In News

Government ready to sell 9.5% stake in NTPC 

Marred by the economic slowdown , the Central Government has decided to divest its share into NTPC . The Cabinet Committee on Economic Affairs gave it’s nod to the proposal of selling 9.5% share in the company on 24th November . This decision will bring down Government’s stake in the entity from 84.5% to 75%. It is a part of the Government’s proposed plan to raise funds of Rs.30,000 crore  in the current fiscal year .Expected value to be raised after the sale is 13000 crore rupees.

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Moody’s Predict Stability for India’s GDP Growth

International rating company Moody’s Investor Service forecasted it’s predictions to be stable on Indian economic growth . This prognosis brings some respite for India who’s economic state and stability were questioned earlier by both S&P and Fitch ratings , rivals to Moody’s . Earlier S&P had given a junk status to India’s economic health unless Government took corrective measures . Moody’s released a statement saying that the “ outlook on India’s sovereign rating is stable , supported by economic strengths that outweigh weaknesses “ . Some economists , however , tended to disagree with the idea citing slowing growth and high inflation .

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European Nations Agree on Greece Bailout 

European Nations and IMF agreed on the deal to give an bail out package to debt laden Greece . They have agreed to cut debts by 40bn euros ($51bn; £32bn) and have paved the way for releasing the next tranche of bailout loans - some 44bn euros. Asian and European Markets reacted positively to the news . The decision was taken after a 10 hours meet of the euro leaders at Brussels . The meet was third of it’s kind in two weeks . Greece has been waiting for the instalment since June to keep the economy ‘afloat’ . The leaders said that Greece would receive the amount by 13th December.

Contributed by Kaustubh Tandon (PGDM 2012-14)

Corruption Economics

In this highly uncertain political environment where no politician seems trustworthy because of the number and the quantum of damage caused by the scams unveiled in the recent history, business sentiment is dented because entrepreneurs are left in a dilemma as to which side should they be on. Do what the latent system requires them to do and fear discovery or stick their neck out and suffer directly. Policy paralysis in any case is like a ridge that they have to cross in getting licences, clearances, permissions and other synonyms of the red-tape system. And that is why we see India down at the 132nd spot on the ease of doing business index. Yes it is still shining.

The two largest scams in the country i.e. the 2G and the Coalgate, according to the figures quoted by the Comptroller and Auditor General of India, the have caused a loss of 1.76 and 1.86 trillion rupees respectively, to the exchequer. This money was lost by the state because of corruption, an undesirable form of public private partnership in which neither of the parties can be entirely blamed. According to the Centre for Monitoring Indian Economy (CMIE), in the last fiscal ending this august, India Inc. has shelved investments worth 5.45 trillion rupees, money that should have been fueling a multiplier effect in the economy but is kept locked in the bank accounts of people either in India or abroad. The direct revenue for the government out of this increase in income would have been 2.2 trillion rupees. Adding up the three we get a loss of 5.8 trillion rupees.

We are an economy worth 100 trillion rupees approx. (after adjusting exchange rate differences) with a fiscal deficit of about 5.8% (considering latest economic estimates), arriving to a figure of 5.8 trillion rupees. This may be a coincidence and I am not taking political sides to redundantly blame the government for the ills of the economy, but trying to drive the point about how just the few largest glitches on the corruption picture are single-handedly responsible for it. This deficit is one of the prime reasons for the rupee to depreciate against the US Dollar. The depreciation leads to expensive imports of the two largest components of current account deficit, oil and gold, leading to an even higher fiscal deficit. This deficit is recouped by the government by two methods of borrowings from the public and of the CRR from the RBI. Due to the unproductive nature of the deficit, it leads to even higher inflation because the money is ultimately directed towards people who will raise their demand. Now this debt of the government will have to be serviced by an interest which again forms a part of the expenditure and hence fuels the already soaring deficit. All these factors and a few more combine to form what I would call a Deficit Trap, where a certain amount of deficit leads to even more of it. This also leads to a Debt Trap because debt keeps on increasing as a result of deficits and growth does not and not because of the potential to grow but because of the unproductive nature of the spending which also causes inflation.

India currently is experiencing cost push inflation and the policies applied by the RBI are to control demand and push demand down to balance prices. Such monetary tightening ultimately leads to counter intuitive policies, which curb growth instead of cutting off the excess people have, where the government should ideally try to control input costs. According to a popular research, every 1 trillion rupees of scam leads to a 2.2% hike in inflation. This scammed money flows in the system in the form of untaxed income and under-priced assets both of which increase the disposable income of large businesses and politicians instead of being a part of the public expenditure and hence productive money supply. Therefore the inflation caused is growthless again leading to an even gloomier picture.

The political establishment is ultimately at fault and as they have famously said, “India is growing despite the government and not because it”. Though the entrepreneurial spirit is high, the pocket to carry it through the initial stages is easy (India ranks 23rd on the ease of getting credit index), until the idea is capable of blowing the roof, there is likelihood that it will fail. This is unlike the United States where according to Jim Collins’ “Good to Great”, success of a business depends primarily on factors like management and discipline rather than innovation and ideation. Trial Entrepreneurs therefore are the worst hit and so is the spirit of the economy because the chances that a small plant reaching sunlight are dependent on the crowding out effect of not its competitors but corruption.

-Rohit Seth

Important News of the week

The government has decided to hike the prices of diesel by Rs. 5 and capped the limit of then number of unsubsidized LPG cylinders to 6 per household. This would push up the price in New Delhi to Rs. 47 per ltr for diesel and 750 per cylinder for LPG. It has also decreased the Excise duty on petrol by Rs. 5.30 but this benefit is not being passed on to the consumers. This decision has come after increasing demands for the same by the oil marketing companies whose under-recovery would be reduced by 20,300 crore.

Just after the outcry over the hike in fuel prices, the government has come up with another politically and socially controversial policy of allowing 51% FDI in multi brand retail, though 30% of its supplies have to be sourced from MSMEs. It has also allowed a 100% limit in single brand retail, 74% in broadcasting, 49% in Power Exchanges and 49% in domestic aviation. This slew of reforms has come after a long struggle for the government to balance between the demands of the industry and those of the people and the other political parties. And it is finally the industries which prevail.

After politically turbulent week where Mamata Banerjee withdrew support from the government, Finance Minister P. Chidambaram has come up with even more reforms, this time in the form of tax reliefs. After the partial non subsidization of LPG, import and excise duty on it have been waived. This has resulted in a 30-40 rupee decline in the prices. The withholding tax on foreign currency borrowings has also been lowered to 5% from 20% with a view of lowering the borrowing cost by up to 70 basis points.  The government has also allowed a deduction of up to Rs. 25,000 from taxable income for the first time investor into mutual funds and exchange trade funds, undaer the Rajiv Gandhi Equity Saving Scheme.

"BRICS vs G5" New Delhi 2012 Summit: Creation of a New Economic World Order

IMT-H organised it’s first mock global summit titled “Creation of a new economic world order”. The event started with summit co-ordinators briefing about the flow of the summit. Then each side was invited to the podium to present their agenda to the audience.

Agenda presented by BRICS (represented by the Indian Prime Minister)

·         Multilateral Institutional reforms i.e. in WB, IMF, etc

The countries called for a review of the current representation in the international institutions and enhance the voice and representation of emerging market and developing countries, including the top level posts in these institutions, by selecting through an open and merit-based process.

·         Free trade agreements

To promote free trade, even in other developing economies like that of Middle East nations; also for the development of those areas.

Issues raised by G5 (represented by the French President):

·        Energy crisis in BRICS countries

Being the emerging economies, BRICS nations are harming the environment in order to meet the demands of energy for the production rate in order to develop their economy. 

·        Political and social instability

Lack of proper structure and administration, occurrence of crisis has made the nations unstable. 

·        Lack of openness in economy 

There is very little freedom in the economies with regards to doing business. 

·        Asymmetric intra-BRICS trade

There are no proper trade tie-ups between the nations themselves, which need to be fixed or channeled first before demanding for free trade agreements. 

·        No sense of geographical unity

The location of the nations is too diverse to actually have a sense of unity for a common cause.

The summit was then open to the house for a healthy discussion over the various issues of the summit. A lot of key points regarding the qualifications to the participation to the global institutions, the law structure in BRICS nations regarding trade, participation of the BRICS nations in global GDP, the erratic bi-lateral trade ties among the BRICS nations, etc. were brought forward.

Later the house was open to the audience, where in the G5 was questioned about the social instability, unemployment issues and the high national debts prevailing in the G5 nations, the non-compliance to the global environmental norms by G5 nations, etc. BRICS nations were asked about the rate at which they are implementing the various laws to make their states stable, and the substantial contribution towards global development, etc.

Meanwhile, the various institutions present in the summit viz. World Bank, IMF, ECB and WTO, pitched in clarifying the various issues between the two sides. They accepted the contributions of the BRICS and graciously applauded their willingness to participate in decision making but reiterated that it can’t be done overnight and over the years, the inclusion of emerging nations in decision making would definitely be considered.

Finally, the summit was concluded by the Indian Prime Minister, who on a hopeful note stated that it is for an even development of all the nations and they are concerned about it, they also look forward towards proper steps by the global leaders and institutes in this respect.

Country/Institution heads’ role enacted by:

BRICS:

Brazil-Siddharth Jaiswal

Russia-Manish Bhalla

India-Nidhi Yadav

China-Rishav Jindal

South Africa-Prateek Gupta

G5:

Japan: Aakansha Mintri 

Germany: Amrutha Ghali

USA: Akshay Bhandari

UK: Gaurav Surana

France: Vineet Kulria

Institutions:

World Bank: Udit Luthur

IMF: Indu Makhija

European Central Bank: Vaibhav Chabbra

WTO: Lokesh Sikhwal

Contributed by Prateek Mukherji

India's Need For Research

Languishing at yet another bottom of the pyramid, India is ranked 119^th in the world for the significance of the research papers published by its top Institutes, according to the Science Citation Index. This acute lack of research is essentially because of the lack of funds available. The annual research budget of USA and China is US$250 and US$60 billion respectively compared to India’s special US$1 billion “Inclusive Innovation Fund” announcement this year. According to the Organization for Economic Co-Operation and Development(OECD) data India has a mere 119 researchers per million of its population, compared to 1,564 in China, 2,706 in the UK, 4,605 in the US and 6,807 in Iceland. Even in terms of the number of researchers per 1,000 employed personnel, India with 24 researchers ranks below China (115), Japan (131), the European Union (231) and the US (324).

In the World Universities Ranking by Thomson Reuters and Times Higher Education, the only Indian university to feature in the top 400 is IIT Bombay on the 317^th place(which is outside the top 50 for engineering and Technology). To be fair to them, their annual research budget is 100 times lesser than that of Massachusetts Institute of Technology (MIT).

The implications of this grim scenario on Business are serious. Status Quo and the world may no longer be flat. If the constant need for upgradation is not met then apart from the established businesses losing share to their global counterparts, the new entrepreneurs will find it harder to absorb the cost of foreign technology against the opportunity cost of the underdeveloped indigenous ones. In the short run it seems cheaper to outsource technology from the recession affected west and fundamentally inexpensive China against establishing fully functioning active Research and development (R&D) divisions in Universities, Government owned facilities and small businesses, but it increases the foreign dependence of the nation. With the economic improvement of the western world in the long run there will be a restoration of bargaining power and will also lead to worsening of balance of payment deficits. India is already the largest importer of defense equipment.

The only respite is the interest shown by the MNCs to innovate, reflected in the substantial increase in the FDI inflow for R&D which was US$4 billion in 2010. The number of research divisions has gone upto 750 from 40 in the last decade. Companies like Yahoo have started offering five times the salary to a research scholar than what IITs and IISC offer. HP Labs is offering doctoral programs in collaboration with BITS Pilani for its R&D scholars. Initiatives like the development of Swach Water Filter by Tata Chemicals in collaboration with MIT, which is 50% more cost effective than its nearest rival, need to be replicated far more frequently.

But the government needs to pull up its socks if the country wants to become a self sustainable economy and strive towards achieving Dr. APJ Abdul Kalam’s vision 2020. The ‘Research Culture’ also needs to be developed so that there is an increase the number of the ‘Masters’ minds that move up to the PhD level and add to the intellectual capital of the country.

Should Greece Stay Euro or go Drachma

The recent Mac-Von debate: "Should Greece stay in Eurozone or move out" had the teams battling out to prove their point. Let’s see what each one had to say:

Amrutha Ghali & Akansha Mintri: Greece should move out of EU

The Austerity measures on Greece are

•     Increasing taxes-imposition of a national, regressive, property tax on homeowners

•     Reducing benefits (pension payments etc.). Downward pressure on wages and price

•   Effect on the public health service-suspended payments to EOPPY, on which pharmacists rely for funding to prescribe drugs.

Because of this,

•  Greece will be stuck in a vicious cycle of insolvency, lost competitiveness, external deficits, and ever-deepening depression.

•    No growth, no productivity, rising unemployment in Greece

•    Cutting deficits will reduce demand

•    Price deflation  will increase the real value of debt and will further increase current account deficit

•   Greece already has an official unemployment rate of 16% and fall in GDP is 7% per year, so further unemployment and falling incomes will effect democracy. Even if Greece agrees to stay back-continued borrowing is needed to finance its current account imbalance. So the core countries need to fund it. Even if Germany formalizes transfer of funds, it will demand further decline in wages and incomes that will lead to severe political tensions between Germany and Greece.

Abandoning the euro now and creating a new drachma would permit a devaluation and a default that might involve much less economic pain than the current course. The value of the new drachma would fall relative to the euro, automatically reducing real wages and increasing Greek competiveness without requiring Greece to go through a long and painful period of high unemployment. Instead, the lower value of the Greek currency would stimulate exports and a shift from imports to domestic goods and services.

Siddharth Jaiswal & Abhishek Sethi: Greece should stay with EU

Greece has taken some significant steps towards getting its public finances back on track but clearly much more is needed. The fact that the country is in a deep recession and that this effort is based almost exclusively on reducing public spending and increasing revenues through greater indirect taxation has placed a very heavy burden on most Greeks. The social impact of the crisis is reflected in the record unemployment rate, the closure of shops and businesses, and an increasing number of people facing social exclusion. 

 

•      As the government embarks on a new round of austerity measures, it is clear that an effort will have to be made to keep the majority of the public on board. Greece and its partners will have to pay particular attention to introducing a sense of burden sharing and fairness with regard to taxation; presenting a coherent vision of how the public sector can be reformed to become more modern and efficient and not just cheaper and smaller; and dispelling some of the stereotypes that are unfairly damaging Greece’s image and feeding scepticism domestically and across Europe.

Following observations are a proof that Greece is on its way to recovery  

• Budget numbers are on track to meet its fiscal consolidation targets (Budget deficit narrowed by 40 %). Greece is complied with all the fiscal measures and transparency on the implementation has been increased.
• The Parliament passed the key pension reform bill at the beginning of July.
• Better political support for the next drive of austerity measures.
• Government’s cash deficit fell from 19 Bn Euro to 11 Bn Euro and the budget’s primary deficit narrowed to 5 Bn Euro from 12 Bn Euro.
• Greek parliament passed the new tax bill which includes
• Unified progressive tax scale for personal income.
• Three year tax exemption period for new businesses.
• Various other taxation measures for capital and real estate and business income.

Liquidity condition of Banks (Stress Test) indicates that the bank’s solvency buffer remains adequate, with some erosion.EMU exposure to Greece is significant, European bank holding large amount of Greek Government Debt, this suggest that there is a strong incentive for the euro area to avoid a restructuring or a default.

 

Post your comments if you agree or disagree to any of the opinions/facts mentioned above.   

     

Myths about poverty lines (Source TOI 30th March 2012)

By the sheer loudness of their protests, NGOs, journalists and intellectuals have bamboozled the prime minister into withdrawing the latest Planning Commission report. The report had shown accelerated poverty reduction, a perfectly plausible outcome in view of accelerated growth since 2003-04. But the critics are not happy that India is succeeding in combating destitution. They therefore tirelessly invent myths to muddy the discourse. If we are to avoid costly policy mistakes, we must expose these myths for what they are.

The first myth is that the Planning Commission plays fast and loose with poverty lines. This myth, endlessly repeated in the media, is an insult to the country's finest tradition of letting professionalism rule without any political interference whatsoever in setting the poverty lines. According to Professor T N Srinivasan, arguably the world's top living expert on poverty, the history of poverty lines in India goes as far back as 1876. That year, Dadabhai Naoroji provided the first set of poverty lines for various regions of India in a paper entitled 'Poverty of India'.

The official poverty lines we have used in recent decades were based entirely on the recommendations of the Lakdawala committee of 1993. Not only was Lakdawala himself a leading scholar of poverty, he also stood on the broad shoulders of such stalwarts as Pitamber Pant, once handpicked by Prime Minister Jawaharlal Nehru to head the Perspective Planning Division of the Planning Commission, and V M Dandekar and Nilakant Rath, both pioneering scholars of poverty in post-independence India. In a nutshell, these poverty lines had been set such that anyone above them would be able to afford 2,400 and 2,100 calories worth of consumption in rural and urban areas respectively, in addition to subsistence level of clothing and shelter.

A committee headed by the late professor Suresh Tendulkar was likewise behind the latest revisions to the Lakda-wala poverty lines that the Planning Commission reported to the Supreme Court last year and also used to derive the number of poor in the report just withdrawn. The integrity and qualifications of Tendulkar are beyond reproach.

The second myth is that the Planning Commission has time and again lowered the poverty lines to make exaggerated claims of poverty reduction. The truth is exactly the opposite. The Tendulkar committee recommended raising the rural poverty line while keeping the urban poverty line at its previous level and the Planning Commission fully complied with that recommendation. After extensive consultation and careful analysis, Tendulkar reached the conclusion that while those living above the Lakdawala urban poverty line continued to be able to afford 2,100 calories, the rural poverty line needed upward adjustment so as to be aligned to its urban counterpart.

Yet, those who have followed the debate subsequent to the Supreme Court filing by the Planning Commission would recall that the uniform impression from media reports was that the commission had lowered the poverty lines. This same impression has been conveyed yet again in the wake of the latest poverty report. For instance, a headline on a major tele- vision channel website states, 'Planning Commission further lowers the [urban] poverty line to Rs 28 [from Rs 32 in the Sup-reme Court filing]'. But, once again, the Planning Commission had done no such thing. The Rs 32 line relates to the year 2010-11 and Rs 28 to 2009-10, with the difference fully accounted for by the higher price level in 2010-11.

The third myth is that the Planning Commission has nevertheless set the poverty lines so low that they threaten to exclude many from benefit-ing from redistribution programmes. The guiding objective behind the poverty line has always been to monitor progress in combating destitution. Therefore, poverty line expenditures have been traditionally set at levels just sufficient to allow above-subsistence existence.

Rather than argue in the abstract what Rs 28 would or would not buy at 2009-10 prices, critics need to concretely analyse the basket of goods that those living on this expenditure actually bought in 2009-10. If they can convincingly argue that contrary to the judgment of Tendulkar, that basket leaves its consumers in destitution, they would have a case. This they have not done.

Drastic upward revisions of the poverty line as suggested by many, especially on the instant Twitter polls that TV channels love to conduct these days, are downright silly.

Suppose we raise the rural poverty line to Rs 80 and the urban one to Rs 100 at 2009-10 prices. What would these lines do?

First, they would designate 95% of the rural population and 85% of the urban population poor. Does anyone believe that all but the top 15% of the urban and 5% of the rural population live in destitution today?

Second, how much good to the bottom 30 or 40% who represent the truly destitute will we do if the tax revenues raised from the top 15% urban population were spread evenly over 95% of the rural and 85% of the urban population?

And finally, suppose we could magically redistribute all expenditures in 2009-10 equally across the population. What do you think this will give each individual? Do not be shocked to hear the answer: barely Rs 41 per day in 2009-10! Everyone would drop well below even the lowest poverty line any critic of the Planning Commission has advocated to date!

fiscal deficit estimates, unconvincing, Budget 2012

The Budget was expected to make some credible fiscal correction and lay out a clear roadmap for fiscal consolidation. It is now accepted that fiscal consolidation has suffered a setback. This article looks into the creative accounting in fiscal correction and the setback to monetary-fiscal co-ordination.

The process has been revenue-led, with little expenditure rationalisation (see table).

Deficit correction has been envisaged through increase in indirect taxes — mainly service tax, and non-tax revenues (primarily through sale of telecom licences). Expenditure cutbacks are expected to come about through reduction of major subsidies. The reliance on indirect taxes has inflationary potential.

There is no evidence of expenditure rationalisation in the Budget, except for the proposed amendment to the introduction of a Medium Term Expenditure Framework. However, the efficacy of such a policy measure (considering that the next Budget will be a pre-election one) seems open to doubt.

CONTINUED FISCAL SLIPPAGE

Deficit targets will once again not be met. The year 2012-13, compared with 2011-12, is not expected to see any dramatic changes in economic growth on the domestic or global front. Growth and fiscal outcomes will be similar, except for some improvements on the revenue side (taxation).

To maintain the budgeted deficit numbers, the government will resort to cutbacks in Plan expenditure, leading to reduction in developmental expenditure.

In addition, on account of market uncertainties, disinvestment proceeds may not be fully realised. Keeping in view the past years' experience of sale of telecom licenses, the amount expected to be raised this time around looks over-optimistic. The budgeted fiscal deficit at 5.1 per cent may slip further to 5.5 per cent of GDP.

The golden rule for deficit correction is to eliminate the revenue deficit. The Budget for 2012-13 proposed to amend the Fiscal Responsibility and Budget Management (FRBM) Act by giving statutory recognition to the concept of “Effective Revenue Deficit” (Revenue deficit less grants given to States for creation of capital assets). Paragraph 12-14 (page 20) of Fiscal Policy Strategy Statement justifies the use of Effective Revenue Deficit (ERD).

The 13th Finance Commission in its report in paragraphs 9.20-9.25 recognised the definitional refinements in respect of revenue deficit and grants for creation of assets as capital grants. However, in paragraph 9.24 (page 130) of its report, it has clearly mentioned that it would be appropriate to continue with the existing classification of expenditure as revenue or capital and that it cannot be disturbed in an ad hoc manner.

Thus, the claim of Budget 2012-13 that zeroing of ERD tantamounts to elimination of revenue deficit is a reflection of creative accounting.

MONETARY OPTIONS REDUCED

Financing of the fiscal deficit reveals the following. First, during 2011-12, there was higher recourse to short-term borrowings (91,182 and 364 day treasury bills) to the extent of Rs 1,16,084 crore as against the budget estimate of Rs 15,000 crore.

This implies that during 2012-13, there will be greater pressure on the short-term interest rates on account of higher borrowings to repay these treasury bills.

Second, the gross market borrowings during 2012-13 would be around 5.6 per cent of GDP (Rs 5,69,616 crores). Such a high level of market borrowing would put adverse pressure on monetary, liquidity and debt management. Third, even though the budget estimate assumes zero net Ways and Means Advances (WMA) from the RBI, in the event of continuation of tight liquidity conditions, the recourse to WMA is inevitable. This development would further aggravate the problems of monetary management. With such fiscal pressure, there is no manoeuvrability left with the RBI for a policy (repo) rate reduction.

Securities issued against small savings as a financing item of fiscal deficit are budgeted at Rs 1,198 crore, against an outflow of Rs 10,302 crore. This implies that small savings is losing its importance as a financial savings instrument. The National Small Savings Fund (NSSF) is budgeted to have a loss of Rs 7,117 crores in 2012-13 on top of a loss of Rs 6,233 crores in 2011-12 and a loss of Rs 12,706 in 2010-11.

The accrued income has fallen short of expenditure on account of higher interest payments and management costs. This has occurred despite a reduction in agent commissions. The proposed Rajiv Gandhi Equity Savings Scheme with tax incentives would have adverse implication for small savings as the tax exemption would entice savers.

Our FRBM experience for the last 8 years has been in the nature of an unkept promise. Therefore it is appropriate that an Independent Review and Monitoring of the implementation of FRBM process be instituted in the form of a fiscal council. This would add to the integrity and effectiveness of the Budget.

BY Dr. R. K. PATTNAIK  & Dr.ARCHANA PILLAI

10 things to know about Mahindra Satyam, Tech Mahindra merger

Mahindra Satyam and Tech Mahindra are likely to announce a merger plan today. The move was widely expected. In January, Mahindra Satyam Chairman Vineet Nayyar had said that the two firms would merge by the end of this year. The Mahindra name is likely to be retained in the combined entity.

Tech Mahindra had acquired the scam-hit Satyam Computer Services in 2010 and re-branded it as Mahindra Satyam with the eventual goal of merging the two firms. In January 2009, erstwhile Satyam Computer’s founder and then Chairman B Ramalinga Raju had admitted to fudging account books to the tune of thousands of crores of rupees.

The most important factor to watch for markets would be the swap ratio, which is the ratio in which an acquiring company will offer its own shares in exchange for the target company's shares during a merger or acquisition. On the basis of the current market prices where the shares of Mahindra Satyam and Tech Mahindra are trading, the likely swap ratio appears to be close to 9:1. That is, 1 share of Tech Mahindra will be issued for every 9 shares of Mahindra Satyam.

Here are 10 things to know before the announcement is made.

1. The boards of Tech Mahindra & Mahindra Satyam will meet today to finalise the merger plans for the two technology ventures. In a statement to the Bombay Stock Exchange Mahindra Satyam said, "Satyam Computer Services Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on March 21, 2012, inter alia, to consider the Amalgamation of the Company with Tech Mahindra Limited..."

2. Shares of both companies traded higher ahead of the board meeting. At 0918 hours, Tech Mahindra stocks rose nearly 2.5% higher on the BSE at Rs 664. Shares of Mahindra Satyam jumped 2.2% at Rs 75.80. The BSE Sensex gained 0.2% or 33.47 points at 17,349.

3. Implications: The combined entity will have revenues of $2.7 billion. The combined entity will become 5th largest IT company in terms of market cap. British Telecom, which contributes 35% of revenue, will contribute only 16% of revenue in the merged entity. Exposure to telecom verticals will reduce to 55-60% against 100% currently. The combined entity will create a diversified company in terms of geographical reach. The merged entity will have a net cash of Rs 1,500 crore on its books against a net debt of Rs 1,100 crore currently. The earnings per share of the merged entity would be Rs 79 per share.

4. The market will be keenly watching the nuances of the merger structure and swap ration between Mahindra Satyam and Tech Mahindra. Possible scenarios: (a) Tech Mahindra buys Mahindra Satyam, or (b) Mahindra Satyam buys Tech Mahindra, or (c) Merger between Tech Mahindra and Mahindra Satyam. Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities Limited says Tech Mahindra will buy Mahindra Satyam in all likelihood.

5. Swap Ratio of the merger will be the most important factor: The swap ratio can be based on different bases such as net worth, EPS (earnings per share), market price, etc.

6. Irrespective of the swap ratio, the impact on the promoter group 'Mahindras' will be limited, as they hold virtually similar percentage of stake in both the entities. That is, they hold about 42.65% stake in Mahindra Satyam and 47.65% stake in Tech Mahindra. However, any swap ratio in favour of Tech Mahindra may prove to be slightly better for 'Mahindra' group.

7. Any swap ratio close to 9:1 will make the merger transaction "market-price" neutral, which means that there may not be any arbitrage opportunity left for the shareholders of both the companies. "However, the swap ratio close to 9:1 appears to be "value" decretive for the shareholders of Mahindra Satyam and "value" accretive for the shareholders of Tech Mahindra, Thunuguntla said.

8. If the final swap ratio is close to 9:1, then the combined entity will be having the market cap to the tune of about Rs 17,000 crore.

9. If the final swap ratio is close to 9:1, then the current Mahindra Satyam shareholders will hold about 51% in the combined entity and the Tech Mahindra shareholders will hold about 49% in the combined entity.

10. British Telecom, other promoter of Tech Mahindra, will be closely watching this space as they hold about 23.20% stake in Tech Mahindra. If the swap ratio is 9:1, then British Telecom will hold about 11.44% stake in the combined entity.

(With inputs from SMC Global Securities Limited note on the merger)

Cheers Future Mangers: No effect of recession on B-school placement

The job market, according to B-Schools that have released their placement data, hasn't looked this good in a long time for fresh management graduates. Top global recruiters have upped their hiring, average salaries have jumped by a minimum of 20 per cent and the number of companies visiting campuses for placement interviews has touched the three-digit mark in most institutes.

The 2012 Placements Story is best told by the experience of IIM-C. Campus interviews at the institute were slotted to be held over five days, but each of the 356 students of its graduating class bagged a job in four. And some must have landed more than one, because the number of collective offers for the batch stood at 423.

Leading the field, of course, is IIM-A, where the prestigious Boston Consulting Group has issued offers to 17 graduates, as against 11 last year. The placement process is still in progress at IIM-A, so the final figures aren't in.

Already, the average salary being dangled is reported to be in the stratospheric Rs 22 lakh to Rs 27 lakh range. The amounts on offer are being buoyed because of the interest evinced by big-ticket consulting companies such as McKinsey (which also hired 17 students from the Indian School of Business, Hyderabad), Bain and Co, AT Kearney, Accenture and Oliver Wyman.

At IIM-C, Zurich Financial Services have come to an Asian BSchool for the first time in its history to recruit for its Zurich and New York offices. Bank of America Merrill Lynch, according to CoolAvenues. com, has hired for an international finance opening based out of Hong Kong.

Capital One has made a global offer for its Dallas (Texas) office. And Swiss- Italian steel giant Duferco is hiring for the first time for its Lugano (Switzerland) head office.

The good news isn't limited to the IIMs. "As many as 98 per cent of our students got jobs within the first three days," an ebullient Fr. E. Abraham, director, XLRI-Jamshedpur, says.

Global investment banking and securities firm Goldman Sachs has made 12 offers for asset management and investment research jobs at the institute. XLRI's graduating batch of 235 has snapped up 284 offers, confirming the pattern of more jobs than new graduates.

Even at newbie IIM-R, the graduating batch of 47 has 58 offers to show, and the placement exercise is continuing. At Bharatiya Vidya Bhawan's S. P. Jain Institute of Management and Research, the batch of 176 has got 257 offers - 51 per cent of them going home with an annual domestic salary package of Rs 15 lakh or more.

"Our highest domestic salary this year is Rs 19 lakh, compared with Rs 15.5 lakh last year," Munish Bhargava, head of placements, IIFT, discloses. "The average salary of our students has also gone up to Rs 12.1 lakh from Rs 11.62 lakh last year," he adds.

IIFT students have accepted offers from 80 companies, including 33 first-time recruiters such as Duferco Group, German logistics giant Duegro, consulting biggies KPMG and Technopak, and ecommerce leader Flipkart. At XLRI, the highest domestic salary is Rs 40 lakh and the top international offer stands at Rs 61.8 lakh.

B-Schools attribute this surge in interest in hiring to the active role of the alumni. "Our alumni network around the world played a critical role in the placement process," Bibek Banerjee, director, Institute of Management Technology, Ghaziabad, says.

The sentiment is shared by Amit Dhiman, IIM-Calcutta's placement director, who says in a statement to CoolAvenue.com: "The alumni played a crucial role in this bad market scenario and were there to support us whenever we needed them. This shows the strength of Brand IIM-C."

Union Budget 2012-13- From the IMT-H Intellect Purse

Hello friends,
Below are the links to the articles on Union Budget 2012-13 by Dr. R.K. Pattnaik, Professor & Dean, IMT-H; and our beloved Dr. Archana Pillai, Associate Professor (Economics & Strategy), IMT-H; published in The Hindu Business Line and Free Press Journal :

1) Pattnaik R.K., Archana Pillai (2012, March 12). Action plan to cut fiscal deficit needed. The Hindu Business Line.  http://www.thehindubusinessline.com/opinion/columns/article2988282.ece?homepage=true
2) Pattnaik R.K.,Archana Pillai (2012, March 14).Time to lay out road map and push growth. Free Press Journal. http://www.freepressjournal.in/news/52682-time-to-lay-out-road-map-and-push-growth.html
3) Pattnaik R.K.,Archana Pillai (2012, March 17) Budget misses the mark on the fisc. Free Press Journal http://www.freepressjournal.in/news/53361-budget-misses-the-mark-on-the-fisc.html

CREDIBILITY OF CREDIT RATING AGENCIES

In November, Moody’s downgraded the Indian banking sector from stable to negative. On the very next day, S&P upgraded the sector by moving it from group 6 to group 5 which means improvement in the future prospects of the sector. Moreover, there is an interesting observation in S&P ratings that countries like Italy and Spain who are in huge debt crisis (specifically due to their banks’ debts) have been rated higher ratings than India. Now, isn’t this a cause of worry? What does this contradictory picture of ratings from world’s top two rating agencies tells us? Should we even bother about these ratings?

Currently, there’s a huge debate going on the credibility of ratings of these credit rating agencies. These ratings are coming out to be false picture of the actual scenario and also, there’s no consensus over the ratings within these agencies as well (As we can see in the case of difference between Moody’s and S&P ratings).  

According to a survey conducted by CFA association on the credibility issue, it was found as the popular response that CRAs were responsible for the Global economic crisis 2008 as they rated the risky financial securities as secure. Just to give a light picture, the day when Lehman brothers collapsed, they had healthy and secure credit ratings.

There are many more such cases where the credibility of these external regulatory bodies has been questioned. The famous fraud cases like Enron scandal have instances where the role of CRAs has been doubted upon.

Thus, the CRAs are being criticized all over the world due to their ambiguous procedures and criteria for ratings. These agencies are considered important as their ratings are a crucial driver of the mass’s business and investments decisions. If the CRAs really want to gain back their credibility, they would have to work on modifying their processes and being more transparent in it. Revival is need of the hour here!

By Nidhi Yadav

G-20 Summit

G20 or the group of 20 is a group of countries that include 19 countries and the European Union. It was formed in 1999 with a point of view of including the major emerging economies along with the developed countries in the important discussions about the global economy as they were not a part earlier. The members of G20 are Argentina, Australia, Brazil, Canada, China, European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, United Kingdom, and United States of America

G20 Summit 2011- Cannes

The 6^th G20 summit was held in 3-4 November, 2011 in Cannes. The main aim of this meet was to discuss the issue of the Euro zone downturn which was affecting the entire global economy along with some other issues.

Agenda

·         The meltdown of the European Union and the Global economic crisis.

·        Volatility in the commodity markets and their impact on the food prices. The rising food inflation in the developing economies.

·        Tax evasion and reforms on strengthening the role of International Monetary Fund (IMF).

·        Need for inclusive growth and infrastructure development as well as job creation in the developing economies.

·        Regulation of shadow banking.

Agreements made at the Summit

·        The G20 countries agreed that there is a need for creating jobs and ensuring financial stability and inclusion in the developing economies and decided to work on it.

·        It was decided to move towards market determined exchange rate systems to avoid exchange tare misalignments and competitive devaluation of currencies.

·        They committed to support the IMF in putting forward the new Precautionary and Liquidity Line (PLL) to provide on a case by case basis increased and more flexible short-term liquidity to countries with strong policies and fundamentals facing exogenous shocks.

·        Members decided to develop the oversight and regulation of shadow banking where India stressed that the sharing of Bank’s past data would help in the investigation of earlier cases of tax evasion.

·        Italian Prime Minister Silvio Berlusconi agreed to open Italy’s accounting books to the quarterly audit of the IMF staff to ensure that Italy is indeed fulfilling its promises to European partners and that his government is both serious about and capable of tackling its burgeoning debt levels.

·        The members decided to stick with their medium-term fiscal sustainability plans and strategies for financial markets regulatory reforms to provide more stable economic growth.

However, the Group of 20 failed to reach over a consensus on giving more power to the IMF to help distressed countries as Euro zone was the major concern. There was a lack of economic cooperation seen at Cannes despite such strong promises made. The individual members were lacking effort, and collective resolution was diluted.

Whether the Group of 20 will be able to implement the decisions made, properly, and will it be successful in reviving the global economy is yet to be seen.

By Aakriti Sharma