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Career Launcher

Analysis of Current National &

Business/Economic Events, 2008

Personality Development Program, 2008

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Contents
1. Introduction 03

2. The Fundamentals of Indian Economy 04

3. Important Economic Issues of the Day 10

4. Global Economic Meltdown 21

5. General Economic Terms 28

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Introduction

Dear Students,

You’ve just completed the dreaded and at the same time revered written examinations for various
management institutes you’ve selected to be your training ground en route your journey to
becoming a successful manager in the corporate world.

Till now you had no say whatsoever in the selection process as the questions were simply there
for you to solve in whatever little time stipulated for it. But that’s history and you would do well to
move on with it. At this stage, things almost take a u- turn! You get to say all you wanted to and
also end up being rewarded with an MBA institute of your choice. You are now at the Personality
Assessment stage where you will face questions on your understanding of the current business
scenario and general events of importance.

You need to make efforts at understanding the core of any issue being discussed. Culling and
parroting facts and figures without understanding the heart of the matter will undo all your hard
work.

In order to maximize use of the handbook, you need to make it a starting point of all your opinion
formations, rather than restricting yourself to just reading it. Never try to mug up this book, as it
contains supporting ideas/opinions and encourages you to speak out and speak sense!

This handbook is largely simple in language; explanatory in content; low in mere facts and
figures; a sort of guide on how to form your own opinions on important business affairs and
issues.

Finally, do note that in GD/PI, the examiners are more interested in your speech and ideas and
your approach on current events, so prepare accordingly.

Best wishes from the Career Launcher team!

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The fundamentals of Indian economy

Through this handbook, Career Launcher seeks to explain in simple terms, one of the most
complex networks within the Indian social systems – the Indian economic structure. We shall try
to discuss and understand oft heard terms like 'fundamentals of Indian economy', India's GDP,
the ‘growth rate’; and seemingly complex terms like CRR; SLR; et al.

Let us start off with the sheer ‘size’ of the matter in front of us. Well, Indian economy is worth
precisely $ 1.2 trillion dollars. That is, India indigenously produces goods and services, excluding
imported stuff and things foreign, worth 1.2 trillion dollars annually. She is the 12th largest
economy in the world with the US at the top, worth $ 13 trillion. The world economic output is at $
65 trillion dollars annually, at present rates.

Now when we hear the phrase; ‘India grew at a very decent rate of 9% in 2007’ or ‘our economy
shall still attain 8% rate in 2008 even after the meltdown’, what do we actually mean? Well, what
we mean is that India will add $ 80 billion to our kitty this year (8% of $ 1 trillion {1 trillion = 1000
bn}.

Let us go on to the most popular phrase, generally touted by our Prime Minister and more
frequently by our finance administrators while assuring us on the soundness of our future growth
and inviting international investments:

'India's economic fundamentals are strong'

Let us understand this phrase and what it means: There are several significant parameters or
factors, which are generally taken into account collectively while ascertaining or assessing the
strength of any economy. Let us examine and understand their impact:

1. The political structure: India's political structure is 'liberal' democratic. {Here liberalism
pertains to individual enterprise and freedom against the Marxist premium on state action
and patronage} All major political parties are committed to honoring the written
constitution in letter and in spirit. All political ‘shift-of- power’ is peaceful. There are no
significant and perpetual political or organized threats to our political structure. Dissent,
protestations and disagreements are constitutional and legal. In sum, our political
structure is deemed stable and conducive to long-term investments.

2. The economic model: Basic principles of India's economic model are derived from our
political structure. Though constitutionally socialistic, the private sector is increasingly
being assured of full political support and since the 90s, India has adopted an aggressive
policy of openness and globalization. Our country is on a fast track to globalizing and
privatizing the economy. Barring very few commodities of strategic and rural importance
and with certain aspects of rural market closed to global commerce, the entire country is
open to world trade.

The most important point is: A quick look at our economic bye laws, provisions, bills and
announcements reveals that the Indian state is committed to liberalization and enabling 'fair' and
equal opportunity to citizens of the world. Policies and measures since 1990s (and accelerated in
2004) have testified to government intentions.
There are some immediate parameters, which are crucial to the soundness of our economy:
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3. Nature of our economy: Is our economy import led or do exports form a major part of
our economy? What does India’s balance of payment sheet look like? While India largely
imports oils, it is increasingly becoming ambitious in its export targets. Though our export
target of $ 160 billion was not met, it talks of the greatness of our economic strength.
India exports more than she imports from the US! This scenario attracts foreign
investments seeking to benefit from export-oriented units in India.

4. Rupee strength and exchange rate mechanism: the strength of any currency is
determined through three major routes: 1.The market decides as in the US and European
countries 2. Government designates its value, as in China and other communist regimes.
3. While the actual rate is left to market forces, the government designates a band or
width movement. It shall intervene if the rate approaches an end of the band. India
largely follows the third route. The Government is actively seen to influence the rate only
if the fluctuation is high, in order to restore the stability, BUT will not necessarily
determine the rate itself. The rate is affected by a series of indices like:

1. Forex1: The absolute amount of the stability factor; growth pattern and source of
income to our FOREX or the foreign exchange reserves. Foreign reserves include
Gold, currencies and depository receipts; and global loans. While India’s foreign
exchange reserves reached a comfortable $ 300 bn this early year, it slipped to
around $ 250 on account of the meltdown.
India — the fourth-largest holder of foreign exchange reserves in Asia after
China, Japan and Taiwan — has seen reserves sliding since the start of this fiscal
year. Since March-end, the forex stockpile has shrunk by $50.2 billion. An important
point before we move on: We must appreciate the nature of the forex reserve. Is it
only short term FIIs2 (Foreign Institutional Investors) or stock money; FDIs (Foreign
Direct Investment) or long-term money invested in the durables/ nation building
industries or manufacturing processes? What is the proportion of our debts and
external borrowings? These may be noted to assess our fundamentals. It is also
important to know our debt servicing track record.
2. Inter alia Commodity and manufactured-product led Exports and imports: A high
export oriented economy is growth led, and shall yield a stable currency regime.
3. The position of our manufacturing and infrastructure development in our
economy. Some of our infrastructure projects (Bharat Nirman, Sarv Sikhsha
Abhiyaan, Road corridors like Delhi Mumbai Industrial Corridor) are among the most
expensive and largest projects in the world. India has assigned prime importance to
infrastructure in our five-year plans and annual budgets.
4. Nature and direction of our five-year plans and annual budgets; per capita income or
the total income of our nation divided by the total population; rate of national
investments and national savings.
5. The literacy rate and the quantum of technically skilled labor present in our
country. Incidentally, almost all institutions of technical excellence have an Indian
work force at the highest level. India has the highest contingent of technical
personnel in the world.
6. Profile of operating multi nationals in India: A profile, which hardly excludes any major
brands of the world.

Track record of profitability of some leading foreign companies in India:

 Members of American Chambers of Commerce in 1992: Zero 2006: 300.
 Most of the US based companies are making huge profits.

1
Foreign Exchange Reserves
2
All important terms like FII & FDI have been explained as you read on…
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 India is the most profitable market for Coke.

 For, Reebok India is the fastest growing market.
 For Motorola, India is the third largest market.
 GE is taking home three times its investments.
 McDonalds is set to earn a 100% profit every three years. Adding on 50 more outlets this
year.
 Nine of the top 20 IT companies are American, amounting to 40% of the profits.
 For Citi Bank and Bank of America, India is the largest market outside the US.
 IBM’s presence with 40,000 employees is the largest outside the US.

Please note that the above data pertains to the situation just before the meltdown. This gives an
indication of the potential of our economy to perform under a normal economic regime.

The upshot of the argument so far is that we are making a case for a very strong economic base
of the country. This enhances ‘investor confidence’ in the Indian market which brings more
Foreign Direct Investment; Foreign Institutional Investment; venture capital; equity; and making
IPOs (initial public offerings) a success.

Drivers of the Indian economy:

The recent growth of our country is mainly policy led. Structural adjustments in the economy of
our country have made trading easy. There is a network of credit agencies giving capital for start
ups, foreign investors are being welcomed, exports are simplified and made less expensive,
regional development boosted through Special Economic Zones being created in low income
regions by giving incentives to big companies like the Reliance, Tata etc. through less taxes, tax
holidays, cheaper infrastructure, cheaper lands, power etc.

Foreign Direct Investment:

Buoyed by a largely supportive public, policies and lawmakers, vast market, foreign investors are
coming to India in hordes. As per the recent rankings India is second only to China in terms of
foreign direct investment demoting the US to a third position. FDIs increase our Forex, thereby
helping the rupee; they also bring dollars, stay for long, build industries, start manufacturing,
increasing both employer and employment potential and help build the nation.

More than $ 20 bn of FDI have already been invested in the current year. Compare this with less
than $ 4 bn that came to India in 2005!

Venture Capital and Private Equity:

Venture capital is the money made available to a 'risky' project. The financier is convinced of the
idea, its blueprint, execution and viability. The financier is not involved more than merely investing
heavily. Any smart management personnel, entrepreneur, individual or a small company can get
funds through a venture capitalist and start his or her project. Generally, venture capital is given
to an entrepreneur, who is brilliant in his/her field of expertise, though s/he may be new to
business. The IT boom has been powered by Venture Capital.

Private Equity: Private equity is the foreign money, which is invested on our IPO’s, joint
ventures, and industry start-ups and green field projects. These money are all long-term
investments, growth linked and increase our capital base and employment and eventually the per
capita income

Private equity is a type of foreign direct investment.

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Among all types of Foreign money, the FDIs are most sought after, as the capital is invested in
nation building processes as manufacturing, export promoting ventures, infrastructure and in long
term equities.

IPOs or Initial Public Offerings:

Let’s read a news article published in January 2008: This piece will give us an idea of the
significance of IPOs before the meltdown stunted this market…actually the entire global market…

…India's Initial Public Offerings (IPOs) market has emerged as the eighth largest in the world.
The year 2007 saw 105 public offerings raising Rs 39,387.72 crore (Rs 393.877 billion).
According to some estimates, the total value of public issues in 2008 could be as high as Rs
75,000 Crores (Rs 750 billion)…. (Rediff)

When a SEBI registered company wants to raise funds or capital for its expansion programs, it
floats an IPO for the first time related to that project. The IPO document will in detail inform the
investor of the project, its growth trajectory, and its profit potential. The risk factors are also
outlined. Based on his personal assessment, the investor may invest as a shareholder, by buying
shares at the face value as announced by the Company. Each investor who buys stocks through
the IPO gets dividends or profits based on the company’s performance, as declared by the
company. If the company faces losses, the equity holder also bears the losses. In uncertain
market situation, IPOs incur losses and so does each investor.

IPOs are generally welcomed as they attract public stakes and long term FDIs, equity. India’s
IPO market fetched Rs. 25,000 Cr in 2006-07. It fetched over 40,000 in 2007.
However, it will not continue to grow this year, for reasons clear to all.

Some of India’s biggest IPOs in the recent past include (in Rs):

1. Reliance 11,000 Cr: Fully subscribed or sold out

2. ONGC 9,500 Cr: Fully subscribed or sold out
3. DLF: 9,100 Cr: Fully subscribed or sold out
4. Cairn Energy: 6000 Cr

When a company floats its second or third public offering, it’s called FPOs of Follow-on Public
Offers. ICICI floated its FPO last year.

Though corporate India had over ambitious plans to launch even bigger IPOs in the latter part of
2008, all such mega projects have been halted due to the crises. India holds the 10th position in
the global IPO market3.

Foreign Institutional Investment or FII: FIIs are funds that are active in both primary and
secondary markets, invest in stocks and aim at reaping short-term profits. Though they bring
dollars, the flight of the capital is sudden, at times leading to currency and monetary fluctuations.

FIIs are heavily involved in speculative practices like futures trade and short selling. They indulge
in heavy trading in times of crisis making the situation very volatile. The recent controversy
relating to Participatory Notes, involved active participation of the FIIs.

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Positions vary with time.
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Still, FIIs push up the stock prices, enhance national reputation, increase the investment profits of
stock players, strengthen the stock exchange and generally increase the ‘brand value’4 of the
region. Presence of over 1000 registered FIIs in India boosts investor confidence in Indian stocks.

Hedge funds: Extremely important in the present times of economic crises. Hedge funds are
investment pools of some of the uber-rich or very high net worth individuals across the wealth.
The Hedge Funds have a certain tendency to aggressively invest and usually their returns are
typically higher than any other form of investment. Hedge funds had initially reaped high returns
in the US realty boom. They have been accused of short selling. Much of their strategies remain
secret. They operate in high-risk markets. Hedge funds have this ability to return profits in both
the bear and bull hugs. They have also been affected by huge losses in the present crisis5.

HNIs: It is noteworthy that more and more Indians are reporting to the millionaires and billionaires
list. HNI or High Net worth investor/individual is the person who has more than $ 1 million,
excluding his immovable properties.

There are close to 1.3 Lac millionaires in India and more than 40 billionaires with four in world’s
top ten richest including Mukesh Ambani, L N Mittal, Anil Ambani and K P Singh.

The idea to include a note on the annual increase in HNI and the millionaire/billionaire list was to
indicate the very fast growing corporate sector in India. Do note the per annum increase in the
list, and the profile of the rich list. While increasing numbers indicate wealth formation, their profile
indicates enterprise and entrepreneurship, indicating tapping of economic opportunities. Of
course it is said that LN Mittal has lost over $ 50 billion in assets and will no longer fall in the
above list. But who hasn’t?

India and China

Most of the noteworthy world leaders, global financial institutions like the WTO, credit rating
institutions, economists, market observers and analysts have called Indian and the Chinese
markets as ‘emerging growth centers’. A few years back Goldman Sachs, a global credit rating
agency developed the ‘BRIC’ theory which stated that countries like Brazil, Russia, India and
China would be the new global ‘economic super powers’ by 2050. They would have the maximum
percentage in the global financial output.

Well, the present crises have certainly proved that India and China have at least been little less
affected by the meltdown, though in reality, India is now feeling the pinch.

If we compare the two economies6 in question closely, we will gather that India is actually distant
from this ‘growing machine’ called China. But then later, when we evaluate world GDP, in their
own currency value or7, we come to some really pleasant conclusions.

 Various financial reports/studies by IMF and World Bank (2007 figures) have placed India
between a high of 3rd and 5th position.
 China is one point ahead of India at 3rd or at 4th positions.
 Wide disparity is witnessed against Food production capabilities.

4
Read detailed discussion on “brands” in the last chapter
5
Hedge funds’ role in the Economic Crises has been dealt with in Chapter on the Meltdown.
6
See chart
7
GDP at PPP has been explained in the Chapter on Economic Terms
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 Both India and China are behind only the US, the European Union and Japan. This
clearly makes the Indian economy among the worlds’ most growing.

We need to focus on these areas in order to catch-up with this aggressive neighbour of ours!
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India and China: Economic comparison

Indicators India China

1. GDP (PPP $ TRILLION) 2.34 5.33

2. GDP per capita (PPP) 2,126 4,091
3. Exports (2006-7 Billion) 126 900
4. EXIM BOT (Bn) - 60 +180
5. Forex ($ billion) 276 1612
6. Population below $1/ day (%) 34.3 9.9
7. Population below $2/ day (%) 80.4 34.9
8. Cultivable land (million) 146 100
9. Foodgrain production 108 400
10. Rice productivity (KG Per Hectare) 3034 6233
11. Wheat productivity (KG Per Hect) 2688 4155
12. Life expectancy (Years) 63.7 72.5
13. Underweight children (%) 47 8
14. IMR per 1000 live births 56 23
15. MMR 100,000 live births 450 45
16. Public health expenditure (% of GD 0.9 1.8
17. Telephones (million) 265 910
18. Internet users (million) 46 185
19. Population (billion) 1.12 1.32
20. Population Growth Rate 2.0 1.2
21. Urban to total (%) 28.7 40.4
22. HDI Rank 128 81

India and China account for 14% of World GDP

Indian exports to China are mainly iron ore based.

Indo-Chinese trade = $ 25 billion our BOT = $ 8 billion this year, may be $ 14 bn year-end. Chinese industrial goods
exports to India account for our 10% of GDP (1.3 reverse)
(It is $8 bn surplus with US). India imports 75% of tubes from China. Data processing machines (35% transmission
apparatus (50%)

Non-tariff barriers: Chinese pricing mechanism is opaque with massive capital and input subsidies. Registrations for
commerce are difficult and expensive no direct flight to Beijing et al.
Agriculture: China invests enormously more in terms of public investment, land holdings are remunerative, more inputs
An
(water, analysis of the above data reveals these distinct trends:
fertilizer)

India lags behind in good measures on the following scores:

 Exports
 The balance of payments
 Foreign reserves
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Important Economic Issues of the Day

Fiscal Deficit:

Simply put the difference between the government revenue and expenditure is known as fiscal
deficit. Since the governments of the day are welfare governments, they spend a very large
proportion of the revenue earned on non-productive expenses like government salaries, poverty
reduction, infrastructure, education and subsidies to poor and farmers.
Funds for massive projects like rural infrastructure promoting Bharat Nirman, the self
explanatory Sarv Siksha Abhiyaan or education-for-all, rural employment based NREGP or
National Rural Employment Generation Programme mostly increase the fiscal deficit of India.

These deficits are recorded in the annual financial statement of the general budget and the Five-
year plans.

It is said that India’s fiscal deficit is one of the largest in the world. Around 5-6% of our trillion-
dollar economy forms the deficit. This makes FD at $ 25 – 30 bn in today’s rates.

In order to bridge this difference the government borrows money either from the market or
international lending agencies. A sustained borrowing leads to external debts, and it is due to
increasing debts, that this instrument is constantly questioned and debated.

Issues related to Fiscal deficit:

The greatest dilemma with the government is the non-receipt of the earmarked funds by the
actual beneficiaries. Former Prime Minister Rajiv Gandhi has famously said that less than 20
paise reaches the poor on every rupee spent! Due to rampant and organized corruption, the
subsidies never reach the poor. As a result no tangible progress is seen in the quality of these
target groups, and the need for huge government expenses is questioned.

Severe political pressure to appear as ‘patrons of the poor’ does not make possible the
withdrawal of any pro poor but unviable project expenditure by the government. Hugely popular
measures like the recently announced Rs. 65,000 Crores farmer loan waiver by ‘educated’ and
economist Prime Minister Manmohan Singh, shall only add to the deficit account. Therefore,
reduction in fiscal deficit becomes extremely difficult for any government of the day.
Another major source of fiscal deficit is our oil import bill. Petrol prices in India are one of the least
in the World. Economists and observers have consistently advocated raising oil price but this
again will not be possible at least in the foreseeable future.

The government has recently admitted that reduction in our large fiscal deficit will not be possible
due to lower revenue generation due to the meltdown and the target to stem and hedge the deficit
at 3% of our GDP will not be possible.

Mergers and Acquisitions

Generally, barring some solid exceptions, Mergers and Acquisitions (M&A) indicate robustness,
soundness, success and even pride on the part of the acquirer and at times both the parties.

While corporate takeovers and complete mergers have been a regular feature in normal
international trade process, the issue of M & A has recently acquired the status of most tracked-
after phenomenon in the market.
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As per the Economic Times, the size of M&A market worldwide this year may cross $ 300 - $ 500
bn, involving some 4000 deals. Most of the deals relate to emerging markets, though. In a trend
setting instance the Tatas have bought luxury brands (the Land Rover and the Jaguar) that are
premium brands in the global upmarket. L M Mittals’ acquisition of a European steel company,
Arcelor is also a trend setting example. An Indian company/India-born industrialist had never
before conducted hostile takeover of globally renowned brand.

Industrial growth is mainly organic and inorganic; M&As involve mainly inorganic growth, where
the expansion is through existing infrastructure and running business operations. For example
Mittal took over all existing steel manufacturing plants of Arcelor. In organic growth, he would
have to develop all plants by purchasing land; employing people and fabricating the machines et
al. Organic growths take place as Greenfield projects8.

Causes of heightened global M&A activity:

In general:

 A new aggression witnessed amidst increased world trade volumes.

Increasingly globalized market
 Entry of big-ticket private equity in international trade facilitating such takeovers rather
easily… Example: US based private equity Blackstone, Singapore governments;’
investment arm the Tamasek etc. Equities come into play when a major player like Ratan
Tata needs money to finance the acquisition of Jaguar or when Mittal bought the
incredibly expensive Arcelor at a bidding of $ 35 – 40 bn.

 Companies have taken the M&A route as a business strategy.

o This is done to enhance global branding: Arcelor Mittal, Tata Motor Jaguar and
Land Rover deal.
o Foray into new market: Naukri.com acquired Jeevansaathi.com to enter
matrimony business.
o Consolidate parent companies’ global position; Tata Steel – Corus is now the
worlds’ fifth largest.
o Acquire emerging threat to big players: Sameer Bhatia and Microsoft deal on
Hotmail, Centurion acquired by HDFC while ICICI acquired Bank of Madura.
o Acquire equally big players to establish monopoly. Arcelor by Mittal Steel and
Hutch by Vodafone.
o
As a survival strategy: the Indian aviation industry with its three high profile mergers is a classic
case in point.

o Indian and Air India.

o Sahara and the Jet Airways.
o Kingfisher and Air Deccan

Do note that Kingfisher and Jet Airways have formed an ‘operational alliance’ and no mergers or
acquisitions have taken place in this venture.

In order to understand why mergers and acquisitions are now so actively and aggressively
pursued as a corporate strategy, we should take a closer look at the economics of Arcelor -Mittal
merger:
8
Greenfield projects are projects which start from a scratch, or undeveloped land or plain field.
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• First steel maker to cross 100 million tonne production capacity.

• $32 billion bill for the takeover
• $ 38 billion combined assets.
• 112 mt of steel production. Three times more than Nippon Steel
• 10% of the total world steel production. Second position: Nippon Steel
• 3, 20,000 collective staff strength.

We note the achievements of Mittal steel after the merger:

1. They became largest steel producer through one move!

2. Their combined net assets rose manifold
3. Their nearest rival was no longer near in terms of production scale.

In the recent meltdown M & A again become prolific with many acquisitions. Read the details in
the chapter devoted to the meltdown. The world financial landscape will no longer be the same
for the M & As after the economic bloodbath.

Vijay Mallaya (Kingfisher), Ratan Tata (Tata Motors, Tata Steel, Tata Chemicals) and Infosys
have been active in the World M & A market. Shiv Nadars’ HCL which acquired the UK based
consultancy, Axon saw Infosys as its main rival making the M & A a completely Indian
competition.

M & A also establishes the soundness of the market in which the players operate. Thus, these
gentlemen have added legitimacy, soundness, credit rating and general acceptance of Indian
markets globally.

M&A in the Aviation sector:

Kindly refer to Market Trends: Aviation Sector for analysis of M&A in the aviation sector.

Participatory Notes

We have discussed ‘Participatory Notes’ in the Chapter on ‘technical terms’ elsewhere in the
book. Since this instrument has ‘supposedly’ played a major role in market volatility, it is
extremely useful to understand its features, as objectively as possible.

Participatory Note is a sort of ‘identity card’ or ‘entry card’ issued by SEBI to an registered FII,
who in turn issues such PN to any unknown, unregistered foreign investor/company to enter
Indian stock market, since the PNs can be freely traded. Thereafter, he is like any other market
investor. Since foreign individuals cannot directly invest in Indian market, PNs are issued.
Participatory Notes may also be used by foreign investors to protect identity.
Unstated fears: Money belonging to Indian residents is being ‘round tripped’ through the PN
route.

What are the issues involved:

• The final beneficiary in unknown. The ultimate investor may or may not be eligible to
invest in Indian markets. Either way, the rich investor is uncomfortable in trading in the
Indian stock market in an open and transparent manner. It is said this leads to lack of
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transparency and may be used to launder money out of India. This instrument is popular
among FIIs.
• Tarapore Committee, said to recommend roadmap towards convertibility, suggested its
ban. RBI also wants to ban it. Says it is dangerously non transparent and can be used to
launder money
• There is considerable apprehension about it as the government has simply bought time
to study the report and has assured no immediate ban.
• A sudden ban can hurt India’s credibility as a business hub.
• No ground evidence for the unstated fear. Most of the money is foreign coming from the
FII route.

Special Economic Zones

SEZs are special earmarked regions or vast lands offered to the private sector for investment on
an industry or a group of activities relating to industry, manufacturing or commerce. The idea is to
promote regions with little or no development. To further its agenda of regional equity, the
governments offer concession on land, power, other infrastructure, tax holiday/ reduction and
scores of other specific concessions.

Typically, the private sector chooses to operate in a developed market like those near the four
main metros, leading to the creation of industrial clusters. To infuse regional equality, the
government borrowed this fairly successful model adopted in some countries, particularly from
China. The famed Chinese ‘Shenzen SEZ’ is a model for all such aspirations.

The concept of encouraging SEZs appears to be a right strategy to develop extremely backward
regions of the nation, where the private sector may never tread on their own. India has some 10
major SEZs with over 1,000 units operating in these exclusive zones. As a tool, SEZ is a
necessity. Most of the units are export oriented and with massive concessions, units were
expected to break-even early.

Other similar strategies of the government to address accelerated development include Export
Processing Zones, Exclusive Economic Zones and the state government promoted technology
and industrial parks.

The SEZ controversy in India:

SEZ progress in India is slow owing to over enthusiasm on the part of the government in respect
of allotting land to the commercial units.

Issue at hand: In India, land is both an economic asset as well as an emotional possession.
Dispossession of land is, at all times, an extremely difficult step. Constitutionally, only the District
Magistrate (DM) through a government order, in the supreme interest of the nation, can remove a
person and acquire his land. The government can also fix compensation on certain announced
criteria. These are constitutionally accepted transgressions for and only for national growth and
security.

The Nandigram Controversy: The Government of West Bengal announced a SEZ project
inviting the Salim Group to establish a group of chemical industries in Nandigram, a village area
near Haldia last year. Now understand where the government in Nandigram went wrong: A PSU,
Haldia Development Authority, issued a circular detailing the names of those to be evicted for a
private venture by a private company. This was sheer scandal and the government had to retreat,
and rightly so. Sensing electoral losses, the ruling UPA has practically suspended the giant
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project. It will perhaps in future, leave land acquisition to private investors but will assist them in
logistics only.

The Singur Controversy: The Singur controversy has nothing at all to do with the government’s
SEZ projects or policies. It has been included here in order to establish some clarity on how the
Singur controversy is different from the nearby Nandigram issue. The government’s handling or
bungling with the farmers land is, however, common to both.

The Bengal state government specifically invited Ratan Tata’s vehicle maker Tata Motors to start
their ‘laktakia’ or One Lakh Car project in Singur. They made available some 1000 acres in one
place for the start up. However it was realized that 400 acres of the 1000 acres were acquired by
muscle power rather than through a fair deal. The state communist cadres had unleashed a spate
of terror to evict the land and make way for the Tata dream car. The Opposition leaders
capitalized on this loophole, and the controversy was played out at the national theatre. The
Tata’s chose Gujarat, inter alia because the chosen site, Sanand is located on the strategic Delhi
Mumbai Industrial Corridor.

Issues at hand: While the entire drama, witnessed by all stakeholders across the world, did not
bode well for Bengal, the Indian economy, we have noted is too vast and huge to be affected by
single event like this, investments in West Bengal will be affected in the short term. Already some
projects are being affected.
A part of the blame must be directed towards Ratan Tata also, as he must have been aware of
the wrong methods used in the land acquisition. Possession of land and sovereignty over the
property must be sacrosanct. If the land is wrongly acquired, development, as a legitimate excuse
must not be accepted.

Patents

A patent is an internationally recognized certificate of 'ownership'. A patent holder is awarded

exclusive rights for the idea, invention, discovery he has made for some specified time from the
date of registry. Thus, ideas, products, methodology of producing in a certain manner, all can be
'patented'. It is directly related to the standards and size of research and development.

Graham Bell was awarded a patent for the ‘phone’ he invented in the year 1876!

Since patent protection needs multilateral understanding and rules vital for the efficacy of patent
license, roles of world body like the WTO are important in honoring the patented rights.

The Trade of Intellectual Property Rights (TRIPs) executed under WTO ensures uniformity of
patent laws across the world; some 1.5 lac patents were filed last year. While US is the most
inventive country with over 50,000 patents, India is at 11th position with over 15,000 patents
being granted in 2007.

Patents could be product patents or manufacturing or process patents. In other words, either
the whole product say, a certain type of energy drink can be patented, or a certain formula can be
patented while the energy drink per se is open to replication. Horlicks, Bournvita are all types of
process patents.

Patents are directly related to the volume of market innovations. The life of patent is variable,
though generally it is 20 years.
 17

Up to now, India was under a process patent regime. From January 2007, India is under product
patent regime. The surge in global players entering India aggressively is inevitable and
unstoppable.

Since India is now a hub of innovations in the Asia Pacific region, the number of Indian
companies’ patent applications is rising.

1995: 65 2005: 520 2007: 15,000. What is the rate of growth?

US Patent Office has received maximum applications from this region. In India, more than 50%
patents are still filed by firms based in foreign countries (mostly by IBM, Texas Instruments and
GE)

Causes of Concern:

1. Patent quality is very low in Asia Pacific.

Patent quality is measured through citation index of prior art. Higher the index better is the quality.
India and China are at the bottom and Singapore is at the top.

2. High degree of foreign ownership though declining to a low of 50% from 80% during1986-1995.

Encouraging trends: Increased awareness among corporate on patent issues. Companies

recognize they have, apart from their physical assets, something called intellectual assets.
Infosys, TCS and all major IT companies are now aggressively filing for patents for their products.

Pharmaceuticals:

Patent Wars:
The pharmaceutical industry is fiercely engaged in the patent war over the data exclusivity
clause. The fight is between innovators (the west) and generic companies (Indian). Also, since
India’s pharma companies lack scale and no R & D base, but are numerous in numbers, the only
way to survive, after Jan 1 is to consolidate or perish. Further, the falling prices due to stiff
competition, is killing them.

Other companies involved in patent wars:

1. T Series with Philips, inter alia over CDs DVDs and VCDs.
Philips is the market leader in the DVD market with 21% share.
2. Parle’s ‘Frooti’ has protested against the use of ‘Frooty’ by Cadburys’.

Try to find some more of the companies and issues involved.

Rupee Convertibility

What is rupee convertibility?

The issue of rupee convertibility (RC) has taxed Indian economic leadership since the late 90s.
Opinions are divided on this extremely sensitive economic instrument.
 18

If our country allows free conversion of your rupees into dollars without official interference, the
currency is said to be fully convertible. This will make you eligible to invest all your earnings
abroad, again, without government regulation/involvement. In other words, you will not be
required to inform the RBI of your dealings in foreign markets.

Theoretically then, every Indian can invest all his savings abroad, and all Indians can also lose
their money through external investments, say, in one or at best few sessions!

Current situation:

Indians can use their personal financial assets to finance their travel; education, medical
expenses and tourism and the petty and individual needs only.
Simply put, one can use the currency to meet personal expenses BUT no investment through the
rupee is directly possible. There are regulated and limited opportunities possible through RBI
regulations and rules.

Let us now understand the concept in detail:

As of now, Use of currency for international transactions is available for these purposes:

1. Travel, tourism, personal expenses, education, health etc.

2. Trade and commercial activities, purchase and sale of Indian and overseas assets.

The Rupee used for purposes under (1) is transacted under current account and the Rupee
used under second category is under capital account.

In India, money is fully convertible under current account. India is migrating to full capital account
convertibility gradually. It is said by some economists that we need to make capital accounts fully
convertible if we wish to sustain 8-9% growth momentum. Fuller rupee convertible currency
makes Indians truer global citizens.

The Tarapore Committee on Fuller Capital Account Convertibility (FCAC) has suggested a
roadmap towards fuller capital account convertibility.
• Under current account, individuals should be allowed to remit up to $200,000 in five years
time, beginning with $50,000 immediately, up from the present $25,000
• Under capital, the raise must be to $1billion (up by 100%)
• Banks to raise 100% capital from the overseas market.
• In simpler term curbs on personal and commercial expenses of Indians would be lifted.
We would be able to acquire assets and open accounts across the globe. Companies
can borrow over a billion every year, without the intervention of RBI. Further, the
companies would be able to invest up to four times their worth, anywhere in the world.
• Capital cost would be lowered for domestic corporate.
• Allowing liberal flow in both debt and equity markets enables instruments to make
transaction costs cheaper.
• Mutual Funds can invest in foreign stocks up to the tune of $ 2billion.

Caveats
• No individual investments in foreign stock exchanges
• Banks to first consolidate capital base.
• While foreign money in equity market is possible, not allowed in debt/bonds market.
 19

Rationale for Fuller Capital Account Convertibility

• In 1992 gross currency inflows of both current and capital accounts added up to 45 % of
GDP. In 2004, it was 72%, of which 24% was in the capital account. Presently the
currency inflow is 90% of the GDP. An open norm for currency movement across borders
is very necessary. There are established norms on international trade in all aspects like
equity investment pertaining to security disclosures, etc. which was absent in earlier
decades, and makes international trade more transparent and accountable.
• Risk management is more effective now, as global trade is conducted with expertise and
a high degree of management.
• Indian economy is robust to endure freer entry and exit of currencies.
• With a stagnant dollar, and rising Asian economies, the rupee should emerge stronger.
• Substantial FDIs and FIIs should ensure investment up to 40% of the GDP.
• More flow of capital should check the current account deficit of 2-3%, which is presently
bridged by remittances. India has never allowed private capital to check this, mainly to
prevent leverage to foreign capital. India’s total public deficit presently is 8% of GDP.

A phased approach is ideal and necessary.

 External commercial borrowings against national assets should not exceed 20% of total
debt.
 RBI must keep a tab on the quality of flow to ensure flow of capital in vital sectors like
infrastructure etc.
 Rupees equivalent to $165 billion FOREX reserve is not excessive but comfortable.
 Inflation must stabilize before Fuller Capital Convertibility or FCC.

Case in favor of FCC:

Past experience in allowing FII in equity market saw comprehensive changes in stock
markets. Foreign funds demanded more transparency, better data management and better
disclosure. The Indian market responded magnificently. Opening up of the market directed
more foreign money to a few large companies in India.

Moot point: Full Capital Convertibility of the Rupee could see Mumbai as a regional
economic hub as a present day Singapore and Dubai.

Full convertibility (FC) and the recent financial meltdown:

Had India been fully convertible, it is said that a huge amount of foreign currency would have
been taken out of India. As it is, foreign investors have withdrawn funds due to ‘parent (company)
pressure’. In a FC rupee regime, all investors would have suddenly withdrawn leading to a
possible collapse of the system.

WTO

Failure of WTO Doha Rounds on farm subsidies after 5 years of global negotiations

Simplified explanations:
 20

Core issue: The US says the real issue is ‘entry tariff’ barrier, blocking the markets’ access to
developed countries, which inflates prices, while the rest of the G-6 say, subsidy cut to the
farmers should first of all be implemented. The US has resolved to increase the subsidy support
to farmers from the present 19 billion dollars to $23 billion. The EU on the other hand agreed to
cut tariffs by 51% while the US demanded a 64% cut.

The US wants to increase the quantum of farm subsidies to its farmers but wants greater entry to
foreign rural markets, like India, before opening up. The rest of the negotiating partners do not
agree on this.

 The US stance. Global pressure on the US to start renegotiations. The United States is
completely isolated in its stance of me-first. Even its European guard, the European
Union, does not strongly support the Americans, as it is itself affected by the American
insistence on giving subsidies to its own farmers.
 The Indian EU and other countries combined stance. As noted above, this is perhaps a
rare issue India and the EU stand together. India however has assumed leadership role
in voicing international concern over the US stubborn policy.
 Multilateralism versus Bilateralism: The US is never comfortable when smaller countries
unite and create nuisance for the US. The US at times prefers bilateralism where it has
more bargaining power against any country. The other forum where the world has
convincingly come together is the UNEPs’ Kyoto Protocol on Climate Change forcing the
US to reluctantly join international efforts at combating climate damages.
 The resurgence of regional markets. The emergence of regional trading blocks like the
ASEAN etc are not very much liked by the US as it undermines its market strength.

The above tendency indicates:

 Presence of protectionism to national market. It is believed that ‘Protectionism’ was a

characteristic of the earlier regulated markets. The US government is openly subsidizing
their farmers and is insisting others do not do the same; tantamounts to its double speaks
on protectionism.
 Preference of regional trade blocks/bilateralism among strong trading partners.
o India’s offer of new tariff cuts to ASEAN to bolster Free Trade Area.

Business aspect of Environment Conservation:

India and the Carbon Credit Market

Context:

For a long time, the world faced an acute dilemma on environment conservation. The rich
countries developed at their own pace, without much restriction on their activities and with
virtually no obligation to environmental conservation. Now, when the developing countries are
progressing, their acts of industrialization and urbanization are sought to be constrained for
ecological preservation. This, many countries like India and China, object to.

Yet, the developing countries have accepted some checks on their rate of progress as the global
ecological destruction is showing. IPCC (The International Panel on Climate Change, a
specialized UN body on climate change strategies, headed by India’s R K Pachauri) has
statistically proved that the rise in global temperatures in the recent years is caused substantially
through reversible man made processes.
 21

According to IPCC, climate change is happening faster than expected; stronger than expected.
Since 2000, the rate of increase in Green House Gases is 3% per year. In 2005, the total carbon
emission was 18 billion tonnes with the US emitting 7 bn tonne and India 1 billion tonne or I tonne
per capita.

Annual carbon-di-oxide emissions today are 35% more than the benchmarked 1990 levels!

Since the 1990s, international concern on ecological conservation has gained momentum.
The United Nations through its specialized agency, the United Nations Environment Program
(UNEP) has brought together the world leaders through various dialogue platforms like the

 The Earth Summit (1992)

 The Kyoto Protocol (1995)
 The Bali Summit (2007).

The world shall meet again in 2009 (Copenhagen) to discuss the world measures to be adopted
after the duration of the Kyoto Protocol ends in 2012.

It was in the Kyoto Round of international discussions on Global Warming through emission of
mainly carbon-based green house gases (GHG) that the idea of Carbon trading through credit
system was accepted.

A carbon credit is the monetary value of one tonne of carbon saved due to application of
technology by adopting a clean development mechanism. Technically, one carbon credit is known
as CER or Certified Emission Reduction.

Rationale: The UN seeks to compensate all those who shall reduce carbon emissions, both as
commercial strategy and as ‘effort recognition’. Thus it seeks to arrest any slow down in
development caused by conservation measures. As a spin off, it will encourage business
enterprise to profit from this necessity.

How it works: The United Nations Framework Convention on Climate Change (UNFCCC) is the
main UN body which regulates the carbon trading.

A company may wish to reduce its carbon trading for two main reasons:

1. As its obligation to reduce carbon emission under Kyoto Protocol.

2. It may want to trade the saved carbon credit in international market.

A company, which wishes to reduce its carbon emission, may avail funds and technology by
applying for UNFCCC supervised Clean Development Mechanism or CDM. A UN appointed
agency would certify the reduction in the amount of carbon emitted by the company, which has
adopted CDM. Thus, for each one tonne of Carbon reduction achieved, the company shall get
one Credit or carbon share. This may be traded at the five dedicated carbon stock exchanges in
the world as of now. Each CER is worth Euro 15 - 20 C02 e.

Many think that this step is a win- win strategy as the company which sells saved carbon shall win
monetary rewards, and the company which buys credits may legitimately emit carbon after paying
for it, and may sooner undergo carbon reduction to save its expenses. While the overall emission
quota remains fixed, commercial activity will make its implementation viable.
 22

The Carbon market is said to be worth $ 100 bn. It was expected to reach Euro One trillion in ten
year’s time. India is emerging as a world leader in generating maximum CERs. According to
reports India has the potential to generate close to 50 mn CERs per year. India is the largest
sellers’ market in the international carbon market.

In India it is estimated that carbon market has the potential to grow faster than even the BPO or
earlier when the IT industry had grown at its peak. Even in the world, the carbon market is slated
to be the largest commodity market.

We must note that the entire global carbon market has been severely hit due to the financial
meltdown. The crisis has upset all carbon calculations.

Carbon credit market and the present financial crisis:

The present financial meltdown has adversely affected the carbon market. In view of the credit
crunch, or lack of capital available to companies for growth, and in some cases even to meet
daily working demands, the industry’s enthusiasm to reduce carbon has dampened. Also, the
major incentive – actual carbon trading, is also affected. Carbon credits are being sold at cheap
rates, attracting slow down in selling activity, as players want to sell it later at higher rates.
Clearly, the world attention is elsewhere and for the present Carbon trading has taken a hit.

Carbon Credits and the US:

The United States has stayed away from all environmental obligations to be observed, as
stipulated by the United Nations. Thus Kyoto Protocol lost its effectiveness as the largest emitter
kept away. The US wants no time limits imposed on it. The world’s largest polluter wants India
and China to be ‘reigned in’ or checked rigorously. Of course there is a distinct hidden economic
strategy in this finger raising. However, in the recently concluded conference in Bali, the US has
in principle agreed to observe the green obligations though it again forced India and China to
come up with a concrete ‘ National Action Plan’ on Climate Change.
Once the United States fully endorses and becomes a party to the UN obligations, and once the
meltdown effects fizzle out, carbon market will again assume really big proportions. The US is the
largest buyers market and India, one of the largest Credit sellers.

Public Private Partnership:

PPP is a novel and an innovative government strategy to engage the private sector in the nation
building processes. Thus the government is inviting the private sector to initiate projects in the
power, aviation, railways, and telecom sectors. These projects will have full government support
in terms of logistics, finance and clearances. Those executing PPP will also get fast track
approvals in their other private projects.

This tool brings together the expertise, experience and wisdom of the government and the private
sector for the ultimate public good. These are areas the private sector would have avoided, as it
would be unviable for them to execute keeping only profit in mind.

The government has taken this initiative rather seriously and has claimed that close to $ 200 bn
worth of projects would by available by 2012. Already it is offering projects to the tune of $ 20 bn.
 23

Global Economic Meltdown

Understanding the US-led global economic crises

There is a whopping increase of 116% in the number of enterprises closing shop

at 25,000 this year; up from 11,044 in 2006. Another 7000 have gone for
bankruptcy, up from the 3500 two years ago. These figures give ample idea of the
financial trauma in the United States. These are unprecedented in the ‘land of
opportunities.’

Perhaps, never before in recent history, has any economic development been so talked about as
the ongoing 'economic meltdown'. Therefore let us understand this phenomenon gradually and
fully. This will also give us a clear picture of the existing global and national economic
administration and functioning. We will stop by important terms and incidents provided in boxes or
in other places as indicated.

As is clear no one person or institution ever understands the world economic network and
functioning completely. Naturally, the fault could not be detected until the symptoms proved
beyond repair.

The sudden collapse of global finance giants like Lehman Brothers, AIG, and battering of
numerous other behemoths like Citi Corp triggered the collapse of the stock capital, affecting all
US financial institutions, the effect spreading to European and Asian markets, leading to a
worldwide credit crunch or lack of capital for daily operations, loans and expansions across all
sectors and all markets. This present situation-- of substantial loss of stock money, shares being
traded very low across all stock exchanges, high rates for borrowing money, and low productivity
due to low demand-- is termed 'economic meltdown'.

How it started: The sub – prime crises

Actively supported by the government, large banks, led by Citi Corp started encouraging the
lower middle/lower class to seek loans to 'own a house' in America. While the banks wanted to
cash in on the booming real estate market, the less affluent were lured by the idea of having their
own houses. Since the boom in real estate appeared real and actually gave high returns, the
banks forayed into lending to those incapable of repayment –the poor and the students. Loans to
this category were known as NINJA loans or No Income No Jobs or Assets Loan. It was
assumed, and here lies the ‘core’ of the storm the house shall always be worth more than the
defaulted amount and therefore the banks would always yield profits—even in the 'default' case.
As stated above, the US government actively encouraged this arrangement as suited its welfare
agenda of 'house for all'. Institutions like Fannie Mae and Freddie Mac, which gave unlimited
mortgage based loans to individuals were supported by it. Since this model appeared to yield
high returns in less time, hedge funds started operations. The advent of huge and easy money for
house loans made loan seeking very popular among the NINJA awardees. Till 2006 and early
 24

2007, all gained. The poor had houses; the hedge funds went for a kill. The banks made sedate
profits and the US was more socialist now, comfortable in the idea that in US, all will have a
house of their own.

House owners who had no income had to default one day. This happened in 2007. Then this
became a trend and suddenly hedge funds, which cannot tolerate losses for long, started
withdrawing. The banks, which had given loans many times more than they should, couldn't do
much to stop the flight out of funds. Since, the realty sector was earlier booming, investors had
put in major capital in realty stocks. Now they started withdrawing. As the realty stocks
plummeted, the realty sector no longer commanded premium. The worst point came when the
houses themselves lost premium and were now worth less than the loans forwarded. This meant
all loans ever forwarded were loss making. The banks themselves had taken loans to forward
loans to retailers. As a result, in a free fall, all realty stocks crashed.

How and why the crisis spread all over the seas.

PLEASE UNDERSTAND THAT THE CRISIS PRECIPITATED NOT BECAUSE OF

CONSTRUCTION ACTIVITIES BUT DERIVATIVE OR FUTURES TRADE AND SPECULATION
OR GAMBLING BASED ON CONSTRUCTION ACTIVITIES.

Role of investment banks (i-banks), Hedge funds and HNI money.

Generally, a bank has substantial ‘liquid cash base’ on the basis of individual and corporate
deposits. This is safe and continuous supply of cash, which forms the base capital of all banking
operations. Investment banks like Lehman Brothers, Goldman Sachs and JP Morgan are not the
usual individual ‘account holder type’ of banks we have explained above. They have no security
of assured individual clients like the State Bank of India! They earn as returns on the investments.
They assess and predict the profitability of a project, invest a huge amount and earn profits as
returns. Thus Lehman and others gambled on house mortgage big time. Hedge funds made
capital or money available for investing in high-risk high-return projects. While the i-banks and
hedge funds made the mortgage market huge, the losses too were vast. And since the same
companies also invest in other global projects, the crisis spread like wild fire. As the markets
crashed, all investors who would have funded other equity projects, infrastructure works,
construction activities, export oriented manufacturing across the globe went bust; all their projects
collapsed.

Since investor money was completely wiped out, no other stock found purchasers, leading to all
round loss across US exchanges. Since all major world companies had invested in US
exchanges, all these companies lost hugely. There was heavy selling and no buying across all
exchanges leading to collapse of the system. Short selling further added to the panic.
Additionally, no money was now available to any new activity. In London, inter-bank loan rate was
trading at unrealistically high levels. This was because no bank knew the level of losses of other
banks and was reluctant to give loans to other banks. The distrust was complete. It was clear, just
as in stampede, where all near the point of origin generally die/ get injured, all major money
forwarding institutions, were paralyzed.

Immediate Impact: It is said that this crisis has wiped out 30% of bank assets in the US.
Lehman Brothers were trading 30 times more than they should have. Citi Corp losses are in
billions of dollars. Washington Mutual, Wachovia, Merrill Lynch, Goldman Sachs, etc. were big
names that orchestrated the world economy. Some of these companies’ total assets are higher
than the GDP of many countries. Citi Bank’s total assets equal a whopping $ 2tn. Lehman
Brothers' assets are pegged at $ 300 bn plus. They predicted, financed and rated future
beneficial projects and were at the core of all global plans. As they plunged same-day-same time,
the world followed suit. Clear enough?
 25

Long-term impact:

Capital for future projects are based on predicted future profitability of the project. Let’s take an
example for elucidation. If ONGC announces an IPO for an oil project, the investors will assume
profit based on increasing demand of oil due to rise in population and purchasing power, pushing
the oil demand. This is how money will be made available to ONGC today.

In the present situation, investors will take the following considerations into account:

1. There is no guarantee of increase in purchasing power as no new jobs are foreseen.

2. Projects might suffer due to credit crunch, as banks have no excess money. Therefore,
the project might suffer delays and increasing cost overheads.
3. There are little prospects for the share of the company rise in near future.
4. No one knows when the global recession is likely to end.

Therefore, if a company is to launch new major projects now, it may not find easy funding. Many
global majors cannot survive without new projects and almost all companies have to innovate.
But again no funds are possible for R & D, innovation or expansion.

India and the US Crisis:

At the beginning of this rather depressive chapter, we noted the gloom statistically. Now relate it
to the fact that the US market formed 14% of our exports in the year ending March 2008.

The prime minister while admitting slow down of our economy has clearly stated that there would
be no recession in our economy. WTO chief Pascal Lamy, said India and China has saved off the
world economy from total collapse. He said India along with Brazil, Russia and South Africa are
still growing economies. These statements suggest soundness and resilience of the Indian
economy in the face of global fluctuations. Still, the impact, in the immediate term, is showing
heavily…

The 'meltdown impact' on India has been moderate to heavy based on the sector/area we are
referring to. There is no uniform assessment across all sectors of our economy. The top Ten
Indian Companies have lost over 3 lac crore rupees through stock capital losses, as of Oct 2008.

Broadly, we must analyze the following activities:

1. Banks operations: Most affected. While we from interest on our saving or current
deposits, banks themselves earn through speculation, futures trading and further
investment. In the absence of these options, as of now, not much capital is available with
the banks to grow. Though individual money is safe under government’s strict regulation,
banks are unlikely to offer easy money to individuals, companies and other banks leading
to slack in manufacturing and trade. It is largely speculated that the ICICI bank has been
particularly affected by the crisis owing to its heavy exposure to world derivative market.
As a result of this rumor, no bank was willing to supply credit to this bank, furthering its
woes. In the quarter ending September this year, ICICI lost Rs 11,000 Cr in deposits
contraction, while the ‘safe’ public sector banks (SBI and PNB) gained Rs 70,000 Cr in
the same three months, as fresh deposits. By ‘safe’ we mean from the ‘public perception’
angle.
2. Sectors affected: Banks and all other financial institutions; real estate; construction; BPO;
Aviation; Hospitality.
 26

3. Job market: projected 20% job cuts. Fresh hiring is negligible. Bonuses affected. Most
affected: IT, Finance; Banking, BPO; Real estate and Construction.

Most of the leading IT companies have recorded low Q39 profits due to meltdown.

Some leading corporations like Tata Motors have temporarily closed down some of its plants
to prevent the piling up of the inventory or previously produced unsold goods and material.

4. Not yet impacted: FMCG; Pharma; Media;

5. Stock Exchange: Plunged from a high of 21K in Jan '08 to 6 K by Oct 08. This is mainly
because of global cues indicating slack future economic activity and withdrawal of foreign
money (FIIs) by parent companies themselves affected by the losses.
6. Slack in demand of Indian goods leading to decrease in export volumes. This means no
demands and therefore no work for EOU or Export Oriented Units.
7. Lack of tourist footfalls.
8. Read along with point 3, decreasing business trips to India is already leading to slower
growth in high-end luxury hospitality sector.
9. Slack demand for Indian professionals in US or other European countries.
10. NRIs across the globe and particularly in the US may send lesser remittances back to
India.
11. Possible job cuts, as there could be a gap/delay in new international projects/ because of
less economic activity in sensitive sectors like aviation.
12. All major BPOs are run on US led projects. They may be impacted.
13. This would mean fewer dollars added to our FOREX. This may impact our national debt
servicing. It would also impact the Sovereign wealth fund.
14. Owing to fluctuations in the dollar trade, the government leverage in regulating currency
demand supply may be restricted. In other words, there could be more demand on the
dollar as less and less dollars would be available for international trade.
15. Government has admitted to slow down in economic activity. India will not achieve 8%
growth rate in 2008 and our five-year plans shall also suffer with a targeted achievement
of 9% annual growth.

The governments' reaction:

The US government has meanwhile made available $ 700 bn (Troubled Asset Relief Program) to
the ailing financial behemoths and for the general resurrection of the recessionary US economy.
The US has provided money to the banks to ease pressures on liquidity demands and other such
purposes, subtly encouraging moving away from speculation based trading. Likewise, the two
major surviving investment banks (Goldman Sachs and JP Morgan Chase) have restructured
themselves to regular banks. The government is keeping a close watch on all major economic
activities and has banned short selling in the stocks for now. It bailed out mortgage banks
Fannie Mae and Freddie Mac; bought majority stakes in AIG to make it government aided and
helped in all bailouts and mergers.

A brief digression is required here: Was the government right in offering such a bonanza to these
institutions? Yes and No. The government at the end of the day is the final guarantor. If all else
fails, the government has to intervene. Second, this crisis was cancerous and was eating away at
all financial institutions and the entire economic fabric of the US - therefore the bail out.
Opposition says there was no need to fund the greedy professionals who lived off gambling with
poor people’s hard earned money. Actually all derivative trade is a form of gambling and
governments do not and should not bail out failed gamblers ever.
9
Q means a Quarter. Q3 = third quarter of a financial year i.e. July-August
 27

India's reserve bank and the bankers' bank, the RBI has made available more than a lakh crore
rupees since the crisis to banks by allowing them to keep less cash with the RBI (CRR). It is also
encouraging banks to lend easy money to other banks by restricting call money market (rate at
which one banks lends money to other banks for short periods). The RBI is also easing off
restrictions on stock trading through Participatory Notes, to infuse more foreign exchange and
cash in the bourses.
In the long-term the government may look into banking reforms, liberalize foreign direct
investment norms, further de-control industry and generally boost trade and investment

The Great Depression of 1929

In order to understand the present crisis and its relation with the term ' recession' we need to visit
this often read phrase: the Great Depression!

The Second World War had ended in 1919 and there was optimism and hope in the air.
Governments of the day had become major buyers of consumer durables in the preceding war
years (1914 – 1919). These purchases were war requirements and did not merely tally with
present demands. While the war ended, the production did not. Years preceding 1929 were
witnessing successive years of frenzied production, apparently fueled by expectations of higher
and still higher demands by consumers. This did not happen. When the demand started falling,
production should have immediately stopped.

The term (economic) depression means a sustained recession in an economy/ (economies). A

depression is a serious form of recession. The 1929 stock market crash preceded the Great
Depression. The crash was followed by the drought of 1930. In the resulting scenario, the banks
failed completely. Production stopped completely and prices fell. Agricultural products became
highly unprofitable. Due to a general lack of work, there were massive defaults on loan
repayment. Simultaneously, people lost trust in banks and started withdrawing their liquid assets.
Banking systems crashed completely. The lowering of Gold prices, crucial at that time, further
created economic void. Unemployment reached unsustainable levels, as there was no
construction activity. In the 30s, these effects reached Europe. These depressive circumstances
continued up to the start of the Second World War in 1939. The governments of the day sat
together to make sense of the events, prevent recurrence (of wars too!) The United States
announced the “New Deal” for the massive reconstruction of the damaged economies. The
resultant solutions were the International Bank for Reconstruction and Development or the World
Bank (through the Breton Woods Conference, 1945), the IMF and the United Nations.

Select Institutions Affected and Bail out Actions Taken

• Fannie Mae and Freddie Mac : US Govt. has taken over

• AIG : 80% Government stake
• WaMu : JP Morgan
• Wachovia : bought by Wells Fargo (Warren Buffet backed) for $ 15 bn
• ML : bought by BoA for $ 44 bn
• Lehman Brothers : various – Barclays, Noumora

Economic Financial Meltdown

 28

Role of RBI in the control of Money supply

We shall talk about RBI (The PMO10 for all banking operations in India) in the specific context of
its role as troubleshooter in the recent meltdown.

Basically, the banker’s bank is the supreme monetary institution in India. It is also the watchdog
of all economic transactions in India. In the ultimate interest of our economy, RBI is authorized to
initiate measures to control money supply in the country.

In troubled times, as in the present, RBI virtually becomes the doctor, whose skill shall shape the
destiny of the patients’ health.

We shall see how exactly, the RBI intervenes in the times of crisis, as in late 2008:

1. Repo rate is the rate at which our banks borrow rupees from RBI. When the repo rate
increases, borrowing from RBI becomes more expensive. Naturally, a reduction in the
repo rate will help banks to get money at a cheaper rate. Every half percent cut infuses
one lakh twenty thousand crores into the market (@current price) for lending, growth
purposes. A cut in the repo rate will add pressure on commercial banks like HDFC or
ICICI to lower the ‘bank rate’ or the interest charged on loans they would give individual
retail consumers. Now, the loan activity will increase leading to a greater economic
activity or growth due to expansion.

2. Cuts the CRR. Well, CRR is a potent fiscal instrument with the RBI to control (rupee)
money supply in the market. CRR or the Cash Reserve Ratio, is the compulsory
requirement on the part of each bank governed by the RBI or ‘scheduled’ banks to keep a
certain amount of money in the liquid form with the RBI. Every one percent
cut would mean Rs. 40,000 cr that banks can retain to give as loans to people.
These ensure the following:
a. No bank will go bankrupt, as some of its money is always available with the RBI,
which may be utilized for this bank.
b. More importantly, the RBI can check reckless lending by the bank to the retailers,
flooding the market with excess rupee.

3. Give more window or leverage to banks to borrow from the banks against their deposits
to be used to firm up the Mutual Funds floated by the bank.
4. Special refinance measures by RBI to commercial banks against their deposits. This
measure is done to enable more funds with the banks for short-term investment
purposes.

By the end of October the RBI had already pumped in more than 2 lac crore into the system
through RBI interventions.

Are the measures undertaken by the Indian government, enough?

Well, first of all, the question itself is inappropriate. We must first understand that to survive and
progress in the present age of competitive market, we need to streamline our economic patterns
and steadily integrate with the global village.
More isolated (or closed) the market, more insulated it is to international fluctuations {as we were
before the 1990s}.

The nation was swiftly moving towards globalization for the preceding 17 years.
10
The ‘Prime Ministers’ Office (humor: most important office!)
 29

It is only natural that when a 13-trillion dollar economy suddenly gets devastated, affecting the
world economy-- to which we were trying our best to align with-- we are bound to be affected. So,
do not take a knee jerk stance. Understand the core of the issue.
Still, are these troubleshooting measures by the RBI enough? No, the RBI can only give you an
umbrella during rains; it cannot either prevent rains or attend to pneumonia.
In the long term we must strongly discourage heavy speculative trade; or at least move away
from our over dependence on select financial institutions, which thrive on risky investments.
We must make our banks and institutions more accountable and transparent
Exports need to be encouraged and diversified, both with respect to product and market.
Our contribution to world trade stands at a measly 2%. We need to enhance this portion.
We need to diversify our trade partners and move away from US based export partnership to
perhaps new markets like the ASEAN.

We have seen how an increased purchasing power can lift up sectors like telecom, retail etc. We
need to develop our human capital to perhaps lead world trade through a stronger trading center.
The point is, rather than being panic, we must use the interval to warm up ourselves and emerge
stronger in trade, commerce, science and education. These are the basic requirements to
become a world leader.
 30

General Economic terms

We have attempted to include frequently used terms/words while describing economic stories in
the last few months. We have tried to explain the terms; their meanings and roles in the economic
matrix in which they operate so that the student relates to each of these terms in their market
setting hereafter.

SEBI: Securities and Exchange Board of India

As of today, SEBI is perhaps the most watched body in India. Along with the central bank the RBI,
it is at the center of focus, especially after the meltdown.
SEBI regulates the Indian capital market.
Set up in 1988, it is after the 1992, SEBI was empowered enough to assume position of
importance after the passage of the SEBI Act.
Its prime functions include making and implementing regulations with respect to

 The trades of all instruments like stocks, bonds and government securities.
 Corporate and retail investors.
 Market holders and intermediaries like brokers etc.
 It frames rules for foreign players investing as FIIs.
 It supervises practices like participatory notes.

In other words it is the watchdog of the Indian stock markets. In India, government owned
institutions are rarely any source of solace, let alone inspiration. But like the Election
Commission, SEBI (under economist administrator CB Bhave) has been rendering superior
services and in many ways, the efficacy and efficiency of SEBI has contributed substantially to
the success of Indian stock market.

Illustration: While the recent crisis sent the US administration in the panic mode, both the RBI
and SEBI have been extremely calm and efficient in the handling of its implications in the Indian
and the capital market. While the US banned short selling, identifying this practice as main
reason for the stock crash; India refused to ban this suspect practice, saying our regulation is
resilient enough to contain the use and practice of shorting without damaging the market.

This demonstrates the maturity and the superb independence of our financial regulators.

Indian Stock Exchange:

Till the financial crisis hit all financial institutions, and arrested global growth, Indian stock
exchanges were top global success stories. All world leading stock exchanges like NYSE,
NASDAQ and LSE evinced keen interest when the BSE offered 5 % percent stake. Already
foreign stock exchanges have stakes in the National Stock Exchange.

This amply demonstrates the recognition of the Indian capital market by world leaders in global
finance and that India now negotiates with the world on its own terms.

The Bombay stock exchange is one of the oldest stock exchanges in the world, established in
the nineteenth century (1875). At 5000, it has the highest number of listed players (companies)
with Tokyo at 2nd (4000) and London at third (3000 companies).
 31

Total market cap of the BSE is over $ 2trillion, which makes it 10 th largest in the world and largest
in South Asia. Its daily turnover is more than $ 1 bn.

In order to measure the daily fluctuations, it tracks the stock prices of 30 top blue chip companies
to form the index called the SENSEX or BSE 30. In October 2007, these 30-scrip led SENSEX
reached the magical 20,000 mark, an achievement reached only by few stock exchanges of the
world.

Recent achievements in by BSE 30 or the SENSEX:

The Bombay Stock Exchange touched the magical 20,000 mark on Oct 29 2007, in just over 10
trading sessions and 15 days, to reach this level from the 19,000 mark. It reached the highest
point 21,000 on Jan 21, 2008. Since then the SENSEX has fallen consistently, going down to
9,000 in Oct 2008.

The National Stock Exchange:

NSE is technology driven, fully automated, very young state- of- the- art Mumbai based stock
exchange, with close to 3000 terminals across the country. It also facilitates paper less trading
through Demat accounts or de materialized or non-paper based accounts. Its index is called the
S&P CNX Nifty or Standard and Poors’ CRISIL NSE Exchange or simply Nifty. The index
comprises leading 50 scrips from 21 sectors of our economy.

Though young, it trades over $ 2 bn each day. At present the listed scrip’s are around 1500; NSE
is the second fastest growing exchange in the world at 17% annual growth rate. Its total market
cap is $ 1.5 trillion.

Compared to the US stock exchange, Indian companies are much smaller than the US
companies. Consider this; the average size of a company listed at the New York stock exchange
is $ 5 billion, while it is $ 120 mn in the Bombay Stock Exchange.

Derivatives: Very simply understood, a stock is an example of a derivative! A derivative is a

financial instrument, which derives its value from some other asset/product/commodity. Thus the
value of a stock is the value of the company it belongs to. It has no intrinsic value of its own.

Derivatives encourage futures trade. A futures trade is a trade on the assumed value of an asset
in future. Futures on commodity, say pepper, is based on its likely growth pattern of price at a
future date. Similarly mortgages, loans, equities, stocks are all derivative trades. Hedge funds
trade on futures or those derivatives, which are highly speculative in nature.

Evidently, derivatives do not protect but trade on 'risk'. This practice or tendency is at the core of
all speculative profits and a major reason for losses and stock crash.

Participatory notes

Participatory notes are a ‘stock trade facilitating financial instrument’ in the Indian stock
exchange. As per SEBI guidelines only those individuals/companies registered with SEBI can
trade at the stock exchange. This has kept out a substantial category of high net worth individuals
who would not register/open shop in India. Since the ultimate stockholder is not known, India did
not encourage this. However, from late 1990s, under SEBI watch, participatory notes were issued
to non-registered individuals/companies to become stock players after registering themselves
through registered FIIs. Thus FIIs were in some way careful of the players who entered bourses
through their participatory notes. (Note that PN are issued to FIIs who give it to foreign players).
 32

Benefits of PN enabled players:

1. They infuse large capital to bourses, increasing trade volume market cap, profitability and
of the SE.
2. This helps in international integration of our SEs with world stock exchanges.

Dangers:

1. PNs are used by Hedge funds who actively encourage and practice dangerous and risky
practices like shorting and indulge in futures.
2. Most importantly we do not know who the beneficiary is, what the motive is. It is said that
Al Quaeda type of outfits have benefited through this route. The recent attacks could well
be funded by Indian stocks themselves!
3. Acting on global cues, they may withdraw huge amounts of money and take the wealth
outside India, thereby
1. Affecting forex situation/health
2. Putting liquidity pressures
3. Making SEs unduly bearish
4. Making capital market volatile

A note on Participatory Notes – Indian regulators have a love-hate relationship with PN as an

instrument. Their role in the recent stock panic crash suggests active involvement in short selling.
Though laudably, India has refused to ban short selling to stem the free fall, yet too much short
selling is unhealthy and the indulgent players give scant regard to the SE health over personal
benefits.

Since close to 50% of all the capital in the BSE was sourced to PN players you are now aware of
SEBI’s dilemma.

In Oct 2007, SEBI banned the PNs and the market crashed 9% -- a record of sorts. The
government immediately intervened to announce status quo. Things stand the same as of now.

Investment Banks: Regular banks prime clients are individual account holders who deposit their
personal liquid assets. These banks invest further in stocks, equities, tender loans, finance
projects, issue credit or other financial products to use the money deposited by individuals and
companies. Their core operation remains individual corporate deposits.

Investment banks thrive and survive on investments in their financial instruments only. They are
not eligible/entertain individual/corporate deposits. They trade on derivatives like futures heavily.
Since their mainstay is speculation-based profit they survive by risk taking, i-banks are inherently
high-risk high-profile and high-net-worth corporate entities. Lehman Brothers, Merrill Lynch,
Goldman Sachs were some leading investment banks before speculations strangulated them.

Short Selling: Well, this financial instrument or process is closely related to the meltdown
aftermath. Though not a cause of the economic downturn, the brokers and investors use short
selling or shorting when they see a large fluctuation in the very near future.

Let us see how shorting or short selling works: Company A 'borrows' 100 shares at the prevailing
price at Rs 100/- per share and promises to return it the next day, since the shares are borrowed
and need be returned, the Company 'anticipates' that the shares will go down from now on.
Company A sells the shares at Rs 100. As the share price declines, as in meltdown times, the
shares may be priced at Rs 70. The same company, that is, Company A, buys the identical
 33

shares at Rs 70. Recall that it had sold the rented shares at Rs 100. These repurchased shares
are now returned to Company B. Co. A has made a neat profit of Rs 30/- per share.

Likely pitfalls: If the shares rise up to Rs 130/-, Company A, which is time-bound to repurchase
the shares, will buy it at Rs 130/- and make a loss of Rs 30/- per share.

Why do companies do it: This is an instrument, which is used for profit even when the decline of a
share or market is forecast. While the US government banned this practice during the crash, India
did not blindly follow suit.

Decoupling: A theory, which suggests that a maturing economy, which is sufficiently sound and
largely self-dependent, is no longer, tagged to large economies – and vulnerable to the bigger
economies’ fluctuations-- with which it was earlier closely linked to. It is theorized by certain
economists that Indian economy is sufficiently strong and self-generating enough to be
‘decoupled’ from the US economy. Not all accept this 'separation' or 'distinction'. The recent global
meltdown has proved that no economy is fully independent and that India has been impacted by
the meltdown. The RBI and Finance Minister do not subscribe to the decoupling thought. But
yes, due to the soundness of our economic system and strength of our key fundamentals, we are
no longer vulnerable to external shocks as in the nineties or earlier.

Primary and Secondary Share Market: All new stocks, bonds or government securities are sold
in the primary market. Whenever a company wants to float its shares, it announces through
market channels open for this purpose. The process is called Initial Public Offering. Existing
companies may float Rights issue. The shares are sold directly by the company to all categories
of investors like individuals/corporate/government-- at a value known as face value, usually Rs.
10 or Rs. 100, though this may vary.
Investors seeking long-term benefits go for the IPOs. Based on the performance, fundamentals of
the company, these are a bit safer, as the starting amount is less and large quanta of shares are
available. There is a large amount of equity investment, or those investments, which are used for
expansion of business; setting up of new industry and the shareholders have some equity stake
(partnership in profit/loss) in the venture.

In January Anil Ambani’s Reliance Power launched its IPO, which created a record at the stock
market raising Rs. 11,000 Crores. Presently there are more than 4 million shareholders of Rel
Power IPO.

The rights issued by the company may now be traded at the secondary market. Here the big
investors usually dominate. It is a den for speculation, as the shares are bought or sold,
depending on market cues and the companies’ performance. Such trading takes places at the
designated stock exchange where the company is listed at the time of issue of the rights/stocks.
Registered FIIs or Foreign Institutional Investors actively trade at the secondary market through
portfolio investments. The unregistered rich foreign investors speculate and trade through some
registered FII who issue participatory notes for these individuals to enter the stock market.

Bear hug/ Bearish/bullish sentiments: As we are aware of, brokers who buy the shares are
'bulls' or risk taking 'creatures' – a bull shall pick on a fight, is courageous and straightforward. He
may not always win. They are taking risks in the sense that they assume the shares of the prices
will only rise (short selling is an exception and we have dealt with it elsewhere). The same broker,
when he is 'selling' the shares is now a 'bear'. He is playing it safe. He wants to either settle for
the targeted profit at selling point, or wants to stem his losses. He assumes the shares will fall
(again the exception which you are aware of, right?)

When majority of brokers are ready to sell shares, the share prices fall, and the market
anticipates more fall, and hence the exit. The market sentiment (direction of movement) is
 34

bearish. Similarly, the sentiment is bullish when majority brokers in that stock exchange are
buying shares. The market expects the Sensitive Index or the price movement indicator to move
up...

A bear hug is when the market is afflicted with bearish attitude by the market for a longer
duration. The bear hug is related to big cues like economic slackening, slowdown, recession or
even depression. The economic meltdown of 2008 has witnessed bear hugs all over the globe's
stock exchanges.

Stock Market Cue: As in general English a cue is a sort of hint. In stock market language a cue
is a trigger. It could be any economic, political or natural event. The impact on shares by these
cues is dependent on the efficacy of the event. Elections, appointments of PMs, finance
ministers, policy announcements; company shake outs; annual results; mergers and acquisitions;
new measures; natural disasters are some of the national cues which impact the stock exchange
similarly, international events like wars; appointments of very important persons, stock market
behavior, natural disasters are global cues.

The moot point is that all these cues are expected to influence the future course of stock behavior
in a positive or negative manner (shares may rise or dip).

A share: In market terms a common or preferred ‘stock’ is called a share. It is a form of a

‘security’. A shareholder may have voting rights based upon the number of shares he holds,
according to company charter. Typically, a shareholder has equity rights. He has certain rights (or
equity or stakes) in the company, its profits, administration and policy based on the number of
shares in his name, which should form a certain percentage against all offered shares.

Market investors or brokers or corporate and individual players in the stock market however buy a
certain number of stocks for a certain periods of time, and thereafter sell them. They get the
share of profits or loose money based on the prevailing share prices. They may not be interested
in the company’s policy or management at all. However, if they buy a large chunk of all shares in
the market of that company, they may be eligible for company rights. The shares may exist
indefinitely, with no maturity time.

A bond: A bond is simpler to explain. It is a type of debt. The issuer will sell a bond with a
promise to return the amount of the bond sold plus a declared amount of interest after a period of
time, usually called, ‘ on maturity’. Let’s explain from another angle. A company may want to raise
funds for a project, which might yield profits in a year’s time; the company may raise the loan from
the market in the form of bonds. It may declare to give the amount plus a certain amount as
interest, in say, 18 months. They may have thus successfully launched a new project without
investing their own money in it.
A debenture is a similar type of loan, which a large company or the government raises to finance
some projects. The debenture holder gets the amount and the interest at the end of the defined
period.

How are bonds different from a share?

 Bondholders have no rights or stakes or equity in the company and after the maturity of
the bond, all relationship with the company ends.
 The company issuing shares will pay up the shareholder only if the company makes
profit. If it faces losses, so do the shareholders. The amount to be paid by the company
depends upon the profits made, bonuses declared are divided by the total number of
shares floated by the company, the company issuing a bond has to give the amount
stated at the time of sale at the designated time, and announced terms, irrespective of
the fortunes of the company.
 35

Money market: Just as you approach a bank for loans against purchase; education; expansion;
start-up and have to pay back with interest and within a time frame, banks themselves want loans
from other banks for generating funds; expansion; projects; capital investment and servicing
liquidity requirements, (or the money you want to withdraw from your bank) Now these banks
approach other banks for loans, generally very short term, for even a day or few hours. Within this
time they service some short errands. The lender bank uses the idle money and makes profit
while the lendee bank need not withdraw its investments for these purposes.

Call money rate; The rates at which banks give loans to other banks is called Call Money rate.
European banks follow the LIBOR or 'London Interbank offered Rate'.

During bad times the lending rate is higher. Say in October 2008, in the aftermath of the recent
global bloodbath, the call money rate in India was pegged at 20%. Now this was high as this
restricts any banks growth activity. If all banks stop growing, their normal operations will suffer.
Hence the dangers of slow down are high if call money rate is high. Generally the governments
intervene to check both: a too low rate or a too high rate.

If the call money rate were too less, there would be frenzied banking activity. The Market would
be flooded with a heavy dose of currency, and loans would be easy. This might lead to over
activity and finally inflation or overheating or both. In 2007 there were suggestions that our
economy was overheated primarily for these reasons. Overflow of rupee, easy credit availability,
too much construction activity makes the situation appear like overheating – a situation wherein
an economy is not able to absorb too much activity in a short span. This phase witnesses
frenzied economic activity, the productivity activities are very high, demands are unrealistically
high and the growth rate is unsustainably high. The economy is said to be in a boom time.

Prime Lending rate (PLR) PLR is a special rate a bank offers top its privileged lendees or
clients. They are most favored customers who are highest credit worthy, or rich, and take heavy
loans and have a rather good track record. However PLRs are usually standard or benchmark
rates declared by a bank. Loans offered to all other products like car loans personal loans or
business loans are compared with this rate. For example, a bank may fix 13.5% as PLR. They will
assign personal loans to be 2% more than the PLR. Or they may offer a discount that is loans to
some categories below the PLR to attract customers.

Recession: When there is a significant decline in economic activity over two successive business
or economic cycles, the economy is said to be in a recession. For example, if in the US, any two
quarters report a decline in growth rate, the US economy is said to be in a recession. In India,
since the quantified business cycle is GDP, measured annually, if there are two negative growth
rates in two successive years, it is recession.

Successive periods of recession lead to a depression. India has had no serious recession and
therefore no depression ever. The US and the European economy was said be in a depression in
the 30s, up to the Second World War.

While the present crash may put the US economy in a recession, (some economists/ analysts
predict six months to a year of depressive commercial performance) India is said to have skirted
recession due to in built strength of our sound economic base.
 36

Gross Domestic Product:

One of the most important terms for all of us is the oft-heard term: GDP. It is defined as the total
market value (in currency terms) of all final goods and services produced within the country in a
given period of time, usually a calendar year. The GDP specifically excludes all foreign grants
loans or imports. Therefore the measure is purely indigenous and a true indicator of a country's
own growth potential.

GDP is also the measure of national income of the country. Its annual increase over the previous
year is known as GDP growth rate or simply as growth rate.

Let us understand this growth rate in terms of actual illustrations. India's GDP is I trillion dollars
plus. If it grows by 9% today, it shall mean an annual growth of 90 billion dollars or rupees
36,000000,00,000 or 3,60,000 crores or 3.6 lakh crores by our country.

India has recorded impressive GDPs for the past few years pegged at 8-9%. However in 2008 the
growth rate shall be around 8 % in view of global economic meltdown. In the 70s and 80s, India’s
rate of growth was consistently slow and laggardly at around 3%. This slow rate of growth was
called the ‘Hindu rate of growth’ by disapproving economists.

Let us have a comparative view of India's impressive position in the world.

Country GDP ( $ bn) rank

US 13.8 1st
Japan 4.4 2nd
Germany 3.3 3rd
China 3.29 4th
United Kingdom 2.7 5th
France 2.6 6th
Italy 2.1 7th
Spain 1.42 8th
Canada 1.3 9th
Brazil 1.3 10th
Russia 1.29 11th
INDIA 1.1 12th
S Korea 0.9 13th

SOURCE: THE WORLD BANK, 2007

The Eurozone as an economic block is at second place with $ 12.1 tn GDP value.

It is noteworthy that India has surpassed South Korea in terms of GDP value.

GDP at PPP: Till now we were comparing growth in dollar terms. We will see some amazing
results, when we compare our GDP against other countries in PPP terms (Purchasing Power
Parity) or the value of GDP in local currency.

GDP at Purchasing Parity Power for top five countries in the world are:
 37

1. The US $ 14 tn
2. China $7
3. Japan $4
4. India $3

India comes at world number 4 when evaluated by GDP in local currencies.

Shorting: According to the data released by SEBI, stocks worth over $ 3 bn were short sold by
unregistered foreign anonymous players using the controversial PN route. They are the sub
clients of the registered FIIs in our stocks.

P/E Ratio: Price to Earning ratio is a term increasingly used in the contemporary corporate
analyses. In simple terms it means the ‘average return on every rupee invested’ in a specified
time. As an example, if on a rupee one lac invested for one year, the return is Rs 10,000, the P/E
is 10. Generally, while fixed deposits presently yield one rupee per every ten rupees invested on
an average, one rupee is yielded per every rupees two that is invested in leading blue chip
companies. Hence the rush for easy though not safe money!

Blue Chip Stocks: A company whose market ‘reputation’ in terms of profits, earnings is high, its
shares are relatively stable, and regularly yield dividends; its scrips are called ‘blue chip’ stocks.
IT giant Infosys, oil major ONGC, RIL these are all blue chip companies. Here we must note that
while the company may show traits of stability and profits, which are statistically proven, yet its
scrips are subject to market instability and may rise and fall in sync with bear or bull hugs.

In the present free fall of the stock market, 29 companies listed in the 30-scrip Sensex of the BSE
just one company registered profit! That sole company was Harish Manvani led Hindustan
Unilever. All blue chip scrips were in the red. But they still reported profits in their Q3 (third
quarter) reports (October 2008) as in the case of Infosys, ONGC RIL et al.

Sunrise industry: Not very popular in the present complex, competitive, technology driven
globalised economy. Yet, let us know its intrinsic worth: Any industry, which is new or at a
nascent stage of its development and holds brilliant future in terms of demand, growth, expansion
and therefore consistently increasing its profits. Sometimes in the 70s and late 80s computer
making was a sunrise industry. Wind energy manufacturing is at present a sunrise industry.

Can you think of more?

Market Cap: Market cap or market capitalization is the total value of a company’s shares as per
the prevailing rupee rates. For example if a company’s shares are worth Rs. 50 and it has 1 crore
shares trading today, its market worth or cap would be Rs. 50 crores.
By this very nature of measurement, the market cap of a company changes after every, or at the
most a few trading sessions.
As of 23rd October 2008, the market cap of top ten BSE listed companies were:

 Reliance Industries : 2 Lac Crores

 ONGC : 1.62 Lac Crores
 Bharti : 1.26 Lac Crores
 NTPC : 1.19 Lac Crores
 SBI : 88 Thousand Crores
 Infosys : 74 Thousand Crores
 MMTC : 70 Thousand Crores
 NMDC : 66 Thousand Crores
 ITC : 64 Thousand Crores
 38

 HUL : 55 Thousand Crores

Legends:
NTPC : National Thermal Power Corporation
MMTC : Minerals and Metals Trading Corporation
NMDC : National Mineral Development Corporation.
HUL : Hindustan Unilever Company

Brand: Branding relates to the consumer reaction, behavior and ‘attachment’ to a generally
established product in the market. Usually, the names like ‘Colgate’ ‘Xerox’ or ’Ambassador’
will need no further tools for explanation on what they stand for. Their respective association
with toothpaste, Photo copying and cars is complete. Consumers react correctly and
spontaneously such that the relation appears natural.

In all the three cases, we can say successful branding is at work.

Now consider these names; ‘Aim’, ‘Sharp’ and ‘Morgan’. Any idea what do they mean? While
‘Aim’ is a type of toothpaste; ‘Sharp’ is a photocopier machine, Morgan is a British carmaker.

Usually, when a product is sufficiently old in the market, it has a committed loyal segment of
consumers. Majority of the consumers are satisfied with its range of products/models for over a
considerable period of time; basic information of its major products and company details are
reasonably known to a sizeable segment, and has well established track record in the market, the
company may be said to be “branded.”

It cannot be said in totality that the craze for the Nano car is simply because of its cost. Iconic
industrialist Ratan Tatas’ name is synonymous with its decades old vehicle making in India;
particularly with more than a century of heavy vehicle manufacturing. Thus Nano comes with an
unmistakable Tata brand of quality and durability. The Tata Group is incidentally the 57 th most
respected brand in the world according to Brand Finance, a British consultancy firm. The firm
awarded the Tata Group as the most respected Indian brand.

Once the brand is established, the consumers themselves advertise the product through word of
mouth. They become the products’ mass ambassadors. In times of crisis, like in the present
scenario, people prefer using branded to new products.

In short, branded products are deemed to be durable, safe and trustworthy, of good quality and
well priced.

The World’s top twenty brands in 2007 were

Company Industry Country of origin

Coca cola Beverage USA

Microsoft IT USA
IBM IT USA
GE Finance USA
Nokia Telecom handset Finland
Toyota Automobile Japan
Intel IT USA
MacDonald’s Fast Food USA
Disney Entertainment USA
 39

Mercedes Automobile Germany

Citi Banking USA
HP IT USA
BMW Automobile Germany
Malboro Tobacco USA
AmEx banking and Finance USA
Gillette Personal Hygiene product USA
Lui Vuitton Leather/ Fashion France
Cisco IT USA
Honda Automobiles Japan
Google IT USA

Top Indian Brands

Below are listed some of the most recognized and respected of Indian brands. They have been
culled from various lists, awards and recognitions. The moot point is that their brand visibility and
respectability makes their expansion projects easier and funds availability faster.
5. Indian Oil Corporation
6. State Bank Of India
7. Bharat Petroleum Corp Ltd
8. Tata Consultancy Services
9. Reliance Industries
10. Hindustan Petroleum Corp Ltd
11. Oil & Natural Gas Corp
12. Tata Motors
13. ICICI Bank
14. Wipro
15. ITC

Market trends:

Telecom:

India finds a voice; The World listens

In the most lucrative and the phenomenally growing world telephony market, India has
demonstrated convincingly, the advantages of a large population with an increasing purchasing
power. Consider this statistic: While the entire population of Finland – the giver of Nokia phones
to the world- is 5 million; India has a 1000 million plus population. With India’s tele density of 26,
there are more than 300 million phone users!

Clearly India is leading the global telecom revolution.

In the telecom market, India’s subscriber base as on Oct 2008 was around 315 million, with
Airtel’s share being 80 million.

Airtel is now the third largest telecom operator in the world after China Unicom and China Mobile.

Please note and appreciate that while the Chinese consumers are largely captive and the
companies are state owned, Airtel operates within a private corporate regime and against large
and efficient companies, the real time hero is Airtel.
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Aviation

The industry crash-lands, all hurt:

While 2007 saw Indian aviation grow at phenomenally high annual rate at 25%. By 2010 500 new
aircrafts would have flown over Indian airspace. There were massive demands for new aircrafts
from all major Indian airlines. This had made the Indian airways, one of the most ‘lucrative’
aviation markets in the world.

The logic at the base of aviation growth in India was simple and widely accepted. India’s strength
has always been the middle class, which has recently acquired the requisite economic credentials
Any comparison with our strong 300 million middle class-consumer base contrasted with an
average European country’s 5 – 10 million entire population, makes Indian markets impregnable
and formidable or simply very tempting. It was assumed that eventually, due to rising economic
activities, more and more of this 300 m strong army will use the airways. Hence, the scramble to
be in place before the floodgates of profits opened.

The assumption proved wrong. Rising input costs, expensive air fuels, consumer preference for
trains, lack of equity flow to the aviation markets were already crippling the sector just before the
economic collapse.

Of late, particularly in the last year, mergers and acquisitions, strategic alliances have been
frequently reported in the Indian aviation sector.
Almost all the M&A activities have been survival strategies merely in order to keep flying! The
aviation market was reporting a collective loss of over Rs. 4,000 crores. It was to arrest or stop
this drain; the airlines were forced to team up.

 While under a consulting major, Accenture’s supervision, Air India and Indian Airlines
(Indian!!) become one as Air India, then under V Thulasidas.
 Subrata Roy’s Sahara was acquired by Jet Airways to be renamed as Jet Lite.
 Air Deccan merged with Kingfisher and is called Kingfisher Red.

This left the market with two major players, Naresh Goyals’ Jet Airways and the flamboyant ‘beer
king’ Vijay Mallaya’s Kingfisher. Now, even these two have formed an operational alliance to form
an understanding on routes, pricing etc. to stem their individual losses. It is said that together this
strategic alliance will rule over 60% of the market share.

As of now, all independent airlines are making losses. Captain Gopinath’s Air Deccan pioneered
no- frills attached ‘Low cost’ airlines or carriers (LCC) have been a flop –show in India and the
days of flying king-size are over.

Aviation and the global financial meltdown or crisis

In early October, the drama of the golden handshake of involuntary job cuts was enacted right
through our television set. The ousted Jet employees went emotionally berserk; knocking on any
door, which could help them get their workstations and dreams back. The reasons for this drama
have been outlined earlier. The aviation pay packages and service conditions were based on the
assumption that the market will boom one day. The last straw was the meltdown, which cut off
credit supply. Usually, credit is required for expansions, but the aviation industry reeling under
accumulated debts perhaps couldn’t do without a fresh injection of cash. This was not
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forthcoming, as all global and Indian financial institutions had no cash to give. Hence the smart
young professionals found themselves ousted by the management.

Retail:

The retail Pull: Reliance attempts to replace the vegetable rehris

Not long ago, questions on availability of self-drawn vegetable rehris (wooden carts) were regular
queries by new entrants to any colony in India, across its vast 4000 towns and cities.

The complete landscape change in the retail sector follows basically the same logic, as noted in
the aviation sector. But the magnitude of this analysis is overwhelmingly gigantic. Theoretically a
billion plus population could be the client base. Clubbing the lower income group with the middle
class, living across the 4000 towns or so, the client base could well be 400-500 million! Compare
this with 300 million of the entire United States population. Or 20 million of Australia! Or 5 million
of Finland.

This logic has made major brands like Bharti and Reliance foray into retail; world retail majors like
Wal Mart, rated as one of the largest of all companies in the world; German retail giant Metro;
French CarreFour are all set to expand their pilot operations/enter India.

Indian bigwigs are Kishore Biyani’s Big Bazaar, Subhiksha, Vishal Mega Mart.

Here we exclude the important lifestyle retails chains like Trent, Pantaloons etc. and all the visible
aspects of retail growth like the surging 300 mall projects across the country. These are economy
related signs of urban growth and should be seen as a logical growth pattern. For conflict and
frictions see below:

It is estimated that Indian retail potential is close to $ 300 bn. Nearly 20 million people are already
employed in the retail sectors. Since much of the $ 300 bn is in the unorganized sector, virtually
this sector is up for grabs.

The controversy: Before this treasure was discovered and the entrepreneurial retail hunters
landed; India already had 12 million strong kirana or mom-and-pop stores. It is a matter of fact
that these will be affected depending upon their geographic location (in towns and cities) relative
to the presence of corporate retail stores and individual proximity to the nearest chain outlet.

While the local friendly neighbor ‘lala’ was humble, even jovial, a friend in need, gave goods on
credit to the known customers, was accessible, arranged for free home deliveries at odd hours;
no such freebies are available with the impersonal; corporate outlet. However, there are
compelling reasons for using corporate outlets. They offer good quality, wide-ranging home
products at cheaper rates along with an environment that is safe, hygienic or let’s say, cool! Since
bulk purchase makes sense, these shops give heavy discounts. This impacts the average
household budget rather substantially.

With some give-and-take, people have accepted these stores in their shopping schemes.

For once the unorganized vegetable sellers and small petty traders came spontaneously together
and protested rather violently against Mukesh Ambani’s Reliance Fresh, selling mainly fresh
vegetables and such products. This made the country sit back and look at the matter. Reliance
Fresh has not picked up operations fearing such a backlash.

The government has yet to frame an appropriate strategy on this tricky issue. While a socialist
leaning Indian state cannot disregard the concerns of a segment of its people especially on their
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livelihood issue, the Indian citizen as a consumer has a right to choose, whatever the criterion be.
Certainly a monthly saving on an average person’s budget needs be encouraged.