Currenc-I Aug’18

MACROSCAN
In this issue
• Trade wars “If all the economist's
• Venezuelan Hyperinflation were laid end to end,
• Falling Rupee they’d never reach a
• Turkey’s crisis conclusion”

• Ayushman Bharat
- George Bernard Shaw
• 5G in India
• Aviation industry

1
Currenc-I Aug’18

Trade Wars US-China 


What’s a trade war?

A trade war is when

countries try to attack each
others trade with taxes and
quotas. One country will
raise tariffs, a type of tax,
causing the other to respond,
in a tit-for-tat escalation. This
can hurt other nations;
economies and lead to rising
political tensions between
them.

What’s protectionism?

Protectionism is trying to use

restrictions such as tariffs to
The United States and China escalated their acrimonious trade boost your country’s
war on 23 rd August 2018, implementing punitive 25 % tariffs industry, and shield it from
on $16 billion worth of each other’s goods. The world’s two foreign competition.
largest economies have now slapped tit-for-tat tariffs on a
combined $100 billion of products since early July, with more in
the pipeline, adding to risks to global economic growth. When
What’s a trade deficit?
you’re already $500 Billion DOWN, you can’t lose!” U.S.
President Donald Trump tweeted on April 4. He seems to It’s a term meaning the
believe that because the United States has a huge trade deficit difference between how
with China — actually $337 billion in 2017, not $500 billion.
much your country buys from
another country, compared
Why is Trump doing this? with how much you sell to
President Donald Trump has threatened to put duties on almost that country.The US has a
all of the more than $500 billion of Chinese goods exported to massive trade deficit with
the United States annually unless Beijing agrees to sweeping China. Last year, it stood at
changes to its intellectual property practices, industrial subsidy about $375bn. Mr Trump’s
programmes and tariff structures, and buys more U.S. goods.
not happy about that,
While, Beijing has denied U.S. allegations that it systematically
forces the unfair transfer of U.S. technology and has said that it
however trade deficits are
adheres to WTO rules. Trump has promised further levies on not necessarily a bad thing.
$200bn (£150bn) worth of Chinese products in September. Mr Many wealthier countries
Trump also wants to cut the trade deficit with China - a country have in recent decades
he has accused of unfair trade practices since before he shifted from manufacturing
became president.
economies to service
economies.

2
Currenc-I
What’s the Real Scenario?
U.S. goods exports to China are mostly
agricultural produce and finished products
consisting of mostly American content and
sold by U.S. firms, China’s exports to the
United States are typically Chinese-
assembled goods that contain many foreign
parts and components — and are often
American-branded to boot. A further 37
percent of U.S. imports from China consist of
parts and components on which U.S.-based
manufacturers rely.
Washington’s latest tariffs apply to 279
product categories including semiconductors,
plastics, chemicals and railway equipment
t h a t t h e O ffi c e o f t h e U . S . Tr a d e
Representative has said benefit from Beijing’s
“Made in China 2025” industrial plan to make
China competitive in high-tech industries.
China also has much more scope to mitigate
China’s list of 333 U.S. product categories hit
with duties includes coal, copper scrap, fuel,
steel products, buses and medical
equipment. First in line is $16 billion of U.S.
civilian aircraft exports. Boeing’s share price
slumped when the Chinese move was
announced. But Chinese airlines are
expanding so fast that Boeing may be willing
to slash prices to hang on to sales there, in
which case none of the cost of the tariffs
would fall on China. And if push comes to
shove, the Chinese already have a reliable
alternative supplier: Europe’s Airbus.
few years.
Second in line is $12.8 billion of U.S. soybean
exports. China accounts for more than half of
American soybean exports, giving it market
power. Indeed, as talk of a trade war heated
up, the hit to U.S. farmers was immediate:
Soybean prices plunged. Here, too, China
has an alternative supplier: Brazil.
Dow Jones industrial average as his personal
How could it impact China?
Though it is too early for trade damage to
show up in much economic data as yet,
tariffs are beginning to increase costs for
consumers and businesses on both sides of
Aug’18
the Pacific, forcing companies to adjust their
supply chains and pricing, with some U.S.
firms looking to decrease their reliance on
China.
The uncertainty about the duration of the
trade conflict was more damaging than the
tariffs themselves because it made business
planning difficult. If the tariffs are in place for
a long while, there will come a point at which
the company would begin moving some
sourcing and production out of China, a
process that would be irreversible for several
years once set in motion.
How much power does China
have?
any economic damage than the Trump
administration does. Unlike the U.S. Federal
Reserve, China’s central bank is not
independent, so the People’s Bank of China
can be ordered to cut interest rates to boost
domestic demand if necessary.
The Chinese government also has a much
healthier fiscal position and is free to
compensate any industries harmed by a trade
war. By contrast, the U.S. government is
facing a large budget deficit of some 4
percent of GDP that is set to rise in the next
Finally, the Chinese government can absorb
the political costs of a trade war much more
easily than the Trump administration can.
Every time Trump lashes out at China, U.S.
stock markets plunge. That is particularly
problematic for a president who treats the
approval rating, especially because the single
biggest constituent of the Dow is Boeing.
Because the president has tied himself to the
Dow, every time stocks fall, the Trump
administration feels compelled to reassure
markets that it is seeking a negotiated
solution to the trade conflict, a move that
undercuts its leverage

3
Currenc-I Aug’18

How could tariffs affect me?

They could affect people around the world - especially since China has retaliated. The world's
second-largest economy has taxed US agricultural and industrial products, from soybeans, pork
and cotton to airplanes, cars and steel pipes. In theory, China could also tax US tech companies
like Apple. That would hit the tech giant, and it could be forced to raise its prices to compensate.
A global trade war could hurt consumers around the world by making it harder for all companies
to operate, forcing them to push higher prices onto their customers

Mr Trump's decision to take on China could lead to adverse effects for consumers in the US and
in China, but also worldwide. Economists reckon that every $100 billion of imports hit by tariffs
would reduce global trade by around 0.5 percent. An economic showdown between the world's
biggest economies doesn't look good for anyone

Particularly for India, the China is allowing the yuan to weaken to increase its export
competitiveness. This has led to the Indian Rupee reaching new lows while the South Asian
stock market has been adversely hit too.

4
Currenc-I
THE VENEZUELAN HYPERINFLATION CRISIS

A 2.4kg chicken costs 14,600,000 Bolivars A toilet paper roll costs 2,600,000 Bolivars
THE ‘WHAT’
Venezuela is currently experiencing a GDP
contraction that dwarfs that of the Great
Depression, the Spanish Civil War, and even
the recent Greek crisis. This GDP contraction
is simultaneously generating hyperinflation of
a magnitude seen only in Germany in 1923
and Zimbabwe in 2008-2009.
2012, of every 100 dollars, more than 90
On 23 July, the International Monetary Fund
(IMF) announced that it was expecting
inflation in Venezuela to reach 1,000,000% by
year’s end. In April, the IMF announced that
Venezuela’s gross domestic product (GDP)
was expected to be 45% below its 2013 level
by the same time. These are mind-boggling
numbers.
retailed petrol was below US$.01 per gallon.
The question is, how is it that Venezuela is
experiencing such hyperinflation and GDP
decline simultaneously only seen twice in the
entirety of the last century?
disempower society and enhance state
THE ‘HOW’
The origin of this economic collapse was
framed in the context of the Great Recession
of 2008. With improvements in the extraction
of unconventional hydrocarbons in the United
States there was a steady increase in oil
production accompanied with a stable
demand. This generated a surplus of this
Aug’18
(Source: Reuters)
resource that caused a drop in prices
of reference crude oil, West Texas
Intermediate (WTI), and Brent Crude, falling in
2014 from $100 a barrel to $50 a barrel,
causing unfavourable changes in the
economy of Venezuela.
Due to high oil reserves, lack of policies on
private property and low remittances, by
came from oil and its derivatives. With the fall
in oil prices in early 2015 the country faced a
drastic fall in revenues of the US currency
along with commodities.
In addition, the government has not made
policy changes to adapt to the low petroleum
price. In early 2016, The Washington
Post reported the official price of state-
So the answer is surprisingly straightforward
and well understood. The government used
the oil boom that started in 2004 to
control over production and the market, while
borrowing massively in international markets.
Although state control was detrimental to
production, the government could shelter the
public from its consequences through
subsidized imports, which further damaged
domestic production.
By 2013, the government’s excessive
borrowing had caused it to lose access to
international capital markets, triggering the
5
Currenc-I Aug’18

start of the recession. In 2014, the price of oil

fell sharply, making the previous import level
unsustainable and triggering a much deeper
collapse. It was clear at the time that the
government needed to change its ways. Even
members of President Nicolas Maduro’s
administration pushed for a return to more
market-friendly policies and for international
financial support. Instead, Maduro’s
government doubled down, deepening
distortionary controls on the economy.

It was also clear by the end of 2015 that a

major collapse was coming—and even that a
famine was in the making. Nothing was done
to prevent it. Offers of humanitarian
assistance were refused. With imports,
output, and tax revenues collapsing, the
government opted to print the money needed
to cover the fiscal deficit, triggering President Nicolas Maduro
hyperinflation.

Maduro barely finished high school; but

plenty of one-time Chavistas pleaded for a
THE ‘WHY’ change of policy in a more sensible direction.
If the government is ignorant, its ignorance
But while the “how” of the Venezuelan was a deliberate choice.

collapse is clear and was predicted ex ante,

the “why” question is harder to answer. Why, That leaves intent. The government chose
with clearly formulated alternatives on the this course of action because it felt that it was
table, did the government choose a better than the alternatives. But it is difficult
predictably disastrous course of action, at to imagine courses of action with worse
such high human cost?
outcomes for millions of people than the
current one.

There are three possibilities: ignorance,

intention, and strategic interaction. Lets start
with the last one. In a 1991 paper, it was
suggested that economic stabilization might
be delayed because two contending groups
are trapped in a war of attrition; all
understand that adjustment is necessary but
expect the other group to bear the brunt of
the cost. By delaying, they provide
information to the other group about their
willingness to withstand the pain. The
process continues until one group capitulates
and bears the cost of adjustment, in order to
The only way out of the crisis was to re-
empower society with the capacity to
organize market-based production to meet
people’s needs. But that was anathema to the
regime. Given the choice between re-
empowering and starving its citizens, the
regime chose the latter and bought off as
many henchmen, through venal means, as it
would need. Yes, the catastrophe would
weaken the regime; but society would
weaken even faster, assuring the regime
continued control.

benefit from the stabilization. But in a

totalitarian regime such as Venezuela—and
with Cuba calling the reform shots—it is hard The Oxford English Dictionary defines “evil”
to tell who is trapped in a war of attrition with as “doing or intending to do harm”.
whom.
Ultimately, there is no other plausible
explanation for what has happened in
Venezuela.

Ignorance is a weak explanation. True, the

government does not have a single cabinet
member with an economics degree, and

6
Currenc-I Aug’18

Falling Indian rupee

The Indian rupee (INR) closed at a record low of ₹70.3 against US dollar (USD) on Thursday, 16th
August, tumbling more than 100 paise in one day. The currency has lost about 4.6% so far this
year, as the dollar has been climbing for much of the year.1) Rupee has been the second worst
performer among the currencies in the BRICS group (Brazil, Russia, India, China, South Africa) in
2018.2) One of the immediate factors triggering the significant decline in the currency is the
worsening economic situation in Turkey. The country is currently witnessing double digit inflation
rate (15.85% in July 20183)), high current account deficit (6.5% of the GDP4)), debt defaults
from major companies and extremely high external debt (52.9% of the GDP in March 20185)).
This has increased volatility in the emerging markets, worsening the investor confidence. The
Indian rupee is victim to the same.

Besides this, other reasons for a weakening rupee are:

Rising Crude prices: 80% of India’s fuel needs are satisfied through imports. The Indian crude basket, the
weighted average price of all the country’s crude oil imports, has gone up from $52.49 in April last year to over $63
in March 2018, a rise of 22% in a year. As per the Economic Survey 2018, every $10 increase in price of crude oil will
increase the current account deficit by around 0.4%. Naturally, greater the amount of dollars spent on oil imports,
greater would be the downward pressure on Indian rupee

Widening trade deficit: As per the recent government data, trade deficit (Imports-Exports) was at a 5-year high of
$18.02 billion in July 2018. Despite export growth of 14.32%, imports grew by a massive 28.2%1), primarily due to
expensive oil imports

High US Bond yield: The yield on the most widely watched bond rate in the world – US 10-year Treasury Notes
hit a high of 3.1% (first time since 2011), making the Treasury notes attractive to the investors. This has given a
robust boost to dollar in the foreign exchange market, adding to the downward pressure on the rupee

Capital Outflows: The vicious cycle of the dollar deficit and weakening rupee can be offset if other sections of the
economy earn additional dollars. For instance, the capital markets. However, foreign investments in equities and
bonds have also been decreasing. As per the data given by National Securities Depository Limited, in the last three
months, foreign portfolio investments stood at Rs 13,260 crore, a fifth of the figure at the same time last year

Trade war between US and China: Higher import tariffs imposed on the imports from China (by US) and
retaliatory tariffs from China have left investors worrying about the economic situation in China. This
coupled with rising bond rates on US Treasury Notes have led to an increased demand for dollars leading
to a fall in emerging market currencies like INR

7
Currenc-I Aug’18

Barclays plc has forecasted that

the Indian rupee will decline to
₹72 per dollar during the year end
as elevated oil prices dent
government finances and foreign
investors dump Indian assets.
Hitting the target would mean an
annual drop of 11.3% for the
currency. Actions taken by the

8
Currenc-I
Dissecting Turkey’s financial crisis 2018
TRY-USD
Turkey’s official currency, Lira, has been
steadily losing value over the last couple of
years. This year the currency has been in an
absolute free fall with loss in value of c. 41%
YTD. Every financial crisis is an
interdisciplinary phenomenon where a
number of forces (economic, financial,
sociological, political, etc) interact in a way
that cripples the economy. Let’s explore
below this financial crisis in depth.
The degree of outflow of funds from an EM is
Before dissecting into the multiplicity of
causes, let’s establish a simple rule first. A
currency falls in value when the sentiment to
sell the currency is greater than the sentiment
to buy it. Add to the situation - foreign
currency debt. If there is a considerable
amount of foreign currency debt and local
currency is depreciating (remember that your
assets are held in the depreciating currency),
the debt servicing costs and default risks rise.
pouring through. JPM has estimated that
Let’s analyse below why there is a negative
sentiment around Lira and Turkey more
broadly.
FED’S NORMALISATION OF INTEREST RATES
The Federal Reserve has been on the path of
normalisation, with the target Fed funds rate
currently in the range of 1.75% to 2%. The
Aug’18
increase in interest rates in developed
markets always creates more volatility in
emerging markets as institutional investors
look to shift investments from “riskier” EM
assets to comparatively “safer” DM assets in
search of yield.
TURKEY’S ECONOMY
also influenced by the fundamentals of the
country. Turkey’s inflation rate has been close
to 16% in latest figures. Also, Turkey’s crisis
is
a debt story. Over the past couple of years,
Turkish growth has been fuelled by debt.
Whereas generally financial crises entail
government debt, here it is a case of foreign
currency debt in the hands of corporates.
News of some bankruptcies have also started
around $179bn of debt would mature in the
year to July 2019 - the amount is about a
quarter of Turkey’s economic output.
While it seems that an IMF bailout is
imminent, it might be somewhat challenging
given that debt is concentrated in the hands
of corporations.
9
Currenc-I
POLITICAL UNCERTAINTY IN TURKEY
There was a failed coup attempt against the
President in 2016, which has further raised
instability in the economy. Erdogan considers
interest rates to be “evil” and hence has been
extending his influence over the central bank
to not increase interest rates to curb the fall in
value of Lira. He has also appointed his close
relatives to important positions in the ministry,
further eroding the trust reposed in his
government.
US-TURKEY RELATIONSHIP
The current relationship between Turkey and
US is quite tenuous over a number of factors
– US support for Kurdish fighters in Northern
Syria, Turkey’s arrest of the North Carolina
pastor, Andrew Brunson (touted to be
arrested to gain leverage to demand
extradition of the cleric Fethullah Gulen-
blamed for a 2016 coup attempt) & America’s
consequent sanctions over Turkish steel and
aluminium.
broader EM crisis - that remains to be seen in
Aug’18
TURKISH CENTRAL BANK INDEPENDENCE
The undue influence of the President ensured
that the central bank failed to raise interest
rates for a considerable period of time when
inflation was increasing. This has reduced the
credibility of the central bank in global
markets, even though it has lately been taking
measures to constrain liquidity in the
economy.
LOW FOREX RESERVES
In the light of Erdogan’s unconventional view
of interest rates, selling forex in the market
would have been the viable option to prop up
the value of Lira and also to act as cushion to
pay off Debt. But Turkey’s reserves are almost
only c. 75% of upcoming debt payments
Turkey’s financial crisis of 2018 is a classic
amalgamation of a currency and borrowing
crisis with the main backdrop of political
instability. There are fears of it precipitating a
the upcoming months.
10
Currenc-I Aug’18

Ayushman Bharath
In his last Independence Day speech before the 2019 elections, the
Prime Minister announced the launch of the National Healthcare 107.4 million
Protection Mission (NHPM), a scheme designed to ensure that the
country’s most vulnerable have access to healthcare. NHPM or families or 500
Ayushman Bharath is an ambitious program that will cover at least 40% million individuals
of the population and gives each family an insurance cover of 5 lakhs will be covered
per year.

The scheme accords the beneficiaries cashless treatment for secondary under NHPM.
and tertiary care at all public sector and empaneled private hospitals Currently only

and eligibility for this is based on Socio-economic Caste Census 440 million Indians
database.

have health care

How does this work? insurance.
Under the current plan, the government has fixed prices for various
treatments which it shall pay the hospitals, thereby keeping a check on
government expenditure. The Centre and State will share the costs in the ratio of 60:40.
However, the North Eastern states, Himachal Pradesh, Uttarakhand, and J&K will get up to 90
funding from the center.

The center has also given the State governments the choice of implementing this scheme
through a trust or an insurance model. In the case of the former, the state governments can
create trusts that will perform the role of an insurance company and disperse money to the
hospitals. In the latter model, the state governments would have to float a tender and the
insurance company is selected on the basis of competitive bidding. 23 states have opted for the
trust model. States can also combine their existing healthcare schemes with NHPM.

This Ayushman Bharath

scheme gains relevance
in light of rising health
care costs in India. A
large number of Indian’s
either choose to go
untreated or are forced
to go to quacks simply
because they cannot
afford quality
healthcare. In spite of
having one of the
highest out of pocket
expenditures in the
world (we are ranked
182 out of 191
countries), the
government spends
less than 1% of GDP on
health care. By making healthcare accessible with NHMP, the government hopes to create a
healthier India, with prevention or early detection of diseases, particularly non-communicable
ones.

The scheme could also serve as an opportunity to tap into a large labor pool. The demand for
healthcare should necessitate the creation of new jobs in the healthcare services industry be it
doctors, nurses or administrators and could raise skill levels.

The scheme is ambitious, yet it is hard to deny the many teething troubles it will encounter. The
first is ensuring a system of checks and balances so that hospitals and doctors don’t
unnecessarily treat patients with the intention of earning a quick buck or register ghost

11
Currenc-I Aug’18

beneficiaries. Secondly, there is a fear that because the government has set low prices for
procedures, there is no incentive for hospitals to be a part of this scheme. This could either
make it difficult for patients to find the right hospitals or force caregivers to find loopholes and
make patients pay for the difference or could affect the quality of services provided. And finally,
there is the problem of shortage. India has a low doctor to patient ratio which needs to be
speedily remedied.

The proof the of the pudding is in the eating and while the scheme is great on paper and makes
for a good electoral promise, the success of the scheme will be determined by the country’s
ability to implement the scheme. India is a large country and the scale of operations, political
differences between the center and the states, lack of bureaucratic will could make things
difficult. 


5G for a faster India

WHAT IS 5G?
• 5G networks are the next generation of mobile internet connectivity, offering faster
speeds and more reliable connections on smartphones and other devices than ever
before. One will be able to download - not merely stream - a full HD movie in less than 10
seconds on a 5G network. The same task would take closer to 10 minutes on 4G.

• It will also help to achieve high data rates with low latency (the delay before a transfer of
data begins following an instruction for its transfer). This requires a number of technical
changes, including sending data using higher radio frequencies and designing arrays of
antennas to reduce interference between  many devices all communicating at the same
time. Together these add up to a 5G network with  many more base stations. 5G base
stations could be placed every 250 meters, rather than the every 1 to 5 km needed for
4G.

• 5G systems offer the possibility of providing reliable connections to massive numbers of

wireless devices simultaneously. This could enable a huge expansion of the number of

12
Currenc-I Aug’18

"internet of things" devices in use, monitoring nutrients in the soil for farmers, package
locations for shipping companies and vital signs for hospital patients, for instance.

• Early 5G networks are being rolled out now in some U.S. cities. The Tokyo Olympics in
2020 are supposed to present the very  first showcase of the full range of what 5G
technology can offer.

POTENTIAL IN INDIA:

• With 5G, Internet of Things (IoT) and Artificial Intelligence (AI) will become mainstream,
and connectivity will be seamless, enabling improvement in the quality of e-governance
and education, as well as enabling financial inclusion, smart cities, and an intelligent
transportation system. Above everything else, in a rapidly developing economy such as
India, 5G will show impactful results in agriculture and healthcare.

• An assessment made by the UN shows that 5G and IoT could enable the agriculture
industry to deliver a 70 percent increase in food production worldwide by 2050, catering
to the ever-growing global population.

• Another early beneficiary of the 5G roll-out will be the healthcare sector. The Indian
medical tourism industry is expected to double in size by 2020, to touch $8 billion, and
the advent of 5G will allow for blistering fast broadband, combined with Virtual Reality
(VR) and AI, to empower medical practitioners by providing more data on diseases and
also by delivering diagnosis and treatment that is not restricted by physical limitations.

• At the Mobile World Congress 2018 in Barcelona, Ericsson demonstrated two live IoT
use-cases in a 5G environment, which it said, could be relevant for India. The first case
shows how IoT networks with sensors can save lives through disaster monitoring and
early warning systems, while the farming solution uses artificial intelligence to monitor
temperature, humidity and CO2 levels to maintain greenhouse ventilation and ideal crop-
growing conditions.

13
Currenc-I Aug’18

STEERING COMMITTEE ON 5G:

• Fifth-generation (5G) telecommunication services can create an economic impact of $1
trillion in India by 2035 and is expected to be launched in the country by 2020. To make
5G a success in India, a steering committee on 5G has suggested increasing the
quantum of the spectrum with lower pricing.

• The committee formed to formulate a roadmap for 5G in India suggested that by acting
early to embrace the 5G opportunity, India can accelerate the 5G dividend and potentially
also become an innovator in 5G applications. The panel has given wide-ranging
recommendations entailing spectrum policy, regulatory policy, development of
application standards, education, etc. The panel feels the quantum of licensed mobile
spectrum in India is much lower as compared to countries like the US and the UK. Also,
the cost of spectrum, relative to per capita gross domestic product, is much higher than
most countries.

• The panel said that 5G roadmap pursued by India should not only move the country
forward but also result in progress of weaker sections of society and proposed some
kind of financial support to telcos as 5G networks will need new business models which
will bring higher investment risks to service providers.

TRAI’S RECOMMENDATION ON SPECTRUM PRICING:

TRAI's recent recommendations on reduced rates for 700 Mhz band took into account the price
of the spectrum that was recently auctioned in some international markets. At around Rs. 65.68
billion per Mhz, the regulator has suggested a whopping 43 percent cut in base price for the
premium 700 Mhz frequency which had failed to attract buyers in the last auction held in 2016.
According to TRAI the new 3300-3600 Mhz band has opened up for 5G services and that
enormous opportunities are available for telecom operators to bid for the spectrum they need for
the next-generation services. TRAI also expects demand to be there in 700 Mhz also because
the ecosystem has developed to a great extent and it is becoming a desired band for LTE and
5G service. Based on the regulator’s base price, the government could make a staggering Rs
1,476 billion if all the 5G spectrum is sold. But most telcos cannot pay this price and
telecom lobby, Cellular Operators Association of India, finds the price of 5G in contradiction with
the objectives of the new telecom policy.

The sub-1 GHz bands are key to providing coverage as well as in- building penetration of
airwaves (that is, they can penetrate walls) and require fewer towers and, therefore, investment.
But they can carry a limited amount of data. But as 5G requires high data capacity, telcos also
require high-frequency bands which are above 1 GHz. However, if telcos only have high-
frequency bands they will have to put in many more towers to ensure coverage and that would
require huge investments and make the project unviable. So a combination is key.

CHALLENGES IN INDIA:
• Investment in fiber network and infrastructure: With 5G requiring highest capacity
backhaul (backhaul portion of the network comprises the intermediate links between the
core network, or backbone network, and the small subnetworks at the "edge" of the
entire hierarchical network) to deliver its intended peak data rates, fiber has become a
critical backhaul and transport technology.
• Regulatory hurdles: On the government side, issues such as Right of Way (RoW) across
different states must be addressed on priority. Currently, RoW charges vary from a few
lakh rupees to 1.5 crores per km across different states. With states having different RoW
policies, telcos are losing out a significant amount of their infrastructure investments to
municipal bodies across states.


14
Currenc-I Aug’18

THE AVIATION SECTOR IN INDIA

The Quarter 1 FY 2018-19 results of all the air
carriers showed a disappointing picture.
InterGlobe Aviation’s IndiGo reported a 96%
year on year decline in net profit at Rs. 278
million. Taking a cue from the poor results,
their stock dipped 11% to Rs. 891, its 52-
week low on BSE. Following suit was
SpiceJet which reported a loss of Rs. 380.6
million on a standalone basis. Leading the
loss making industry was Jet Airways with a
loss of Rs. 10,400 million in Quarter 4 in FY
2017-18. The crisis-struck airlines is yet to
release its earnings for Quarter 1 FY 2018-19.
parallels to the telecom sector in India. The
At the same time, one can see an apparent
contradiction in the airline industry. As per the
figures given by the Directorate General of
Civil Aviation, India’s air passenger traffic
shows an annual increase of 16% over the
past decade. While the airlines flew 14 million
passengers in 2000-01, by the end of 2017
Moreover, the Indian aviation market is price-
sensitive. The pricing here is not based on a
cost-plus model. Typically, the booking curve
starts two-three months in advance and
hence any changes like rise in fuel prices,
depreciation of rupee have to be borne by the
airlines. Availability of substitutes (in the
transportation industry) ensures that the
power in the market is with the buyers.
Increased competition amongst the players
has pushed down the fares which has dented
the margins of the carriers. One can draw
entry of Reliance Jio brought in cut-throat
competition amongst the service providers
which reflected in the slashing of tariffs on
various plans. In Quarter 1 FY 2018-19, all the
major telecom players reported a loss in their
earnings. In the same way, reducing air ticket
fares in a bid to capture larger market share
puts a squeeze on their margins.

the number had risen to 140 million

passengers, most of which were domestic. The airline sector is plagued with uncertainty.
India is the third largest aviation market in the The competing tensions set up by the
world. Airbus forecasts that the Indian airline breakneck growth, the New Civil Aviation
industry will continue to show robust growth Policy of 2016 for the benefit of regional
with five and a half times growth over the connectivity which puts a price cap on ticket
next two decades.
prices and heavy capital expenditure on the
airlines part to fuel the growth is bound to put
One of the major reasons for the downward pressure on the aviation sector. Perhaps, a
spiral of the airline’s earnings is their cost greater consolidation of the market along with
component. Aviation Turbine Fuel (ATF) some policy support can ease the worries of
accounts for over 30% of the total costs of this troubled sector.

the airlines. The fuel prices have seen a
colossal increase with a litre of turbine fuel
costing 30% more than it did in Quarter 1 FY
2017-18. Prices of jet fuel have risen in
response to strong demand for air travel
which in turn is fuelled by global economic
growth. Fuel prices are a variable cost
component and cannot be absorbed into the
business model immediately. In airline’s case,
irrespective of the number of passengers, the
fuelling expenses will have to be incurred.
Another recent development in the list of
woes is the depreciation of rupee. Around
25-30% of their costs, excluding fuel, like
aircraft lease rentals, ground handling and
parking charges overseas are dollar
denominated and a fall in the value of rupee
increases these expenses.

15
Currenc-I Aug’18

References

1. https://www.livemint.com/Opinion/7gNrvecy9QlyFrJYmZfiiL/The-how-and-why-of-
the-Venezuelan-crisis.html

2. https://en.wikipedia.org/wiki/Crisis_in_Venezuela#Economic_crisis

3. Economic Times, 15th August 2018

4. https://scroll.in/article/876204/widening-trade-deficit-high-oil-prices-why-the-rupee-
is-at-a-seven-month-low-against-the-us-dollar

5. https://tradingeconomics.com/turkey/inflation-cpi

6. https://ahvalnews.com/turkey-economy/turkish-current-account-gap-widens-
portfolio-inflows-slump

7. http://www.hurriyetdailynews.com/turkeys-external-debt-stock-reaches-466-7-
billion-in-first-quarter-133976

8. https://www.livemint.com/Opinion/PnHcP040QNZYkLT5BWK5rL/The-impact-of-
rising-oil-prices-on-Indian-economy.html

9. https://www.pwc.in/assets/pdfs/publications/2018/ayushman-bharat-national-
Aditi
health-protection-mission.pdf

Amol
10. https://www.livemint.com/Money/cTLp5La8xA6P8PmeXiMDmL/The-challenges-
before-Ayushman-Bharat-Scheme.html
Gunjan
11. //economictimes.indiatimes.com/articleshow/65139383.cms? Leena
utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
Samir
12. https://5g.co.uk/guides/what-is-5g/
Aishwarya 
13. https://www.business-standard.com/article/economy-policy/trai-says-4g-5g-to- Awiral
drive-demand-for-spectrum-in-next-round-of-auctions-118080201338_1.html
Gaurika
14. https://www.financialexpress.com/opinion/why-india-must-get-fiberised-to- Gayatri
leapfrog-to-5g/1069371/
Suyash
15. http://fortune.com/2018/04/12/5g-technology-explained/
Saylee
16. https://thewire.in/tech/5g-the-next-generation-of-wireless-explained
Simran
17. https://www.business-standard.com/article/economy-policy/5g-launch-in-india-
likely-by-2020-economic-impact-of-1-trillion-by-2035-118082301296_1.html

18. https://www.business-standard.com/article/markets/interglobe-aviation-skids-11-
on-weak-june-quarter-results-118073100181_1.html

19. https://indianexpress.com/article/india/indias-spicejet-posts-quarterly-loss-on-
fuel-expense-forex-loss-5306667/

20. https://www.business-standard.com/article/companies/why-jet-is-flying-low-
facing-questions-from-sebi-over-results-deferment-118081401539_1.html

21. https://www.livemint.com/Opinion/63uRs1nOypm4GVPUBXFbYJ/The-Indian-
aviation-sectors-many-problems.html

22. https://www.reuters.com/article/usa-products-jetfuel/jet-fuel-prices-rise-with-
global-demand-as-economies-expand-idUSL1N1RP1K2

23. https://indianexpress.com/article/business/aviation/high-fuel-cost-weak-rupee-
hurting-aviation-sectors-profitability-5324908/

16