MACROSCAN : JULY 2014

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INTERNATIO
NAL
BUSINESS

INTERNATIO
NAL
ECONOMICS

INDIAN
ECONOMY

IBM-Lenovo
deal
The One cent
Delivery Amazon

IMF outlook on
recovery
Worlds 8th largest
economy

India- an
attractive
investment
destination?

INDIAN
BUSINESS

FACT-ABASE

CONCEPT
CRACKER

Flipkart buys
Myntra

Key Figures
Personalities

Greshams Law
Pigou Effect
NEXT
1

INTERNATIONAL BUSINESS
Arcelor Mittal, IBM and Lenovo
IBM-Lenovo strike a deal; Arcelor Mittal contemplating a takeover bid

The Chinese Ministry of Commerce's anti-monopoly bureau has approved Lenovo

Group's proposed $2.3 billion deal to buy IBM Corp's low-end server business. The
deal, announced in January, is expected to be completed by the end of the year.
ArcelorMittal, the world's biggest steelmaker, is considering making an offer later this
month for Italy's second largest steel producer Lucchini.
Lucchini, formerly owned by Russia's Severstal, was declared insolvent in 2012 and
later placed under "special administration" - a procedure designed to save large
companies and avoid heavy job losses. It fell victim to the 2008 recession that has cut
Europe's steel demand by about a quarter.
Italy's unions and politicians favour an offer that includes a commitment to keep the
blast furnace running. The furnace, idled in April, is part of a complex that last year
produced 1 million tonnes of steel or 4 percent of Italy's output.

NEXT
Aditya Sood

INTERNATIONAL BUSINESS
The One Cent Delivery - Amazon
Amazon fights back against what it terms discriminatory regulation
Amazon can no longer offer free shipping for books in France, so its charging a single penny.
The token charge is Amazons retaliation against a new French law, enacted Thursday, that bars
online booksellers from discounting their titles or offering free deliveries for book orders.
Nicknamed the anti-Amazon law, the measureis designed to protect Franceslocal book stores,
which face intense competition from larger chains and online retailers.
While the law is not specifically aimed at Amazon, Culture Minister Aurelie Filippetti has singled
out the US giant's practices in the past,attacking it for its "dumping strategy"and for selling
books at a loss.

Since 1981, France has banned booksellers from discounting the cover price of new books more
than 5%, an effort to discourage price wars between large retail chains and their smaller rivals.
Now Amazon and other online retailers cant even implementthatmodest discounts on books.

NEXT
Aditya Sood

INTERNATIONAL ECONOMICS
IMF Outlook on Recovery
Still fragile!

According to the IMF, Global economic activity should strengthen in

the second half of the year and accelerate in 2015, although
momentum could be weaker than expected.

As per the IMF, Central banks' accommodative policies may have

only limited impact on demand and that countries should boost
growth by investing in infrastructure, education and health, provided
theirdebtstays sustainable.

The fund forecast that global output would grow by 3.6 per cent in
2014 and 3.9 per cent in 2015.

"Despite the many responses to the crisis ... recovery is modest,

laborious, fragile, and measures to boost demand, despite the
goodwill ofcentral banks, will find their limits," IMF chief Christine
Lagarde commented.
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Aditya Sood

INTERNATIONAL ECONOMICS
Worlds 8th Largest Economy
Californias economy overtakes Russia and Italy, could surge even more

Californias economy has overtaken Russia and Italy, with the state now
ranked as the worlds eighth-largest economy.

The states $2.203 trillion gross domestic product in 2013 put California
slightly ahead of Russia and Italy and just behind the No. 7 economy, Brazil.
The rankings were calculated by the Center for Continuing Studyof
theCalifornia EconomyinPalo Altoand based on annual statistics from
theWorld
Bank.

Because of slow growth in Europe, California could close in on No. 5 France

and No. 6 United Kingdom in the 2014 rankings.

Californias eighth place showing in 2013 tells the story of the states
comeback after years of hard knocks starting in 2007. Silicon Valley has
played a pivotal role in the rebound. Californias GSP Gross State Product
grew 2 percent in 2013, slightly above its 1.6 percent average growth between
2000 2013.

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Aditya Sood

INDIAN ECONOMY
Railway Budget 2014-15
Key Highlights

No increase in passenger fares or freight proposed during the budget

Highest ever plan outlay of Rs 65,455 crore for 2014-15; Expenditure
pegged at Rs 149,176 crore
Proposal put forth for introduction of Diamond Quadrilateral
Plan to hike speed of trains to 160-200 km/hr in 9 sectors
Introduction of 58 new trains and extension of 11 existing trains
proposed
Online booking to support 7,200 tickets/minute and to allow 1.2 lakh
users to log in simultaneously
Women RPF Constables to escort ladies coaches; 4,000 women
constables to be inducted to enable the same
Feedback services through IVRS on quality of food; Food can be
ordered through SMS, phone
CCTVs to be used at stations for monitoring cleanliness
FDI in railway projects, except in operations; FDI, domestic
investments in rail infrastructure
Some stations to be developed to international standards through
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PPP model

Sandesh V

INDIAN ECONOMY

Railway Budget 2014-15 (contd..)

Analysis & Implication A Non-populist Budget

Non Populist Budget- Though no fare increase has been

announced in the budget, fare increase of 14.2% effective from June
25 was done to reduce losses/passenger. These losses were
estimated to have increased from 10paise/passenger in 2000-01 to
23paise/passenger in 2012-13. Further, fares have been linked with
fuel prices, to offset losses from fuel hikes. Hence, even though not
explicitly stated in the budget, fare hikes are imminent as fuel prices
vary

Refocus Resources- Of the 676 projects sanctioned at a cost of

over Rs 1,57,883 crore, in the past 30 years, less than half were
completed. An investment of Rs 1,82,000 crore is required to
complete them. Also, of the 99 new line projects started in the past
10 years, only one has been completed. Indefinite delay in
completion has led to dead projects and high sunk costs. To improve
this dismal completion rate, proposal is to limit new trains and
projects and focus on completing existing ones and to improve the
operating efficiencies of the railways

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Sandesh V

INDIAN ECONOMY
Railway Budget 2014-15 (contd..)
Analysis & Implication Focus on technology, safety, initiatives to bring in big money

Focus on Technology- Many new initiatives, from IVRS feedback of catering

to SMS booking of food would improve the quality of services on offer.
Offering of Wi-Fi in A-1, A category stations and in select trainsis proposed to
attract passengers to higher fare sections of trains, thus improve
revenue/passenger

Focus on Safety- Setting up of CCTVs at stations and introduction of Women

RPF Constables to escort ladies coaches is touted to improve the safety of
railways

Initiatives to Bring in Big Money- Introduction of FDI in projects and

infrastructure suggests that this would be the sources of fund for visionary
projects such as the Diamond Quadrilateral.

Change in policies- Looking to support PPP model, cabinet approval has

been sought for the same. This would require immediate and effective
change in policies to prevent failure of the PPP model. Though PPP Model has
been supported, silence has been maintained regarding privatization of
railways
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Sandesh V

INDIAN ECONOMY
Inflation of food prices
Recent rise in prices of food items and steps taken to tackle it

Reasons for Worry- Inflation, based on WPI, reached a high of 6%

in May 2014. This was led by increase in food prices, especially that
of potatoes, fruits, eggs and fish. Threat of low rainfall in coming
months and speculation regarding this is expected to further exert
stress on the prices
Steps taken to tackle this inflation and their implications-

Onion and Potato has been included under Essential Commodities

Act 1955 by the Cabinet Committee on Economic Affairs (CCEA) on
2 July 2014. This enables State governments to undertake dehoarding operations of onion and potato to control the prices and to
improve availability of these commodities to general public,
especially the vulnerable sections.
CCEA increased the minimum export prices (MEP) of onion by 67
percent to 500 US $/tonne from 300 $/tonne, making exports
costlier and no more a profitable option for traders
Additional allocation of 50 lakh tonnes of rice for distribution to BPL
families. This is expected to mitigate the problems of people
affected by food price inflation, particularly in States where the NEXT
Sandesh V National Food Security Act has not been implemented

INDIAN BUSINESS
Flipkart acquires Myntra
Post the deal, both entities will remain independent but Myntra chief will double up as head of
fashion vertical for Flipkart.

Company background:

Flipkart was founded in 2007 by Sachin Bansal and Binny Bansal. The
business was formally incorporated as a company in October 2008 as
Flipkart Online Services Pvt. Ltd. During its initial years, Flipkart focused
only on books, and soon as it expanded, it started offering other products
like electronic goods, air conditioners, air coolers, stationery supplies and
life style products and e-books.
Myntra.com was established by Mukesh Bansal, Ashutosh Lawania, Vineet
Saxena in February 2007. From 2007 to December 2010, Myntra.com was
in the business of personalization of products online.The products ranged
from T-shirts, mugs, greeting cards, calendars, key chains, diaries etc.
However, in 2010, the company expanded its catalogue to retail fashion
and lifestyle products.

Deal Details:

Deal Value- Rs 2,000 crore (over $340 million) through a stock transaction
Closure Date 23 May2014
Target Company Myntra.com
Stake acquired 100%
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Priyadarshini Mullick

10

INDIAN BUSINESS
Flipkart acquires Myntra (contd..)
Flipkart gets to add on the fashion segment leader; Combined entity eyeing to share logistics and
What really lies beneath technology
the deal backbone
?

According to the Economic Times, Flipkart loses Rs 70 crore a month while

Myntra is not just bleeding but also rapidly losing market share to
competitors like Jabong and other fast-rising fashion e-tailers. In 2013,
Flipkart lost Rs 281 crore (US$47 million) on revenues of Rs 1,180 crore
(US$197 million) while Myntra lost Rs 134 crore (US$22 million) crore on
revenues of Rs 212 crore (US$35 million) which is why, combining forcesin
other words, sharing a logistics and technology backbone, as well as
customerswill stem that tide to some extent, is the thinking.
One more reason is the worlds largest e-retailer ,Amazonthat has started
patrolling the waters in India.According to KPMG in just a year, Amazon India
has garnered half the visitors of Flipkart (6.78 million vs. 13.22 million). And,
with FDI in retail around the cornereven if the government doesn't go all
the way they are likely to introduce significant concessionsit could
completely upend the landscape.

Why Myntra makes sense for someone like Flipkart?

The e-tailer gets to add-on the leader in the hottest growth category in etailingfashionand one that has the fattest margins.The combined
entityalready has 50 percent of the marketand is expected to increase that
to 70 percent with this fashion-focused acquisition.

NEXT

Priyadarshini Mullick

11

INDIAN BUSINESS
India- attractive for investments?
High inflation and the other macroeconomic problems have cast doubts on the prospects for FDI

According to a UN survey, India has slipped to the fourth place in the

list of preferred investment destinations for transnational corporations.

China remained the top draw followed by the US. But, Indonesia has
overtaken India as the third most preferred destination for 2014-16.

In the last report, India was placed third but a series of policy flip-flops
and tax notices, which many in the government refer to as "tax
terrorism", have dented India's image.

Macroeconomic uncertainties in India continue to be a concern for

foreign investors. High inflation and the other macroeconomic
problems have cast doubts on the prospects for FDI, despite the
government's ambitious goal to boost foreign investment. Policy
responses to macroeconomic problems will play an important role in
determining FDI prospects in the short to medium run
NEXT

Priyadarshini Mullick

12

INDIAN BUSINESS
India- attractive for investments? (contd..)
A different policy approach to leverage foreign investment; franchising and other non-equity forms
to get5,000
global players
At the end of 2013, the world's
top TNCs, which include the likes of

Apple, Google and Pfizer, were sitting on a cash pile of close to $3.5
trillion almost twice the size of the Indian economy. They are expected
to invest a large part of the money in developing countries such as
China, India, Indonesia and Brazil to expand their business and tap the
growing talent pool across these countries. India has traditionally trailed
several Asian economies and even in 2013 was placed fourth in terms of
FDI flows, after China, Hong Kong and Singapore.

The Unctad report said the government's retail liberalization efforts have
not resulted in expected flows as international supermarket chains,
barring Tesco, have stayed away from investing in the multi-brand retail
segment due to the policy uncertainty.

It suggested that the government could adopt a different policy approach

to leverage foreign investment for the development of the Indian
industry. It also suggested that the government can look at franchising
and other non-equity forms to get global players to start operating in
India

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Priyadarshini Mullick

13

CONCEPT CRACKER
Greshams Law
Bad money drives out good

When a government overvalues one type of money and undervalues

another, the undervalued money will leave the country or disappear
from circulation into hoards, while the overvalued money will flood into
circulation

This law applies specifically when there are two forms ofcommodity
moneyin circulation which are required bylegal-tenderlaws to be
accepted as having similarface valuesfor economic transactions

The experiences ofdollarizationin countries with weak economies and

currencies may be seen as Gresham's Law operating in its reverse form
(Thiers law): Good money drives out bad money

Gresham's law may be generally applied to any circumstance in which

the "true" value of something is markedly different from the value
people are required to accept, due to factors such as lack of information
or governmental decree
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Arjit Agarwal

14

CONCEPT CRACKER
Pigou Effect
Wealth Effect resulting from Deflation

It is a term which refers to a relationship between consumption, wealth,

employment and output during periods of deflation

It states that when there is deflation of prices, employment and thus the output
will be increased due to an increase in wealth and thus the consumption. It is
also known as the real balance effect

Arthur Pigou (for whom this effect was named) argued against Keynesian
economic theory by professing that periods of deflation due to a drop in
aggregate demand would be more self-correcting. The deflation would cause an
increase in wealth, causing expenditures to rise, and thus correcting the drop in
demand

The Pigou effect creates a mechanism for the economy to escape the liquidity
trap: as unemployment rises, the price level drops, which raises real balances,
and thus consumption rises, which creates a different set of IS-curves on theISLM diagram, intersecting the LM curves above the lowinterest rate threshold of
the liquidity trap. Finally, the economy moves to the new equilibrium, atfull
employment
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Arjit Agarwal

15

CONCEPT CRACKER
Pigou Effect Contd
Pigou effect through IS LM curves

The Pigou or real-balance effect is a mechanism by

which an increase in the real money supply
resulting from a fall in the price level can influence
aggregate
demand
through
increasing
autonomous expenditure

If the reduction in prices from P0 to P1 is

associated with both an expansion of the real
money supply and autonomous spending, both the
IS and LM curves will shift rightward

Equilibrium output will rise to Y2 instead of Y1. This

implies the flatter AD curve in the bottom frame

With the real-balance effect, an increase in the

nominal money supply (all else being equal) will
result in a greater horizontal shift of the AD curve
as well
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Arjit Agarwal

16

FACT-A-BASE
INDIA AT A GLANCE
MEASURE
GDP(Q2 actual)

GDP(Q3 forecast)

VALUE
1.877
Trillion
USD
1.899
Trillion
USD
4%
22.5%
172.1
244

CRR
SLR
IIP
CPI (Industrial
Workers)
Government
8.72%
Bond Yield-10
WORLD Year
AT A GLANCE
MEASURE
LIBOR (Yearly)
US One Year
Constant
Maturity Treasury
(CMT)
US Treasury
Yield- 10 YearCoupon- 2.75%
Arjit Agarwal

VALUE
0.55
0.1

2.56%

Arvind Mayaram
Mr. Mayaram serves as Secretary
of Department of Economic
Affairs
He serves as Director of RBI, LIC
and also serves as Alternative
Governor for India at Asian
Development Bank
Rajasthan Cadre IAS Officer, he
holds experience at creating
frameworks
for
public-private
partnerships
He is the key
Roberto
Azevedo
personality involved
2014 Budget
preparation
in
Mr.theAzevedo
is the
Brazilian
diplomat and Director-General of
WTO
Under his watch, the Bali
package was approved
He is well known for his lectures
on international economics
He has served as Brazils
Ambassador
to
the
UNs
international organizations

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