MACROSCAN : January 2015

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INTERNATIONAL
ECONOMICS

INTERNATIONAL
BUSINESS

INDIAN
ECONOMY

Russian Ruble collapse

Snapchat valued at $10bn

in the latest round of
fundraising
Xiaomi fundraising
values group at $45bn

FDI Insurance cap rises

from 26% to 49%
Retail inflation lowest,
WPI 0% for November

INDIAN
BUSINESS

FACT-A-BASE

CONCEPT
CRACKER

Micromax plans a $500

million IPO
SpiceJet financial crisis;
Jet fuel rates cut by 12.5%

Personalities
Key figures

Coase Theorem
Hedonic Pricing

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1

INTERNATIONAL ECONOMICS NEWS

Ruble Collapse Shakes Russias Economy
The tale of a devastated currency and its after-effects

On 15th December 2014, Ruble the Russian currency fell by as much as 19% in a
worst single day drop in past 16 years

Russian economy was in trouble for quite a few months , but the giant fall of the
currency could be attributed to two reasons primarily

First is the plummeting prices of global crude oil prices - Oil and Gas industry
contributes approximately 50% of Russias revenues

Secondly, the sanctions imposed by the U.S. and Europe did not help the cause of
the troubled currency

This along with a panic rush on the part of investors to get their money out of
Russian assets led to the giant run on the entire country
NEXT

Mohit Surana

INTERNATIONAL ECONOMICS NEWS

Ruble Collapse Shakes Russias Economy
The tale of a devastated currency and its after-effects

In response to the collapsing Ruble, the Russian central bank, raised the interest
rates from 10.5% to 17% in an attempt to make Russians resist the frenzied
spending by citizens and investors

The banks could raise the interest rates again in an attempt to contain the currency
slide, but this would only worsen the countrys present economic slowdown

The other alternative with Russia is To continue supporting its currency by

spending its foreign exchange reserves. However, it has already spent around onefifth of its exchange reserves in 2014 in a bid to support its currency

Russia, which fulfills most of its food requirements through imports faces an
impinging threat of costlier food imports owing to a weak domestic currency,
which may lead to a rise in poverty rates of the nation
NEXT

Mohit Surana

INTERNATIONAL BUSINESS NEWS

Snapchat valued at $10 bn in the latest round of fund-raising
With the valuation of $10bn, Snapchat joins elite group of mobile application based start-ups like Uber

Snapchat, founded in 2011, is a Los-Angeles based mobile messaging application

that allows users to send annotated photos or videos to friends with a pre-defined
limit until which users can view the message, after which is deleted from the
recipients device as well as from Snapchats servers

As of May 2014, around 700 million snaps are exchanged daily through the
smartphone app, globally

Earlier this month, Snapchat revealed that it had raised $486 million in the latest
round of funding which took its valuation to $10 bn

According to a WSJ report, Snapchat had turned down a $3 bn acquisition offer

from Facebook in September 2013

NEXT
Mohit Surana

INTERNATIONAL BUSINESS NEWS

Xiaomi fundraising values the group at $45 bn
The valuation makes Xiaomi worlds most highly valued technology startup

Beijing based Xiaomi, worlds third largest mobile distributor was founded in 2010.
It designs, develops, and sells smartphones, mobile apps, and consumer
electronics

Xiaomi is Chinas top-selling smartphone manufacturer and raised $1.1 bn venture

capital funding late last year, valuing the group at about $45 bn surpassing Uber
the online cab-booking smartphone application

In September 2014, Xiaomi had a 15% market share in China compared to 13%
market share of Lenovo

Xiaomi was valued at $10 bn when it last raised funding in August 2013

Xiaomi sold 60 million smartphones in 2014 and is looking forward to sales of

another 100 million this year
NEXT

Mohit Surana

INDIAN ECONOMY
Union Cabinet approves ordinance on Insurance Bill
FDI cap in Insurance sector hiked to 49% from 26%

The Union Cabinet approved the promulgation of an ordinance on the Insurance Laws
(Amendment) Bill of 2008 on 24th December 2014, a day after the Winter Session of
Parliament concluded.

The ordinance hikes FDI cap in Indian Insurance Companies from 26% to 49% and
empowers the IRDA to regulate key aspects of Insurance Companys operations to
enable more effective regulation of the insurance industry.

The investment limit is composite, i.e., it includes both FDI and FII.

As insurance companies generally have long gestation periods that can last 7-8 years,
they need new equity capital to help fund growing businesses and encourage new
players to enter the industry. The insurance ordinance shall help enable the same.

Although the cap for foreign investment in insurance companies has been increased, the
ordinance ensures that the Indian party in the JV controls the decision making in the
company. Control includes the right to appoint the majority of directors or to control the
management or policy decisions of the company.
NEXT

Anubha Aggarwal

INDIAN ECONOMY
Union Cabinet approves ordinance on Insurance Bill
FDI cap in Insurance sector hiked to 49% from 26%

Currently only 6% of Indians have insurance cover. The insurance ordinance by helping
insurance industry would help cover more people under its umbrella.

The ordinance allows for the maintenance of records of claims and policies in an
electronic format.

Further, the definition of the health insurance business has been updated to include
sickness benefits on account of both domestic as well as international travel, as against
only domestic travel.

In addition, the minimum paid-up equity capital in health insurance companies has been
increased to Rs.1 billion to make sure only serious players enter the market.

It also makes claim processing rules simpler for policy holders. It makes life insurance
policy unchallengeable on whatsoever ground after three years of issue of the policy.
NEXT

Anubha Aggarwal

INDIAN ECONOMY
Union Cabinet approves ordinance on Insurance Bill
FDI cap in Insurance sector hiked to 49% from 26%

Further, the policy holder can also transfer the policy, with all the rights it entails, to a
third-party. However, an insurer is permitted to reject such a transfer on the basis of
certain guidelines.

A life insurance policyholder can also nominate a person or persons to whom the claims
will be paid, anytime before the policy matures for payment.

An overarching theme of the insurance reforms is to give the IRDA greater flexibility and
powers to regulate the insurance sector.

Previously, for an insurance company that is less than 10 years old, the first-year
commission was capped at 40 per cent of the premium whereas if the insurer is more
than 10 years old, the first-year commission was capped at 35 per cent. The IRDA will
now have the flexibility to introduce fresh incentives.

NEXT
Anubha Aggarwal

INDIAN ECONOMY
Retail inflation lowest, WPI reaches 0% for November
Decline in vegetable and global crude oil prices touted to be the reason

Consumer price index-based inflation eased to a record low of 4.38 percent during
November from 11.16 per cent during the corresponding month last year . WPI also
turned zero which was 1.77 per cent last year.
Except manufactured items, prices of which rose by 2.04%, inflation of primary
products and the fuel group contracted by 0.98 % and 4.91 %
The cause of the same has been cited due to fall in vegetable prices by 28.57% and also
the fall in petroleum product prices as a consequence of lower global crude prices.
The fall of prices is not a welcome news since it points to a deeper problem of decline
in consumer spending. Manufactured product inflation(constituting around 65 per cent
of WPI) was minus 0.3 percent in November. This was due to the fact that people were
slow on purchasing goods. This may over the course lead to no incentives for
businesses to expand and hence a slow economic growth.
However, many analysts feel an eroding base effect, especially for food items with a
probable lower kharif or monsoon crop output, may see wholesale price inflation
picking up again. The rise in global food prices would also help pick the inflation.
NEXT

Anubha Aggarwal

INDIAN BUSINESS
Micromax plans to raise upto 500 million IPO
Will Micromax be successful the 2nd time, with an aim to become the no.1 company in the smartphone segment

Micromax informatics, India's 2nd largest smartphone player after Samsung is planning to
have an IPO.

Founded in 2000, Micromax started making phones in 2008 and now commands a 2.2% share
of the global smartphone market in September as per Gartner.

Micromax is fast catching up with Samsung and now expects a revenue of about $2 billion in
FY15, nearly twice that of 2014.

Economic Times reports that it has started looking at investment bankers to manage an initial
public offer to raise as much as $500 million (Rs 3,170 crore) .

It has already shortlisted Morgan Stanley and Goldman Sachs to manage the offering and is
reported to be expecting valuation of 14 times its operating profit.

Micromax had in 2010 planned to raise $150M In IPO backed by private equity firms TA
Associates and Sequoia Capital but later backed out due to poor market conditions .
NEXT

Yashvardhan Singh

10

INDIAN BUSINESS
SpiceJet Financial Crisis
SpiceJet overcomes its financial crisis, Reasons and lessons learned

The problems of the Indian Aviation Industry continued in 2014 with Indias 2nd
largest low cost carrier SpiceJet having to ground its fleet for more than 10 hours.
SpiceJet has been under financial stress, having incurred record loss of Rs 1003.24
crore in the fiscal year ended March 2014
Such was the gravity of the situation that SpiceJet had to manage its working capital
through advance ticket sales.
Fearing another Kingfisher in the making , the civil aviation ministry asked SpiceJet to
stop advance sales as SpiceJet had cancelled more than 1800 flights in December
alone.
Unable to raise capital through advance sales resulted in drying up the airlines funds
and oil companies refused to supply fuel to SpiceJet unless it paid its dues. This
resulted in grounding of its fleets for more than 10 hours.
Later Aviation Ministry allowed SpiceJet to book orders till March and banks have
provided it short term loans resuming some of the flights starting new year.

NEXT
Yashvardhan SIngh

11

INDIAN BUSINESS
Vistara starts operations; Jet Fuel prices cut by 12.5%

The reasons for these problems is manifold. In 2011 SpiceJet shifted its policy
of a standard fleet of aircrafts to Bombardier Q400 turboprop to connect to
Tier 2 and 3 cities.

India though a growing market for Aviation industry is a high cost operating
centre in terms of jet fuel, airport charges and other flight charges.

Non standardized fleet, more number of destinations and high cost of Aviation
Turbine Fuel (ATF) in India has added to Spicejets woes.

Incidentally starting January 9, Vistara, joint venture between Tata and

Singapore Airlines starts its operations in India.

In response to the reducing oil prices across the world, oil marketing
companies reduced jet fuel prices by 12.5%. This has resulted in lowest ATF
rate in the last 4 years.

With fuel costs accounting for about 40 per cent of an airlines operating
expenses, this comes as a much needed relief especially for SpiceJet
NEXT

Yashvardhan
SIngh

12

Concept Cracker
Coase Theorem
Efficiency in trading an Externality

Ronald Coase developed this theorem while considering the subtle yet important
issue of assignment of property rights which contributed to his winning the Nobel
Memorial prize in Economics.

The Coase Theorem states that, when conflicting property rights occur, bargaining
between the parties involved will lead to an efficient outcome regardless of which
party is ultimately awarded the property rights.

However , the aforementioned statement assumes the following :

Complete, competitive markets
No transaction costs i.e. bargaining is costless
Perfect information symmetry
Costless court system for enforcing agreements
No income or wealth effects

NEXT
Saumya Data

13

Concept Cracker
Coase Theorem (contd)

--- Example
A noise emitting turbine company will end up compensating the residents affected
by the noise because the value of operating the turbine is greater to the company
than the cost of compensation, if the residents have the required rights.

Similarly, if the rights are vested with the company and the value gained by
diffusing the noise is greater to the residents than the cost of compensating the
turbine company for shutting up, the residents will pool in money and pay the
company.

Therefore, regardless of initial assignment of property rights, an efficient outcome

has been achieved.

Consequently, Coase Theorem asserts that if property rights are well defined and
transactions costs are low, private parties can internalize an externality.
--- Application
The Coase Theorem has been used by jurists and legal scholars in the analysis and
resolution of disputes involving both contract law and tort law.

NEXT
Saumya Data

14

Concept Cracker
Hedonic Pricing
A pricing method for valuation of Environmental goods

The hedonic pricing method is used to estimate economic values for

ecosystem or environmental services that directly affect market prices.
It is based on the principle that, the price of a marketed good is affected
by certain external environmental or perceptual factors that can raise or
lower the "base" price of that good.
It can be used to estimate economic benefits or costs associated with:
environmental quality, including air pollution, water pollution, or noise
environmental amenities, such as aesthetic views or proximity to recreational
sites

The basic premise of the hedonic pricing method is that the price of a
marketed good is related to its characteristics, or the services it provides.
NEXT
Saumya Data

15

Concept Cracker
Hedonic Pricing(contd)

Therefore we can value the individual characteristics of a good by looking

at how the price people are willing to pay for it changes when the
characteristics change.
------ Example

The hedonic pricing method is most often used to value environmental

amenities that affect the price of residential properties.
On observing the prices of houses that are bought and sold , it is noted
that houses with fewer rooms fetch lower prices, as do with lower air
quality.
Therefore, by observing the prices of many houses with different
characteristics , it is possible to back out the implicit value that is being
placed on air quality, for instance.

NEXT
Saumya Data

16

FACT-A-BASE
INDIA AT A GLANCE
MEASURE
GDP
CRR
SLR
IIP
CPI (Industrial
Workers)
Government Bond
Yield-10 Year

VALUE
1.876

Trillion USD
4%
22%

162.4
253

Pratik Bandishte

Appointed the first vice-chairman of the newly formed NITI

(National Institute for Transforming India) Aayog
Professor of Economics and the Jagdish Bhagwati Professor
of Indian Political Economy in the School of International
and Public Affairs at Columbia University
Former Chief Economist of Asian Development Bank and
Professor of economics & co-director, Centre for
International Economics, University of Maryland
Worked for the World Bank, International Monetary Fund,
World Trade Organization, and the United Nations
Conference on Trade and Development in various capacities

7.86%

Nachiket Mor

WORLD AT A GLANCE
MEASURE
LIBOR (Yearly)
US One Year Constant
Maturity Treasury
(CMT)
US Treasury Yield- 10
Year- Coupon- 2.75%

Arvind Panagariya

VALUE
0.62730
0.23

2.03%

An Indian banker and a member of the Central Board of

the Reserve Bank of India
Board Chair of CARE India and a member of RBI Eastern
Area Local Board and Central Board; and the Boards of IKP
Centre for Technologies in Public Health and CRISIL
Headed the Committee on Comprehensive Financial
Services for Small Businesses and Low Income Households
formed by Raghuram Rajan to study various aspects
of financial inclusion in India
Served as a Board Member of Wipro for five years and
Board Chair of the Fixed Income Money Market and
Derivatives Association of India for two years

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