The Financial Quarterly December, 2016

BUSINESS World Fiscal MONEY TOMORROW Finance Economics BUSINESS

CULTURE MONEY TOMORROW QUESTIONS AND ANSWERS BUSINESS Investment
BUDGET Monetary MONEY Fiscal QUESTIONS AND ANSWERS BUSINESS assets MONEY debt
_________________________________________________________________________________________________
Analysis of how the budget
2017 will impact major

AndTheTrump’et
industries in India

Blew
GST
How a slew of protectionist policies
is affecting the world
PAGEor8 boon?
Curse

TowardsaCashless
EXPERT
Economy
OPINION
De”Modi”tisation and its effects
PAGE 11
Watch out for Deepak
Pande’s insight into the

China“yawning”?
banking industry of India

Devaluation myths busted

PAGE 13

CREDIT
RATINGS
_________________________________________________________________________________________________

bank&
Is Standard i ng
Poor’s ratings S o cial M edia Wo r l d M o netar y Po l i c y
“Standard” or “Poor”

GAME
THEORY
Payment banks
For strategy enthusiasts
Upfront quotes Brexit Low interest Rates
_________________________________________________________________________________________________
 2 SECTION NAME

F R O M T H E E D I TO R S ...

Dear readers,

We, the members of Investurn, the Finance and Investment Club of IIM In-
dore, Mumbai Campus are proud to present to you the 2nd edition of
our quarterly magazine, “The Financial Quarterly”. After the overwhelm-
ing response and huge success of the 1st edition, we decided to come up
with the 2nd with a promise to make it bigger, better and grander.

By covering a huge gamut of topics ranging from “Effects of GST” to “Budget

2017 analysis” we want to offer something that would not only help our read-
ers be aware, but also become contextually relevant in the areas of Finance
and World economy. With the advent of Globalization, we believe in publish-
ing articles that would not only capture the effect of Indian policies but also
the International vagaries that can have a profound impact on India.

We started small, but are motivated towards making this magazine grander
and more visible through the choice of articles and quality of the content. We
are also proud to say that this time we have opened up the magazine to ar-
ticles from authors outside the Mumbai Campus. We have contributions from
a student of IIM - Lucknow, one of the finest B-school in the country and
from a very esteemed expert in the area of banking - Mr. Deepak Pande.

We hope you find the views expressed in all the articles insightful and stimu-
lating. Please let us know about your experience of reading the 2st edi-
tion of “The Financial Quarterly”. We hope to see you again next quarter.

Investurn Team
The Finance and Investing Club
IIM Indore, Mumbai Campus

(The views expressed in all of the articles are those of their writ-
ers and we do not take any responsibility for any actions based

B u s i n e s s M a g a z i n e | A p r i l 2 0 11
 SECTION NAME 3

CO N T E N T S
   MAGAZINE                                  

4 Catroonique
Just for fun

5 GST: Correct way forward?

GST: Curse or boon? Watch out how the expected GST bill will impact
major industries in India Inc.

8 Expert opinion
Source: Economic Times
Banking veteran Mr. Deepak Pande talks about his views, visions and
opinions about the banking sector in India

11 Budget 2017: Analysis

A detailed analysis on how Budget 2017 will impact major business
sectors in India

15 Is Standard & Poor’s credit ratings

“standard” or “poor”?
Standard and Poor’s inability to correctly grade credit ratings of India.
Source: Health Care Executive
17 Contra Investing
Learn how contra investing will help you make money in bear markets
Source: BBC UK

19 Game theory
An interesting take on using game theory to determine strategy

21 Industry snapshot
How markets have performed across major industries in the past
quarter

B u s i n e s s M a g a z i n e | A p r i l 2 0 11
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C A R TO O N I Q U E
    JUST FOR FUN                                     

Source: politicalcartoons.

Source: Moneycontrol.com
Raghuram Rajan

Raghuram Rajan

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 SECTION NAME 5

GST

CO R R E C T WAY F O R WA R D ?
    TAXATION                                     
Paradoxical as it may seem, ‘A fine
is a tax for doing wrong; a tax is a
fine for doing well.’ Tax has puzzled
human beings for the longest time.
Taxes have the ability to evoke hap-
piness and sadness all at once; they
act as a sign of prosperity and then
one has to give away a part of it. It is a
price that has to be paid in exchange
for a civilized society, or so they say.
In India, Kautilya’s Arathashastra,
written as far back as 300 B.C, was
the comprehensive treatise that first
listed the rates and methods of tax-
ation. A formal income tax depart- Source: Business Insider
ment was established in 1922 and
it was the first time that a legal act In indirect taxation, the providers of goods and services act as agents of
imposing income tax was formu- the government that collect taxes from the end consumers and trans-
lated. As for indirect taxation, it was fer it to the government. Thus, the burden of indirect taxation falls on
first charged in the form of sales tax the common man utilizing the goods and services for personal con-
in the state of Madras in 1935. sumption. Indirect taxes are said to be unfair to the lower economic
strata of the society as they are charged uniformly despite differences
In India, we currently have two forms in income. However, a very tiny section of the population (3.81% to be
of taxation – direct and indirect tax. precise) pays direct tax and so, the government charges indirect tax for
The basic difference between these a wider tax base and higher revenue collection. Indirect taxes also have
two forms of taxation is that the lower administration costs for the government and are easier to collect.
burden of direct tax lies on the indi- As per the data from OECD and India’s Ministry of Finance, India’s direct
vidual and the burden of indirect to indirect tax ratio is 35:65 as against 65:35 in favor of direct taxes for
taxation can be shifted to another other OECD nations.
individual. Direct taxes are charged
on individual income and wealth As a telling example of being the largest democracy in the world, India
whereas indirect taxes are charged took 13 years to implement Goods and Service Tax (GST) which will finally
on goods and services sold. Some become applicable with effect from July 1, 2017. In a step towards increas-
examples of direct tax are income ing the ease of doing business, the following indirect taxes have been
tax, corporate tax etc and of indirect subsumed in GST – excise duty, service tax, VAT, Central Sales Tax (CST),
tax are excise duty, value added tax entertainment tax, tax on lottery, betting and gambling, entry tax, luxury
(VAT), custom duty, service tax etc. tax, purchase tax and related surcharge and cess.

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GST will have four
rates of taxes – 5%,
12%, 18% and 28%.
A person who sup-
plies goods and/
or services whose
value exceeds Rs. 20
lakhs in a financial
year (Rs. 10 lakhs
in some special-
category states) is
required to regis-
ter and pay GST.
As can be observed, the list is lengthy
and poses unnecessary compliance
issues for businessmen. All of these
indirect taxes have different return
filing and tax payment dates. The
Honorable Finance Minister, Arun
Jaitley, who is also the chairman
of the GST council certainly gave
them a reason to rejoice through his
budget speech in February 2017.
Ever since the Kelkar Task Force first
suggested the GST scheme in the
year 2003, it has been discussed in
many budget announcements and
was finally introduced through ‘The
Constitution (One Hundred and First
Amendment) Act, 2016’.
scheme’ wherein if they have a turnover up to Rs. 50 lakhs, they can pay
GST at a flat rate of 1-5% and need not maintain detailed invoices.
As per the current indirect tax regime, some of the taxes are collected
by the state and some by the Centre. In GST, there will be a dual taxa-
tion system in the form of Central GST (CGST) and State GST (SGST). An
additional Integrated GST (IGST) would also be levied by the Centre on
inter-state supply of goods and services and also on imports. Also, man-
ufacturers do not get the input tax credit of excise duty and service tax
(levied by the central government) against VAT (levied by the state gov-
ernment) on the same goods. There is also no input tax credit for goods
sold from one state to another. Input tax credit is the indirect tax paid
on purchases that should be set off against the indirect tax on sales and
only the balance tax on the actual ‘value addition’ should be paid. If input
tax credits are denied, it leads to cascading effect of taxes or tax on tax.
As per GST, the input credits of IGST can be used for CGST and SGST and
vice versa. However, the input credit of CGST and SGST cannot be used
against each other. This is done with a view to maintain separate revenue
streams for the Centre and the states. This means that various taxes of the
Centre that are subsumed under GST can be set off against each other
and similarly for the states as well. So, GST has reduced the hidden costs
of doing business (tax on tax) to quite a large extent.
States have a very high reliance on indirect taxation for their revenue
requirements. As GST may hamper state earnings, it has been decided that
the Centre will compensate them taking fiscal year 2015-16 as the bench-
mark and an additional 14% on that amount considering the growth
rate of tax revenues. This compensation may well run into excess of Rs.
50,000 crores. On a lighter note, alcohol in Goa will still be cheap as it is
the only item that remains purely under state taxation and doesn’t fall in
the ambit of GST. Also, five petroleum products (crude, natural gas, ATF,
diesel and petrol) will come under GST after further notice is released and
tobacco will continue to have excise duty levied on it in addition to GST.

GST is a destination based tax which

means that it will be collected in the
state where the goods and services
are consumed rather than where the
goods and services originate. GST will
have four rates of taxes – 5%, 12%,
18% and 28%. A person who supplies
goods and/or services whose value
exceeds Rs. 20 lakhs in a financial
year (Rs. 10 lakhs in some specialcat-
egory states) is required to register
and pay GST. In order to reduce the
administrative cost burden of small
vendors, GST also has a ‘composition

B u s i n e s s M a g a z i n e | A p r i l 2 0 11

A project by the name of ‘Saksham’ has
been initiated by the Central Board of
Excise and Customs (CBEC) in order
to handle the scaling up of IT infra-
structure needed to handle the large
number of taxpayers to be registered
under GST. A private limited company
by the name of Goods and Service Tax
Network (GSTN) has also been set up
to provide an online portal for regis-
tration, filing of returns and payment
of GST.
GST will bring about relief that was
long overdue across all industries
in the form of reduced administra-
tion costs. In case of the pharma
sector, the Model GST law provides
for a refund of accumulated input
tax credit that could not be set off
due to lower output tax rates. Also,
since the inter-state tax on goods can
be claimed as input credit, pharma
companies can improve their logis-
tics costs to enhance profits. In case
of the telecom sector, the services
are provided circle wise. These circles
sometimes cover 2-3 states and so, in
order to determine the point of taxa-
tion, they would now have to maintain
accounting records state wise instead
of the erstwhile circle wise. Also,
As per a report by
Motilal Oswal, auto-
mobile costs may see
a fall of upto 8%. Fly-
ing by air will become
dearer due to higher
rates of tax appli-
cable under the GST.
SECTION NAME 7
Source: India Briefing
accounting records state wise instead of the erstwhile circle wise. Also,
another problem in recognizing point of taxation is that sometimes
recharge coupons are sold in one state and the mobile phone being
used in another state is recharged. Telecom companies would also
need to file returns in each state as there is no provision of centralized
registration. The power used in providing telecommunication services
uses petrol which continues to come under excise duty and sales tax
charges. Under GST, the cost of mobile phones and laptops will rise.
FMCG companies stand to gain through lower tax rates except in the
case of ‘demerit’ goods such as tobacco and aerated drinks. As per a
report by Motilal Oswal, automobile costs may see a fall of up to 8%.
Flying by air will become dearer due to the higher rates of tax applica-
ble under GST. There is a belief that tax collections will increase signifi-
cantly through GST and this will in turn improve infrastructure due to
increased government spending on the same. In case of the oil and gas
industry, there would be input tax in the form of GST for spending on
plant and equipment but no output tax in the form of GST as the date
for levy of GST on five petroleum products has not been announced.
Due to this, they would have to comply with the earlier schemes as
well as GST. Banking and financial services may become costlier as the
service tax charged earlier is less the GST levied.
In order to truly progress, India needs to focus on direct tax reforms
such as the Direct tax Code (DTC) along with indirect tax reforms
like GST. Although GST portrays to be the much needed change the
economy required, the challenges that lie ahead of us to go through
with the smooth implementation and collection of GST are far more
than those we have left behind. But again, let us not forget – Well
begun is half done!
- Bhoomi Agarwal, PGP Mumbai, IIM-Indore
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 8 SECTION NAME

EXPERT
OPINION
   BANKING                                  

Deepak Pande is a seasoned banking professional with over 30 years of experience in Indian Markets. He is a Business
Development specialist across diverse Banking Products. Expertise in Branch Banking, Retail Banking, Branch/ATM
Expansion, Business Banking, Trade Finance and Retail Investment Products including Retail Broking. He currently
works at Suljhan Consulting as a Co-founder and CEO. We got an opportunity to catch up with him to understand
his views about the banking industry, his vision and opinions about the future of this industry.

Q 1. What do you think about the impact that the government’s initia-
Transaction tives to go cashless will have on the banking system?
cost is high- A. Bankers have always been creating an awareness in the mind of custom-
est for Brick ers to migrate to digital channels. There are twin benefits to the Bank when
and Mortar Banking. customer switch to alternate channels viz ATMs, Net Banking, Telebanking,
Mobile, debit/credit cards or mobile app. Firstly, transaction cost is highest
Post demonetization for Brick and Mortar Banking i.e. when customer comes to the branch and its
a large number of cus- reduces drastically when customer migrates to ATM, Telebanking, Netbanking,
tomers have shifted Mobile Banking, e-wallets and credit/debit cards, in that order. Post demoneti-
zation, a large number of customers have shifted to digital transactions, which
to digital transactions, would mean cost savings for the Banks that, in turn, would increase the profit-
which would mean cost ability of the Banks. Secondly, when you are able to successfully migrate the
savings for the Banks customers to alternate channels that provides Banker an opportunity to serve
an even larger customer base, as footfall comes down, and an opportunity to
that, in turn, would cross-sell various products, including third party products.
increase the profit-
ability of the banks As regards cashless economy, it would be difficult to say, at this juncture, how
much time it would take to become cashless economy but we have taken a
big stride towards less cash economy. None of the countries in the World has
become cashless so far.

Q 2. What do you think Urjit Patel is doing to continue the progress done
by Raghuram Rajan regarding NPAs?

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 SECTION NAME 9

A. Cleansing of the Balance Sheets have formally commenced the opera-

of the Banks was the initiative taken
by erstwhile RBI Governor Dr
Raghuram Rajan. The way NPAs
have got unfolded during last 18-24
months period, it appears that these
were kept under carpet for quite some
time. With the passing of Bankruptcy
Act and empowering Bankers with
Surfaesi, auctioning of the collat-
eral securities, quick disposal of
pending cases in debt recovery tribu-
nals, converting debt into equity by
taking Management control, putting
the stressed corporate on block and
needless to mention, a crackdown on
the defaulting borrowers by sending a
stern message of repayment of debt,
has set the ball rolling. Some of the
large Corporates have voluntarily
sold assets to reduce the debt burden.
Since RBI has given a deadline of
31st March 2018 to Banks for clean-
ing up their respective balance sheet.
There is every likelihood that policy
of cleansing the Bank’s Balance Sheet
would continue in the present era of
Dr Urjit Patel. Government has been
infusing capital in PSBs to meet CAR
requirements, based on achievement
of certain parameters but this budget
has no provision of funds for infusion
into PSBs, Either Government will
take mid-year decision or PSBs will
have to raise funds themselves. The
next year budget has a proposal of
setting up a Rehabilitation agency(Bad
Bank), which may take over NPAs of
the PSBs.
Q 3. Do you think the RBI’s ini-
tiatives to strengthen the formal
banking system in rural India
through payment banks and small
finance banks will pay off?
A. Financial Inclusion is the buzz
word for issuance of in-principle
specialized licence to 11 entities as
Payment Banks and 10 entities as
Small Finance Banks.While Airtel
Payment Bank and India Post Bank
tions, rest are awaiting final approval
from RBI barring 3 entities which
have withdrawn the applications. 4-5
Small Finance Banks have also com-
menced the operations. While bigger
Banks were also using Business
Correspondents for expanding the
reach but these specialized Banks
would be more effective in reaching
out to un-banked areas for extending
banking services. When one takes a
closer look at the criteria of granting
specialized licences, majorly payment
Bank licences have been granted to
telecom service providers in addition
to other players like NSDL and PayTm
whereas all SFBs licence have gone
to micro-finance companies. All these
entities have a large consumer base
of their own, which could become
immediate target segment of these
newly launched banks. As regards
reach of these Bank, consumers/cus-
tomers are widespread throughout the
country in the form of mobile users
and small borrowers. India Post has
a network of 155,000 Post Offices,
which will be offering Banking ser-
vices over a period of time. Airtel
and Reliance has 300 million and 100
million subscribers, which will be the
target segment. Airtel payment Bank
has acquired 2 million customers in
less than 2 months period that itself
is a landmark figure and now that
Bank has announced plan to cross-
sell third party products. Jan=dham
accounts have already covered more
than 50% population of country, rest
of the population would be covered
over a period of time by these special-
ized Banks.
Q 4. Is the government’s decision to
reduce the recapitalization amount
given to banks in budget 2017 from
22000 crore to 10000 crore an indi-
cation that the government has left
banks to survive on their own?
Government has been infusing funds
With the
Basel III likely to be
implemented from 1st
April 2018, Banks need
to be self-sustained
to raise funds despite
limitation that Govern-
ment holding in these
Banks can not go below
51% barring IDBI Bank.
into PSBs for last so many years, With
the Basel III likely to be implemented
from 1st April 2018, these Banks need
to be self-sustained to raise funds
despite limitation that Government
holding in these Banks can not go
below 51%, barring IDBI Bank.This
year first tranche amounted to 22,915
crores whereas further fund infusion
of similar amount is expected before
31st March. Since Government had to
provide relief to middle class, farmers,
economically weaker section while
containing fiscal deficit at 3.3% level,
it appears that the Government could
not allocate funds in budget for infu-
sion into PSBs but during the course
of the year depending on enhanced tax
collections post demonetisation, it is
likely to allocate funds to some of the
weaker PSBs. Some of the stronger
Banks would be in a position to raise
funds on their own based on the sound
financials.

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 10 SECTION NAME
Q 5. What are your thoughts on
the traditional debate between
Relationship banking vs arm’s
length banking.
Customer acquisition is the first step
towards Relationship Banking offer-
ing traditional banking products to the
customers besides extending delight-
ful customer service.The traditional
products are offered through the cus-
tomer interface officials whereas
specialized services like Merchant
Banking,Investment Banking,
Trusteeship Services, Factoring,
Forfaiting, Insurance, Mutual Funds,
Wealth Management Products are
offered through subsidiaries or
through partnership, Even Wealth
Management Service will also have
to offered through a subsidiary main-
taining an arm’s length from the Bank
over a period of next two years. Since
Banks are moving towards becom-
ing one stop financial shop where all
financial requirements of the cus-
tomers could be met at one place,
it is necessary to make available all
B u s i n e s s M a g a z i n e | A p r i l 2 0 11
it would get into top 50 banks of the
World in terms of assets. With one-
fourths of the Banking business in
the Indian Markets, SBI would look
forward to increasing its market share
to the next level. The enhanced reach
through associate Bank network will
enable SBI to increase its presence in
the regional areas like SBBJ has more
presence in Rajasthan, SBH is pre-
dominantly present in Telangana and
Andra Pradesh. Similarly SBP, SBM
and SBT will provide it enhanced
reach.This extended reach through
associate Bank network will help SBI
Source: www.umassmed.edu to meet financial inclusion objective of
RBI. The merger would increase the
market capitalization of SBI that will
financial products through distribu- help it to bridge the gap between it and
tion network. As all Banks have been HDFC Bank. This merger could also
moving towards Treat Customer be construed a pre-cursor to the con-
Fairly (TCF) guidelines, they have to solidation phase in the Indian Banking
adopt a customer-centric approach Industry over a period of time.
rather than Bank-centric or a prod-
uct-centric one. While relationship
Banking focuses on the traditional
products, specialized products are
offered through subsidiaries to avoid
mis-selling to customers. With the
movement of wealth management
products to a subsidiary, the objec-
tive of arm’s length Banking would
be met to a certain extent.
Q 6. What effect will the merger of
SBI and its subsidiaries have on the
industry?
As announced by the SBI Management,
the Associate Bank merger would
be effective from 1st April 2017.
That would result in formation of
a global size bank with asset base
of 32 lakh crores, 22,000 branches,
58,000 ATMs. The merged entity will - Deepak Pande
have 25% share of the business and
 SECTION NAME 11

B U D G E T 2 017
    FISCAL POLICY                                   

Given the heavy usage of economical terms and verbose construction of sentences, the Union Budget usually elicits
unenthusiastic reactions from the common man. But the fact that India stands out as a bright spot in the world eco-
nomic landscape despite tumultuous international developments and radical domestic policy actions shows that her
macro-economic stability continues to be the foundation of her economic success. The government should be cred-
ited for not indulging, this year, in any ill-advised fiscal adventurism or resorting to sheer populism for good ratings.
This year, the government came up with a “Transform, Energise and Clean India” agenda to transform the quality
of governance, energise the various sections of society and clean the country from the evils of corruption, black
money and non-transparent political funding. The budget also witnessed the historic merger of the Railway Budget
with the General Budget to bring the railways to the centre stage of government’s fiscal policy without “compro-
mising the functional autonomy” of the Indian Railways. The government also did away with the plan and non-plan
classification of expenditure, a remnant of the Planning Commission, to facilitate optimal utilisation of resources.
This paper discusses the Union Budget and its provisions under the following themes:

I. Indian Railways
“For 2017-18, the total capital and development expenditure of Railways has been pegged at Rs. 1,31,000 crores.
This includes Rs. 55,000 crores provided by the Government.”

Indian Railways is envisaged as a microcosm of the society and the lifeline of our economy. But excessive popu-
lism and bureaucratisation over successive years have left railways in a shambolic state. While the setting up of a
railway regulatory authority for organisational consolidation, decentralisation of operations, setting up of biode-
gradable waste to energy plants and realistic pricing of fares, as proposed in the Budget, is imperative, an equally
strong political intervention is required to dismantle vested interests in the monopoly. Introduction of onboard ser-
vices like quality catering, hospitality services by uniformed personnel, access to WiFi and entertainment, special
emphasis on hygiene and cleanliness and provision of bio-toilets have been inundating the Rail Budget for last
couple of years. A “party with a difference”, when in power, was expected to undertake administrative reforms to

B u s i n e s s M a g a z i n e | A p r i l 2 0 11
 12 SECTION NAME
overhaul the railways structurally.
The creation of Rashtriya Rail
Sanraksha Kosh, competitive ticket
booking facility and elimination
of unmanned level crossings are
welcome changes to enhance pas-
senger safety and travel experience.
The operating ratio target of 94.9
as against 92 for the previous year
seems optimistic even in the wake of
increasing number of rail accidents.
In brief, the doing away with the
rail budget is a welcome acknowl-
edgement of growth as a process
of change that requires flexibility,
adaptability and the willingness to
experiment. But how the new institu-
tion plans to deal with the burden of
legacy and carve out a niche for itself
to set the pace and steer transfor-
mation is unclear. While the Finance
Minister expressed immense sat-
isfaction at saving about Rs. 9,500
crores as dividend on the budget-
ary support to railways, he remained
silent on how to go about financing
its pension liabilities which are esti-
mated to be about Rs.45,500 crores
in 2016-17.
II. Black Money and Electoral
Reforms
“Madam Speaker, the thrust of my
tax proposals in this Budget is stim-
ulating growth, relief to middle class,
affordable housing, curbing black
money, promoting digital economy,
transparency of political funding and
simplification of tax administration.”
B u s i n e s s M a g a z i n e | A p r i l 2 0 11
The government’s spirit to increase
tax buoyancy as well as compli-
ance is manifested in its proposal
to develop a robust digital payment
infrastructure in the country by lever-
aging the Jan Dhan-Aadhar-Mobile
(JAM) trinity. The ban on cash trans-
actions exceeding Rs. 3 lakhs per se
is insufficient to curb the menace of
black money. The lowering of capital
gains tax on immovable assets and
halving the income tax rate for the
low income group seems to be an
exercise in placating voters in the
aftermath of demonetization.
By reducing the maximum amount
of cash donation that a political
party can receive from an anony-
mous source from Rs. 20,000 to Rs.
2,000, the government seems to
have walked the talk on bringing
transparency in political funding.
The proposed amendment to the
Reserve Bank of India Act to enable
issuance of electoral bonds pur-
chased from authorised banks
against cheque and digital payments
only and redeemed only in the desig-
nated account of a registered politi-
cal party, further reiterates its resolve
to fight black money. However, in this
bureaucratic sleight of hand, it has
dodged the real question of investi-
gating the funding sources of politi-
cal parties. Nor has it laid down any
penal provision in this regard. Also,
political parties, owing to their par-
tisan nature, should be mandated to
disclose information sought under
under the Right to Information Act to
bring transparency in their otherwise
obscure way of functioning. The
government seems to have lost yet
another opportunity to address this
incoherence in electoral politics.
III. Rural
“The Government will continue to
work closely with the farmers and
the people in the rural areas to
improve their life and environment.
This is a non-negotiable agenda for
our Government. The total allocation
for the rural, agriculture and allied
sectors in 2017-18 is Rs. 1,87,223
crores, which is 24% higher than the
previous year.”
Increased allocations under the Fasal
Bima Yojana, computerisation and
integration of Primary Agriculture
Credit Societies, expansion of the
coverage of National Agriculture
Market (e-NAM) with enhanced agri-
cultural credit target are welcome
measures in raising the productiv-
ity of primary sector. The launch of
Mission Antyodaya for poverty allevi-
ation, availability of electricity, clean
drinking water and sanitation facili-
ties and stepping up of allocations
under the Pradhan Mantri Gram
Sadak Yojana and Pradhan Mantri
Awas Yojana will go a long way in
improving rural infrastructure. The
allocation of Rs. 8,000 crores for the
NABARD-anchored Dairy Processing
and Infrastructure Development
Fund is expected to modernize milk
processing units.
It is surprising, however, that the
“living monument of failures” of

the UPA government, MGNREGA,
regained its glory as the ‘nation’s
pride’ and also succeeded in garner-
ing the highest ever budgetary allo-
cation of Rs. 48,000 crores. Perhaps,
by appropriating the scheme and
laying claim to it by improving it
and making it more constructive, the
government is trying to salvage its
image among the rural population.
IV. Infrastructure – Make in
India/Digital India
“The total allocation for infrastruc-
ture development in 2017-18 stands
at Rs. 3,96,135 crores. This magni-
tude of investment will spur a huge
amount of economic activity across
the country and create more job
opportunities.”
By loosening its purse strings for
the infrastructure sector, the gov-
ernment has given a fillip to afford-
able housing and connectivity, both
transport and telecom. Increased
allocations for highway construction,
SECTION NAME 13
airport development and the for cashless transactions is, there-
Sagarmala project are expected to fore, understandable. The proposal
spurge a huge amount of economic to strengthen digital payment infra-
activity and create new job oppor- structure and grievance handling
tunities for the masses. It is surpris- mechanisms is welcome. The pro-
ing, however, that the much publi- posed Payments Regulatory Board
cized policy initiatives, namely Make should aim at bringing parity
in India and Digital India, found only between physical cash and digital
a passing reference in the Finance payment transactions, with interop-
Minister’s speech. The National erability and access to a unified
Optical Fiber Network project payment infrastructure.
renamed as BharatNet, it seems, has
failed to reflect the national aspira-
tion despite several timeline revi-
sions and budget allocations.
The Income Declaration Scheme
2016, that preceded demonetiza-
tion of 500 and 1000 rupee notes,
was succeeded by a “surgical strike”
against black money, corruption
and counterfeit currency which led
to the stripping of high denomina-
tion currency notes of their statutory
status. The push for digital payments
through introduction of Aadhar Pay
B u s i n e s s M a g a z i n e | A p r i l 2 0 11
 14 SECTION NAME
In the spirit of Sabka
Saath Sabka Vikas, the
government has pro-
posed to set up Mahila
Shakti Kendras to pro-
vide convergent sup-
port services for em-
powering rural women
V. Education & Social Sector
“Quality education will energise
our youth. In the words of Swami
Vivekananda, “The education which
does not help the common mass of
people to equip themselves for the
struggle for life ………… is it worth
the name?”
The launch of SWAYAM platform by
leveraging information technology,
Skill Acquisition and Knowledge
Awareness for Livelihood Promotion
(SANKALP) programme to provide
market relevant training and inte-
gration of entrance examinations
under a National Testing Agency
are important reforms necessary to
build an able workforce. Pradhan
Mantri Kaushal Kendras stand out
as a shining example of harnessing
youth talent and empowering them
for better job opportunities. The
thrust given to Skill Strengthening
for Industrial Value Enhancement
(STRIVE) will strengthen the appren-
ticeship programmes through indus-
try cluster approach.
B u s i n e s s M a g a z i n e | A p r i l 2 0 11
On expected lines, most of the edu- the path of fiscal consolidation
cation related announcements this without compromising on the
year had little or no financial implica- public investment requirements
tion as the Higher Education Finance of the economy. Demonetisation
Agency envisaged in the budget last of high denomination bank notes
year is expected to raise up to Rs. and the proposed roll out of the
10,000 crores from the market and Goods and Services Tax are trans-
lend to government-run higher edu- formational economic reforms that
cational institutions. will have “epoch making impact on
our economy and the lives of our
In the spirit of Sabka Saath Sabka people”. The government has done
Vikas, the government has proposed the right thing by embracing the
to set up Mahila Shakti Kendras to historic opportunity at this cusp of
provide convergent support services change.
for empowering rural women with
opportunities for skill development,
employment, digital literacy, health
and nutrition. By granting infrastruc- - Written By Shreyans jain
ture status to affordable housing,
it has opened the gates for higher PGP IIM Lucknow
investment. Targeting bank lending
to the real estate sector, however, is
a risky proposition as it poses a sys-
temic risk of emptying the coffers
of state-controlled banks through
imprudent lending, as has been
observed in past years.
Conclusion
“When my aim is right, when my goal
is in sight, the winds favour me and
I fly.”
The International Monetary Fund
(IMF) estimates that the emerg-
ing economies will increase their
growth from 4.1% to 4.5% in 2017-
18. Thus, macro-economic policy is
expected to be more expansionary
which points to an optimistic outlook
for the next year. Amidst all these
developments, the government
has shown wisdom by choosing the

IS STANDARD & POOR’S CREDIT
RATINGS “STANDARD” OR “POOR”?
    CREDIT RATINGS 
Mercantile credit rating agencies
were established in the wake of the
financial crisis of 1837. These credit
rating agencies rated the debtors
according to their ability to repay the
debt. The importance of credit rating
agencies increased in early 20th
century as industrialization required
the financial instruments and thus
rating agencies to rate them. After
great depression in 1934, Securities
Exchange Commission formed in the
United States, and regulation helped
the rating agencies to grow. Later,
The rating agencies like Standard
& Poor’s, Fitch and Moody spurred
in the financial world also called
as Big Three as US and European
Governments gave them special
status. During the 1980s, the liberal-
ization trend and development of the
bond market in developing countries
increased the use of sovereign credit
ratings to access funding in interna-
tional bond markets. After 2008 sub-
prime crisis Big Three credit agency
were criticised for incorrect ratings
given to Lehman Brothers.
Amongst the Big Three Standard and
Poor’s, i.e., S&P is the most promi-
nent name in the rating industry.
The world’s biggest capital market
uses S&P 500 index considered as
one of the most commonly used
indices. The popularity of S&P can be
gauged from the fact that BSE tied
with S&P to use S&P brand in front
of BSE SENSEX on 19th Feb 2013. S&P
rates the long-term credit ratings of
the country depending upon the
likelihood of payment by the issuer,
the nature of financial obligation and
protection afforded in the event of
bankruptcy. It looks into the political
and economic stability of country to
assess the default risk. The company
rates sovereign bonds on a scale
from AAA to D whereas AAA con-
siders the highest capacity of obli-
gators to meet its financial commit-
ment and D for default of imputed
promise. AAA to BBB is known as
Investment grade whereas BB to D
is known as a speculative grade.
Big Three agencies have always
underrated India. In 1991, S&P rated
India’s sovereign bonds to BBB- with
the negative watch which considered
as just one grade above junk bonds.
In 2007, when India was growing at
9% S&P rated India’s bonds to BBB-
with the stable outlook. In 2008, after
crisis S&P and other rating agencies
were criticised for overestimation of
ratings. After that, all the rating agen-
cies followed the ultra-conservative
approach in rating the sovereign
bonds. Most of the country’s credit
ratings have been downgraded after
the 2008 crisis. In 2010, India was
B u s i n e s s M a g a z i n e | A p r i l 2 0 11
SECTION NAME 15
rated as BBB- with stable outlook
since then S&P has not revised credit
ratings. Even after 26 years of liber-
alisation, India has not been consid-
ered worthy of getting credit scores
more than BBB- according to S&P
thus this has resulted in higher bor-
rowing cost. China got BBB in 1992
and jumped to AA- in 2016.
In 2014, A political mandate shifted
India’s policies towards sustainable
growth. Despite global growth fal-
tering, India stood out as a haven
of stability and land of opportu-
nity for investments. In 2015, India
was the fastest growing economies
in the world and continued to hold
the title. The enactment of FRBM
Act for fiscal consolidation is ensur-
ing the credibility of both centre and
state governments. The GST bill and
Aadhar Bill will create the productive
ecosystem in the Indian market will
help to improve the growth in long
term. Monetary policy remains in
the stable zone from the Raghuram
Rajan’s tenure. The overall picture
of Indian economy both regarding
fiscal and monetary policy looks
bright. Despite all these facts S&P
has not revised its rating since 2010.
Angel Gurria, the secretary-general
of the Organisation for Economic
Cooperation and Development
(OECD) said that India deserves the
 16 SECTION NAME

credit ratings upgrade. According to

Economic Survey 2016-17, ”India’s
ratings have remained stuck at the
much lower level of BBB-, despite
country’s dramatic improvement in
growth and macroeconomic stability
since 2014 ”. Even Economists from
IMF and World Bank are very vocal
about Indian Economy they see India
as a next driver of global GDP.

Yield curve indicates the cumulative

priorities of lenders to a borrower
such as government. Yield curve
represents the long-term picture of
Economy and overall sentiments of
Investors.

Source: are
Following Reuters
the yield curves of
Indian and Chinese sovereign bonds
as on 03/03/2017

As we can see from the graph A Indian

yield curve is upward sloping stan-
dard curve and in Graph B Yield curve
is somewhat flattened compared to
Indian case. The investors perceive
good outlook for Indian Economy
in the long run compared to China.
China’s central bank is in a dilemma
whether to increase the rate of inter-
est or not. China which is having
lower growth rate, more than 200%
debt to GDP ratio and fiscal deficit of
around 3.8% has got AA- rating six
grades above India.Countries like
Aruba, Botswana, Estonia, Latvia, compared to China, but credit rating
Malaysia, Peru, Panama has got China which is having lower agencies are stuck with their ultra-
better ratings than India. conservatism. Therefore standards
growth rate, more than 200% of S&P can be called as poor. If these
Standard and Poor’s and major credit rating agencies have to gain back
rating agencies have failed to rate debt to GDP ratio and fiscal the credibility they have to improve
the sovereign bonds. It seems that their models on both quantitative as
Econometric models adopted by deficit of around 3.8% has got well as qualitative aspects. Looking
these rating agencies do not consider at overall picture India deserve an
the stability and sound policies into AA- rating six grades above upgrade in credit ratings.
consideration. From yield curves, it is
evident that investors are indirectly India. - Akash Doifode
rating Indian sovereign bonds better PGP Mumbai - IIM Indore

B u s i n e s s M a g a z i n e | A p r i l 2 0 11

CO N T R A
INVESTING
   MARKET                      
When equity markets are on
the move, investors are quite
happy to join the bandwagon. In
fact, in boom times, we seldom
discuss the strategy being used
by our fund manager because all
that matters is that he is giving
great returns. It’s only in a down-
turn that reality checks are done
and one looks at strategies to
minimize the pain.
One such strategy is a ‘con-
trarian’ investing. As the name
suggests, one would expect the
fund manager have a completely
different strategy to the existing
market conditions.
This basic idea is to protect
the downside when markets are
falling. But the reverse is also
true. Returns in an upside might
be lower.
Understanding the term ‘con-
trarian’ is important because it
can be defined in different ways.
In most cases, contra investing
involves selection of stocks that
are not popular at the moment
but has the potential to deliver
over time because of factors like
strong fundamentals, future turn-
around in the cycle and so on.
For contra investing, there
are couple of strategies that are
used. The first one involves direct
investment in stocks, whereby a
particular theme is identified. The
stocks are bought, in accordance
with the theme and held for a par-
ticular time period. The simpler
option is to select a contra fund
that is offered by mutual funds.
B u s i n e s s M a g a z i n e | A p r i l 2 0 11
SECTION NAME 17
Let’s understand this method
with example, as we know on 8th
November PM Narendra Modi
demonetize 500 and 1000 Rs
notes (85% of total currency) in
circulation.PM modi got every-
one by surprise including stock
market and all major indices has
taken hit but one stock which was
heavily dumped by investors was
Delta Corporation.
To give brief background of
this company, Delta Corporation’s
primary business is gaming and
hospitality. It owns 5 casinos
in Goa and Sikkim.87% of its
revenue comes from casino busi-
ness. Because of demonetization
and subsequent cash crunch,
casino business has taken big
hit and stock price has declined
from 180 Rs to 104.10 Rs on 16th
November, 2016 [as you can see
on the graph]. Now, this is a great
opportunity for contra investor
to come in and buy this stock
because fundamentally nothing
has changed with the company
and its business, but due to exter-
nal one off event stock has taken
hit.
 18 SECTION NAME

For contra investing, there are couple of strategies that are

used. The first one involves direct investment in stocks, whereby
a particular theme is identified. The stocks are bought, in accor-
dance with the theme and held for a particular time period. The
simpler option is to select a contra fund that is offered by mutual
funds.

Corporation declared 3rd

quarter results, company has
seen 27% decline in casino busi-
ness and net profit has plunged
by 69% but worst was over for
company and investors has
started buying this stock again
and it looks in strong up trend
from 16th February, 2017 and
reached 153rs on 3rd march, 2017
[As you can see from 2nd chart].
So, if one could have found right
entry point with good technical
analysis and bought it on 16th
November, 2016 and sold it on
3rd march, 2017. One would have
made 47% return in 3 and half
months. [Which would be better
than return of all sectorial index
and nifty50 for same time frame.]

- Hiren Suthar

PGP Mumbai - IIM Indore

B u s i n e s s M a g a z i n e | A p r i l 2 0 11
 SECTION NAME 19

GAME THEORY
   STRATEGY                                  

The Clown Prince of Crime. The

Ace of Knaves. He goes by many
names, batman’s most formidable foe
and arch nemesis - The Joker. From
being a prankster thief to a genius
psychopath, Joker’s character has
seen various renditions. But, one of
them stands out. The Joker played by
Heath Ledger in Christopher Nolan’s
‘The Dark Knight’ will truly remain
etched as one of if not the most iconic
joker. Not only the acting, but also the
character scripting was par excel-
lence. His dialogues, use of psychol-
ogy and well laid plans had always
impressed me since the first time I
saw the movie (and every single one
of the next nineteen times I watched
it)
I was recently introduced to the as they complete their specialized the loot, and do not trust each
subject of behavioral economics. part in the plan, until only the Joker other. The basic game assumes five
It is through this subject that I got is left with all the loot. This sequence pirates. The optimal distribution for
another chance to get amazed at is closely related to ‘The Pirate Game’. the most senior pirate would be
Nolan’s Joker. He had managed to It is a mathematical puzzle in eco- 1: 98, 2: 0, 3: 1, 4: 0, 5: 1
incorporate interesting concepts of nomics, where in a fixed number of This solution can be extended
economics into his plans. This can pirates have to divide up their loot. to different numbers of pirates. The
be best seen in the next couple of The pirates have a decided order of Joker is in the position of the most
instances: seniority. The most senior pirate gets senior pirate. However, him being The
1. The opening bank robbery the first chance of proposing a way of Joker, he manages to keep all the loot
sequence: division. Then a vote is called. If passed for himself.
The opening sequence can truly the loot is divided in the proposed
be called one of the best opening way, if rejected the proposer is tossed 2. The Two Ferries Sequence:
scenes. The Joker puts together a overboard or killed. The assumptions Towards the end of The Dark
team of thieves to rob a bank, and made are that the pirates are ratio- Knight, The Joker tries to prove to
then kills them sequentially as soon nal, want to maximize their share of Batman that morality is thrown for

B u s i n e s s M a g a z i n e | A p r i l 2 0 11
 20 SECTION NAME
a toss in the face of mortal
threat. To prove this, he orches-
trates the two ferries as a means of
escape for the citizens of Gotham.
One of them contains the regular
citizens of Gotham (Ferry A) while
the other hosts Gotham’s worst
criminals (Ferry B). The Joker
declares on each ferry that the
ships are rigged with explosives
and the detonator to the opposite
ferry lies on each ferry. Whichever
ferry presses the button on their
detonator survives, and the other
ferry is blown up. He further states
that if they do not press it in a
certain time limit, he will blow up
both the ferries. Now, this turns
itself into a Prisoner’s Dilemma
Situation. The game is as follows:
B u s i n e s s M a g a z i n e | A p r i l 2 0 11
Looking at this game, it can be
said that the dominant strategy
for both the ferries is pressing the
button. This would in turn lead to
the destruction of both of them,
which is exactly what Joker wants.
As both ferries rationally would
end up destroying each other, he
would prove his point to Batman.
However, morality plays a part in
this game and both ferries do not
press the button. The wait gives
Batman enough time to take
down the Joker, foiling his game.
The Joker makes brilliant
use of behavioral economics to
achieve his ends. But then again,
not even economics can stand up
to Batman now, can it?
-Nidheesh Samant
PGP Mumbai - IIM Indore
 SECTION NAME 21

INDUSTRY
S N A P S H OT
    MARKET NEWS                                   

B u s i n e s s M a g a z i n e | A p r i l 2 0 11
 22 SECTION NAME

B u s i n e s s M a g a z i n e | A p r i l 2 0 11
 SECTION NAME 23

REFERENCES
    THE FINANCIAL QUARTERLY                                   

GST
Budget 2017 Analysis
• http://www.gstindia.com/
about/
• h t t p : / / w w w. c b e c . g o v. i n / (All visuals used in this paper have been obtained from
resources//htdocs-cbec/gst/ national dailies like The Financial Express, The Indian Express,
gst-dgtps-01012017.pdf Business Standard etc, for representation purpose only.)
• https://en.wikipedia.org/wiki/
Goods_and_Services_Tax_
(India) S & P ratings
• h t t p : / / w w w. c b e c . g o v. i n /
resources//htdocs-cbec/gst/ • http://www.buynowpaylatersites.net/
gst-concept-status-0101017. buy-now-pay-later-sites-the-history-of-personal-credit/
pdf • https://www.moodys.com/Pages/atc001.aspx
• http://www.livemint.com/ • http://www.spratings.com/en_US/what-we-do
Opi ni on / br bD 6Tw1ak pG- • http://www.thehindu.com/business/india-worthy-of-rat-
S3um0t3CaM/India-is-an- ing-upgrade-oecd/article17383692.ece
outlier-in-its-tax-policy.html http://indiabudget.nic.in/es2016-17/echapter.pdf
• http://www.firstpost.com/
business/only-3-81-indians-
pay-income-tax-maharashtra-
delhi-pay-53-2761510.html
• http://indianexpress.com/
article/business/economy/
centre-to-compensate-states-
every-quarter-for-gst-revenue-
loss-4396299/
• http://www.ey.com/in/en/
newsroom/news-releases/pe-
ey-pharma-companies-must-
remodel-their-supply-chain
• http://www.ey.com/in/en/

B u s i n e s s M a g a z i n e | A p r i l 2 0 11
 Mumbai Campus

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