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The Indian Economy: The fairytale, which is in danger of losing the plot
From Faculty !s Desk
The year 1990 was a significant
milestone on the road of India’s
economic growth. Since the economic
reforms of 1990, India has been growing
at a rapid rate. The years 2005 to 2008
were some of the most exciting in our
country’s history. India was growing at
rates of around 9 per cent, making it
the second fastest growing economy in
the world and triggering hopes that we
would soon break past the magical
double digit barrier.
2008 was another marker in our
economic history-this time however it
marked the beginning of a slow and
painful regression of our economy. The
Indian growth engine, instead of
shifting into the next gear, is grinding
to a shuddering halt. The IMF growth
forecast for India in FY 2014 is hardly
inspiring at a figure of 5.6%.
There are several reasons for this sudden
change in fortunes in the growth story
of India. The global environment is
deteriorating and is volatile. This has
had an adverse impact on trade and
capital flows as well as the external
value of the rupee. Domestically,
inflation and in particular food
inflation, has proved to be a stubborn
adversary. The corporate sector did not
have much to cheer about either as the
period was marked by tight monetary
policy and high interest rates.
Politically, the situation was unstable
and the government has lost credibility
with civil society bringing decision
making to halt by accusing the
government of corruption. The hazards
of coalition politics became apparent
and regional political powers did not
allow the government to adopt any
significant policy reform, thus resulting
in what is today known as policy
paralysis. The same investors who were
singing India’s praises a few years ago
Dr. Sangita Kamdar
Area Chairperson,
Economics,
NMIMS, Mumbai
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E COSHASTRA A
are now the first to dismiss our
economy.
Compounding the issue are problems
such as the ever-increasing chasm in
our current account deficit. With
industrial production coming to a
standstill and our reliance on imports
growing, this gap has been growing ever
wider. Our insatiable desire for gold is
leading us down a dangerous path and
the government is trying hard to curb
this demand. Ben Bernanke is not
helping matters either. Since the time he
announced that the US would cut back
on quantitative easing, the Indian
rupee has been in free-fall with the RBI
having to intervene to arrest its fall.
Another contentious point is the populist
reforms, which the government is
implementing in the run up to election
year. While it may have good intentions
there are several structural issues, which
suggest that, it may be severely flawed.
The Indian growth story, which
promised so much, has seemingly lost
the plot. All hope is not lost however.
There exist deeply rooted structural
drivers of economic growth. We are a
young nation. The average age of our
citizens is a lot lower than many of the
developed nations. The disposable
income of the Indian citizen has been
growing. This coupled with the vast
domestic market has propelled India’s
growth even during the global recession
period. The levels of poverty have
significantly improved and economic
benefits have been felt even at the base
of the social pyramid. The question that
remains is whether these factors are
sufficient to bring the country back on
the path of high growth. Perhaps not. It
is one thing to have a young population
but it is another to have a young,
trained population. The need of the
hour is widespread education and that
too quality education. An environment,
which is favorable for investment in the
domestic industry, needs to be created.
There are issues such as access to land
and natural resources, which are
causing major holdups in various
industries. Policy measures to address
these pressing issues are needed. We
have been found wanting in areas such
as investment in infrastructure and the
speed with which administrative
decisions are being taken. A lot needs to
be done to improve in this regard. It is
time for our government, and for
whichever government comes into
power, to take hard decisions. Fiscal
consolidation will only be achieved if
the government is ready to take a hard
stance.
In summary, all is not lost. There are
strong indicators, which show that we
can bounce back from our present
predicament. We need to back our
strengths. The country is in need of a
policy agenda, which is based on
economic considerations and is investor
friendly.
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E COSHASTRA
CONTENTS
EcoNMist Article by Senior Committee 2013-14
CORPORATE INTERVIEW
!
COVER STORY "#!Suhasini Kirloskar
Is the Dragon !s fire incinerating the Elephant?
Mr. Narendra M.
Murkumbi
Managing Director & Vice Chairman of
Renuka Sugars Limited
Lets try and keep this private !
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AMAZING
FACTS
G !30
!32 High Growth Trajectory: The FDI
and The Uncelebrated Savers
The Food Security Bill : Vote bank Politics or A Game Changer? !
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Take the Leap of Faith !
SOLUTION
ECODOODLE
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E COSHASTRA
AUGUST 2013
EcoNMist
The total estimated coal reserves in the world
are about 860 billion tonnes. With energy,
power and various other dependent sectors
worldwide growing at breakneck speeds, the
demand curve for coal has always been on a
steady rise. The supply on the other hand
has been unable to keep up. Moreover,
governments have had to lay down stringent
environmental regulations as a result of
which the production targets have fallen well
short of demand from various sectors. The
gap has been steadily increasing.
Of all the primary sources of energy, coal is
the most extensively used one in India. This
trend is expected to continue. The power
sector is the largest consumer of coal
followed by the iron and steel and cement
segments. The demand for coal in FY 2012-
13 was 696.03 Million Tonnes (MT) while
supply was only 534.53 MT. As per the 12th
Five Year Plan the estimated demand of coal
in 2016-17 is 980MT while the supply has
been pegged at 795 MT. Fast forward to
2021-22 and the demand and supply are
expected to rise to 1373 MT and 1102 MT
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Let !s try and keep this Private !
respectively. Clearly there is a shortage.
This leaves organizations no other choice but
to source from abroad. As a result of this the
annual rate of coal imports has been growing
at 22%. On the one hand there is pressure to
spur growth. On the other, there is pressure
to minimize the Current Account Deficit and
maintain price levels. There is need for an
equitable solution.
Are there substitutes that could be imported?
As can be seen from the table, coal is a much
cheaper alternative when compared to other
options. Moreover a large percentage of
consumption of Oil and LNG is already
imported. To meet the demands of various
sectors, coal as an energy source appears to
be the only feasible option.
On the downside however, with the
imbalance in supply and demand, the prices
of coal are headed in one direction only – up.
Another point of concern is that the cost of
internationally traded coal is considerably
higher than domestically available coal. This
would have an inflationary effect on all
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ECOLIBRIA
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E COSHASTRA
THE ECONOMICS CELL NMiMS, MUMBAI
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affected sectors which in turn would lead to
slowdown in growth. Moreover the country
cannot afford to have further strains on its
already burgeoning Current Account Deficit.
It appears therefore that the most viable
option for the government would be to look
within and turn to the private sector.
Presently private participation in the coal
sector is restricted to captive mining and
contractual operations. The concept of
captive mining was introduced in the 70s
when coal production became nationalized.
Up until the 70s, the coal sector mostly
comprised a mix of small and big mines with
most of them under the control of private
players. Due to mismanagement, no
forthcoming investments and an extremely
low annual growth figure of 2%, the
Government passed the Coal Mines Act in
1973 with the purpose of nationalizing the
sector. Barring the mines under the control of
Tata Steel Ltd and one or two major players
at the time, the remaining mines were
brought under the government’s control. In
1976 companies like Tata Steel were allowed
to captive mine i.e. they were allocated a
block or an area within which they were
allowed to mine. They could then use this
block to cater to the needs of the steel
industry exclusively. The allocation of blocks
was done based on the sector’s end-use
requirements and the technical capabilities of
the private company (the 1973 Act was
amended in 1993 to expand captive mining
to the power generation sector. It was further
modified in 1996 to include the cement
sector). The rest of the sector was broadly
divided among two public companies!
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E COSHASTRA
AUGUST 2013
Given below is the production history since that decade:
As can be seen from the figures, there has
been considerable growth under
nationalization. But of late the figures seem
to be stagnating. Unfortunately this
stagnation is occurring at a time when
demand is peaking. Compounding the issue
are events like the 2012 blackouts which was
the largest power outage in history. All this
suggests that changes are the need of the
hour. There is a need to bring in new
technology and mining methods to improve
current productivity. Following are the areas
which need to be looked at:
! Exploration
The Working Committee Group of the
Planning Commission stated that in excess
of 4000 sq. km. of area remains unexplored.
It is not feasible for a body such as Coal
India to explore this entire area by utilizing
only its own resources. The technical
expertise of private companies could be
leveraged here. The exploration of these
mines could be outsourced. There is a large
possibility of finding suitable mines in such a
large area. They could then be developed
and utilized and in the process reduce the
pressure on coal imports.
! Improving technology of currently
existing mines
While it is necessary to explore further, it is
equally if not more important, to try and
maximize the productivity of already existing
mines. Private companies would bring to the
table deep pockets, human resource and
technical knowhow. They could contribute
towards increasing the efficiencies of the
processes and boost levels of output to meet
demand and hence reduce reliance on
imports. Alternately the expertise of private
companies could be used at various levels of
the supply chain.
! Finances
In India FDI for setting up power projects and
coal mines for captive consumption is allowed
up to 100%. However, given the current
industry trends, global economic pressures
and lack of private participation, the sector
has seen limited investment.
This figure (table on the next page) amounts
to only a fraction of the total FDI inflows into
the country. So where is the money going to
come from?
Commercial Bank Lending is one option. The
other option would be to turn to the private
Let’s try and keep this Private
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$
ECOLIBRIA
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E COSHASTRA
THE ECONOMICS CELL NMiMS, MUMBAI
sector and enter into a Joint Venture or Private
Public Partnership Model. There is already a
Mine Developer cum Operator or MDO model
in place. This is similar to a contract model
wherein the MDO finances the start up costs
while the PSU focuses on the end requirements.
The MDO alternately provides equipment or
brings technical capabilities to the partnership.
This model could be promoted and the
incentives need to be made more attractive to
private players. The main advantage of this kind
of contract model is that it would ease financial
pressures. PSUs would not have to buy and
maintain expensive equipment or hire labour.
As can be seen there are a fair few advantages
of calling for the private sector’s aid. Not only
would it help improve productivity it would also
level the playing field. There would be more
players and this would make prices more
competitive. It would reduce the Current
Account Deficit considerably and would reduce
the number of stalled projects thus contributing
towards growth.
All this sounds quite rosy, too good to be true
even. Surely there are pitfalls? There are, in
fact, some strong arguments to prove that
privatization is not always the answer:
1) If history is any indicator then privatization
does not seem like a very good option. The door
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to the power sector was left open for private
players. Although they entered, they seem to
have slipped on their way in and some
companies are now in need of financial
bailouts.
The power sector was opened to private
companies in 2002. In some states like Delhi
there has been no significant improvement.
Between 2002 and 2012, the power generation
capacity has risen from 995 MW to 1047 MW,
a rise of only 52 MW. Demand on the other
hand has spiked to 5500 MW. In order to meet
the gap private players have had to buy from
other states or standalone power generation
firms. A similar trend might follow in the coal
sector. Private players might be plagued by the
same problems which are being faced by the
PSUs and there is no guarantee that
privatization will bring about a drastic change.
Another pertinent argument is that a fairly large
percentage of the regions which need to be
explored are Naxal dominated territories. This
questions the merit of the suggestion that
privatization will lead to higher levels of
exploration.
2) Detractors of the move for privatization say
that Coal India Limited has had the raw end of
the deal. They are of the view that CIL is, in
fact, competent to meet India’s demand
requirements. It is the government which is
hampering its progress. Given below are some
of the project details of Coal India Ltd.
What the table shows is that if the government
laid more focus on giving clearances to
projects then they would not have to turn to the
private sector. Coal India seemingly has the
capabilities to increase its production levels
and reduce the gap between supply and
demand which currently exceeds 150 Million
Tonnes.
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AUGUST 2013
Given below are some of the project details of Coal India Ltd.!
3) There is always the possibility that some
players might buy rights to the mines but then
sell them off to bigger players. Moreover the
power sector has the most subsidized rates.
Private companies, in order to generate profits
might choose to avoid this sector in favour of
other, more lucrative ones like the iron and
steel sector. Unless there are firm regulations
in place private companies will supply to
sectors which suit their requirements. A strong
auditing body will have to be set up to monitor
and regulate the private players. Another
apprehension among Left wing politicians and
labour unions is that introducing private players
will slowly lead to the privatization of Coal
India. Their fear is that this would lead to a
loss of jobs.
In theory the proposition of making the coal
sector private does sound inviting. There are,
however, convincing opposing viewpoints to
the move. It remains to be seen as to what
steps the government will finally take to tackle
this problem. Is the sector ready for
privatization? Has the government learnt from
past errors with the power sector?
One does hope though that with the coal
sector, the government decides to ‘try and
keep it private.’
Article by Senior Committee 2013-14, Ecolibria
Anirudh Kowtha – MBA (Core), NMIMS – 2012 -14
Krishnakumar Subramanian – MBA (Banking), NMIMS – 2012-14
Let’s try and keep this Private
References
Indian chamber of commerce coal report-
The Indian coal sector:Challenges and future outlook
Govt of India-Ministry of Mines report on fdi in mining secto
Livemint article-Government approves bailout plan for power, roads Fri Jun 21, 2013
References
Indian chamber of commerce coal report-
The Indian coal sector:Challenges and future outlook
Govt of India-Ministry of Mines report on fdi in mining secto
Livemint article-Government approves bailout plan for power, roads Fri Jun 21, 2013
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&
Business standard article: Will privatisation help fire up the coal industry? , January 15, 2013
Financial express article : A private tinge for coal sector via equity tieups , Jul 15, 2013
ET article : Montek for coal sector privatization , Jan 4, 2013
ECOLIBRIA
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THE ECONOMICS CELL NMiMS, MUMBAI
COVER STORY
For young Indians who are entering the
professional world today, what exactly is the
unique place that they can carve out for
themselves? This question is related to the
question of India itself, what is her space in the
world today? Let’s examine these two
questions to develop a vision of the great things
we can achieve in the future.
Our country is at a unique juncture today, and
we can sense that we are at the threshold of
something big but are being held back from
taking that leap of faith. The heady days of
aiming for double digit growth (which was a
tantalizing possibility a few years ago), now
seems like a distant memory. While our country
seems to be floundering currently, we have
come a long way since independence. We need
to look back over our shoulders at the road we
have taken and decide the course for the future.
The Indian economy was largely a closed and
controlled one from the 40s up until 1990. You
may have heard your parents tell you that there
were only 2 models of cars on the road! Today
there are more than 50 automobile brands on
Indian roads. Owning a landline telephone
was considered a luxury. These things may be
quite hard for the present day Indian to
imagine, who is spoilt for choice.
India’s economy in those decades was
influenced by socialist principles. Post World
War II, the Soviet Union appeared to be
present an economic model and Jawaharlal
Nehru sought to lay down the same
foundations which the Russian economy
rested upon. State controlled industrialization,
central planning and licensing was the norm.
The idea was to generate a pattern of savings,
believing that this would lay the foundation for
growth and to help the country revive from
colonial rule.
In reality though, the conditions were not
conducive for private industry and enterprise
to flourish. As an example, Bajaj Auto Ltd was
given a license to produce only 20,000 two
wheelers a year, a control that Mr Rahul Bajaj
challenged, saying he was ready to even go to
Suhasini
Kirloskar
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Take the Leap of Faith
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E COSHASTRA
AUGUST 2013
jail for the excess production of a commodity
that most Indians needed.
While Indian entrepreneurs were stifled in this
manner, international competition too was
restricted from entering the market. The Indian
consumer was simply left with no choice.
I sometimes imagine that if in those days, one
would have asked international economists or
investors, “What do you think about India?”,
their answer may have been something like, “I
don’t think about India.” We were simply not on
the world’s radar.
This left one wondering as to how India was
planning on growing. How were our leaders
planning on bringing India on the global map?
India’s was growing at a pedestrian rate in that
era. In 1950 India’s growth was about 4% and
was predominantly reliant on agriculture.
Agriculture’s contribution to in the FY 1950-51
was 55% of GDP and close to 75% of the
workforce.
By 1991, it became apparent that the economy
could not continue in this manner. Reforms
were forced on us after the 1990-91 external
payments crisis. When the government finally
adopted liberalization in 1991, our lives
changed. Private enterprise began to flourish.
The previously suppressed entrepreneurial spirit
of Indians finally found scope to grow.
By 1993 there were no quantitative restrictions
on manufactured capital goods. The tariffs on
manufactured goods were reduced from 76.3%
in 1990 to 42.9% in 1992. Opening up the
economy opened up avenues in the job market
which led to a higher disposable income of the
average Indian. Per capita spend slowly began
to rise and the Indian citizen began to adopt a
spirit of consumerism. People who previously
did not have access to products and services
now became consumers. They were not
restricted in terms of options either. By 2001,
10 years after the reforms began, restrictions
on manufactured consumer goods were lifted.
The demographics of India when compared to
the rest of the world at that point of time proved
to be favourable as well. European and
American markets were beginning to saturate
and some were even on the decline. Growth
was beginning to stagnate and maximum
penetration had been reached in these markets.
Moreover, European and American citizens
were getting older and manufacturers were
facing the prospect of slowly losing customers.
They began to seek access to new markets and
new geographies.
In a category such as automobiles, whereas
only 7 Indians out of every 1000 owned a car,
500 out of every person in Western Europe
owned one. This led companies across the
world to believe that there was a huge,
untapped market opportunity in India.
A similar trend followed across all categories of
products and services. The developed
economies saw India as an exciting
opportunity. The caged tiger that was the Indian
economy was slowly breaking its shackles. The
purr was building up to a roar.
Our reliance on agriculture also reduced. While
in the 1950s, agriculture’s contribution to GDP
was about 50%, the number reduced to 17% by
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Cover Story – Take the Leap of Faith
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ECOLIBRIA
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E COSHASTRA
THE ECONOMICS CELL NMiMS, MUMBAI
2008. This is an indication of how far India had
grown in terms of industrialization.
Buoyed by this optimism, we began to grow at
figures of 8 to 9% for a sustained period of
nearly 5 years from 2007 till about 2012. At
one point in 2008, the Sensex touched 21000
points. In 2010, India’s trade to output ratio
was 46.3%, a dramatic rise from the figure of
15.7% in 1990. Those were definitely heady
days. A Mckinsey report said:
‘Income levels will almost triple. India will be
the 5th largest consumer market by 2025. Over
291 million people will move from desperate
poverty to a more sustainable life. By 2025,
over 23 million Indians, which is more than the
population of Australia, will be among the
world’s wealthiest citizens.’
Investors were pinning their hopes on India’s
growth story and companies were eagerly
trying to enter into our market and establish
themselves. According to development reports,
India, China and Brazil were projected to
account for 40% of global output by 2050. The
roar was now loud enough for everyone to
hear.
Coming to 2013, however, we see a very
different picture. The tiger now seems to be
withdrawing back into its cage. Investors who
not too long ago were knocking at our door are
now beating a hasty retreat. The extent of
negativity towards India is shocking and
depressing. The country at the moment is
lacking credibility and there is no faith in the
existing policies. When giants like Arcelor
Mittal decide to scrap their plants in parts of
the country, then you know that something is
amiss. The figure of 6.5% growth now seems a
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E COSHASTRA
AUGUST 2013
distant possibility.
The environment is not ideal and poses a
challenge for all of us. This does not necessarily
mean there is a dearth of opportunities today. If
the world is changing, we may need to change
our approach as well. The first thing that we
should keep in mind is that we should not fall
prey to hype cycles. Bubbles while pretty to
behold, take only the slightest touch, gust of
wind or dust particle to pop. It is therefore
imperative to understand that we cannot remain
insular in our environment. We must look at
ourselves not in isolation but as part of a larger,
interconnected system.
The second thing we should do is to look
beyond economic indicators. The ugly truth is
that while we were growing at 9%, we were not
performing well on human development indices.
The 2013 UN Human Development Report
portrays a sad picture on many different
indicators. . Some of the more humbling points
of the report are:
• The average life expectancy of a newborn
child in India is lower than a child born in
war torn Iraq
• Overall in the human development report we
are 136th out of 186 countries
• Our neighbors Sri Lanka, Bangladesh,
Nepal and Pakistan are performing better
than us on many development indices
• Education and literacy figures are poor
So for young people in India today, I believe the
time has come to think differently. The young
generation has to think radically, going beyond
even the vision of Mr Narayan Murthy and Azim
Premji. The time has come to focus on our
development and social indices.
Where we fare poorly on development
indicators is exactly where we offer
opportunities for improvement and enterprise.
There are opportunities in areas such as
healthcare, education and sanitation that will
affect the country right at its roots. If you can
find a way to really change the lives of people,
the monetary and business model will fall into
place. Take the example of the recent
Uttarakhand tragedy. Such a catastrophe could
have been avoided if significant investment of
resources and capital had been made to
strengthen our warning systems and research
equipment. These are areas which remain
ignored and are a clear opportunity for us.
There seems to be a basic flaw in our
assumption that technology is beneficial only if
there is an immediate reward of dollars through
its use. Our technological prowess cannot be
directed only towards creating IT systems for
foreign clients. Can we not look inward and try
and capitalize on our immense intellectual
capital to improve the developmental indices of
the country?
Young Indians today need to have a vision of
what is possible if a sustained economic model
is built on improving our development indices.
The world is looking to the next generation for
solutions in the areas of education, health,
sanitation and infrastructure. There are a
number of organizations that are willing to
recognize, support and reward entrepreneurs in
these fields. Initiatives such as the Mahindra
Rise program, the Graduate Entrepreneur
program run by UK Trade and Investment, the
Bill and Melinda Gates Foundation and the
Stanford Ignite program are meant to produce
entrepreneurs in this direction. The tools are
laid out for you. It depends on how you use
them. The next generation needs to take a leap
of faith. So let’s get out of our comfort zones
and make this country as great as she deserves
to be.
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Cover Story – Take the Leap of Faith
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ECOLIBRIA
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THE ECONOMICS CELL NMiMS, MUMBAI
About Suhasini Kirloskar
Suhasini Kirloskar, an alumna of the NMIMS batch of 1989, works with UK
Trade & Investment as Director, British Trade Office, Pune. In this role, she
promotes UK and India partnerships in the areas of business, education and
R&D. Prior to this, Suhasini had her own consulting company where she
consulted Indian as well as international companies on marketing strategy and
corporate communications. She has also consulted overseas companies to help
them create and execute India market entry strategies. Besides this, she has
also authored a number of articles and spoken at a number of forums, as well
as visited B-schools around the country as a guest lecturer.
When she is not donning her corporate hat, Ms. Kirloskar dabbles in art and
writes graphic novels for kids.
All views expressed in this article are Ms. Kirloskar’s personal views.
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AUGUST 2013
Corporate Interview
Mr. Narendra M.
Murkumbi
Mr. Narendra is Vice Chairman & Managing
Director at Renuka Sugars Limited. He
trained as an Electronics Engineer and then did
his MBA from the Indian Institute of
Management, Ahmedabad in 1994. He co-
founded Shree Renuka Sugars Limited and in
the last 14 years, the Company has become a
fully integrated sugar manufacturer, which also
has large power generation, ethanol and sugar
refining capacities
Team Ecolibria – What role does sugar
industry play in building Indian Economy
and what is the current scenario of sugar
industry in India?
Mr. Narendra – In population terms, India
remains a rural economy; Of the 1.2 billion
total population of India, 69% resides in
Rural areas. Out of the people staying in
rural area a total of 129 million farmers, of
which about 6 million farmers (4.6%) are
engaged in sugarcane cultivation. The sugar
industry provides a large revenue source to
growers with annual payments of Rs.
65,695 crore (US$ 12 bn) in 2012/13 which
is approximately 9% of total farming GDP.
The industry is used as a channel for loans,
technology and banking services to farmers.
As it has to be located in close proximity to
the sugarcane fields, the continued
development of the Sugar Industry would
foster further rural growth and provides high
skilled jobs through the process and
manufacturing technologies employed. The
industry fosters economic development
through provisions of schools & healthcare
facilities
Besides supplying sugar to the Indian population,
sugarcane is also used to produce ethanol and
electricity.
Team Ecolibria – What are the effects of
government regulation on sugar industry? (wrt
pricing, exports, imports etc)
Mr. Narendra –
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ECOLIBRIA
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E COSHASTRA
THE ECONOMICS CELL NMiMS, MUMBAI
Before partial de-regulation
• Mills suffered from regulatory release
mechanism whereby quarterly quotas
were given to sugar mills in order to
sell their produce
• Mills had to supply 10% of sugar
produced to public distribution system
(PDS) at a subsidised rate of Rs.
18.5/kg much below its cost of
production
• There were quantity restrictions on
import and export of sugar
• Post Partial De-regulation
• Regulated Release Mechanism of
sugar by mills dispensed; the move will
lead to timely payment of cane price to
farmers
• Obligation to supply sugar as levy on
mills at a control rate for Public
Distribution System (PDS) done away
with & requirement of sugar for PDS to
be procured by states through open
market
• No limits on quantum of sugar for
import & export but there is currently
15% import duty whereas no duty on
exports
• The current system of dual fixation
(central and state) of cane prices
would continue but it recommended
that cane pricing move to a system
based on sharing returns from sugar,
bagasse and molasses between
farmers and mills
Team Ecolibria – What is the impact due to
concept of levy sugar on the industry as a
whole and on profits of the company?
Mr. Narendra –
• Obligation to supply sugar as levy on mills
at a control rate for Public Distribution
System (PDS) done away with &
requirement of sugar for PDS to be
procured by states through open market
• Present sugar quota of states to be
protected and States mandated to
continue with the current retail issue
price of Rs. 13.50 per Kg. under PDS.
• States to be given subsidy for the
balance amount between retail issue
price and the current ex-mill price
calculated provisionally at Rs. 32/- per
Kg.
• Removal of levy sugar would save the
industry about Rs 3000Cr per annum
and our company to the tune of Rs. 80
crores
Team Ecolibria – How is the situation in India
different from what it is in Brazil?
Mr. Narendra –
There are differences both at the farm plus mill
levels as well as on the policy front as
highlighted (table on the next page)
Team Ecolibria – When the overall sugar
industry is facing losses, how does Shree
Renuka Sugars sustain in such a difficult
scenario?
Mr. Narendra –
• Strategic Locational Advantage and
Nation-wide Presence –
o SRSL’s presence in the progressive
sugarcane states of the country,
o its port-based refineries providing
ease of imports and exports and
• Integrated Business Model to manage
Industry Cyclicality –
o High level of Integration enables
better earnings stability in the
business during different phases of
sugar cycle;
o Strong demand for Ethanol in future
due to requirements for the National
Fuel Ethanol Program (current 5%
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AUGUST 2013
blend in petrol going up to 20% in
future),
o Cogeneration Capacity of 272 MW with
surplus of over 139 MW of saleable
energy
• Refining Operations Support Sustainable
Operating Profitability –
o Only sugar company in India with port-
based standalone sugar refining
operations,
o Covers the fastest growing sugar
consumption regions of the world,
o Strategic advantage being on both the
east and west coast of India,
o High quality ports capable of handling
large bulk as well as containerized
volumes,
" Lower transportation costs as
compared to land-locked refineries
(almost Rs. 3,000 per ton),
" Proximity to both high consumption
export (middle-east and south-east
Asia) as well as domestic (Northern,
Western, North-eastern and Eastern
India) markets,
" Flexibility to take advantage of
domestic sugar demand-supply
balance,
" Ability to import raw sugar and supply
refined sugar in domestic market in
the event of sugar deficit in India,
" Ability to procure raw sugar
domestically and export white sugar
internationally in the event of sugar
surplus in India
" Strong Operating Track Record with
Efficient Operations
" Leading to Consistent Revenue
Growth, While Maintaining
Consistently Profitable Operations
Team Ecolibria – In your opinion, what are the
initiatives that need to be taken by the government
and ISMA to boost the sugar industry?
Mr. Narendra –
• Cane Pricing Mechanism: It is required that
"$
Corporate Interview – Mr. Narendra M. Murkumbi
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THE ECONOMICS CELL NMiMS, MUMBAI
State Governments to ensure a
progressive cane pricing policy in line with
global practices wherein the sugar cane
price is linked with revenues from sugar
and by-products. Following the
recommendations of Dr. C Rangarajan,
Maharashtra and Karnataka are on the
verge on framing such a policy whereby
farmers are assured 75% of the returns
from sale of sugar and by-products (70%
if the mill sells only sugar).
• Ethanol Blending Policy: Government
must play a stronger role in ensuring fuel
ethanol blending in the country starts on a
firm footing. The policy measure has the
potential of reducing India’s fuel imports
and managing the widening current
account deficit that the country is facing
currently. ISMA can emphasize on the
benefits of ethanol in fuel viz. reduced
carbon footprint, renewable clean energy
source, reduction in GHG emissions,
ability to use the fuel without any
modifications required in vehicle, energy
security to the country
• Fostering Cane Research and
Development Program: Investments need
to be made to improve the productivity of
current land and research to increase the
productivity of land along with sugar
recovery. There need to be continuous
focus on knowledge sharing with other
major producing countries like Brazil,
Australia, Thailand etc. And good
practices need to be bought from those
countries to India
Team Ecolibria – How can India leverage
technology adoptions to increase sugarcane
yields?
Mr. Narendra –
1) Technology adoption can be adopted
to increase the forecasting of cane
crops, yields and output for better
price discovery of the raw material.
2) Also, mechanical planting and
harvesting can be adopted to increase
the efficiency and also reduce the
dependence of manual labour for cane
cutting.
3) SRSL has adopted Cane Tabs for its
on-field Cane Supervisors that helps
provide real-time data and
management reports regarding
sugarcane acreage, yields and age of
cane so that it can schedule the
harvesting across its registered area
to maximise yields and recoveries
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Team Ecolibria – How has rupee depreciation
affected Shree Renuka Sugars?
Mr. Narendra – For Renuka, we are net
foreign currency earners on account of value-
addition in our refineries. However we do suffer
from high hedging costs of our imports as well
as on our overseas borrowings on the Indian
balancesheet. However the depreciating
currency is making our refineries more
competitive in cost compared to other
refineries in the region.
Team Ecolibria – What is the contribution of
sugar industry by-products to the overall
profitability of Indian sugar mills vis-a-vis
foreign companies?
Mr. Narendra – Given the pressure on sugar
margins , ethanol and power are critical to the
survival and sustained profitability of the
business in India. Indian sugar industry can
now claim to be in the forefront of tight
integration in production of all three co-
products.
While Brazil has pioneered the production and
use of ethanol as a fuel, the level of
exploitation of by-products in other countries is
not as high as in India.
Team Ecolibria – What is your take on the
future outlook of sugar industry?
Mr. Narendra – The sugar industry is poised
for better times with deregulation of the sector
effective from this year onwards. The vicious
sugar cycle of alternating high and low
production should ease off now that the
industry is able to flexibly able to manage its
price risk and cashflows. Reform in cane
pricing would make sugarcane farmers the true
partners of the industry leading to predictable
earnings for both. Demand is poised for steady
growth to keep up with the growing
consumption needs of our country.
With the current deregulation and freer
environment, it seems Indian sugar
sector is gearing for surge in M&A
activity, big investments including FDI
and consolidation of the sector.
"&
Corporate Interview – Mr. Narendra M. Murkumbi
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ECOLIBRIA
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THE ECONOMICS CELL NMiMS, MUMBAI
"&&&&&&&&&"'
CROSSWORD !
!
Top-down (superscript)
1. The economic doctrine that government control of foreign trade is of paramount importance for ensuring the military security of the country(12)
2. Value of the best alternative forgone (11,4)
3. ____ is present when future events occur with
measurable probability (4)
4. Synonym for prize, bonus, reward, bounty (7) 5. The term first used by Keynes for consumer
confidence (6,7)
6. Planning commission is an _______ body (8)7. Middle name of the author of the book The
General Theory of Employment, Interest and Money (7)
8. Recently, 100% FDI has been approved for this
industrial sector (7)
9. An environmental tax which is imposed on products which utilize materials which contribute to greenhouse gas pollution known as _____ tax (6)
10. When a government/ business spends more in a given period of time than they generate in income, they incur a _____ (7)
11. One of the proposals of the _____Woods conference was that currencies should be convertible for trade and other current account transactions (7)
12. A very early school of which likened the interactions between different sectors and classes of the economy, and the monetary flows between them, to the circulation of blood through the human body (10)
Left -right (subscript)
1. The exclusive possession or control of the supply, an American-originated board game (8)
2. Goods are those which cannot be provided to one group of consumers, without being provided to any other consumers who desire them(6)
3. Tax imposed to stimulate more domestic production of the product in question (6)
4. Association of independent firms for the purpose of exerting some form of restrictive influence on the production or sale of a product (6)
5. Green Gold: The empire of ___ (3) 6. A statistical measure of inequality. Score of 0
implies perfect equality and score of 1 implies perfect inequality, known as ____ coefficient (4)
7. The father of economics (4,5) 8. Someone who benefits from resources, goods,
or services without paying for the cost of the benefit (4,5)
9. A form of trade in which one good or service is exchanged directly for another (6)
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AUGUST 2013
UPFRONT
Nitesh Sinha IIM Ahmedabad
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"#!
Is the Dragon !s fire
incinerating the Elephant?
India’s Current Account Deficit (CAD) has
climbed to 4.8% of the GDP or about $18.1
billion for the January-March quarter of 2012-
13. The magnitude of the situation can be
assessed from the fact that India’s average
CAD between 1949 and 2012 is $1.5 billion.
As is evident from Figure 1, the situation has
been deteriorating since Lehman’s ceased to
exist. The situation is so precarious that it is
being suspected that Balance of Payments
(BoP) may have to be cleared using forex
reserves.
What is to blame for this menace? It is the
general opinion among industry and
government circles that gold imports are the
culprit. India is the largest consumer of the
yellow metal (about 25% of world production)
and this trend has continued in spite of rising
prices of the precious metal. The volume of
gold exports has registered only a modest
growth, a CAGR of 6.27% between 2006-07
and 2011-12. In fact, the gold imports
declined in the fiscal 2012-13 by 11.8% in
volume terms. But it is the price of gold that
has become the cause of much damage.
Table 1 shows the gold import trends in the
past 10 years.
But a careful analysis of Figure 1 shows that
India’s CAD began to increase 2008-09
onwards, a time when gold imports were the
lowest (as percentage of imports) in a
decade (see Table 1). Then what has been
!"#$%&'()'*+,"-./'012'34&%'56&'7-/5'(8'9&-%'
China has witnessed massive
growth in the past three
decades. It is suspected to
surpass US’s GDP (in PPP
terms) by 2016. Essentially, the
nation is in the latter half of its
journey towards being a
developed country.!
ECOLIBRIA
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THE ECONOMICS CELL NMiMS, MUMBAI
"$!
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the cause of increasing CAD? The answer-
increased world oil prices and India’s increasing
manufacturing trade deficit, especially with
manufacturing strongholds like China, United
States and Germany. Figure 2 provides us with
the information that India’s trade deficit began
to increase from 2008-09 onwards, the same
period since when the CAD began to increase.
Let us consider the case of oil imports and
exports. Between 2011-12 and 2012-13, the net
imports of crude and petroleum related products
has increased 24.75% in rupee terms and
11.38% in dollar terms. As payments for oil
imports are usually paid in Dollars and Euros,
the net effect of this increase is weakening of
rupee. This increase in oil import bill is being
observed since the time oil recovered its prices
after the dip in 2008-09. Moreover, this trend (of
increasing oil imports) is going to continue as
India’s consumption of oil is only increasing.
The effect of this depreciation of rupee has
been in terms of trade gap for manufactured
items increasing by about 9.3% (in rupee terms)
between 2011-12 and 2012-13. On the other
hand, manufacturing exports from India have
increased by only 7.91% in this period. The fact
that value (in rupee terms) of imports of
manufactured goods was 20.4% larger than
exports in 2011-12, makes the situation even
more worrisome
Let us take the case of China in detail. It’s
just 5 months in to the year and the trade
gap with the country has already touched
$12 billion in a total trade value of $26.5
billion. This is despite reduced gold imports
from China (details in Figure 2). This gap is
about 2/3rd of the India’s CAD for the first
quarter of 2012-13.
Now the question that follows from the above
facts is why is the trade gap widening
between the largest and third-largest
economies of Asia? The answer lies in the
composition of trade between the two
countries. More than half of China’s exports
to India comprise electronic goods (27%),
machinery (12%), organic chemicals (7%),
project goods (7%) and fertilizers (5%).
Clearly, China is providing India with two
broad classes of goods. Firstly, there are
goods, which are technology related. Since
India is a developing (more appropriately,
industrializing) country, the import of these
equipment is only going to increase as has
been happening in the past. Even economic
downturns have only retarded the growth
(6.9% increase by value in the import of
electronic goods and machinery) of these
imports and not reduce imports themselves.
Second, China is selling essential
commodities like organic chemicals and
fertilizers, which are indispensable no matter
what the market situation is. This is even
more reasonable given the burgeoning
middle class (leading to increased
consumption and hence, increased usage of
farm inputs) and growing population.
Now let us a take a look at the other side of
the table. Bulk of India’s exports to China
includes raw cotton (16%), non-ferrous
metals (15%), iron-ore (10%), cotton yarn
(9%), other ores and minerals (7%) and
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E COSHASTRA
AUGUST 2013
Is the Dragon’s fire incinerating the Elephant?
!!
! !
plastic products (6%). As is evident, India is
supplying goods, which have very low level of
sophistication. It is common knowledge that
the lower the level of sophistication of goods
the lower are the holdup costs for the buyer.
Therefore, source of such goods (India in this
case) is easily replaceable. The theory is
exemplified by the fact that Bangladesh is
fast eating into India’s pie of cotton exports
market. The sporadic supply of iron ore due
to the recent mining scams in Karnataka and
elsewhere have caused China to majorly cut
down imports from India.
In order to further comprehend the
vulnerability of India’s imports to China, it is
important to understand the past and likely
future trend of China’s sourcing from India.
These trends are found to be affected by
three major factors (which may be
interrelated); phase of economy, domestic
supply & demand of goods & services and
Chinese exports. Let us take a look at the
phase of Chinese economy. The country has
witnessed massive growth in the past three
decades. It is suspected to surpass US’s
GDP (in PPP terms) by 2016. Essentially, the
nation is in the latter half of its journey
towards being a developed country. History
tells us that a country in such a phase
witnesses declining growth rates and
correspondingly, declining needs of basic
resources.
The supply of various items of domestic
consumption (e.g. infrastructure build-up)
has outstripped its demand in China since
the period of recession. The growth of
China’s exports in the world market has seen
a declining trend (on an average) since the
time of recession. Given these factors, the
requirements of inputs for manufacturing
have seen either a decline or minuscule
growth.
The combined effect of declining growth
rates, over-supply of consumption goods and
declining trends in growth of exports has
been in terms of lower consumption of
India’s exports. The Chinese import of iron-
ore from India has declined by 62.82% (it
includes the effect of the ban on mining
activities in India). There is also a decline of
8.13% in cotton related imports.
One important thing to note here is that
although the above discussion is centered on
India’s trade with China, similar observations
are also aplenty in India’s trade with other
economies (e.g. European Union) as well.
This is the reason why the problem of trade
deficit is getting exacerbated instead of
getting compensated from India’s trade with
other nations as well. India’s export to the
world again comprises products of very low
levels of sophistication. Imports on the other
hand include petroleum, crude & products
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THE ECONOMICS CELL NMiMS, MUMBAI
!
Deficit is not just dependent on the current
trends as increased gold imports but also on
structural issues in the Indian economy.
Therefore, increasing the excise from 6% to
8% on gold (as done recently by the Finance
Ministry) is only likely to procrastinate the
advent of problem, not resolve it. India needs
to take lessons from the development of the
Asian Tigers during the last quarter of the
20th century. All these economies were
manufacturing based and started from low
tech products but eventually became world
suppliers of high-tech equipment. India
cannot afford to rely just on the services
industry to fill the trade gap as countries in
South East Asia are now challenging its
dominance in this industry. The government
needs to take a hard look at its
manufacturing policy to increase the
sophistication of the manufactured products
in order to be able to do both, meet the
domestic requirements and compete with
countries like China in the international
arena
About Author
Nitesh Sinha is a PGP II student at IIM. He
has completed his internship with Accenture
Management Consulting. Nitesh is an IIT
Guwahati (Electronics and Communication
Engineering) graduate of the 2010 batch. He
went on to work as a Software Developer
with a Bio-bioinformatics firm, Strand Life
Sciences Pvt Ltd. based out of Bangalore. He
had a 22 month stint with them. Nitesh
thoroughly enjoys taking part in cultural
activities and is a member of the theatrical
society of IIM A, IIMACTS. Event
Management, travelling and listening to
music are other things that interest him!
!
! !
(34.48%), gold (10.94%), electronic goods
(6.41%), machinery (5.63%), pearls and stones
(4.61%). Most of these goods are either
essential (e.g. petroleum) or related to
technology and the consumption of both
groups is likely to increase in a growing
economy. Table 2 shows the evolving trends in
export composition of China and India.
The inference from the above discussion and
Table 2 is that the problem of Current Account
&'
References
Trading Economics. (2013, July 13). INDIA CURRENT ACCOUNT. From Trading Economics: http://www.tradingeconomics.com/india/current-account
ASSOCHAM. India’s Gold Rush: Its Impact and Sustainability.
GOI. (2013). Commodity And Country Wise Imports In India From 2011-12 And 2012-13.
RBI. (2013). Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs. RBI.
RBI. (2012). India’s Foreign Trade: 2011-12. RBI.
PTI. (2013). India's trade deficit with China balloons to $12 billion. Beijing: Business Standard.
PTI. (2013, June 27). Current account deficit widens to record 4.8%.
WTO. (2012). International Trade Statistics 2012. WTO.
Moulds, J. (2012, November 9). China's economy to overtake US in next four years, says OECD. From Guardian: http://www.guardian.co.uk/business/2012/nov/09/china-overtake-us-four-years-oecd
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AUGUST 2013
CLOSE RANGE
Ashok Rimmanapudi IIM Banglore
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&"!
High Growth Trajectory: The FDI
and The Uncelebrated Savers
!
It has been only 2 weeks since the Ministry of
Finance has removed the FDI caps on many
critical sectors like Telecom, Insurance, stock
exchanges etc., based on recommendations
of Mayaram committee chaired by Sh. Arvind
Mayaram, Secretary, and Department of
Economic Affairs. Many more sweeping
changes are under consideration. Though
well intended, it cannot be helped but give an
impression that the ruling government is not
leaving any stone unturned to revive the
economy before the crucial election year.
Nine months earlier, when the much debated,
FDI Cap in retail has been relaxed, one
would have expected to see a flood of foreign
funds in this sector. But, on the contrary, not
a single application has been filed with the
FIPB (Foreign Investment Promotion Board)
as of March 2013.
These happenings seem to point at the
weakness inside the Indian economy, feeding
on lack of proper action, has been damaging
the economy further. Well, we will come to
that part later anyhow; first let us try to
understand the nature of FDI flows and their
impact on the economic growth.
Prior to 2006, the FDI flows to India have
never crossed 10 Billion USD. Starting
2006-07, the FDI flows to the country have
never gone below the 2006-07 level of 22.8
Billion USD.
Regarding FDI Inflows and their role in
economic development, researchers have
differentiated opinion about various aspects.
One of the most significant studies was
done by Borenszteina (1997) which resulted
in conclusion that FDI flows will have
positive impact on host economy only under
certain condition. Carcovick (2005) proved
FDI flows are not necessarily
the flag bearers of Economic
development but rather a
lagging indicator of the same.!
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THE ECONOMICS CELL NMiMS, MUMBAI
Exhibit 1: FDI Inflows and real GDP Growth !
! !
&&!
through econometric analysis, which is robust
to national income, financial development and
openness to trade, that FDI inflows do not
have a causal relationship with economic
development. Observing Exhibit 1, we can
see that it was only after the propulsion of
Indian economy into high growth trajectory
(Real GDP growth>8%), that the FDI flows
shifted from the muted levels (<10 Billion
USD). So in a way, this suggests that the
FDI flows are not necessarily the flag
bearers of Economic development but
rather a lagging indicator of the same.
Hence this brings the issue of causality in
economic development - Foreign inflows
relationship to the front. The actions by the
ministry of Finance seem to suggest the belief
and attribution of foreign flows as the causal
factor between the two. Putting it in another
way, it seems as though the Government
is turning to the foreign investors to
revive the economy. So the next part of the
article deals with the role of domestic
investors in the economic development so
far.
India, like its Asian counterparts, is a saving
rich nation. The savings rate of domestic
households and private corporates has been
very high in India compared to developed
economies, but a crucial difference in
Indian economy is that, unlike its Asian
Counterparts, it is consumption driven. As
Gross domestic savings (GDS) in one year
become the source of investments for next
year, the investment rate also follows a
similar pattern. Exhibit 2 shows the
investment rate pattern since 2000 and
Exhibit 3 shows the year-on year growth rate
of Investments since 2001.
Source: Handbook of Statistics on Indian Economy 2011
Exhibit 2: Investment Pattern of different
sectors in India since 2000-01
Exhibit 3:
Year-on-Year Growth rate of
Investments of different sectors
in India since 2000-01
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AUGUST 2013
Exhibit 4: Sector-wise ICOR
High Growth Trajectory: The FDI & The Uncelebrated Saver
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Two observations can be made from the
exhibits 4 and 5. Firstly, the foreign direct
investments have always been minor
compared to investments from households
and private corporates. Secondly, there is a
pattern of slowdown in growth of investments
from private corporate and foreign sector
since the world economic crisis of 2008.
So, given that the slowdown in economic
growth is due to slowdown in investments by
corporate and households, the situation
clearly calls for application of Keynesian
principles. But given the figures of high fiscal
deficit (4.9 % in 2012-13), the GOI is not in a
position comfortable enough to go on
spending spree to propel the economy. This is
why the quality of spending has attained its
vitality which inevitably leads to conclusion
that the spending should be aimed at
increasing the productive capacity.
At the outset of the 12th 5-year plan, the
Planning Commission has calculated the
required investment in different sectors and
estimated productive capacity improvement
thereof. This figure, technically called as
Incremental Capital Output Ratio (ICOR), is an
indicator of the productiveness of an
investment in a sector.
Exhibit 4 provides the following insights
1. Investments in Electricity & Gas have
most significant effect on improvement in
productivity, followed by investments is
Mining and Manufacturing
2. The National ICOR is 4.04
Exhibit 5: Potential GDP growth rate in 2013-14
So, putting all of the above factors together,
1. FDI does not necessarily accelerate
economic growth. It is more of a lagging
indicator of development.
2. Indian Economy has high saving rate like
other Asian economies, Average Gross
Domestic Saving (as % of GDP) since 2000-
01 is 31%
3. Indian economy is different from other
Asian economies as it is consumption driven.
So, this makes the job of reviving economy
easier the current slowdown can attributed to
anaemic demand.
4. So, the solution lies within. The domestic
saving by themselves can lend to a growth of
8.6 % next year (ref. exhibit 5). Rather than
trying to restore the economic growth
through foreign investments, the focus
should be on attracting the domestic
savers (households & Private Corporates)
and making qualitative utilization of Public
sector spending.
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THE ECONOMICS CELL NMiMS, MUMBAI
2. As employees are major source of
household savings, attractive schemes,
alternative to the existing funds like Provident
Fund etc., should be developed.
Simultaneously, new instruments like Capital
Indexed Bonds (CIB) aimed at diverting
saving from unproductive assets like gold
should be aggressively promoted.
3. In order to encourage private participation
in infrastructure projects with long gestation
period, encouraging exit mechanisms should
be developed as this leads to the safety of
investment.
References
- Borenszteina E, J. De Gregoriob, J-W Leec, (1997),
“How does foreign direct investment affect economic
growth?”, Journal of International Economics
- Planning Commission of India, (2011), Report of the
committee on Investment requirements, Twelfth Five
Year Plan Committee
- Reserve Bank of India, (2011), Handbook of
Statistics on Indian Economy
- Carkovic. M and Levine R, (2003), “Does Foreign
Direct Investment accelerate Growth” , University of
Minnesota, Working Papers
About Author
Ashok Kunar Rimmanapudi graduated with
B.Tech in Electronics & Communication
Engineering from IIT Guwahati in 2012. He is
an ardent lover of Macroeconomics by choice
and a movie buff by helpessness. When hassle
free he loves spending time doing anything
from working out his grey cells to sharpening
his backhand. He is currently in his 2nd
year of
PGP at IIM Banglore.
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The significance of high productive
infrastructure investments is that it will have a
two pronged effect on the economy. First, it
will remove the supply bottlenecks in the
economy. Secondly, these investments
increase the domestic demand because of the
ripple effect of the spending.
This article concludes with the following
recommendations for reorienting into the high
growth trajectory:
1. The Cabinet Committee on Investments
(CCI), should make promoting investments in
Electricity & Gas, Mining and Manufacturing
its top priority.
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E COSHASTRA
AUGUST 2013
OPINION
Mohit Bajpai
NMIMS, Mumbai
Saurabh Sharma
NMIMS, Mumbai
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The Food Security Bill : Vote bank Politics or
A Game Changer ?
A Populist Step
An initiative like Food Security Bill in its true
spirit is a great step to help the nation get rid
of a chronic disorder like malnutrition. But the
way it has been drafted and intends to
perform poses serious questions on its real
motive. Thus it seems to be more populist
step directed at vote bank for upcoming
elections rather than treating the problem of
malnutrition.
Past Experience
With the agenda of alleviating the basic
problems of the weaker section of the society,
the government has time and again come up
with measures to help them. One such
attempt is the “Mid-Day Meal” (MDM). It was
started in the year 1995. Its main objective
was globalization of primary education, and to
impact the nutrition intake of the students. But
even after spending exorbitant amount of
money (For example, a budget of Rs. 7324
Crores was allocated to this project in the
year 2007-08), there are about 67.5 percent
of children under 5 years and 69 percent of
adolescent girls who suffer from anaemia due
to iron and folic acid deficiency. A nationwide
study by Planning Commission also shows the
MDM scheme to be found wanting on several
evaluation parameters.
Some of the factors on which this scheme was
reviewed were nutrition level, quality of food
and food safety. Planning Commission has
recently brought out an evaluation report of
the national MDM scheme. Some of the
findings are reproduced below (verbatim):
• Except for Tamil Nadu and Kerala, in rest
of the states a majority of sample schools,
on an average, suffer from the
unavailability and poor functional condition
of kitchen sheds.
• All the states, except for Bihar and
Rajasthan, have reported poor availability
of tumblers. Except for Rajasthan, all the
states have reported a poor availability of
plates.
• Out of the 17 sample states where the data
was collected, students in 9 states reported
that they were involved in washing utensils.
India is 15th most malnourished country with
its Global Hunger Index (GHI) increased from
1996 to 2011. 25% of all hungry people
worldwide live in India and 40% of children
below 5 years of age are undernourished.
ECOLIBRIA
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E COSHASTRA
THE ECONOMICS CELL NMiMS, MUMBAI
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Recommended Dietary Allowances as per Indian Council of Medical Research (ICMR) is
as below:
A separate agency evaluated efficacy of the food in schools run in Ahmadabad
and came up with the following results
So the core proposition of the policy that is to
provide nutrition is not met, and because of
negligence in issues like quality and food
safety, 22 children recently lost their lives.
Food security or nutrition security?
India is 15th most malnourished country with its
Global Hunger Index (GHI) increased from
1996 to 2011. 25% of all hungry people
worldwide live in India and 40% of children
below 5 years of age are undernourished.
Share of expenditure of cereals has decreased
to 29.1% in rural areas and 22.4% in urban
areas in 2009-10. The bill doesn’t talk about
nutritional security but only supply of food
grains. But just by making food grains easily
available at cheaper prices won’t actually
decrease the overall cost of nutrition. It will
also add more pressure on the demand side
and may push the agriculture sector to
produce food grains more.
Besides that there have been schemes in
place which provide cheaper food grains to
citizens, but it has been observed that
despite that the level of malnutrition has not
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E COSHASTRA
AUGUST 2013
which was enacted in 1997-98 to mitigate the
practical difficulties in centralized
procurement.
The bill relies on existing TPDS and
procurement system which are already
notorious for inefficiencies and leakages
amounting to as high as 40%. This poses a
serious challenge to the effectiveness of the
scheme.
Provision of cheap food grain to about 70% of
the country’s population also throws up
serious issues for the agriculture sector. The
government already buys about 1/3rd of the
grain output. In case of increased demand,
the agriculture sector may shift to low value
cereal cultivation. It will also create a crowding
out effect on the private players competing for
the remaining stock. It will have an upward
rising impact on the inflation. Thus there will
also be an upward shift in the Minimum
support prices (MSP) because government
would become a larger buyer of the food
grains. Another impact would be on other food
items, like vegetables, pulses.
It is argued that despite similar schemes of
grain distribution by central and state
governments the nutrition level of children has
actually decreased. It can be attributed to
other factors like drinking water, hygiene and
protein rich food.
The government estimates the cost of
implementing bill to be Rs. 1.3 crores per
annum. But to provide a complete food and
nutritional security to underprivileged and
mothers and children the financial burden on
the exchequer would be much higher (~2.4
crores). It will involve additional financial
obligations of provision of clean drinking
water, hygienic sanitation facilities and protein
rich food like pulses, fish etc. But the current
The Food Security Bill: Vote Bank Politics or A Game
Changer
!
dropped significantly. It points to our argument
that a cereal centric approach won’t be
sufficient to address the problem of
malnutrition.
Where is the security? - Clause 51
Without enhancing the production capacity,
irrigation systems and storage facilities, the
government has simply rushed through the
passage of the bill. The bill carries an
objectionable clause which absolves Central
as well as state government of any obligation
in case of supply failure due to war, flood,
droughts, cyclone and any other act of nature.
Agriculture is highly dependent on monsoons
(~60%) in India; impact on farm produce is
quite frequent due to climatic conditions. So
under adverse conditions the security of food
becomes a big question mark.
Vote bank politics
During the last tenure of UPA I, a lot of
populist measures had been taken by the
government to create a favorable environment
and appease the voters. Farm loan waivers,
MNREGS and implementation of 6th pay
commission. UPA II already facing flak from
urban middle class over graft issues seems to
be planning to leverage upon Food Security
Bill to win votes.
Structural flaws
The bill proposes a centralized procurement
and distribution mechanism which takes away
a state’s legal authority to customize it
according to a state’s needs and strengths.
Some states like Tamil Nadu have their own
PDS which now will have to comply with
National Food Security Bill. It also mandates
the central government to procure for the
central reserve of grains, which is in discord
with the Decentralized Procurement System
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ECOLIBRIA
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E COSHASTRA
THE ECONOMICS CELL NMiMS, MUMBAI
Bad economics
India is reeling under tremendous pressure of
widening fiscal deficit and reducing value of
rupee. It is expected that it will increase to
about $155-160 billion this year way above
last year figure of $104 billion. High spending
on subsidies and lower than expected
revenue collection puts an inflationary
pressure also on the economy. Given such a
scenario import of food grains to meet the
additional requirements over local sourcing
will burden the economy further increasing
the fiscal deficit.
So it can be concluded that Food Security is
imperative for the country facing an acute
problem of malnutrition and hunger. But for
such a large and populous country a well
articulated and more practical route than
Food Security Bill is required. The Food
Security Bill’s hasty passage raises serious
questions about meeting its actual goals and
makes it seem more of a political gimmick.
About Mohit Bajpai
He is an engineer with 2.5 years of work ex
in Software Industry. He loves playing and
watching badminton. Also a keen follower of
Tennis and Cricket. A great fan of movies
and series like 'Suits', 'Game of Thrones'.
Likes to read business news and articles
About Saurabh Sharma
He is an engineer with 2.5 years of work ex
in Software Industry. He loves playing and
watching cricket. Heis a movie buff and
great Batman the Dark Knight fan. Follows
business news and current events around
the world
"*!
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bill does not include the above provisions
which render it ineffective.
Black Marketing
Though launched with the best intentions,
there is a strong possibility of beneficiaries
selling it in the secondary market. In order to
understand this, lets understand it through
need hierarchy, so if a household gets grains
at subsidized rates, there is a possibility that
due to budget constraints he might sell it in the
secondary market, in exchange of other
goods. Let’s evaluate it through indifference
curve.
Now when the government gives the food, it
expects that there is a shift upwards, but
because of the selling in the secondary
market, there is no such shift. On the contrary
the government has to spend money to stop
hoarding. To top that, there is no guarantee
that the quality of food will not be
compromised.
References:
1)An Evaluation of Mid-day meal by Sweta
Mahandiratta, K.V. Ramani, and Dileep
Mavalankar
2)Food Security Bill: Good politics to deliver bad
economics accessed from
http://www.deccanherald.com/content/213752/food
-security-bill-good-politics.html
3)2012 Global Hunger Index report
4)National Food Security Bill-Challenges and
Options, A Gulati, J Gujral, T Nandakumar
5) Report of the expert committee on national food
security bill accessed from
http://eac.gov.in/reports/rep_NFSB.pdf
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E COSHASTRA
AUGUST 2013
Subscript: Left to right
1. The exclusive possession or control of
the supply, an American-
originated board game Monopoly (8)
2. Goods are those which cannot be
provided to one group of consumers,
without being provided to any other
consumers who desire them Public (6)
3. Tax imposed to stimulate more
domestic production of the product in
question Tariff (6)
4. Association of independent firms for the
purpose of exerting some form of
restrictive influence on the production or
sale of a product cartel (6)
5. Green Gold : The empire of ___ tea (3)
6. A statistical measure of inequality.
Score of 0 implies perfect equality and
score of 1 implies perfect Inequality,
known as ____ coefficient Gini (4)
7. The father of economics Adam smith
(4,5)
8. Someone who benefits from resources,
goods, or services without paying for the
cost of the benefit free rider (4,5)
9. A form of trade in which one good or
service is exchanged directly for another
barter (6)
Superscript: top to down
1. The economic doctrine that government control
of foreign trade is of paramount importance for
ensuring the military security of the country.
Mercantilism (12)
2. Value of the best alternative foregone
opportunity cost (11,4)
3. ____ is present when future events occur with
measurable probability Risk (4)
4. Synonym for prize, bonu, reward, bounty
premium (7)
5. The term first used by Keynes for consumer
confidence animal spirits (6,7)
6. Planning commission is an _______ body
advisory (8)
7. Middle name of the author of the book The
General Theory of Employment, Interest and
Money maynard (7)
8. Recently, 100% FDI has been approved for this
industrial sector telecom (7)
9. An environmental tax which is imposed on
products which utilize materials which contribute
to greenhouse gas pollution known as _____ tax
carbon (6)
10. When a government/ business spends more in a
given period of time than they generate in
income, they incur a _____ deficit (7)
11. One of the proposals of the _____Woods
conference was that currencies should be
convertible for trade and other current account
transactions Bretton (7)
12. A very early school of which likened the
interactions between different sectors and
classes of the economy, and the monetary flows
between them, to the circulation of blood through
the human body physiocrat (10)
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! !Crossword Solution
ECOLIBRIA
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E COSHASTRA
THE ECONOMICS CELL NMIMS, MUMBAI
AMAZING FACTS
$%#
Before 1896 India was the only diamonds
producing country in the world.
Captcha is actually an acronym. It means
"completely automated public Turing test to tell
computers and humans apart
Saudi Aramco is an oil company that makes
over $1 billion of revenues in the course
of just one day! A million dollars
weighs about one metric ton - Hence
the phrase, "a ton of money”.
Last year, for the first time, spending by Apple and Google on
patent lawsuits and unusually big-dollar patent purchases exceeded
spending on research and development of new products,"
writes The New York Times
Dell has spent more money on share repurchases than it earned throughout its life as a public company, writes Floyd Norris of
The New York Times
Apple's cash and investments are now equal to the GDP of Hungary and
more than those of Vietnam and Iraq.
!
The budget was first introduced in India on 7th April 1860 from East-India Company to British Crown. The first Indian Budget was presented by James Wilson on February 18, 1869. Mr Wilson was the Finance
Member of the India Council that advised the Indian Viceroy. He was Scottish businessman, economist and Liberal politician. He founded The Economist and the
Standard Chartered Bank
Budget of 1973-74 is known for ‘Black Budget’ in India. During this year budget deficit in 1973-74 was
Rs 550 crore
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E COSHASTRA
AUGUST 2013
$&#
In the first quarter of 2012, the number of iPhones Apple sold per day surpassed
the number of babies born per day worldwide (402,000 vs. 300,000), according
to Mobile First.
Renaissance Technologies, a hedge fund run by James Simons, has allegedly
produced average returns of 80% a year since 1988 (before fees), according to
Bloomberg. That would turn $1,000 into $2.4 billion in 25 years.
The first FM's post went to Sir RK Shanmukham Chetty, industrialist, erstwhile Diwan of Cochin state and
Constitutional Adviser to the Chamber of Princes. He had been a member of the pro-British Justice Party. Mr. Chetty presented the first budget of Independent
India on November 26, 1947, in the backdrop of partition and riots.
42% of the world's poor live in India
Half the world’s outsourced IT services
come from India, amounting to a $47
billion dollar industry
India is the world's second largest importer of arms and has spent $50 billion on defense purchases in the
last decade
India used to account for 33% of the world's GDP
before Industrial Revolution; then fell to
3%; now may rise to 25%
China's economy grew 7 times as fast as America's over the past decade (316%
growth vs. 43%)
When you buy Chinese stocks, you are basically financing the Chinese
government. Eight of Shanghai's top ten stocks are government owned.
The employees printing the Budget papers in India are kept in complete isolation
(quarantine) in the Finance Ministry for one week before the Budget.
Transfer Pricing Regulations was introduced by Yashwant Sinha in Budget
2001-02.This regulation played a big role in the prevention of erosion of the tax base
in India.
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Winner
Winner
ECODOODLE
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Saurabh
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E COSHASTRA
AUGUST 2013
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Ecoshastra, August 2013
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