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    THE INVESTOR VOLUME 6 ISSUE 5 MAY 2013

    OPPORTUNITY COST: a NOT SO

    SIMPLE COST, pG. 17

    lETS BANK ON WOMEN,

    PG. 22

    A Road less taken...

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    2/28Disclaimer: 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 VI

    ISSUE V

    MAY 2013

    Faculty Mentor

    Prof. P. Saravanan

    Editorial Team

    Anchal Khaneja

    Anushri Bansal

    Gourav Sachdeva

    Himanshu Arora

    Ishaan Mohan

    Kaushal Kumar Ghai

    Kritika Nema

    Neha Misra

    Nirmit Mohan

    All images, design and artwork

    are copyright of

    IIM Shillong Finance Club

    Finance Club

    Indian Institute of Management

    Shillong

    www.iims-niveshak.com

    THE TEAM

    Dear Niveshaks,

    The gres for GDP 2012-2013 were out recently and the perforance ofour nation, to put it mildly, was below the mark. We gew by 5% in the

    last year which is our slowest pace in the last decade. Thats a huge wor

    for Manmohan Singh. But our cover stor may feel like a stoke of cool

    breeze to him. We claim that this number is as meaningless as it can get!

    There are far more imporant things to look at but we wont even have

    a glimpse at them since neither that is the latest fad in interational

    circles nor is the panic sitation here yet. However, an increasing num-

    ber of leaders social, political, business and environment leaders are

    seeing Natral Capital Accounting as having tly arived. Niveshak

    brings to you the new age, yet-to-take-its-proper-shape, in-line-with-IIM

    Shillongs core theme of sustainabilit Natral Capital Accounting!!! We

    suggest that we value the air, water, soil, ecosystem and all that we essen-

    tially use for ee in our companies in our nancial statements and pay

    the te cost of our actions.

    Niveshak also brings some more good reads for you in this issue the

    highlight is the gest column by one of our Professors, Dr. Sanjeeb Kako-

    t, as a supplement to our cover stor. Let me not forget to mention that

    he was the sole educationist om India to be invited to Rio+20 summit

    last year and hence, has enorous perspectives to oer on the subject.

    So, sit back and think as he takes you through the inticacies of Natral

    Capital Accounting in his own interesting way.

    Then there is the stor of miraculous gowth of Japan aer the Second

    World War. What was the miracle involved is something you will dis-

    cover only aer you read the issues Finistor but one thing is cerain

    that the path charered by the nation aer facing the nuclear disaster

    is a continuing inspiration for many other nations. FinGyaan of the is-

    sue talks of the much deliberated Oppornit cost but in a reesh-

    ingly new way! And you will agee, thats something Niveshak is known

    to bring to ever topic!

    To end this brief note, its imporant that we thank you, our readers,

    for your constant suppor and appreciation. Thank you! It is your end-

    less encouragement and enthusiasm that keeps us going. We hope your

    interships went on well and you did leave geat impressions on your

    employers. Kindly keep pouring in your suggestions and feedback to

    [email protected] and as always,

    Stay invested.

    Team Niveshak

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    C O N T E N T S

    Niveshak Times

    04The Month That Was

    GUEST COLUMN08 Perspectives on NaturalCapital Accounting

    Cover Story

    11Natural Capital Accounting:A Road Less Taken

    FinGyaan17 Opportunity Cost: A Not

    So Simple Cost

    Finistory19 Japans Economic MiraclePost World War II

    Finsight22 Lets Bank on Women

    CLASSROOM

    25 Know Your Customer

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    4/28JUNE 2013

    Rupee sinking below 56. No need to panic

    said Raghuram Rajan

    The Rupee breached the key psychological level of56 to fall as low as 56.01 per dollar on 23rd May,

    a level last seen on September 6, 2012. Though itclosed above 56, the downfall was a continuousfifth day fall to mark its longest losing streak in

    over three months. Forex dealers said the Americancurrency remained in demand even as the Reserve

    Bank of India imposed restrictions of forwardcontracts by banks and arbitrage trading. It seemscapital outflow of foreign funds from falling marketsremained a major driver behind the rupees fall asdollar surges because investors are finding the

    American currency a safer bet amid concerns thatGreece might exit the euro-zone. We are not theworst, but we are also not the best either in termsof depreciation. I wont say it is out of sync with

    what is happening in other countries. There is nopanic-based need for new measures (on rupee).

    I dont see any reason for apprehension, ChiefEconomic Adviser in the Finance Ministry RaghuramRajan told.

    RBIs upcoming ination indexed bonds

    look benecial for investors

    Inflation erodes the purchasing power of money.Most debt products such as fixed deposits or regularbonds provide returns that

    are not protectedagainst inflation.If a bank FDpays ani n t e r e s t

    rate of 9%per annuma n di n f l a t i o na v e r a g e s

    9.5% that

    year, theinvestor losesmoney in real terms.To cushion investorssavings against rising prices, the RBI will soon

    issue inflation-indexed bonds (IIBs). IIB adjusts its

    interest payments depending on the inflation rate.As the inflation rate changes every year, so doesthe cash flow from the IIB. The other advantageof the IIB is that it not only adjusts the interestpayments to inflation but also the principal repaid

    to the investor at the end of the bonds tenure. In

    the final year, the higher of the original principalor the inflation-adjusted principal is paid to thebond holder. These financial instruments are meantto encourage savings and wean investors awayfrom gold. Whether the central bank succeeds in

    reducing the attraction of the yellow metal remainsto be seen, but the launch of these bonds does giveIndian investors a low-risk option for protectingtheir savings from inflation.

    J P Morgan shareholders support Dimons

    dual roles of Chairman and CEO

    Jamie Dimon will keep his titles of chairman and CEOof JPMorgan Chase & Co. after shareholders voted

    down a proposal to split the companys top twojobs. Despite a year that severely tarnished Dimonand the firms reputation as the best risk managersin theb a n k i n g

    indus t ry ,the voteto splitthe toptwo jobs

    r e c e i v e donly 32.2percent ofthe total votes. Earlier to this, Dimon had suggestedthat he may eventually leave the bank if he lostthe vote. The nations largest banking company,

    also saw its entire board of 11 directors re-elected.Among big-bank CEOs, Dimon ranks first for stockreturns and has been praised for leading the bankthrough the financial crisis with no quarterly lossesand a strong balance sheet. If Dimon had lost the

    vote and left the bank, the banks shares couldhave fallen as much as 10 percent and erase about$20 billion in market value, according to Mike Mayo,

    The Niveshak Times

    www.iims-niveshak.com

    IIM Shillong

    Team NIVESHAK

    NIVESHAK4

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    a bank analyst with brokerage CLSA.RBI, Sebi to get more teeth

    An inter-ministerial group (IMG), constituted in the

    beginning of May to ensure strict enforcement ofrules governing firms operating collective investmentschemes, non-banking finance companies and multi-level marketing firms and to suggest regulatorychanges in this regard, is set to recommend giving

    more teeth to Sebi and RBI to regulate chit fundfrauds and ponzi schemes. Sebi is expected to getthe power to attach immovable properties, searchand seize assets and seek information from anyentity in connection with its investigations. Therelevant Acts would be amended for this purpose.

    Though collective investment schemes fall underSebis jurisdiction, investments made in chit fundsare currently regulated by the Chit Fund Act, 1982,which has to be enforced by the respective stategovernments. To plug this loophole, Sebi had sought

    direct powers so that effective action can be takenif the concerned entity has either disappeared, or

    raised money in violation of securities laws, orhas fraudulently diverted public money. Such anoverhaul of securities laws was first proposed by

    Sebi in June 2009.

    CAD to climb again after improving in

    previous quarter : Nomura

    Indias current account deficit is expected to showsome improvement in the January-March period at4-4.5 per cent of GDP, but is likely to worsen againin the current quarter due to sluggish exports, highgold demand and seasonal rise in imports, Nomura

    has said. After hitting a record high of 6.7 per centof GDP in Q4 2012, in the first quarter of this yearCAD is likely to narrow to 4-4.5 per cent of the GDP,owing to some improvement in trade deficit. CADrepresents the difference between inflows andoutflows of foreign currency. The Japanese brokerage

    firm said, CAD is likely to worsen in the April-Junequarter as the countrys trade deficit has worsenedagain to USD 17.8 billion in April and we expect it todeteriorate further to USD 20.8 billion in May.

    Yahoo! buys Tumblr and PlayerScaleYahoo! was on its shopping spree this month as it

    acquired two companies Tumbr at $1.1 billion on20th May and PlayerScale at undisclosed price on24th May. While the purchase of hip blogging service,

    Tumblr, wasseen as part

    of a move towoo a youngeronline audience

    by Yahoo!,

    acquis it ionof a startupthat powersg a m e s

    played on smartphones, tablets, consolesor personal computers came as a surprise to many.Tumblr claims to have 300 million monthly unique

    visitors and 120,000 sign-ups every day, with about900 posts a second. And PlayerScale is a 4 year oldcompany that powers games played by over 150million people worldwide and adding over 400,000new users every day. Since former Google executive

    Marissa Mayer became chief at Yahoo! in July oflast year, the company has racked up a series ofacquisitions including startups Alike, Stamped, Snip.it and a Summly application built by a British teen.

    The Niveshak Times

    www.iims-niveshak.com 5NIVESHAK

    TheMonth

    ThatWas

    FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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    MARKET CAP (IN RS. CR)BSE Mkt. Cap 6,801,181

    Index Full Mkt. Cap 3,283,167

    Index Free Float Mkt. Cap 1,719,989

    CURRENCY RATESINR / 1 USD 55.74

    INR / 1 Euro 72.03

    INR / 100 Jap. YEN 54.65

    INR / 1 Pound Sterling 84.17

    POLICY RATESBank Rate 8.25%

    Repo rate 7.25%

    Reverse Repo rate 6.25%

    Market Snapshot

    www.iims-niveshak.com

    RESERVE RATIOSCRR 4.00%

    SLR 23%

    LENDING / DEPOSIT RATESBase rate 9.70%-10.25%

    Deposit rate 7.50% - 9.00%

    Source: www.bseindia.comwww.nseindia.com

    Source: www.bseindia.com

    Source: www.bseindia.com27th April to 28th May 2013

    Data as on 28th May 2013

    MarketSnapshot

    CURRENCY MOVEMENTS

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    MarketSnapshot

    BSEIndex Open Close % changeSensex 19286.72 20160.82 4.53%

    MIDCAP 6275.12 6498.66 3.56%

    Smallcap 6023.86 6068.62 0.74%

    AUTO 10848.28 11076.54 2.10%

    BANKEX 14343.35 14799.81 3.18%

    CD 7288.34 7744.4 6.26%

    CG 9756.89 9679.51 -0.79%

    FMCG 6116.45 6757.8 10.49%

    Healthcare 8624.83 8805.66 2.10%

    IT 5614.92 6061.33 7.95%

    METAL 8636.85 8864.14 2.63%

    OIL&GAS 8691.77 8950.96 2.98%

    POWER 1732.5 1790.24 3.33%

    PSU 6837.6 6814.47 -0.34%

    REALTY 1892.92 1832.18 -3.21%

    TECK 3413.32 3638.75 6.60%

    www.iims-niveshak.com

    Market Snapshot

    % CHANGE

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    The term Natural Capital is gaining wide currency,

    especially after the UN Earth summit at Rio in themonth of June last year. As a matter of fact, Riosaw concerted efforts to incorporate the conceptof Natural Capital Accounting into mainstreamaccounting practices of business organizations.The primary argument for this goes that theEarths natural resources, be it soil, air, wateror flora and fauna, combine to create what weterm as the ecosystem. It is this complicatedecosystem that gives rise to life and sustainsit. Human beings have succeeded in using

    a variety of goods and services from this ecosystem to support life and promote civilization.In the process, the goods and services elicitedfrom nature has been transformed into tradableitems. The accounting system developed to trackthe flow of goods and services normally takesinto account the tradable goods and servicesproduced from nature but interestingly theaccounting practices do not take into accountthe basic Natural Capital!The accounting systems that are currently used

    incorporate the financial capital account ofbusinesses while also attempting to include theaspects of social accounting. What is conspicuousis the absence of any system of natural capital

    accounting. This absence is amazing when one

    considers the fact that the fundamental well-being of man and the very survival of modernday civilization are dependent on natural capitalmanagement, and yet we have no accountingsystem for it! It goes without saying that the useof any capital, especially natural capital, withoutan accounting system is sheer madness. It isimperative that we account for the use of NaturalCapital and debit the true cost of economicgrowth and thereby take the first step towards asustainable future.

    The study of natural capital accounting must startfrom the basic understanding that the ecologicalbalance of the earth is extremely fragile and ismaintained through the intricate symbiosis ofdifferent life forms. For the natural system tosustain itself, the earth would require a minimumlevel of natural resources at all times. Whileusing natural resources, one has to rememberthe fable of killing the goose that laid the goldenegg. Instead of being happy with a golden egg aday laid by the goose, the greedy owner decided

    to kill the goose and take away all the eggs insideit, only to discover to his utter dismay that therewere no more eggs inside and the goose wasalso dead by then! Maintaining a basic minimum

    8

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    IIM ShIllong

    Professor Sanjeeb Kakoty

    Perspectives on Natural Capital

    AccountingProfessor Sanjeeb Kakoty

    Prof. Sanjeeb Kakoty did his MA in history from NEHU

    and went on to do his PhD by adopting technology

    and social formation to understand and explain

    historical change. Currently a faculty memeber at IIM

    Shillong, he has been a sole educationist from India tobe invited to Rio+20 summit last year and hence, has

    enormous perspectives to offer on the subject. So, sit

    back and think as he takes you through the intricacies

    of Natural Capital Accounting in his own interesting

    way

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    level is imperative to ensure regeneration andalso allow the bare minimum required for alllife forms to survive and also thrive. Unless wemonitor effectively the use pattern of our naturalresources within the above frame work, it will leadto degradation and ultimately the exterminationof all life form. Any study of Natural Capital

    reveals that there are two types of resources,renewable and non renewable. The large scaleand unrestricted use of non renewable resourceshas already pushed our Natural Account BalanceSheet into the red and the mindless use hasput a severe strain on the renewable naturalresources be it in the form of pollution, loss ofhabitat andbiodiversityl e a d i n gto climate

    change.The naturala c c o u n tframeworks,at present,do not eventry to enterinto thelarger sustainability debate which takes intoaccount all life forms. Instead, it only talks aboutensuring that the national account frameworks

    should incorporate into its frame work the risksof incurring massive costs to future economicproductivity by not taking into account thenatural capital stocks available today! In thiscontext, the term capital is used to describe astock or resource from which revenue or yield canbe extracted. Since the concept of human well-being is inextricably linked to the combinationof different types of capital, such as socialcapital, human capital and economic capital; allof which are based on natural capital. In this

    regard, it may be pertinent to acknowledgethat there are four basic categories of naturalcapital viz. air, water which includes fresh,groundwater and marine, land, and habitatsincluding the ecosystems, flora and fauna. Overthe millennia, it has become apparent thatthat the degradation of ecosystems often leadsto irreversible changes, leading to extinctionof species and disruption of natural cyclesleading to calamities and disease. Under suchcircumstances, it becomes impossible to regain

    or restore natural capital. In the event of thequantitative depletion of natural capital assets orthe qualitative degradation, it adversely impactsthe flow of beneficial services to the people. One

    may cite the case of diminished catches fromoverexploited fish stocks or decreased cropyields from degraded soils. Abuse and misuseof natural systems result in impaired productionof biomass and oxygen, and the disruption ofhydrological and atmospheric cycles which inturn adversely affects the natural capital.

    While it may be easy to put a monetary value onproducts arising out of natural capital that aretraded, be it agricultural commodities, mineralsor other natural resources, there are difficultiesin assigning economic values for the benefitsthat natural capital provides if they do not havea precise traded market value. In fact, the traded

    value oftenexternalizesmany hiddencosts, such

    as impactson airquality, waterresources andbiodiversity.It is thebiodiversitythat gives rise

    to the varied ecosystems that prevail in differentparts of the world. Ecosystems are composed of asymbiosis of the physical, biological and chemical

    components such as soils, water, organismsand nutrients interacting with each other andgiving rise to a unique ecology. It incorporatessub systems such as the nutrient cycle and thehydrological systems. These are fundamental toan ecosystem and ensure that it maintains itsintegrity. These interactions between structuresand processes, be it physical as in infiltration ofwater or chemical as in oxidation or biologicalas in photosynthesis, all testify to the basicpremise of biodiversity. The different subsets of

    genes, species variety and ecosystems delicatelycombine to present itself to us as the naturalresource systems! In other words, we have tounderstand that the natural resource system isdependent upon the health of the ecosystem.There have been attempts, with varying results,to incorporate eco system valuation with naturalcapital accounting. For instance, the MillenniumEcosystem Assessment (MA) presented ecoservices into four categories: food and waterwere classified as provisioning services, flood

    and disease control under regulatory services,spiritual and recreational activities were groupedunder cultural services and under the categoryof supporting services were placed activities

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    such as soil formation, photosynthesis andnutrient cycling that maintain the conditionsfor life on Earth. Arguably, ecological functionsthat contribute to an ecosystem at large may beclassed as a service in its own right.The Globe International Commission on Land

    Use Change and Ecosystems has drafted aNatural Capital Action Plan on the theme ofParliamentarians and Biodiversity. This actionplan has recommended that a ministerialposition be created within the ambit of eitherthe finance ministry or the treasury departmentfor managing natural capital. They should alsobe vested with the responsibility to develop acomprehensive set of natural capital accounts.In addition, there should be a report highlightingthe effects of integrating the true value of

    ecosystem services into policy decisions.To create better synergy within all arms of thegovernment, it was felt that it is advisableto create an inter-departmental MinisterialCommittees on Natural Capital which would beadvised by an expert technical advisory group.Each government departments would alsoindividually draw up natural capital inventoriesof natural capital assets which would besynchronized with the larger inventory.In turn, this would be linked to the development

    of national-scale accounting and performanceassessment for natural capital stocks. It wouldmeasure the status and flow of resources andlink itself to the conventional national incomeaccounting. In other words, the accountingframework would incorporate both the stock andflow of natural capital, and more importantlylend itself to an analysis of the interactionsbetween the economy and the environment.While the management of such natural resourcessuch as forests would be much simpler, such as

    interlinking the rate of timber supplies to therate at which the overall stock of the forest ismaintained and regenerated to avoid damagingthe ecology, accessing the stock of naturalcapital and arriving at figures to ensure futureflows of benefits would be a much contestedand more complicated process.Attempts are being made to arrive at acceptablemodalities for natural capital accountingsystems. One such is the Ecosystem ServiceValuation Framework. It suggests that instead

    of attempting to arrive at a complete valuationof every aspect of the environment, it may bebetter to understand the complex nature ofinteractions between it and humans. In the

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    process, it would also try to clarify the natureof resources stock, flow, use and regeneration.Similar valuation concepts and yardsticks for

    accounting have also emerged from numerousorganizations. Agencies such as the US NationalResearch Council, the Natural Capital Project,the US Environmental Protection AgencyScience Advisory Board, the French Council forStrategic Analysis, The Economics of Ecosystemsand Biodiversity (TEEB) and the UK National

    Ecosystem Assessment, have all attempted tocontribute to the debate.However, it has been difficult to arrive at aconsensus on the scale and relative importanceof ecosystem services to human beings bothat the local and global level. This lack of auniversally accepted modality for measurementand accounting is a difficult hurdle. Toovercome some of these problems the EuropeanEnvironment Agency has suggested a CommonInternational Classification for Ecosystem

    Services (CICES). This would be consistentwith existing yardsticks such as the MillenniumEcosystem Assessment (MA), and compatiblewith the integrated environmental and economicaccounting methods being considered in theUN System of Environmental and EconomicAccounts. The importance of the CICES isheightened by the lack of any classification ofecosystem services for accounting purposes.The current frameworks primarily addressindividual policy decisions, rather than act as

    a broad system to be used for economic andenvironmental accounting.Notably, majority of the environmentalassets are not traded in markets. In addition,

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    those that are, such as, minerals, fish or timberdo not have a system to incorporate depletionrealistically. Accounting methods for these itemsare often done on the basis of the extractioncosts. The price of traded natural resources has

    no correlation to actual environmental costs.Many developed countries have tried to addressthis lacuna by trying to include such factors aspollution damage and control costs and materialand energy flows. They however stop short ofaccounting for the depletion and degradationof natural resource systems. To overcome someof these issues, the 2012 UN SEEA revision wassought to be split into two volumes. The firstwas to be a set of standardized methods forenvironmental accounting. This in turn would

    sought to be integrated with the System NationalAccounts (SNA), including the existing fourcategories, with the second volume includingsectors such as ecosystem accounting, that areyet to find incorporation till now.There is no doubt that there are huge challengesto the proper development of natural capitalaccounting procedures. The first colossal stepwould be the systematic description of both thecosts and benefits associated with ecosystemservice. To ensure sustained supply from the

    ecosystem the issue of reinvestment in thestocks of natural capital has to be given primacy.This would include necessary investmentsto conserve biodiversity. The concept of

    reinvestment in natural capital has to includenot only preservation and protection, but alsorestoration and even limiting or desisting fromthe use of natural capital assets to ensuresufficient time for natural regeneration and

    renewal. However, the lack of knowledge andconcurrence about the level of natural capitalrequired to maintain ecosystem capacity whilefocusing entirely on resource requirement todrive economic growth is the major impedimentto the development of the needed accountingsystems. It goes without saying that if mankindwere to stay alive in the business of survival,all of this has to figure in the book of accountsand we need to determine the profit and lossaccount at the end of each quarter!

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    company after company represented by finance,

    development, or environment ministers, CEOs,

    CFOs or CROs now talk about how natural capital

    accounting fit their priorities and how it can be a

    tool to address some of their key policy challenges.

    Existing Scenario

    In the present day scenario, GDP is a widely

    accepted measure of a countrys growth and

    development. But it accounts for only a part of theactual performance, i.e. the income, while ignoring

    the assets that are crucial in that income formation.

    When a country over exploits its resources, it

    does generate income but simultaneously causes

    depletion of wealth. And thus, adopting GDP as the

    sole measure of economic performance can project

    a wrong picture, showing growth in the short run,

    and hamper the overall growth in the long run. It has

    We are all rather too familiar with the termsustainability. But as finance enthusiasts that weall are, do we ever think of it while projecting thatbalance sheet for the next so many decades? Or dowe ever put a star mark over that projected profitfor the eighth year from now? Well, we should. Andthat is what we deal with in this story on NaturalCapital Accounting. That projected profit of yoursfor the eighth (or probably just the second) year

    from now will not actually exist if there be no waterleft to be used by your firm or in the extreme case,we run out of the air that we breathe!

    As the diplomats from across the world havesupported the idea of Natural Capital Accountingat Rio+20, a new era began. A concept, which waslargely considered only academic, is now makingits inroads into the main stream measurement

    of a countrys growth. Country after country and

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    Anchal Khaneja & Gourav Sachdeva

    Fig 1: Natural Capital, a part of wealth and overall well being hierarchy

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    to better decision making for development. Figure

    2 shows how Natural Capital forms a considerable

    part (36 per cent) of the total wealth of a sample in

    a low-income country.

    Increasingly, it seems, nature is actually money. The

    concept of natural capital has existed for more than

    30 years. But the shift towards including the conceptinto our main stream accounting has been really

    slow. The contemporary moment of global crisis in

    both ecological and economic spheres marked the

    moment wherein Nature is now being refashioned

    as Natural Capital. This marks a material shift,

    one which allows the businesses to understand the

    effects of expansion on the environment and its

    sustainability.

    Natural Capital accounting is even more important

    now as we seek to measure the success of Millennium

    Development Goals and Sustainable DevelopmentGoals in the post-2015 debate. An inclusive growth

    can only be achieved in the context of sustainable

    development. And this requires wealth accounting

    and valuation of the ecosystem. How else can we

    know that achievement of goals will build prosperity

    sustainably for todays generation and tomorrows?

    How to Get There

    Natural Capital Accounting can lead to better

    decision making for inclusive growth. It can provide

    a detailed framework for improved managementof an economy by assessing the value of various

    resources. Its not only a means to maximize growth

    but also a tool to assess the benefits and costs

    of ecosystem changes. That is all well but the key

    question that remains is how do we include natural

    capital into our books?

    The development of national-scale accounting and

    performance assessment for natural capital stocks

    and flows needs to be consistent with conventional

    national income accounting, the principles of the

    underlying ecology and measured consistently over

    time. The stock and flow of natural capital should

    be comprehensively described by the proposed

    accounting framework and the interactions

    between the economy and the environment should

    be accounted for and analyzed. With some forms of

    natural capital, such as forests, the flow of benefits

    (timber) needs to be exploited at a rate which the

    overall stock (the forest) is maintained over time

    to avoid damaging the ecological infrastructure

    that supports it. The present value of a stock ofnatural capital incorporates a measure of the future

    flows of benefits that it can generate. The changes

    in the ecosystems quality and/or quantity can be

    been rightly pointed out by Nobel laureate Joseph

    Stieglitz, a private company is judged by both its

    income statement and balance sheet, but most

    countries only compile an income statement (GDP)

    and know very little about the national balance

    sheet. Wealth accounting, including natural capital

    accounting, is needed to assess whether growth is

    sustainable or not.

    Mr. Jean-Marc Hut, CFO of the giant Unilever also

    said very accurately, The current financial reporting

    model only tells half the story about a businesss true

    performance and potential. The numbers say little

    of its reliance and impact on natural capital, factors

    that will increasingly influence competitiveness in a

    resource-scarce world. However, many corporations

    believe that businesses solely rely on financials and

    are driven by their bottom lines. Still, even those

    concerned only about the bottom lines - and notthe fate of nature - must now begin to realize that

    the sustainability of business itself depends on the

    long-term availability of natural capital.

    What is Natural Capital?

    Natural Capital includes all the resources such

    as minerals and energy, agricultural land, timber,

    fisheries and water. It includes in its purview the

    ecosystems which are otherwise invisible to people

    such as air and water filtration, flood protection,

    carbon storage, pollination for crops, and habitatfor fisheries and wildlife etc.

    Natural Capital is an asset of great importance and

    constitutes a giant share of a countrys wealth. And

    more so, for low-income countries where the mere

    survival of communities is largely dependent on

    healthy ecosystems. Thus, incorporating this critical

    asset into our national accounts can definitely lead

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    Fig 2: Composition of Natural Capital

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    detailed by proposed accounts either in physical

    units based on different indicators of ecosystem

    functioning, or on changes in the monetary value

    of benefits flowing from an ecosystem. The stock

    of an ecosystem will change over time depending

    on its degradation or restoration due to varied

    human uses, and the quality of the stock ofecosystems may change with the level of pressures

    that impact on ecological processes. Broadly

    speaking, accounting frameworks require at least

    three things: the definition and measurement of

    quantities; the aggregation or adding-up of those

    quantities; and, weights for the individual elements

    in the aggregation index.

    Institutional Framework

    A major step en route to Natural Capital Accounting

    is the adoption of the concept by the UN StatisticalCommission of the System for Environmental

    and Economic Accounts (SEEA). The SEEA allows

    the countries to use an internationally agreed

    method, on par with the current System of National

    Accounts, to account for material natural resources

    like minerals, timber, and fisheries. There is now a

    wide consensus on the need to put the concept of

    natural capital accounting into action. This has led

    to an increased momentum with the finance and

    environmental ministries of various nations who

    now want to account for natural capital in theirnational incomes. Countries are now prioritizing

    their natural capital accounts. Say, if a countrys

    current concern is the fast depleting coal reserves, it

    begins by compiling energy accounts while keeping

    the other accounts on hold. Many countries such

    as Botswana, Spain and Australia are developing

    material resources accounts.

    Following 3 approaches have seen considerable

    support from various forums as preferred over the

    others for valuing environmental issues:

    Environmental Valuation - The environmental

    valuation approaches attempts to quantify in

    monetary terms the changes in human welfare

    which result from a companys environmental

    impacts. It employs a wide range of techniques to

    estimate changes in human welfare, sometimes

    eliciting estimates directly from affected parties

    (for example, by asking how much they would be

    willing to pay to achieve a particular environmental

    outcome), or indirectly, by using estimated

    willingness to pay or accept compensation forchanges known to be caused by environmental

    factors (for example, particular health outcomes)

    Market prices: Market transactions are associated

    with the management of many environmental

    impacts and can be used to measure the same.

    For example, the cost of disposing of waste,

    charges paid for water abstraction and use, or

    the traded price of carbon (e.g. in the European

    Union Emissions Trading Scheme). However, these

    prices reflect the supply and demand conditionsin imperfect markets and are not generally a good

    approximation of the costs to society of the impacts

    associated

    Abatement costs: The cost of reducing emissions

    or impacts, for example through adopting different

    manufacturing practices, is termed the abatement

    cost. However, the cost of abatement varies across

    different technologies, each offering a given

    potential for emission reductions at a different cost

    There are, however, some instances where an itemor issue might be easily measurable in financial

    terms and therefore included in the quantitative

    elements of the accounts. Some examples are given

    here:

    Significant and sustained drops in share price

    may occur as a result of the refusal of planning

    permission motivated by environmental concerns.

    Canadian gold mining company, Infinito Gold,

    lost over 50% of its share value as a result of the

    withdrawal of a mining concession in Costa Rica

    due to concerns about the potential impacts onagriculture, endangered species and forests (Figure

    3)

    Clean-up costs from the 2010 Gulf of Mexico

    oil spill, and associated compensation claims for

    ecological damage, affected both BPs balance

    sheet and its profit and loss. In the companys 2011

    annual report, a $3.5 billion provision related to

    Fig 3: Innito Gold lost more than half its value when the Costa

    Rican court annulled a gold mine concession

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    clean-up costs, and a $7.8 billion provision related

    to litigation and claims associated with the spill.

    Newmont mining company in Peru experienced

    significant delays as a result of concerns regarding

    the impact of the mine on water availability.

    Overcoming these concerns has required a $150

    million investment from partner, Minera Yanacocha,to build water reservoirs to compensate for the

    mines impact on local water supplies.

    Challenges to Developing Accounting

    Procedures

    In order to integrate the concept of natural capital

    accounting into the existing accounting procedures,

    it is important to provide for both the costs and

    benefits associated with the natural capital. The

    investment in the management of natural capital

    signifies the costs of maintaining the ecosystem.For example, management measures to conserve

    biodiversity at levels sufficient to maintain the

    flow of an ecosystem service is a cost arising from

    provision of benefits from ecosystems. But there

    are no concrete procedures to measure the same.

    Also the reinvestment can take different forms such

    as protection and restoration of the natural assets

    to ensure their usability.

    Some of the specific challenges to developing

    an overwhelmingly acceptable and practical

    methodology include:

    Untangling the value of ecosystem service and

    the benefit that personifies the intrinsic value. For

    example, the water quality and drinking water

    The low incremental economic value of individual

    environmental impacts versus the long-term

    cumulative environmental cost of such impacts.

    For example, although a small area of habitat may

    have a low current economic value, the cumulative

    impacts of the losses of lots of small areas of habitat

    over an extended period will have large impact onthe ecosystem services supported by that habitat

    in a given area

    The multi-dimensional effect of change in natural

    capital stock on service outputs. For example, halving

    the area under forest just reduces the provisioning

    service of wood production by half but it leads to

    a much greater loss of host of other services such

    as carbon sequestration and recreational services.

    Many of the world renowned companies have tried,

    in their own capacities small and big, to accountfor natural capital they utilize. But the success

    stories are limited in number. One of the most

    impressive among them is what PUMA did in 2010. It

    actually published an environmental profit and loss

    account for a full calendar year. As Pumas mission

    statement says, it aims to be the worlds most

    desirable and sustainable Sportlifestyle Company.

    In the opening foreword of the e-P&L statement,

    its CSO (Chief Sustainability Officer) Jean Paul Sartre

    beautifully said, Once we know and are aware, we

    are responsible for our action and our inaction. We

    can do something about it or ignore it. Either way,

    we are still responsible. An e-P&L statement wasdefined as a means of placing a monetary value on

    the environmental impacts along the entire supply

    chain of a given business and in it, a profit was

    any activity that benefits the environment while

    a loss was any activity that adversely impacts the

    environment.

    Puma wanted to know how much it would need to

    pay for the services nature provides so that it can

    produce, market and distribute all its products

    footwear, apparel and accessories made of leather,

    cotton, rubber or plastic for the long run. It also

    wanted to know how much compensation it would

    have to provide if nature was asking to be paid

    for the impact done through its manufacturing

    processes and operations. Puma focused first on

    its greenhouse gas emissions and water usage

    and later added land use, air pollutants and waste

    throughout its operations and supply chain. The total

    results revealed, that if Puma treated our planet as

    it treats any other service provider, it would have to

    pay EUR 8 million to nature for services rendered toits core operations such as its offices, warehouses

    and stores in 2010, alone. An additional EUR 137

    million would be owed to nature from Pumas

    CoverStory

    Fig 4: PUMA E P&L results by environmental indicator

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    supply chain ofexternal partners

    that it shared with

    numerous other

    companies, and

    where it had less

    influence. Figure

    4 reveals the

    distribution of this

    amount (EUR 45

    million) as shared byenvironmental indicators.

    As the first company to attempt to transparently

    lay out its environmental footprint from cradle-to-

    gate, Puma obviously caused some waves in the

    corporate world. Many companies followed the

    suit with some being successful and some not so

    successful. Companies like Coca-Cola are working

    one-on-one with organizations such as The Nature

    Conservancy (TNC) and the World Wildlife Fund to

    assign a monetary value to natural resources, such

    as clean water, and the services they provide andthen use these calculations in making business

    decisions. Coca-Cola is also working with the World

    Wildlife Fund to set up water funds that collect fees

    from local water users such as Coca-Cola, distilleries,and paper processing mills. Other companies doing

    work on natural capital include Disney, Miller-Coors

    and Xerox. Disney has committed to fund 6,000

    acres of reforestation projects by 2015, not only to

    lower the companys net carbon emissions, but also

    to protect watersheds and habitats that wildlife and

    communities depend on. These goals are rooted

    in the recognition that a healthy environment

    is essential to Disneys long term success, the

    company has said. Miller-Coors is working toimprove business practices to protect freshwater.

    The project can serve as a model for other beer

    producers. SABMiller, MillerCoors parent company,

    is also partnering with TNC to start water funds

    in Colombia, Ecuador, Peru, and Panama. Xerox

    is working with TNC to establish a methodology

    for quantifying carbon emission reductions from

    improved forest management that can be used by

    other companies in the paper industry. The tools

    will lead to a more sustainable paper supply chain

    and also support local communities, the companysays.

    Fig

    5: Natural Capital & Financial Statements

    1. In order to demonstrate how natural capital may affect or be included within financialaccounts, the following set of financial statements has been prepared and annotated.

    2. Some companies will have direct impacts or dependencies on natural capital (suchas forestry companies), while others (such as retailers) will have indirect impacts ordependencies on natural capital.

    3. The annotations included in the diagram below can be applied to either case.4. Please note, the gures included below are for illustrative purposes, and do not relate to

    any real organisation.

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    ArticleoftheMonth

    IRMa

    Vishwas M. Virani

    FinGya

    an

    The word opportunity cost requires asincere attention be defined properlywith reasonable arguments. Opportunityis, in simple terms, a combination ofdifferent outcomes. These outcomes are

    either positive, in a subjective contextor negative, again in a subjectivecontext. Although opportunity is usuallyperceived to have an affirmativeconnotation, it should not be the case. Itshould be scrutinized from all possibleangles. Opportunity approaches aperson with a pile of nuances. Thesenuances, if encountered effectively, canyield a desired outcome or result forany firm or person. In any mercantile

    entity, this applies pervasively. Say, afirm in Ahmedabad produces and sellsonly mango pickle with khatta andMeetha variants. Its raw material, i.e.raw mangoes, is supplied by a smallfirm from Valsad, Gujarat. The maininput cost turns out to be around 50 lakhs per annum. This cost includesordering cost, carrying cost, purchasecost, handling cost and waste orspoilage cost. The company has not paid

    much attention to efficient materialshandling due to heavy demand andsteady operations of business. Now, thevalsad-based firm comes with an offer of

    acquisition and values its firm at 4 crores. Assuming this valueto have been estimated through asound valuation model, the firmmakes first offer in market to this

    pickle company. The companyhas simply two options, either toaccept offer and have an exposureto mango-farming and itssubsequent benefits or to carry onits business without getting intocapital budgeting and incur inputcost worth 50 lakhs every year.If it is assumed, for simplicity ofcalculation, that cost of capitalof the pickle company is known

    and is 10%, the total amount ofperpetual benefit would comearound 5 crores i.e. V = Benefitper annum/cost of capital. Now,Simple application of Net PresentValue concept generates 1crore of possible gain (differencebetween total benefit and totalcash outlay) given this offer isaccepted. In general situation,entrepreneur is likely to accept

    this offer of acquisition. Now,the opportunity cost of this offeris possible gains on the amountspent for acquisition i.e. 4

    Opportunity

    CostA not so

    simple Cost

    The concept ofopportunity cost has

    gained significantattention in fieldsof economics andfinance. In simple

    terms, it means thebenefits lost by notselecting the secondbest alternative indecision-making.

    Although it is simple

    to comprehend, it isdifficult to quantifyoriginally. Moreover,

    opportunity costhas two maincharacteristics:

    Recurring natureand incremental

    opportunity cost andMulti-entity cost.

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    crores. A conventionalconcept would considerinterest amount that canbe earned on 4 croresas opportunity cost. Forsimplicity of calculation

    again, assume the interestrate is 10%. If the companyhad not invested moneyin acquisition, it wouldhave earned 40 lakhsper annum as interest. Aconventional conceptdoesnt take into accountthe possible gain that canbe garnered from this interest amount.Say there are 3 possible options for utilizing

    this income:1) It is possible that the company may invest thisinterest amount in diversified portfolio of equity,preference and bonds or debentures with overallpossible return of 10% on an investment. Anadditional income of Rs. 4 lakhs per year wouldbe generated. This shows recurring nature of anopportunity cost. It is, unlike traditional concept,not only the interest amount that is about to belost but also the amount that can be gained oninterest amount.

    2) The company may start to produce Lemon orChilly pickle. The profitability lost on sales of theseproducts is also an opportunity cost for the firm.

    3) The company can itself develop better facilitiesfor materials management from income of interestand bring down its input cost significantly. Now,say if the cost (input cost) is brought down to Rs.40 lakhs per annum, the whole capital budgetingdecision of acquisition of supplier firm provesfallacious because at input cost of Rs. 40 lakhs,

    F

    inGyaan

    the Net Present Value ofproject would be zero.

    Opportunity cost is hard toquantify at times taking intoconsideration time, energy

    and other factors. Moreimportantly, its principles ofmulti-entity opportunity costand incremental opportunitycost should be paid moreheed to. These principlesapply pervasively and can be

    seen in any commercial orpersonal relationship. Say,

    a 21 year old boy has been in love witha girl in his class but out of apprehensions and

    shyness, he doesnt enable his mind to peel backcurtain on what is going on inside a heart. The boyhas been facing this dilemma for last 6 monthsand has evidently lost possible affirmation of girl,who also somewhat likes him. This possible-to-be committed relationship is a boys opportunitycost. Because since the time he fell in love, hismind has somehow always chosen silenceas the best option and probably speaking upas second one. Moreover, the boy is bound toface incremental opportunity cost gradually and

    episodically. An opportunity cost of possiblecommitted relationship gets enhanced with thepassage of time. Say, the boy begins to be moredefensive or even desperate for this matter, theopportunity cost gets enhanced. If the boy plansnot to talk to her to avoid emotive reactions, thiscost adds another incremental cost of losing outgirls attention more and probably increasing anopportunity for another guy. This incremental costis linear in relationship with time and actions of theboy. This is, however, a single-entity opportunity

    cost approach. The girl may also be waiting for thisboys proposal for a long time and she drifts hermind away gradually thinking boys indifferencetowards the idea of love or any other stereotypefor that matter. Her first best option still remainssame to silently wait for his initiative and atthe end of the day; a multi-entity opportunity costcomes into picture. The cost of not being able tobe the best expressive possible is the summationof both cost borne by a boy and his girl. Hence, anopportunity cost is not simply the benefits lost by

    not choosing the second best alternative!

    Fig 1: Opportunity cost eminates from Scarcity of Resources

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    Month

    1950-71

    Finistor

    y

    Studies into the Wealth of Nations have been the

    aim of every economist. However, the spectacularrise of some economies, as the rise of Germany andJapan from the ashes of World War II or the rise ofSouth Korea from one of the poorest countries in theworld to the league of OECD members and later therise of China are termed to be economic miracles.It has always been a point of debate if there wasanything miraculous in the development of theirrespective economies or was it just getting thebasics right. If they are really economic miracles,are there any ways to emulate these economicperformances? Can we learn a few lessons fromthe economic miracles of the past for the futuredevelopment of other economies?

    After the World War II, the United States emerged asthe most powerful nation, while Europe and Asia hadexperienced extensive destruction and loss of life.The reconstruction of a new global economy startedin the 1950s. Between 1950 and 1973 the economicgrowth among the world nations was smooth,without any recessions. During this period annualreal GDP growth of developed market economies

    averaged around 5 percent. Over time many Asianand European countries closed the technologicaland productivity gap with the United States. Japanwas one of the first countries to bridge this gapwith US and become the second largest capitalisteconomy in the world by 1970.

    Japan was devastated during the World War II. Thehuman loss amounted to 1.85 million, while thematerial loss was about 25% of the nations wealth.Post war, the industrial production has reduced toone-tenth of that of the pre-war level. The increase

    in expenditure and commodity shortage resulted inhyper-inflation. With the economy highly dependenton the US aid, the government of Japan laideconomic and corporate strategies with a commonpurpose of catching up with the US economy.

    Role of Japanese government in the post

    war reconstruction process:With high government activism in national planningand implementation along with powerful monetaryand fiscal policies, Japan witnessed a phenomenaleconomic growth during the period from 1950 to1971. During this period, Japans annual growthin real output was 9.45% while the industrialproduction grew at an astonishing 14.56% per year.Stable relationships were built on a foundationincluding (1) the long-term employment system, (2)corporate governance built on cross shareholdings

    among businesses and with other financialinstitutions, and (3) the main-bank system. TheMinistry of International Trade and Industry (MITI),which coordinates national industrial policies,played a significant role in this economic and socialgrowth of Japan.

    Japans post war economic reforms:

    In an attempt to democratize Japan on both politicaland economic fronts, the so-called economicdemocratization reforms were carried out first.

    Zaibatsu dissolution and Agricultural reform:Zaibatsu were big conglomerates of major companiesand banks, often controlled by a share-holdingcompany. To eliminate concentration of economicpower in a limited number of companies, financialinstitutions and landlords hands, zaibatsu weredissolved. In line with the zaibatsu dissolution, thegovernment acquired all the tenant land in excessof one hectare from the landlords and sold them totenant farmers at nominal prices. This resulted inthe drop of percentage of tenant lands from 46%to 10% and increased the number of Independent

    farmers.

    Priority sector production strategy: To rapidlyreconstruct the economy despite shortages ofcommodities and investment funds, MITI selected

    IIM ShIllong

    Prasanna Kumar V L V

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    and nurtured the industries that were targetedas important to Japans future economic growth.Industries so targeted were steel, coal mining,electricity, shipbuilding, marine and railwaytransportation, and chemical fertilizer.

    Labor reforms: The rapid creation of labor unionswere caused in part by the breakup of the zaibatsuand poor working conditions with low wages inJapan, and in effect, formed The Trade Union Law.

    Banking: Shortage of savings was one of thebiggest macroeconomic challenges that Japanfaced during the postwar period. In order to avoidthe risk of falling into the savings shortage trapwhere a shortage of savings leads to a shortage of

    industrial funds, which in turn leads to a limitedproduction capacity, to stagnant income, and finallycomes back to aggravate the savings shortage,Japanese government implemented certain policiesthat were targeted to direct the funds to keyindustries. The policies include the introductionof the fiscal investment and loan program (FILP)and establishment of commercial banks. FILPchanneled public funds to key industries while thecommercial banks actively lent to various businesssectors.

    Favorable factors:Due to the newly formed labor law, the earlyimprovements in real wages and workingconditions were significant. In addition, the unions

    had compelled management to accept thelifetime employment system with restrictionsof dismissing employees in return for promiseof loyalty and priority to the company. Theimproved working conditions and higherwages achieved by the labor unions expandedthe domestic consumption markets and

    contributed greatly to the development of theeconomy.

    Investment as a percentage of GDP increasedgradually and high productivity growth wasbrought about by the introduction of foreigntechnology and improved engineering.The younger-generation workforce has beenmigrated from the rural area to cities bycollective employment scheme. Due to the

    break out of the Korean War in 1950, the demand formilitary equipment increased steeply and triggered

    rapid reconstruction of the Japanese economy.In addition, the world free trade boom created afavorable situation for Japanese exports.

    Rapid Growth Period:

    Eventually, the Japanese economy entered aneconomic growth process with positively reinforcingfeedback: demand expansionproduction

    expansionincreases in incomeconsumption

    expansionfurther income expansionincreases in

    savingsinvestment growth and an expansion of

    production capacity. This virtuous cycle particularly

    benefited big businesses in heavy industries suchas metal, chemicals, energy and machinery.

    Employers in Japans manufacturing export sector,

    with its extremely high growth in labor productivity,

    bid vigorously for both skilled and unskilled workers

    subject to remaining internationally competitive

    at the fixed exchange rate. The wages increased

    rapidly resulting in increased purchasing power of

    the workers. As in the Scandinavian Model, these

    high wage settlements spread into the rest of the

    economy, such as non-tradable services, whereproductivity growth was much lower. This resulted

    in the increase of prices of services relative to the

    prices of the goods. Hence, for 1950-71, Japans CPI,

    Fig 1: Factors to Support investment

    Fig 2: Key Economic Indicators foor Japan and US, 1950-71

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    which includes services as well as goods, beganto increase much faster at 5 percent per year thanits WPI, which contains only goods. But Japansinternational competitiveness in its high-growthtradable sector remained balanced with the UnitedStates.

    Shifting focus from industries that require expensiveimports to industries like cars that require lessimports made Japanese exports less expensive.Even though Japans miracle was not export-ledand the country did not begin substantial exportinguntil the 1960s, when the export boom did occurin Japan, it made a strong economy even stronger.

    Return to the International Community:

    In 1951, the San Francisco Peace Treaty was co-signed with the major allied-force countries, andJapan regained independence. Japan joined the

    United Nations in 1956. Japan also joined the

    International Monetary Fund and the InternationalBank of Reconstruction and Development (the WorldBank) in 1953, and the General Agreement on Tariffsand Trade in 1955.

    Economic Plans that Played a Signicant

    Role:

    In 1960, Prime Minister Hayato Ikeda, regardedas Japans most charismatic postwar primeminister, challenged Japan to double its incomein the next decade. Under the Income DoublingPlan, consumption was boosted by cuttingtaxes, bolstering welfare, raising farm prices andreducing income inequality. Subsequent planssuch as the Economic and Social DevelopmentPlan (19671971) and the New Economic andSocial Development Plan (19701975) addressedproblems that emerged as a result of this rapidgrowth, such as pollution, income inequality, and

    rapid urbanization and concentration. These plansshed light on the importance of balanced economicdevelopment.

    How did it end?

    The 1973 world oil crisis and its aftermath severelyshook Japans trade-dependent economy. In 1974,the GNP actually shrank by 1.8%, the first suchnegative growth in three decades. Inflation soaredin the economy and unemployment problem arose,

    causing Japan to go into a recession for a shortperiod of time. However, the Japanese governmentmanaged to keep economy under control by itstight money policies and again achieved successfulrecovery. For example, Japanese companies startedmanufacturing automobiles that used less oil torun. The economy after the oil crisis stabilizeddue to governments quick response and hightechnological level already achieved. The Japanesealso began focusing on producing electronics such astransistor radios and televisions. The key to recovery

    was the boom in exports of cars, electronics, andother products, which grew far more rapidly thanimports. By 1977 Japans burgeoning trade surplushad become a global issue.

    Explaining the miracle:

    Was the rapid growth really that miraculous? Toanswer this question, we need first to recognizethat during the rapid growth period, there was adramatic increase in working population as well.Many of these workers were moving from relativelow productivity rural jobs to more high-tech urban

    ones. Helped by a favorable geographic location inthe middle of the rich raw materials and consumermarkets of the Pacific rim countries, the availabilityof technology that could be purchased cheaply,low defense expenditures, cheap raw materials(at least until the 1970s), a favorable exchangerate deliberately set by the United States at Y360to $1, and open export markets, Japan was bound,miracle or not, to overcome the two decades oflean years caused by militarism and war. To thismust be added such human factors as a legal

    system that encouraged big business, an educationsystem geared to producing highly skilled workersand a high rate of personal savings (up to 25% offamily income or four times that of the average USfamily in this period) that helped Japan find capitalto invest in export oriented industries. In additionto these basic factors, the governments activismin designing suitable policies and implementingthem effectively also contributed its bit. Knowingthat any other might not face the exact socialand economic conditions, it might not be possible

    emulate this stellar economic performance.However, the learning from Japans rapid growthperiod can certainly be applied wherever possiblein the amount applicable.

    Fig 3: Sustainale Growth

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    MAY 2013

    encourage more of women participation andSHGs in availing microfinance. There will be a

    sense of freedom among the women in startingtheir own ventures. But the questions thatarise here are hard to deal with like Will thisbank for women serve the entire country? Ifyes, how long will it take to roll out across thelength and breadth of India? Will it go to thehinterlands, where bulk of our disempoweredand un-creditworthy women live? What is thatextra which will make it work even whennationalized banks and micro-credit institutionsare struggling to include people at scale in

    rural areas?In the era of online and mobile banking,people hardly bother to visit banks. Soopening up women banks will require a hugeinvestment and infrastructure to be built.Such banks will be more profitable and willbe able to generate more business in ruralareas. Many microfinance institutions have

    I was eagerly waiting for this years unionbudget after dismal performance of UPA 2 seems

    all encapsulated with scams and scandals. Butwomen centric budget is like thinking out ofthe box and it completely took me with surprise.Will it be the last dice thrown by FM before thenext year general elections or will it be going togenerate more women entrepreneurs in future?Let us analyze it in detail.

    Quite naturally, there are positives as well asnegatives by opening a women-oriented publicsector bank (PSB) with an initial capital infusionof 1,000 crore. The question is how much

    will such a move create an impact? But onething that remains undoubtable is that termslike women empowerment and financialinclusion will surely get a boost.

    Women customers will certainly feel comfortableon being serviced by women bankers.Penetration of such banks in rural areas will

    SIIB Pune

    Rohit Ranjan

    Let's Bank on Women

    Indias frst women-only bankproposed : Do we really need one?

    Women banks will be more

    proftable and will be ableto generate more business in

    rural ares

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    opposed this move but I think its a positivemove for poor women sections of society who

    borrow money from private money lenders torun their business. Competition will definitelyget stiffer but opportunities do seem to emergefrom it.

    Addressing the gender related aspects ofempowerment; it will certainly fulfill a socialgoal. A women run banks arelikely to attract women clients,promoting inclusive financingand other women livelihoodschemes.

    But did we need to startsomething new like this in acountry where there are 26nationalized banks, 21 privatesector banks, 34 foreign banksand numerous cooperative andlocal banks? Such moves createa serious doubt on our ownavailable resources.

    To look at an example, a similar banking modelwas started in Pakistan 14 years back in the

    name of First Women Bank but it didnt go along way. It currently has only 38 branches allover and the work culture is corporatish.

    On the contrary, let us witness the success storyof India Post which, through its infrastructureand network, has implemented many plans intoaction. It has more than 1.54 lakhs post office

    branches out of which around 90% are in ruraland semi-urban areas. Each post office has

    been providing banking services like Post OfficeSavings Bank to people for decades. Peoplewho grew up in rural areas without banks, orin places where petty bankers were too strictto entertain the illiterate villagers, know whereto go for the safe-keep of their precious money

    that little window at theirneighborhood post office.

    Its not a long trek to thepost office. There is a postoffice for every 7176 people

    in the country. In rural areas,the coverage is even better one for every 5682 people.Even when the same UPAgovernment was struggling tofind a way to transfer the wagesfor NREGA beneficiaries, it wasthis network that came to itsrescue. About 2.2 crore people

    get their NREGA payments through the postoffices today.

    People in rural and semi-urban areas who arefamiliar with the post office savings banks alsoknow that it is the most women-friendly andinclusive banking system where agents evencome home to take your money, update yourpassbooks and even return the money onmaturity. In rural areas, there are about 2.69 lakh

    NIVESHAK 23

    Finsight

    FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

    Fig 1: First Women Bank Ltd , an all-women bank in Pakistan

    A women run banks are

    likely to attract womenclients, promoting inclusive

    fnancing and other women

    livelihood schemes.

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    agents who come home to help people, mostlywomen, with banking. Almost all these agentsare also people from the neighborhood and arefamiliar with the beneficiaries. It is a uniquebanking eco-system that only Indian Post canclaim credit for. It is a model that has evolved

    over time and is very hard to replicate becauseit is driven by the sheer needs of people, andnourished by trust and relationships.

    It will be difficult to establish another systemlike India Post with such network and coverageanywhere in the world. Currently post offices

    provide only savings facilities. However, it hasdecided to set up Post Bank of India and is all

    ready to apply for banking license by July undernew RBI guidelines to operate as completebanking system.

    P. Chidambaram would have been more prudentin utilizing this network to provide financialservices to women at minimal cost. It will takearound decades to establish numerous womenbanks all over India. Will it employ womenagents to provide door to door service to women?What kind of banking guidelines will it follow?There are many questions which have been left

    unanswered. Last time they lured farmers byannouncing a relief package which includedthe complete waiver of loans given to smalland marginal farmers. Called the AgriculturalDebt Waiver and Debt Relief Scheme, the 600billion rupee package included the total valueof the loans to be waived for 30 million smalland marginal farmers (estimated at 500 billionrupees) and a One Time Settlement scheme(OTS) for another 10 million farmers (estimatedat 100 billion rupees). This time it should notbe women who fall prey into UPA hands since Ihave a deep regard for poor women and I trulybelieve in saying that They are Bankable.

    24 NIVESHAK2424 NIVESHAK24

    Co

    verStory

    ArticleoftheMonth

    Co

    verStory

    Finsight

    MAY 2013

    FIN-Q Solutions

    FEBRUARY 2013

    1. Basisswap

    2. Idiosyncraticrisk

    3. GeorgeSoros

    4. BanksName:ShriMahilaSewaSahkariBankCity:Ahemdabad

    5. Postocesavingsbank/

    Indiapost

    6. Mr.DeepakParekh,HDFC,CentralBankofIndia

    7. DispositionEect

    8. Notching

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    25/28FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

    25

    CoverSt

    ory

    NIVESHAK 25

    ArticleoftheMonth

    FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

    25

    CoverSt

    ory

    NIVESHAK 25

    ArticleoftheMonth

    25

    CoverSt

    ory

    Sir, one of my friends, working with anNBFC called me up yesterday and asked me toinvest in an SIP. While mentioning the requireddocuments he also mentioned something likeKnow Your Customer details. I couldnt reply

    anything as I have no idea about what it means. Canyou please elaborate what does KYC signify?

    Know your Customer is a term commonlyused for Customer Identification Process.RBI first introduced this process through ThePrevention of Money Laundering Act, 2002(PMLA). KYC involves making reasonable

    efforts to determine true identity and beneficial ownershipof accounts, source of funds, the nature of customersbusiness, reasonableness of operations in the account inrelation to the customers business etc.

    How does KYC help a financial institution?

    The major objective of KYC is to combatmoney laundering. Many criminals get theirmoney into the bank accounts using a falseidentity and address. The funds so depositedcan be transferred to other accounts and be

    used for buying goods or services. Such transactionsshould be traced by the bank and stopped. KYC guidelinesprevent the banks and other financial institutions frombeing used intentionally or unintentionally by criminalelements for money laundering.

    What are the benefits of KYC to thecustomers?

    That is a very important question. A keydefence against money laundering is to preventaccounts being opened in false identities.Anyone wishing to open an account will,therefore, be asked for proof of their identity

    and address. This does not imply that you are being

    suspected of money laundering but, it is to ensure that nocriminal can falsely use your identity to make transactionsthat can be potentially harmful to the interests of many.Hence, KYC protects your identity from being misused andprovides safety to your investments.

    Is KYC mandatory?

    Yes. According to The Prevention of MoneyLaundering Act, 2002 (PMLA) which came intoforce from July 1, 2005, the Banks, FinancialInstitutions and Intermediaries need to ensurethat they follow certain minimum standards ofKYC. Also, on the part of the customers, with

    effect from January 1, 2011, KYC has become mandatoryfor all classes of investors in Mutual Funds (SIP and Lumpsum) irrespective of investment amount.

    What is the procedure for complying withthe KYC guidelines?

    To be KYC compliant, you need to fill a KYCform which is available with your investmentor the mutual fund consultant. Along withthat you need to submit a valid identity andaddress proof. The data is then updated into

    Credit Information Bureau India Limited (CIBIL) database

    and checked for your credit worthiness.

    Is KYC a one-time process?

    For investment in Mutual funds, KYC isa one-time verification process and need notbe done again though you might be investingin multiple mutual funds. On the other hand,banks can ask for your details again even if

    they had complied with the KYC norms while openingthe account. This happens when the transactions in the

    account are observed not consistent with the profile. Thisis just to confirm that the account is not being used forany Money Laundering or any other criminal activities.

    Is government doing something to bringawareness about the KYC process amongst thecustomers?

    The RBI is determined to bring awarenessabout this concept among all of us. With thesame in mind, KYC day is celebrated on August

    1 every year in major banks around the country.

    Thank you so much SIr, for the explaination.

    CLASSROOM

    FinFundaof theMonth

    Know Your Customer

    NIVESHAK 25

    Classro

    omIIM Shillong

    Himanshu Arora

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    2626

    F I N - Q

    1. Name a famous Hollywood star after whom a stock index is named includingthe names of all companies that have a connection to the star

    2. What is the term for an agreement between a company and its top executives

    giving substantial benefits (usually in the form of stock options or cash

    bonuses) in case the employment is terminated?

    3. X, perhaps the most important asset anyone can possess, is a fabric composed

    of 25% linen and 75% cotton. X has tiny red and blue synthetic fibers of

    various lengths evenly distributed throughout the length and breadth. Identify

    X. (Niveshak wishes you have lots of X in your life)

    4. X is the bond index named after Y, an U.K. headquartered bank. Y was also

    involved during the LIBOR scam. Identify X?

    5. Bullish market refers to an upward trend in the market. What is the term that

    refers to no significant movement of the stock market index?

    6. He started his career as a runner in bank whom he mistook as a law firm by

    its name in the employment ad and later went to introduce one of the most

    important derivatives in 1972. He is currently the Chairman Emeritus in the

    same exchange which launched that derivative. Name the person.

    7. This term is used as a charge when a company does not do something

    intentionally but recklessly ignores a problem which it has been made aware

    of. Name the term.

    8. Give the term for the practice of using of unrealized gains on the existing

    futures position as margin to increase the size of the position, usually in

    small increments.

    9. In money market, what is known as non-convertible paper money?

    All entries should be mailed at [email protected]

    or

    You could also submit your Fin-Q answers on the link given below:

    https://docs.google.com/forms/d/16MfUouGDgKISrJpG-VzzagMm_t8Weywy2n9B_VjCwio/viewform

    by 15h June, 2013 23:59 hrs. One lucky winner will receive cash prize of Rs. 500/-

  • 7/28/2019 Niveshak May 2013

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    W I N N E R S

    A N N O U N C E M E N T SALL ARE INVITED

    Team Niveshak invites articles from B-Schools all across India. We are looking fororiginal articles related to finance & economics. Students can also contribute puzzlesand jokes related to finance & economics. References should be cited wherever nec-essary. The best article will be featured as the Article of the Month and would be

    awarded cash prize of Rs.1000/- along with a certificate.

    Instructions Please send your articles before 15th June, 2013 to [email protected] The subject line of the mail must be Article for Niveshak_ Do mention your name, institute name and batch with your article Please ensure that the entire document has a wordcount between 1200 - 1500 Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 Please do NOT send PDF files and kindly stick to the format

    Number of authors is limited to 2 at maximum Mention your e-mail id/ blog if you want the readers to contact you for furtherdiscussion

    SUBSCRIBE!!Get your OWN COPY delivered to inbox

    Drop a mail at [email protected]

    ThanksTeam Niveshakwww.iims-niveshak.com

    27

    FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

    FIN - QPrize - INR 500/-

    Nishanth Shourie

    IIM Shillong

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    COMMENTS/FEEDBACK MAIL TO [email protected]://iims-niveshak.comALL RIGHTS RESERVED

    Finance Club

    Indian Institute of Management, ShillongMayurbhanj Complex,Nongthymmai

    Shillong 793014


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