Niveshak February 2010

8/14/2019 Niveshak February 2010

1/26FIN-Q PG.24 Calendar spread: Key to free lunches Pg.6

THE INVESTOR VOLUME 3 ISSUE 2 FEBRUARY 2010


2/26Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bearsno responsibility whatsoever.

F R O M E D I T O R S D E S K

NiveshakVolume III

ISSUE 2

February 2010

Faculty Mentor

Prof. S.S Sarkar

Editor

Bhavit Sharma

Sub-Editors

Durgesh Nandini Mohanty

Hitesh Gulati

Sumit Kedia

Tanvi AroraUpasna Agarwal

Designers

Bhavya Aggarwal

Swarnabha Mukherjee

All images, design and artwork

are copyright of

IIM Shillong Finance Club

Finance Club

Indian Institute of Management

Shillong

www.iims-niveshak.com

Dear Niveshaks

Here comes the month of February- a month which is long awaited by manyof us to witness the balance sheet and income statement of our own India Inc.

Yes!! I am talking about the Union budget which is expected to be released on 26th

Feb by our finance minister Mr Pranab Mukherjee. His first budget may not have

been accepted well by Indian citizens, but this time the old warhorse is leaving no

stone unturned. He is expected to target on the GDP growth rate as this budget

will be very critical for India to lead the recovery from the global economic crisis.

However, looking at the Reserve Bank of Indias (RBI) recent review of the monetary

policy, we can predict that the forthcoming Budget will reverse the expansionary

fiscal policy and rein in fiscal deficits. After two years of runaway deficits, surely, the

time is ripe for the finance minister to initiate the fiscal consolidation process in the

forthcoming Budget. Besides this, the Railway Budget 2010-11 is also scheduled tobe presented to the Lok Sabha on February 24 after the Budget session of Parlia-

ment begins on February 22.

The January effect on the sensex also seemed to have faded away by the

fag end of January 2010, when our benchmark BSE sensex broke by 490.6 points

on a single day due to global cues and fears of tightening monetary measures

by central bank. As per the expectations, RBI launched a battering on inflation by

increasing the cash reserve ratio by 75 basis points to 5.75 percents. We hope that

this move brings cheers to the aam aadmi by dampening the momentum of sharp

surge in food prices and uneasy price escalation which has been a cause of worry

for all of us. However, there have been some positive results too against the back-drop of this RBIs decision. The manufacturing sector seems to be poised for revival

after the HSBC Markit Purchasing Managers Index (PMI), one of the most reliable

indices tracking the health of the manufacturing sector, climbed to its highest level

in one-and-half years to 57.6 in January, 2010. We also see IIP numbers reaching

new heights. The Indian IT sector, on the contrary, might get perturbed after US

president Obamas decision to end tax breaks to American firms that outsource

jobs overseas. But it needs to be seen if the president can afford to walk his emo-

tional talk.

Now as we are speeding on a road to recovery, a question arises in front of

us is Are we achieving this economic recovery at the cost of fiscal deficits and

inflation? So to throw a word of caution on this, we have our cover story which

highlights some of the inherent financial problems like huge fiscal deficits in India,

and which shows a possible way ahead for us in this edition. This reading also

provides a primer on the resurgence of mergers and acquisitions post recession

and an article on Calendar Spread along with some arbitrage trading strategies

for Index spread trading. Let us go through some really insightful articles that our

friends from across all B-Schools have penned down. Hope this issue would prove

to be an interesting read for you.

Wishing you all a very Happy Holi!!!

Happy InvestingBhavit Sharma

(Editor-Niveshak)

EDITORIAL TEAM


3/26

Niveshak Times

04The Month That Was

C O N T E N T S

PERSPECTIVE

09 Resurgence o M&As postRecession

Cover Story17 India at crossroads

- yet again

Finsight

13 Cofee Derivatives Market

Recherche

21 Growth Story : Myth orMist?

Article of the month

06 Calendar Spread : The Keyto Free Lunches

finlounge

24 Fin-Q


4/26NIVESHAK VOLUME 3 ISSUE 2 February 2010

Market Watch

The markets for this month (January 25 Feb-

ruary 19) were calmer as compared to previous few

months. The four weeks ended in positive but not

much achievement.

In the week starting on January 25, Sensex and

Nifty both were plunged down due to the RBIs an-

nouncement of increased CRR. But the recovery on

both the indices was quick. The 30-stock BSE index

fell below the 16,000 psychological mark during the

week. But it recovered quickly to close the week at

16,357, up by 51 points or 0.3 percent. The CNX Nifty

also ended up by 0.3 per cent or 14.8 points at 4,882

points.

The second week (February 1 February 6) was

an extended week for the Indian stock market as

there was a special 90-minute trading session on

Saturday, February 6. Sensex marked the end of the

week at 15,915.65 after gaining 124.72 points, while

the broad-based Nifty gained 38.60 points at 4757.25.

The special session on Saturday remained bullish

throughout after two losing days for the indices.

Indian equities stabilized in the 4 trading days

week (February 8 February 11) after a months

widespread selling activity on both Sensex and Nifty.

Sensex ended with modest gains of 236 points end-

ing at 15,915.65 points as compared to the last week.

Nifty fifty closed on Thursday evening at 4757.25

points. The markets this week were majorly affected

by the fear of growing debt in Greece and its effectson the economic recovery around the globe.

The fourth week of this month (February 15

February 19) suffered volatile movement on the ma-

jor indices but managed to close the week with little

gains. The stocks opened on a negative note due to

higher WPI in January then December. The Sensex

rallied 39.04 points to end the week at 16,191.63 on

Friday and Nifty ended the week at 4,844.9 points,

gaining 18.15 points.

EU saves Greece

With the increasing pressure to refinance al-

most $23 billion of bonds maturing in April and May,

the conditions have been deteriorating for Greece. In

2009, the government debts were about 113 percentof its GDP. And the budget deficit was 12.7 percent

of GDP. Two thirds of this debt is owed to foreigners.

Greece had planned to default on its bonds impos-

ing the losses on banks and other investors. But the

EU leaders came to rescue Greece with the blocs

highest budget deficit under control. Also, they have

determined to take strict actions to come out of this

crisis. But this help has seen mixed reactions. This

might lead to demand of deficits from other debt-

laden countries of the bloc.Another stride in Yahoo-Microsoft deal

The European and US regulators have given a

nod to the long pending issue of Microsoft Corp.

and Yahoo Inc.s relationship. The several years long

courtship period between the two companies seems

to be ending up as an alliance finally. Though Yahoo

had turned down Microsofts offers quite a few times

in previous years but now it sees this as an oppor-

tunity to enhance its slumping profits. In May 2008,

MS had to withdraw its offer of $47.5 million pricingYahoos share at $33. But this time, the companies

are counting on the 10-year deal to counter Googles

domination of the lucrative Internet search market.

The source of revenue for these companies is the

advertisers who pay to have their links appear when

people search for certain terms. This deal would

lead to greater competitive pressures in the market-

place. Till now the figures have been sad for both

Yahoo and Microsoft with 7.4% and 3.2% of search

requests share, respectively. The speculations arethat Microsofts technology would start processing

search requests that people enter on Yahoos US site

by the end of this year. But making it available to the

rest of the world would be delayed until 2012. Yahoo

estimates the partnership eventually could boost its

annual operating profit by $500 million. The financial

gains arent expected to start flowing to Yahoo until

next year. The other details of the deal are being

discussed upon.

Government saves Air India

The Indian government has approved the injec-

tion plan of 800 crore rupees into the loss making

Air India. Air India has been struggling to pay off the

Niveshak Times

The MonTh ThaT Was

IIM, Shillong

Tanvi Arora

www.iims-niveshak.com


5/26FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 5

The MonTh ThaT Was

debts of about 2 billion. Government has decided

to give a support of about Rs. 5000 crores subjectto condition that Air India implements certain cost

cutting measures which includes downsizing its fleet

by about 30 per cent, to 105 aircraft by March 2011.

The already awful reputation of Air India was wors-

ened due to various controversies in the last one

year. Owing to these situations Indias national car-

rier made huge losses in the last financial year. But

the question now raised is why the already strained

Government of India is bailing out an airline when

the state is that the demand is less and supply ismore.

Government doubles the limit on FDI

The government raised the cap on foreign di-

rect investment proposals from Rs. 600 crores to Rs.

1,200 crores. This means the tenders of the total

foreign equity inflow of upto Rs. 1200 crores can

be approved by the finance minister. Previously,

any amount of foreign investment exceeding Rs.

600 crores could be approved by the finance min-

ister and other proposals with more than that hadto be forwarded to the cabinet committee of eco-

nomic affairs for approval. This increase in the limit

is only on the operations of foreign equity and not

the whole project. The government also made a few

relaxations for FDI, like cutting back the role of the

Foreign Investment Promotion Board so that the ap-

provals on foreign investments are not delayed due

to unnecessary conventional regulations.

RBI increases CRR

In the recent quarterly monetary policy review,

the central bank has tried to keep the policy rates

unchanged. But the RBI increased the cash reserve

ratio or CRR by 75 basis points to 5.75% as against

the expectations of the market of an increase of only

50 bps. The repo and reverse- repo rates remained

untouched. This decision was taken as an attempt

to not upset the growth but impacted the inflation

index. The CRR hikes were to be launched in two

phases. The first phase was effective from February

13 with an increase of 50 basis points. It will be fol-lowed by another 25 basis point increase effective

from February 27. This would suck out almost Rs

36000 crore from the system.

Bharti-Zain Win-win deal

The acquisition proposal by Bharti Airtel hasbeen dealt positively by the government. It plans to

acquire Kuwait-based Zains African operations for

$10.7 billion. The payment would be financed using

$1.7 billion debt and the remaining would be the

outgo of the company. Bharti currently has 125 mil-

lion user base in India which would be extended to

African markets by the addition of 42 million new

users. There would be knowledge and technology

transfer between the two companies so that they

can provide better services in both India and Africa.Earlier, Bharti had got into talks of acquiring MTN,

the largest service provider in Africa, but was unsuc-

cessful. Though there seems to be certain abrup-

tions with the deal but it is expected to work out in

the end.

Impressive numbers in third quarter results

The banking sector saw more than 20% in-

crease in the net profits of HDFC bank and Axis bank

and a minor steady increase for State Bank of India

and Punjab National Bank. On the other hand, ICICI,the second largest bank of India, announced a fall in

quarterly profits.

The IT giants of the country, TCS, Infosys and

Wipro also had good figures on the balance sheet

with Wipro having net profit increase of about 21%.

Jet Airways profits soared to reach Rs. 106

crore compared to a loss of Rs. 214 crore in the same

period last year. This came as the result of cost cut-

ting measures by the airline and also the increase in

air traffic. But the respective figure increased by only5.4% for Hindustan Unilever.

For Tata steel this figure shot up by almost

three times. Tata Motors reported a turnaround with

net profits jumping to Rs. 400 crore compared to

a loss of Rs. 263 crore in the previous years third

quarter.

Reliance Industries Limited announced more

than expected net profits increase of 15.8% to Rs.

4,088 crore.

In the telecom sector, Bharti Airtel posted gains

of just 2% compared to the same period last year.

Niveshak Timeswww.iims-niveshak.com


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NIVESHAK VOLUME 3 ISSUE 2 February 2010

Contrary to popular beliefs,

the real world markets are full

of irregularities and provide

ample opportunities to the

Intelligent Investors to enjoy

free lunches.

Those who still believe in thesaying There Aint No Such Thing asa Free Lunch, have not yet heardabout Arbitrage.

Arbitrage is the art of purchas-ing and selling assets simultane-ously to take advantage of the pricedifferentials that arise due to inef-ficiencies in the market. Contraryto popular beliefs, the real worldmarkets are full of irregularities and

provide ample opportunities to theIntelligent Investors to enjoy freelunches.

One such arbitrage strategy, ex-tremely popular in the world of op-tions is Arbitrage Spread. Spreadtrades are strategies that involve aposition on two or more options ofthe same type. The position can be acall or a put but can never be both.Some examples of spreads include

butterfly, vertical, horizontal, diago-nal calendar etc.

In this article we explore Indexfuture spreads and develop an al-gorithm which will help us to earnhigh returns at minimized risk. Here,we have used calendar spread inIndex futures. Calendar Spreadis the difference in prices of twofuture contracts with different ma-turities but the same underlying as-

set. One can make profit by under-standing and predicting the relativeprice movements of the two futurecontracts. Depending on the expec-tations as to whether the spreadwould increase or decrease, traderscan take long and short positionsin the futures with different matu-

rity expiry months to gain from thespread movements.

As we already know that therecan be two market conditions withrespect to contract prices of two dif-ferent future contracts of differentexpiry month. Here we designate thecontract that has the shorter matu-rity period as the near month fu-ture and the other the far monthfuture. A normal market condition is

when the far month futures contractprice is higher than the near monthfutures contract price. So in thissituation, also known as Cotango,if the spread differential is expectedto increase, one should take a shortposition in the near month futureand long position in the far monthfuture. Alternatively, when thespread is expected to decrease, re-verse position should be taken. The

rationale behind this strategy is thatin a normal market condition whenfuture market price of far month isgreater than future market price ofnear month and spread is increas-ing, there can be three cases:

Case I: Future prices of both

near and far month increase

In this case as spread is in-creasing, therefore increase in priceof far month future contract will be

greater than increase in price of nearmonth future contract hence takinglong position in far month futurecontract and short position in nearmonth future price will result in pos-itive cash flow.

Case II: Future price of both

In this article we

explore Index future

spreads and develop

an algorithm which

will help us to earn

high returns at mini-

mized risk by utilizing

the calendar spread.

Also, a proper flow of

activities for a trading

strategy is provided

to understand things

better. Further the

concept of exponen-

tial moving average

(EMA) is detailed in

and the relations to

trading strategy mixand development of

a good returns strat-

egy is discussed.

IIM ShillongArpan Ghosh

Calendar Spread. .The Key to Free Lunches



AoM

near and far month decrease

In this case as spread is increasing, thereforedecrease in price of far month future contract will begreater than decrease in price of near month futurecontract hence taking long position in far month fu-ture contract and short position in near month fu-

ture price will result in positive cash flow.Case III: Future price of far month increases

and that of near month decreases

This is most profitable condition as both longposition and short position will result in positivecash flow.

In an inverted market, i.e. when the far monthfutures contract price is less than the near monthfutures contract price (a condition called backward-ation), the strategies are completely reversed.

A long calendar spread, which involves buy-ing an option with a longer maturity and shortingone with shorter maturity, in a normal market condi-tion would require an initial investment because ofthe greater value of the long call. Thus long optionspreads are traded for a debit. The amount of thisdebit paid up until the short option expires repre-sents the maximum possible loss. After expiry the

position is that of a long option and further risk isjust the value of the option.

The calendar spread tries to capitalize onthe differences in time decay of options betweenmonths. Options in nearer-month expirations havemore time decay than later months. The calendarspread profits from this difference in decay rates.

Trading Strategy

We now try to find a profitable arbitrage tradingstrategy for Index Spread trading. For this purposewe compare the spread in the values of 1 monthIndex futures of Nifty.

In order to build the strategy, we start withthe simple process of comparing the actual spreadvalues to their 3 day exponential moving average(EMA). The rationale behind this process is verywell documented- the exponential moving average

smoothes the fluctuation in the spread values andprovides indication of a long term trend. This willhelp us understand the trend of the spread in shortterm as compared to long term so that we can deter-mine whether spread is increasing or decreasing. Sothis strategy is based around the interaction that thespread line will have with the moving average line hence we are creating a kind of a lagging indicator

Spread cutting

EMA from

Below or Above

Spread cutting

EMA from

Above or Below

Check

Spread>0

Plot Spread and 3day EMA of spread

START

Is spread

trend

changing

Stay

Invested

Square off

your position

YesNo

Above

Take Long in Near

Future & Short in

Far Future

Take Long in Far

Future & Short in

Near Future

Take Long in Far

Future & Short in

Near Future

Take Long in Near

Future & Short in

Far Future

Below Below

Above

Yes

No

STOP


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The calendar spread tries to

capitalize on the differences in

time decay of options between

months

supported by strategies for its various behaviors inorder to earn profits over a long term. Strategy ad-opted for trading is explained with the help of flowchart shown in Figure 1

Based on the flow chart we can develop a twodimensional matrix with dimensions as Spread (Pos-

itive or Negative) and Direction of Interaction (Aboveor below) as shown in Figure 2.

We apply this strategy set depending onthe conditions i.e. if spread is positive (if Futureprice of far month is greater than future priceof near month) and actual spread is cutting ex-ponential moving average (EMA) from below i.e.Spread is increasing, then take a long positionin far month future and short position in nearmonth future. Similarly if spread is negative

and actual spread is cutting EMA from belowi.e. spread is actually decreasing then take longposition in far and short position in near. Thusthe strategy that the investor employs to enablearbitrage will differ according to the positionof the spread line with respect to the movingaverage line and their respective directions ofmovement. So based on that, the 4 strategiesthat we have are based on whether the spreadis positive or negative, when we decide to enter

the market and whether it is cutting the movingaverage line from above or below.

In order to test this strategy we took thepremise that 100 Index futures are being tradedin and we enter the market when the spreadline is moving near the moving average line andsquare our positions on the other side once thelines have intersected. So, let us take a few ex-

amples from the graph in figure 3 to prove thepoint.

The graph plots the spread of Nifty futuresmaturing in January and February 2009. The val-ues used are the prices at which the futureswere traded in NSE in the months of December

2008 and January 2009. These months werechosen as they represented the worst phase ofthe current economic crisis.

So we can conclude that the exponentialmoving average (EMA) line of the index futurescan be used as an indicator of the market sen-timents in conjunction with the actual spreadtrend line. An investor who varies his strategyaccording to the kind of interaction that takesplace between these lines according to theframework provided in this article will be ableto earn good returns in the long term. Thus arbi-

trage trading if done carefully with a specific tar-get and strategy in mind can indeed be a freelunch that would disprove the famous saying.


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Distressed M&A which means the purchase of bankrupt companies is a permanent feature of anyRecession period. It was said that deals during downturns sometimes outperformed the ones during

robust economic times.

In 2009, the volumes of Mergers and Acqui-sitions were believed to have come down by asmuch as 36% with respect to the previous year.With just 5,800 deals billing up to $2.3 trillion in2009, M&A volumes were at their lowest since2004. The main cause behind this was the 29%reduction in market capitalization worldwide.The activity of private equity firm also dimin-ished due to the unavailability of credit. Whenadjusted for market capitalization the level wasalmost at par with 2008, though slightly lowerthan that of 2007.

FROM ANOTHER POINT-OF-VIEW

Some experts though expressed contradic-tory views. They believed that an important cor-porate restructuring strategy like an acquisitionor a divestiture should continue in all phases ofthe business cycle, be it a recession or a boom.

And if done with a strategic goal in mind, amerger or an acquisition could add value evenduring the downturn. Distressed M&A whichmeans the purchase of bankrupt companies isa permanent feature of any Recession period.It was said that deals during downturns some-times outperformed the ones during robusteconomic times. One good example of a smartacquisition that brought a turn around in fateswas IBMs acquisition of Lotus in 1995.

M&A POST RECESSIONAn economy buzzing with M&A activity

gives out the vibes of a vibrant economy. Aswe gradually recover from the downturn, pes-simism has made way for optimism. Companieshave shifted their focus from the reduction ofdebt. Firms are busy in rapidly recapitalizingtheir balance sheets. The government provided

stimulus packages has led to an upward surge inthe capital markets, stock indices have risen totheir pre recession levels. The fuel required formergers and acquisitions - conveniently avail-able capital is here again. M&As post Recessioncan be studied under the following three heads.

RETREAT OF CORPORATE ACQUIRERS

With cheap credit available again leveragedbuyouts are ready to make a grand entry on theM&A dais. This is primarily due to two reasons:

Improved P/E Ratios

Corporate acquisition appetite has in-creased many times over in the recent past. Thisis because of the highly improved forward P/ERatios of the companies with respect to that ofthe previous year. Though the markets duringrecovery have been pretty volatile throughout

the year ago, forward P/E Ratios have increasedby 7% from13.1x in 2009 to 14.0x in 2010. Anincrease in earnings by as much as 24% hasbeen predicted by analysts in 2010 with respectto 2009. In such a conducive environment andpeaking markets the forward P/E Ratio is boundto increase. The resurgence of Mergers and Ac-quisitions in 2010 may not sky-rocket, but it willbe a steady one.

Declining Debt to EBITDA ratios

During recession companies had been busystriking the debt off their balance sheets anddeleveraging. Post recession due to these low-ered Debt to EBIDTA ratios improved the dealmaking capacity of the acquirers as they couldtake more debt for leveraged buyouts. EBIDTAratios are expected to decrease by 18% from



Perspective

Kraft Foods, the worlds

second largest food companybehind Nestle, fnally bought

out Cadbury in a deal worth

11.9 billion.

1.5x to 1.2x. Geographically analyzing, the debtto EBITDA ratios in Africa & the Middle East willhave a 37 percent decline (down from 0.8x to0.5x), followed by North America at 24 percent,Asia-Pacific (excluding Japan) at 20 percent,Latin America at 18 percent and Europe at 15

percent.Thanks to the above two factors, both the

corporate appetite and corporate capacity forM&A activity has increased in 2010.

RETREAT OF PRIVATE EQUITIES

With the economy showing evi-dent signs for recovery the timeis ripe for Private Equity formsto make their much await-ed comeback. After a de-

cade of frenzied activity,PE players were faced theshock of Global Reces-sion and an acute creditcrunch. They had to rethinktheir strategies of entry andexit and managing their portfo-lios. With Wall Street nearly back a tits previous glory and giving away bonus- eslike pre Recession days, investors stand con-

vinced that the economy has found sturdyground beneath its feet, at last. According torecent poll conducted, 80% of PE managers be-lieve that a wave of M&As will sweep the finan-cial world in near future.

Further, exposure to PE investmentsthrough publicly traded Exchange Traded Funds(ETFs) is being offered by giants like PowerSharesGlobal Listed Private Equity Portfolio (PSP). PSPinvests in over sixty PE firms all around the

world. The investments of PSP are distributedin various countries with a majority stake in US(36%). Private Equity Companies have makingbig gains in 2009 already. PSP made gains worth140%, which is still 50% its pre-recession levels.Sentiment within the private equity industry isclearly yet to fully recover, as firms expectingto trim their operations far outnumber those

expecting to expand significantly in the shortterm. Private Equity M&A activity that loiteredaround $15 billion a quarter since 2008 end, hasincreased to three times this value, i.e. $45 bil-lion in the fourth quarter of 2009.

CHANGE IN THE INTERNATIONAL ORDER

M&A had been used as a powerful arm toextend the foreign presence of companies andconvert themselves into pan national giants.This trend came to a halt in 2009 when the num-ber of cross-border deals dropped significantly.

Cross border activity as a percentageof total M&A volume dropped by

ten points from a pre recessionvalue of 40%. However, this

phenomenon was limited

to the Western countries.Recently companies fromAsia have been trying toexpand their global pres-

ence. This fact is confirmedby the fact that companies in

the Asia-Pacific accounted for 26%of the global M&As. So M&A activity

was distributed more uniformly around theglobe.

EXAMPLES OF SOME RECENT ACQUISITIONS:Krafts Acquisition of Cadbury

Kraft Foods, the worlds second largestfood company behind Nestle, finally bought outCadbury in a deal worth 11.9 billion. The driv-ing force behind this acquisition was the expo-sure to the emerging markets that the Britishconfectioner Cadbury offered to Kraft. The newcompany will own more than 40 brands. Share-holders of Cadbury have been offered 500p in

cash and 0.1874 Kraft stock for each share theyown. This values Cadbury at 840p per share, butshareholders will also receive a special 10p divi-dend. Moving above the initial derisory offer of755p per share of Cadbury, the deal was struckat 840p per share which was supposed to be agood deal though the shareholders themselvesbelieved every share to be worth more than 9.


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Bharti takes a bite off Zain

After the Bharti-MTNL deal failed to seethe light of the day, international dreams of In-dias largest telecom operator came true afterit acquired the African assets of Kuwaiti-basedZain Telecom in a deal worth $10.7 billion. Thisnew venture will help Airtel access a customerbase of 70 million across Africa and Middle East.Bharti, controlled by the Mittal family caters to110 million customers already. The promoters ofZain, the Kharafi family owned a stock of 11%had been looking for an investor for sometime.Zain had other eligible suitors like state-ownedBSNL and MTNL but none of them were inter-ested to pay more than $ 10 billion. Zain hasannual revenues of over $ 7 billion and has in-

vested around $12 billion to expand its opera-tions in Africa.

Reliances Lyondell dreams

This is one giant deal which is yet to hap-pen. According to latest reports, Reliance valuedthe bankrupt chemical maker at $13.5 billionwhich considerably exceeds its November bid of$12 billion. LyondellBasells board is unyieldingeven now and demands more compensation.If this deal materializes it would entail Indias

largest company buying $2.25 billion in stockand backing a $2.8 billion share sale. Lyondellwould do wonders to Reliance by giving themaccess to three continents and large numbers

of factories and customers and this fuels RILsnew obsession. Lyondell Chemical Co. is a Neth-erlands-based company which filed a plan toreorganize with the U.S. Bankruptcy Court in De-cember. RIL said it raised Rs. 26.8 billion rupees($586 million) selling shares. As a result of this

its shares fell by 0.9%.

SOME MORE NUMBER CRUNCHING

Mergers and Acquisitions and Private Eq-uity transactions have surged with a new vigorat present. All the M&A and PE deals (includ-ing QIPs) in the month of January have been awhopping $3.8 billion (around Rs 17,480 crore)totaling 85 deals. This is way above the statis-tics of January of 2009 which amounted to $2.1billion (around Rs 9,660 crore) coming to a mere34 deals. There has been a growth of 81% andthis is proof enough for the changing climate.Besides many Indian companies are looking foracquisitions outside the country. The total val-ue of outbound M&A deals (Indian companiesacquiring businesses outside India) in January2010 was $341 million (15 deals), as comparedto $40 million (five deals) in January 2009. Thetotal value of domestic deals this January was$2,167 million (32 deals), as compared to $1,324

million (eight deals) and $223 million (28 deals)during the corresponding months of 2009 and2008, respectively.



FinSight

The coffee futures and op-

tions markets at NYBOT

provide the perfect tools for

risk managers throughout the

coffee marketing chain to help

protect the bottom line.

IIM BangaloreDebprotim Dutta &Sripriya GN

There is an im-

mense need for an

active commodities

derivatives market

in India and here

the study on coffee

derivatives markets

has been reflected.

The authors herehave argued for the

establishment of an

active derivatives

market in coffee and

established its vi-

ability as an efficient

market using ADF

test. However, some

structural and regu-latory bottlenecks

have to be sur-

mounted in order to

have a sustainable

derivatives market in

India.

India is among the top-5producers of most commoditiesbesides being a major consumerof bullion and energy products.Agriculture contributes about20% to the GDP of the Indianeconomy and employees around57% of the labor force. All theseare indicative of the fact that In-dia can be promoted as a major

center for trading of commodityderivatives. It is important to un-derstand the need for commod-ity derivatives and the role theycan play in risk management. Itis common knowledge that pricesof commodities, metals, sharesand currencies fluctuate overtime. The possibility of adverseprice changes in future createsrisk for businesses. Derivatives

are used to reduce or eliminateprice risk arising from unforeseenprice changes. The two most com-mon derivatives for commoditiesmarkets are commodity futurescontracts and commodity optionscontracts.

COMMODITY MARKETS IN IN-

DIA

The history of commod-ity markets in India dates backto 1875. However, it was fearedthat these markets would engen-der unnecessary speculation ad-versely affecting the markets forthe underlying commodities. Sev-eral acts were passed overtime

that either severely restricted orbanned commodity derivativestrading for select commodities.This sentiment reached its peakafter independence in 1952 whencommodity options trading andcash settlement of commod-ity futures was banned in India.A further blow came in 1960swhen following several years of

draughts, many farmers default-ed on forward contracts. As a re-sult, forward trading was bannedin many commodities consideredprimary and essential. The com-modities markets remained inac-tive until, in the new millennium,the government started activelyencouraging the commodities de-rivatives markets. Since 2002, thecommodities markets faced un-

precedented boom crossing the$1 trillion mark in 2006.

However, there are still sev-eral impediments to be overcomefor a sustainable commoditiesmarket to function in the coun-try. For instance, trading in com-modity options has been bannedsince 1952. With a ban on suchan important derivative, the com-

modities derivatives marketscannot be called complete. Also,there are issues regarding ware-houses and standardization. TheCentral Warehousing Corporationof India presently operates 500warehouses with a storage ca-pacity of 10.4 million tones. This


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FinSight


As the gestation period for coffee

plantations is large, any new invest-

ments in coffee plantations are for

long term and short-term adjustment

of supply and demand is absent

which results in high price volatility.

is not sufficient for a vast agricultural country.In addition, cash settlement of the contracts isnot allowed upon the maturity of the contractsbecause of which many settle the contracts justbefore the maturity. Further, many commodityexchange houses (3 national and 21 regional)

impede achieving economies of scale. To addto these, there are restrictions regarding themovement of goods from one state to another.Finally, there are issues regarding governmentsMinimum Support Policy (MSP). Given the wide-spread use of providing subsidies even in devel-oped nations, price controls etc, the MSP cannotbe wished away in the near future. However, itseverely hampers free market mechanism andefficient functioning of commodities markets.One way could be to de-link MSP from pro-curement. Under this model, while MSP couldcontinue to be fixed, present prices may be de-termined by market forces. The farmers couldbe reimbursed the difference between the mar-ket prices and MSP on the marketed produce.The other method could be to guarantee theincome level of farmers through an insuranceprogramme where guaranteed income will bedetermined on the basis of MSP and historicalyield of the farmer and the difference between

guaranteed income and actual income (actualproduction and market price) will be made goodunder the insurance programme.

We thus see that there are several struc-tural and regulatory issues that need to be ad-dressed and resolved for a truly active and na-tional commodities market to emerge in India.In this paper, we will focus on the coffee deriva-tives market in India.

FUNDAMENTALS OF COFFEE

Although coffee, like cotton, has manygrades, growths and specific growth qualities,it is primarily classified into two types Arabicaand Robusta. Arabica coffee beans, which growmainly in the tropical highlands of the WesternHemisphere, make up the bulk of world produc-tion and are higher grade, higher quality beans.

When a commodity assumes a prominentposition in the global economy, it also invitesspeculative excess and ever-increasing vulner-ability to major price shocks. The coffee trade with its long sea-route, supply lines and weath-er variables suffered from wild price swings.

After an uncontrolled cash market specula-tion brought about a calamitous market collapsein 1880, a group of coffee merchants mobilizedto bring some order to the chaos. The first trans-action on the New York Coffee Exchange, of 250bags of coffee, helped to establish an organizedmarketplace that served several key functions:set standards for different grades of coffee;provided a market where growers, merchants,roasters and wholesalers could hedge against

losses in the cash market; established an ar-bitration system to settle disputes; recordedand disseminated current market information tomembers.

At any time along the marketing chain forcoffee from the tree to the cup, coffee pricescan move quickly and often in response to keysupply and demand factors such as weather, po-litical policies, labor contracts, crop predictions,etc. Given the growth cycle/ characteristics ofthe coffee bush/ tree (three to five years fromplanting before bearing marketable beans), theprocessing capabilities necessary for highergrade and quality washed Arabica coffee and theshipping/storage demands, the physical marketcannot respond quickly to reflect changing sup-ply/ demand conditions. In the absence of amajor increase in consumption, adjustments onthe supply side are difficult to implement in ashort time frame and involves painful choicesfor producers that cannot be easily undone.

Futures markets, however, can respondquickly through their price discovery processthat reflects changing cash market conditions.Futures markets react immediately to any funda-mental change in the marketplace and the pricediscovery process reflects this shift. The coffeefutures and options markets at NYBOT provide



FinSight

When a commodity assumes

a prominent position in the

global economy, it also invites

speculative excess and ever-in-

creasing vulnerability to major

price shocks.

the perfect tools for risk managers throughoutthe coffee marketing chain to help protect thebottom line.

Coffee offers a good illustration of the vitalrisk management function of futures and op-tions. Coffee productions sensitivity to weather

shocks and its limitations of climate and geogra-phy are a constant source of price volatility. Thehistorical volatility for coffee has been signifi-cantly greater than for other commodities (likecocoa or sugar).

Coffee futures and options mar-kets do not increase volatility. Thevolatility and risk originate in thecash market. The cash price of cof-fee, while benchmarked to the Cof-

fee C futures price, is determinedprimarily by cash market condi-tions. Thus, while coffee futuresand options markets cannot re-move volatility and risk arisingfrom a change in cash marketconditions; they do allow coffeeindustry participants to transferand manage risk.

The same coffee price

volatility that makes coffeefutures and options markets necessary to riskmanagers creates opportunities for investors.Since volatility measures the frequency and sizeof price movements in both directions, it affectsall levels of the marketing chain and brings inmarket users with opposing price goals. As thelevels of volatility and risk management activityin the futures market increase, the speculativeopportunities on both the buy and sell side ofthe market expand. The speculative activity inthe coffee market provides a critical mass of li-quidity and pricing opportunity. Increasing thenumbers of bids and offers in the trading ringthroughout the day increases the pricing effi-ciency of the market. Due to these character-istics, coffee presents an attractive and viablederivatives market.

COFFEE- EFFICIENT MARKET HYPOTHESIS

TESTING

Before we argue for an active encourage-ment of coffee derivatives market, we will es-tablish the efficiency of the market in coffeederivatives to confirm its viability. This can be

achieved by an econometric analysis of the dataobtained from New York Board of Trade. Howev-er, before we delve into the findings, the theorybehind the methodology used will be explainedin brief.

A series is said to be (weakly or covariance)stationary if the mean and auto-co vari-

ances of the series do notdepend on time. Any se-ries that is not stationary

is said to be nonstationary.A common example of anon-stationary series is therandom walk:

yt= y

t-1+ e

t

Where et is a station-ary random disturbance term.This random walk is a differ-ence stationary series sincethe first difference of the above

equation is stationary:y

t- y

t-1= e

t

Econometric theory says that if the move-ments of market prices, as regressed againstprevious historic prices, gives a stationary pro-cess this would imply inefficiency within themarket. The Augmented Dickey Fuller (ADF) Testtests for the presence of this stationary process.

Consider an autoregressive, pth order pro-cess:

yt= a

0+ a

1y

t-1+ a

2y

t-2+ + a

py

t-p+ e

t

This can be rewritten in the following form:

yt= a

0+ y

t-1+ b

iy

t-i+1+ e

t;

for i ranging from 2 to p

Where = -(1- ai); for i ranging from 1

to p


16/266

FinSight


And bi = - aj;where j ranges from i to p

The coefficient that is to be observed inthe above equation is . If = 0, the equationhas a unit root. This comes from the theory ofdifference equations that if the coefficients of adifference equation sum to 1 (in this case a

i),

at least one of the characteristic roots is unity.We thus test the hypothesis of a unit root atstandard critical values and a failure to rejectthe hypothesis would imply a non-stationaryprocess.

However, there are certain assumptionsto be made while performing ADF test. Firstly,it assumes that the error terms are indepen-dent and have a constant variance. The valueof cannot be estimated

accurately unless all theautoregressive terms areincluded in the estimat-ing equation. The practicalimplication of this is theproblem of choosing thelag length. Seasonality inthe roots and structuralbreaks require specifichandling.

Once the series haspassed the unit root test performed, namelythe ADF test, we check the correlation betweenthe spot and the future market. This is donethrough cointegration testing. The basis behindcointegration testing is the possibility that a lin-ear combination of two or more non-stationaryseries may be stationary. We say that a non-stationary series is cointegrated if there existssuch a linear combination of series. The lattercombination is known as a cointegrating equa-tion and indicates long run equilibrium betweenthe variables. Cointegration testing checks if agroup of non-stationary series are cointegratedor not.

RESULTS

The methodology followed to test the hy-pothesis is explained in this section. The datafor coffee has been taken from the New YorkBoard of Trade spanning from the year 1994 to2006. The trends and volatility of the data over arunning period of 30 days has been calculated.Subsequently, ADF test and cointegration test

have been performed. In this section we ana-lyze the results and findings.

The data series for these periods passedthe unit root test indicating it is a non-stationaryprocesses. During the period from 1994 to 2001,coffee prices underwent a period of intense vol-

atility showing very high bullish trends due toconsiderable speculative activity. The only inevi-table correction caused prices to plummet onlyto witness this cycle repeat.

A cointegration test between the spot andfutures rates indicate the presence of a coin-tegrating equation between the two. The testprobability is low for the initial 1994 to 2001end period but the significance improves for the

subsequent period.

The findings are thusencouraging and imply ef-ficient market mechanismin place for coffee deriva-tives.

The coffee marketsfollow the commodity cy-cles. As the gestation pe-riod for coffee plantationsis large (5-7 years), any

new investments in coffeeplantations are for long term and short-term ad-justment of supply and demand is absent whichresults in high price volatility.

THE ROAD AHEAD

The current Indian regulations preventplayers from writing either call or put optionsor even from the purchase of call options. Thisis based partly on the downside risk that theseoptions expose you to and also on its effect

on foreign exchange flows. The absence of acommodity derivative market in India impliesa requirement to trade at International mar-kets, chiefly New York and London for meetingIndias hedging needs. These traders and mar-kets, quite unaware of the Indian seasonalitycannot do complete justice to the execution ofthe trade. The translation of prices from the In-dian to the International scenario could resultin some distortions and inhibit efficient trading.



CoverS

tory

IIM ShillongAnurag Joshi

Milton Friedman made a sardonic descriptionof Governments Budget once suggesting four waysin which money can be spent:

First, when you spend your money on yourselfyou do your best to put the money to good use.

Second, when you spend your money on some-body else you try to control costs.

Third, when you spend someone elses moneyon yourself you try to have a good time without

bothering about costs.

Fourth, when you spend someone elses moneyon somebody elseand then you do not care about

either the efficiency of spending or the price.

And thats Government, Touche!

As the economy suffered its biggest recordedhit in USA, the transmission channels establishedduring the period of great moderation, sprung into

action ensuring that no country in the world re-mained unscathed. In India, the Government wasface to face to with a difficult situation. The reactionwas immediate and predictable. As currency inflowsdried out, the Govt. of India and RBI performed thetextbook exercise of lowering interest rates, easingtrade barriers and deficit financing.

Below is a graph showing the ratio of CentresFiscal Deficit to GDP. During the period of great mod-eration the ratio showed a steady decline due to

tax reforms and increasing inflows in investment.However as the Global Financial Crisis surfaced it-self in India, after the fall of Lehman Brothers theGovernment was forced to push in stimulus packageto prevent the Humpty Dumpty of Indian economy

from falling. General elections too somehow man-aged to coincide with the financial crunch raisingthe fiscal deficit further. Deficit financing may inthe short run help the economy curtail the effectsof recession however for a growing economy likeIndias, such an increase in fiscal deficit is non-sustainable.

Slowly as the economy has started pickingup the discussion regarding the exit strategy hasstarted gaining pace. The big question is how thegovernment and RBI should go about with the rollout slowly withdrawing the stimulus packages of-fered earlier. But, before going on to discuss somepossible way out, we need to understand the keyfinancial issues facing the country.

The Age old Impossible Trinity

As the government of India opened up theeconomy for inflows in investment, India has be-come a hot market. With investments pouring in,the rupee value will appreciate. However the ITSector of India which is a major source of employ-ment for millions of Indians suffers because of ru-pee appreciation as most of its services have beenoutsourced to it. Hence the RBI is required to keepa check on the exchange value of Rupee so as tokeep the interests of IT sector in mind. This how-ever increases the rupee supply in the economyleading to a price hike. During the recessionary

period since the capital inflows dried out a hugeamount of money was pumped into the system tokeep the economy from dying.

Now as the Capital inflows start coming in,the excess money supplied at the time of reces-

India

@ Crossroads...Yet again


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sion needs to be sucked out of the system toprevent inflation from rising further. And this isthe big question that the RBI is facing. If it with-draws the stimulus, and capital inflows taketime, then the economy will be hurt in the longrun. However if it does not withdraw the stimu-

lus the rising inflation will continue to tormentthe common man.

The problem obviously is graver thansuggested by Mundell, as the complex Indianeconomy is affected by a multitude of factors.However the question of balancing the TRINITYis something that has a great relevance for anemerging economy fighting for its place in theworld when it emerges from a downturn.

The Mammoth Fiscal Defcit

Government spending grew 3 percentagepoints a year faster than Indias gross domestic

product at current prices, going by compounded

annual growth rates over 59 years. The abso-

lute numbers are truly astonishing: The size of

the economy grew 578 times since 1950 while

the size of the governments spending bill grew

3,020 times. - Niranjan Rajadhyaksha

As already mentioned the Govt. of Indiamade huge spending during the last year to

keep the economy buoyant. The spending hasresulted in a huge fiscal deficit which branchesout into three salient issues:

a. The fiscal stimulus at the time of recessionwas more than required

b. The stimulus was largely responsible for defi-cit in the budget

c. The only way to solve the problem is throughlowering expenditures

In his budget speech delivered on July 6,

2009, Finance Minister Pranab Mukherjee en-dorsed that the fiscal policy did create a bur-den on the economy when he said that fiscalaccommodation in response to the crisis hadresulted in a sharp increase in the fiscal defi-

cit from 2.7 per cent in 2007-08 to 6.2 per centof GDP in 2008-09 and estimated that the to-tal fiscal stimulus (equal to 3.5 per cent of GDPat current market prices) in 2008-09 amountedto Rs. 1,86,000 crore. It is true that 2008-09 didsee a significant increase in expenditures with

non-plan expenditures in particular rising by 23per cent relative to the revised expenditures for2007-08. However, there were two other areasthat were responsible for the major rise in thedeficit. The areas being Government Subsidiesand Expenses incurred after Sixth Pay Commis-sion.

The payment of the new salaries and halfof the arrears during 2008-09 resulted in addi-tional expenditure of about Rs. 21,500 crore, re-

sulted in 18 per cent of the actual increase innon-plan expenditure. The increase in subsidiesresulting from higher minimum support pricesand larger procurement during added anotherRs. 59,500 crore to the non-plan expenditures.

Government debt in the advanced econo-mies is projected to jump from the pre-crisislevel of 78 per cent of GDP in 2007 to 118 percent by 2014 assuming some discretionary tight-ening begins this year. In such a scenario, whatare now seen as cyclical fiscal deficits may, infact, morph into structural fiscal deficits. Wemay then see the return of fiscal dominanceand undermining of the independence of cen-tral banks

Therefore it can be seen that the rise infiscal deficit has not been only because of thestimulus packages rather it is a conjoint effectof the benefit package along with other govern-ment schemes rolled out during the previousyear. It becomes necessary to state this, be-

cause the effect of a roll back on the fiscaldeficit may not be as much as the governmentexpects it to be. Therefore a closer look at theFiscal Policy is needed currently.

The Supply Side Shocks



CoverS

tory

Another important issue is that of the vul-nerability of food prices in India to supply sideshocks. The food prices have sky rocketed thisyear on account of poor rainfall leading to lessercrop yield. As the supply of food grains reducedthe prices shot up. Hence it is being argued that

a mere tightening of monetary policy would beinsufficient to get the food prices down to itsnormal level. There is also a chance that thesupply side inflation might change into a de-mand side one as the demand increases in arecovering economy (with supply shortage).

Weekly Wholesale Price Index Movements (May2009 to August 2009)

It is true that a mild inflation is good forthe economy as inflation reduces the return on

monetary assets relative to real assets. Henceinvestors pull money out of the money mar-ket and invest in real capital projects. Howev-er the level of inflation in India tends to affectthe common man the most, reducing his realpocket money. Simply put, a very high inflationmakes the poor poorer. Few steps taken by thegovernment to cool off inflation are:

The import duty on rice and wheat has beenreduced to zero.

Export of non-basmati rice and wheat hasbeen banned and stock limits have been im-posed on rice to prevent hoarding and blackmarketing.

In order to cool inflationary trends in foodeconomy, the Government has undertaken saleof wheat under Open Market Sale Scheme. Therate of wheat and rice under this scheme is sub-sidized, so that the consumers can be benefited.

Allocations have been made through a num-

ber of channels so as to increase the spread aswell as coverage and thereby augment marketavailability.

Weekly movement of Annual Inflation Rate(May 2009 to August 2009)

India also experienced a deflationary phasein 2009 with the fall in oil and metal prices acrossthe globe and lowering of industrial growth. Itmay be argued here that those were exceptionaltimes requiring drastic steps. However the les-sons learnt from difficult times(which is not yet

over) should not be forgotten. As Indian econo-my totters back into life, the ghost of inflationis here to haunt the dreams of country wishingfor long term growth. The fact that the currentinflation is not a mere effect of monetary stimu-lus and has been affected due to supply sideconstraints which India faces is a lesson to belearnt for all.

There should be steady attempts made atreducing the supply side vulnerability through

implementation of rural irrigation projects,stricter monitoring of hoarding of food grainsand a better stock of food grains.

Lack of Technological Innovation

Be it U.S.A. or Europe each of them hada point in history where a great technologicalpush ushered in a new era of development. ForEurope it was the industrial revolution and forUSA it was the golden period of 1960s and 1970s.The technological innovation provided the forcethat each of them needed to usher in a new eraof growth and development. While countries likeChina, Japan and USA have heavily funded re-search facilities, India currently lacks a researchconducive environment. As long as that doesnot happen, the country will continue to grapplewith imported technology and India will contin-ue to be bothered by external shocks.

As of now the scientific research receivesvery little corporate funding and this has forcedIndia to import technology from foreign coun-

tries. A recent example of this can be seenfrom the 3G fiasco in India. As 3G phases outfrom the American and European markets thetelecom companies explore newer avenues todump the existing technology. India is the saf-


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est playground for such games. Moreover Indiatakes pride in the services sector especially ITservices, but the major chunk of revenues of theservice sector comes from countries in Americaand Europe. The heavy dependence on foreigncustomers for services creates a difficult situa-

tion in times of crisis. The need of a developedmanufacturing and research sector is imminentand steps need to be taken soon as the digitaldivide keeps getting wider and wider.

WHAT MIGHT HAPPEN

...the crisis saw unprecedented expan-sionary fiscal and monetary policies launched

by governments and central banks in coordina-

tion. As countries contemplate exit from these

expansionary policies, the familiar tensions be-

tween monetary and fiscal policies are showing

up again, - Dr. D. Subbarao

The Central Government and theRBI have come to a decision of not in-tervening unnecessarily in the foreignexchange market. A large proportionof dollars bought by the RBI are re-in-vested into US Treasury Bonds, wherethe rate of return is very low (approx.3% - 5%), making the cost of main-taining US Dollar very high. The ex-

cess liquidity flowing in the economyhas to be removed through government bonds,where again, interest has to be paid. So, in real-ity the tax payers money will used to pay thedifference between domestic interest rates andthe rate earned by RBI. It can also be predictedfor sure that there will be a hike in interest rateswith a probable rise of 25 basis points in RepoRates and Reverse Repo Rates in April. Also anincrease in CRR is also probable if the liquiditycontinues to rise. These measures are necessary

to put a check on the level of inflation. Howeverthe clear flavor of the monetary policy can onlybe seen once the Central Government comesout with the Annual Budget.

Also, the restrictions of monetary policywill not be effective unless there is also a rollback of government borrowing. The RBI had hasalready requested the government to indicatea roadmap for fiscal consolidation and definethe broad outline of tax policies and expendi-

ture compression. We also have to keep in mindthat Indias high fiscal deficit is part cyclical andpart structural. Therefore the main task beforethe government is to curb the fiscal deficit fromgrowing further. Now there could be three steps

which the Government could take at this point

Control and minimize Government spending,hoping that the tax collections will increase dueto signs of global economic recovery

Work towards an economic growth hoping thegrowth would ultimately help in lowering the

fiscal deficit Sell Capital Assets to fund revenue spending

Firstly, if the government does decide tolower spending it will only harm the countryin the long run as we are still recovering andlowering spending now, will only impede theprocess of growth. There is huge spending re-quired in many areas like rural development,infrastructure development and energy resourcegeneration and hence curbing on spending at

this stage may not be justified. Also, the na-tions politics wont let the Gov-ernment decrease spending, aspayments are to be made for theincreased salaries and subsidies towin votes.

The second option seemsmore plausible where the govern-ment does place some restrictionon its spending, yet focuses to-wards long term growth. The long

term growth will help in increasingthe income thereby increasing tax collections(Obviously tax reforms too are necessary). Thethird option of selling capital assets, can beavoided for the time being! A mention of the3G fiasco could be made here though. The dealwas supposed to get the government extra rev-enue, yet has been delayed due to numerousissues. The need of the hour is thus transpar-ency in the government mechanism which will

prevent such incidences from recurring. Anotherimportant step which may be taken (yet willnot be taken) is the implementation of a Perfor-mance Based Budgeting method. Countries likeSweden, South Korea and U.K. have already hadlarge scale budgetary procedure reforms. It isnow Indias turn to implement certain changesso as to bring transparency into the system.

The need of the hour is thus to have a longterm growth in perspective and making policydecisions such that Indias dream of 2020 is

not hampered. The real test lies in identifyingour long term goals and setting short term mon-etary policies in alignment with it. As long asthat happens, the FUTURE IS IN INDIA.



Recherche

JNU/IGIDRTwisha Chatterjee &Aditya Jagati

A rendezvous with

the development

structure right at

the grassroots, in

an attempt, to see

through the faade

of all-encompassing

growth. The fable

has been quantifiedwith empirical evi-

dence questioning

the claims of strong

economic growth.

If mere installation of the

source can be interpreted as

synonymous to access and pro-

vision of safe drinking water,

then undoubtedly the govern-

ment has done its job.

This decade has witnessedIndias shift to a high growth,neo-liberal model of develop-ment, the recent financial crisis,global food crisis and not to for-get the spiralling food prices inIndia. Whatever the debate beregarding the origin and propaga-tion of these events, these haveone thing in common: the poor

are the worst affected, trite as itmay sound. The Suresh TendulkarCommittee has recently put forthits estimate of poverty as 37.2%for all India (41.8% for rural and25.7% for urban India).

THE TRUE MANIFESTATION OF

INDIAN GROWTH

Among the many problemsthat plague urban growth in In-

dia, a manifold acceleration inthe slums and squatter settle-ments in the metropolitans hasbeen widespread. Although largescale industrialization, motheredby the extraordinary phenom-enon of Globalization, has beenrampant, it is still doubtful as tohow it leads to a betterment inthe informal sector of the econ-omy, and it should not come tous as a surprise that 93% of theworkforce is still associated inthe informal sector.

. Hence the level of urban-ization and the rate of urbaniza-tion may not always be the resultof pull factors of economic pros-

perity and opportunity in the cit-ies; it is sometimes caused by thepush from the rural areas due tosignificant changes in the modeof production in agriculture in aform that we recognize as dis-tress migration.... in which thereis a steady increase in the propor-tion of the rural population whoare compelled to seek a living

outside agriculture. Most stud-ies recognize the role of migra-tion of the rural poorer sectionsin search of work and their fre-quently joining the lower cadresof the labour market and subse-quent forced living in dilapidatedconditions within cities.

CASE STUDY

Sonia Camp, situated be-

side the Jhilmil Industrial area inthe Shahadra region of East Delhiis one area that can claim of giv-ing employment to hundreds ofresearcher minds who are willingto probe deeper into the mostfashionable issue of today:Poverty.

Our survey revealed thatWorking Class consisted of main-

ly casual hard-earned labourers,Petty shopkeepers or vendors,Factory workers working in thenearby industrial area, and somereported as unemployed. In a sce-nario where people complainedof accentuating prices of basicnecessities, only 27% of house-

Growth Story:Myth orMist??


22/262 NIVESHAK VOLUME 3 ISSUE 2 February 2010

holds had multiple working members, else withan average income of approximately Rs 4500 permonth dwellers can only afford meagre suste-nance at the brink. The chart below depicts thedivision of workforce in varied fields, but thefact remains that all work is manual labour, andcontract based labour, where job security or job

prosperity is bleak.

GOVERNMENT PROVISION: A MYTH?

While the Twelfth Five year Plan says Pro-vide clean drinking water for all by 2009 and en-sure that there are no slop backs, our study ofthe Sonia Camp done in December 2009 revealsa different story.

However, if mere installation of the sourcecan be interpreted as synonymous to access

and provision of safe drinking water, thenundoubtedly the government has done its job.The lives of the people of the camp start muchearlier than the rest of Delhi. With a net avail-ability of approximately 6 taps(totis as the lo-cals call it) with 6 taps in the entire area , witheach household comprising of an average of 6.5members, long queues , relentless wait and thefight for water is inevitable. The constraint ishowever, not limited to this. The water is sup-plied for only two hours in the morning and in

the evening. Moreover, with open drains aroundwith every basic chore, right from bathing todefecating, done at such close proximity to thewater source, potability of water remains ques-tionable. The residents report that they havenot suffered from any major ailment as a resultof the poor water quality. However, behind thisclaim there could be a number of possible rea-sons. Either, the people have become immuneto this kind of environment that owing to their

forced complacency, they feel no aberration intheir lives anymore or it could be as a result ofmere ignorance. With extremely limited finan-cial resources affording a private doctor seemsa distant luxury. Also, with a few Government

Hospitals in the neighboring area that refuse toadmit the patients and cater to the needs ofthese poor, these people have learnt to refuseto believe that they can ever fall sick.

It is conspicuous that none of the house-holds enumerated possessed a toilet within the

household. One can gauge the enormous prob-lems that these slum dwellers live with, espe-cially where hygiene is so highly compromisedwith.. Women in some households reported thatusing open spaces for washing clothes or bath-ing or doing other household chores may notbe cumbersome, as they are destined to do soin poverty but lack of toilets within the house-hold premises causes lot of problems during ill-ness especially during pregnancy. In a situation

where MCD toilet is efficaciously ill maintained,and no heed paid to its renovation or main-tenance, it is tormenting to use such sanitaryconditions. There were even households whoreported that using open spaces was more vi-able and economical--- paying for using a provi-sion which is no more in a state of usage, froma stipulated budget made no sense. It is to benoted that slum dwellers in some of the house-holds were extremely particular about cleanli-ness, and hence preferred using open spaces,

railway tracks rather than using the filthy MCDtoilet.

It came to us as a surprise to see cer-tain households carving out a part of theirliving room( which consisted of the entirehousehold),(about 3*3 in area) as toilets for us-ing at night, especially during winters or duringillness, or for bathing purposes of young girls.The lack of proper boring or drainage is whatis conspicuous. When inquired at a household

which had a child of 5 years and suffered frompolio, the mother reported that the child defae-cates and it is then manually disposed off in themorning.

Distance from the household to the MCDtoilet also determined their usage of it. Proxim-ity played a big role, especially for women andchildren, and specifically during nighteven ifthat entailed using the paid unbearable publictoilet or the open space.

LITERACY SITUATION

To reiterate common knowledge, this ig-norance is attributable to the state of educa-tion in the area. The government expenditure



Recherche

What appears as mere escalat-

ing fgures in the growth pathis actually smeared with the

blood of vagary that the poor

is subjected to!

on education as a percentage of GDP has neverbeen above 4% despite the target of 6% havingbeen set as far back as 1968 by the Kothari Com-mission. When asked as to which class her sonstudies, Kamla Devi replied, maybe fourth orfifth. Ram, her son, studies in class eighth. This

does not mean that Kamla Devi and many likeher does not attach importance to education.According to them there is no point studyingwhen the masterji of the municipality schoolcomes once a month. The boy would rather helpthe family fetch some additional fifty rupees.

Total Male literacy in the sample is 100out of total 608 members in the entire sample.That gives the Proportion of Literate males inthe population across the sample as 0.1644

(100/608). This is accounted with all the existingand current literate members going to school.Total Female literacy in the sample is abysmal,it is 71 out of 608 members in the entire sam-ple. That provides the Proportion of Literate Fe-males in the population notified in the sampleas 0.1167(71/608).

NO. OF CHILDREN AND STATE OF EDUCA-

TION

Same accounting as before ChristopherUdry points out that against the common belief,child labour is not responsible for the low levelof schooling, but it is the other way round. Thisis exactly what the story of Sonia Camp con-firms. It is because of the poor teaching stan-dards that parents attach low opportunity costin students not going to school. Frequency ofhouseholds having 5 children is maximum, inthe entire random sample of 100 enumerated .

Attendance ratio in school is slightlyskewed toward boys which could have variousplausible explanation. Attendance ratio of girlsturned out to be 0.416 and for boys happenedto be 0.5837 in the random sample notified. Thisis evident from the bar diagrams below. The dif-

ference could be attributed to various existingbiases against female literacy, which are deeplyrooted in the theories of woman empowerment,the existing male hegemony and the chauvin-ism that we still need to cope with.

CONCLUDING REMARKS

However, the story of Indias sky-rocketinggrowth masks the vicissitudes that a majorityof population succumbs to. It is time we lookbeyond the artifice of growth and widen ourhorizon for an all-encompassing Development

structure. The fable thus remains incompletewhat appears as mere escalating figures in thegrowth path is actually smeared with the bloodof vagary that the poor is subjected to!


24/264 NIVESHAK VOLUME 3 ISSUE 2 February 2010

FinLounge

F I N - Q1. The CEO of this European company became a national hero and legend in his country.

However, his expansion programme in television and personal computer manufacturing

brought financial problems commensurate with the size of the company in the late 1980s andhe committed suicide. Identify him and the company.

2. What were the two oldest stock exchanges worldwide?

3. What stock has the symbol BOOT?

4. What has been the longest-listed company on the NYSE?

5. In context with securities market in India, the regulator SEBI has recently constituted a

committee to review the role of market infrastructure institutions in the securities market,

which shall review the ownership and governance structure of market infrastructure

institutions in the context of their evolving role. Who among the following will head thiscommittee?

6. In which of the following group the shares of those companies are kept which, dont

comply with the stock exchange listing agreement?

7. Recently Rakesh Mohan , Deputy Governor of Reserve bank of India said that RBI

has been absorbing over Rs 1,00,000 crore (Rs 1 trillion) from banks under the liquidity

adjustment facility (LAF). Which technique is being used for this process?

8. Connect the region shaded in blue to a major happening in the world of global finance

and economics.

9. Name the parliamentarian who raised the matter of insurance fraud by owners of

private insurance companies in 1955. Also name the person, one of wealthiest businessmen

then, who in the resulting investigations was sent to prison for two years. Name them.

10. First credit scoring system in 1958, for American Investments was developed by?

All entries should be mailed at [email protected] by 10th March, 2010 23:59 hours

One lucky winner will receive cash prize of Rs. 500/--


25/26

A N N O U N C E M E N T SARTICLE OF THE MONTH

The article of the month winner for February 2010 isArpan Ghosh

of IIM Shillong

He receives a cash prize of Rs.1000/-

Nivesh WinnerThe Nivesh Winner for the month January 2010 is

Amit Arora

of IIM Shillong

He receives a cash prize of Rs.1000/-CONGRATULATIONS!!

ALL ARE INVITEDTeam Niveshak invites article from B Schools all across India. We are lookingfor original articles related to finance & economics. Students can also contrib-ute puzzles and jokes related to finance & economics. References should becited wherever necessary. The best article will be featured as the Article of theMonth. and would be awarded cash prize of Rs.1000/-

Instructions Please submit your article with the file name and the email subject as __ by 10 March 2010. Article must be sent in Microsoft Word Document (doc/docx), Font: Times New

Roman, Font Size: 12, Line spacing: 1.5 Please ensure that the entire document has 1500-2000 words The cover page of the article should only contain the Title of the Article, the

Authors Name and the Institutes Name Mention your email id/ blog if you want the readers to contact you for furtherdiscussion Also, if certain entries which could not make the cut to the Niveshak will get

figured on our Blog in the Specials section

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