The Financial Quarterly

December, 2016

BUSINESS
World
Fiscal
MONEY
TOMORROW
Finance
Economics
BUSINESS
CULTURE MONEY TOMORROW QUESTIONS AND ANSWERS BUSINESS
Investment
Monetary MONEY Fiscal QUESTIONS AND ANSWERS BUSINESS assets MONEY debt
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And The Trumpet

Blew

How a slew of protectionist policies

is affecting the world
PAGE 8

Towards a Cashless
Economy
DeModitisation and its effects
PAGE 11

China yawning?
Devaluation myths busted
PAGE 13

_________________________________________________________________________________________________
b anking

Payment banks

Social Media

W o rl d

Mo n e ta ry P o l i cy

Upfront quotes

Brexit

Low interest Rates

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F RO M T HE ED IT ORS. . .
Dear readers,
We, the members of Investurn, the Finance and Investment Club of IIM Indore, Mumbai Campus are proud to present to you the 1st edition of our quarterly magazine,
The Financial Quarterly. We understood that there was a need for a magazine
that would not only present the readers with something to read but also provide
an opportunity for them to send in articles that will be read by many others.
By covering a huge gamut of topics ranging from Effects of Trumps policies on India
(pg no. 8) to Towards a cashless economy (pg no. 11) we want to offer something
that would not only help our readers be aware, but also become contextually relevant in the areas of Finance and World economy. With the advent of Globalization,
we believe in publishing 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 start 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 all of the articles are written by our very own participants at IIM Indore, Mumbai Campus and hope to expand this writers universe to many more across different B-Schools in the future editions.
We hope you find the views expressed in all the articles insightful and stimulating. Please let us know about your experience of reading the 1st edition 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 writers and we do not take any responsibility for any actions based
on the recommendations given in their writings.)

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CONTENTS
MAGAZINE
4 Upfront
Quote unquote how head-honchos and bigshots from the financial
world react to financial news

5 Payment banks
How newly issued payment bank licenses promise to revolutionarize
the payments industry

7 HeadQuarters
A view of the market happenings, news and trends of the last quarter

8 And the trumpet blew

How a slew of protectionist policies across the world is affecting tade,
economy and business with Trump being elected as POTUS

11 Towards a cashless economy

With demonitisation and its implications, India is moving towards a
cashless society. Is the promise of Acche din being fulfilled?

13 Chinese economic slowdown

Is it the end of the manufacturing boom in Asias biggest economy as it
tends to move towards a more consumption based economy?

15 Implications of brexit
After the referendum of Britain to exit from EU, how will Indias ties with
Europe be impacted?

17 Impact of low interest rates

With sluggish growth being reported across all major economies of the
world, is interest rates the only tool left with the central banks to spur
growth?

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UP FRONT
FINANCE

Yanis Varoufakis
Mohamed A. El-Erian

Milton Friedman

Raghuram Rajan

Raghuram Rajan

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PAYMENT BANKS
BANKING

Payments banks in India are primarily formed for the purpose of financial inclusion of under-banked and
unbanked rural areas, migrant labourers and poor households. Initially,
40 applicants applied for payments
banks license but RBI granted the
license to only 11 applicants out of
which 3 have already opted out of
the process. They were given a gestation period of 18 months after which
RBI would review whether they have
completed the formalities or not.
Licenses for payments banks have
been given to already established
telcos because they have penetrated into those areas where traditional banks cannot reach. Mobile
phones have reached to around 1
billion people but banks have not
reached even 60% of the Indian

population. Moreover, payments banks have shaped the way how cashless transactions will be carried out in many developing countries. Most of
the banks are going online and targeting the youth because in India the
average age of the population is around 30 years. Furthermore, m-wallets like Paytm have increased by manifolds since they have initiated their
operations and are penetrating into the market exponentially. One colossal advantage for payments banks is that they already have the infrastructure and have an established market. For example: Vodafone, Idea
and Airtel are popular among the Indian market and they enjoy loyalty
among the local merchants. Till now m-wallets have only targeted the
mobile recharge market, but with the coming up of the payments banks,
they would also focus on diverse areas like grocery stores and Paan shops.
However, 70 percent of transactions in India are still performed through
cash. This is quite ironical and raises questions about the efficacy of our
banking system and also their capacity to cater to those who still remain
excluded.

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In Kenya, Vodafone mPesa has been

very successful and is able to reach
70% of Kenyas population even
though 68% of the population does
not have a bank account due to bad
infrastructure which cannot support
traditional brick and mortar banks.
Once customers have an MPESA
account, they use their phones to
transfer funds to both MPESA users
and non-users and pay bills. The
affordability of the service has been
key in opening the door to formal
financial services for Kenyas poor. So
the key take away from the success of
mPesa in Kenya which Nachiket Mor
committee has taken into account
are- Leveraging of mobile technology to extend financial services to
large segments of unbanked poor
people, designing usage-based
rather than float-based revenue
models for reaching poor customers and the need for a low-cost transactional platform that enables lowincome customers to meet a range
of payment needs. In India, Nachiket
Mor committee is trying to replicate
the success of mPesa by introducing
payment banks.
Adding to the aforesaid benefits, it
will also help to curb the flow of black
money as most of the transactions
will be carried out online and they will
be recorded and monitored by the
authorities. This will help to achieve
yet another prominent mission of
the Modi Government. For migrant
labourers whose houses are located
in remote areas will be benefitted by
bringing money in their hands at a
go of just 2-3 clicks. In African countries, a lot of development has been
done in this regard and people are
purchasing petty things in remote
areas by transferring money digitally.
In this era where Post Offices are
getting redundant, this will be a
breakthrough because India Post
Payments banks will provide the

much-needed revival to the sinking

ship. The Indian Post office, having
more than 150,000 branches across
the length and breadth of India
will provide enormous advantage
and trust earned by several years of
service and will boost the process of
banking for all unbanked individuals
Considering the growth of m-wallets in the past 3 to 4 years, payment
banks have huge potential. In addition to this, payment banks will
provide interest on deposits, so it
will encourage the youth to have
the money in their mobile and travel
cashless without worrying about carrying many Cards, especially Debit.
It will provide massive comfort as
all people need to have is a mobile
phone. Looking at the profile of corporates which have got licenses in
the first round, the acceptance of
this type of money will be immense.
So whether people want to purchase Versace or want to enjoy a
cup of tea at the top of Himalayas,
all people need to have is charged
mobile. But there are several challenges for payment banks. One of
the major challenges for Payment
Banks is of security in this era where
there is news floating about data
theft of debit/credit cards which
has shaken the whole ecosystem of
online payments.
Secondly, since the payment banks
can not extend credit, so they have
to play by volume. Also, according
to the study of Institute for Financial
Management and Research, 274
domestic migrants and their families
found that the average cost to make
a domestic remittance (including
both direct and indirect fees) across
all channels was only 3.5%, with India
Post costing 6%, informal hawala
channels 4.6%, and banks 3.0%.
Adding to the challenges, is the
RBI notification requiring all the

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payment banks to follow KYC norms

that have put them at somewhat
par with traditional banks. Firm
are concerned that the preference
for Paper-based KYC will be a costintensive and time-consuming exercise and is, therefore, a major impediment to the growth of the new age
banks. Moreover, payment banks will
face stiff competition in semi-urban
markets from Commercial banks as
the number of POS (Point Of Sale)
terminals increased from 11,11,576
to 12,36,933 from October 2014
to October 2015 and most of this
increase has been attributed to the
installation of POS in semi-urban
areas.
Payment banks require large upfront
investment and it will take 3 to 5
years before the business shows positive cash flows. Also, cash addiction
in Indian society is immense. The
2014 Intermedia Financial Inclusion
Insights (FII) survey of 45,000 Indian
adults found that 82% of adults consider cash to be the best tool for
small- to medium- transactions and
over 80% of respondents in both
urban and rural areas receive remittances in cash and in person. One
option for migrating cash-based customers to digital accounts is to charge
rock bottom digital transaction fees
for basic P2P (Peer to Peer) Payments.
Telesom Somaliland, for example,
sought to migrate cash-based customers into digital channels by offering digital payment transactions for
free which led to rapid uptake and
usage, with the average Telesom customer conducting 40 digital transactions per month. There are challenges but opportunities are also
immense and payment banks have
to carve a way out in order to establish their supremacy.
- Written By: Shubham Chabbra

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HEAD QUARTERS
MARKET NEWS

BSE Sensex over the last quarter

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AND TH E
TRUMPET BLEW
WORLD POLITICS
It has been said by Sherlock Holmes, the famous fictional detective character that Life is full of whimsical happenings. And more so when we are witnessing increased financial instability, protectionism, immigration problems,
emergence of extreme nationalist parties, possible trade barriers, geopolitical conflicts, shifting foreign policies and
challenge to superpowers hegemony. USA has elected Mr. Donald Trump, a far-right republican, as their President.
The world is seeing an emergence of authoritarian leadership rather than an inclusive form of leadership that has
been the norm since quite a few decades. This list of events can go on and on. It is pertinent on our part to look at
each of these issues in an unbiased albeit critical manner.

Voices
supporting
protectionism are
on the rise. The rise of
right-wing parties have
been a significant driver
for this change. Immigration policies, unemployment and economic disparities have
a strong correlation
with the rightward shift
of many
countries

From a financial viewpoint, stock markets are a good indicator of the wellbeing of an economy. A healthy economy will have investor confidence, relatively stable but not stagnant growth rate in stock prices as well as surging
indices. However, the financial markets,as expected, reacted negatively after
the results of US presidential elections. In the events leading up to the election, markets expected a stronger economy under Ms. Clinton and more
risk under Mr. Trump as per a report by PBS Newshour. Japans Nikkei index
plunged more than 900 points (5.4%) early morning on 9th Nov. Dow Jones,
S&P 500 and NASDAQ slid by 4 % or more late evening on 8th Nov. As per
Bloomberg, the Mexican Peso fell to an 8-year low as the republican candidate rose in the polls. This clearly indicates that Trumps message of isolationism and protectionism has not resonated well with the investors. As
a result there has been a loss in investor confidence though some indices
have recovered after 9th Nov, the day election results were announced. This
also holds significance for India. A market crash globally can create volatility in the Indian stock market though it will be short term. SENSEX has been
down by 3% in the fortnight leading to US Elections. The Indian IT company
stocks are bound to taste the bitter pill due to Mr. Trumps shifting stance on
H-1B visas. Historically, the dollar has firmly held its ground in the event of
a market crash following the election result. A dollar rally after the market
crash can weaken the rupee to some extent. Mr. Trumps ascension to the
coveted post will certainly not be seen in good light by the emerging economies given his plans of levying 35% tax on US companies having manufacturing facilities in developing economies. This can worsen relations between
US and the emerging economies.

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Even international trade is likely to
see the repercussions. There has
been an increasing clamour against
free trade agreements. Voices supporting protectionism are on the
rise. Protectionism essentially means
restricting free trade between countries through a number of barriers
such as tariffs, restrictive quotas,
imposing a bunch of government
regulations etc. As per a WTO report,
many G20 countries have started
rolling out protectionist measures
numbering to five per week since
the 2008 crisis. Only 387 protectionist measures have been removed
while 1583 new trade restricting
measures were introduced since the
global financial crisis. China, Russia,
Indonesia and India together account
for nearly half of all those restrictive
measures. This was followed by South
Africa, Argentina, Turkey, Ecuador,
Algeria, Brazil, Mexico, Thailand,
the US, Egypt, Nigeria and Malaysia.
Brazil continues to provide border
measures and behind-the-border
measures by providing discriminatory support to its local economy in
sectors such as aviation, transportation, mining, healthcare etc. There
have been import substitution policies in Russia. The protectionist measures relate to technical regulations,
customs matters and discriminatory
subsidy programmes. Globalization
already has been in a back gear in the
recent years. The results of US presidential elections have given a further
fillip to protectionism.
The new US president-elect is known
for his anti-globalization stance. His
nativist and America first agenda
are in contrast to globalization.
His victory puts into jeopardy the
unratified Trans-Pacific Partnership
(TPP) Treaty with 11 pacific countries as well as the currently stalled
Transatlantic Trade and Investment
Partnership (TTIP) with the European
Union. There has also been statements of pulling out of WTO,

re-negotiating the North American

Free Trade Agreement with Canada
and Mexico and putting tariffs on
Chinese imports by Mr. Trump. All
these can lead to numerous volatile
situations such as dismantling of TPP
and TTIP treaties, emergence of rival
trading blocs, increased influence of
Eurasian Economic Union headed by
Russia and emergence of a powerful
bloc headed by China.
With regards to India, this newly
changed equation of global trade
can have several positive as well as
negative implications. China in collusion with Pakistan, may exclude India
from their trading bloc. A review of
the trade partnership between India
and China indicates that China has
been the dominant player. As per
the financial data of 2014-15, exports
from India constitute only 16.5% of
the total trade of USD 72346 million
with China. Chinese manufacturers enjoy a 10% cost advantage
compared to Indian manufacturers
according to a report by The Hindu.
Chinese government supports manufacturing wholeheartedly. This has
resulted in dumping of various products by China in the Indian market.
The rise of Trump can possibly alert
China given his admiration for Mr.
Vladimir Putin. The Chinese trading
block excluding India can restrain
the flooding of Chinese goods in
the Indian market. This will be a good
signal for India given the support of
Indian government to entrepreneurship. India may finally look at ways
to strive towards achieving quality
manufacturing levels at affordable
cost.
Possible changes in foreign policies
may result in strategic shifts in alliances as well as impact the overall
economy. The European Union,
Canada and Mexico traditionally
have been strong trading partners
of US. With a protectionist regime at
the helm of US, there might be a possibility of decrease in bilateral trade

between US and its erstwhile trading

partners. Especially with EUs neighbourhood policy, there has been an
increasing trade between EU-Russia
and EU-Turkey. Emerging economies are significantly increasing their
share of bilateral trade with the EU.
Also, EU must explore other strategic
allies than US given Mr. Trumps rejection of a liberal world order. China is
currently the second largest trading
partner of EU after the US. The outcomes of the protectionist policy of
US could be isolation in global trade,
increased influence of China and
Russia and possible trade embargoes
on goods imported from other countries. Socialist thought may dominate
global trade with capitalism taking a
backseat.
With the environment of conservatism going around, we should dig
deeper into some of the reasons for
the current situation. The rise of rightwing parties have been a significant
driver for this change. Immigration
policies, unemployment and economic disparities have a strong correlation with the rightward shift
of many countries. Germany, Italy,
Sweden, the US, France, Netherlands,
Austria, Poland, Hungary and
Britain were the coveted destinations for many refugees. An open
embrace policy for refugees by
many of these countries have caused
tension amongst the local populace. With rising number of immigrants, more government resources
need to be diverted towards immigrants. Employment opportunities
will become lesser as immigrants
would compete for job opportunities. Playing on this public emotion
of anger against immigrants, rightwing nationalist parties have continued to gain a firm footing in the political arena of the above countries. As
quoted by New York Times, Norbert
Hofer of the nationalist and a-

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nti-immigration Freedom Party in

Austria has emerged as the front-runner in the first round of Presidential
elections winning around 35%
votes.It has been for the first time
since World War II that neither of
Austrias two main centrist parties
made it to the presidential run-off.
The far-right Freedom Party holds
40 out of 183 seats in the National
Council and has clearly become a
force to reckon with. In Poland, the
right-wing Law and Justice party
won the Presidential elections 2015
and formed the government. It won
39% of the national votes. Hungary
has a situation of right-wing politics becoming increasingly dominant since the last two elections.
Viktor Orban and his right-wing
Fidesz party with a coalition with
the K.D.N.P. (a Christian Democratic
Party) have won the last two parliamentary elections in Hungary. There
has been an emergence of Jobbik, a
far-right, anti-immigration and economic protectionist party which won
20% votes in the 2014 parliamentary
elections. It is now Hungarys third
largest party. The UKIP, a right-wing
party in UK has significantly influenced Britains decision of exiting
from the EU. Similarly, parties such
as the far-right Sweden Democrats
Party in Sweden, the neo-fascist
Golden Dawn in Greece, National
Front in France, Danish Peoples Party
in Denmark, the far-right Alternative
for Germany Party and others have
become crucial players in the political spectrum. A research from
Markus Bruckner and Hans Peter
Gruner points out interesting linkages between political extremism
and economy. The research states,
Higher per capita GDP growth is
significantly negatively linked to
the support for extreme political
positions. Roughly, a one percentage point decline in growth translates into a one percentage higher

vote share of right-wing or nationalist parties. An analysis of these

countries unemployment rates tells
us that they are on the higher side.
Greece, Spain, Italy and France with
high unemployment rates of 23.4%,
22.7%, 12.4% and 10.5% respectively. A look at another macroeconomic parameter i.e. GDP growth
rates tell the same story. The year on
year GDP growth rates of Hungary
(2.2%), Austria (1.2%), Denmark
(1.2%), France (1.1%) etc. convey the
same story. An overall environment
of rising unemployment and slow
GDP growth have aided in fuelling
right-wing sentiments. Given that Mr.
Trump, ideologically is a right-wing
person, there may be greater ideological bonhomie between US and
European Union. However, on the
economic front, unemployment may
continue to rise and GDP growth may
slow down further.
We also need to look at Gini coefficients - the measure of income disparities in these countries as a possible underlying cause of this political shift. Germany, touted to be the
most developed nation in EU has
a surprisingly high Gini coefficient
of 78% as on 2012. Gini coefficient
for UK is 67.8 %. The richest 10% of
households hold 45% of the wealth.
On the other hand, the poorest 50%
own only 8.7%. Income disparities,
unemployment, immigration and a
general loss of trust in a liberal government give rise to extreme nationalist and nativist feelings. It can give
rise to numerous scenarios in the
near future. We may witness a split
in the European Union and emergence of two blocs- one bloc led
by the right-wing governments and
the other block led by centre-left/
centre-right/centrist governments.
Significant trade barriers imposed by
the right-wing bloc would result in
trading and investment opportunity

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losses for the right-wing bloc. The

worlds two superpowers - US and
Russia might possibly have coherent and friendly relations with each
other by that time (given both are
led by authoritarian leaders who
have expressed tacit support). So,
the liberal and democratic european
bloc would need to align itself with a
like-minded partner.
The middle-east crisis might see the
exit of US from middle-east. Increased
US-Russia alliance will threaten the
very existence of ISIS as Trump and
Putin are aggressive on the issue of
wiping out terrorism. ISIS was a byproduct of US itself in order to outstage the Syrian President Dr. Bashar
Al-Assad as he did not toe the US
line. Russia, on the other hand supports Bashar-Al-Assad for exerting
its influence in the region. With the
increased relations between US and
Russia, we might see a possible shift
in the foreign policy of US in which
US may reduce its interference in the
middle east and let Russia handle the
situation. This will further bolster
Russias interests in the already warrattled middle east. USs traditional
allies i.e. the UAE and Saudi Arabia
might cut ties with US given that
Mr. Trump has a strong anti-Islamic
stance. Also, US has historically supported Israel on the basis of ideological bonds as well as with the thought
of having a powerful ally in the
middle east. However, the current
president-elect of US does not have a
fixed policy regarding Israel and this
may leave Israel to the mercy of Mr.
Trumps whims. Here, an attempt has
been made to analyze the results of
American elections and the prevailing environment from many possible
lenses. The world awaits with a sense
of cautious optimism.
Written by: Shubhadeep Basak

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11

TOWARDS A CASHLESS
ECONOMY
DEMONITISATION
Achhe din aane wale hain believers began asking Acche din kab
aayenge? The slogan, which boasts
of its own Wikipedia page, paved
the way for Narendra Modis sweeping victory in the elections. India
had long awaited (since 1984, to be
precise) for a single political party to
have a majority for better decision
making and the wait finally bore fruit
in the 2014 elections.
8th November, 2016 is a day that will
go down in history and only time will
tell if it is for the right reasons. Mr.
Modi announced the demonetization of the high currency notes of Rs.
500 and Rs. 1000 catching the citizens of India off guard. Taking advantage of their large numbers, the BJP
passed a unanimous resolution
backing the Indian Prime Minister.
While this bold move is being criticized with a slew of very valid points,
it has pushed the hassled public
towards going cashless. Digital
wallets have proved to be a pleasant offshoot of the demonetization
move taken to combat corruption.
To put things in perspective, Paytm
registered a 700% increase in traffic
and MobiKwik saw a 2000% rise in
transactions in less than a month
after the announcement was made.
From a situation where cashless
transactions were done only for a
few non-routine transactions, it is
now no more surprising when day
to day requirements are being paid

for digitally. Online payments have

become commonplace for payment
in local general stores, auto-rickshaw rides, phone recharges, roadside vendors and even small eateries. Also, as withdrawal of cash is not
allowed by digital wallet providers,
the money can be used for further
transactions (free of cost) or even be
transferred to the individuals bank
account (charges apply), the currency remains in the digital form for
a longer period of time.
India has a black money economy of
nearly $460 billion a year, a number
so large that it is bigger than the
GDP of Argentina. This undisclosed
income is used to fund terrorism,
increases the disparity between
the rich and poor and causes inflation. Demonetization, when combined with cashless payments, will
strengthen the fight against this parallel economy. A virtuous loop will
form as a result The gap between
the developed economies and developing economies will reduce to a
large extent when the public at large
decides to embrace technology in
their lives. As per a United Nations
report, India has the worlds largest
youth population. Once these youngsters, that will shape Indias future,
get on the network and go cashless,
India will progress towards becoming a developed nation faster than
any of us could have ever imagined.

India has a black

money economy
of nearly $460
billion a year, a
number so large
that it is bigger
than the GDP of
Argentina.
The internet is here to accelerate the
journey for attaining the status of a
global superpower.
India has been privy to many crimes
pushed under the rug by bribing the
people in power. People have come
to believe that they can get away
with their wrongdoings by simply
knowing the right people. Extortion
of money by mafia leaders from businessmen is more of a norm than an
exception. This exchange of money
will become increasingly difficult
once there is a transition to a cashless economy.

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These are hindrances to the advancement of any country and they will be
effectively dealt with through digital
currency.
The Digital India campaign,
launched on 1st July, 2015 to digitally empower the citizens, will go
a long way in improving digital literacy. Smartphones and access to
internet are the key enablers of
a cashless system. Although the
smartphone penetration in India is
less than 30%, India is the second
biggest smartphone market after
China and has already surpassed USA
in the number of smartphone users.
The year on year growth in users is
pegged at around 20%. A transparent system coupled with rising cashless transactions will boost the economic growth and put across the
true GDP and GNP numbers.
Counterfeit currency is also a menace
to society. Terrorists are using it to
exercise power over the helpless
citizens through their horrifying

Although the
smartphone
penetration
in India is less
than 30%,
India is the
second biggest
smartphone
market after
China

exercise power over the helpless

citizens through their horrifying
weapons. Due to the high level of
detailing, the layman is not able to
distinguish the fake notes from the
genuine. A cashless economy will
put an end to these illegal acts and
help in maintaining harmony in the
society.
Indias affinity towards hard cash
comes at a cost. As per the Cost of
Cash in India report released by IBGC
(Institute for Business in the Global
Context), the reserve bank and the
commercial banks spend approximately 21000 crores in currency
operation costs annually. These costs
are incurred for transport of cash
across the geography of the country,
printing of new currency, ATM costs
etc. This money can be put into more
productive use if we adopt the cashless route and help in reducing the
problems of poverty, unemployment, low connectivity that plague
the country. As per the report, there
has also been a growth in the use of
electronic funds transfer, debit and
credit cards by almost 25 times since
2003. However, the time has come to
penetrate into the rural markets as
well and set up a robust infrastructure for cashless transactions.
To elaborate the cost of cash to the
public, lets take the example of
a young accountant from Nashik
named Tanvi. She gets her paycheck
within the first week of every month.
She needs to encash the same to
meet her monthly expenses. As and
when she gets time, she goes to the
bank and waits in the queue. The
hidden costs of this is the time cost
during which the cheque is received
but not encashed, expense incurred
for travelling to the bank and the
time cost of standing in the queue.
Then, when she takes the money, she
doesnt spend it all at once and so,
the money is kept idle at home for
which there is an opportunity cost

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of loss of interest. Further, in order

to pay utility bills such as for gas,
water, electricity, she has to further
stand in queues. So, even though
Tanvi earns a fixed salary, her real
income is actually much lower. A
simple move towards cashless transactions can make all these issues disappear in addition to providing physical respite.
Reliance Jio will also prove to be a
game changer in every sense of the
word. With the help of aggressive
advertising, Reliance is looking to tap
into the rural markets which is a huge
potential market and in great need
of internet connectivity. The other
telecom companies have also been
forced to pull up their socks proving
to be a healthy sign for cellular networks in India. In a country comprising of a large rural area, the cashless system needs to reach the rural
consumers which will be possible
only they are added on the network
through reliable internet access.
A cashless system comes across as
a very attractive option but it can
succeed only if it garners support
from the Indian citizens. A strong
infrastructure is required to handle
a large population like India which
requires the government and the
citizens to collaborate. The problems of corruption, black money,
terrorism and poor advancement in
technology faced by India since so
many years can be effectively shown
the door through the simple step
of downloading mobile wallets or
migrating to electronic fund transfers. The freedom fighters fought for
independence in 1947 and this is
Indias chance to repay the debt by
freeing herself from the clutches of
social evils and transforming into a
country that the coming generations
will feel proud to inherit.
Written By: Bhoomi Agarwal

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13

CHINESE ECONOMIC
SLOWDOWN : GAIN
FOR INDIA?
ECONOMY
China liberalized its economy in
December 1978 nearly 13 years
before India did and shifted its
economy from a centrally planned to
market based economy. From 1978
to 2016, China has seen unprecedented growth rate averaged at
approximately 10% a year. The
Chinese growth model resulted in
migration of workers from rural areas
to urban areas, creating job growth
and therefore has lifted more than
800 million people out of poverty.
Since 2013, Chinese economy is
slowing down because of decreased
labor force resulting from its past one
child policy. The reduced demand
and rising deflationary risks in the
world market is also one of the reason
for sluggish growth as large pie of
Chinas GDP comes from exports. The
rising expectation of wages is reducing the global competitiveness of
Chinese products. In August 2015,
Peoples Bank of China devalued its
currency by 2% to remain competitive. China saw drop in reserves of
around $513 billion in 2015 due to
foreign outflow. Real estate sector
is the biggest concern for Chinese
economy as prices of houses are
increasing by more than 30% year
on year suggesting bubble like phenomenon. This may lead to another

financial crisis and its effect on the

long term growth of world economy
would be very catastrophic.
While retail sector is showing higher
growth of nearly 10% which clearly
indicates that Chinese economy is in
transition process of changing from
export led economy to consumption led economy. In the current year,
private consumption and service
contributed mostly to

Retail sector is
showing a growth of
10% which indicates
China is changing into
a consumption led
economy
the GDP growth. These signs are
enough evidence to say that China is
moving from developing to a developed country and because of catch
up effect, developing economies
other than China are bound to grow

faster than China.

Developing nations like Brazil and
Russia are mired in deep recessions.
The oil exporting countries are
struggling with weaker exports and
tighter financial conditions. As per
Asian Development Bank report,
ASEAN countries are expected to
rise by 4.8% in 2016 which is even
lower than the Chinese growth rate.
The external environment remains
fragile for developing countries as
the developed countries like USA,
Japan and EURO area are expected
to recover slowly after the 2008
financial crisis. Also, rising protectionist policy in UK and US raises
concern for export led developing
countries. In this sluggish growth
world over, India seems to be the
bright spot for investors. The major
gain from sharp correction or from
Chinas decreasing trend would
benefit India if directed by appropriate fiscal policy and structural
changes.
In India, growth is projected to
remain around 7.5% during 201617. Growth is primarily driven by
consumption benefitted by lower
oil prices and higher real incomes.
But, if India wants to replace China it
needs to shift from a consumption

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% GDP growth

Source: World Bank

led to an export led economy. The

current GDP of India is around $2.25
trillion whereas for China it is $11.39
trillion. If China still grows by 6% per
year it still adds equivalent to Indias
GDP in 3 years. The current growth
figure is not sufficient for India to
replace Chinas spot as destination
to attract foreign direct investment.
The focus of the Indian government
should be on bringing the green field
investment rather than investments
from FII which involves speculations.
Make in India is a good initiative but
lack of infrastructure is the main
hurdle in bringing foreign direct
investment. Primary fiscal spending
should focus upon improving infrastructure and higher education. Also,
revamping agriculture research to
improve productivity and becoming leader in agricultural output will
help in sustainable development. In
this transition, there needs to sufficient job creation at greater speed.
CRISIL estimates that employment
outside agriculture will increase by

only 38 million between 2011-12

and 2018-1 9 compared with 52
million between 2004-05 and 2011-12. The rising domestic tensions
along caste lines because of lack of
jobs is evident from protests of Jats
in Haryana, Patels in Gujarat and
Marathas in Maharashtra.

moves by the current government

to gain confidence of investors.
Chinese Government focused on
growth at the expense of the environment. The Indian Government
also should cautiously look into
environmental concerns while
focusing on growth. Things are
getting better but the pace of
But to ensure healthy environment reform will shape the future of
for investments, policy decisions India.
taken by the government should be
consulting with opposition parties - Written By Akash Doifode
to, build consensus in policies to
avoid drifts due to political changes.
In August legislators approved the
implementation of the Goods and
Services tax (GST ) which could
boost the productivity. According
to the National Council of Applied
Economic Research, governments
tax revenue will increase by about 0.2
per cent because of GST implementation, while GDP growth could go up
by 0.9-1.7 per cent. Introduction of
benami transaction act and demonetization of current higher currencies
are the good and positive

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15

IMPLICATIONS
O F BREXIT
TRADE
The term Brexit is colloquially used
to denote the Exit (withdrawal) of
United Kingdom from the European
Union, by way of the referendum
held in June 2016 whereby 52%
of votes were cast on leaving EU.
Politically, Brexit can aptly be considered to be an open blow to globalization, a move towards conservatism which is now further fuelled by
Trump victory in the US presidential
election. Brexit referendum drew an
immediate reaction from the stock
markets and currencies world over,
India being no exception from this
contagion effect.
UK voting for the Leave from the EU
will definitely have considerable socio
economic and political ramifications
on the Indian Economy. Lets consider these one by one: Indias GDP
forecast has been lowered from 7.9%
to7.3%, post Brexit. However India
will continue to remain one of the
fastest growing major economies of
the world. Taking into consideration
the case of the India-EU Free Trade
Agreement (FTA), a neutral status is
expected to post Brexit incidence.
India and the EU first started negotiations in 2007 on an FTA to cover

trade in goods, services, intellectual

property and foreign investment.
Considering the fallout of Britain out
of EU, the benefits to India from the
India-EU FTA (Free Trade Agreement)
will be lost and UK being Indias
gateway to Europe, India will need
to reconsider and renegotiate the
agreement with EU, that too with
the revised tariff conditions. Till
that, Indias exports particularly the
apparel sector will be hampered
due to the competitive tariff disadvantage and exchange rate fluctuations. With significant (2.5%) population in UK being Indian, we can
expect a stronger ally in UK, than
in EU. A preferential access to the
European market is critical in view
of Indias exports falling continuously
for past 15 months.
Brexit and the TPP (Trans Pacific
Partnership) are the two big threats
for the revival of Indias exports. On
the positive side, India has diversified its exports significantly away
from the EU and other developed
markets towards emerging markets
of Asia, Africa and Latin America. That
could minimize the damage.

UK is third largest investor in India

and accounts for about 8.0% of
the total FDI inflow. PostBrexit the
confidence of the investors will be
impacted, for the FDI outflow and
inflow till the clarity about the new
working framework between EU
and UK is established. Despite this
negative effect, India is expected to
get the required attention from the
investors across the globe, due to
measures by the Govt, like the Make
in India Campaign and opening
up a number of sectors for FDI. By
opening the FDI in multiple sectors,
India has strengthened its position
on the investment front and growth
prospects will continue to remain
strong.
The UK and EU account for 23.7% of
the rupees effective exchange rate.
The impact on Indian Rupee will
remain shaky with short term negative impact and long term neutral.
Risk aversion is likely to be seen
across the multiple asset classes.
Asian currencies, excluding Japan,
could be hurt if other EU countries
follow suit like Brexit and call for a
referendum.

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The direct trade impact (on the

rupee) is as such limited from UK,
but global risk will likely weigh on
India in the near term. Brexit can culminate in long periods of risk aversion in equity markets that could
spark foreign portfolio investor outflows and fuel rupees fall. The Rupee
is expected to show some volatility
due to prevalent anxiety in global
markets, but, RBI is likely to pitch in
to manage liquidity and currency
fluctuations.
Coming to the point of inflation, considering the fall in oil and commodity
prices, there is minimal risk of price
spike and so the inflation will be
contained within the limits. On the
domestic front, it is expected that this
year will witness good monsoon as a
result of which the food prices will
be expected to remain manageable.
On the IT front, UK accounts for
about 17% of Indias total IT exports
while Indias export to other
European countries account for 11%
. Considering the scenario of Pound
falling post-Brexit, the impact on IT
Sector is expected to be Short-term
negative, long-term uncertain. This
fall of Pound will negatively affect

the growth of IT sector. The costs

taken up by IT players are incurred in
INR, primarily due to the Offshoring
Model used by Indian IT companies.
Therefore continuous fall of Pound
may call for a need to renegotiate the
contract, due to falling profits.
Talking about immigration for the
students as well as the professionals, the outlook in the very short run
is expected to be negative, however
in long run UK will try to get a competitive advantage over EU by providing the students with scholarship opportunities. Work-related visa
restrictions have already resulted in
a fall in the number of Indian students in the UK. Following Brexit, the
number of Indian students applying
to UK universities and colleges might
reduce further. With Brexit, the governments stance on immigration will
likely curb overall immigration into
the country.
The overall impact is likely to be
muted as the flows of trade and
investment is expected to continue
in the regular way. Two potential
impacts that will have major effects
on Indian businesses will be for the
manufacturing companies that have

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set up base in the UK while having

a substantial exposure to mainland
Europe, and firms in the services
sector, specifically information technology firms. Concluding, whatsoever may be the future recourse, the
thing that is evident is that BREXIT
has caused a major thrust to the five
decades of old Political, Economic,
Socio-Legal unification process of
Europe.
Written By: Amey Nagapurkar

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17

IMPACT OF LOW
INTEREST RATES
MONETARY POLICIES

It is almost seven years since

the seizure in global financial
markets and a sharp recession in
the advanced economies, from
which recovery has been painfully
slow. The financial crisis caused
the Federal Bank of United States
of America lower the short term
interest rates to near the Zero
Lower Bound. Subsequently, the
European debt crisis led to lower
interest rates in the European
Union. Central bank policy rates
in the main advanced economies
remain at, or near, their effective
floor. In the Eurozone, Denmark,
Sweden and Switzerland, the
commercial banks have even
been paying to leave funds on
deposit with the central bank.
Moreover, the major advanced
economy central banks have also

adopted unconventional monetary policies forward guidance

and quantitative easing with
the intent of providing additional
monetary stimulus by further lowering longer-term interest rates.
These have fallen to historically
low levels, with negative yields
recorded on some of the sovereign debt of several Eurozone
members.
World expected deep recession of 2008 to be followed by
unusually rapid recovery, with
output and employment returning to normal levels. Weaker
recovery and grappling with stagnation is forcing developed world
to implement the unorthodox
monetary policy of lower interest below zero and quantitative

easing have been regular phenomena for the central bankers.

Moving the marginal policy rate
into negative territory help real
interest rate to adjust downwards
resulting into inflation expectation to rise. The benefits of lower
interest rate are firstly, low interest rate help to keep real interest
rate below neutral rate. Secondly,
the positive cash flow effects of
low or negative nominal interest
rates permits increase in spending by liquidity-constrained firms
and households. Third, low interest rate helps stimulate lending.
In Studies in the Quantity
Theory of Money, published in
1956, Friedman stated that in
the long run, increased monetary growth increases prices but
has little or no effect on output.
In the short run, he argued,
increases in money supply growth
cause employment and output to
increase, and decreases in money
supply growth have the opposite
effect. Monetary policy works
only for short run and its excessive
use makes worse impact in the
long run. Negative interest rate
have not spurred economy but
uncertainty in the global world
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ECB and Japan central bank lowered interest rate because

of excess saving, unavailability of safe assets and sluggish demand. Denmark, Switzerland and Sweden lowered
interest rate to stop plight of capital flows from European countries because of interest rate differential.

has risen. More importantly,

bank profitability has deteriorated due to lower interest rates in
the long run. After the default of
Lehman Brothers in 2008, similar
situations could arise due to deterioration of profitability of banks.
This unconventional policy implementation by central bankers will
not make gains to the world in the
longer run and will add bubbles
and risks in the fundamentals of
the economy
ECB and Japan central bank
lowered interest rate because
of excess saving, unavailability of safe assets and sluggish
demand. Denmark, Switzerland
and Sweden lowered interest
rate to stop plight of capital flows
from European countries because
of interest rate differential. The
economies of developed world
suffers from an imbalance resulting from an increasing propensity
to save and decreasing propensity
to invest. Also Concern is over the
profitability of banks as narrowing
margins for the long run. This is
particularly relevant in euro area
countries. Thus, declining profitability may reduce credit expansion opposite of main motto of
central banks. Pension funds and
Insurance are also under threat

because of these unconventional

policies as the long term yield are
declining.
Monetary policy has been
driving growth and preventing
deflation in developed world.
There is a limit for the monetary
policy, therefore fiscal policy is the
only policy tool left. Now, government are shifting their policy
to fiscal stimuli in addition to
monetary expansion. In Canada,
Government is planning to boost
public investment. Shinzo Abe,
Japanese prime minister has now
decided to postpone a risky consumption tax hike next year and
also announcing supplementary
budgets to increase spending and
boost household sectors purchasing power. German Government
is spending on refugees, defense,
security and infrastructure. In
United States also there is wave
of expansionary fiscal policy. The
shift to normal conventional fiscal
policy in Europe and Japan indicate that end of negative interest
rate in near future.
Written By: Ayush Agarwal
Akash Doifode

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19

CAR TOONIQUE
JUST FOR FUN

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