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MACROSCAN : JULY 2014

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INTERNATIONAL BUSINESS

INTERNATIONAL ECONOMICS

INDIAN ECONOMY

FACT-A-BASE

INDIAN BUSINESS

CONCEPT CRACKER

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• IBM-Lenovo deal• The One cent Delivery - Amazon

• IMF outlook on recovery• World’s 8th largest economy

• India- an attractive investment destination?

• Flipkart buys Myntra

• Key Figures• Personalities

• Gresham’s Law• Pigou Effect

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INTERNATIONAL BUSINESSArcelor Mittal, IBM and Lenovo

• The Chinese Ministry of Commerce's anti-monopoly bureau has approved Lenovo Group's proposed $2.3 billion deal to buy IBM Corp's low-end server business. The deal, announced in January, is expected to be completed by the end of the year.

• ArcelorMittal, the world's biggest steelmaker, is considering making an offer later this month for Italy's second largest steel producer Lucchini.

• Lucchini, formerly owned by Russia's Severstal, was declared insolvent in 2012 and later placed under "special administration" - a procedure designed to save large companies and avoid heavy job losses. It fell victim to the 2008 recession that has cut Europe's steel demand by about a quarter.

• Italy's unions and politicians favour an offer that includes a commitment to keep the blast furnace running. The furnace, idled in April, is part of a complex that last year produced 1 million tonnes of steel or 4 percent of Italy's output.

2Aditya Sood

IBM-Lenovo strike a deal; Arcelor Mittal contemplating a takeover bid

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INTERNATIONAL BUSINESSThe One Cent Delivery - Amazon

• Amazon can no longer offer free shipping for books in France, so it’s charging a single penny. The token charge is Amazon’s retaliation against a new French law, enacted Thursday, that bars online booksellers from discounting their titles or offering free deliveries for book orders.

• Nicknamed the anti-Amazon law, the measure is designed to protect France’s local book stores, which face intense competition from larger chains and online retailers.

• While the law is not specifically aimed at Amazon, Culture Minister Aurelie Filippetti has singled out the US giant's practices in the past, attacking it for its "dumping strategy" and for selling books at a loss.

• Since 1981, France has banned booksellers from discounting the cover price of new books more than 5%, an effort to discourage price wars between large retail chains and their smaller rivals. Now Amazon and other online retailers can’t even implement that modest discounts on books.

3Aditya Sood

Amazon fights back against what it terms ‘discriminatory’ regulation

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INTERNATIONAL ECONOMICSIMF Outlook on Recovery

• According to the IMF, Global economic activity should strengthen in the second half of the year and accelerate in 2015, although momentum could be weaker than expected.

• As per the IMF, Central banks' accommodative policies may have only limited impact on demand and that countries should boost growth by investing in infrastructure, education and health, provided their debt stays sustainable.

• The fund forecast that global output would grow by 3.6 per cent in 2014 and 3.9 per cent in 2015.

• "Despite the many responses to the crisis ... recovery is modest, laborious, fragile, and measures to boost demand, despite the goodwill of central banks, will find their limits," IMF chief Christine Lagarde commented.

4Aditya Sood

Still fragile!

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INTERNATIONAL ECONOMICSWorld’s 8th Largest Economy

• California’s economy has overtaken Russia and Italy, with the state now ranked as the world’s eighth-largest economy.

• The state’s $2.203 trillion gross domestic product in 2013 put California slightly ahead of Russia and Italy and just behind the No. 7 economy, Brazil. The rankings were calculated by the Center for Continuing Study of the California Economy in Palo Alto and based on annual statistics from the World Bank.

• Because of slow growth in Europe, California could close in on No. 5 France and No. 6 United Kingdom in the 2014 rankings.

• California’s eighth place showing in 2013 tells the story of the state’s comeback after years of hard knocks starting in 2007. Silicon Valley has played a pivotal role in the rebound. California’s GSP — Gross State Product — grew 2 percent in 2013, slightly above its 1.6 percent average growth between 2000 – 2013.

5Aditya Sood

California’s economy overtakes Russia and Italy, could surge even more

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INDIAN ECONOMY

• No increase in passenger fares or freight proposed during the budget• Highest ever plan outlay of Rs 65,455 crore for 2014-15; Expenditure pegged at Rs

149,176 crore• Proposal put forth for introduction of Diamond Quadrilateral• Plan to hike speed of trains to 160-200 km/hr in 9 sectors• Introduction of 58 new trains and extension of 11 existing trains proposed• Online booking to support 7,200 tickets/minute and to allow 1.2 lakh users to log

in simultaneously• Women RPF Constables to escort ladies coaches; 4,000 women constables to be

inducted to enable the same• Feedback services through IVRS on quality of food; Food can be ordered through

SMS, phone• CCTVs to be used at stations for monitoring cleanliness • FDI in railway projects, except in operations; FDI, domestic investments in rail

infrastructure• Some stations to be developed to international standards through PPP model

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Railway Budget 2014-15

Sandesh V

Key Highlights

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INDIAN ECONOMY

• Non Populist Budget- Though no fare increase has been announced in the budget, fare increase of 14.2% effective from June 25 was done to reduce losses/passenger. These losses were estimated to have increased from 10paise/passenger in 2000-01 to 23paise/passenger in 2012-13. Further, fares have been linked with fuel prices, to offset losses from fuel hikes. Hence, even though not explicitly stated in the budget, fare hikes are imminent as fuel prices vary

• Refocus Resources- Of the 676 projects sanctioned at a cost of over Rs 1,57,883 crore, in the past 30 years, less than half were completed. An investment of Rs 1,82,000 crore is required to complete them. Also, of the 99 new line projects started in the past 10 years, only one has been completed. Indefinite delay in completion has led to dead projects and high sunk costs. To improve this dismal completion rate, proposal is to limit new trains and projects and focus on completing existing ones and to improve the operating efficiencies of the railways

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Railway Budget 2014-15 (contd..)

Sandesh V

Analysis & Implication – A Non-populist Budget

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INDIAN ECONOMY

• Focus on Technology- Many new initiatives, from IVRS feedback of catering to SMS booking of food would improve the quality of services on offer. Offering of Wi-Fi in A-1, A category stations and in select trains is proposed to attract passengers to higher fare sections of trains, thus improve revenue/passenger

• Focus on Safety- Setting up of CCTVs at stations and introduction of Women RPF Constables to escort ladies coaches is touted to improve the safety of railways

• Initiatives to Bring in Big Money- Introduction of FDI in projects and infrastructure suggests that this would be the sources of fund for visionary projects such as the Diamond Quadrilateral.

• Change in policies- Looking to support PPP model, cabinet approval has been sought for the same. This would require immediate and effective change in policies to prevent failure of the PPP model. Though PPP Model has been supported, silence has been maintained regarding privatization of railways

8Sandesh V

Analysis & Implication – Focus on technology, safety, initiatives to bring in big moneyRailway Budget 2014-15 (contd..)

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INDIAN ECONOMY

• Reasons for Worry- Inflation, based on WPI, reached a high of 6% in May 2014. This was led by increase in food prices, especially that of potatoes, fruits, eggs and fish. Threat of low rainfall in coming months and speculation regarding this is expected to further exert stress on the prices

• Steps taken to tackle this inflation and their implications- Onion and Potato has been included under Essential Commodities Act 1955 by the

Cabinet Committee on Economic Affairs (CCEA) on 2 July 2014. This enables State governments to undertake de-hoarding operations of onion and potato to control the prices and to improve availability of these commodities to general public, especially the vulnerable sections.

CCEA increased the minimum export prices (MEP) of onion by 67 percent to 500 US $/tonne from 300 $/tonne, making exports costlier and no more a profitable option for traders

Additional allocation of 50 lakh tonnes of rice for distribution to BPL families. This is expected to mitigate the problems of people affected by food price inflation, particularly in States where the National Food Security Act has not been implemented

9Sandesh V

Inflation of food pricesRecent rise in prices of food items and steps taken to tackle it

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INDIAN BUSINESSFlipkart acquires Myntra

• Company background:– Flipkart was founded in 2007 by Sachin Bansal and Binny Bansal. The business was

formally incorporated as a company in October 2008 as Flipkart Online Services Pvt. Ltd. During its initial years, Flipkart focused only on books, and soon as it expanded, it started offering other products like electronic goods, air conditioners, air coolers, stationery supplies and life style products and e-books.

– Myntra.com was established by Mukesh Bansal, Ashutosh Lawania, Vineet Saxena in February 2007. From 2007 to December 2010, Myntra.com was in the business of personalization of products online.The products ranged from T-shirts, mugs, greeting cards, calendars, key chains, diaries etc. However, in 2010, the company expanded its catalogue to retail fashion and lifestyle products.

• Deal Details:– Deal Value- Rs 2,000 crore (over $340 million) through a stock transaction– Closure Date – 23 May’2014– Target Company – Myntra.com– Stake acquired – 100%

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Post the deal, both entities will remain independent but Myntra chief will double up as head of fashion vertical for Flipkart.

Priyadarshini Mullick

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INDIAN BUSINESSFlipkart acquires Myntra (contd..)

• What really lies beneath the deal ?– According to the Economic Times, Flipkart loses Rs 70 crore a month while Myntra is

not just bleeding but also rapidly losing market share to competitors like Jabong and other fast-rising fashion e-tailers. In 2013, Flipkart lost Rs 281 crore (US$47 million) on revenues of Rs 1,180 crore (US$197 million) while Myntra lost Rs 134 crore (US$22 million) crore on revenues of Rs 212 crore (US$35 million) which is why, combining forces—in other words, sharing a logistics and technology backbone, as well as customers—will stem that tide to some extent, is the thinking.

– One more reason is the world’s largest e-retailer ,Amazon that has started patrolling the waters in India. According to KPMG in just a year, Amazon India has garnered half the visitors of Flipkart (6.78 million vs. 13.22 million). And, with FDI in retail around the corner—even if the government doesn't go all the way they are likely to introduce significant concessions—it could completely upend the landscape.

• Why Myntra makes sense for someone like Flipkart?– The e-tailer gets to add-on the leader in the hottest growth category in e-tailing—

fashion—and one that has the fattest margins. The combined entity already has 50 percent of the market and is expected to increase that to 70 percent with this fashion-focused acquisition.

11Priyadarshini Mullick

Flipkart gets to add on the fashion segment leader; Combined entity eyeing to share logistics and technology backbone

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INDIAN BUSINESSIndia- attractive for investments?

• According to a UN survey, India has slipped to the fourth place in the list of preferred investment destinations for transnational corporations.

• China remained the top draw followed by the US. But, Indonesia has overtaken India as the third most preferred destination for 2014-16.

• In the last report, India was placed third but a series of policy flip-flops and tax notices, which many in the government refer to as "tax terrorism", have dented India's image.

• Macroeconomic uncertainties in India continue to be a concern for foreign investors. High inflation and the other macroeconomic problems have cast doubts on the prospects for FDI, despite the government's ambitious goal to boost foreign investment. Policy responses to macroeconomic problems will play an important role in determining FDI prospects in the short to medium run

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High inflation and the other macroeconomic problems have cast doubts on the prospects for FDI

Priyadarshini Mullick

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INDIAN BUSINESSIndia- attractive for investments? (contd..)

• At the end of 2013, the world's 5,000 top TNCs, which include the likes of Apple, Google and Pfizer, were sitting on a cash pile of close to $3.5 trillion — almost twice the size of the Indian economy. They are expected to invest a large part of the money in developing countries such as China, India, Indonesia and Brazil to expand their business and tap the growing talent pool across these countries. India has traditionally trailed several Asian economies and even in 2013 was placed fourth in terms of FDI flows, after China, Hong Kong and Singapore.

• The Unctad report said the government's retail liberalization efforts have not resulted in expected flows as international supermarket chains, barring Tesco, have stayed away from investing in the multi-brand retail segment due to the policy uncertainty.

• It suggested that the government could adopt a different policy approach to leverage foreign investment for the development of the Indian industry. It also suggested that the government can look at franchising and other non-equity forms to get global players to start operating in India

13Priyadarshini Mullick

A different policy approach to leverage foreign investment; franchising and other non-equity forms to get global players

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CONCEPT CRACKERGresham’s Law

• When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation

• This law applies specifically when there are two forms of commodity money in circulation which are required by legal-tender laws to be accepted as having similar face values for economic transactions

• The experiences of dollarization in countries with weak economies and currencies may be seen as Gresham's Law operating in its reverse form (Thier’s law): Good money drives out bad money

• Gresham's law may be generally applied to any circumstance in which the "true" value of something is markedly different from the value people are required to accept, due to factors such as lack of information or governmental decree

14Arjit Agarwal

Bad money drives out good

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CONCEPT CRACKERPigou Effect

• It is a term which refers to a relationship between consumption, wealth, employment and output during periods of deflation

• It states that when there is deflation of prices, employment and thus the output will be increased due to an increase in wealth and thus the consumption. It is also known as the real balance effect

• Arthur Pigou (for whom this effect was named) argued against Keynesian economic theory by professing that periods of deflation due to a drop in aggregate demand would be more self-correcting. The deflation would cause an increase in wealth, causing expenditures to rise, and thus correcting the drop in demand

• The Pigou effect creates a mechanism for the economy to escape the liquidity trap: as unemployment rises, the price level drops, which raises real balances, and thus consumption rises, which creates a different set of IS-curves on the IS-LM diagram, intersecting the LM curves above the low interest rate threshold of the liquidity trap. Finally, the economy moves to the new equilibrium, at full employment

15Arjit Agarwal

Wealth Effect resulting from Deflation

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CONCEPT CRACKERPigou Effect Contd…

• The Pigou or real-balance effect is a mechanism by which an increase in the real money supply resulting from a fall in the price level can influence aggregate demand through increasing autonomous expenditure

• If the reduction in prices from P0 to P1 is associated with both an expansion of the real money supply and autonomous spending, both the IS and LM curves will shift rightward

• Equilibrium output will rise to Y2 instead of Y1. This implies the flatter AD curve in the bottom frame

• With the real-balance effect, an increase in the nominal money supply (all else being equal) will result in a greater horizontal shift of the AD curve as well

16Arjit Agarwal

Pigou effect through IS LM curves

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FACT-A-BASE

17Arjit Agarwal

Arvind Mayaram• Mr. Mayaram serves as Secretary of

Department of Economic Affairs• He serves as Director of RBI, LIC and also

serves as Alternative Governor for India at Asian Development Bank

• Rajasthan Cadre IAS Officer, he holds experience at creating frameworks for public-private partnerships

• He is the key personality involved in the 2014 Budget preparation

MEASURE VALUEGDP(Q2 actual) 1.877

Trillion USD

GDP(Q3 forecast) 1.899Trillion USD

CRR 4%SLR 22.5%IIP 172.1

CPI (Industrial Workers)

244

Government Bond Yield-10 Year

8.72%

INDIA AT A GLANCE

WORLD AT A GLANCEMEASURE VALUE

LIBOR (Yearly) 0.55US One Year Constant

Maturity Treasury (CMT)

0.1

US Treasury Yield- 10 Year- Coupon- 2.75%

2.56%

Roberto Azevedo• Mr. Azevedo is the Brazilian diplomat and

Director-General of WTO• Under his watch, the Bali package was

approved• He is well known for his lectures on

international economics• He has served as Brazil’s Ambassador to

the UN’s international organizations