NIVESHAK

THE INVESTOR VOLUME 2 ISSUE 6 July 2009

SPECIAL EDITION

Investment Banking: A flawed model Pg.6 National food security Bill Pg.22
 Niveshak From Editor's DesK
Volume II
ISSUE 6
July 2009

M
arkets across the globe are at their peaks since the Sub-Prime crisis en-
gulfed the world economy last September. Although it was there for some
time, it made its presence felt when the so called rock stars of high street
Faculty Mentor finance, the last four wall street investment banks, ran for cover in the second week of Sep-
tember last year. Since March this year the bull has been spotted on most of the occasions
Prof. S.S. Sarkar
but bear has capitalized on the volatility of the markets on some occasions. Since then, Bull
has pushed all the indices by more than 30%. To name a few, Nasdaq composite has moved
up by 48%, Dow Jones Composite Index up by 35%, NYSE S&P 500 by 40% and Nikkei
Editor by 35%. But the star performer has been our very own Bombay Stock Exchange-Sensex
Biswadeep Parida which has risen by more than 80% since March this year. This has been made possible
by positive quarterly corporate results, positive government reports, dwindling unemploy-
ment figure, and growth in Industrial indices, increased oil prices, increased government
spending by all countries, favourable growth projections by banks, government & non-
Team Niveshak government agencies.
Amit Choudhary Banks like Goldman Sachs, Citibank, JP Morgan Chase which were seen chasing
Nilesh Bhaiya Federal Reserve for life support a few months back booked huge Q2 profits even after
Sareet Mishra servicing debt bullets. This brought more cheer among B-Schoolers than in the market.
Sarvesh Chowdhury Corporate houses have been successful in riding this wave and have accumulated huge capi-
Sujal Kumar tal. Indian corporate which raised huge capital through Global Depository Receipts and by
Qualified Institutional Placement, were seen a few waves ahead.
Tripurari Prasad
All these news push me out of the limits of my realistic self. But as I float in opti-
mism and take a look behind my shoulders, I see lots of instances where a day of Bear Paws
upset days of Bull Run. What does this suggest? This says that there is enough pessimism
and volatility in the market; too high for comfort. Any half cooked report of a small nega-
tive projection by any non entity on any sector has upset the whole market on many ses-
sions. Macroeconomic fundamentals are projected on flowery assumptions and so are still
dicey. They have been intentionally projected to boost sentiments, financial markets & the
economy. As a result most of the markets are trading by more than twenty times their Price
to Earnings Ratio. Most of the listed companies are trading at more than fifty times their
Price to Earnings ratios. This indicates that even at such perceived low levels, the market is
irrationally upside and will slip once the dust settles and the smoke clears.
My last editorial suggested that much of India’s recovery and growth depends upon
the Union Budget. The Union Budget was passed on 6th July with a negative short term
effect on the markets. The long term effect of this budget, its effect on various sectors, its
comparison with expectations and growth parameters have been discussed in details as the
cover story of this issue.
I am very happy to note that in our next issue, Niveshak will celebrate its first anni-
versary. With your support, good wishes and contributions, Niveshak has successfully com-
pleted a full circle around the sun. Together we have witnessed the most turbulent time of the
world of Finance and learnt from it. We have seen the fall of banking stars, we have seen
iconic companies turning to Chapter 11 bankruptcy or mergers/acquisitions for survival, we
witnessed bankruptcy declaration by sovereign states and then we saw economies navigating
through the worst of recessions. To mark the success of our journey together, we shall have
a special anniversary issue capturing the roller coaster ride that we have been through, the
highs and lows of the world economy over the past year, the most fearsome fight between the
All Images and artwork
Bear & the Bull. I invite you to contribute articles on any specific event of the last year or
are copyright of IIM on “The year that was” as a whole. Yes that is the theme of out anniversary issue. Lots of
Shillong Finance Club exciting prizes are waiting to be yours. For more information, please see the declarations
page or Niveshak website.
What an awesome “Year that was”.
©Finance Club
-biswadeep Parida
Indian Institute
of Management, Shillong (Editor- Niveshak)

Disclaimer: The views presented are the opinion/work of the individual

author and The Finance Club of IIM Shillong bears no responsibility whatsoever.
 ContentS

In The News(4)

Finsight
Investment Banking -
A Flawed Model(6)

Cover Story
Budget '09(9)

The Chindia Debate

Where neighbours Spend(20)

Opinion
National Food Security Bill(22)

FinLounge
FinToon(12)
FinQ(24)

© The Finance Club, Indian Institute of Management, Shillong

 In the newS

July Gold compensation for Goldman’s

14 employees after robust Q2 Performance
Goldman Sachs stunned the world with a net income of $3.44bn this quarter even as the newly
turned bank holding company repaid back $10 bn of federal loans. It is now crystal clear that Goldman
knows how to make money better than anyone else on Wall Street. For Goldman Sachs, it is the time
to pay-off the conscientious foreign exchange and commodities traders, the people accountable for the
bank’s whopping profits. The bank is in the process of deciding the compensations for their employees
which may go up to $11 million. According to the CFO, these packages reflect the performance of the firm
in the second quarter where the ratio of compensation and benefits to net revenue rose to 49 percent.
These fat bonuses were widely criticized for pushing the world into sub-prime crisis.

July Tech Mahindra’s increased stake in

10 Mahindra Satyam
After the rechristening of Mahindra Satyam, tech Mahindra hikes its stake in the company. Through
the second round of preferential share allotment, Venturebay, a unit of Tech Mahindra, increases its
stake to 42.7% as Mahindra Satyam apportions 19.86 crore additional shares to venturebay. Tech Mahin-
dra had to go for second round of allotment of shares as it failed to acquire 20% additional stake from
the open market due to higher market price of Rs. 73 as compared to the open offered price of Rs. 58
per share.

July
Deflation Paradox Continues
10
Despite the fact that the prices are rising on weekly basis for the seventh straight week, still the
wholesale price index (WPI) decreased by 1.55% in the week ended on June 27. The overall price index
inched up 0.04% during the week with prices of primary articles firming up by 0.3%. Retail inflation has
increased from April to May 2009. Inflation in manufactured items, however, remained benign, hence
suggesting a poor demand environment.

July China Opposed ADB loan to Arunachal

10 Pradesh
The diplomatic war between India and China over the $60 million loan from the Asian Development
Bank, or ADB, for Arunachal Pradesh has entered a new arena. After the ADB overruled China’s objection
and approved a $60 million loan for a watershed development project in Arunachal Pradesh, China took
its protest to Japan. This loan is a part of ADB’s $2.9 billion India development plan for three years to
2012. China’s Opposition is based on its claims that Arunachal Pradesh is its territory. Its wait and watch
for now.
Page 4

Niveshak Volume 2 Issue 6 July 2009

 In the newS

July
Banks opting for “take-out financing”
07
For a long time, banks like SBI and IDBI have been trying to transfer some of their infrastructure
loans to finance companies like IDFC and LIC. Now, India Infrastructure Finance Company (IIFCL) plans to
pick up infrastructure loans from banks’ books after a few years of disbursement. With four ultra mega
power projects (UMPP) proposed by the government, the enormous loans required for a longer period
necessitates the take-out financing option.

July
Budget for “aam aadmi”
07
On 6th July, Union Finance Minister Mr. Pranab Mukherjee presented the Union Budget for the
year 2009-2010. The budget concentrated mainly on policies to augment the economy with a focus for
increasing the GDP growth rate to 9 percent per annum. Fiscal deficit was 6.2 percent of the GDP for
year 2008-09. Allocation for rural and urban infrastructure was increased by a large amount of almost 87
percent. GST would be applicable from April 1, 2010. It also concentrated on the upliftment of the weaker
sections. This budget had considered all the sections which affected the economy. This Budget has been
discussed in detail as the cover story of this issue of Niveshak

July
Mamta’s unique Rail Budget
03
Railways Minister Ms. Mamata Banerjee, on 3rd July, unveiled a massive plan to revamp railway sta-
tions in the country, saying that 50 stations in large cities would get world class facilities, while 50 more
would have multi-functional complexes. Though the financial stress was high, Ms. Mamta Banerjee did
not change passenger fares or freight cost. Passengers may cheer as the Rail minister has promised to
start 11 new non-stop trains and also improve on the other rail facilities on the various routes. But with
gross traffic receipts expected to grow at a slower 7.3%, while total working expenses are set to climb
by 12.7%, the operating ratio is set to deteriorate to 92.5% in 2009-10 from 88.3% in the revised estimates
for 2008-09.

June
Cuts in SBI rates
30
SBI promotes its market share in dealer financing by reducing the interest rates by 50 basis points
that is 0.5%. This sink would depend on the bank’s internal rating scale for each individual customer.
This new scheme started from July 1 and will be open till December 2009 and would help to double the
bank’s market share. It would also provide roaming current account and multi-city cheques facility to
dealers.

-Tanvi Arora
Page 5

© The Finance Club, Indian Institute of Management, Shillong


Investment Banking
...A Flawed Model
W ith the fall of the GODS of the Wall Street (most of
the Investment Bankers “Big Five”), the question in
everyone’s mind is whether the concept of I-banking is flawed.
What needs to be understood is, what made these institutions
fall. Was it because of the fallacies inherent in the Model or
simply because of Factors that were exogenously determined,
such as the burst of the Asset Bubble?
The people who argue so claim that the I-Bankers took
very high risks in order to book even higher returns, that could
not be justified by any kind of logical financial analysis. I do
not dispute their claim that perhaps they took risks that could
not be justified, but their extension of this argument that this
points to the faulty model of the I-banks is something that I do
not concur with.
I-Banks had started out as Organizations that facilitated
foreign trade through Underwriting and Distributing the issues
of the companies and later on moved to trading and facilitat-
ing Government Securities Market. They were primarily family
run businesses, and they bore all the risk of their activities that
they chose to undertake. This ensured that the risks would be
controlled as the owners themselves were liable.
As the banks progressed and the need arose they ven-
tured into the business of providing advice as financial experts
on a variety of issues such as Mergers and Acquisitions, Issues
of Equity, Capital Structure, etc and also Investing their clients
wealth. Still the risk of the investment lay with the Investment
Banks due to the “Principal Risk” clause in their contracts. Thus
their Revenue Model divided into two kinds of businesses, Fee-
based and Fund-Based. Underwriting, Advisory Services and Mer-
chant banking all formed part of this revenue source wherein
there was little or no risk in such returns. The other source of
revenue was Fund Based, which consisted of Investing on behalf
of their clients. This part also called Book-Keeping, and this is
where the risk lay.
With time as these Institutions expanded and were no
longer family owned or managed, these Fund-based earnings
were managed by the smart Investment Bankers, typically MBAs
from IIMs and MDIs of the world. They were paid huge bonuses
based on the kind of return that they were able to generate,
without any personal financial risk. This effectively provided
them sufficient incentive to take more and more risk, as the risk
was the organizations’ and they were counting on the diversity
of such risks to hedge their bets.
Niveshak Volume 2 Issue 6 July 2009
FinSighT
All went hunky dory till the Asset Bubble went bust and
the Subprime Crisis began. Most of the I-Bankers had purchased
the CDOs (Collateralized Debt Obligation), and MBOs (Mortgage
Backed Securities) of the world, based on the promise of high
returns. This was under the assumption that since such debts
had been bunched together as securities the risk had been ad-
equately hedged, playing by the rule of large numbers. Unfor-
tunately they did not anticipate the fall of the entire market of
such securities due to drastic fall in the value of the underlying
asset, the real estate.
This led to fall of the fund-based part of the Investment
Banks, due to insufficient Risk Management of their investments.
They had forgotten the very principle that they had based their
risk on, the Portfolio Theory. Nobel Laureate Harry Markowitz
(for his contributions in Economics namely The Portfolio The-
ory), had said in an interview “Diversifying sufficiently among
uncorrelated risks can reduce portfolio risk toward zero”. The
important word here is uncorrelated, as the risks that these
organizations undertook was simply not diverse enough, and
when one investment tanked it was followed by many more.
Hence I believe that it was not a failure of Investment Banking
per se, but of Risk Management. Moreover Investment Banks
are not just Fund-based Revenue dependent but also dependent
on Fee-based revenues, which are relatively no risk businesses.
Hence the Investment bank as an Institution has not
failed but it’s a failure of the Management, and more specifi-
cally the HR (Human Resource) of these organizations. The kind
of Performance Management System these organizations had
along with the individualistic and competitive work culture
provided an environment which was conducive to high amount
of risk taking. The only I-Bank that had a relatively more team
oriented work structure Goldman Sachs is in fact the one which
has been least effected as the team structure ensured lesser
investments because of competition and more because of analy-
sis. What does come out of this crisis of the Investment Banks is
the need for better Risk Management by the Corporates and the
role of the Human Resource Departments of these Corporates
in creating a more conducive environment which supports a
more stable and sustainable growth.
By Utkarsh Bindal
MDI, Gurgaon
Page 6
 Cover storY

BU
D GET ' 09

Exhibit: Revenue Budget

2008-09 2008-09 2009-10 Increase in FY10
Budget Est. Revised Est. Budget Est. over FY09 (RE) %
(INR b) (INR b) (INR b)
Tax Revenue 5072 4660 4742 1.8
Non-Tax Revenue 958 962 1403 45.8
Total Revenue Receipts 6030 5622 6145 9.3

Non-Debt Capital Receipts 147 123 53 (56.4)

Debt Capital Receipts 1261 2965 4010 35.2
Total Capital Receipts 1407 3088 4063 31.6
Draw down of cash balance 72 300
Total Receipts 7509 9010 10208 13.3
Fiscal deficit financing 1333 3265 4010 22.8
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© The Finance Club, Indian Institute of Management, Shillong

 Cover storY

Exhibit: Expenditure Budget

2008-09 2008-09 2009-10 Increase in FY10 over
Budget Est. Revised Est. Budget Est. FY09 (RE) %
(INR b) (INR b) (INR b)
Total Revenue Non 4484 5618 6188 10.0
Plan Expd.
Total Capital Non 591 562 769 37.0
Plan Expd.
Total Non Plan Expd. 5075 6180 6957 13.0
Total Revenue Plan 2098 2417 2784 15.0
Expd.
Total Capital Plan 336 413 468 13.0
Expd.
Total Plan Expd. 2434 2830 3251 15.0
Total Budget support 1800 2041 2398 17.0
for central plan
Total Central Assis- 634 788 853 8.0
tance to states/UT
Total Expenditure 7509 9010 10208 13.3

T
he Union Budget for the year 2009-10 was
announced by Finance Minister Mr. Pranab
Mukherjee on 6th July 2009. He had the
twin responsibility of meeting the expectation of the Aam
Aadmi who had delivered a clear mandate to the Con-
gress led UPA and the responsibility of taking India back
to the 9% growth bracket. Lets us see how he fared the
expectations.
The budget for FY10 clearly focused on boosting de-
mand and enhancing infrastructure investments. This is
reflected in:
1) An increase in plan expenditure by 34% from the
revised estimate in FY09, and an increase in non-plan ex-
penditure by 37%.
2) Increasing disposable income by abolishing sur-
charges on personal income tax and by marginally in-
creasing (by INR 10,000) the tax exempt income bracket.
The estimate is that this will increase disposable income
in the upper and upper-middle income brackets (i.e. an-
nual income above INR 10m) by 4.5-5%.
3) Allocation to key infrastructure projects increas-
ing sharply – for example the National Highway Develop-
ment Program (23% increase over FY09), Jawaharlal Neh-
ru National Urban Renewal Mission (87% increase) and
Accelerated Irrigation Benefit Program (75% increase).
4) A larger target for agricultural credit flow (INR
3,250b from INR 2,870b in FY09), continuation of interest
rate subvention for farmers (short term crop loans up to
INR 300,000 at 7%).
PSU disinvestment as a source of funds has not been
considered aggressively, moreover diluting the disinvest-
ment plan over a period till 2014. The government chose
to increase the fiscal deficit to 6.8% of GDP (from 6.2% in
FY09). The market borrowing target increased from INR
3.1trn in the interim budget to INR 4trn – raising con-
cerns about an increase in bond yields and interest rates.
Moreover, GDP for BE 2009-10 has been projected at INR
58.57t assuming 10.05% growth over the revised estimates
of 2008-09 (INR 53.21t) as released by CSO, leading to the
risk of slippage from the fiscal deficit target.
Market response
The BSE benchmark index, Sensex, tanked 5.83% on
the budget day. The market was disappointed primarily
because there were no targets set on disinvestments, no
announcements on increasing FDI limits on various sec-
tors. But the budget has to address a much larger con-
stituency than what the markets address. In addition to
the market concerns, the budget looks at rural spending,
infrastructure, education and health. Also, the decline in
Sensex may be because of the fact that the market may
have misinterpreted some of the specific tax proposals.
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Niveshak Volume 2 Issue 6 July 2009

 Cover storY

Tax Measures Impact

Increase in MAT from 10% to 15%
Abolition of personal income tax surcharge
Abolition of FBT
No impact on companies' EPS as increased MAT would
be claimed as MAT credit in the same year. Cash flow
would decline as MAT is a cash charge. Infrastructure,
Telecom and select oil & gas E&P companies are MAT
paying.
Increase in disposable incomes (for tax payers with
income above INR 1m) by roughly 4.5%
Positive for IT, Telecom and consumer companies by up
to 1% in earnings.

Budget impact on various sectors

Sector Budget Analysis Stock most

Impact impacted
Autos Positive Higher outlay for rural income/agricultural credit positive for tractors. In- M&M
crease in personal disposable income due to roll-back of 10% surcharge on
income-tax will be a positive for passenger car and UV sales. Higher allo-
cation for infrastructure development (through NHAI and JNNURM) will
benefit sales of trucks and buses.
Banks/ Neutral Market borrowing in FY10 projected to be INR 3,980b compared with the
Financials interim budget estimate of INR 3,086b. Government may shop in the first
six months of the fiscal and leave the next for private companies. IIFCL to
refinance commercial bank loans, & enable commercial banks to address
asset-liability mismatch.
Emphasis on developing core infrastructure was evident, with allocation to
road, rail and urban infrastructure projects increasing significantly.
Telecom Neutral Impetus to the rural economy through employment generation and other Bharti
initiatives positive. Increase in MAT from 10% to 15% negative, removal of
FBT positive.
Oil and N e u t r a l / Deregulation still on the cards as the government sets up an advisory com- RIL
Gas positive mittee to advice on fuel pricing reforms.
Real Es- Neutral Budget disappoints on key expectations. Key beneficiary would be Sintex Sintex
tate industries due to increased government spending on housing for rural and Industries
urban poor where Sintex already has a presence.
Construc- N e u t r a l / Target of increasing infrastructure spending to 9% of GDP extended by two L&T,
tion positive years to 2014. Increase in MAT from 10% to 15%. IIFCL to refinance com- Lanco and
mercial bank loans, enable commercial banks to address asset-liability mis- GMR Infra
match. Increase in allocation by 64% for the infrastructure sector overall.
M e t a l s Neutral Steel and other non-ferrous metal companies will be a beneficiary of the
and Min- increased budgetary allocation announced for spending on the infrastruc-
ing ture sector.
IT N e u t r a l / Overall, neutral to marginally disappointing relative to market expecta- HCL Tech and
Positive tions. Market is of the opinion that the industry was lobbying not just for Rolta
an extension of STPI tax breaks beyond March 2010, but also for a relaxation
of the 10-year holiday period by at least another three years.
Pharma N e u t r a l / Customs duty on specified life saving drugs/vaccines as well as on specified Cipla and Sun-
Positive heart devices reduced to 5%. Pharma
Cement Positive Indirectly benefits through infrastructure and rural housing stimulus. Grasim and
Ultratech
Page 9

© The Finance Club, Indian Institute of Management, Shillong


Budget discussion
The commitment to implement GST from April 1,
2010; the draft new direct tax code within 45 days; elimi-
nation of surcharge on personal income tax; increasing
allocation to most major infrastructure programs; Sup-
port to agricultural sector to maintain 4% growth are the
major positive signals from the budget. The FM has pro-
jected continuous infrastructure development and export
growth as medium and long term drivers for economic
growth.
Fiscal deficit of 6.8% at the centre means that the
economy may be in the unsustainable territory. With a
government borrowing program of almost INR 4t, inter-
est rates will head upwards. This may drag down the eco-
nomic growth even when the government on one hand
is spending more to give a stimulus. Our fiscal sustain-
ability is much leveraged to getting back to high growth
rates. In this backdrop, the dependence on external capi-
tal to fund private sector capex would increase, but to
pull the external capital we need a luring FDI policy. This
justifies the industry demand of increasing FDI limits. But
the stronger view is that to put Indian economy back on
the 9% growth trajectory an expenditure-centric budget
has been outlaid. IMF expects the global economy to con-
tract by 1.3 per cent in 2009, with a number of advanced
economies experiencing the deepest recession in the post
World War-II period. The World Bank has an even gloom-
ier outlook of -2.9 per cent for the world economy. This
has adverse implications for India's exports and capital
inflows, and hence, its growth, which has already slipped
from the highs of 9.0 per cent to 6.7 per cent in 2008-09.
Had it not been for the government stimulus, the fall in
growth would have been sharper. In this scenario, an-
other expansionary fiscal policy is essential to push up
growth; however, mounting deficits impose limits on
government's ability to do the needful. Deficit spending
on this scale risks an international rating review with
consequences for the rupee’s external value, potential in-
flation and of course higher interest rates.
Money supply growth has slowed down to 20.2%
and is marginally lower compared to last year’s growth
of 20.7%. RBI has targeted M3 growth for FY10 at 17%.
RBI may undertake various policy tightening measures on
higher inflationary concerns.
The New Food Security Act, which will come into
being in all likelihood by the next budget may cost INR
250b. We continue to spend but without any sustainable
financing source. PSU disinvestment and 3G auction pro-
ceeds (approx., INR 350b) are not the sustainable route to
fund expenditure. We have to target our subsidies better
and remove some of the tax exclusions.
Infrastructure development (highway and railways,
power, gas, water, urban infrastructure, etc) is the answer
to sustainable growth. The planned budget allocation has
been increased in the above areas to give a platform for
sustained inclusive growth. Allocation for railway devel-
Niveshak Volume 2 Issue 6 July 2009
Cover storY
opments was increased to INR 158b from INR 108b. The
budget stressed the government’s intention of bringing
infrastructure investment to 9% of GDP by 2014, from the
present 6%. The key proposals in the export sector includ-
ed the extension of Export Credit Guarantee Scheme till
March 2010, interest subvention for exporters, increase in
allocation for market development assistance schemes,
facilitating flow of credit at reasonable rates to micro,
small and medium enterprises through special funds etc.
The government is likely to rely on disinvestment as
well as an implementation of Goods & Services Tax (GST)
to achieve longer-term fiscal sustainability. The latest
Economic Survey has suggested an aggressive disinvest-
ment program to generate at least INR 250b per annum.
The government proposed to encourage people’s partici-
pation in the program while retaining 51% government
equity in public enterprises. The threshold for public
shareholding in finance companies was also proposed to
be raised in a phased manner.
The governments’ efforts to bring in structural
changes in the tax system (direct tax code) and stimulate
tax collections to GDP are a positive system building step.
On the indirect tax front, GST can be seen as a system
reforming measure.
Rural area development spending remains the key
policy focus in order to promote inclusive growth. Specif-
ically, the allocation for the National Rural Employment
Guarantee Scheme (NREGS) was increased to INR 391b
from INR 301b in the interim budget. The government
is set to pay additional interest subvention of 1% to the
farmers who repay their loans on schedule, which will
effectively bring down interest rates for these farmers
to 6% from 7%. The deadline for the Agricultural Debt
Waiver and Debt Relief Scheme was meanwhile proposed
to be extended to 31 December 2009 from 30 June 2009.
The allocation for the Pradhan Mantri Gram Sadak Yojana
has been raised to INR 120b. Allocation for the Rajiv Gan-
dhi Grameen Vidyutikaran Yojana has been stepped up to
INR 63b. Allocation of the housing component of Bharat
Nirmaan, Indra Awaas Yojana, is at INR 88b.
The living
standards of
the landless
rural work-
force would
improve with
the support
from NREGS
and other
rural devel-
o p m e n t
schemes
and also
with the
shortage of
labour from Bihar
and Uttar Pradesh
Page 11

due to successful NREGS implementation in those states,
the day wages of labour would improve in states like Pun-
jab and Haryana. Also the budget points out that NREGS
would be merged with other social sector schemes in-
volving farming, land resources and rural roads. NREGS,
PMGSY, IAY, would stimulate rural demand for products
like cement, steel and fast moving consumer goods as
well as services like mobile telecommunication services
and direct-to-home television.
The government wants to ensure an annual growth
of 4.0% in the agricultural sector. The government has in-
creased allocation to Rashtriya Krishi Vikas Yojana (RKVY)
by 30% to INR 41b. The outlay for the Accelerated Irriga-
tion Benefit Program (AIBP) has been increased by 75%.
The flow of institutional credit to farmers has been in-
creased to INR 3.25t. With 60% of population in India liv-
ing on agriculture, government has paid special attention
to this sector. The performance of the sector is highly
depended on monsoons and with the impending short-
fall in rainfall this fiscal, the robustness of the govern-
ments’ plan would come under severe test. The Budget
is silent on Plan-B to achieve projected 10.05% nominal
GDP growth in FY10 should the agriculture sector falter
given deficient monsoon conditions. The cascading ef-
fects would be seen in the manufacturing sector as well.
The government has not tackled the slippery wicket
of subsidy yet again. The total subsidy bill is around INR
1.06t. The government plans to move towards a nutrient
based subsidy regime instead of the current product-pric-
ing regime in the fertiliser sector. The unshackling of the
fertiliser manufacturing sector is needed to attract fresh
investments. Also government plans to move towards a
system of direct transfer of fertiliser subsidy to the farm-
ers. This only means shifting of subsidy from the indus-
try to the farmers, whereas the problem of subsidy still
remains. With improvements in farm product pricing,
rural transportation, rural roads, irrigation, rural electri-
fication and warehouses, government can embark on a
slow reduction of agricultural subsidy and making the
sector more responsive to market dynamics. Of course
this won’t happen overnight but still an early step in this
regard should have been taken.
The overall Plan budget for higher education is to
be increased by Rs 20 bn over Interim B.E. Government
introduced new scheme to provide full interest subsidy
to cover loans taken from scheduled banks to pursue any
of the approved courses of study in technical and profes-
sional streams from recognised institutions.
Growth drivers - 2009-10
1) Private consumption
During the 4 years of accelerated growth between
2004-05 and 2007-08, increase in private consumption
made the most important contribution to aggregate de-
mand. But the picture changed dramatically during 2008-
09. In the first half, the monetary tightening measures by
the RBI to control inflation and inflationary expectations
© The Finance Club, Indian Institute of Management, Shillong
Cover storY
pushed up the cost of borrowing. In the second half, the
sharper-than-expected global slowdown had an impact
on employment and income growth, especially in export-
oriented sectors. As a result, private consumption growth
slowed down considerably in 2008-09.
The budget of 2009-10 aims to stimulate private
consumption by increasing plan expenditure by Rs 400
billion over and above that was announced in the interim
budget in February. A large portion of this outlay would
be channelled through schemes such as National Rural
Employment Guarantee Scheme (NREGS) and Jawahar-
lal Nehru National Urban Renewal Mission (JNNURM).
The enhanced provisions for these schemes are aimed at
boosting demand and generate employment in the do-
mestic economy. In addition, an increase in the threshold
level for paying income tax by Rs 10,000 for general tax-
payers, and by Rs 15,000 for senior citizens would raise
disposable income, albeit marginally. The removal of the
10 per cent surcharge on income above Rs 10 lakh for per-
sonal income tax payers should also encourage consumer
spending. However, In spite of these measures, private
consumption growth is unlikely to recover significantly
in the current fiscal as job and income uncertainty con-
tinues. In addition, interest rates on retail bank credit
have not come down to the level necessary to boost
household consumption.
2) Government consumption
In the second half of 2008-09, the government effec-
tively used the fiscal policy as a tool to provide a boost to
domestic demand and counter the negative impact cre-
ated by the global financial crisis. Government expendi-
ture is once again expected to be a leading growth driver
in the current year. Total expenditure of the Central gov-
ernment is budgeted to increase by INR 1.199t or by 13.3
per cent y-o-y, primarily on account of higher plan outlay
to boost domestic demand and increased food subsidy
Until 2007-08, the most encouraging feature of govern-
ment finances was an improvement of government sav-
ings and the increasing fiscal responsibility it exhibited.
The pattern altered completely last year. As noted in the
previous section, given the large size of stimulus already
underway and more under consideration, importance of
a clear commitment to long-run fiscal discipline is criti-
cal. In the absence
of such a perceived
commitment, expan-
sionary fiscal actions
can lead to increases
in long-term interest
rates, which would
tend to offset the
stimulus effects of
the fiscal actions on
GDP.
Page 11

3) Investment
The trend of investments in the economy rising
in tandem with the GDP has been a prominent feature
of India's growth story. In the last fiscal, however, in-
vestment growth, although robust, slowed down from a
peak of nearly 19.0 per cent in 2004-05 to just over 8.0
per cent, as financing constraints and depressed demand
compelled companies to revise their investment strate-
gies. The improvement in investments in recent years
has been driven by a significant increase in the private
corporate sectors investment, largely funded via retained
earnings, which has doubled as a share of GDP within 4
years - from 6.8 per cent in 2003-04 to 15.9 per cent in
2007-08. The current slowdown is likely to hit corporate
investments, going forward.
In light of the slowdown in growth of private in-
vestment, the budget announced a number of key initia-
tives to increase public sector investments, especially in
infrastructure sectors such as highways and railways as
well as urban infrastructure. The increased government
spending, although necessary at this juncture, has further
weakened the government's fiscal position. The current
deterioration of the public sector finances could have an
FIN TOON
By D i lpr eet S. Gandhi &Saurav Bagchi
Niveshak Volume 2 Issue 6 July 2009
Cover storY
adverse impact on corporate investment going forward, if
a definite plan to reduce fiscal deficit is not in place. Ear-
lier in this decade, private corporate sector investment
had soared after the public's saving records started to
improve and freed up resources for private investment
and also brought down the cost of borrowing.
4) Trade
India's external sector also witnessed a significant
contraction in export and import growth in the second
half of 2008-09 as the global economic crisis spread and
world international trade started to contract.
In spite of the government measures announced in
the budget to support the export sector, such as provi-
sion of enhanced export credit and guarantee cover and
the extension of the interest subvention of 2 per cent on
pre-shipment credit for certain export sectors, trade con-
traction is likely to persist in the current fiscal year due
to shrinking global trade activity.
By Arun Saluru
IIM, Shillong
IIM Shillong
Page 11
 Cover storY

»»»»»»»» Budget'09:Analysis »»»»»»»»

Economic Backdrop
Union Budget was to be presented in a difficult
time of downturn and recession in the global economy.
This had an adverse impact on Indian exports and capi-
tal inflows. Growth rate fell from high 9’s to 6.7 percent
due to reduced demand and financial constraints faced
by the private sector. Almost all sectors took a hit. This
could have been worse had the government not pro-
vided three stimulus packages as a counter measure.

Expectations
Budget of 2009-10 was expected to take the econo-
my on a growth trajectory. The Budget was expected to
provide the necessary demand side push. Due to this the
GDP would grow and the economy will move towards
full capacity and employment.
Expectations from Budget -
1. India needs a massive infrastructure up grada-
tion. Development of infrastructure would not only im-
prove the supply side bottlenecks but also provide the
requisite demand side stimulus to growth. This would Sector-wise growth rates that influenced the Budget
create jobs, public wealth, conductive environment for
Spending more money in rural sector and lower income
business and a good return for investment. Investment
grow will create larger multiplier as they have a greater
plan regarding investments in nuclear power genera-
marginal propensity to consume.
tion was expected to be announced.
8. India's exports have fallen for the ninth month
2. Disparities in India are stark. 35% of Indians are
in a row, beginning October 2008 under the impact of
illiterate. The condition of health care in the rural areas
the global downturn. Export based industries that ex-
is dismal. Most of the hospitals are without the basic
pect a decline in growth should be supported. Credit
equipment. Spending in education and health sector
facility, tax incentives, export promotion are some mea-
was expected to increase. Improving the quality of hu-
sures that will boost exports and create jobs.
man resource will result long term growth.
9. Direct and Indirect tax burden on private sec-
3. The huge Central Government fertiliser subsidy
tor should not be increased as it would affect the senti-
is one of the main reasons behind imbalance and over-
ments of the sector. Also high taxes will result in lower
use of synthetic nitrogen fertilisers in India. Replacing
private investments. Introduce GST to demolish tax bar-
the current subsidy with nutrient base fertilizer subsidy
riers between states and have uniform tax rates and
was required. Performance of food grains, oil seeds, sug-
policy within the country.
ar and cotton was dismal during 2008-09 compared to
2007-08. 10. Cautious disinvestment was expected. Disin-
vestment will cause decrease in revenue account re-
4. Increased allocation of funds for defence and na-
ceipts due to loss of dividends (especially high perform-
tional security.
ing companies like BSNL). Therefore government should
5. A comprehensive policy on water and food se- try to increase the efficiency of PSUs. Disinvestment can
curity was expected especially due to climate change is- be done in some selective PSUs.
sues.
11. Auction of 3-G spectrum should bring in addi-
6. Reforms were expected in both fertilizer and tional revenues. Loan from World Bank, borrowing from
food sector. There are urgent non-merit subsidies using public should be other big sources of funds for the gov-
step ladder approach. These subsidies are huge burden ernment.
on revenue account. With stable UPA govt at the centre
12. FDI limit in some sectors like in insurance
this was best opportunity to initiate the reforms.
should be increased and FDI should be allowed in re-
7. Promotion of NREGA, funding to SMEs and SHGs tail and aviation. This would increase the foreign invest-
should be done more aggressively as it would create ment.
employment in rural sector and increase in demand.
13. Roadmap to reduce fiscal deficit was expected.
Page 11

Niveshak Volume 2 Issue 6 July 2009

 Cover storY

Fiscal Policy Tools Dissection

Page 11

© The Finance Club, Indian Institute of Management, Shillong

 Cover storY

Fiscal Deficit Trend

Actual Budget Analysis
Expansionary fiscal stance has been maintained in
order to reverse the economic slowdown that has set in
since the second half of 2008-09. Expenditure has been
increased in critical areas while tax rates have been
largely left untouched. As a result, the fiscal deficit is
expected to increase from 6.2% of GDP in 2008-09 to
6.8% in 2009-10. High deficit poses a threat to mid-term
macro-economic stability as, for example, the price level
and foreign exchange rates.

Growth strategy
1. Increase in private consumption (C) - Large por-
tion of this outlay would be channelled through schemes
such as NREGS and JNNURM.
2. Government consumption (G) – Government
expenditure will be leading growth driver in the cur-
rent year. Total expenditure of the Central government
is budgeted to increase by Rs 1,199 billion or by 13.3 per
cent y-o-y.
3. Investment(I) - Budget announced a number of
key initiatives to increase public sector investments, es-
pecially in infrastructure sectors such as highways and
railways as well as urban infrastructure
4. Trade(NX) -Provision of enhanced export credit
and guarantee cover and the extension of the interest
subvention of 2 per cent on pre-shipment credit.
Yad = C + I + G + NX
Equilibrium condition will be reached when output
supplied (Y) will be equal to quantity demanded (Yad)
Page 11

Niveshak Volume 2 Issue 6 July 2009

 Cover storY

Area of emphasis security.

Expenditure 2008-09 2009-10 %Change 4. FDI limit in insurance sector was expected to be
Defence 105600 141703 34.19 increased. Also FDI could have been allowed in aviation
Petroleum 288.43 3109 7.79 and retail. A high forex inflow opportunity was lost here
subsidy 5. Surcharge should not have been removed. High
Food subsidy 32666.59 52489.72 60.68 income group can be taxed as their marginal propensity
Fertilizers 20139.26 15728.19 -21.90 to consume is low.
subsidy 6. Subsidy like in kerosene and LPG should be only
Education 4244.18 7778.6 83.28 for those living below the poverty line.
Medical, public 1555.75 2726.7 75.27 7. Though there was provision for institutions like
health and IITs and NITs, there was no increase in allocation for
family welfare primary education
Transport 1550.63 1985.61 28.05 8. Last but not the least budget speech by our
FM was expected to be energetic and reassuring, sadly
If we compare the budget of 08-09 with 09-10 which was not the case here.
we can see that subsidies have increase specifically in Given the scenario our finance minister has done
food, oil etc. Subsidy on urea fertilizer has decreased a good job. There is a calculated risk which has been
as government has moved towards nutrient based fer- taken but lot will depend on the execution of the budget
tilizer policy. Government has laid emphasis to already provisions. Also monetary policy must be in sync with
neglected education sector by increasing budgetary al- fiscal policy to maximise the effect of this stimulus. Ex-
location by 83.28%. This budget is therefore directed ternal factors like oil prices, monsoon, external demand
towards creating consumption which would help indus- etc will also play a major role in the success of this bud-
tries to recover. Sector which will benefit the most will get.
cement/steel, FMCG, Consumer durables, real estate and

By Atul Gupta
automobiles.

Expectations v/s Actual budget SIBM, Pune

This budget from UPA was eagerly awaited by the
industry and general public alike. Industry had hoped
for tax reliefs, stimulus packages and reforms in agri-
culture and subsidies. People especially poor who had
brought the UPA government to centre were expecting
job opportunities; cheaper/subsidised on food, oil and
fertilizers; lower taxes; better health and education fa-
cilities. Thus this budget was a challenging task keeping
in mind the bleak economic scenario worldwide.
Few things that were expected and were not incor-
porated are –
1. Roadmap to reduce fiscal deficit should have
been provided. High fiscal deficit is a cause of extreme
worry and can reduce the credit rating for India
2. Roadmap on disinvestment should have been
provided at least in the loss making PSUs
3. The budget disappointed in areas related to seed
sector, rainwater harvesting, agri-insurance etc. There is
little in budget for agricultural growth but more for in-
clusive growth. Little has been done to ensure the food
Page 11

© The Finance Club, Indian Institute of Management, Shillong


E F F E C T ON Financial sector
The Finance Minister, Mr. Pranab Mukherjee’s
Budget Speech talks of three main challenges to Indian
Economy at present:-
i) Lead the economy back to the high GDP growth
rate of 9 percent per annum at the earliest. Growth of
income is important in itself, but it is as important for
the resources that it brings in. These resources provide
us with the means to bridge the critical gaps that re-
main in our development efforts, particularly with re-
gard to the welfare of the vulnerable segments of our
population.
ii) Deepen and broaden the agenda for inclusive de-
velopment; and to ensure that no individual, community
or region is denied the opportunity to participate in and
benefit from the development process.
iii) Re-energize government and improve
delivery mechanisms. Indian institutions must provide
high quality public services, security and the rule of law
to all citizens with transparency and accountability.
The Finance Minister has tried his best to main-
tain a tight balance between all these three objectives
throughout the various nitty-gritty’s of his Budget. Let
us try to analyze some of the important steps that he
has mentioned from the point of view of the problems
mentioned above, and how far do they have the poten-
tial to be successful in achieving the objectives as men-
tioned above.
Key points of budget'09-10
a) Real and Nominal GDP growth assumed at 6.5%
and 10.05% respectively
b) Revenue Deficit projected at 4.8 percent of GDP
c) Fiscal Deficit projected at 6.8 percent of GDP
d) Total expenditure increased by over 36 percent
to Rs 10,208.38 billion over 2008-09
e) IIFCL to refinance 60 percent of commercial
bank loans for PPP projects in critical sectors over the
next 15-18 months
f) Allocation to NHAI for NHDP, JNNRUM, APDRP
all increased by large extent.
g) Rebate for Farmers paying loan on time at a low-
er rate of 6 percent proposed.
h) Allocation under NREGS programme increased
Niveshak Volume 2 Issue 6 July 2009
Cover storY
Budget'09
by 144 percent
i) Allocation for BHARAT NIRMAN programme in-
creased by 45 percent
j) Overall Plan budget for higher education to be
increased by Rs 20 billion.
k) Retaining 51 percent govt. equity stake at PSUs,
still estimated proceeds from Disinvestment for Busi-
ness year 2009-10 stands at 11.2 billion.
Impact factors and their impact
FARM CREDIT
Government has directed banks to lend Rs. 3,250
bn to the farm sector. Interest subvention scheme for
short term crop loan at a subsidized rate of 7% per an-
num is going to continue for the current fiscal year. Un-
der the debt relief scheme, farmers having more than
two acres of land were given margin upto 30 June 09
to pay 75% of their overdue. In the current budget this
period was extended to 31 Dec 09 because of late arrival
of monsoon.
REFINANCE SCEHME
There is also a proposal to provide a special fund
of Rs. 40 bn for supporting micro, small & medium en-
terprises (MSME). This will incentivise the banks & state
financial corporations (SFC) to lend MSFE by allocating
about half of the incremental lending to small and me-
dium enterprises. Also Rs. 20 bn is allocated for the ru-
ral housing fund to National Housing Bank (NHB) will
broaden the pace of rural housing.
FINANCIAL INCLUSION
To ensure provision of atleast one centre for bank-
ing services in every part of the country, one time grant
in aid of Rs. 1bn was proposed to set aside. This project
is expected to be completed in 3 yrs. It has been pro-
posed to relax the Branch Authorization Policy. These
proposal are a part of the large financial inclusion drive,
providing banks with an opportunity to expand their
core banking business.
HARDENING YIELD
Lower returns on G-Sec in the back drop of revised
estimates for fiscal deficit will have a negative impact
on the banks’ investment portfolio. On the other hand,
the investment activities will pick up due to the growth
Page 11
 Cover storY

in investment income. However, comparing the magni-

tude of both the effects, it is estimated that the fall in
the face value of G-Sec will be of higher order than in-
FinQ March’09 Issue Answers
vestment income. Also there are other factors like ma-
turity profile& coupon rate which will determine the 1. Bank of New York, which was the first cor-
impact on G-Sec. Still, on an average this will have a porate stock traded under the Buttonwood
marginal negative impact on the investment portfolio tree in 1792, and the first listed company on
of banks.
the NYSE.
In Budget ’09, emphasis has been laid on priority
sector lending focussing on Agriculture, micro & small
enterprises and rural housing. Continuation of interest 2. Berkshire Hathaway
subvention scheme, debt waiver and debt relief scheme
will negatively affect the profitability of banks. How- 3. $80 million in U.S. Government bonds that
ever, the reduction in target growth rate (over the previ- were issued in 1790 to refinance Revolution-
ous year ) will give bank a breather.
ary War debt.
Overall the impact of BANKING & FINANCIAL sec-
tor is NEUTRAL
4. The Philadelphia Stock Exchange, in 1790
Industry expectations Vs Budget'09
The budget didn’t meet most expectations of the 5. 1867
banking sector. There were no announcements made on
foreign direct investment (FDI) in insurance and public 6. Chicago Board of Trade 1848
sector undertaking (PSU) bank divestment. Banks had
gained 32% between May 15 and July 3 on account of 7. Con Edison, which was listed in 1824 as the
high expectation of reforms to be introduced but not
much was covered in the budget. Also, higher than ex- New York Gas Light Company
pected fiscal deficit will put pressure on bond yields.
Many financial analysts expect 10-year bond yield to 8. March 29, 1999, when it closed at 10006.78
touch 7.5% in short-term and 8% by December-end.
Severe liquidity crunch will keep the banking 9. The Curb, because it was originally started
counter underperformer. The relaxation in non-per-
by traders on the streets of New York City
forming loan norms in real estate and corporate sectors
may lead to weakening of asset quality and exert greater standing on and by the curb.
stress on the sector. Retaining public sector nature of
banks is seen as an indicator of slow process of consoli- 10. The Massachusetts Investors Trust was
dation & reforms. created on March 21st, 1924
On the contrary, there are few positive points also.
As the disposable income of people increases due to In-
come tax relief, savings will increase and it is also good
for banking. Overall, while the Budget did not stand true
to all of market expectations, we expect that the govern-
ment’s efforts will continue outside the Budget also and
will help improve India Inc’s earnings.

By Arpit S O lanki & Avik Roy

IIM, Kozhikode
Page 11

© The Finance Club, Indian Institute of Management, Shillong


Where
the
neighbours
spend
T he current global economic scenario presents
several challenges and opportunities to the
world’s emerging economic powerhouses - China and In-
dia's economic developments. The repercussions of the
financial crisis has manifested itself in terms of reduced
GDP growth rates in China from 13% in 2006-07 to 9% in
2007-08 and from 9% in 2006-07 to 6.7% in 2008-09 for In-
dia. Sustaining high growth rates would require increased
government spending to support key areas in economic
and social development like agriculture, infrastructure,
education, healthcare, etc. Diminishing revenue sources
due to the slowdown would make it difficult for gov-
ernments to finance expenditures necessary to enhance
the economic wellbeing of the country and its people.
Targeted fiscal deficit for 2009 is at a six-decade high
in China while for India it is at an uncomfortable 6.8%
of GDP, the widest in sixteen years. While acknowledg-
ing these economic pressures, the article tries to look at
how being in a period of strategic opportunities, the two
countries plan to continue to promote steady and rapid
development in three aspects – the rural economy which
supports majority of the population, infrastructure – that
would provide continued stimulus to growth and educa-
tion – that determines the future of the two countries.
Rural Economy
The sector is very important to both India and China
since they have a huge proportion of rural population to
support which are directly dependent on agriculture for
their livelihood. However, the China-India differential in
the average growth rate of agriculture (4.8 per cent ver-
sus 2.9 per cent) is like a mirror image of the differential
in the overall growth rate of GDP (9.5 per cent versus 5.6)
averaged over the last twenty five years. There is wide
consensus on the rule of thumb that for China and India,
an X% growth in agriculture will result in a growth of
2X% overall.
China has 933 million hectares of total land, a little
over three times of the Indian land area of 297 million ha.
Yet, the Chinese are constrained by an arable land area
of 124 million ha, which is three quarters of the Indian
endowment of 162 million ha. However, the amount of ir-
rigated land is the same in both the countries at about 55
Niveshak Volume 2 Issue 6 July 2009
The chindia debatE
million hectares giving China an irrigated to arable land
ratio of 0.44 while India a modest 0.34. In order to correct
this anomaly, the Indian budget proposed a hike of 6.8%
for irrigation and flood control and a 5.5 % growth in
agricultural allocation this year. In comparison China has
boosted spending on agriculture and allied activities with
a 43.6% y-o-y increase in 2008-09 followed by a healthy
27% increase in 2009-2010.
The Indian budget has also been seen a big push
for rural development in 2009. There has been a 144 per
cent jump in the allocation for the flagship job guarantee
scheme, NREGA to Rs. 39,100 crores, and a 45 per cent
hike for the Bharat Nirman programme that seeks to
improve infrastructure in villages. There is also mention
about efforts to merge the scheme with other social sec-
tor schemes involving farming, land resources and rural
roads. China has also boosted its spending on rural areas
by 20% over the previous year.
Infrastructure
Developing infrastructure is the key to sustaining
economic growth and poverty reduction. Throughout the
last decade, China has invested heavily in infrastructure.
A lack of a facilitating policy framework had been the
major roadblock in infrastructure development in India.
However, the last two years have seen India boosting
spending on building highways, modernising ports and
airports. Despite significant improvements most infra-
structure services are at a level far below that what is
required to sustain high rates of economic growth. While
most of China’s infrastructure was developed by state
owned companies and would continue to be so, India of-
fers huge scope for opportunities for Public-Private Part-
nerships, private firms and portfolio investors.
The Union Budget in India had but limited provi-
sions for infrastructure. It is only the power sector that
received an increase of 160% through the Power Develop-
ment and Reform Programme. It is interesting to note
that over the past two years allocation towards transport
infrastructure in India had increased 57.1% in 2008-09 and
20.4% in the last budget. The corresponding figures in
China had been 28.1% and 17.8% respectively. Also, spend-
ing on transport Infrastructure in India is budgeted to be
Page 22

about US $20 billion in 2009 while in China it is US $ 27.7
billion.
The issue that arises is, even if China is the bench-
mark and our allocations towards infrastructure are in-
creasing every year, is the pace sufficient to sustain a 8-9
% growth rate. While spending on roads in India would
increase by 23 %, spending on national highways other
than those implemented by NHAI would reduce .The bud-
get has mainly increased allocations on ongoing projects
like Jawaharlal Nehru National Urban Renewal Mission
for urban infrastructure and Bharat Nirman.
Education
Education is a fundamental driver of a society’s de-
velopment. Both China and India spend roughly the same
percentage of GDP on education. This implies that in per
capita terms, China spends more than India on this front.
It is also a well known fact that India well lags behind
China in primary education with literacy rates more than
85% compared to India’s less than 65%. While China has
achieved universal basic education, India has much left to
do. Although primary education is compulsory and there
is legal guarantee of free education, the gross enrolment
ratio in primary education is low in India at 98.1 as com-
pared to China (116.2). Also, China has acquired a consid-
erable lead over India even in higher and professional
education.
The Indian Union Budget 2009 has laid emphasis
on education through a Rs.900 crores provision for the
Scheme ‘Mission in Education through ICT’ and higher al-
locations under the Skill Development Mission .There has
also been enhancement for higher education and alloca-
tion of Rs 2,113 crores for IITs and NITs especially in J&K
and the North Eastern States. The Mid Day Meal Scheme
has been extended to upper primary classes which will
benefit 2.5 crores additional number of children. How-
ever, spending on school education under Sarva Shiksha
Abhiyan has not been increased. Public expenditure on
schooling would be inadequate for the number of chil-
dren entering school-going age every year. The budget
also makes no mention of issues related to implementa-
tion of the programmes. The Budget has also introduced
a new scheme to provide full interest subsidy for loans to
the weaker sections of the society.
The Budget in China is more focused on compulsory
education and implementation. It has provided for a 16.1%
increase in for operating compulsory education in rural
areas which includes a wide range of allocations from
providing tuition and other education-related expenses
for compulsory education, maintenance of buildings, to
implementing a performance-based salary system for
teachers in compulsory education. Funds have also been
allocated to develop county-level vocational education
centers and demonstration secondary vocational schools
and improve facilities in rural schools. Subsidy allocations
have been made for vocational colleges and workshops
to gradually make secondary vocational education free in
rural areas. Several billions have been allocated for assis-
© The Finance Club, Indian Institute of Management, Shillong
The chindia debatE
tance to students from poverty-stricken families and for
state education assistance loans and subsidies apart from
provisions for higher education.
At an overall level, planned expenditures for edu-
cation in the Indian budget have increased at 20% over
2008 and 24.5 % in 2008 over 2007. The corresponding fig-
ures for China are as high as 23.9% and 48.5% respectively.
Out of the US $54 billion budgeted for planned ex-
penditure in China, funds have not only been allocated
for building rural highways, airports and trunk railway
lines but also for subsidizing urban public transportation,
rural passenger transportation and taxi services. More
than half the planned expenditure would be allocated to-
wards rural development and infrastructure construction
like roads.
Conclusion
The Chinese model of development has stood it in
good stead, with agriculture first getting transformed and
growing rapidly, creating the funds and manpower sur-
pluses for fuelling industrial growth, notably in the small
and medium industrial sector. For India reform began in
the external sector. Purchasing power in the rural areas
remained low for years, with a tremendous impact on
the overall growth rate. The rural poor in India continue
to be around 30 per cent of the population as against
less than 5 per cent in China. The link between Chinese
agricultural expansion and the overall market expansion
for all sorts of non-agricultural goods and services is only
obvious. All this happened in a country with less arable
land than that of India.
Over the past decade, economic growth in rural In-
dia has outpaced growth in urban areas by almost 40 per
cent. Rural India now accounts for half of the country's
GDP. Hence, the emphasis on the rural development with
an increase of over 117% over the previous year makes
strong economic sense. Also, this would further cushion
India from external crisis due to increased dependence on
domestic consumption whereas the Chinese ‘economic
miracle’ is hugely dependent on export-led growth and
state-led fixed investment. Importantly, agriculture in ru-
ral India now accounts for only half of rural GDP and is
declining.
However, infrastructure and education need further
reforms in India as both hold the key to poverty reduc-
tion. Infrastructure development would take place only
with stronger political will, greater transparency and
an environment conducive to the private sector. Invest-
ments in infrastructure, primary education and higher
education that foster innovation are indispensable to lay
the foundations for more developed economies in future.
India has much to learn from China here.
By Manas Jain &Lopam udea Biswas
NMIMS, Mumbai
Page 22

NATIONAL FOOD SECURITY BILL
E mboldened by the electoral verdict that gave 206
seats to the Congress, the UPA-II government has set
out a five-year ``transformative agenda for governance'' that
promises a big deal to women and the poor.
The National Food Security Act (NFSA) is a strategy to ef-
fectively address global hunger and improve food security. So is
this different from the half-a-dozen schemes already in place or
just another populist measure?
At present, the Centre provides 35 kg of rice or wheat per
month to each BPL family. Wheat is supplied at Rs 4.15 per kg
while rice at Rs 5.65 a kg to over four crore families living below
the poverty line.
The proposed National Food Security Act (NFSA) is the
government’s way to feed the hungry and impoverished in India
– the world’s largest population of hungry and malnourished. As
per the NFSA bill worth Rs. 50,000 crores, each Below Poverty
Line (BPL) family would be entitled by law to get 25 kg of rice or
wheat per month at Rs 3 a kg.
The Act, if enacted properly, could be a new beginning
and turn the appalling hunger in India into history or become
just another populist measure by the government.
However, the only worry here is that the proposed Act
should not push the hungry even more deeply into a virtual hell
because of the following factors:
• The urgency with which the proposed law is being
drafted: Meeting the deadline of putting this law into gear in
the first ‘100 days’ of UPA-II without first adequately debating
the finer details and trying to work out a plausible structure for
a long-term food security plan, is fraught with dangers. Merely
replicating the Public Distribution System (PDS) in a new avatar
will not be sufficient to lift people out of hunger.
There have been earlier attempts by other nations at
fighting hunger. For example, Brazil’s Zero Hunger programme
launched by in 2003, for providing three square meals a day to
an estimated 46 million people living in hunger and extreme
poverty, was the result of a year of inputs from various stake-
holders, and is still far away from alleviating hunger.
Thus these hunger-alleviating programs require extensive
research and study for effective implementation and success of
the programs.
• Data surveys carried out to estimate the BPL families,
are useless if the people being surveyed have an incentive to
lie: Surveys of the National Sample Survey, used to measure
poverty, ask people how much they consume of various items.
But people have an incentive to understate consumption to be-
come eligible for benefits.
E.g.: The Act guarantees 35 kg of grain at Rs 3/kilo for the
poor, who are to be identified by five-year surveys. Hence, even
the middle-income families will claim to be poor to qualify for
cheap food.
• Currently, wheat is supplied at Rs 4.15 per kg while
rice at Rs 5.65 a kg to over four crore families living below the
poverty line. Now if new food security bill is likely to reduce
the monthly allocation by 10 kg, then all poorest of poor under
existing BPL list are also likely to pay @ of Rs.3 kg in place of Rs.2
kg.
Niveshak Volume 2 Issue 6 July 2009
OpinioN
The road to insecurity
The NFSA bill is likely increase food rate by 30 per cent
and may cut 35 per cent monthly allocation of more than 32
million poor families under existing Antyodya scheme. In short,
the scheme claims to reduce the prices of food grains but at the
same time the total quantity has also been reduced by 10 kgs.
Hence the allocation of grains also reduces from the present
one.
Since poor families generally have many members to feed,
they will need to buy the extra needed grains at market prices
which in turn will defeat the purpose of providing food security
to the poor and needy.
• Addresses malnourishment and not hunger:
The focus of any food security bill should be nutritional
security as opposed to food security. Instead of providing the
high quality, high cost and low nutritional valued rice, the cen-
tre could provide the poor with nutritionally superior and low
cost coarse grained rice. This will not only serve the purpose
of feeding the poor but also address their nutrition needs and
hurt the government treasury a little less! Thus the NFSA must
aim at expanding the food basket by including coarse cereals
and pulses.
• Dependence on adequate rainfall:
The Government, in passing the NFSA bill, has been as-
suming that the rainfall in 2009-10 will be normal and adequate
enough to produce the required amount of food grains.
However, if this doesn’t happen and since the Govern-
ment will still have to honour the proposed scheme, it will just
add to the government’s fiscal deficit problems.
Thus, any flaw in the proposed Act, leading to unintended
exclusions of genuinely poor people will only result in unneces-
sary discord and discontent at the ground level.
The key challenge is not just passing the Bill, but making
sure it is implemented in a manner by which this subsidized
food reaches the needy. The proposed National Food Security
Act (NFSA) cannot be a stand-alone activity. It has to be inte-
grated with various other programmes and policy initiatives to
ensure that hunger becomes history. To achieve this objective,
the food security plan should essentially aim at adopting a five-
point approach:
Key points to ensure the success
1. Public Policies for Zero Hunger:
• For a successful ‘food-for-all’ in the long-term, India
must move to a Zero Hunger programme by attacking the
structural causes of poverty and hunger like creating adequate
employment opportunities and promoting sustainable liveli-
hoods by involving the village communities.
• Better health care facilities, access to safe drinking wa-
ter and sufficient micro-nutrient intake will ensure that food is
properly absorbed.
2. Sustainable livelihoods:
• Agriculture is being sacrificed for the sake of industry,
mining and exports, and land acquisitions are divesting Indian
farmers of their only form of economic security by forcing them
to quit agriculture.
Page 22

• In a country where agriculture is the mainstay of the
economy, all efforts must be directed towards strengthening
low external input sustainable agricultural practices and revi-
talise the natural resource base, restore groundwater levels, and
provide higher incomes to farmers.
• The NREGA has to be integrated with agriculture, and
the interest on micro-credit for the poorest of the poor has to
be brought down to 4 per cent from the existing 20-48 per cent.
3. Dismantling the Public Distribution System:
• India’s PDS technically caters to 316 million people. If
the PDS had been even partially effective, India shouldn’t have
been saddled with the largest population of hungry in the
world. Hence, there is an urgent need to dismantle the PDS
except for the Antyodya families.
• The reason is that the existing PDS, with a network of
at least 400,000 fair price shops, suffers from large leakages. The
Planning Commission’s study of 2005 shows that roughly 58%
of grains issued from the PDS do not reach BPL families due to
problems ranging from targeting errors to corruption all along
the chain.
• The Wadhwa committee looked into the operations of
PDS and recommended, in its report submitted in 2009, an end-
to-end computerization of PDS operations, from procurement
to distribution of grains.
• It also suggested using radio frequency identification
devices to track the movement of grains to stop large-scale cor-
ruption and diversion.
• Even the present classification of BPL and APL (‘below
poverty levels’ and ‘above poverty levels’) needs to be done away
with. For e.g. The recommendation of the National Commission
on Enterprise in the Unorganised Sector (NCEUS), which states
that 836 million people in India spend less than Rs 20 a day,
could be the criteria for a meaningful food-for-all programme.
4. The Community Food grain Bank Model:
• The dismantling of the Public Distribution System has
to be followed by the setting up of food grain banks at the vil-
lage and taluka levels. Any long-term food security plan cannot
remain sustainable unless the poor and hungry become part-
ners in the fight against hunger.
• A Community Food Bank could be maintained by the
community with withdrawals according to need in times of
stress.
• The subsidy involved is barely Re1 per kg, as compared
to the Rs7-10 per kg for wheat currently being shelled out by the
Food Corporation of India under various schemes.
• This system has the advantage of cutting down on food
miles. The shorter the distribution channel or food pipe, the
smaller the possibility of leakage.
• Coarse grains and pulses, despite their low cost and
nutritional superiority, have not been a part of the public dis-
tribution system on account of their limited shelf life. However,
this argument is easily overcome by making production and
consumption local.
• Thus, it would also provide traditional, nutritionally
superior, culturally acceptable fare based on coarse grains and
pulses rather than on wheat and rice.
• The Community Grain Fund model not only caters to
the chronically hungry but also empowers them by giving them
control over their own food security. Decisions on crops to be
planted, procurement prices and beneficiaries would be taken
locally, albeit closely monitored by designated government
agencies or NGOs.
• Thus there are ample examples of successful models of
© The Finance Club, Indian Institute of Management, Shillong
OpinioN
traditional grain banks (The famed Gola system in Bihar), which
need to be replicated through a nationwide programme involv-
ing self-help groups and NGOs.
5. International commitments:
• Global commitments and neoliberal economic policies
like the World Trade Organisation (WTO) agreements, the Free
Trade Agreements (FTAs) etc should not be allowed to displace
farming communities and play havoc with national food secu-
rity.
6. Other Implementations:
• A system of direct cash transfer to beneficiaries should
be adopted instead of resorting to the "complex Public Distribu-
tion mechanism" which is fraught with possibilities of default
and errors of inclusion and exclusion.
Studies show that instead of physical handling of grains,
conditional cash transfers to the poor, especially women, are
much more cost-effective ways of helping the poor.
• New technologies can be used to issue biometric cards
to the poor for their entitlements through food vouchers. These
food vouchers can be used to buy a number of food items from
any grocery shop, who in turn can get these reimbursed from
post offices or banks on a commission basis.
• To identify the poor, one can combine high-tech meth-
ods with social audits. The criteria must be simple, and to the
extent possible, foolproof.
For example, one can say that all those who have a motor-
ized vehicle, or a cell phone, or a land line with a minimum bill,
or a job in the organized sector, etc., are not BPL.
However, these people will have every incentive to make
false claims to poverty so the leakages to the non-poor will be
massive.
A better way to improve targeting would be to use gram
panchayats to identify the poorest families in each village, and
restrict cheap food to them, as in the Antyodya programme,
which has a decent reputation for reaching the truly poor.
For instance, in poor districts, panchayats could be given
enough cheap food to distribute to the poorest 60% of families,
while in rich districts panchayats could be given enough cheap
food for the bottom 10% of families.
This will eliminate the incentive of households to lie to
surveyors — beneficiaries will be selected by panchayats, not
surveyors. Such a scheme will restore honesty to surveys, and
reduce leakages of food and cash transfers to the undeserving.
Thus the National Food Security Act which works on the
"cheap wheat and rice" model, would not only be more expen-
sive, in terms of economic cost, carrying cost and transportation
but will also ignore the nutritional needs and the existing food
culture among two-thirds of our population.Also, it artificially
inflates the demand for wheat and rice and does not involve or
empower the community in any way.
Thus unless the UPA-II government comes up with a de-
tailed and well-studied implementation plan, the NFSA or, for
that matter, ANY such schemes will erode, rather than enhance
the self-reliance of rural communities!
By Rituma & Shubhada
NMIMS, Mumbai
Page 22
 FinloungE

FinQ
1. Which word was derived from the French word Bougette meaning 'Little Bag'

2. In Indian economic scenario what significant reform was introduced by the Indian Government on
April 1, 1957?

3. Name the first private sector corporate launched the gold fund in India?

4. Which is the only country having paper currency and have no coins and it introduced cheque only in 1997?

5. X has its headquarters in Zurich, Switzerland. It opened its first branch outside of Switzerland in 1942. In 1988,
it gained a controlling stake in The First Boston Corporation. In 1993, Credit Suisse Group bought Schweizerische
Volksbank (People's Bank of Switzerland). Identify X

6. Which company had its world Headquarters located at 383 Madison Avenue, between East 46th Street and
East 47th Street in Manhattan?

7. The founder of which brand, now a part of P&G, once said, ''I have done more than anyone else to change the
face of mankind''?

8. Identify the company whose ad is shown below?

9. Identify the logo

10. This is a mathematical algorithm for scheduling a set of project activities. It is used commonly in the fields
of construction, engineering, plant maintenance among others. It was developed by the DuPont Corporation in
the 1950s. What is this technique?

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

ARTICLE OF THE MONTH

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year or look at the year as a whole. You can choose from one of the top-
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1. The Collapse of Wall Street

2. 21000-8500-15000. what a roller coaster ride?
3. Satyam Fiasco
4. Bankruptcy of Auto Giants
5. Was 2008 worse than 1929?
6. Can the new government in USA & India bring things back on track?
7. Is the crisis bottoming out or is the worst yet to come?

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