices for the year ending July 2012 according to the Flurry report. As per eMarketer, social media globally is expected to reach 1.5 billion users in 2012 (1.2 billion in 2011). India is expected to see the fastest growth of 51.7% yoy. This underscores the need for these sites to control their content and the government to crack the whip when necessary. The argument obviously gets turned on its head if the government misuses its rights to clamp down legitimate criticism of its own policies/agenda at any time. Ganesh Kumar Roy
Septenber 2012 27

STRATAGEM

Global Spotlight
Microsoft CEO Steve Ballmer delivers a speech at the Seoul Digital Forum in Seoul on May 22, 2012. Microsoft is seeking to revamp its position in the mobile-led industry market with its new PC and tabletcompatible OS, Windows 8

IN THIS SECTION
SIGNS OF A LONG IMPENDING TRANSITION

30
RIP: FANNIE MAE, FREDDIE MAC, 2012

33
WHY EVERYBODY AT SPICEJET LOVES RAYMOND

50
TRAI: A WOEFUL DOWNSLIDE

68
WHEN SILENCE SAYS IT ALL...

74

or a lot of companies that ruled computing over the past several decades, the launch of the iPhone, by the Mountain View based computing mammoth Apple in 2007, marks a tipping point. For instance, lets ponder over Hewlett Packard (HP) and Dell two companies which will go down in history as iconic cases of vision mismanagement. Since June 2007, HP has lost 60% of its value bringing down its market capitalisation to $35 billion. During the same time, the company spent a monumental $40 billion on acquisitions that have neither created value for shareholders nor have set up the company for the future. The companys revenue has been declining continuously for the last four quarters compared to the same period last year. In fact, last month, the PC major posted a quarterly loss of $8.9 billion

SIGNS OF A LONG IMPENDING TRANSITION

Microsoft is still far from projecting itself as the innovation mean machine that it once was. But after years, it looks as if Steve Ballmer has nally got it right. Microsofts focus on cloud computing along with its formidable position in the gaming industry has set up Redmond for a favourable future.
AMIR MOIN

30 Business & Economy

Microsoft
the most significant $492 million for the fourth Microsofts m-cap vis--vis competitors quarterly setback in its quarter of the fiscal ending Like Microsoft once was, Apple is now the worlds most valuable company 700 73-year-old history. The June 30, 2012. A compariother company which was son with the same quarter 600 Microsoft Apple once referred to as the last year reveals that the 500 Cisco 1,000 pound gorilla of the company had posted a Google 400 PC heydays, but doesnt profit of $5.87 billion (69 quite ring a bell today is cents per share). Despite 300 Dell. In this case too, the this, the companys reve200 iPhone phenomenon has nues increased to $18 bilIBM 100 pushed down Dells value lion (a 4% growth). The perSumsung 0 by 60% to a mere $20 bilformance would have been 1990 92 94 96 98 200 02 04 06 08 10 12 lion. Interestingly, Apple better had Microsoft not Source: Thomson Reuters; in $ billion made more money selling taken into account $540 the iPhone over the last million in deferred revenue agement over the last 10 years set a nine months ($63 billion) than the on the Windows business a result of combined market value of HP and Dell. doubtful precedent for Ballmers regiving discounts to those who buy a The declining performance of these cord with respect to strategy. In 2007, Windows loaded system before the PC manufacturers is a matter of conBallmer decided to pay an 85% premi- launch of its Windows 8 OS on Octocern for not just their respective um ($6.3 billion) for acquiring aQuanber 26, 2012. If we were to factor in shareholders but for Redmond-based tive (an online advertising company). the accounting adjustment of $540 software major Microsoft as well. The While criticising Microsofts $8.5 bilmillion and exclude the write-down on Steve Ballmer led companys bread lion takeover of Skype last year (IrreaQuantive, then the result comes and butter is a direct function of manpressible we are, Irrepressible we will down to 67 cents a share. Therefore, ufacturers like HP and Dell selling be!; B&E, June 2011), we had pointed instead of people selling off the stock, more PCs every year, and their inabiliout that the companys experiment Microsoft gained 2.5% in trading at ty to convince the market that comput- with aQuantive which was absorbed the bourses. ers are still indispensable is most disinto Microsofts online services diviThe fact of the matter is that after a turbing for Microsoft. The fact that resion was a mess generating an opervery long time, Microsoft finally search firm IDC has cut down growth ating loss of $2.6 billion by 2011-end. seems to be in a position to reestabforecasts for PC sales to 0.9% from 5% Come July 2012 and Microsoft reportlish itself as the technology leader in June doesnt make the situation any ed its first ever quarterly loss. Raison that it once was. Recently, the compabetter. The data reveals that a total of dtre: It was forced to take a $6 bilny unveiled its new logo. Since then, 367 million PCs will be shipped global- lion write-down on aQuantive! there has been a furious debate over But thats not important at all. What design aesthetics, but what people ly this year. Further, indicating a sechowever is important is to look at ond year of continuous contraction, US seem to be missing out on is the fact what happened after Microsoft anshipments are forecasted to fall by that the logo represents a new stratenounced the write-down. Despite a 3.7%. Emerging markets wont be of gy focus. The entire efforts of the stagnant market for PCs, Microsoft much help either as growth stagnates company have been condensed into from last years already minuscule 2%. exceeded Wall Street expectations (if the Windows OS (both for PCs and moIt is precisely because of this comthe $6 billion write-down is excluded). bile), the office suite of utility tools petitive shift in the marketplace that Heres the bigger picture Microsoft and the gaming division Xbox. In orfor most of the last decade, Microsoft reported a loss of 6 cents per share or der to explore Microsofts prospects has appeared to be a company which as it progresses, we need to look at its is clueless and has lost its taste for inoperations in totality rather than looknovation. Call it a matter of fate if you ing at them one at a time. Although will, but the fact remains that Ballmer this may not be the best approach, in took over the reins from Bill Gates at a case of a company in transition it time when personal computing was yields a far better picture. undergoing a seismic shift a shift The company is on solid financial that the late Steve Jobs hopped on to, ground as far as its balance sheet is making Apple the worlds most valuconcerned. Sitting on a cash pile of able company today; a title that once $63 billion, Microsoft will continue to belonged to Microsoft! To make matgenerate $20 billion every year. This ters worse, initiatives taken by manis not just sufficient to off set the bur-

Initiatives taken by the management over the last 10 years set a doubtful precedent for Ballmers record with respect to strategy

September 2012 31

STRATAGEM

Global Spotlight

Microsoft: Direct competitor comparison

Microsoft is sitting on a cash pile of $63 billion
MSFT Market Cap Employees Quarterly rev growth (y-o-y) Revenue (ttm) Gross Margin (ttm) EBITDA (ttm) Operating Margin (ttm) Net Income (ttm) EPS (ttm) P/E (ttm) PEG (5 year expected) P/S (ttm)
Source: Company reports

AAPL 615.00B 60,400 0.23 148.81B 0.44 55.82B 0.36 40.13B 42.55 15.42 0.68 4.13

GOOG 218.95B 54,604 0.35 43.16B 0.63 15.45B 0.31 11.11B 33.73 19.85 1.01 5.07

ORCL 155.02B 115,000 0.01 37.12B 0.79 16.05B 0.38 9.98B 1.96 16.2 1.04 4.18

Industry 213.55M 437 0.25 97.80M 0.71 6.46M 0 N/A N/A 25.57 1.34 2.83

258.21B 94,000 0.04 73.72B 0.76 30.71B 0.38 16.98B 2 15.4 1.14 3.5

den arising out of debt, but also leaves significant cash on the table to be further invested. Microsofts main problems arise out of the Web 2.0 phenomenon. The cloud has become a single touch point for almost all connected devices. This results in the commodification of the companys cash cows Windows and Office. The server business and application software products are therefore key strategic undertakings that will guide the company into the future. In part, Windows 8 is Microsofts attempt to make its OS engineered around web based dynamic applications. While the company will need to refine the OS continuously, it is well set to leverage the Office business in the cloud. The Office 365 suite works on a unique combination of software and services. For instance, you might soon see MS Word available through a subscription based model hosted in the cloud. What makes this proposition a viable one is the assumption that current customers would not want to disrupt their existing workflow. If it finally comes down to transitioning to a cloud based environment, then it would make absolute sense to do it with a long term partner like Microsoft instead of collaborating with a service provider which works on a different platform altogether. Having

said that, Microsoft will succeed in insulating its existing customer base but will have to struggle to acquire new clients. Another reason why cloud computing will become one of Microsofts totem poles is its presence in the development business. In order to develop and deploy applications in the cloud network, developers need a dedicated platform. Microsoft has this in the form of Azure. Not only does the platform accommodate different languages and developer tools, it also allows its users to merge their public cloud applications into their internal IT setup. Switching to different platforms is extremely costly and Microsoft has a great opportunity to shift its existing .NET customers to the Azure platform because the switching costs are almost non existent in this case. Andrew Lange, Associate Analyst at Morningstar

I expect Microsoft to build an economic moat around Azure and generate high returns on invested capital from this business

agrees. He believes that cloud platforms are very sticky due to high switching costs, enabling vendors to reap significant economic profits. Competitive dynamics should favour early entrants like Microsoft, and we do not expect the playing field to get very crowded; the combination of first-mover advantages, breadth and depth of technological expertise required to develop a robust offering, and large up-front capital investments pose formidable barriers to entry. As a result, I expect Microsoft to build an economic moat around Azure and generate high returns says Lange. Apart from these, Microsoft has Xbox as a source of significant competitive advantage. For the companys last fiscal year that ended June 30, the Business division generated $15.7 billion in operating income (almost half). Out of this, the entertainment and devices business (which falls under the Business division), made up for 40% of revenues. In June alone, Microsoft sold 257,000 units of the Xbox 360 in the US, giving it a market share of 47%. While some might argue that the console business is just a small part of Redmond, the fact that a seven-year-old device is delivering stellar performance quarter after quarter makes it a star performer. Skepticism aside, Microsoft has entered one of the most favourable phases in decades. The Samsung vs. Apple verdict plays out well for Microsoft which now has a better chance of pushing its Windows Phone 8 OS to manufacturers. Moreover, by announcing the Surface tablet, not only has Ballmer challenged Microsofts OEMs to come up with better tablets but has demonstrated that it has the capability of developing mobile devices which will deliver compelling performance to enterprise users something that the iPad has failed to do. If this was a well planned strategy, then Ballmer will go down in history as a worthy successor to Gates; and even if its not, shareholders wont be complaining if things go right.

32 Business & Economy

Fannie and Freddie

Timothy Mayopoulos, CEO, Fannie Mae (L), and Donald Layton, CEO, Freddie Mac (R): While the two mortgage giants need to focus on stabilisation in the short term, longerterm structural reform is needed soon

RIP: Fannie Mae, Freddie Mac, 2012

The recent changes in bailout agreements indicate that the Federal Government is now gearing up the process to end the era of mortgage giants Fannie Mae and Freddie Mac. But is it the right time? Is the US housing market ready to accept this and move on with the reform process to a new system? An analysis of why this is essential. DEEPAK RANJAN PATRA

he United States government couldnt have been clearer on this. The latest changes to the US Treasury bailout agreements with governmentsponsored enterprises (GSEs) Fannie Mae and Freddie Mac clearly indicate that its just a matter of days when the official words will be out to wind them up; the process has started though. As per the changes made to the agreements, the mortgage finance giants have been asked to turn

over all profits to the government and wind down their large investment portfolios at 15% per year rather than 10% as stated earlier. Result: The US government would soon take over all business controlled by the two GSEs for which it has been acting as the primary guarantor since both the institutions announced bankruptcy in 2008. The fact is that when the US government decided to continue the two agencies after bankruptcy, everyone knew that sooner or later they will be asked to

shut their shops. They only existed because the government wanted them for reviving the distressed US housing market. Now, when the government looks decisive, the question remains, has the US housing market stabilised enough to say goodbye to Fannie and Freddie? Its a point worth exploring besides understanding how the two mortgage giants have contributed to the overall US housing scenario. The story of Fannie Mae is certainly interesting in this regard for the
September 2012 33

STRATAGEM

International Finance

Quarterly Treasury draw request

No help has been requested so far in 2012
35 30 25 20 15 10 5 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 0
Fannie Mae Freddie Mac (Amount in $ billion)

Source: Fannie Mae, Freddie Mac

GSEs Quarterly draw from Treasury

Both are now less dependent on the govt.
35 30 25 20 15 10 5 0 2008 008 2009 2010 2011
Fannie Mee Freddie Mac (Amount in $ billion)

Source: Fannie Mae, Freddie Mac

GSEs payback in a decade

The Federal estimate seems really stretched
250
Total Treasury Draw (No addition)

200 0
Total Treasury Draw (Govt Projection)

150 0 100 0
Total Dividend Payments

50 0
(Amount in $ billion) -7

0 2008 08

-9 20 21

10

12

14

16

18

Source: Fannie Mae, Freddie Mac

Cumulative net income

Both the rms are expected to be in black in 12
10 0 -10 -20 -30 -40 -50 -60 -70 -80

(Amount in $ billion)

Source: Moodys Analytics

fact that it was commissioned in 1938 after the Great Depression provide the necessary impetus to the US housing market as a part of the New Deal (a series of economic programmes enacted in US between 1933 and 1936). Interestingly, it was this mortgage giant that ended up initiating the second biggest financial crisis ever. In fact, by the time Global Financial Crisis started (in the second quarter of 2008) Fannie Mae and Freddie Mac (the younger counter art of Fannie Mae was commissioned in 1970 to give competition to the former) had been exposed to subprime/ Alt-A loans worth a mind-boggling $388 billion and $392 billion respectively. Certainly, considering that the annual Private-label Mortgagebacked Securities issuances remained at over $800 billion per year in 2005 and 2006, one cannot say that these GSEs caused the crisis, but they for sure were the biggest contributors. Perhaps this was what prompted Senator John McCain to say that the catalyst for this housing crisis was Fannie Mae and Freddie Mac. In one of the debates during the Presidential campaign in 2008, he had claimed that these two GSEs caused the subprime lending situation that now caused the housing market in America to collapse. However, with the taxpayers owing close to 80% of the two GSEs post bankruptcy, the onus was on the government to use them to reorganise the US housing market. And as it can be seen, the job is done, at least to some extent. After long, the US housing market seems gaining legs. What is more interesting is the fact that now its in a situation where people have started looking forward to it as a growth driver. Agrees Celia Chen, West Chester based Senior Director at Moodys Analytics, as she tells B&E, Housing, once the Achilles heel of the US economy, is starting to look like a source of strength in a recovery that has lost its vigor and faces significant roadblocks. That housing is now a bright spot speaks more about the weakness of the recovery than absolute strength in housing.

Housing is starting to look like a source of strength in a recovery that has lost its vigor and faces many roadblocks
This comes as a relief at a time when the other drivers of growth are faltering. Housing is about to turn from being a drag on the broader economy to being a driver. Going by the available data, excess supply of housing in US has fallen to 750,000 units, its lowest since 2006. At its peak during 2008-09, excess supply was at 1,750,000 units. In addition, the share of distressed home sales is declining at a sound rate. As per Moodys Analytics, the share of distress sales has declined from 34.2% to 33.8% year-on-year in the second quarter of 2012. On the other hand, with the supply side stabilising slowly and steadily, home prices have started taking a U-turn suggesting that the prices already reached the bottom. The CoreLogic repeat purchase house price index suggests that housing prices have surged 2.2% year-on-year in Q2, 2012. The biggest concern, however. is the wide pool of bank-owned properties which are either in late-stage delinquency or in the process of foreclosure. The pool is as big as about 3.5 million homes. Another critical aspect of the reviving housing market that might keep it far from recovery is the visi-

34 Business & Economy

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Fannie and Freddie

Headquarters of Fannie Mae (Wisconsin Ave, N.W., Washington, D.C.) and Freddie Mac (McLean, Virginia). Both the rms have managed to put up a good show since bailout in 2008.

ble uneven growth. For instance, in July 2012 new home sales increased 3.6% as compared to 2.4% in June 2012. But this growth was more due to a bumper 76.5% growth in the Northeast, which witnessed a 55.3% fall in the previous month. The real housing growth in US, excluding Northeast, remained almost flat. Meanwhile, sale of existing houses rose as much as 2.4% in June 2012. Further, what remains the biggest problem in housing growth is mortgage credit availability. With banks and other mortgage financing companies still struggling to recover from the pile of delinquencies, new credit has become scarce with stricter application of terms and conditions for credit disbursement. Nevertheless, the sentiments are changing, though at a snails pace, and analysts are expecting that after six years (since 2006), 2012 may finally see the housing sector contributing to the countrys real GDP growth in a positive manner. Estimates suggest that while homebuilding will add as much as 30 basis points to real GDP growth, stability in house prices will add 20 basis points. It is also expected that 2013 onwards housing recovery will be in full swing. Such estimation could have fuelled the governments thought process to wind up Fannie Mae and Freddie Mac faster than what was originally thought when Obama called for a slow death of these two companies

last year. Moreover, its also time when the Federal Government is determined to get going with its mortgage finance reform plans. Early last year US Treasury Secretary Timothy Geithner had commented, We are going to start the process of reform now. But we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market. And the current move to accelerate Fannie Mae and Freddie Macs wind up process is nothing but a step in the same direction. Considering the amount of housing lending the government is handling at present (through Fannie Mae, Freddie Mac, Federal Housing Association and Veterans Administration) effectively all new loans it wont be wrong if the federal government is called the nations mortgage lender. But that certainly is not a sustainable model and they must exit this system at the earliest. This need, along with the reform plan that suggests nationalisation and privatisation of the housing finance sector, has ensured that the government sets both the GSEs free from duty at the earliest. However, what adds a little debate to the story is the way both the GSEs have performed over the past few years. Most importantly, they are back in black. This allows the federal government to gain handsome returns on $148.5 billion that it had infused into these companies to bail them out (both companies have returned $41.1 billion so far as against a withdrawal of $189.5 billion from the US Treasury). The argument gains some ground from the fact that drawing from treasury by the two companies have now gone down to almost zero and they have started repaying. Also losses from lending have drastically gone down since the day Fed took charge of these companies. Thus, the question remains: Is the government killing the goose that has just started laying golden eggs? As per federal government estimates, Fannie and Freddie, combined together, would receive as much as $221 billion from the Trea-

Gross loss on mortgage loans*

Newer loans outperform despite weak recovery
15 12 9 6 3 0 1
Months since origination 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1

61

Source: Equifax; *% of original dollar balance written off

Share of mortgage debt (%)

Fannie and Freddie still rule the sector
55 50 45 40 35 30 25 20 15 10 5 0 1996

Fannie & Freddie - Housing Private lable RMBS - bubble

2009

2010

2010

Source: Moodys Analytics

sury. On the contrary, if the two companies start earning the way they did in their hay days, between 2000 and 2005, they can manage just $33 billion in five years. That way, the federal bailout money would be fully repaid only by year 2033 (Moodys). Further, by closing down Fannie Mae and Freddie Mac which means putting brakes on large subsidies for homeownership (the government cannot afford to pay the kind of subsidies it used to give in the pre-crisis days) and privatising the sector in part or full the federal government can actually save a lot more money than continue operating the two giants. No doubt, in such a situation, the home owners might end up paying more for mortgage loans. But then, not to forget, it will also ensure a smooth functioning of the housing sector without risking the taxpayers money in mortgage lending. Do we need to say more?!
September 2012 35

Presents

POWERBRANDS RISING STARS 2012-13

A feature of

Signature Series

Supported by

In Association with

Powered by

MINISTRY OF TOURISM

Gold Sponsors

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Message from HH Sheikh Nahayan Bin Mubarak Al Nahayan, Minister of Higher Educa on and Scien c Research, UAE
You gather tonight to celebrate the success of Indian Brands, Power Brands that are establishing the reputa on of India; and it is my honour to be your guest and join in your celebra on. As you know, we in the United Arab Emirates appreciate very much the power of brands. By holding this event today, you underscore the fact that Indian Brands are valuable contributors to na onal, regional, and global development. Your mee ng in Dubai is a clear indica on that developing successful brands has become a global endeavour and that brands establish their reputa on in the context of an interdependent world. The number of brands that you celebrate tonight with the launch of this extraordinary book en tled PowerBrands Rising Stars will probably double in the next published volume. You should be immensely proud of the excellence you have brought to the world and we in the United Arab Emirates certainly admire your accomplishments. Thank you again for the opportunity to be with you this evening and congratula ons once more on the publica on of this inspiring book.

HE Reem Al Hashemi, Minister of State, UAE

n the 29th of August 2012, dignitaries, business tycoons, bollywood icons, celebrities & socialites from India and the UAE descended to the Jumeirah Emirates Towers to witness the launch of PowerBrands Rising Stars 2012-13 at the PowerBrands International event. An initiative by Planman Media, the PowerBrands Signature Series event, was supported by His Highness Sheikh Nahayan Bin Mabarak Al Nahayan - Minister of Higher Education and Scientific Research, UAE. Special guests included His Excellency Mohammed Ahmed Bin Abdulaziz Al Shehhi, Under Secretary - UAE Ministry of Economy, His Excellency M.K. Lokesh the Indian Ambassador to UAE and His Excellency Sanjay Verma The Consul General of India to Dubai. The evening began with a special message

from His Highness Sheikh Nahayan Bin Mubarak Al Nahayan - Minister of Higher Education and Scientific Research, UAE delivered by Her Excellency Reem Al Hashemi. PowerBrands Middle East was launched by Prof. Arindam Chaudhuri, EditorIn-Chief, Planman Media and Honorary Director IIPM Think Tank, Her Excellency Reem Al Hashemi, His Excellency Mohammed Ahmed Bin Abdul Aziz Al Shehhi, His Excellency M.K. Lokesh and His Excellency Sanjay Verma. Prof. Arindam Chaudhuri, said, It was amazing to have some of the fastest growing brands and their brand leaders at the event. These remarkable brands represent the changing face of contemporary India. On behalf of the entire Planman Group, I congratulate all the brands that are a part of the book. The

event also marks the launch of one of our most ambitious projects PowerBrands Middle East. We are confident that like in India, PowerBrands Middle East too will rise to become the brand bible of the region. Mr. Deepak Kaistha, Chief Executive Officer PowerBrands added, The event was a great success both in terms of achieving the objective of celebrating the brands as well as that of encouraging brands from both our country and from across the globe, to elevate the brand playing field to a new level of creativity and innovation. It was a proud moment to be present at the launch of PowerBrands - Middle East, a project that we are very excited about! I take this opportunity to thank the great city of Dubai and its people for the tremendous warmth and generosity with which they have greeted us.

1. HE M.K. Lokesh - Indian Ambassador to UAE. 2. HE Sanjay Verma Consul General of India to Dubai. 3. HE Reem Al Hashemi - Minister of State, UAE. 4. HE Mohd. Ahmed Bin Abdul Aziz Al Shehhi, Under Secretary, UAE, Ministry of Economy. 5. Dr. Bharat Butaney - President, IBPC. & Hamdan Mohamed Al Morshedi- Chairman, ArabBusiness club

8
6. Yash Chopra - PB HOF Father of the Indian Cinema (received by G. G. Valrani); 7. Prof. Chaudhuri in conversation with Arjun Rampal (recipient of PB HOF Dynamic Personality Cinema award) ; 8. Arjun Kapoor - PB HOF Rising Star Male; 9. Ranveer Singh PB HOF Youth Icon; 10. Manish Malhotra - PB HOF Styling New India Award; 11. Lillete Dubey - PB HOF Exemplary Contribution to Indian Cinema & Theatre

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of

FAME

AWARD RECIPIENTS
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1. Dr. Zulekha Daud; 2. Dr. Ram Buxani; 3. Chenthir Kumaran; 4. Yogesh Mehta; 5. G. G. Valrani for Yash Chopra; 6. Dr. Sanjeev Mehta; 7. D Shivkumar; 8. Rajeev Kakar; 9. Rizwan Sajan; 10. Vasu Shroff; 11. Dr. B. R. Shetty; 12. Dr. Rana Kapoor; 13. Vandana Luthra; 14. Kulwant Singh; 15. Rahul Sharma; 16. Paras Shahdadpuri; 17. Abdallah M. Ansari; 18. Ajay Pandey

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19. Ajay Bindroo; 20. Shaji Ul Mulk; 21. Sajith Ansar; 22. Dr. Ajay Gupta; 23. Tej Lohia; 24. Mohan Jashanmal; 25. Raza Beig; 26. Uma Ghosh Deshpande; 27. Gagan Modgul; 28. Alina Shah for Musaddiq Shah; 29. R. Seetharaman; 30. Sanjeev Agarwala; 31. K. Rajaram; 32. Manoj Mathew

Deepak Kaistha, CEO, Planman Media

Emcee's for the evening - Naveen Chamoli & Shadab

UNVEILED!

1. Anirudh Dhoot; 2. Paras Shahdadpuri; 3. Kulwant Singh 4. Dr. Bharat Butaney; 5. Prof. Arindam Chaudhuri; 6. HE Sanjay Verma; 7. Hamdan Morshedi; 8. Rajeev Kakar; 9. Samar Jodha; 10. Sudhir Chavan

1. (Left to Right) Zenitex, Earth Infrastructure, Vita Granito, Brys Group, Graphic Connections, EGE; 2. (Left to Right) Max Cement, Tirupati Rened Oil, Param Ghee, R-pure Agro Products, The Chocolate Room; 3. (Left to Right) Jade Blue, Khushi Advertising, Kasturi, Mad Over Donuts, Lovely Professional University, karachi Bakery, Kalamandir; 4. (Left to Right) Rama Group, Sangam Suitings, Asian Tiles: Asian Group, Sincere Group, Veneld, People's University, Kashish, Shreenathji Holidays; 5. (Left to Right) Hi-Tours, Ekbote, AMR Infrastructures, Bonzer7, Cocoberry, Dainik Amber; 6. Bright Outdoor Media, Astral CPVC, Fogg & 18+, Havmor

1. Sunil Tibriwal; 2. Abhishek; 3. Vibhishek Pal Singh; 4. Veena Patil (received by Himanshu Patil) ; 5. Sanjay Arya; 6. Ram Udharam Panjabi; 7. Ram Pal Soni; 8. Poonam Gurnanai; 9. Mohammed Esa; 10. Megha Vijaywargia (received by Akhilesh Mittal); 11. Kamlesh Patel; 12. Jagdish Sarda; 13. Anoop Bartaria; 14. Vikas Gupta; 15. Viral Desai; 16. Rahul Gaur; 17. Vineet Mal; 18. D.Suresh Kumar; 19. Rajkumar Jain; 20. Rajeev Gulati; 21. Rahul Jain

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22. Pratik Seal, 23. Prasad Chalavadi, 24. Kevin Power, 25. Krishna Srivastava (received by Jacob Mathew), 26. Moni Patel, 27. Kashif N. Usmani, 28. Kapil Aggarwal, 29. Jitendra Aghara, 30. Dr.Himanshu Garg, 31. G. Karthik Veeramani, 32. Dharmesh R Choradia, 33. D. Gandhikumar, 34. Ashok Chhajer, 35. Dr. Arun Kumar Sharma, 36. Anil Aggarwal, 37. Varuna D. Jani, 38. Viraf Sarkari on behalf of Kingdom of Dreams, 39. Darshan Patel, 40. Sandeep Engineer, 41. Pradeep Chona, 42. Yogesh Lakhani, 43. Chiranjiv Patel, 44. Nitin Aggarwal, 45. Sandipp K. Jhunjhunwaala

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1. Anirudh Shoot; 2. Samar Jodha; 3. Yogesh Deshpande; 4. Mehirr Chopra & Hiten Bajaj

PowerBrands Middle East - Grand Launch

(Left to Right) HE M.K. Lokesh, HE Reem Al Hashemi, Prof. Chaudhuri & HE Mohammed Al Shehhi

(Left to Right) Dr. Sanjeev Mehta, Yogesh Mehta, Raza Beig, Avi Bhojani, HE Sanjay Verma, HE M. K. Ramesh, HE Reem Al Hashemi, Prof. Arindam Chaudhuri, HE Mohammed Al Shehhi, Paras Shahdadpuri, Arjun Rampal, Dr. Rana Kapoor, Rizwan Sajan & Uma Ghosh Deshpande

(Top) Mesmerizing Fashion Show by Manish Malhotra; 1. Wiam Dahmani; 2. Arjun & Mehr Rampal; 3.Arjun Kapoor with his sister Anshula Kapoor; 4. Fardeen Khan in conversation with Rekha Taurani; (Bottom Left) Ranveer Singh, the Entertainer

9
5. Sakshi, Chandrika & Manvi; 6. Ria D'souza; 7. Shadab; 8. Roohi Singh; 9. Electric Strings in action

STRATAGEM

International Column

William W. George Professor of Management Practice, Henry B. Arthur Fellow of Ethics, Harvard Business School

Prof. William W. George, Harvard Business School

Penn State pedophilia scandal: Lessons for CEOs

CEOs may argue that cover-ups protect their companies interests. An HBS Working Knowledge column on why these arguments may be totally invalid
he most damaging portion of former FBI Director Louis Freehs report on the Pennsylvania State pedophilia scandal is his conclusion that four senior university officials concealed football coach Jerry Sanduskys child abuse from 1998 to 2011, even from its board of trustees, because they wanted to avoid the consequences of bad publicity. In so doing, these officials including legendary head football coach Joe Paterno and President Graham Spanier placed their own reputations ahead of the harm that Sandusky did to young boys for the next 14 years. Ironically, had Penn State turned Sandusky over to legal authorities in 1998, the public would have viewed its actions as protecting the victims, thereby enhancing the Universitys reputation. Instead, these men caused grave damage to a great university while allowing Sandusky free reign to destroy lives. Sadly, the Penn State situation is not unique. Consider these other cases: Had President Richard Nixon acknowledged his role in the Watergate scandals, he could have saved his presidency and his legacy. Had the hierarchy of the Roman Catholic Church acknowledged its pedophilia scandals, it would have protected victims and its moral authority. Had President Bill Clinton admitted his relationship with Monica Lewinsky, the scandal would have subsided, enabling him to focus on his pro-growth policies to balance the budget and create jobs. Had Martha Stewart and Rajat Gupta admitted their roles in insider trading, they could have plea bargained, moved past their ethical lapses,

and possibly avoided prison time. Had Best Buy founder Richard Schulze not covered up CEO Brian Dunns improprieties, he could have retained Best Buys reputation for sound values (and his own). Contrast these actions with JPMorgan CEO Jamie Dimon, who took immediate responsibility for his firms recent trading losses, calling them stupid and egregious. While Dimon took considerable heat, his reputation as a truth teller remains intact. Eventually, JPMorgan will be restored and corrective actions put in place to mitigate future risks. The deeper question raised by these examples is what causes leaders to cover up inappropriate actions instead of acknowledging them immediately? Many leaders strive for such perfection that they are unwilling to admit mistakes. They feel tremendous external pressure to be perfect, but in reality they are far more successful when they are authentic. Were they to think rationally about what to do, they would see it is better to acknowledge the truth, no matter how painful, because the truth will surface eventually. More importantly, they can prevent further harm to the victims. While leaders may rationalise that a cover-up protects the interests of their organisations, the damage of one typically harms their institutions far more than the direct admission of a mistake. The Greatest Generation, venerated for placing stewardship and institutional trust ahead of self-interest, contrasts starkly with those in this generation of leaders who believe that putting self-interest first is acceptable. The cardinal responsibility of leaders is to

always put their organisations first. As leaders become increasingly successful, their reputations soar and they begin to think they have to be perfect, contributing to their inability to acknowledge mistakes. Or they conflate their interests with the institution, thinking I am the institution. In doing so, they head for a fall often taking their organisations down with them. Meanwhile, the public loses trust in them, and everyone associated with the organisation gets hurt. This problem is compounded when many leaders fail, further alienating the public. Reversing this loss of trust will require a concerted effort to develop a new generation of responsible leaders. No longer can leaders be chosen strictly for their abilities. In future, they must also be selected for their sense of institutional responsibility, based on their performance under stress. They must be bound by a sound governance system and constraints that require them to acknowledge their responsibilities to their organisations. Developing this new leadership generation will require programs that focus on their inner sense of responsibility, their integrity and purpose in leading, and accepting themselves as imperfect human beings striving to do their best to help their organisations. An integral part of their development is gaining the self-confidence to acknowledge mistakes and make their actions transparent. Many leaders fear showing their vulnerabilities, but actually gain power and respect in being authentic. Improving leadership development and selection wont prevent all failures. But it will minimise them and restore trust in our leaders and CEOs.

September 2012 49

Reprinted with exclusive permission from HBS Working Knowledge

STRATAGEM

Corporation

Why everybody at SpiceJet loves Raymond

Two years back, Neil Raymond Mills took over as SpiceJets new chief. Then, the airline was unwell. He began by slashing costs. Strategies that didnt make economic sense were forgotten. Today, the airline appears a turnaround tale. Reality is, the job isnt over yet. Worse, harsh history could repeat itself
STEVEN PHILIP WARNER

simple analogy. If you drive a car at a constant speed minus stops, you burn less fuel. The gains dont become apparent after each short drive. But in a quarter of a year, the reduction in fuel consumption starts to show. The results become more pronounced in a year. Much is saved in gas and cash. Common sense. But most airlines in India ignore such small money-saving acts. SpiceJet is not one of them. At the airline, this constant speed philosophy is communicated as a compulsory key message to each of its newly recruited pilots. These cockpit handlers are supposed to remember it every time they leave an air strip. The idea is to get the pilots to save anywhere between 0.5% to 1% of the airlines fuel bill. A small chunk saved. But at SpiceJet, if a cost can be avoided, it is.

maintain an average load factor (LF) of over 75%, and plans to increase it over the quarters to come [in Q1, FY2012-13, LF was 80.8%]. Result: SpiceJets flight cancellation record (2%) is only better than those of Air India (3.2%) and Kingfisher (8.2%). Others boast of a lower figure (IndiGo: 0.1%, Jet:1.4%, GoAir: 1.6%).

MILLS... A NUMBER-LOVING TURNAROUND GUY But CEO Neil Mills, who has turned around the airline in the past two years, knows that these numbers only tell a part of the SpiceJet story. He is familiar with how budget airlines work. An industry veteran of over 20 years, this former CFO of Middle-Eastern LCC Flydubai knows his numbers fall on the rational side. He measures every paragraph in the book by weighing data. That is exactly how he helped build Flydubai from scratch. He plugged cost holes at the company, and improved its balance sheet, helping the airline grow from a drawing on the whiteboard to a fleet COST-CUTTING DOESNT ALWAYS HELP of nine operating aircraft in just a year-and-a-half. Before FlyThe companys hardheaded emphasis on lowering costs does afdubai, he was at easyJet for 12 long years. Under him, the compafect its operational efficiency metrics. Unfavourably at times. In ny grew from 4 to 174 aircraft, and became one of the biggest, July 2012, SpiceJets On-Time Performance (OTP) on domestic most profitable airlines in Europe. routes was 84.3%. That meant, about 16 of every 100 flights were At SpiceJet too, his moves have paid off. Under the previous delayed beyond 15 minutes. Much of this is can be blamed on the CEO (Sanjay Agarwal who constant speed norm that is served for 20 months before in place at the airline. This Market shares of domestic carriers (%) quitting in July 2010 when makes the airlines record onhe learnt that Kalanithi Maly better than the havocHow the equations have changed in 20 months ran, who had then bought stricken Air Indias (OTP of over SpiceJet, was in talks 81.2%) and now-stripped-to1.5% with Mills to get him on the-bone Kingfisher Airlines 12.2% board), the airlines reach (81%). All other airlines re17.8% 27.0% 18.8% 14.1% grew from 94 flights a day corded OTPs in the 90%-plus (to 16 cities) with a fleet of range [IndiGo: 95.3%, GoAir: Jan 2011 July 2012 7.2% 7.5% 18.2% 15 Boeing aircraft to 137 90.3%, and Jet: 91.6%]. The 21.1% 19.5% 19.4% flights (to 19 cities) with 21 company isnt one to worry planes. But the airline was about offloading passengers 3.4% 5.3% still in doldrums as far as to peer carriers (and cancel7.0% profit-making was conling flights) either, when load Jet Airways JetLite IndiGo SpiceJet Paramount cerned. Under Agarwal, it factors dont justify economAir India Kingsher GoAir Source: DGCA reports lost Rs.2.73 billion. Mills ics. The carrier strives to

50 Business & Economy

SpiceJet Limited

Neil Raymond Mills CEO, SpiceJet Limited, took charge of the company starting October 2010. He is an industry veteran, and is considered one of the key people who built both Middle-Easts successful LCC Flydubai and the worlds third-largest carrier easyJet from scratch

STRATAGEM

Corporation

Bottomlines of Indias top carriers (Rs. million)

Under Mills tenure, SpiceJet has always shown signs of a revival
20 10 0 -10 -20 -30 -40 -50 -60 Jct Airways Kingsher Air India SpiceJet IndiGo
FY2009-10 FY2010-11 FY2011-12

Source: Companies reported PATs and market reports

began with route rationalisation and frugal spending. Old spokes were deserted, new profitable routes were added, flights were rescheduled, turnaround times was reduced, manpower reallocation was undertaken et al. It took him five quarters to set the house in order. In Q1, FY2012-13, he finally converted the 47 fleet-sized SpiceJet into a money-making company. Total profits during the past quarter amounted to Rs.561.5 million. Better still, the airline has grown into a disciplined, but larger carrier. It serves 36 destinations, with 275 flights per day. IN TOTAL CONTROL This boyish-looking 43 year-old believes that profits for the budget carrier can be made in the long run even if with every task, every employee saves Rs.100 for the company. And how does he ensure that? At the core of Mills functioning lies his belief in total knowledge and central control. Company insiders claim that he keeps complete information of the budgetary inflows and outflows, on a daily basis. When B&E asked Mills to explain why so, he said, A majority of the payments that goes from the company are signed by me. Its not that I want to spend my day signing cheques. But that gives me a review of every thing that we are spending money on. Its more about knowledge than about control. I want to make sure that what we are spending on makes sense. How has Mills succeeded in plugging holes at SpiceJet is visible from the many cheques that are sent back from the corner office with flags attached to them. Why are we spending on this? What is this for? Or simply... Please justify. are common lines that Mills uses. UNDERUTILISED ASSETS = ADDED REVENUES? The company claims that everything within its perimeter is actively managed. At least under Mills it is. Since he came to SpiceJet, the airlines aircraft utilisation has risen about 40% to 12.5 hours per day the highest in a market where the average stands at 8.5 hours. But breathing in a cyclical industry poses a problem that of its fleet being under used during certain months. To make such lean periods count, Mills has decided to lease out aircraft during months when demand doesnt justify supply. Though globally, leasing out aircraft is a common phenomenon, in India, it isnt a strategy tried before. In the past, SpiceJet would
52 Business & Economy

operate its airlines at a Load Factor of under 60% during the July to mid-October period. No more. The airline has withdrawn excess capacity from routes in West and South India and is leasing out two of its Boeing 737-800 aircraft (along with the crew) to Saudi Arabian budget airline Nas Air under a wet lease agreement (during which Nas would bear the costs of operating and maintaining the planes which would be used for Haj operations). And the additional profit earning opportunity from this transaction amounts to a huge Rs.278.15 million! This exercise is now being adopted by SpiceJet and can serve a lesson for massive fleet owners in India in the commercial aviation space like Air India, Jet and IndiGo. As per a 2011 study by Ascend, 36% of the fleet owned by airline companies are leased out. Such an arrangement also insulates lessors from the risk of a fall in the planes second-hand values. Currently, the five most profitable airlines in the world Lufthansa (PAT of $1.03 billion in FY2011), China Southern ($968 million), Air France ($868 million), Delta ($854 million) and United-Continental ($840 million) lease out up to 20% of their capacity in a year. Its a big money-earning business overseas. Going by what Mills has therefore started, deploying under-performing assets in such a fashion appears one way to make profits a permanent feature in SpiceJets books. ANCILLARY A SOURCE LARGELY UNTAPPED Once meant only for LCCs, today even the largest of FSCs have a lesson to teach SpiceJet on how to make money from sources other than seats. From $2.45 billion in 2007, the total revenues earned from ancillary mode globally, rose to $22.6 billion in 2011. The worlds largest airlines are the highest earners from this medium. In FY2011, Delta (the worlds largest in terms of passengers carried) earned $2.55 billion from it. The airline which made most of this opportunity was however United Continental (the fifth-most profitable) $5.21 billion. United and Delta make money through

SpiceJet Limited

Private carriers could make SpiceJets living tougher if the sector turns profitable owing to a general rise in fares and stabilisation in fuel prices with ATF import being allowed (L) Begumpet Airport, Hyderabad; Oct. 15, 2008: Naresh Goyal, Chairman, Jet Airways (left) with Vijay Mallya, Chairman, Kingsher Airlines at the India Aviation Expo; (R) Sept. 8, 2011, Bangkok: Aditya Ghosh, President, IndiGo Airlines, on the inaugral ight of IndiGo from Bangkok to New Delhi

a mix of activities which included charging for checked baggage, sale of frequent flier miles, reservation cancellation fees (Delta charges 36% more than United-Continental combined and 57% more than American Airlines), merchandise, and other innovative programs like FareLock from United (which allows potential passengers an option to freeze a ticket price for 7 days) by paying a small price for the option. Not that the SpiceJet hasnt tried to capitalise on ancillary sources. A couple of years back, it did tie-up with UCP Direct to generate revenues from in-flight contests and space-selling to advertisers on its boarding passes, luggage tags and head-rest covers. It also recently joined hands with Amadeus e-Travel services to rope in business travellers. However, the outcome is yet to inspire peers in the Indian market. Industry sources claim that today, less than 5% of SpiceJets revenues come from this alternate revenue source. Low as compared to how LCC leaders around the world are making this medium the touchstone of their earning campaigns. For examples, look West. Southwest, the largest LCC made 9.1% of its revenues from non-ticket sales. [For standards, SpiceJet is the 25th largest, and IndiGo is the 19th largest.] Spirit Airlines the 18th largest earned 33.2%. Ryanair, the most profitable LCC (PAT: $746 million in FY2011) and 2nd-largest in volumes made 20.5%. Air Asia the 12th largest made 17.8%. Jetstar Airways the 9th largest made 15.3%. And as a reminder to Mills, easyJet, which he nurtured for a dozen years to make it the 3rd largest LCC in the world and the 3rd most profitable (PAT: $134 million in FY2011), earns more than a-fifth (20.8%) by making passengers pay for the nonseat component(s). FLEET COUNT RATIONALISATION Mills may have been late to the game in India. But he hasnt gone slow at chopping down bills in the past two years. Problem is: he

still has some work left to be done. Under the previous CEO, SpiceJet was operating at a passenger to fleet (PTF) ratio of 322,376 (CY2010). Today, the airlines PTF ratio has fallen 27.48% to 233,787. But Mills isnt worried. At present, SpiceJet is operating at an PTF ratio that beats the best in the business. Deltas PTF ratio stands at 218,569. United-Continental: 204,425. Southwest: 189,233. Lufthansa: 175,632. And China Southern Airlines: 221,739. And even the so-celebrated airline IndiGo which became the largest airline operator in the month of July 2012, with a market share of 27% - operates at a fleet efficiency level (252,646 passengers annually per aircraft) that is only 8% better than SpiceJets. At present, the #4 (in India) SpiceJets market share is 9.2% less than IndiGos. Perhaps its this single-digit difference in PTF that separates the leader from the follower. Mills has to decide. At present though, market share is the last thing on this mind. Market share is a nice metric, but its just a number. Im not ready to pay for market share, he rebuts. What keeps him at ease is the fact that SpiceJets fleet is a combination of the high-capacity Boeing 737 family [35 planes - 29 of which can accommodate 189 passengers (B737-800s) and 6 can carry 212 (B737-900ER)] and the low capacity Bombardier Q400 aircraft for short haul routes [12 planes, which can accommodate only 78] leading to a total of 7689 available seats one-way, at 100% load factor. In comparison, all 60 planes that IndiGo operates are Airbus 320s which have a capacity of 180 (total of 10,800 seats, one-way). Therefore, he knows that vis-a-vis IndiGos, his fleet has a lower total passenger capacity which translates into a lower PTF ratio at equivalent load levels. But with such a fleet, he has avoided risking wastage of capacity. Mills also knows that for the diverse mix of short and medium haul routes, his airline has a more efficient fleet mix (as smaller planes consume less fuel and have a lower maintenance cost). The only immediate concern is that with ten more aircraft to be added to his fleet, will demand growth (which has not been very encouraging of late, with a y-o-y increase of just 1.74% in July 2012 due to increase in fares and taxes) enable the airline to keep the FTP efficiency ratio in place? In the recent quarter, the airline made profits on the back of capacity additions, a higher load factor and higher ticket prices (which rose by 15-25% y-o-y for LCCs across various routes) that allowed its operating margins to increase by 1,168 bp to 18.6%. But with capacity additions in place (even IndiGo plans to add 12 more aircraft during FY2012-13; CAPA forecasts up to 5% increase in supply in FY2012-13), fares may fall by up to 7-8% and reduced load factors may mean shrinking margins. December 2011 marked the end of double digit y-o-y growth of traffic in Indias domestic circuit. And CAPAs forecast that annual traffic will slow in 2012-13 from the 16.6% growth seen in 2011-12 (that saw 60.7 million passengers taking to the domestic skies) isnt good news either. But Mills believes that demand growth will remain robust. He is hopeful. Besides fleet count, Mills also has to look to rationalise manpower count per aircraft (EF ratio), which at present stands at 118 for SpiceJet. IndiGo is currently operating at a lower 102. To talk of a benchmark, the airline could aim to better the EF ratio of that of Southwest (EF ratio of 80.56). And why Southwest? First, its fleet is a big-sized version of that of SpiceJets as it uses only B737 family (571 aircraft). Operationally too, the two are similar.
September 2012 53

STRATAGEM

Corporation

Growth in domestic trafc of select carriers

By July 2013, SpiceJet & IndiGo will become the top 2 airlines
+60%
Spicejet IndiGo Indian carriers - industry

Growth in international trafc of select carriers

Why SpiceJets international expansion plans will pay off
300% 250% 200% 150% 100%
SpiceJet IndiGo Indian carriers - industry

+40% +20% 0 -20% Jan 11

50% 0% Jun 12 Jun 13 -50% Jan 11 Sep 11 Jun 12 Jun 13

Source: ICAO ATR Form A furnished by carriers; Forecasts using 4th order Regression Analysis

Source: ICAO ATR Form A furnished by carriers; Forecasts using 4th order Regression Analysis

Southwests route network only includes spokes and hubs within a flying time of 6 hours of each other. With such similarity, imitating the only airline which has never made a quarterly loss in the past three decades sounds fair. AMBITIOUS INTERNATIONAL PLANS. NOT YET. Mills has his foot set firmly on the ground. Unlike Jet, Air India and Kingfisher, he doesnt plan to read the atlas wrong. Under the current economic scenario, expanding into far off markets like US and EU would not only mean attempting to blindly rise in flat markets, but also disrupt a fleet and route combination, which the airline finally seems to have got right. Its planes are not meant for flights that last more than 5 hours, and ultra-long haul services are today exposed to competition due to more than the desired number of hubs mushrooming between India and EU/US. Call it a photocopy of the short haul flight strategy adopted by successful European and US budget carriers or by IndiGo, the airlines international network should not go beyond hubs/spokes that are beyond 5 hours of flight duration in near future. Mills says, it wont. After Dubai, Kathmandu and Colombo, markets like China, Hong Kong, Bangkok, Maldives and Kabul, are next on his radar. The potential of trade & tourism which he explained to B&E does sound interesting as he relished the thought of challenging FSCs in these international markets. Speaking on the outlook for the copany, Rashesh Shah, Analyst, ICICI Securities, says, The company is in the process of importing fuel directly and also focusing on international routes. This, in turn, should help SpiceJet to further improve its margin, going forward. However, the operating environment would remain challenging in the wake of slowing passenger traffic growth and a weak rupee. Adds John Siddharth, Aviation expert, Frost & Sullivan, With airline operators like Air Asia in South East Asia the price war is intense. SpiceJet would need to make a cautious approach and decide if it is equipped enough for the price war. SpiceJet has always been keen on the South East Asian markets. Now it has decided to take the plunge. All said and done, for SpiceJet, increasing its international footprint from the current 3% to about 15% in another year will make for a healthy arrangement. That will also create a cushion from the slowdown that may hit India again. Mills realises this.
54 Business & Economy

He confesses that he only undertakes an action which would result in a more secure future coupled with superior stock returns for the shareholders. So far, he has. Since August 2011, the SpiceJet stock (rise of 36%) has outperformed its peers (Jet: +22%, Kingfisher: -67%) and the Sensex (+6.4%). By the end of Q2, FY2012-13 (Sep. 2012), the airline will become the first carrier in the country to be allowed to import ATF directly. This will help reduce its fuel bill by about 20-25%. Such cost savings will be a relief to a carrier for whom ATF amounts to over 48.63% of total costs and 54.93% of revenues in FY2011-12 it paid Rs.21.96 billion on ATF last year. Its earnings will take a leap too. Analysts have already forecasted profitable years ahead for the airline, much due to some relief on the fuel bill. Amber Dubey, Partner & Head Aviation at KPMG India, shares Mills faith. He feels that times ahead for SpiceJet appears bright because Indian domestic consumers are not yet ready for the FSC model. Good news. The road ahead however will not be 100% challenge-free. First, policymaking isnt a quick process in India. FDI is still stuck in a barbwire. [SpiceJet, given that it has 0% foreign equity, unlike IndiGo and the airlines balance sheet and stock price are both attractive, will benefit the most of all airlines even if a 26% FDI limit is approved by the Cabinet.] And procedural delays have already cost the airline two months in the case of ATF fuel import. Second, with the sector gradually turning profitable, there will be others who will want to either try their luck or give flying another shot. Besides SpiceJet, even Kingfisher and IndiGo have been given the nod by the Director General of Foreign Trade for importing ATF, which will help their bottomlines. Third, Mills is a self-confessed number addict, and makes decisions based on demand-supply economics sans quivering with emotion. This is what enabled a quicker than expected turnaround for the airline. Finding a suitable successor for this CEO in his prime one who hangs on to Mills habits at the corner office will be a difficult task for the airlines bosses. [Mills is already being watched closely by other airline bosses.] For SpiceJet, its time that it gets back to some advertising soon [an area that got the axe from Mills]. In an industry where every cent of fare increase threatens to derail demand, performance coupled with promotion will lead to a good word of mouth. Not the other way round. This cost, Mills shouldnt avoid.

SpiceJet Limited

I am not prepared to pay for market share

Neil Mills, CEO, SpiceJet, on how route rationalisation and other decisions were key to moving the budget carrier into the black, and why he doesnt care about market share
B&E: SpiceJet recorded a prot in Q2, 2012 (Rs.560.2 million) after ve quarters. Was it an outcome of you benetting from supply problems at Kingsher and Air India? Neil Mills (NM): I dont agree. There has been a growth in the number of seats deployed as compared to the same quarter last year. The brains that have provided the seats may have changed but the total market supply has risen. So how can anyone claim that we made prots because the others failed? The logic doesnt follow. B&E: But numbers make the objections strong. Air India saw a 9.30% y-o-y drop in ight count in the Q2, CY2012, while Kingsher saw a 71.80% fall. Your comment. NM: The reality is much different. If you look at the two airlines, Air Indias issues have affected its international network. Not its domestic network. Our international deployment is only 3-4% of our total ight volume. So how can I benet in a space where Air India didnt have problems? As far as Kingsher is concerned, the capacity has been replaced by everyone. I dont see how only we benetted from its problems. B&E: So are you pointing towards a plan that has started paying off? NM: Yes. Its active management of business that is at work. Particularly, the route deployment being done on a far more commercial basis. And that actually means that we are turning around to become protable. B&E: Two years since you joined SpiceJet what has been the most important change in the airlines strategy since then? NM: Most specically, we have rationalised our routes. We dont y loss making routes any more. At the end of the day we are there to deliver returns to our shareholders. B&E: We spoke to the IATA Chief Tony Tyler. He believes that India will remain an aviation market that will continue to have a mix of LCCs and FSCs. You think so too? NM: If you look at major airline markets be it Australia, US, Europe the major chunk of volume consists of LCCs. LCCs is a value for money proposition. It suits a market like India. If you look at Network strength, OnTime Performance (OTP) and Load Factors, ours is actually better than FSCs. The FSCs have to ask, what is it that they are offering extra in terms of value for the extra price they charge? B&E: Since January 2011, IndiGos market share has risen from 14.1% to 27%. Your growth has been slower from 12.2% to 17.8%. Doesnt market share bother you?

NM: Not at all. The airliness fuel bills cant be paid with market share. My employees want to be paid with cash, not market share. I just want to be big enough to be relevant. In this industry, a bigger market share gives you no advantage, as no player, not even the largest in India possesses pricing power! I am not prepared to pay for market share. Its a nice metric. But it is not everything. B&E: When you were at easyJet, you changed its eet from a Boeing one to an Airbus-Boeing mix. Is that a possibility at SpiceJet? NM: Were not considering any change at present. B&E: What is your limit as far as overseas expansion is concerned? NM: Nothing beyond ve hours of ight time. So a destination like Australia is not on the cards.
September 2012 55

COVER STORY

Indian Economy

REVIVE THE INDIAN

ECONOMY

10 WAYS TO

56 Business & Economy

With faulty policies and incompetent policy makers, the Indian economy has seen its worst. IIPM Think Tank suggests ten critical policy measures that can save the Indian economy from mirroring the paralysed socioeconomic conditions of US and Europe
SRAY AGARWAL

T&D losses (% of output)

India has high inefciency in T&D
30 world, which has a huge impact on industrial production 25 20 15 10 5 0 1995
India Brazil South Africa Indias power sector inefciency is the highest in the

2009
Mexico Indonesia China Singapore

Source: World Bank, World Development Indicators

hen the northern, eastern and north eastern power grids in India collapsed in July and left more than half the country in the dark, it was declared to be another vivid indicator of Indias incredible growth story having run its course (following S&Ps downgrade, which predicted that India would be the first fallen angel among the BRICs). What the world chooses to ignore is that structural flaws in our power sector in generation and T&D have been holding back our economy for years, including the years where they felt so overtly optimistic (and even insecure) about Indias potential on the world stage. For the record, India achieved a net capacity addition of around 4 GW per year from 1997-2007. But a McKinsey report (however much you might wish to believe it) indicates that a growing Indias needs from 2007-2017 merit a net capacity addition of 2040 GW per year, i.e. 5-10 times that figure. And the 11th Five Year Plan added only around 53.12 GW, or a little over 10 GW per year. In fact, the last year (2011-12) was particularly a good one with installation of 20.5 GW. In other words, despite the best attempts of the powersthat-be in scuttling our growth in the past decade, the economy has somehow pulled itself together and kept up the heat. Clearly, it appears that countries are perceived very similarly to companies today, and you are only as good as your last quarter. By that yardstick, the Indian economy is still struggling with a depressed GDP growth of 5.5% for Q1, 2012-13; which makes it 9 consecutive quarters of declining growth rates. The surprising part is the shock and awe most Indians feel with this slowdown, as if they were in the middle of a rude awakening! Thats really because even till June last year, the government was predicting 9% GDP growth for India in FY 2011-12 and the RBI was looking at an 8% figure! However, as B&E had concluded from its statistical analysis last year (refer B&Es issue dated August 4, 2011 titled The Upcoming Indian Economic Slowdown), there were really no surprises. We had predicted it based on a multifactor correlation analysis using inflationary trends in India as the base. Interestingly and snapping back temporarily to the start of the past decade during the year 2000, the Indian economy followed a trend in inflation similar to the US. The trend was again repeated in 2010 when the Indian economy mirrored the US economic condition of 2008 just before it (US) stumbled into a deadly recession. As per our polynomial forecasting trend line analysis, the correlation will continue till the end of 2012 with its impact lingering till the last quarter of this fiscal year. So our prognosis is that India would see a relatively depressed growth at least till FY 2012-13. But all is not lost. In fact, this trend is based on the fact that the government will continue to simply do nothing to reverse the situation. In other words, its quite easy to electrifyingly turnaround our prognosis. What is it that our government spokespersons including our Prime Minister have done best in this economic slowdown? Blame external factors, and thats quite a convenient thing to do at the moment! The US grew by 1.7% yoy for the quarter ending June 2012 as compared to 2% for the previous quarter. The Eurozone remained in a quandary with GDP shrinking by 0.4% yoy for the quarter and jobless rates at a record high of 11.3% in July. And thats why the escap-

COVER STORY

Indian Economy

ist reasoning by the government. But then, that is hardly an excuse for not setting our own house in order. There is no denying the fact that the Indian economy has sufficient potential of its own accord, and if given the right impetus, India can indeed get back to 8-9% and beyond sooner than expected. B&E and IIPM Think Tank present 10 critical ways in which we can bring the economy back to its high growth phase. #1: KNOW HOW DEEP IS THE DITCH BEFORE YOU JUMP IN How would you feel if you were asked to run a 100 metre race by an expert who claims to have assessed the racing track; and you realize after running a few metres at full speed that youve just jumped off a cliff? Inaccurate data is bound to affect the quality of decisions. It is startling that there are huge discrepancies in GDP growth rate figures in different reports from both Central Statistical Organisation and Ministry of Finance. As per the January 2012 report, GDP (at factor cost) growth rates (yoy, at FY 2004-05 prices) in the first two quarters of FY 2009-10 are 6.3% & 8.7% respectively, which, in the February 2012 report, have been reported as 7.5% & 9.8% respectively! In another report, as per April 2012, GDP growth rate in the fourth quarter of 2010-11 is 7.8%, which all of a sudden becomes 9.2% in the July report! Such discrepancies are also observed with respect to quarterly GDP growth rates in reports published by CSO. And here, we have scrutinised only a couple of reports and observed irregularities in the data of the last two years. Also, our GDP figures are flawed on another very significant front. Unlike Western capitalistic economies, a third world economy like India is still characterised by a huge informal sector. As per an OECD report, the average size of the informal economy of a developing country is 30-40% of GNI, which boils down to around $1.9 trillion in Indias case. According to the Economic Survey 2007-08, the unorganised sector accounted for employ-

India-US ination: Mirror

Indian ination trend is imitating Americas pre-2008 trend
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 5 0 2001 16 14 12 10 8 6 4 2 0 2001 US Y-o-Y

03

05

07

09

11

13

15 17

India Y-o-Y

03

05

07

09

11

13

15 17

Source: IIPM Think Tank analysis, World Bank

ment of 93% of Indias workforce. Interestingly, the contribution of the unorganised sector, which National Commission for Enterprises in the Unorganized Sector (NCEUS) also estimates to be around 50% (NCEUS 2008) of the GDP, is not considered while computing the GDP figures. Including it would create positive externalities for the nation and also allow the government to allocate funds in more rational ways over the current method, which is highly populist with

an inclination towards favouring corporate lobbies. The same goes for our inflation data. In Indias case, WPI is calculated on an weekly basis while CPI is calculated on a monthly basis. When you look at the composition of CPI in India, many goods consumed in day to day basis are not even listed in the CPI. For instance, in UK, the latest CPI basket of goods includes essential items like health, communication, transport in addition to iPads, Twilight merchandise and other leisure goods. On the other hand, a WPIbased inflation approach does not depict the true picture as it measures changes in the wholesale price of 435 items and not what the end consumers would actually pay. In addition to CPI, many countries also calculate inflation based on RPI (Retail Price Index) thus making sure that their inflation data is real time and accurate. The RBI governor D. Subbarao said recently, In its present structure, the WPI does not capture the price movement of services. Also, it is a hybrid of consumer and producer price quotes. For example, the index captures the price of important commodities like

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(Left) The UPA under PM Dr. Manmohan Singh had forecast a growth rate of around 7.6% by the end of this scal; (Right) Planning Commission Head Montek Singh Ahluwalia feels even 7% growth would be tough to reach

The pro-India view

H.E. Peter N Varghese AO Australian High Commissioner to India The India-Australia coal trade is a token of Indias growth story driven by huge domestic demand, which is one of the highest in the world. Earlier, the imported coal from Australia was mainly cocking coal used for domestic consumption but the future import usage would be centered on thermal power generation, another important prerequisite for Indias growth story. It would be myopic to look into Indias growth with quarterly or yearly results Indias economy has undergone many twists and turns from Hindu rate of growth to a fast paced one from the time of liberalization. That notwithstanding, a massive pool of young population would be the key to Indias success in the long run. In this age of globalization, Indias economy is not a phenomenon in isolation, rather its being impacted by the global economy and economic meltdown in Europe and North America always have a negative effect on it. The strength of Indian economy is based on certain factors viz. it is a consumption based economy, its high savings and high investment level, and then if it can win the challenge of education for its citizens. Economy is a part of an ecosystem and it does not exist independently. Economic growth and political stability are clearly inter-related. Further, Indias democracy is the pillar of strength for its economic advancement, which provides as shock absorbers, so that in the long term economic growth speeds up. Since Independence, India has shown remarkable growth amidst pessimism even with such diversity.

Quarterly GDP trend

India is witnessing a negative trend in quarterly GDP growth rates
Quarterly Variation Quarterly GDP growth rate

40 30 20 10 0 -10 -20 -30

Q1 Q2

12% 10% 8% 6% 4%
Quarterly variations is showing a downward trend
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2% 0%

FY 2009-10

FY 2010-11

FY 2011-12

Source: MoF gures, IIPM Think Tank analysis

milk from the retail markets, not at the producer level. Wonderful Mr. Governor, now lets do something about it, shall we? #2: GET THE RIGHT PEOPLE PLEASE! Metaphorically speaking, asking your cook to double up as the household electrician is as dangerous as asking a history and law graduate to be your Finance Minister. Theres nothing to take away from the sheer energy exuded by now Pres-

ident Mr. Pranab Mukherjee, but having this double MA (in history and political science) and a qualified LLB handling the finance portfolio is clear evidence that its popular appeal than technical competence that drives such postings. Honestly, if the argument is that people learn on the job, then the counter argument is to spare us the spiel; the nations top posts are not meant for ultra-excited people ready to learn on the job. We dont have that kind of time, money and patience to waste. Pranabda was assisted by two Ministers of State Namo Narain Meena and S.S. Palanimanickam. The former holds a Masters Degree in Geography and the latter is, again, a lawyer! Also, the MoF is composed of mostly IAS cadres with arts backgrounds. The current FM P. Chidambaram is also in fact an LLB. Thankfully, his MBA from Harvard might be quite some help. In stark contrast, Barack Obamas economic team is composed of economists only; giving it a much higher credibility (see the comparative competency table). In our MoF, out of 35 chief members (including the Finance Minister) only nine have a background in economics, whereas in Obamas team, almost all of them are PhDs in economics! While recruiting members of the Planning Commission or MoF, a post graduate degree in economics should be a minimum prerequisite. Lateral hiring at the secretary and joint-secretary levels of officials with competence in economic and econometrics must be given top priority. MoFs languor is potent in making its report quality inferior to the ones published from constitutional federal bodies of United States. MoFs voluminous database is generally based on outdated stats and visibly lacks analysis, a sharp contrast to not only American institutional bodies like Bureau of Economic Analysis, but also to the RBI. All economic data needs to be updated and

Photo: Mukunda De

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modelled and simulated on the lines of BAE. A team of economic analysts is required who can perform real-time modelling and simulation on available data (using various econometric tools) to assist MoF at policy level. #3: KEEP THE FOCUS ON THE BOTTOM 80% Growth in the Indian economy is bound to hit a brick wall soon if it is focused only at the top 20%. If we do whats desired to ensure a life of dignity to the bottom 80%, India can even look at 10% plus growth rates. And if the middle class actually is made to rise to 500 million (currently over 100 million), it would bring huge purchasing power and unleash a healthy dose of economic dynamism. However, the picture on the ground is deeply disturbing. The first story that the government needs to set right is agriculture, which is officially the source of livelihood for 58.4% of Indians and continues to show sluggish growth, coming down to 2.9% for the quarter ending June. A World Bank report earlier this year highlighted three critical challenges for Indian agriculture raising agricultural productivity per unit of land, boost in farm and non-farm income to bring down rural poverty and ensuring better response of agriculture to Indias food security needs. MNREGA has been a vital initiative towards the second goal, but is riddled with red tape and needs far better real time monitoring (possibly, the UID could be of some help in identifying and compensating identified genuine beneficiaries). While the first goal can be achieved through better utilisation of resources, the third has links to the go-to-market mechanism for food, which we will discuss later. When it comes to employment, India does not have reliable figures on this front either. Over 85% of the people are reportedly working in the unorganised sector. The ruling government has claimed that the unemployment rate has drastically fallen down from 8.3% in 2004-05 to 6.6% in 2009-10. Interestingly, according to

AEPC, 4.5 million people lost their jobs in the textile sector alone in last three years! As per the Labour Bureau of Indias latest employment survey, India has a 3.8% unemployment rate, while NSSO concluded it to be 2% for 2009-10. An economist opines, Like poverty, unemployment definition needs a national debate. The 3.8% unemployment rate is unbelievable its science fiction. The rate must be a multiple of this rate in the range of 15% to 19%. MNREGA, while laudable in principle, should ideally shift to permanent infrastructure development rather than temporary makeshift development (follow what China has done); thus creating long term employment and acting as catalyst for the economy. #4: DONT BE AN INFLATION NINCOMPOOP I must admit that even at a personal level, I do not know how to interpret inflation. Whatever you might criticise the RBI governor D. Subbarao for, you just cant disregard his highly popular jests; with the above one being made at a recent economic conference, where he started comparing his costs of getting a haircut a few decades back and now. But really, this epitomizes the issue. Our government simply is lost on inflation. Indias wholesale inflation unexpectedly fell in July to 6.87%, its lowest level since January 2010. Food inflation, to some, may seem to have cooled down relatively but then a walk down the street would be enough to gauge the ever increasing food prices that are burning holes in
Photo: Mukunda De

Steel production saw a growth rate of -0.5% in June 2012 against 14.5% growth in June 2011. Cumulatively, steel production had a 3.6% growth during April-June 2012-13 compared to 8.4% growth during the same period last year

As per a report published by the Ministry of Road, trafc jams, delays at tolls cost India nearly Rs. 40 billion annually

the pockets of consumers. The growth rate of agriculture slowed down to 3% in 2011-12 from 6.6% in 2010-11, affecting food prices and food production. Moreover, lack of storage facilities and increasing prices of fuel have shot the price further up. The average WPI inflation since the beginning of 2012 was over 9% and settled down at 9.2% by the end of July. To tackle inflation, the government must realise that it is a demand side inflation, and the governments policies should be looking at improving supply chain inefficiencies in our food distribution systems. Anis Chakravorty, Chief Economist, Deloitte India, comments, When the RBI started increasing interest rates around 17-18 months back, by around 25 basis points and in some cases by 50 basis points, it did not have too much of a dent on inflation numbers. Also, it started as food inflation and later

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Wholesale Price Index trend

Ination rates are expected to stay on the higher side
14 12 11 10 8 6 4 2 0 -2 Apr05 Apr06 Apr07 Apr08 Apr09 Apr10 Apr11
Monthly Variations WPI monthly average

300 250 150 100 50 0 -50 -100 -150 -200 -250 -300 -350

Source: RBI data, IIPM Think Tank analysis

rubbed off on manufactured goods. Over the months, manufacturing goods inflation started coming down, and food inflation persisted. This could only happen because supply was not keeping pace with demand. So rather than looking at it as a monetary policy issue to be tackled by the RBI, the government should see how it can make long pending improvements in supply chain infrastructure. #5: GETTING THE INDUSTRY BACK ON TRACK Ministers giving drab comments of wanting to equal Chinas economic growth should be summarily dismissed from their jobs. China can only be a supreme lesson that should be followed but not with an intent to equal (which is not possible at all) but with an objective to get our industry back on track. The problems of economic slowdown have been exacerbated with waning industrial output, which contracted by 1.8% in June 2012, mainly due to a slowdown in the manufacturing and mining sectors (by almost 3%), which saw a major setback after the ban on mining in Kar-

nataka and Orissa. Eight core infrastructure industries - namely crude oil, petroleum refinery products, coal, electricity, cement, steel, natural gas and fertilizers (that fuel economic growth) registered a growth of 3.8% in May 2012 as compared to growth of 5.8% in May 2011. Heavy industries are facing problems with a number of product categories facing negative growth. HSBCs Manufacturing Purchase Managers Index (PMI) for India was 55 in June compared to 54.8 in May. However, it has come back to 52.9 in July. The worst part is the impact on expansion plans. CRISIL did a survey of 500 industrial projects covering 11 sectors and concluded that India Inc. is likely to see a 25% drop in planned expenditure in the next 3 years to Rs.10 trillion. Of course, RBI continues to face criticism from industry regarding its stinginess on interest rates. The major direction that propels RBI to increase or decrease interest rates is controlling inflation to soften the crisis on average citizens. With increased lending rates, demand for money subsides, putting a curb on inflation. Similarly lowering interest rates induces growth as investment is made easier in that case. The Federal Reserve of United States, on the other hand, has a federal fund target rate, which it follows based on open

market operations to control money supply. Furthermore, every financial institution in US is required to maintain a proportion of fund to its total demand accounts either with the Fed or as vault cash. Though the reserve can vary depending on the size of the institution, it is typically pegged at 10%. There is no provision of this in India for the banks and NBFCs vis-vis RBI. Almost all Asian nations that had increased rates in the past two to three years have decreased their interest rates (including China), but RBI stays put. Most countries use the Taylor rule to decide on interest rates, which allows banking institutions to calculate interest rates based on factors like inflation and industrial output. As a thumb rule, interest rates are kept loose during high inflation periods. The Taylors principle (proposed by Nobel prize winning John B. Taylor) states that a rise in inflation by 1% should portend the nominal interest rate to be augmented by more than 1% by the central bank of a country. The result attained by our economy is the worst of both worlds viz. low growth and high inflation! Now the concern should shift to growth. The government has too much on its hands when it comes to encouraging industry. It is imperative to take at least a few signature measures to im-

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Falling IIP, Falling production

IIP gures need to be perked up to restore condence in the economy
30 20 10 0 -10 -20 -30 -40 -50 -60 Apr05
Source: RBI data

Jun12

prove sentiment like implementation of the GST and the National Manufacturing Policy on an urgent basis, progress in the outdated land acquisition and labour laws and incentivising industry in critical growth areas. In addition,better clarity and understanding of the industrys position on areas like 2G spectrum auctions, GAAR and SEZ taxation will go a long way. #6: GET THE MONEY IN Liberalising FDI merits a mention separately in our list. India still happens to be one of the hottest destinations for FDI. As per the AT Kearneys FDI confidence index, India with a score of 1.73 stands only behind China (1.87) in terms of FDI attractiveness. The country attracted FDI of $36.5 billion in FY 2011-12. Although it is significantly less as compared to 2008 ($43 billion), it is still an impressive growth by 88% yoy. However, the months of April and May saw FDI at just around $3.17 billion compared to $7.78 billion in the same period last year. FDI should be allowed in the core sector like logistics, infrastructure and power, which would help India in capacity expansion to support economic growth. Moreover, the cap on FDI in insurance should be increased to at least 49% from the existing 26% cap. RBI, in its annual report for 201112, has stressed on the need to im-

A startling 410 projects out of 583 are delayed, a gure that runs counter sharply to the ideology of maintaining a status quo with the original project outlays
prove FDI inflows in sectors like insurance, retail, aviation and infrastructure. The proposition of allowing 100% FDI in retail is still stuck in petty politics. Although, the extent to which it will improve supply chain efficiencies and bring down food inflation is still debatable, it would certainly help in boosting employment (estimated to create 8-10 million jobs) and bringing valuable economic traction to related sectors. It should be the immediate priority, even if it has to start on a state by state basis. #7: REINING IN THE SHORTFALL The current account deficit in 2012 is at 3.6% (higher than the 1991 figure) and short term debt is at 23.3%, way above the 10.2% mark in 1991. The fiscal deficit has also risen to around 5.9% of GDP. Though India is far better off when it comes to forex reserves ($290.18 billion as on August 24), there is no room for complacency. Subsidies, which were as high as Rs.650 billion in fuel alone, are putting pressure on fiscal deficit and its time the UPA government swallowed the bitter pill. Imagine if the same amount was invested in revamping infrastructure. People would have switched to alternative modes of transport, which would invariably have reduced wastage of productive time due to traffic jams and also reduced the need for high fuel consumption. As per a report published in June 2012 by the Ministry of Roads, traffic jams and delays at tolls cost India nearly Rs.40 billion annually. The options dont look too bright on international trade as well. Weaker demand in Indias major export markets the US and Europe - owing to ongoing financial turmoil coupled with devaluation of Rupee has pushed the trade deficit to an all-time high of

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UPA government, in June 2010, deregulated fuel prices with an objective of reducing the subsidies it offers to state-run oil companies which rely on imports. As of now, imports account for 80% of total oil supplies. In August 2012, Union Petroleum Minister Jaipal Reddy (above) accepted in Parliament that 52 exploration blocks, some awarded long back in 1999, have still not gotten operational due to approval delays

$185 billion in the last fiscal. It is important to note here that although China is Indias largest trading partner with bilateral trade flows of $75 billion (expected to grow to $100 billion by 2015), trade is heavily skewed in Chinas favour. The trade deficit of India vis-a-vis China has ballooned to $39.7 billion in 2011-12. India should put pressure on China (which now has significant stake in Indias economy) on working out possible ways of reducing that trade deficit. In order to bridge this deficit, the country needs to concentrate on heavy manufacturing and increase south-south trade. On the positive side, a report by Goldman Sachs reveals that only around 40% of Indias exports are now going to the old markets of US, EU and Japan compared to 72% in 2001. Furthermore, there is a need to curb duty-free imports from neighbouring countries which is hurting textiles and allied sectors (one of the biggest employers). Besides, timely PSU divestment is a critical agenda that needs to be expedited. #8: INFRASTRUCTURE GAPS The pathetic story of Indian infrastructure so far is known to all. The

fact is that Indias economy was always headed for this stumbling block sooner or later. Unfortunately, data indicates that as many as 410 projects out of 583 are delayed, and that runs contrary to stated government policies. In power alone, 32 out of 59 public sector mega projects with a massive outlay of Rs.10 billion each and with average cost overruns of 35.2% were running behind schedule by the end of March this year. In petroleum projects, the extra cash spent due to time slippage has been around 30% with 19 out of 33 projects experiencing delays. In other sectors too, the picture is quite similar. There are two major problems with infrastructure projects besides execution challenges the first is the lack of funds and the second is the delay in clearances. It is extremely important for the government to commit itself to clearances of pending projects and awarding new contracts on PPP basis within a given time frame. The Planning Commission has already admitted that the government will be unable to meet the $1 trillion target with respect to investments in infrastructure projects in the 12th Five Year Plan due to subdued economic growth. Some estimates put the deficit in funding between $150 billion and $190 billion for core infrastructure sectors. Given its constraints, the government must look at plugging the gap in every way possible, including FDI. Foreign investors have so far been investing 8-10% in the Indian infrastructure market via the debt-equity route, and this percentage must increase. #9: BUILDING THE CORE OF THE ECONOMY In the industrial sector as well, policies have to focus on formalising of unorganised sector and providing them all possible assistance in scaling up. SMEs contribute 45% to industrial output, 40% to exports and around 17% to Indias GDP. The right kind of policies that focus on this sector can bring disproportionate gains in value creation and employment generation.

However, SMEs have suffered heavily in the previous slowdown. Due to rising input prices which they could not pass on to customers, they have faced severe margin pressures; leading to an increasing incidence of credit defaults. For the quarter ending June 2012, net bad loans for 32 listed banks (barring SBI) rose by around 9% to Rs.914.29 billion for the quarter ending June 2012, a majority of which are attributable to SMEs and the agriculture sector. Clearly, the government has to be extremely proactive with respect to these two sectors. Going further, we need a nurturing environment for entrepreneurship to flourish, leading to bottom up growth. India still ranks pathetically at 166 globally when it comes to ease of starting a business. The Indian standard for the number of procedures for starting a new business is 12 as compared to an average of 7 for starting a new business in South Asia (which includes Singapore, Maldives & Afghanistan besides our immediate neighbours). It takes 29 days to start and requires a paid-in minimum capital (the amount that the entrepreneur needs to deposit in a bank or with a notary before registration & for up to 3 months following incorporation) that is around 149.6% of GDP, while the corresponding figures for South Asia are 23 days and 19.1% respectively. If we are not able to support our entrepreneurs, we are seriously compromising on our future. #10: ANOTHER WHITE REVOLUTION Black money has caught the government in a political storm that refuses to abate, and brought the UPAs perceived credibility to an unprecedented low. Some estimates suggests that the sum total of it can exceed $1.4 trillion in Switzerland alone! The Swiss Bankers Association and Government of Switzerland counters that the amount wont be more than $2 billion. The CBI, however, is sharply at odds with SBA and Swiss government, with its own scrutiny claiming that the figure would be around at least $500 billion, more than any other country. This quantum

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Comparative competency table: Indian vs US policy makers

Members of MoF are hardly equipped with knowledge of economics
Ministry of Finance Name Manmohan Singh Palaniappan Chidambaram Pranab Kumar Mukherjee Yashwant Sinha Namo Narain Meena S.S. Palanimanickam Shri R. Gopalan Bimal Julka Shaktikanta Das Dr. Kaushik Basu Raghuram Rajan Alok Sheel Thomas Mathew Venu Rajamony Rajesh Kumar Khullar Prabodh Saxena Sumit Bose Anjuly Chib Duggal Rajiv Kumar Saurabh Garg Dinesh Kumar Mittal Sunil Soni Umesh Kumar Alok Nigam Anurag Jain Aravind Kumar Shashi Shekhar Madan Lal Meena Arun Goel Planning Commission Montek Singh Ahluwalia Ashwani Kumar B.K. Chaturvedi Saumitra Chaudhuri Syeda Saiyidain Hameed Dr. Narendra Jadhav Prof. Abhijit Sen Dr. Mihir Shah Dr. Krishnaswamy Kasturirangan Ms. Sindhushree Khullar Barack Obamas Advisory team Jason Furman Austan Dean Goolsbee Karen Kornbluh David Matthew Cutler Jeffrey B. Liebman Richard H. Thaler James Galbraith Gene B. Sperling James Bradford DeLong Y Y Y Y Y Y Y Y Y National Economic Council Chief Economist Ambassador to OECD Bureau of Economic Research Bureau of Economic Research Bureau of Economic Research Ed at the Joint Economic Committee Director of the National Economic Council Bureau of Economic Research Y N N Y Y Y Y Y N Y Deputy Chairman Minister of State Member Member Member Member Member Member Member Secretary Economic Background Y N N N N N Y N Y Y Y Y N N Y Y N N N Y N N N N N N N N N Designation Prime Minister Finance Minister (cabinet) Former Finance Minister Former Finance Minister Minister of State (E&FS) Minister of State (Finance) Secretary Additional Secretary & DG Additional Secretary Chief Economic Adviser (former) Chief Economic Adviser Joint Secretary (MR) Joint Secretary (CM) Joint Secretary (MI) Joint Secretary (I&I) & CVO Joint Secretary (ABC) Secretary Additional Secretary Joint Secretary (PF - I) Joint Secretary (PF-II) Secretary Additional Secretary Joint Secretary Joint Secretary Joint Secretary Joint Secretary (P&I) Additional Secretary Joint Secretary Joint Secretary

of black money abroad has severe repercussions for India. Firstly, it has speeded up the inflation rate as it has enhanced purchasing power for a few people (with black money) and the impact is enough for the market and prices to escalate. Secondly, the black money is deposited in foreign shores, whereas it could greatly improve the investment scenario in India. Thirdly, if investment at all has happened with black money, it has been funneled towards real estate, causing prices to skyrocket; especially in the major cities. Fourthly, the black money, if restored, could have solved the problem of fiscal deficit. Finally, India is ranked dismally at 95 in Corruption Perception Index with a score of just 3.1 in 2011 (3.3 in 2011). In fact, most developed nations have a score above 8, which is like a distant dream for us. If the government can make some major breakthrough in this regard, it will send the kind of signal India desperately needs to rebuild investor confidence. Last but not least, we have to stress on two long term objectives critical to the long term. The first is education. The baby boom of late 1970s and 1980s has created a youth bulge, which if not properly nourished and given opportunities to, can create a Frankenstein that would develop into internal unrest like the Arab Spring and jeopardize Indias dream of a much celebrated demographic dividend. It is sad that two years after the Right to Education act was introduced, over 95% of the schools lack infrastructure as per RTE guidelines, so we neednt say more on the state of higher education. The second is our poor state of R&D readiness, be it with the number of PhDs or the number of IPs (5900 compared to 3,51,342 applications by China in 2009 as per WIPO) being won by our companies every year. Innovation has to be our backbone as we move to advanced stages of development. While India looks at reviving growth in the short term, these long term measures cannot be ignored at any cost. With inputs from Mrinmoy Dey, Sayan Ghosh & Amir Hossain

Source: IIPM Think Tank research based on details available on the ofcial websites

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We had predicted it in 2005, but no one took it seriously

Arun Maira, Member-Planning Commission, reveals to IIPM Think Tanks Sray Agarwal and Ganesh Roy about why the need of the hour is to have a faster decision making procedure
B&E: The Indian economy is going through a slowdown. Whats the way forward for the economy now? Arun Maira (AM): What is happening in the Indian economy is just a phase of an economic cycle and it is not going to be the situation forever. In the present scenario, the investors are shying away from coming to India but there is a dire need to understand that this slowdown is temporary. One of the main reasons for this picture is lack of power in decision making. Hence, the need of the hour is the ability to have a faster decision making module. The trust of our people in the government is shaky right now. Its not only the case with India but in US too that people currently are low on condence in the government and there too it is very difcult to bring reforms, whether health care or industrial. Both these nations are on the same page and the transformation seems difcult; but since the US has much larger economy they do not get much affected by investors. We at the Planning Commission perform tasks which do not change with these economic cycles rather, we do a combined and collective research taking views from common people, environmentalists, people from civil society and many more and try to nd out what could be the best possible outcome for any situation; and then we proceed from there. We had predicted long back in 2005 that the Indian economy will grow at around 8% to 9% growth rate; but none of the institutions took our prediction seriously; yet eventually we were right! What policy reforms should we take to tackle the current issues? AM: This is a fundamental thing and this has happened over the last 2 years and this has not happened overnight. We have predicted that if policy making and decision making are faster, we can achieve a growth rate of over 9% and we have done that. But again, we also have said that things if not done properly will equally affect the economy, as is the case that you see now. I agree with the fact that the economy is not in a good position; but if things like policy making can be done immediately, we can recover from this economic slowdown very fast. The growth in the economy has made many persons rich but what about the lower strata of the society? They are deprived of the benets of liberalization so the ultimate challenge for us is to bring these people into the main strata of the society. The political lock-jam which has happened is also one of the reasons for this condition currently. The institutional and economic reforms if not implemented will make the scenario even worse than what it is prevailing right now. I am not talking about reforms like FDI in retail or the banking reforms but the way in which jobs are created in the country. It is a major issue of concern for us. For example, the main problem

with the Naxal affected areas is that the things which were promised to them were never fullled; so to get those promised things, they take the help of arms! This is one example of a main policy failure which we have in our system as of right now. Do local administrators lack competencies? AM: Bureaucrats are not policy makers but they only implement policies made by the government. Yes, I agree with the fact that we need immediate administrative reforms to increase the productivity at each level of the society. Merely saying would not solve the purpose. We need to implement the same at the earliest. Is lack of political will the reason behind such a turmoil? AM: Political skill rather than political will, lack of which is the reason of not implementing the policies.
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There is no problem in power generation in India!

Dipak Dasgupta, Principal Economic Adviser - Ministry of Finance, in an interview with Sray Agarwal and Ganesh K Roy, on reforms for infrastructure and transport
How do you feel about the Indian Economy right now? Dipak Dasgupta (DD): There is no doubt that the Indian economy has slowed down and the reason for this is a function of strategy failure and that the investors have lost their confidence. The last year scenario also has not been favorable; but this is not a new thing rather its the investment cycle which remains in every developing economy all around the world. That [investment cycle] is what drives the course of any economy. At the same time, the problems in Europe and US have hampered the growth of many countries and we are not alone. China too is going through this phase. The last time we had that cycle was in the year 2008. Export markets are growing very badly. We also need a logistics revolution so that growth can been accelerated. Despite having poor infrastructure, we have been able to grow at such a high rate; but now we need a major infrastructure revolution so that we can again reach to the erstwhile levels. Ours is a large landlocked country, which is much like a continent; so we need to connect all the corridors to achieve better growth. But we dont have that kind of a system right now in our country. We have a young population which will help us to grow in the long run. We need more public private partnerships in India to make things better. There is a huge skills gap between public and private firms which makes it imperative for the PPP model to flourish in India. We
66 Business & Economy

are in a marathon race and not in a 100 metres race; so we need long term plans which will enhance our economy. Power failures, time overruns, cost overruns, are the indicators of structural aws in the economy. How do you think India can overcome these hurdles? DD: Power generation is growing at 8.8 % in India. In fact, contrary to the general perception, there are huge power plants coming up in India; this shows the level of development that we are going through. Yes, here we have a system where some states are producing huge amount of power and some are not and the demand is also not equal in each state. There is no problem at the production end; rather, we have a problem at the distribution end and in the channels. We have built a state of the art facility in the field of power generation so there is no problem at the generation part. But the slowdown did not happen overnight. Do you think the governments policy paralysis added on to this situation? DD: We need to do things every day because doing things once in a year wont do well for any economy. We need to bring in reforms every now and then so that the growth story is kept on going. In the government

sector, incentives are less and performance parameter are also not standardized. Politicians respond to what the electorate wants. How to make the public sector work better is the challenge. A strong leadership is the need of the hour. How much, according to your perception of ground reality, is the need for administrative reforms? DD: I accept that we need administrative reforms and that perhaps is also the need of the hour; but it is much harder to do than to say. We all have the feeling that lateral entry is also good just like I had but it is a very complicated process. The quality of entry will be one such issue. Very good leadership, selection of good people and then paying them well and grooming them so that they can be more focused on the objective, are what we need to do.

STRATAGEM

Special Story

TRAI: A woeful down

The Indian telecom sectors current situation merits a more progressive line of thinking from the regulator to ensure that the sector continues to progress on the governments stated agenda of inclusion. But TRAIs recommendations for 2G auctions and spectrum refarming would actually end up achieving more of the opposite.

Rahul Khullar, Chairman, TRAI: The regulators stance on reserve price and spectrum refarming has telecom players (particularly GSM incumbents) united in fervent opposition

n July 2012, Indias mobile GSM subscriber base reached 679.05 million from just over 1 million in 1998 through just voice services for the most part. And by that time, CDMA subscriptions had reached around 230 million (AUSPI). This stupendous growth in subscriptions has been a revelation of sorts globally, along with the surprisingly low price points at which Indian telecom players are providing these services. From an ARPU of Rs.362/user/month for GSM players in December 2005, the figure has declined to Rs.100/user/month in March 2011 as per a PwC report. The report further highlights that Indias ARPUs are around 3 and 10 times lower than developing and developed

countries respectively on an average. However, the recent trends point to trouble in paradise. For a sector that is already struggling with low ARPUs, slowing penetration and high debt, the last straw would really be a lack of appreciation of its achievements and insensitivity towards its pressing issues. But unfortunately, that insensitivity is real, and it is coming from none other than the regulatory authority TRAI. By proposing a spectrum reserve price of Rs.36.22 billion per MHz on a pan-India basis in the 1800 MHz. band for the 2G spectrum bidding process planned in November, the regulator is imposing a burden that only serves to undo much of the good that has been achieved by the telecom sector

in the past. In February this year, the Supreme Court quashed all 122 licenses that were given out during the A. Raja regime, and TRAI came up with its revised recommendations as per the SCs directions. The price it has proposed has united an otherwise intensely competitive industry against what they term as an atrocious figure. The price is 10 times higher than the benchmarks used under A. Raja. And at Rs.180 billion plus for 5 MHz, it even beats the 3G auctions that took place last year, where the reserve price was Rs.168.28 billion (and they were globally declared as atrociously overpriced!). The regulator has stuck by its argument and asserts that the new reserve price will

68 Business & Economy

TRAI

slide

Net prots of top telecom companies (in Rs. billion)

Margins have come down calamitously in the past two years
Mar 10 100 80 60 40 20 0 Airtel -20
Source: Company reports

Mar 11 Mar 12

Idea Cellular

TTSL

Rcom

ing reluctant to join the bidding process. The same goes for the relatively new operators in India, for their investments have really not paid off well. TRAI is assured of 2-3 big telecom players participating in the process, but it already seems that the top circles may not see significant participation due to high prices. There are legitimate reasons why such exorbitant pricing will do little more than providing some short

impose a relatively insignificant burden on end consumers. Later on, the industry got some respite as an Empowered Group of Ministers (EGoM) panel led by then Home Minister P. Chidambaram brought down the reserve price to between Rs.141.11 billion Rs.151.11 billion for 5 MHz. on a pan-India basis. But players are far from satisfied. The level of competition this time around for the re-auctioning process is not as bullish as it was when the first auction was carried out. One has to keep in mind that licences of most of the telcos are up for renewal soon. Also, they would not be exempted from paying for the spectrum they gain through any source (direct buying via auction or M&A activity). Thus, the incumbents are feel-

The TRAI analysis of perceived impact of its pricing recommendations ignores signicant aspects and also makes some off the mark assumptions
term gains to the government. TRAI has gone on and on discussing how the price will have limited impact on the balance sheet and the impact will in fact come further down over a period of 20 years. But Franco Bernab, Chairman, GSMA and Chairman & CEO, Telecom Italia Group, cautions with respect to the TRAI decision, Efforts to squeeze money out of mobile operators for some perceived

short-term gain will only reduce investment in networks, inhibit growth of mobile services and drive up consumer prices limiting the value that the public will derive from spectrum resource in the long term. The TRAI analysis concludes that the price impact would be 8.6 paise per minute in the event of all existing spectrum allocations being repriced at the reserve/auction price for a 10 year period at the time of licence extension; and 9.4 paise per minute if the same was repriced for 20 years. However, PwC calculations indicate that the real figures would turn out to be 44 paise and 60 paise respectively in the two scenarios. In its report assessing the impact of TRAI recommendations, PwC questions the logic of a few TRAI assumptions. The firm contends that MoUs (Minutes of Usage) will not increase as projected by TRAI. It projects growth of MoUs to 4.91 trillion by 2032 as compared to TRAIs figure of 7.36 trillion (3 trillion in 2011); and MoUs are known to decline in the global context over the long term. Also, TRAI concluded that nonvoice revenues would reach 50% of voice revenues in the metros in five years and the rest of India in 10 years, while PwC points out that they are still languishing at 12-14% and no country other than Japan has achieved the feat of 50% in non-voice revenues. Furthermore, in a country
September 2012 69

STRATAGEM

Special Story

Government is positive
Rakesh Mehta Assistant Research Manager, Fullerton Securities & Wealth Advisors.

B&E: Much was expected from the EGoM. But with just 23% slash in the reserve price, what are your thoughts? Rakesh Mehta (RM): Telcos were expecting drastic reduction in reserve price for the 1,800 MHz spectrum by around 80%. But in the EGoM, the price was reduced by around 20% to Rs. 140 billion for 5 MHz spectrum. I think the major reasoning was the flexibility given to the operator to pay the stated amount in 10 years and in instalments (operator needs to pay one third of the amount in the first year, followed by a two year moratorium and the balance over the next seven years). Moreover, the operators are free to offer any service on this spectrum (mobility service, data service et al), mortgaging of spectrum et al. B&E: What are your expectations on the upcoming auction? RM: The top five operators have seen a decline in revenue per minute over the last two years. Moreover, due to 3G auctions, balance sheets are too leveraged with very less option to raise additional loan at attractive costs. Telcos planning to participate need to work on the pricing and business model. There will be pressure from incumbent operators that they will overbid for the spectrum so that it is unviable for new operators. On the contrary, incumbent operators will have to be ready to pay higher charge for spectrum re-farming. The government is confident that the auction will be successful even at a reduced base price of Rs. 140 billion as some telcos have hinted that they will bid aggressively, taking the final price to Rs.200 billion.
70 Business & Economy

which has just about managed a 74% literacy rate by 2011, what spurt in non-voice services is TRAI looking at? Also, TRAI has ignored the additional infrastructure/servicing costs of increased MoUs as well as increased costs of spectrum. TRAI has also proposed refarming of the existing 900 MHz. band into the 1800 MHz. band and a re-auctioning of 900 MHz. spectrum when it comes up for renewal in 2014. This is bad news for incumbents, but also apt in the interest of a level playing field. However, TRAI has underplayed the expected costs of refarming. As per industry estimates, the cost of refarming will be Rs.2.34 billion more than TRAI estimates in the next 20 years. It also means that incumbents in the 900

by 0.83% yoy. Net profits for major players including Airtel, Idea Cellular and RCom have been under severe stress in the past few years. Airtel registered a decline of 29.6% in its yearly net profits, which stood at Rs.42.59 billion (down from Rs.60.47 billion yoy). Idea Cellular was in fact better off in comparison, as it registered a decline by 19.55% to post a net profit of Rs.7.23 billion. And RCom had a fairly good year with a net profit of Rs.1.56 billion, considering that it suffered a huge loss of Rs.7.58 billion in the previous fiscal. Telecom growth in India has several spin off effects for the economy. For instance, it has been projected that a 10% increase in mobile broadband penetration has the

More consolidation is expected once the auction is over & guidelines on refarming & M&A are declared
MHz. band will shell out more for the same quality of service. Considering the plight of telecom operators, who are still smarting from the hit their balance sheets took due to the 3G auction and the 2G eviction, TRAIs outlook seems even further away from reality. Post the cancellation of 2G licences, companies are now staring at a sky rocketing debt equity ratio; with the total estimated burden crossing nearly Rs.3 trillion. PwC further asserts that refarming and spectrum costs will increase the capital deployed by the industry to Rs.6.64 trillion by 2015. With current D/E ratio already high at 4.87, further borrowing will get harder. Major telecom companies are already facing significant challenges in terms of growth and new customer acquisitions due to high penetration levels, since urban teledensity has already crossed 170% in the metros (TRAI). The sector has generated revenues of nearly Rs.1.13 trillion in FY 2011-12, a fall potential to deliver $80 billion in extra revenue for Indias transportation, education & healthcare industries by 2015. The stated goals of the government have been to increase mobile penetration in India as a part of its inclusion agenda (the Prime Minister has even talked about providing mobile phones to the BPL population). But TRAIs recommendations are a step in the reverse direction, taking us towards spectrum scarcity, poor quality of service and higher prices. Rakesh Mehta, Senior Analyst, Fullerton Securities, points out, It is expected that there will be more consolidation once the scheduled auction is over and guidelines on re-farming and M&A are declared. Also, the critical loss that TRAI is causing is similar to what GAAR caused the loss of sentiment. When such regulations are thrust on to a sector, they are discouraging for future investment essential to bring about growth and consistent improvements in customer value.

TRAI

Increased costs will be passed on to consumers

Rajan Mathews, Director General, COAI, laments that the recent slew of policy decisions is extremely debilitating for an already struggling industry. ANIRUDH RAHEJA
B&E: It is being put forward that the incumbents already have enough spectrum and may not bid at all. Wont this encourage monopoly in the hands of a single operator? Rajan Matthews (RM): It is not true. In fact, the scarcity of spectrum is affecting roll-out obligations and the Quality of Service of the operators. Being the 2nd largest telecom market in the world, it is actually ironic that average spectrum availability with Indian operators is significantly lower than in other leading markets in the world. Most operators who have been in the market for some time now have a fairly large subscriber base, which needs to be catered to with appropriate Quality of Service and outreach. Lack of spectrum leads to dearth in capacity for serving subscribers and further roll-outs into rural, semi-urban and urban areas; and leads to a substantial rise on the OPEX. In fact, if the operators did not require more spectrum, there would not have been so many representations made by them to the government regarding the high reserve price being set for the auction. The only reason for operators to shy away from the auction would be the exorbitantly high reserve prices that threaten sustainability. B&E: What are your thoughts on refarming of spectrum against the high prices that have been set? RM: The entire restructuring of an efficient network, by ripping off the existing infrastructure, disconnecting the connected and then deploying an infrastructure, which is more demanding both in terms of capital as well as space and construction, does not bring any sense of benefit to our minds, whether to the industry, or the consumers. As per an independent study conducted by Analysis Mason, operators with 900 MHz band will need to replace 286,590 base stations and install an additional 171,954 base stations to provide equivalent coverage on 1800 MHz; which will lead to an incremental capex of Rs.54,739 crores, and incremental annual opex of Rs.11,762 crores. Also, operators will have to write-off existing 900MHz assets at an estimated cost of Rs.22,310 crores. At an industry level, additional capex of about INR 26,653 crores will be needed to deploy new towers to support incremental base stations. In the scenario that operators with 900MHz spectrum are unable to provide equivalent coverage due to business case and operational feasibility, there is a risk of reduction in geographic coverage by as much as 40%. This is estimated to directly affect connectivity to about 70 million subscribers, and consumers trying to reach them. Also, the business case for a new operator acquiring 900MHz spectrum at the proposed prices will not allow for expansion to rural markets. If incremental investment in refarming and the costs of spectrum are passed on to consumers in the form of higher retail voice tariffs, overall tariffs will go up by as much as 64 paise/minute, with much higher impact in non-metro circles.

B&E: Whats the expected impact on the already high D/E ratio? RM: It is extremely unfortunate that a slew of policy decisions such as auction of spectrum, one-time fee, refarming etc. are being imposed on the industry when it was already grappling with business viability and sustainability. Such decisions have further increased the financial burden on operators, leaving no scope to absorb the increased costs. It has been brought to the notice of the Government and the ministry that India has one of the lowest EBITDA margins of 29% among emerging Asian economies (36% on an average). Several operators report negative PATs and will not be able to cash break-even in next 5-7 years. Similarly, most operators report a negative or low return on capital employed. Hence, these increased costs will eventually be borne by consumers in the form of higher tariffs for the services.
September 2012 71

STRATAGEM

International Column

How Paulsons plan gave life to US banks

How the US governments response to the nancial crisis in the fall of 2008 created enormous value for banks and saved a few that were on the brink of bankruptcy

n Monday, October 13, 2008, the CEOs of US largest banks were summoned to a meeting in Washington DC. The call came just days after the worst weekly decline in US stock market history. At the meeting, the-then US Treasury Secretary Henry Paulson announced a plan that reportedly took the CEOs by surprise. The plan was to inject a massive $125 billion in preferred equity investment in the countrys top banks and provide them with various guarantees an unprecedented move that would hopefully restore stability to a tumultuous financial market. Much controversy followed on whether this was the right thing to do and whether the government should have stepped in at all. A recent paper titled Paulsons Gift that I co-authored with Chicago Booth professor Pietro Veronesi states how the rescue plan announced by Paulson on October 13, 2008, indeed created value. The plan affected the countrys 10 largest commercial banks, including Wachovia, which was purchased by Wells Fargo, and three former investment banks: Goldman Sachs, Morgan Stanley and Merrill Lynch. In particular, Paulsons plan increased the value of banks financial claims debt, equity, and derivative liabilities by $130 billion. Accounting for what the government spent for the rescue plan, which was between $21 billion and $44 billion, the plan produced a net gain of $86 billion to $109 billion. The likely reason why Paulsons plan appeared to have created value is that it prevented a disastrous run on the banking system that, according to the papers estimate, would have destroyed 22% of a banks enter-

Luigi Zingales Robert C. McCormack Professor of Entrepreneurship and Finance and the David G. Booth Faculty Fellow at the University of Chicago Booth School of Business

72 Business & Economy

Prof. Luigi Zingales, University of Chicago Booth School of Business

prise value. Unlike a traditional run on deposits, a banks short-term creditors can run on a bank by refusing to roll over loans if they fear other creditors will do the same, which can quickly make a bank insolvent. The fear of a run can be self-fulfilling. Thus, successfully stopping a run on banks can create significant value. In spite of its success, the plan ended up being very expensive for taxpayers. The terms of the deal were very friendly to banks. Moreover, a bankruptcy procedure that allows banks to restructure their debt would have been a better strategy to repair insolvent banks. In the long run, the success of Paulsons plan underscores how tempting it is for the government to intervene, which encourages banks to take on more risk. The results exacerbate the perception that banks are too big to fail. The financial rescue plan that Paulson presented, had three parts.The first was a $125 billion preferred equity investment in the 10 largest US commercial banks. In exchange for this capital infusion, the government

would get preferred stock with a nominal value equal to the amount invested and which would pay a dividend of 5% for the first 5 years and 9% thereafter. In addition, the government would receive a warrant equal to 15% of the value of preferred stock with a strike price equal to the average stock price 20 working days before the money is invested. The second part of the plan was a 3-year Federal Deposit Insurance Corporation (FDIC) guarantee for all new issues of unsecured bank debt until June 30, 2009. The third part provided full FDIC insurance coverage on all

September 2012 73

Reprinted with permission from the University of Chicago Booth School of Business

The net benet of Henry Paulsons plan was anywhere between $86 billion to $109 billion

non-interest-bearing deposits. The study analyses the impact of Paulsons plan by looking at the change in the market value of banks equity, debt, and derivative liabilities before and after the announcement. Looking at the changes in bank Credit Default Swap (CDS) rates between October 10 and 14, 2008, and at the same time controlling for movements in the CDS rate of the largest financial firm that was not involved in the intervention (GE Capital), the study finds that bond holders of the 10 participating banks gained $120.5 billion from the announcement of the Paulson plan. Citigroup and the three former investment banks gained the most. The banks equity holders lost $2.8 billion, but there is a wide variation within the group. JP Morgan Chases shareholders lost $34 billion while shareholders of Citigroup and Goldman Sachs gained roughly $8 billion each. The value of preferred equity rose by $6.7 billion. Because the majority of derivative contracts are traded between the top banks and these transactions are highly collateralised, the increase in the value of derivative liabilities was a modest $5.3 billion. Overall, Paulsons plan boosted the value of banks financial claims by about $130 billion, with most of the gains accruing to debt holders. This is not surprising since banks are highly leveraged and carry only a very small share of equity. Long-term debt holders, in particular, stand to gain the most from an intervention because they tend to receive very little in the event of a run. The bulk of the cost to taxpayers of this plan is the difference between the $125 billion capital infusion and the value of the preferred equity and warrants that the government gets in exchange for the deal. The expense of guaranteeing new unsecured debt for three years also is substantial, which is equivalent to what the banks save by not having to insure their own debt. There is a relatively small cost to extending the FDIC deposit insurance to all non-interest-bearing accounts. On the other hand, the inter-

vention itself makes deposits somewhat safer and the FDIC insurance a little less costly. Altogether, the cost to taxpayers was estimated between $21 billion and $44 billion. The net benefit of Paulsons plan was about $86 billion to $109 billion. Although Paulsons plan successfully prevented a bank run, the taxpayers did not capture any benefit. In fact, they paid between $21 billion and $44 billion to help the top 10 banks. Paulsons plan was superior to the original intention of buying banks distressed assets. In fact, it would have been necessary to spend between $3.1 trillion and $4.6 trillion to buy those assets to achieve the same effect, that is, the same drop in CDS rates. While the expected cost to taxpayers of this alternative is zero because the transactions would have been done at fair value, it is a much riskier strategy. The government could lose up to half a trillion dollars. A pure equity infusion also is riskier and more expensive, and the government would end up owning 40% of the banks. On the other hand, a debt-for-equity swap along the lines proposed by Zingales in previous papers clearly dominates Paulsons plan. If an otherwise healthy company goes into bankruptcy because it has too much debt, then converting debt into equity can be a viable solution. The same could be done for banks. However, this would require a change in bankruptcy law to allow and expedite such a process for financial institutions, something which Zingales feels would have been justified given the extraordinary scale of the crisis. The long-run consequence of the success of Paulsons plan is that banks know, perhaps more than ever, that it is almost impossible to tie the governments hands in the future. Banks will have an incentive to take on more risk if they know that the government will not let them fail, which makes it even more important to find the most effective ways to curb those incentives in order to prevent a future crisis.

STRATAGEM

FEATURE

WHEN SILENCE SAYS IT ALL...

There has been a prolonged phase of silence since ICICI Bank announced the acquisition of The Bank of Rajasthan on May 19, 2010. What is ICICI Bank up to? MANISH K. PANDEY

I
Chanda Kochhar Managing Director & CEO, ICICI Bank

t was the summer of 2010. While organisations across the globe were trying to stay away from the heat wave induced by the worst financial crisis since the Great Depression of the 1930s, in India, officials of the largest private sector bank, ICICI Bank, were busy acquiring The Bank of Rajasthan. The idea was to strengthen its presence in the Indian banking space by undertaking a slew of acquisitions much like its peer HDFC Bank did in the past. In fact, thats exactly what it had been doing over the last decade between 2001 and 2010. First it was the Bank of Madura. Then, it was Bank of Sangli, and finally, The Bank of Rajasthan. And the strategy paid off well too. It not only increased ICICI Banks branch count by 941 and ATM count by 151 (280 branches and 40 plus ATMs of Bank of Madura; 198 branches of Bank of Sangli; and 463 branches and 111 ATMs of Bank of Rajasthan), but also instantly made its presence felt in several parts of the country (ICICI Bank added a combined customer base of over 4.5 million through these three acquisitions), particularly Rajasthan and Maharashtra. Even the annual numbers now seem to tilt in favour of ICICI Bank. Two years hence, and not only did the Banks profit after tax (PAT) increased by 25.5% from Rs.51.51 billion in FY2011 to Rs.64.65 billion in FY2012, its total assets also increased by 16.6% from Rs.4,062.34 billion as on March 31, 2011 to Rs.4,736.47 billion as on March 31, 2012. While total

ICICI Bank

deposits were up 13.3% from Rs.2,256.02 billion as on March 31, 2011 to Rs.2,555 billion as on March 31, 2012, total advances increased by 17.3% from Rs.2,163.66 billion as on March 31, 2011 to Rs.2,537.28 billion as on March 31, 2012. Certainly, there is no denying that inorganic growth strategy is good for a bank like ICICI in a growing economy, but going by what expected synergies were, it appears to be more of an inorganic strategy out of compulsion. In fact, in early 2008, when it appeared to most that the bubble will never burst, Business & Economy did a cover story with a headline Aggression pays; Aggression Slays. One of the case studies was an analysis of how far ICICI Bank could go with its aggressive growth strategy. Now we know. ICICI has been more aggressive and tried to adopt the banking culture prevailing in large foreign banks. Perhaps that is why ICICI is now reversing some of its strategies. In fact, there has been a prolonged phase of silence since ICICI Bank announced the acquisition of The Bank of Rajasthan on May 19, 2010. Even Chanda Kochhar (MD & CEO of ICICI Bank) has done much work towards rebuilding the perception of the bank amongst its customers. Amidst a rapidly evolving global and domestic economic environment, we at ICICI Bank have continued to focus on the strategic path we outlined three years ago. Our goal was to rebalance our funding mix and grow our retail deposit base; substantially improve asset quality; and enhance our prof-

ICICI Bank headquarters in Mumbai: The bank is executing a strategy of consolidation, which has resulted in an improved deposit and loan mix and should drive improved operating metrics going forward

itability, Kochhar says in a communiqu. This really seems to be a right step, in a right direction, at a right time for Indias leading private sector bank. Indian banks (both private and public), which have been high fliers in terms of growth in profits for years, have registered their lowest growth rate for the past six years in the last fiscal. They could grow only by 15% in FY2012 as compared to a four-year simple average growth rate of 24%. Even the net interest margin (NIM) for the banks has dropped from 2.99% in FY2011 to 2.94% in FY2012 for private banks, and from 2.65% to 2.56% for public sector banks. Interestingly, despite this situation while the biggest public sector lender State Bank of India was able to increase

its PAT by 41.66% to Rs.117.01 billion in FY2012, ICICI Bank managed a PAT growth of 25.5% to Rs.64.65 billion during the fiscal. Even its arch rival HDFC Bank saw its PAT increasing by 31.6% to Rs.51.67 billion in FY2012. Considering the strong lending base of ICICI Bank a low PAT growth (when compared to its peers) might not be a problem for countrys biggest private lender, but looking at the stress which the Indian banking system is facing at the moment, the low PAT growth could be a cause of concern going forward. The reason is simple the fast pace at which the industrys exposure to small and medium scale enterprises (SMEs) is getting potentially toxic. In fact, a stress test done by equity

Stock price movements of leading banks

ICICI Bank has signicantly outperformed its peers so far
SBI IDBI Bank Axis Bank Sensex ICICI Bank

ICICI Bank: Prot & loss statement (in Rs. billion)

Growth in prot came largely on account of solid operating performance
20 1 10 0 -10 -20 -30

Oct-11
Source: BSE

Jan-12

Apr-12

Jul-12

-40 Sep-12

NII Non-interest income Total income Operating expenses* Operating prot Provisions Prot before tax Tax Prot after tax

Q1 FY12 24.11 16.43 40.54 18.20 22.34 4.54 17.80 4.48 13.32

Q4 FY12 31.05 22.28 55.33 22.22 31.11 4.69 26.42 7.40 19.02

Q1 FY13 31.93 18.80 50.73 21.24 29.49 4.66 24.83 6.68 18.15

Q1-o-Q1 growth 32.40% 14.40% 25.10% 16.70% 32.00% 2.60% 39.50% 49.10% 36.30%

FY 2012 107.34 75.02 182.36 78.50 103.86 15.83 88.03 23.38 64.65

*Includes commissions paid to direct marketing agents (DMAs) for origination of retail loans and lease depreciation Source: Company reports

September 2012 75

STRATAGEM

Feature

Composition of total loan book

Total advances of the Bank increased by 21.6% year-on-year
March 31, 2012
Overseas branches #
27.4% 35.5%

Capital adequacy (Basel II )

The Banks total capital adequacy is well above RBIs requirement of 9%
Basel II
34.0%

June 30, 2012

28.0%

Rural Domestic corporate

8.8% 5.3% 23.0%

7.7%

SME Retail business group*

25.0%

5.3%

Total loan book: Rs.2,537 billion

Total loan book: Rs.2,684 billion

* Retail business group includes builder loans and dealer funding # Including impact of exchange rate movement Source: Company reports

Total Capital - Tier I - Tier II Risk weighted assets - On balance sheet - Off balance sheet

June 30, 2011 March 31, 2012 Rs.bn % Rs.bn % 680.09 19.57 738.13 18.52 464.35 13.36 505.18 12.68 215.74 6.21 232.95 5.84 3,474.84 2,656.02 818.82 3,985.86 3,043.23 942.63 -

June 30, 2012 Rs.bn % 763.91 18.54 526.39 12.78 237.52 5.76 4,120.10 3,132.13 987.97 -

Source: Company reports

research firm Prabhudas Lilladher on public and private sector banks revealed a hit of up to 30% on book values, given NPA shortfalls and higher restructuring. As far as ICICI Bank is concerned, their report suggests, Valuation for the countrys strong and leading private sector bank ICICI Bank is approximately 15% lower than its long-term average after considering a 15-17% hit to book value. This is similar to what Moodys, a global rating agency, had cited as the reason when it recently downgraded Indias leading private lender ICICI Banks rating by one notch to D+ from C- (as per Moodys definition, banks rated C have adequate intrinsic financial strength, while those rated D have modest intrinsic financial strength, potentially requiring some outside support at times). The ratings reflect the banks high borrower concentration in the form of its mandatory government securities portfolio, its weaker asset quality when compared to its Indian private sector peer banks and the difficult operating environment currently prevailing in India, including the intense competition it faces in its domestic markets, said the report. Bad loans certainly bear watching because they could lead to bank failure and ultimately a credit crunch. No doubt such loans still represent only a small share of ICICI Banks lending, but then, not to forget, every big fire starts as a small spark! And there are reasons for this pessimism. During the first quarter of 2013, advances for the Bank increased by healthy 21.6% year-on-year (5.8% quarter-onquarter), aided by strong 45.6% and 37% annual growth in corporate book and SME
76 Business & Economy

book respectively. Deposits accretion too remained healthy during the quarter with an annual growth of 16.1%. However, despite healthy accretion in savings deposits, subdued current account deposits led the CASA ratio for the bank to decline to 40.6% in Q1 FY2013 from 43.6% in first quarter of FY2012. Result: The cost of funds too has increased from 5.35% in FY2011 to 6.33% in FY2012. Interestingly, a rise in both cost of deposits and cost of borrowings is responsible for this sharp increase in the overall cost of funds. While the cost of deposits increased from 4.92% in FY2011 to 6.12% in FY2012 (the cost of average term deposits also increased from 6.51% in FY2011 to 8.21% in FY2012), the cost of borrowings increased from 6.14% in FY2011 to 6.71% in FY2012. Even the branch expansion seen is quite muted in the case of ICICI Bank. The primary reason for this sluggishness is that Indian banks are in a consolidation phase currently with business levels and profitability being under pressure. The focus is on cost cutting and bringing about efficiency in operations. Therefore most banks are looking at following a gradualist approach in their brick and mortar models, and ICICI is not an exception. Further, when it comes to CASA growth, its determined more by two factors: One is higher consumption and lower savings. While this phenomenon directly impacts these deposits at the retail end, corporates too use their current account funds more judiciously under such conditions. The other is that there has been a tendency for households to move over to term deposits where the interest rates are

higher. These two factors have caused this shift in the share of CASA. Also banks have been resorting to the use of CDs (Certificate of Deposit) which has skewed the ratio, D. R. Dogra, MD & CEO, CARE Ratings tells B&E. Thus, going forward, the challenge for ICICI Bank is to become more efficient by cutting costs and improving the NIM by smart application of funds. The bank needs to be quite disciplined in terms of incremental lending and wherever there are opportunities to re-price, it needs to go for it. The Bank also needs to leverage it branch network more efficiently. Although the number of branches for the Bank has almost doubled over the past three years, they remain under-leveraged, as reflected in the falling CASA deposits/ branch of Rs.390 million as on June 30, 2012 compared to Rs.650 as on December 31, 2008 and the total assets/branch of Rs.1.75 billion as on June 30, 2012 against a whopping Rs.3.94 billion as on December 31, 2008.2008. While the Banks management plans to add 200250 branches in current year, it should really ensure that this extended network is properly leveraged to grow its CASA market share. This will not only improve the profitability of the Bank, but will also help it improve its market presence. With growing pressures on capital, ICICI Bank needs to weave together all these strategies to ensure that things are under control. Until then, silence is the best policy for the nations second largest lender, we would say!

With inputs from Mona Mehta

INDIAS BRAVEHEARTS NEED MORE THAN A SALUTE AND

A CERTIFICATE!
Displaying exemplary courage, many real life young heroes and heroines risk their lives to save fellow Indians. They are winners of National Bravery Awards. But often poverty and apathy deny them their dreams and a chance...

Planman Media in association with GIDF is o i proud to announce an initial corpus of Rs 5 lakh y s for underprivileged bravery award winners. The n funds will be used for the education and all-round v g development of deserving candidates every year.

PLEASE DONATE GENEROUSLY AND MAKE THEIR DREAMS COME TRUE!

Cheques\Drafts can be sent to Aurobindo Chaudhuri Memorial Great Indian Dream Foundation to IIPM campus, Satbari, Chandan Haula, Chattarpur, Bhatimines Road, New Delhi-110074

Major donors will be featured and proled in all Planman Media magazines in all 14 languages.
A regular update of accounts will be displayed on www.thesundayindian.com for public scrutiny.

STRATAGEM

National Focus

(Left) Anand Mahindra, Chairman & Managing Director, M&M. Mahindras XUV 500, has changed the game in SUV segment, inspiring other automakers to follow suit and launch their own SUV models. (Right) Len Curran, Vice President Sales & Marketing, Renault India, is very optimistic about its recently launched Duster, which is receiving amazing response from buyers.

Why fuel guzzlers are turning friends

The market for SUV vehicles in India has taken off in a big way. For the rst time utility vehicles are beginning to outsell small cars and sedans, prompting automakers to rush into the segment with new launches and models to cash in on the growing consumer demand.
DEEPANSHU TAUMAR
ven as the Indian automobile market is facing a slowdown in sales and the market share of small cars has dipped below 50% for the first time in many years, sales of sports utility vehicles, off-road capable cars and multi-purpose vehicles have been revving up like never before. Sales in the utility vehicles category, which includes multi-purpose as well as sports utility vehicles, jumped 15% to 326,824 units in the first 11 months
78 Business & Economy

of the 2012 fiscal year ending March, led by Mahindra & Mahindra, the nations top maker of sports utility vehicles, according to the Society of Indian Automobile Manufacturers. By comparison, sales of passenger cars gained by a miniscule 0.3%. Further, the UV segment grew by 50.85% to 117,711 units between April and June this year, and the share of UVs in the overall passenger vehicle industry increased to 17.81% in this period from 12.96% in Q1FY12. The emergence of SUVs clearly re-

flects the changing dynamics of the Indian automobile industry. According to a report by Deloitte Touche Tohmatsu India, a little over one in five of the 2.5 million passenger vehicles sold in India annually are utility vehicles. The shift towards SUVs is more pronounced in the premium Rs.20,00,000-25,00,000 price segment. If Honda Accord, Toyota Camry, Skoda Superb, among others, sold 1,244 units for the entire quarter of April to June 2012, SUVs like Toyota Fortuner, Ford Endeavour, Skoda Yeti,

Rise of SUVs

among others, sold four times the cars in the segment at 5,580 units during the same period. No doubt that a part of this SUV boom is being fuelled by Indias fuel pricing policy, which has made petrol 60% more expensive than diesel compared with 28% in June 2010, when the government lifted the price control on gasoline. With diesel-powered vehicles driving Indian auto sales, the biggest beneficiaries are sports utility and cross-over utility vehicles, which in India are predominantly equipped with diesel engines. Analysts also believe that sales of SUVs are being spurred by the rising incomes of an aspirational middleclass, the rapid growth of satellite towns away from the metro cities, and the rise in auto dealership networks beyond Indias biggest cities to areas where rugged vehicles are more useful. The lack of public transport in many Indian cities and the growth of satellite towns are also feeding the sales boom in utility vehicles. People are moving from one city to another for jobs and given the high real-estate cost in the metros, the corporate sector is moving towards the outskirts, leading to the boom in the sales of utility vehicles, says Kumar Kandaswami, Senior Director of consultancy firm Delloite. Also, a sizeable chunk of the young demographic in India now identifies more with SUVs than sedans, which they perceive to be an option for the older people. Yet another reason driving the sales of utility vehicles is that families are now travelling more and more out of the city, so owning a SUV has become more of a lifestyle-related consumption. On technical parameters too, SUVs score over sedans. A lot of people prefer to buy an SUV over a sedan as it offers a higher seating position, better fuel economy and seats seven people comfortably, something that any D segment sedan would be hard pressed to do. The industry believes that growth in the automobile sector this fiscal will be driven by a flurry of launches. A number of major global brands like Toyota, Honda, Ford, General Motors,

Market share of utility vehicles

M&M enjoys market leadership in the segment
0.81% 4.73% 0.9% 8.89%

Growth in the UV segment

The top ve players in the segment
90 80 70 60 50 40 30 20 10 0 M&M
Source: SIAM 2011 2012

48.83%

16.16%

19.68% Mahindra & Mahindra Toyota Maruti Tata Motors Force Motors Renualt Rest Source: SIAM

Toyota

Maruti

Tata Force Motors Motors

The SUV segment is growing and has a huge potential as it currently constitutes only 15% of the overall passenger car market. In developed countries the segment constitutes 35-40%.
SANDEEP SSINGH, DEPUTY MANAGING DIRECTOR, MARKETING, TOYOTA KIRLOSKAR MOTOR

Hyundai, Mitsubishi and Renault have all launched various SUV models in the Indian automobile market and have plans for fresh launches too. For instance, Mitsubishi India currently sells about 2,000 units a year in India with a product portfolio spanning no less than six different products, in both the sedan and SUV categories. So, when the automaker announced recently that it intends to sell about 5,000 units of its Pajero Sport SUV in India over the next one year, it only means that Mitsubishi has big plans hinging on wwthe Pajero Sport as it aims to more than double its yearly volumes with a single product. Accordingly, from the next month onward, Mitsubishi will begin assembling the Pajero Sport SUV at its Chennai production unit, which it shares with its Indian partner Hindustan Motors. Another Japanese auto maker Toyota has already launched a refreshed version of its Innova and had to increase its production to cope with the growing demand. According to Sandeep Singh, Deputy Managing Director, Marketing, Toyota Kirloskar Motor, The SUV and MUV segments are growing and have a huge potential as

they constitute only 15% of the passenger car market. But if you look at any developed country the segment constitutes 35-40%. The Japanese auto maker sold 19,367 units of Innova and Fortuner last year but had already crossed 31,989 in sales of these two vehicles so far this year. Similarly, home-grown Mahindra too had to jack up its production on the back of heavy demand for its XUV 500 model. When the countrys largest utility vehicle maker launched its XUV 500 model earlier this year, it was forced to close its booking in the face of heavy rush for the vehicle. The XUV 500 booked more than 25,000 orders in the 10 days between January 25 and February 3 when it opened bookings for the Rs.11,00,000 offroader. While the XUV 500 has trumped Dsegment sedans, Maruti Suzukis Ertiga is outselling C-segment sedans such as the Honda City, Hyundai Verna, Ford Fiesta and Volkswagen Vento. Maruti sold more than 6,500 units of the Ertiga in the first month of its launch in April this year. The recent launch of Renault Duster and the earlier than expected entry of Ford EcoSport and Maruti XA Alpha soon are exepected to crank up the
September 2012 79

STRATAGEM

National Focus

SUV segment in India will grow the way of Chinas

Kumar Kandaswami, (Senior Director) Delloite, talks about the rise of the SUV in a weak economic enviorment and how the segment is gaining traction
B&E: What are the factors you think are driving the growth of sports utility vehicles in India? How do you see the SUV segment shaping up in the days ahead? Kumar Kandaswami: The SUV segment is categorized as the non-sedan and non-hatchback segment. There is a high growth in this segment as SUVs have become lifestyle products. Many existing car owners are looking to buy a SUV whenever they plan to change their vehicle. Though the Indian market is heavy loaded in favor of hatchbacks it is likely to follow the way of China where the SUV segment is growing very fast. Lack of good road infrastructure and the growth of satellite towns will drive the growth in this segment. The segment has the potential to grow to 20%-22% of the passenger car segment in the next couple of years from where it is today. B&E: The recently launched Renault Duster and Maruti Ertiga are doing well in terms of their sales. So will compact SUVs outsell their larger peers just as small cars sell more than sedans? KK: The Indian market growth for SUVs is likely to be driven substantially by the fuel-efcient soft-roaders (two-wheel drive) rather than the classic SUV. The traditional SUV product will grow anyways but will not be able to make the numbers.
80 Business & Economy

Top-end SUVs in the D-segment will continue to grow but their numbers will remain relatively small. To a large extent, soft roaders with prices tagged between Rs.6,00,000 8,00,000 and going to Rs.12,00,000 14,00,000 will drive important numbers from the segment. Therefore the high growth will necessarily come from the segment equivalent to B+, C, -C, which are in the Rs.5,50,000 10,00,000 price bracket. There will be a lot of activity in this price band in which premium hatchbacks and entry level sedans currently call the shots. Over a period of ve years, SUVs in this segment will grow close to 15% whereas the overall market is currently growing at 12 % at the minimum. In the good years, the segment can actually grow much bigger, and could eat into the market share of other segments. B&E: Do you foresee any price war taking place in the SUV segment going forward? KK: Yes, there will be a price war. As more numbers of SUVs, MUVs and cross-overs come into the market in the next two-three years, the segment will get crowded and manufacturers will be forced to offer discount offerings similar to what we see in the hatchback segment currently. Price wars will happen as the segment gets crowded and competition becomes more intense.

excitement and drool factor in the segment further. Industry observers say the next-generation Toyota Rush SUV could make its way into the Indian market soon and could prove to be a strong competitor for Renaults Duster. Other SUV launches set to happen over the next few months include the 2012 Chevrolet Captiva and the new Ford Endeavour. Tata Motors too is scheduled to introduce Safari Storme shortly. With an eye on the fast growing Indian utility vehicles segment, even luxury carmakers like Audi and BMW are beefing up their SUV portfolio by adding new models. The worlds largest luxury carmaker BMW plans to roll out its mid-sized SUV, the X3, from its Chennai plant that already assembles its smaller sibling, the X1. Italian car major Fiat is planning to bring brands from its Fiat-Chrysler portfolio, including Jeep and 500X, to the country. According to Enrico Atanasio, Senior Vice President (Commercial), Fiat India Automobiles Ltd, Lots of brands with SUV or SUV-like products are coming to India as the segment is growing faster than sedans. SIAM has projected that the growth in utility vehicles will be between 29%-31% this fiscal. Such strong numbers are in sharp contrast to the low visibility of the segment until a few years ago. Obviously, the arrival of competitively priced quality products that are safe and fun to drive and offer loads of features have turned the tables for the SUV segment. With the arrival of stylish new models like the Duster and the Ertiga in the sub Rs.10,00,000 range, it is expected that sales of these vehicles will continue to be in line with the forecast rate. As the market matures and more families buy their second car, the demand for SUVs will continue to increase. Indians have just started out on their love affair with the SUV, so the romance is not likely to wear off anytime soon.

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STRATAGEM

National Focus

Can Samsung keep its edge in smartphones?

The South Korean player enjoys a clear lead over its Finnish rival in the smartphone sweepstakes currently but there are quite a few curveballs to come in the hyperactive mobile phone market before a clear winner can emerge.
ONKAR PANDEY

Keeping the ag ying high B.D. Park, Managing Director, Samsung India, leads an established brand, which is the leader in the smartphone segment. But his real test will be to manage the brand in face of a resurgent Nokia, besides facing off competition from the likes of Sony

Revenues of top mobile players

Samsungs revenue rose more than Nokias
Rank 201112 119.25 78.91 19.78 14.60 13.27 9.23 7.90 7.80 7.50 6.70 201011 129.29 57.20 22.89 19.50 10.04 4.50 9.20 18.34 6.26 13.26 Change market (%) share (%) -8 38 -14 -25 32 105 -14 -57 20 -49 -5 38.2 25.3 6.3 4.7 4.3 3 2.5 2.5 2.4 2.1 100

Nokia Samsung Micromax BlackBerry Karbonn HTC Spice LG Huawei GFive TOTAL

312.15 330.31

Source: CyberMedia Research (Revenue in Rs Billion)

ntil as recently as 2008, Nokia had an invincible lock on the mobile phone market in India. The Finnish giant was by far the strongest Richmond in the field, controlling a humongous 75% of the Indian mobile handset market by volume. But over the next couple of years, even as the handset market was going through a watershed technological change and churn, Nokia made the mistake of taking its eyes off the emerging market trends and has had to pay a heavy price for the lapse. By the time it realised its mistake, the South Korean major Samsung had already taken the market by storm, introducing a whole new dynamic to the Indian mobile phone market: smartphones, which have operating systems just like PCs (with Android being the most popular). The past two years have seen Samsung make hay and sunshine of the Indian handphone market while Nokia has been left to nurse a bloody nose in the smartphone sweepstakes. From the staggering peak of its market leadership four years ago, it has seen a heartbreaking fall with its current market share declining to 31%. In comparison, Samsungs

share in the volume game has moved up from 5% to 28% over the past two years alone, according to a research report by Cyber Media. The cardinal sin Nokia made was to forget that technology is ephemeral in nature. So when smarphones became the hottest flavour in the handset business, Nokia was caught napping. So far it had played the market on the strength of its feature phones and had nothing equivalent to offer in the sizzling smartphone category. Its Symbian platform looked antediluvian and anachronistic in comparison to Samsungs offerings on Googles Android. Unlike Nokia, Samsung had abandoned the Symbian OS early on and succeeded in developing leadingedge handsets using multiple operating systems. At the same time, it developed its own operating system called Bada to push smartphones into the mid-market and cannibalize the feature-phone segment. It was also quick to launch several attractive models on Googles Android platform, which helped it gain global market leadership in the smartphone segment. The Korean tech giant with an estimated revenue of roughly $200 billion globally started its tech world ascendancy in late 1980s and

82 Business & Economy

Samsung vs Nokia

Change of guard: P. Balaji, the new Nokia India MD, comes in from the erstwhile Sony Ericsson; Can he propel Nokia to become the frontrunner in the smartphone business by taking on Samsung on its strong turf?

90s as a component manufacturer and supplier of DRAMs, and other flash memory chips for companies like GE and (its love/hate partner/foe) Apple Inc. In the 90s, once it got the hang of basics like DRAMs, and LCD displays, it quickly scaled its electronics business, investing big sums to create economies of scale and outprice the competition. On the strength of its broad product portfolio, differentiated retail and multiplatform strategy Samsung has, in recent years, gone about breaking Nokias hegemony and its premium brand perception. Nokias fortunes have been in reverse gear as its two biggest markets China and India have gone on to lap up the feeding frenzy over smartphones. Today, Samsung has a clearly established lead in the lucrative and rapidly growing smartphone category with 43% market share as compared to Nokias 23%, according to a CyberMedia Research report. The saving grace for Nokia is that its still the overall market leader in the Indian mobile handset market with Rs.119.25 billion revenue and a 38% overall handset market share, compared to Samsungs 25.3% share and Rs.78.90 billion in revenue. But there is no denying the fact that the tide has clearly turned Samsungs way, as theres no good alternative yet to its smartphone dominance in the Rs.312.15 billion Indian mobile handset market (some other industry estimates put it around Rs.550 billion). Clearly, Samsungs ascension to the market throne and its emergence

The market is fast evolving in the digital communication devices space and no player can afford to be content about its products and their positioning
AMANDEEP KALSI, DIRECTOR, PROTIVITI INDIA

as the biggest smartphone manufacturer globally is not a case of overnight success.There is a lot that it has done to differentiate itself from other handset players to claim the throne of the biggest smartphone manufacturer globally. Like Apple, Samsung has overlaid Android with a distinctive user interface, which offers consumers a delightful experience. From the beginning, Samsung has remained a pure-play touchscreen player in the smartphone category, which has burnished its premium brand image. All our products have a simple DNA of innovation, differentiation and quality. Our products are designed with the aim to simplify technology and ease of use for consumers, says Ranjit Yadav, Country Head, Mobile & IT, Samsung India. In the smartphone segment, Samusng has consistently offered global standards and innovative features. For instance, its latest launch S3 comes with retina scan and other

In the rapidly growing smartphone category, Samsung leads with 43% market share as compared to Nokias 23%

such first-in-class features, making it a truly global product. At the same time it has also ensured that its lowend feature phones have good localised applications. Samsungs strategy has been simple waiting for the right moment to open up in the market and quicikly moving in to seize the opprtunity with both hands. Experts say Samsungs success has come from spotting technology trends in the initial stages, in areas where the growth is rapid and development capital-intensive. It has invested heavily in such areas to make it harder for rivals to keep up. For example only when LCD displays got to 40 inches did Samsung move in to turn them into televisions around 2001. Its a quick follower (less of an innovator like Apple), and has great execution skills. That remains the hallmark of its continuing success over the years. Today, Samsung accounts for almost 13% of South Koreas exports. Believing in the philosophy of constant change, as envisioned by its founder, Samsung now has set its ambition to become a $400-billion company by 2020. It will invest into still nascent but fast emerging techSeptember 2012 83

STRATAGEM

National Focus

nologies related to the healthcare and environment space like medical equipment, LED lighting, solar panels et al. In India, Samsung has succeeded by becoming a full range smartphone player. It has 19 smartphone models available across varied OS platforms across Android, Windows and Bada. The company has flooded the market with phones at every price point conceivable, making it easier for aspiring young consumers to jump to their next level of technology experience, as per their needs and affordability. It has priced its products extremely competitively, thus outsmarting the competition. Katyayan Gupta, analyst with Forrester Research, says, Samsung has won because of both its hardware as well as software innovations. It introduced multiple smartphones at quick intervals and varying price-points. So we have a Samsung Star and Champ models starting around Rs.6,000 to S3 and Note at Rs.35,000. Samsung offers consumers choices and value for money. It ensures a smooth path for consumers to jump to the next level of smartphones by having products at almost every price point. Nokia phones dont have so much variety, adds Gupta. Besides, the company hasnt ignored the feature phone category, which has helped it increase its penetration and build brand awareness in tier 2 and tier 3 towns among consumers, who would become future smartphone users. Though Nokia is still the overall leader in the Indian mobile phone market and has a formidable presence with close to 200,000 service outlets, Samsung has ensured that the brand enjoys strong visibility albeit with lesser number of outlets. With 100,000 distribution centres that cover most parts of the country, Samsung is focused on better control on service quality and maintaining a premium brand edge over Nokia. So even in smaller cities it runs better designed and illuminated outlets. This ensures that the Samsung brand isnt just a metro phenomenon like an
84 Business & Economy

Top smartphone OSs shipments & market share, Q2 2012 units

Android is ahead by miles, while Windows (expected to grow steadily) lags majorly
Operating System Android iOS BlackBerry OS Symbian WP7 / Windows Mob Linux Others Grand Total
Source: IDC report

Q2 2012 Shipments 104.8 mln 26 mln 7.4 mln 6.8 mln 5.4 mln 3.5 mln 0.1 mln 154 mln

Q2 2012 Share 68.10% 16.90% 4.80% 4.40% 3.50% 2.30% 0.10% 100.00%

Q2 2011 Shipments 50.8 mln 20.4 mln 12.5 mln 18.3 mln 2.5 mln 3.3 mln 0.6 mln 108.3 mln

Q2 2011 Share 46.90% 18.80% 11.50% 16.90% 2.30% 3.00% 0.50% 100.00%

Y-o-Y Change 106.50% 27.50% -40.90% -62.90% 115.30% 6.30% -80.00% 42.20%

HTC, BlackBerry or Sony Ericsson. To cement its long-term trust and relationship with consumers, the company has invested heavily in setting up a strong after-sales service network with trained professionals and responsive call centres, which ensure customers have a good experience. These measures have helped Samsung gain strong word of mouth publicity and get repeat buys from older customers, who feel the brand cares for them. It has also ensured that Samsung, which started in India as a consumer electronics players at a distant No.2 to LG, has not only emerged as a strong and credible challenger to global tech giants like Apple and Nokia but also become capable enough to beat them at their own game. The success of its handset business has ensured that almost 55% of its India revenues of over Rs.200 billion comes from the mobile phone division. In contrast to Samsungs steady march in India, Nokias biggest problem has been its lack of a strong smartphone range in its portfolio. To make amends for its shortcoming, Nokia has, over the past year, started moving (rather late though) aggressively by teaming up with Microsoft to offer Windows OS-based Lumia range of smartphones. It has announced slowly phasing out its Symbian phones and would focus on pushing its Lumia and Asha-series range of smartphones in the country. The response so far has been encour-

aging but not enthusiastic enough. On the other hand Samsung, though still on a strong wicket, has come up against legal troubles that have the potential to upset its smartphone business. The past month has been a particularly bad one for the company, which has been asked by a US district court to pay $1.05 billion as damages to Apple in a patent infringement and copyright related lawsuit. The court held that many of Samsungs Google Android-based phones infringed Apples patents. The indictment comes as a dampner as it can dent Samsungs image as an innovator company. To ensure that its brand image remains intact, Samsung will have to focus on creating a strong future product line-up as well as ensure that it doesnt get caught in more such high-profile legal contretemps. Says Amandeep Kalsi, Director, Protiviti India, The market is fast evolving in the digital communication devices space and no player can afford to be content about its products and their positioning. Market positions are up for grabs every couple of years and so be it Apple, Samsung, BlackBerry or Nokia, none can afford to take it easy. While its true that nobody can predict how the tech scene will unfold in the future, a wrong move by Samsung at this stage or a right strategic push by Nokia now can yet again reconfigure their stakes in a rapidly changing market. Though theres no strong alternative for Sam-

Samsung vs Nokia

sung at the moment, multiple scenarios have begun to emerge, especially in the aftermath of the US court verdict against Samsung. More and more smartphone makers may turn increasingly to Windows devices because of the legal uncertainty surrounding Android phones. Right now, Nokia is the primary manufacturer designing for Windows phone. But Samsung may actively now weigh in big time in favour of Windows. It has already surprised the market by unveiling a new Windows phone, called ATIV S. The move seems like pre-emptive action on the part of Samsung and designed to steal a march over Nokia whose own Lumia line of smartphones using Windows Phone 8 is slated for release in New York on September 5. Nokia expects its services bundled with the Lumia, such as Nokia City Lens, Transport, for public transport information, and Nokia Music with Mix Radio, a free mobile music streaming and offline listening apps, to be a big hit with consumers. So even though Samsung enjoys the whip hand in the smartphone market currently, the future is not without upside possibilities for Nokia. The brand continues to retain a huge fund of goodwill and trust among Indian consumers and enjoys an enviable reputation. Millions of Indians who continue to use Nokia feature phones could be potential customers for its superior smartphones. But in a hyperactive market that demands constant innovation, the player that is more innovative and can play the pied piper to the consumer will win the game. With the smartphone market set to grow to 30% by 2015 from 11% currently, the fight for the smartphone market pie is still largely open and the player whose offerings best meet the market pulse and satisfy customer expectations will get to hit the home run.

55% of our India revenue comes from mobiles

Ranjit Yadav, Country Head, Mobile & IT, Samsung India, talks about the reasons for the success of its smartphones and the strategy for the future
B&E: Samsung has had a meteoric growth in India in the smartphone segment. What are you doing to create more traction for your products in the future? Ranjit Yadav (RY): Samsung is a full range player in India offering products for all kinds of consumers, with products starting at Rs.1200 for a basic phone and going up to around Rs.40,000 for some of our latest smartphones and tablets. We are a fully committed player in the Indian market and have over 2500 service centres all over the country. All our products have a simple DNA of innovation, differentiation and quality. Design too is one of our key product differentiations. Look at the design and ergonomics in the S3, which (we say) is designed for humans, inspired by nature. B&E: Whats in the S3 that is different from other smartphones? RY: It offers a great user experience and is probably the best smartphone around. It goes much beyond simple performance and specifications; its about simplicity in technology. Its intuitive, and very easy to use. B&E: Whats your marketing strategy for smartphones? RY: Its based on creating the right consumer experience. We will be very strong in digital and experience-based marketing. Like for our S3 range, you can experience the product in-store and outside as well, to demonstrate what the product can do for you. We believe consumers are available across the country for our higher range phones and not just in the metros. So we will take our marketing campaign across the country, rather than limit it only to top cities. B&E: What has been the impact of the current economic slowdown on your smartphone business? RY: Slowdown is a risk that we all have to face. In the mobile phone industry sales are flat and volumes are not growing any more. Going forward theres a risk of growth dropping off. Though, we have been growing even during the current slump, the key is to differentiate and we are good at that. B&E: What is Samsungs share of the smartphone market in India? RY: I cant give you an exact number but we are already over 26% in volume sales in the overall handset market, and above 40% share in the smartphone segment. We dominate the smartphone market. Today the mobile division contributes more than 50% of Samsung Indias annual revenue. B&E: How do you look at the competition from players like Nokia, Sony, et al? RY: We only focus on our products, through which we try and simplify technology and ease of use for consumers. We dont focus much on what the competition is doing.
September 2012 85

HIPSHOT

Power Talk

Let us do something big rst!

He makes an energy drink named Five Hour Energy, and his company Living Essentials has a current annual turnover of around US $1.3 billion. Forbes magazine has named him amongst the richest Indian billionaires in the US. In this interaction with B&Es Onkareshwar Pandey, Manoj Bhargava talks about Indian and US politics and his decision to donate most of his wealth to charity.

B&E: You basically hail from Lucknow. Tell us more about your lifes journey from Lucknow to the US? Manoj Bhargava (MB): I would prefer to say little because I have had little attachment to my personal life. I was born in Lucknow and studied at the Mayanagar School till class 6. After that, my father decided to send me abroad. So for preparations, I spent three years in Mussoorie, while my Dad went there in 1967 only. My father had a big publishing business there. It was called Upper India Publishing House, which published books taught in various colleges. My father had written many books under the Bhargava De name. But with time, everything went downhill, though he was still among the top people in Lucknow. Our grandfather was a leader from the Awadh region. He used to get many hand-written letters from Mahatma Gandhi, who had also sought the help of our grandfather in those days. Even after out grandfathers demise, many leaders from various political parties used to come home. Even Chief Ministers and Ministers used to frequent our house before and after being sworn in for support. Thats all more or less how it was. Afterwards, we moved to Philadelphia in the US, and I finished my education from there. B&E: Tell us more about your initial days in US. Were things smooth from the beginning? MB: In those days, you could not take money abroad. We had nothing when we reached there, but we were very happy and made up our mind to work hard. A new beginning had to be made all over again. We started from zero again. Everyone finished their education there, and except me, everybody had a graduate degree. There too, illiteracy is not considered good. I think that there are two types of education. One is just to take a degree. And then begins the second type of study the study of life. Bookish studies do not pay
86 Business & Economy

Photo: Parmod Pushkarna

Manoj Bhargava, Founder & CEO, Living Essentials

Manoj Bhargava

much, they act as only a base in life. Then you have to build your own house on that. If you study at Doon, IIT, and IIMs and still dont know much about life, what is the use of such an education. B&E: Today, you are the richest Indian in America. How did this success come about? MB: We create an energy drink, which we call 5-Hour Energy. If youre tired, you can take it and your exhaustion will disappear. It works for five hours, and after that you will return to your normal state. Last year, in the US, we sold 50 Million bottles of this drink. It costs $3 per bottle, or nearly Rs.165. I thought that if I am doing something, it has to be special. To make something new and special, you have to invest a lot of time and energy. So after talking to nearly two thousand people, we decided to start the business. Initially, the company manufactured the drink in big bottles. Later on, I thought that its a headache to buy the big bottles, so we created a smaller bottle. We kept on im-

thought kept me occupied for a long time. Everyone has different kind of goals. I am not a show off and I do not have a thing for too many material possessions. Theres a saying in our land, that we dont spend time, time spends us. We dont indulge, indulgence indulges us. Still, if someone doesnt learn and isnt careful, he cant be called intelligent. B&E: Being a non-US trader, did you face any challenges there? If so, how did they impact your business? MB: (Smiling) When you get down to wrestling, you have to do it with someone else. You cant do it alone. I just thought that we have to do this and just started. We didnt care about what will happen ahead. B&E: I recently read that you have decided to part with a large share of your income and spend it on charity? MB: Yes. And I am not donating a big part, but almost the entire part. I thought about what I eventually want. What will I do with this money? I do not have a hobby. My son is 22 years old, and he thinks like me only, since he believes that one must stand on his own feet. He is pursuing a job in the private sector right now. So we decided to put the money up for charity in areas of health, education, water et al through over 400 NGOs. However, we often face trouble in this area too. B&E: The Obama administration had talked about stricter curbs on outsourcing to India to reduce unemployment there? What is your view on the same? MB: Nobody can stop outsourcing. It is like a wave of the ocean, which finds its lowest point. I mean that even the outsourcing market is looking for its cheapest market. B&E: Recently, Indian Prime Minister Manmohan Singh and President Obama had a discussion on the problems related to the economic downturn. Do you think that there is anything that the US

can learn from India? MB: There is no such thing. Leaders discuss issues, and keep learning from each other. Yes, India definitely needs to learn from the US. In my opinion, I dont think that theres anything in India, which the Americans need to learn; and even if theres one, they will not learn. B&E: You are looking at the functioning of Indian Prime Minister Manmohan Singhs government. One US magazine termed him as an Underachiever. What do you have to say? MB: You tie a craftsmans hands, and then tell him to show his workmanship. Under such circumstances, he will be known as an Underachiever! Prime Minister Manmohan Singh is a very nice person, if he is allowed to do his job well. But his hands are tied. In this government, the tactics of power play have ensured that no one has the power to do anything good, no matter how much he desires and has the ability for it. B&E: How do you look at the current state of affairs in Indian politics? MB: The current situation in India reminds me of the situation which existed even before the British rule. Development of India has been messed up by the multi-party political system and its ways of working. Political manoeuvring is bound to impact the economy. B&E: When it comes to foreign investors, especially Americans, which market do they prefer to invest in - India or China? And why? MB: The question is not so easy. In some cases, its better to invest here. India has the basic infrastructure to set up industry. But red tape is rampant here. In China, on the other hand, investors have this internal fear that the Chinese government might nationalise everything. So they dont trust the government there. It might be giving all the facilities today, but it can take all of this tomorrow. So investors generally balance out their options.
September 2012 87

You tie a craftsmans hands telling him to show his workmanship, and then call him an underachiever
proving it. Today, the sixth generation of 5-Hour Energy is out in the market. The retail turnover of our business today is around a quarter of a billion dollars. B&E: You came from a well to do family and there was no shortage of material possessions. Can handling this kind of wealth be difficult for people at times? MB: I studied for nearly 12 years. After school I thought about the reasons why one needs to earn money. What should one do with it? That

REVISTING HISTORY

Bihar Bengal Famine

IN THIS SECTION
THE FAMINE THAT INDIA DID NOT WASTE

88
A WEAK POWER SECTOR: WHATS THE CURE?

92
UPA GOVERNMENT: CAUGHT IN CAGMIRE

96
WILL PRICE CONTROL MAKE MEDICINES ACCESSIBLE?
(File photo) Prof. M. S, Swaminathan presents a packet of seeds to PM Indira Gandhi on behalf of farmers Jontia, Khanjanwal block in the national capital in 1966: At this fateful meeting, Ms. Gandhi asked Dr. Swaminathan how quickly India could build a surplus of 10 million tonnes of foodgrains. When he asserted that it would only take a few years, Ms. Gandhi went on to give her full support for him to execute his vision on the ground

108

The famine that India did not waste!

Between 1965 & 1967, the Government of India was up against an extremely daunting challenge the Bihar Famine. It compelled the then PM Indira Gandhi to realise the importance of self sufciency in food for Indias long term interests. This realisation led to the Green Revolution, and things were never the same
K. S. NARAYANAN

t was circa 1966-67. Anil Vibhakar, then a high school student, has chilling memories of the last famine that hit his home state Bihar, along with other parts of India. Newborn babies and young infants cried and shrieked for their mothers milk. But young mothers were not in a position to generate milk in the absence of enough food, he recalled. Vibhakar, now a senior journalist based out of Gaya, also recalled how many people vomited after eating wheat chura. Ultimately, they developed a taste for it and mixed it with milk powder and also made kheer (Indian dessert) out of it. In adjacent Jehanabad, Bali Ram Mishra narrates how pregnant women were most affected in light of poor calorie intake and found it
88 Business & Economy

hard to deliver babies. Similarly, Vijendra Singh in Patna recalls how his grandfather failed to grow even a blade of grass and the family carried on for a few months with a reserve stock of food. On account of a decline in death rates, Indias population grew from 300 million in 1947 to 500 million in the 1960s. This led to increased demand for food and Indias food imports rose from 1 million tonnes in 1950 to 10 million tonnes in 1966. The genesis of the Bihar famine lay in the successive monsoon failures of 1965 and 1966 that affected south Bihar, currently Jharkhand. Some reports peg the total loss of lives at 2,500. The year 1965 was already a year of deficient rainfall. Then a double tragedy

struck by way of floods in north Bihar and poor monsoons in the south. As a result, foodgrain production declined to less than 25% of the normal in large parts of south Bihar. Annual production in Bihar fell from 7.5 million tonnes to 3.5 million tonnes and availability of foodgrains declined from 13.4 ounces to 6.5 ounces per head. Some 30 million people faced scarcity and famine with around 18.8 million cattle. Studies pointed out that food shortage in Bihar was significant in 17 out of 17 districts, with 9 districts producing less that 50% of normal output. The Congress Working Committee decided to hike the central allocation to the state. In a months time, the allocation of foodgrains to Bihar from the central pool increased from 70,000

Prelude to the Green Revolution

Begging mother with her child: This picture is arguably the most famous work of ace humanitarian photojournalist Werner Bischof. He was particularly stung by the poverty in India and these pictures were his way of inciting a call to action from politicians. It is believed that his work in Bihar in the early 1950s inuenced the US Congress to send 136 million tons of wheat and a $190 million loan. India, on the other hand, continued to face severe food scarcity till the reforms led by Prime Minister Indira Gandhi after the Bihar famine of 1965-67 gave Indian agricultural production a fresh lease of life

REVISTING HISTORY

Bihar Bengal Famine

tonnes in October 1966 to 150,000 tonnes in December that year and further to 2,25,000 tonnes between AprilOctober 1967. Thanks to the US Public Law 480 Program (PL-480), India got continued food supplies and the Bihar Famine did not precipitate a national calamity. PL-480 or Food for Peace is a funding avenue by which US food can be used for overseas aid. It was signed by then President Dwight D. Eisenhower in 1954 after US produced surplus grain and as a result, global prices crashed. But PL 480 was given to countries that didnt antagonise US geopolitical interests. Food imports were used by US to arm-twist non-aligned India into accepting its position. Leading US political scientist Paul R. Brass, in an article titled Political uses of Bihar Crisis: The Bihar Famine 1966-67, wrote: Lyndon Johnson was known to be angry with Mrs. Gandhi (Indira Gandhi) and the Government of India for their disagreement with US Policy towards Vietnam and he adopted short-tether policy of adjusting the release of aid, including food aid, to India... The US still uses food imports as a diplomatic tool as is visible in recent cases of North Korea and Iran. It denies food even on commercial terms. Noted agricultural scientist MS Swaminathan, who ushered in the Green Revolution, recalls how Indira Gandhi was the first Indian PM to realise the connection between food sovereignty and independence in foreign affairs. Dr. Swaminathan recalls, When I called on the PM to invite her for the inauguration of a seed village at Jontia, Khanjanwal block in the national Capital, she asked me one question: How soon can we build a reserve or surplus of 10 million tonnes?. He assured her that India could do it in a few years. Swaminathan and his fellow scientists got enormous support from the PM, but Union Food Minister C. Subramaniam and American scientist Norman Borlaug were sceptical. The Planning Commission rejected the proposal. VKRV Rao, noted economist and planning commission member, didnt believe that yield under the Green Revolution could exceed 200%. They were
90 Business & Economy

Norman Borlaug successfully introduced improved semi-dwarf wheat varieties to India

moulded in the Hindu rate of growth theory propounded by fellow economist Raj Krishna. Population ecologist Paul Ehrlich in fact proposed a strategy of triage based on the military field medical approach to the injured and dying. He proposed that India and China were beyond help! But Gandhi would buy none of these arguments. She pulled up the Planning Commission to understand the state of affairs, as Indias population was touching 600 million and natural disasters could strike any time. Meanwhile, interesting developments were taking place both in the laboratories and on land. In 1964, both India and Pakistan began importing, testing and demonstrating semi-dwarf varieties of wheat from Mexico. The results were promising. In the following years, the crop yield was larger than ever in both India and Pakistan. For the next season, India ordered 47,000 tonnes of seeds while Pakistan ordered 18,000 tonnes. This was the largest purchase of seed in the world until then. The Bihar drought of 196667 taught India to achieve self-sufficiency in foodgrains, gave impetus to further changes in agricultural policy and leading us to the Green Revolution. It was this backdrop that led to the setting up of the Agriculture Cost Price Commission to determine the minimum sup-

port price for farmers and the establishment of the Food Corporation of India, which was tasked with the procurement and distribution of food grains. India had produced so much grain over the next few years that there werent enough people to harvest the crop! It is said that there werent even enough bullock carts to haul the wheat to threshing floors. There werent enough jute bags, trucks, rail cars or grain storage facilities. Some towns closed schools temporarily to house the grain. Swaminathan recalled how, in AprilMay 1968, the country witnessed the wonderful spectacle of large arrivals of wheat grain in the mandis of Punjab. Wheat production in the country rose to nearly 17 million tonnes that year, from the previous best harvest of 12 million tonnes. Indira Gandhi released a special stamp titled Wheat Revolution in July 1968 with a Pusa Institute Library Clock Tower in the background. The nation rejoiced at our coming out of a ship to mouth existence. Later Dr. William Gaud of the US referred to the quantum jumps in production brought about by semi-dwarf varieties of wheat and rice as a green revolution. This term has since come to symbolise a steep rise in productivity and, thereby, of production of major crops. Significantly, it reduced Indias dependence on foodgrain imports from the US, which had shot up to 10.4 million tonnes in 1966. Thanks to the Green Revolution, support to farmers in terms of minimum prices and procurement by FCI, foodgrain production increased from 72.3 million tonnes in 1966 to 105.2 million tonnes in 1972, while imports dropped to as low as 0.5 million tonnes. Today, with over twice the population, India is still in a position to export around 10 million tonnes of foodgrains (government estimates for FY 2012-13). And though our farming sector faces innumerable issues even today, India has credibly managed to successfully keep a Bihar Famine-like situation at bay. With field inputs from Sanjay Upadhyay (Patna) & ChandraSekhar Bhattacharjee (Kolkata)

Prelude to the Green Revolution

We have nothing like a foodgrain surplus

Shetkari Sangathana founder Sharad Joshi tells Chandran Iyer of B&E that lopsided policies pursued by successive governments could lead to bigger famines
B&E: Lets take a ashback to the famine that hit India during 196567 and then the seventies. What are your memories? Sharad Joshi: Things were terrible at that time. There was not only food security but also acute drought. The whole of Maharashtra was reeling under water shortage. Most of the wells in this state had become dry. I had seen birds falling down on the roads due to thirst. You can imagine the condition of people. B&E: Do you think India has learnt its lessons from that famine? Is our agricultural policy today strong enough to prevent it from happening again? SJ: I dont think so. Successive governments have pursued lopsided policies. Wrong policies introduced during the British tenure are still being continued. The British imposed the system of land revenue and its collection posed a big problem to even better-off farmers. Even now, in many places in India, landless people are giving loans to the farmers to help them pay land revenues. Even the coolies in the Agricultural Produce Market Committees (APMC) are giving loans to farmers and turning money lenders. B&E: The agriculture minister recently said that in 1972, there was food decit while now there is food surplus. What is your take? SJ: I dont believe that there is any food surplus. The statistics comes from Food Corporation of India, which has to show that there is excess food, which is rotting. Unless they show that food is rotting, they cannot tally their accounts. They have to show that they do not have enough storage capacity. In the case of wheat and cotton, we are doing quite well. But apart from these two, I dont think we have anything like grain surplus. B&E: Can you pinpoint what exactly is wrong with our governments agricultural policy? SJ: What is happening now is that there is no ofcial conrmation that the prices cover the cost of production. Farmers cannot pay taxes and the dues of the loans that they have taken and the electricity bills are a huge burden. The loan waiver scheme of the government completely forgot the electricity bills with the result that many farmers have been unable to pay these bills. So, there is no power and diesel is already in short supply as its expensive and there is no government policy yet on ethanol and biodiesel. At the same time, labour is in short supply. All these are precursors to a great famine. B&E: Doesnt it sound like a bit of a doomsday prediction? SJ: What we have seen earlier have been famines due to natural reasons. But what we may see in the future is

going to be the result of folly of man as well as fury of nature. To avert it, India needs structural reforms. Firstly, there is a need to scrap the APMC system. It has outlived its utility. They have never been able to x a good minimum support price. The second important step is to scrap the Food Corporation of India. Thirdly, there should be nothing like a Public Distribution System. B&E: But wasnt the PDS introduced to benet the poor? SJ: This is actually the stated argument in theory. But in reality, it never happens. The system of PDS was something that was started by the Britishers during the Second World War period. A person who believes that PDS was meant for the good of the country must genuinely believe that the Britishers were also wellwishers of India.
September 2012 91

Photo: Ranjan Basu

POLICY & POLITICS

Spotlight

A WEAK POWER SECTOR: WHATS THE CURE?

Power blackouts that occurred recently have put the spotlight back on a troubled power sector. Grid failures, shortage of coal supply, nancial losses, poor infrastructure & governance, and political nger-pointing are making matters worse
PARIMAL PEEYUSH
or some, it was their worst experience ever. For others, it was a repeat of the horror. We are referring to the blackouts that left over 680 million people in a state of darkness and despair for long hours together on July 30 & 31, 2012. But more than the unforgiving power cuts and crippled state of trains and metro rails that resulted from failure of three transmission grids in the coun-

try, it was the kind treatment offered to the one responsible for the disruption that embarrassed India, Sushil Kumar Shinde (the-then power minister), that made bigger headlines. Post the incidence, Moodbidri Veerappa Moily was made the power minister and Shinde was asked to take charge of a higher office in the government. [He is today the Union Home Minister.] When questioned over objections raised by critics on this move, Shinde clarified that he rated the perfor-

mance of the power ministry under his tenure as nothing short of excellent. I have briefed the Prime Ministers Office... In USA, light does not come for four days. Here we got it in a matter of hours. People should appreciate how work is done at the grid, was Shindes justification. [He was referring to a blackout in North America in 2003 that lasted 4 days.] Starting 2.35 AM on July 30, the whole of North India experienced a power cut for 10 hours after the

92 Business & Economy

Power Sector

(L) February 18, 2011; Mundra, Gujarat: Adani Powers thermal power plant, about 400 kms from Ahmedabad, which is Indias rst supercritical 660 MW unit. India needs more power output from private players to make up for the gap between supply and demand of power in the country, which is expected to touch 50,000MW by 2015; (R) July 31, 2012; Panipat, Haryana: Passengers of Paschim Express travelling from Bandra to Amritsar waiting during the power cut that stalled trains. Due to failure in the Northern Grid power supply, services of around 400 passenger trains and 250 freight trains were hit. The power shutdown disrupted services on 2,100 km of rail routes

Northern Grid tripped. The next day saw a bigger outage hitting 19 States and two Union Territories when the Northern, Eastern and North-Eastern grids all went on the blink. An estimated 684 million people, or a-tenth of the worlds population, were left without power for up to 8 hours. Shinde was quick to blame States like UP, Punjab and Haryana for overdrawing power. The event that lasted two days was just a bellyache a symptom of the deep malaise that afflicts governance in the power sector in India. On the face of it, many would assume that the power ministry has its task cut out for itself. But hasnt it always been so? Are long power cuts new to India? Has the 100 million tonne gap between coal demand and

supply just emerged? Are issues related to supply of coal and gas new? Or has the fact that over 400 million people still lack access to electricity just struck India? The recent grid failures that won India international shame and exposed the lack of grid discipline in the Indian power sector, could act as a trigger to implement corrective measures to eradicate problems which the sector is reeling under. That would call for bold measures on the part of the new minister. To begin with, he will have to put in place a system that ensures strict adherence to grid discipline (a present, violations due to overdrawing of power by various states are common). As per the Central Electricity Regulatory Commission (CERC), it had is-

sued four directives to States not adhering to their set limits of drawing power. But to no avail. The reason political compulsion. Moily though, claims that the guilty will be brought to book. There is a provision to imprison authorities or the state chief secretary for disobeying grid discipline. Perhaps we need to enforce that, he said. A bigger challenge for him will be to fix things on the supply side. Though a large chunk of Indias power capacity is coal-dependent, it has failed to generate enough power, largely on account of shortage of fuel, particularly coal. Despite India boasting of one of the worlds largest coal reserves, the countrys power plants are crippled by inadequate supply, where most operate 20% below maximum capacity. Ensuring a quick rise in supply of coal one that has fallen short of demand due to delays in environmental clearances and Coal Indias (CIL) inability will prove a huge task for Moily. As per estimates, the gap between coal demand and supply is likely to rise to 170 MT by 2015. This could result in power generation capacity of upto 50,000 MW to be affected due to the inability expressed by CIL to ensure supplies. The government, in 2006, had embarked upon an ambitious drive, the Ultra Mega Power Project (UMPP), that promised to permanently put Indias power woes to rest. In line with the governments Power for All mis-

Power supply and demand during scal year 2010-11

Evaluation in both energy and peak terms (Figures in brackets are negative values)
Region Requirement (MU) Energy Availability (MU) Surplus/ Decit (MU) Surplus/ Decit (%) Demand (MW) Met (MW) Peak Surplus/ Decit (MW) Surplus/ Decit (%)

Northern Western Southern Eastern North-East

258,780 268,488 229,904 94,558 9,861

237,985 232,871 217,981 90,526 8,992

(20,795) (35,617) (11,923) (4,032) (869)

(8.0) (13.3) (5.2) (4.3) (8.8)

37,431 40,798 33,256 13,767 1,913

34,101 34,819 31,121 13,085 1,560

(3,330) (5,979) (2,135) (682) (353)

(8.9) (14.7) (6.4) (5.0) (18.5)

Source: Central Electricity Authority (CEA); MU = Million units; MW = Mega-watt

September 2012 93

POLICY & POLITICS

Spotlight

sion, these coal-based UMPPs (each with a minimum capacity of 4,000 MW) were meant to meet the power needs of a number of states at highly competitive tariffs. 4 UMPPs, with another lot of 12 that were to be subsequently initiated, were to facilitate capacity addition of a whopping 88,000 MW to Indias power kitty by 2017. That was the plan on paper. Now, reality. In January 2012, Tata Power commissioned an 800 MW unit of its UMPP at Mundra in Gujarat. It became Indias first and only UMPP to generate electricity so far. Though the initial generation has been just 60 MW, the company is already staring at an annual loss of Rs.500 billion. Today, Indias sad coal story also reflects on the failure of the ambitious UMPPs. The biggest worry that has crippled power sector in India is the financial losses due to poor transmission infrastructure that state utilities are reeling under. According to the Economic Survey presented earlier this year, the combined annual loss of all state utilities in FY2010-11 has been pegged at a Rs.500 billion. Though it appears that this loss is all due to inadequate investments over the years (for system improvement), unplanned extensions of distribution lines, overloading and lack of adequate reactive power support, a deeper look suggests that the problem might be political. Lack of investments and reluctance of state governments to increase power tariffs, have resulted in a discouraging scenario. Sources in the power ministry inform B&E that the government is working on a plan to restructure about $35 billion of loans held by state utilities. Electricity theft, though a criminal offence, is also never taken seriously by state governments for fear of loss of votes. Distribution happens to be the weakest link in Indias power story with states reporting about 30% in power losses. This is the situation a decade after the Centre launched the

and tells much of the story. The power ministry blamed grid failure. The grid manager, i.e. the Power Grid Corporation of India Ltd. (PGCIL), blamed the state governments. The state governments blamed the power generating companies. The power generating companies like NTPC blamed coal supply (i,e, CIL). CIL backed by the coal ministry, blamed In US, light There is a the Environment ministry (for its faildoesnt come provision to for 4 days. imprison au- ure to raise coal production). A committee led by A.S. Bakshi, We got it in a thorities or Chairman of the Central Electricity few hours. the State Authority (CEA), that was constituted People should chief secreto investigate reasons behind the reappreciate the tary for discent blackout has now found that inwork done at obeying grid stability in the Northern grid combined with other issues like 20 transdiscipline the grid SUSHIL SHINDE, MOODBIDRI VEERAP- mission lines being shut down during FORMER UNION MIN- PA MOILY, CURRENT the monsoon season led to the ISTER OF POWER UNION MINISTER OF AND PRESENT UNION CORPORATE AFFAIRS blackout. The committee has conHOME MINISTER AND POWER cluded that the disturbances were caused by a combination of factors, inter-alia weak inter-regional corriAccelerated Power Development & dors due to multiple outages, high Reform Programme for reducing Agloading on 400 kV Bina-Gwalior-Agra gregate Technical & Commercial link, inadequate response by State losses (previously known as TransLoad Despatch Centres (SLDCs) to mission & Distribution losses). the instructions of Regional Load Even the National Electricity Act Despatch Centres (RLDCs) to reduce 2003, which was created with the overdrawal, loss of the 400 kV Binaaim to replace some archaic legislaGwalior link, said K. Venugopal, tion on electricity, and provide for measures to develop the industry has Minister of State for power in the central government. proven a lesser success. Today, the Moily has promised the nation that lack of consensus between the States the July-blackout will never recur. and the Centre has put to rest the However, his tenure which is likely to very purpose of the Act. The blame game is on as well. Un- run up to the 2014 elections will be judged not on averting another blackable to meet commercial commitout, but in improving the overall scements, the power industry depends on expensive diesel-generated power. nario of the power sector. Reducing power cuts that plague irrigation, waAs diesel demand goes up, its subsiter facilities, improving fuel supplies dy bill burns a large hole in the pockand ensuring an enabling environets of oil companies, observes BJP ment for the industry to flourish is leader Balbir Punj. That, in turn, raises the fiscal deficit of the govern- what he should be work towards. Many question whether Moily can fix ment leading to rising inflation. The problems that his predecessors common man suffers at the end of failed to address. Alone, he cannot. It the day, he adds. In fact, a look at the accusations that were flung about will take the collective will of several ministries and the PM to ensure during the blackout brings to light that India learns to take pride in its the vicious circle that has derailed any improvement in the power sector power sector.

94 Business & Economy

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Special Report

UPA GOVERNMENT: CAUGHT IN CAGMIRE

Close on the heels of its report on the allocation of 2G spectrum, which led to the cancellation of 122 licences, three CAG reports indicting the ruling government has left the UPA red-faced yet again. As the usual blame game holds crucial reforms to ransom, can India expect answers from its elected leaders?
PARIMAL PEEYUSH

f being dysfunctional was an attribute to go by, Indias parliamentarians would have won laurels. Sadly though, the case is not so. Our memories of parliamentary proceedings in recent times are ridden with disruptions and logjams that have resulted in the government earning a dubious reputation of being one in policy paralysis. This tag has been synonymous with Indias staggering economic growth along with a plethora of scams scarring the countrys reputation and the trust of its citizens. In early August this year, the Comptroller & Auditor General (CAG) of India released three reports that created a storm in political circles. These reports on the allocation of coal blocks, the Indira Gandhi International Airport in Delhi, and Ultra Mega Power Projects (UMPPs) have left the UPA government on a sticky wicket. For instance, according to the CAGs report on the allocation of coal blocks submitted on August 17, 2012, the government allocated 142 national coal blocks arbitrarily to staterun and private companies from the period ranging between 2004 and 2009. During this period, the charge of the coal ministry was with none other than the Prime Minister Manmohan Singh himself. Result: The Parliament has been paralysed for the eighth consecutive day (till the time the magazine went for print) with the opposition demanding the PMs resignation and cancellation of coal block allocations. Coal, or black gold, currently accounts for about 70% of Indias energy

Vinod Rai, Comptroller and Auditor General of India has has put the estimate of the losses on account of the coal blocks allocation scam at Rs.1.86 lakh crore

96 Business & Economy

CAG Report

consumption. Given the dependence of the power, steel and cement sectors on this vital fuel, the governments handling of coal production and supply has always been mired with controversy and shortages. Until 1993, there was no specific criteria for allocation of coal blocks and most allocations were done based on letters of recommendation from concerned state governments. However, after 1993, the allocations made by the coal ministry based on recommendations of an inter-ministerial screening committee. The screening committee recommended the allocation of coal blocks to a particular allottee out of all the applicants for that coal block by way of minutes of the meeting of the committee. There was nothing on record in the said minutes or in other documents on any comparative evaluation of the applicants for a coal block which was relied upon by the screening committee, the CAG report stated, adding, Minutes of the screening committee did not indicate how each one of the applicant for a particular coal block was evaluated. Thus, a transparent method for allocation of coal blocks was not followed by the screening committee. As per the report, one that has gained maximum attention, the government deviated from the standard protocol of competitive bidding, resulting in an estimated loss of Rs.1,86,000 crore. 142 coal fields were sold since July 2004 to private and state-run companies. Interestingly, some of the 57 coalfields bought by private companies in 2004 did not even begin production till 2011, while some companies made enormous profits by selling the coal mines. It further estimated that private companies made windfall gains because of the low bidding prices paid for the fields. Meanwhile, coal imports during the period (2007 to 2011) increased from 49.80 million tonnes to 68.92 million tonnes. Quite expectedly, a much-awaited statement by the PM tagged the CAGs findings as disputable on grounds that the policy of allocation of coal blocks to private parties, which the CAG had criticised, was not introduced by the UPA. The policy has existed since 1993 and previous governments also allocated

Prime Minister Manmohan Singh addressing the Lok Sabha on the issue of coal block allocations that have led to huge protests in both houses of the Parliament. Proceedings in the Parliament have been hit badly after the BJP stuck to its demand for the resignation of the PM on the coal blocks allocation issue.

coal blocks in precisely the manner that the CAG has now criticised, the PM said. The PM added that the CAGs premise that competitive bidding could have been introduced in 2006 by amending the existing administrative instructions was flawed. Apart from rubbishing the CAG findings, Dr. Singh also sought to lay the blame on major coal and lignite bearing states such as West Bengal, Chhattisgarh, Jharkhand, Orissa, and Rajasthan for opposing a switch over to the process of competitive bidding. The CAG, understandably, has also come in for its fair share of criticism and the realm of attack has been far ranging. If coal is not mined, it remains buried within mother earth, where is the loss, asked Finance Minister P. Chidambaram. The loss can arise only if coal is mined and sold, he said, defending the PM. Digvijay Singh went a step ahead slamming the CAG for giving exaggerated figures and even targeted CAG Vinod Rai of political aspirations. The people of India have the right to ask for answers and it is the governments responsibility to clarify. The CAG and his team are a highly competent set of people and the CAG bashing has been most illogical, says economic expert Suvrokamal Dutta The CAGs view is that auctions for allocation of coal

blocks could have started from 2004. In fact, out of four views of the law ministry, the first three hold that auctions could begin by executive order. The fourth is an opinion given during a discussion to the effect that the law had to be changed. If we read all the four opinions together, it is clear that auctions could have started by administrative order and the amendment to the Act initiated at the same time, observes former member of Central Board of Excise and Customs Sukumar Mukhopadhyay. Such views and actions are not new. When Service Tax was introduced in the 1994 Budget, the law ministry and the finance ministry did just that, he adds. It was for the government to choose between the quick and the long method. The government chose the long method which, as per the CAG, resulted in undue gains to private parties. With different methods of valuations, differences and debate over the extent of losses - notional and real are understandable. There is little to expect when you hear defences of the likes of the zero-loss theory. The essence here is that malpractices in allocating coal blocks have always existed and there are ample cases where a nexus of politicians, bureaucrats, business groups and power brokers has helped them build
September 2012 97

POLICY

Special Report

RECENT CONTROVERSIAL CAG REPORTS

2G Spectrum Allocation: CAG stated that the process lacked transparency and A. Rajas decisions cost the exchequer Rs.1.76 lakh crore. Commonwealth Games: A CAG report found nancial mismanagement and misappropriation in CWG in 2010 and pinned the blame on Suresh Kalmadi, while also taking the PM and Delhi CM into the dock. Krishna Godavari Basin: CAG said that the government allowed companies like the Mukesh Ambani-led Reliance Industries Ltd. and Cairn India to violate terms of its contract with the government for exploration in the KrishnaGodavari basin. Air India: Former Civil Aviation Minister Praful Patel was in trouble after the CAG report blamed the ministry for several decisions that led to the downfall of the Maharaja. It termed the Rs.40,000 crore bulk order for 93 aircraft awed and based on market share growth estimates that were not validated. Adarsh Cooperative Housing Society: Took to task the Maharashtra government, the army, and the defence ministry for dereliction of duty and severe lack of probity. Ofcials and politicians instrumental in the decision making became members of the society, the CAG alleged. Antrix-Devas: A CAG report on the Antrix-Devas deal found one of Indias best known scientists Madhavan Nair guilty of conict of interest and said he failed to consult the stakeholder ministries. In 2005, Antrix, the commercial arm of ISRO, signed a contract to allow Devas Multimedia access to precious S-Band spectrum.

empires worth crores. Much of what has followed since the CAGs submission of the coal report in the Parliament has been the usual round of allegations and counter allegations between the UPA and the Opposition. But as letters written by BJP chief ministers expressing concerns over the bidding process and minutes of screening committee meetings hog the limelight, the other two reports on the Delhi international airport and UMPPs, have gone almost unnoticed in the Parliament. For starters, here is a quick look at what the other CAG reports have to say. The report on the Public Privater Partnership on Indira Gandhi International Airport states that the civil aviation ministry violated bid conditions and allowed the GMR-owned Delhi International Airport Limited (DIAL) to charge development fee on passengers at the Indira Gandhi International Airport. DIAL can potentially earn Rs.1,63,557 crore over a 60-year-period from the land leased out to it in 2006 at Rs.100 a year, with an equity investment of just Rs.2,450 crore. Praful Patel, who held the aviation portfolio in 2006, is also in the dock. The audit has found that benefits to GMR-led DIAL were to the tune of over Rs.3,415 crore. Likewise, the report on the UMPPs found that the Empowered Group of Minister allowed Anil Ambani led Reliance Power Ltd. (RPL) to divert excess
98 Business & Economy

The loss can arise only if coal is mined and sold. If it is not mined and remains buried within mother earth, where is the loss
P. CHIDAMBARAM, UNION FINANCE MINISTER, GOI

Suggestions that the issue should be debated only in the Parliament will put a lid on one of the greatest scandals in history
ARUN JAITLEY, LEADER OF OPPOSITION, RAJYA SABHA

coal from the three coal blocks allocated to the Sasan UMPP, which not only violated the bidding process but also resulted in undue benefit to RPL. As per the report, overall financial largesse to Reliance Power due to this act of commission amounts to Rs.29,000 crores. As the Parliament remains in gridlock with the BJP pressing for the cancellation of licenses, crucial reforms are bound to be further delayed. A recent

poll carried out by the industry body Associated Chambers of Commerce and Industry of India (ASSOCHAM) suggests that reforms measures like FDI in retail, Goods & Services Tax (GST), Direct Tax Code (DTC), Company Law Bill are going to be further pushed by a few years. More importantly, with several states set to go to polls in the coming months, the government has very little time to work on repairing the countrys fiscal position. This is sad because the economy needs a non-partisan approach because the GDP growth has touched a nine-year low, said ASSOCHAM President Rajkumar Dhoot. The CAG, meanwhile, is preparing a strong case for scrapping controversial allocations of coal mines during its presentation to the Parliaments Public Accounts Committee (PAC). The auditor is likely to cite total lack of transparency in the recommendations made by the screening committee for allocation of coal blocks. It is also likely to bring out how the screening committee failed to make any comparative evaluation of applicants in establishing that the allocations were influenced by extraneous considerations. With the SC having already taken a tough stance on allocation of natural resources, like the 2G spectrum, denying what the countrys most competent auditors have pointed out, could prove a disaster for the UPA in 2014.

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104 Business & Economy

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Deputy Manager Internal Audit

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ue: I am working with a multinational company as a financial analyst. I have spent three years at the company. This is also my first job after an MBA. I had dreamt of a long career in finance and also wanted to complete my CFA as soon as possible. In recent months however, I have been attracted to the media and entertainment industry. What should I do? I am confused. Also to add to my dilemma are suggestions from my peers. They all claim that being in the finance industry would assure me of a longer career and with greater monetary benefits than media. Please suggest. [Purvi Ghose, Kolkata] Ans: Purvi, first you have to decide what you want to pursue in the long run. Do you want to remain in the finance industry for ever, or switch over to something which is more glamourous like media and entertainment. The two are completely different. But your success in any of the two streams would depend on what you are really passionate about. Yes, paychecks in the finance industry are definitely bigger, but only if you compare it to those given to average performers in the media industry. You have to think over whether you want to move out of the finance industry, because once you are out of it, it may get difficult for you to bounce back, if ever in future you feel like doing so. We would suggest, since you have already given finance three of your best years, give it another year and then decide. Doing a CFA is great. We are not suggesting that you drop the idea of becoming a PR chief or a famous news anchor on TV, but whether that will give you more satisfaction than being known as the head of treasury in a renowned bank is for you to decide. Our suggestion. Decide after a year. We feel, then, you will definitely have your mind and heart supporting the same cause. For questions related to career and job issues, you can mail to feedback@businessandeconomy.org

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September 2012 105

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POLICY

Drug Price Control

Will price control make medicines accessible?

The governments move to make drugs available at reasonable prices should be supported if such an intervention can help in solving the problem of non-availability of medicines to large sections of our population.
ASHISH KUMAR

n October last year, the government announced the draft National Pharmaceutical Pricing Policy, which aims to put in place a regulatory framework for pricing of essential drugs. The idea behind controlling the prices of drugs is to ensure that they are made affordable and accessible to all. Drug costs are seen by the public to be the greatest barrier to treatment access and the high cost of medicines is often financially debilitating. According to the Ministry of Health and Family Welfare, cost of medicines constitutes over 60% of the total cost of healthcare. Though cheaper Indian generics have pushed drug prices to among the lowest in the world, medi-

cines, especially for chronic diseases, continue to remain out of reach for many. Over two-thirds of the Indian population has no access to health insurance, with nearly three-fourths of all health spending by the uninsured going towards buying medicines. Also, the shabby state of our public health infrastructure, marked by hospitals that often lack basic amenities, a shortage of primary health staff, and reluctance of doctors to serve in villages, has increased the reliance on expensive private hospitals, adding to the costs of essential drugs that are often prescribed by the doctors there. To maintain low prices for essential medicines and ensure their availability at reasonable prices, the policy pro-

poses bringing 60% of the Rs.600 billion domestic formulation industry under pricing control compared to 20% earlier. The focus of the NPPP is to strengthen the National List of Essential Medicines by bringing under its cover at least 348 essential drugs in the domestic pharma market under official price control. The NPPP, which is awaiting implementation upon clearance from the group of ministers currently examining it, would mark a big shift from current levels of price control wherein the prices of only 34 essential medicines, accounting for around 20%-30% of the market, are capped. To bring about a lowering of prices of essential drugs, the NPPP seeks to

Approximate prices of select medicines around the world (in INR)

Even in the developing countries, Indian offers cheapest medicines to its citizens
Drug Strength India Pakistan Indonesia US UK

Ciprooxacin tabs Noroxacin tabs Ooxacin tabs Cefpodoxime Proxetil tabs Diclofenac Sodium tabs Ranitidine tabs Omeprazole caps Lansoprazole caps
Source: IDMA and OPPI

500 mg 400 mg 200 mg 200 mg 50 mg 150 mg 30 mg 30 mg

29 20.7 40 114 3.5 6 22.5 39

423.9 168.8 249.3 357.3 84.7 74.1 578 684.9

393 130.6 204.3 264 59.8 178.4 290.8 226.2

2352.4 1843.6 1973.8 1576.6 674.8 863.6 2047.5 1909.6

1186.7 804.8 818.3 773.2 61 247.2 870.9 708.1

108 Business & Economy

Pharma Industry
On a high: Many leading pharma brands in the country sell at exorbitant mark-ups to their cost of production, making a mockery of the governments intent to make medicines affordable and accessible to all

movie away from the principle of cost-based pricing to a market-based pricing model. Under the current Drug Price Control Order (DPCO), pharma prices of essential drugs are based on their manufacturing and conversion costs, which lead to higher pricing of drugs. Thats ostensibly because leading brands say they have to pump in a lot of expense on marketing. But can that be an excuse for the gouging prices that many pharma brands charge with impunity? Many leading pharma brands often resort to the practice of rigging the maximum retail price (MRP) to an exorbitant high (even 1,000% of the cost of production), making a mockery of the governments aim to provide affordable medicine to the public. A recent study by the cost audit branch of the Ministry of Corporate Affairs found drugs like Calpol manufactured by Glaxosmithkline, Corex Cough Syrup by Pfizer, Revital by Ranbaxy Global, Omez by Dr Reddys Labs, Azithral by Alembic and several others being sold at a mark-up of up to 1,123% over their cost of production. To check such blatant distortions in the pricing of pharma products, the governments draft pharma policy proposes changing to a system of setting

a ceiling on the prices of formulations based on the weighted average price of the leading three brands. According to the draft policy, which has been issued by the Department of Pharmaceuticals within the Ministry of Chemicals and Fertilizers, the ceiling prices of formulations will be fixed below the current highest market prices by 0%-5% for over 50% of the medicines of the NLEM-2011, and this reduction will be more than 20% for over 30% of such medicines. So the price charged by leading producers when the policy comes into operation would provide the benchmark for fixing the ceiling. The ministry also proposes a twoyear price freeze on all drugs currently under price control, and for products that are not officially controlled to be

Pharma prices of essential drugs are based on their manufacturing and conversion costs, which lead to higher pricing of drugs.

permitted annual price rises of 15%, compared to 10% at present. Once a medicine is brought under DPCO, it cannot be sold at a price higher than that fixed by the government. NLEM has 348 medicines that cover 489 formulations, including 16 fixed-dose combinations. These drugs are considered to be adequate to meet the common contemporary health needs of the general population. The Department of Pharmaceuticals argues that marketbased pricing would result in more transparent and fair pricing, as well as increase competition in the marketplace. Price regulation will encompass all drugs listed in the NLEM, as well as formulations containing combinations of drugs listed in the NLEM; this will include combinations comprising listed drugs and unlisted drugs. But the governments latest plans to bring more drugs under price control have sparked strident reactions from many pharma manufacturers who say the market is already competitive and there is no need for price regulation. Analysts argue that focusing on price controls in the belief that it will lead to better access to healthcare is an erroneaous call to make on the part of the regulatory authorities. Price caps, they say, will have the opSeptember 2012 109

POLICY

Drug Price Control

No pharma company is in favour of price control

Shakti Chakraborty, Group President India Region Formulations, Lupin Ltd, on why pharma companies are not in favour of pricing control on drugs
B&E: The National List of Essential Medicines includes the reference molecules only and not their me too versions that can be made by making minor tweaks. Does it make the list meaningful? Shakti Chakraborty (SC ): There is nothing like tweaking a molecule. So if you list Ibuprofen as a molecule under the NLEM then the molecule is covered. It doesnt matter by which name it is sold in the market. Any new addition or subtraction to the formulation can be done by introducing a totally different molecule which may or may not be covered by the NLEM. By denition all the derivatives of a molecule are also covered under the list. For example, in Lupins case we have a molecule called doxophylline, which is quite different from theophylline (both are used for the treatment of respiratory diseases) Theophylline is listed under the NLEM but the department says that doxophylline is a derivative of theophylline and hence, is covered under the list. B&E: The methodology to arrive at the price of a drug is by taking the weighted average of the prices of three top selling drugs in a particular category. What could be its implications on drug prices? SC: As of now nothing has been nalized on the methodology. The health ministry is proposing to take
110 Business & Economy

the weighted average of the lowest three priced brands instead the highest three. If you ask me, no company would like to have this kind of control. For a top class company with good R&D effort, manufacturing facilities etc., you need to incur signicant costs. By putting a price ceiling, there will be no incentive for a company to do R&D and bring out quality products. The lack of clear policy is also hurting the strategic planning of the companies. I feel that the market is smart enough to decide the price of a drug. B&E: The NLEM only covers off patent drugs in India. When we talk about availability of drugs to the needy, should there be discrimination on the basis of patent status or the source of a drug? SC: Even for off patented drugs, the department has come up with different set of regulations. The recommendation is to design a price structure by which the price of a patented drug is decided on the basis of per capita income parity of the country. This is to ensure that the price of a patented drug in India is not high as compared to the outside world. This certainly is not the most desired way for the industry. Prices of drugs in India are already the lowest in the world and these kinds of mechanism are really going to put a burden on the cost structure of the companies.

posite effect by disincentivising the sale of innovative drugs or drug research in India. According to Kewal Handa, the former Managing Director of Pfizer India, price control does not work and a look at the global experiences bears out this assessment. In Canada, when price control was introduced research & development came down by 50% in a span of three years. When pharma prices were reduced in the Philippines by almost 50% it was the branded generic players that benefited from the exercise, he says. If you look at the competition, it is very intense and fierce. For every molecule we have not less than 50 players competing and if thats the scenario where the prices are the lowest in the world, is there a need to reduce prices?, he asks. As per the WHO Report 2011, drug prices in China are about seven times that of comparable molecules in India. Moreover, the rise in drug prices in India in the last 10 years has remained lower than that of other essential commodities like food, housing etc. According to data from IMS Health, a leading health-care consultancy, the annual rise in drug prices in the country was 1%-2% over the past 4 years as compared to the 9.4% annual rise in the WPI-Food index and 11.8% rise in the CPIFood index. Ranjit Kapadia, Senior VP, Centrum Broking, says, Drug prices in India are the cheapest in the world, thanks to the Governments policies of price control on essential drugs and various incentives given to domestic pharma companies to manufacture and market both Active Pharmaceutical Ingredients (APIs) and Pharmaceutical Formulations. But in spite of the goverments focus on providing access to medicines through price control, the proposed regulatory move may not have the desired impact given the fact that the country is woefully short on the availability of a robust health-care infrastructure

Pharma Industry

Impact due to NPPP

Bottom lines of the top domestic players will come in the line of re
Company Sales Impact % impact

Total Pharma market Cipla Ranbaxy Labs Glaxo SK pharma Sun Pharma Piramal Healthcare Zydus Cadila Mankind Lupin Alkem Labs Aristo Pharma
Source: AOICD

521.35 27.5 24.6 23.94 23.2 21.77 20.5 17.18 15.9 15.58 12.42

14.85 0.8 1.15 1.37 0.45 0.55 0.52 0.07 0.33 1.04 0.27

2.8 2.9 4.7 5.7 1.9 2.5 2.5 0.4 2.1 6.7 2.2

including, doctors, paramedics, diagnostics, health centres and hospitals. Unfortunately, while the demand for these services has outstripped supply, the key focus of the government still remains primarily on access to medicines. Health care industry professionals agree that pricing alone cannot solve the problem of access and that access has to be resolved separately. We need to focus on access and that needs to be done with higher spend by the government with partnerships with Indian and multi-national companies. Pricing cannot be looked at solving the access problem. The biggest mistake we are doing is mixing the two, says Handa. The government could also be mistaken in thinking that fixing prices of drugs on the basis of the average price of the top three brands in that category will automatically help bring down the prices. In a majority of cases, it has been observed that the brand leader in a specific drug category is also the price leader. Prescription of a drug is driven by promotional activities of the company and this cost is build into the price of the brand, making it costlier. About 60,000 brands are marketed in India and the bestsellers command a higher price over peer brands because of the market power of the dominant firms. Thats one reason why many non-government organ-

isations are against the governments move to price essential medicines and their combinations based on the average price of three best-selling brands. They have been expostulating against this pricing model and want it to be made more inclusive because the best-selling drugs are usually the costlier brands as they are most aggressively marketed. On the other hand, drug makers have also warned that for the government to go back to the earlier costbased policy will be a recipe for stifling the industrys growth and so the pricing principle should remain market-based. In a recent letter written to the Union Commerce Minister Anand Sharma, the Indian Pharmaceutical Alliance which counts Ranbaxy, Cadila and Sun Pharma among its members, and accounts for about a third of the Rs.450 billion worth of drugs exported from the country every year

Pricing cannot be looked at solving the problem of access to medicines. The biggest mistake we are doing is mixing the two.

has complained that export earnings of the manufacturers will be hit if the government persists with the cost-based pricing mechanism. The large domestic pharma companies contribute 81% of total pharma exports and earn over 50% of their revenues from exports. Price reduction will have a corresponding impact on their export price realization. The pharma group has urged that the government should implement the Department of Pharmaceuticals proposal to fix prices of essential drugs at the average price of the three topselling brands in the segment but also ensure that there is no abnormal reduction in the prices of medicines. While the debate on which pricing model should be implemented looks far from being settled, the governments focus on price control should not blind it to meeeting other equally important priorities in the health-care sector. But ironing out the existing wrinkles in the policy is important given that the government is also looking to re-orient drug procurement and provide free generic medicines under a $5.4 billion plan by October 2012. By 2017, the government is targeting to increase public-health spending to 2.5% of gross domestic product, up from an average of 0.9% during the five years to March 2012. The aim is to improve health infrastructure and train more doctors, which it has failed to do so far. Apart from the prices of drugs, the policy should also address other pending issues like developing a functional delivery mechanism for providing health services, regulation of new drug approvals, availability of unbiased drug information, removal of unsafe and irrational drugs, and utilisation of the flexibilities under TRIPS/ WTO to protect public health. While the commitment to regulate the prices of essential medicines is laudable in the light of its implications for public health, price regulation shoulsd be done in the spirit of collaboration between the trade, industry and the medical profession so that any future pricing process works for most market participants.
September 2012 111

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BACK OF THE BOOK

International Column

MA JIAN: EXILED AUTHOR

Chinas trial of the century

Bo Xilai and Gu Kailai affair may only be a prologue, because the only clear truth to emerge from it is that the Party leadership is fractured
lead the local public-security bureau. Small he trial, conviction, and suspended wonder, then, that the artist Ai Weiwei could be death sentence of Gu Kailai, the wife of detained in secret, Liu Xiaobo could be senpurged Chinese leader Bo Xilai, has tenced to 11 years in prison for starting a peticalled into question not only Chinas legal systion, and Li Wangya could commit suicide tem, but the very unity of the Communist Parwhile in custody. But even this monolithic systy leadership. tem of control is porous. Had Wang Lijun, the Let us begin with the many questions raised former Chongqing police commissioner and at the trial. For starters, Gu claimed that she close ally of Bo Xilai, not feared for his life and killed the British businessman Neil Heywood fled to the United States consulate in Chengdu, only to protect her son. But, given Gus power Gu would still be helping Bo to rule the city. as Bos wife, she could have had someone like Heywood jailed or expelled from China at the Wang is no saint. Before he became Bos poMa Jian snap of her fingers. No need for cyanide. Still, lice commissioner, he was the director of the she not only admitted her guilt, but seemed to embrace it as a Field Psychology Research Center, where the condemned were sort of historical necessity. In order to uphold the sanctity of executed and their live organs removed. Wangs paper, A Study the law, she told the court, I am willing to accept and calmly of Organ and Receptor Transplantation after Execution by Injecface whatever judgment I am given, and I also expect a fair tion, earned him the Guanghua Innovation Contribution Award. and just judgment. Not since Stalins show trials of the 1930s In the paper, he credits our achievements to the thousands of has a defendant so effusively praised a judge who seemed transplantations. Given his familiarity with the brutality of the bound to condemn her at a trial where no witness or evidence Chinese system, Wang no doubt understood that, after falling against her was presented. The bitter irony of Gus high-speed out with Gu and Bo, the US consulate might be the only place he trial is that she was a true believer in Chinas legal system. could find safety. After all, when it came to the public-security Indeed, Gu was an avatar of the Maoist form of legality that organs, the courts, and the prison system, Gu always had the fiChina has maintained long after Maos death. Having failed the nal say. She acted as her husbands adviser for cracking down entrance examination to Peking University, Gu was nonetheon crime and corruption, and was responsible for sending two less granted an exception and admitted to read law soon after people including the PLAC secretary in Wushan County to the Communist Party restored the law departments. Prior to prison. that, she sold pork in a Beijing market, where she earned the In fact, a few days after killing Heywood, Gu donned a nicknamed, Yi dao zhun, meaning that she could hack off a major generals uniform (which could have belonged to her father, General Gu Jingsheng), convened police officers in Chongqing, and falsely claimed that she had received a secret order from the Ministry of Public Security to protect Wangs personal safety. The uniform, perhaps, was intended to intimidate the Chongqing police. But, in a strange and unexplained twist, Wang was whisked from the consulate to Beijing, where he presented the Party desired slice of meat with one blow. leadership with the evidence that brought about Bos downfall Gu was one of the first lawyers to receive her license. But, and Gus arrest. But revealing the skeletons in Bos closet alwith the Tiananmen Square incident of 1989, the authorities so meant revealing the secret world of the red aristocracy. clamped down on the professions autonomy. The Party reasSo Wang can expect no leniency at his trial. serted control over every aspect of justice through a core deIn order to protect the red aristocracy, the PLAC made no partment: the Communist Party Central Committees Political mention during Gus trial of her myriad economic crimes. So, in and Legal Affairs Committee (PLAC). the PLACs rewrite of history, Heywood was murdered so that This totalitarian organ has no known address, yet it manag- Gu could protect her son, Bo Guagua. And Wang did not defend Chinas honor by revealing Bos and Gus criminality, but aired es Chinas police, prosecutors, courts, and justice ministry, his stories to hostile foreign forces. Only through his punishand appoints their leadership. All lawyers fall under its remit. ment can popular indignation be contained. Most important, all local PLAC secretaries simultaneously

This totalitarian organ has no known address, yet it manages Chinas police, prosecutors, courts

114 Business & Economy

Project Syndicate 2012

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IIPM flagship programme students also do CERTIFICATION PROGRAMMES from WORLDS TOP RANKED B-SCHOOLS
IIPM GOTA* programmes are held in the following institutions abroad, leading to Certification in Global Management from them
International Residency Participating B-School: Affiliate B-School: Participating School for GOTA:

Participating B-Schools in India

Strategic Marketing Programme Wealth Management Programme:

Maximum Industry Interface amongst all B-Schools in India Maximum Global Exposure amongst all B-Schools in India Maximum Placements amongst all B-Schools in India Maximum Intellectual Capital amongst all B-Schools in India Maximum International Placements amongst all B-Schools in India Maximum Global Student Exchange amongst all B-Schools in India

*The entire cost of travel, boarding and lodging of IIPMs GOTA (Global Opportunities and Threat Analysis) programme is included in the programme fees. It is a two week programme out of which one week is spent in one of the above campuses depending upon the programme and batch timings.

IIPM. Real Education. Real Placements.

Indias Global B-School

Placement News

IIPM
Spring Summer

The destination for the smartest students in the country!

For the class of 2012:

3200+ PLACED! 75+ INTERNATIONALLY!

Highest number of placements
by any B-School in India for the year 2008, 2009, 2010 & 2011!

Admissions Open
for 2012-2013/14/15 FOR YOUR www.iipm.edu

Winner of Dewang Mehta Best B-School Award 08, 09 & 10

For highest international placements in India Best B-School in India in the non IIM category

BBA MBA EMBA

IIPM programmes in Planning and Entrepreneurship at the Graduate and Post Graduate level are superior in contents and rigour to MBA/BBA programmes taught anywhere else. Students doing IIPMs unique programmes additionally become eligible for a Post Graduate/Graduate Degree in Management from IMI, Europe. For further details log on to www.iipm.edu

Ranking News
Powered by another NO.1 RANK IN GLOBAL EXPOSURE
IIPM now enters the league of top 5 B-Schools in India!
ZEE BUSINESS BEST B-SCHOOLS OF INDIA 2011 in Global Exposure in India. >> (Ahead of all the IIMs)<< In Industry Interface and Overall >> (Ahead of 3 IIMs)<< in Intellectual Capital in India >> (Ahead of all the IIMs)<< In Placements amongst all B-Schools >> (Ahead of 3 IIMs)<<

Ranked No.1 Ranked No.5 Ranked No.1 Ranked No.5 Ranked No.1 Ranked No.3 Ranked No.8
FREE LAPTOPS are provided to all IIPM students.
For FREE Prospectus /details come to IIPM office or send request by post or email at info@iipm.edu or SMS your name to +91-9999999911 and we will call you back. You can also contact us on 011-41799992-95 or Toll Free no. 1800-10-30-909. DELHI : B-11, Tara Crescent, Qutab Institutional Area, New Delhi - 110016 GURGAON: IIPM, Building No.25B, Sector-32, Gurgaon-01

MAIL TODAY RANKINGS OF DELHI/NCR-2011 B-School in Delhi NCR & Global Exposure in Placements

HINDUSTAN TIMES BEST B-SCHOOLS OF INDIA-2011 Most Aspired for B-School in India >> (Amongst all B-Schools in India)<<

FREE study tour to Europe/USA

IIPM flagship programme students also do CERTIFICATION PROGRAMMES from WORLDS TOP RANKED B-SCHOOLS
IIPM GOTA* programmes are held in the following institutions abroad, leading to Certification in Global Management from them
International Residency Participating B-School: Affiliate B-School: Participating School for GOTA:

Participating B-Schools in India

Strategic Marketing Programme Wealth Management Programme:

Maximum Industry Interface amongst all B-Schools in India Maximum Global Exposure amongst all B-Schools in India Maximum Placements amongst all B-Schools in India Maximum Intellectual Capital amongst all B-Schools in India Maximum International Placements amongst all B-Schools in India Maximum Global Student Exchange amongst all B-Schools in India

*The entire cost of travel, boarding and lodging of IIPMs GOTA (Global Opportunities and Threat Analysis) programme is included in the programme fees. It is a two week programme out of which one week is spent in one of the above campuses depending upon the programme and batch timings.

IIPM. Real Education. Real Placements.