Cases

1. Due to the certain events, manufacturing companies’ setup in China are looking to setup
further investments outside country. India is one of the alternate countries for setting up
of manufacturing plants outside China. But instead, companies moved their manufacturing
to ASEAN countries like Vietnam and Korea. What can Government of India do in terms of
Policy changes to attract those companies?

The first and foremost thing which irks incoming FDI investors is red tape. Why would
anyone want to put their money in a financial ecosystem which mandates running around,
appeasing an army of bureaucrats and leaves you exposed to instability and cost as well time
overruns without so much as a whimper of an apology or consideration. Legal reforms,
liberation and favourable taxes are necessary for economies to reach their full potential.

In Vietnam, there is a single point of contact, a person who takes care of everything from the
government side. By doing more of what Vietnam and Thailand already do, India needs to
increase infrastructure spending, liberalise trade, reform land and labour laws and offer tax
reductions to foreigners willing to invest in India.

India has also recently lowered the corporate tax rates to assuage large corporations but the
road does not end there. India needs to be quick to react to the evolving global scenario.
Recently, in the light of the trade war, Vietnam has been swift in offering attractive
corporate tax rates for large firms wanting to relocate. For instance, the two common
preferential corporate tax rates of 10 per cent and 20 per cent are applicable for eligible
large manufacturing projects for 15 years and 10 years. In deviation, the standard rate is 40
per cent for foreign companies and branches of foreign companies in India. Considering the
surcharge and cess, the highest effective rate is 43.68 per cent for foreign companies in the
country.

To attract more industry and large players, it needs to provide incentives based on the type
of work that it wants to host on its land which is technology intensive industries like
electronics and export quality technical manufacturers. India already has existing
infrastructure by companies like Samsung which has a large factory in the NCR region,
exporting about thirty percent of what it manufactures which is a good sign.

Presently, our import regime is also in need of dire reform. To help build up the
abovementioned industries, we need to ease up on the import frameworks so that more of
electronic and electrical assembling can be carried out inside the country.

While industrial hubs like Germany, Japan etc. attract the best talent, Indians look down
upon anything that involves getting into the dirt or grease. Vocational training can help
inculcate a rigorous work ethic and make the most intellectual of us feel like being a part of
the manufacturing sector. This should not be difficult as India produces approx. 20 STEM
graduates per 1000 citizens which is respectable and more importantly a vast pool of
relevant talent, just waiting to be employed and engaged.

References:
  Why manufacturers are not rushing into India. (2019, October 7). mint. Retrieved
December 23, 2020, from https://www.livemint.com/industry/manufacturing/why-
manufacturers-are-not-rushing-into-india-11570429217983.html
 Mazumdar, R. (2020, September 2). Forget China, can India match Vietnam?
@businessline. Retrieved December 23, 2020, from
https://www.thehindubusinessline.com/opinion/forget-china-can-india-match-
vietnam/article32506729.ece

4. Suppose that you are the manager of a firm that has just entered the chemical processing
industry. You face the following problem- should you produce a relatively small quantity
of industrial chemicals and sell them at a higher price or should you increase your output
and reduce your price?

Deciding the pricing of a product while entering into a new market can be very challenging.
In the given situation the company has taken the decision to enter the chemical processing
industry and face the problem with respect to the supply quantity and its price.

Let’s suppose it is an Indian company. It could operate in segments like base chemicals,
speciality chemicals, pharmaceuticals, agrochemicals or biotechnology. And, the products
could be alkali chemicals, inorganic chemicals, organic chemicals, pesticides, insecticides,
dyes and dyestuffs. Since nothing has been specified about the product, we assume that
they are into one of the above-mentioned segment/products and they are not introducing
any new/niche chemical or a patented one, over which they would anyway have monopoly
and can could sell it at a premium price or exercise their pricing power.

So based on above assumptions, a basic understanding of the chemical industry can give us
our answer.

1. Chemical industry is highly fragmented with intense rivalry amongst companies. Since,
100 per cent FDI is allowed hence domestic companies face stiff competition from
foreign competitors as well who may dump chemicals at low prices.
2. Small chemical companies rely on supplies from larger plants, or petrochemical units.
Inputs for a chemical plant cannot be easily substituted. So due to high bargaining power
of the supplier the company has to bear minimum cost and cannot keep low prices.
3. Customers have multiple sources of supply and chemical companies are bound by long-
term contracts. So, the bargaining power of the customer is high as we have assumed
that the company is not into a niche speciality chemical.

Considering this we can say that the market for chemicals is an elastic one and the
company don’t have the pricing power and they have to set it as per the market forces.
5. Financial sector in India witnessed a number of setbacks in the recent times like the NBFC
crisis, PMC bank crisis, Yes bank crisis, very recent Laxmi Vilas bank crisis. What do you
think are the prominent reasons behind these failures? Is there any common similarity
that indicates a deeper malaise in the system? What RBI can do as a regulator to prevent
these events?

A lot of reforms have been going on in the banking and NBFC space led by the RBI. The major
issues that these sectors face are that of capital and liquidity. Let’s look at the given
examples in detail:

The NBFC crisis: NBFCs can be broadly classified as deposit taking NBFCs and Non-deposit
taking NBFCs. While the deposit taking NBFC have the CAR requirements the non-deposit
NBFCs don’t. The issue that they face is that of liquidity. The NBFC in order to improve their
interest margin take short term loans that are available at lower interest and lend them for
long duration which offer a higher interest. If the credit rating of the NBFC go down they
won’t be able to raise new loans to pay the existing one and the NBFC defaults. Also, banks
which have lent to NBFC see a rise in their NPAs. This is what happened in the ILFS case.

PMC Bank crisis: The reason that led PMC Bank into trouble was the money laundering
activities that were deployed by the company’s management. PMC being a cooperative bank
was not regulated by RBI’s banking guidelines and its auditing was not done as per their
norms which RBI changed subsequently.

Yes Bank crisis: Yes Bank lent money aggressively to stressed companies in order to garner
higher interest income. The bank eventually saw the NPAs rising and their capital eroded
subsequently. RBI had to step in and later capital was infused in the bank mainly by SBI and
other financial institutions. Later the co-founder Rana Kapoor was booked for Money
Laundering and fund diversion.

Laxmi Vilas Bank crisis: Laxmi Vilas Bank has been the latest private bank to fall prey to the
rising bad loans. Lakshmi Villas Bank, which had a Gross NPA of 25.40% in Jun-20 quarter and
a CAR of 0.17% had to merged with DBS India as per the directions of RBI. The bank was
already put under the PCA framework by the RBI since September 2019.

Banks and NBFCs are backbone of any economy. Due to their unique characteristics, they are
regulated by the central bank, RBI. Currently, Banks have to adhere to BASEL III norms and
maintain the required amount of capital and liquidity. RBI has taken various measure like the
establishment of Central Repository of Information on Large Credits (CRILC) in July 2014
where the banks are required to share real time data of all loans of Rs 5 crore and above.
This has helped gauge the NPA accounts of the banks which are even further classified into
SMA0, SMA1, SMA2 accounts. Also, RBI has started placing the state-run banks whose NPAs
are rising beyond the limit under PCA Framework. Banks need to follow risk management
practices effectively.

Also, good corporate governance and senior management accountability can prevent the
misappropriation of funds.
6. There was reduction in the sales of watches in India in a particular year. The fast-track
watch owner decided to reduce the price of watches to boost sales. The Rado watch
retailer in India suggested its parent company in Switzerland to do the same. But the CFO
of Rado did not agree to the proposal despite the retailer mentioning the demand and
pricing concepts. Rather the CFO advised the retailer to clear his concepts of economics.
Retailer went back and after studying some economics considered himself to be a fool to
suggest the CFO to reduce price. What was CFO referring to?

Price elasticity of demand is an economic measure of the change in the quantity demanded
or purchased of a product in relation to its price change. Here, the lowering of the Rado
watch’s price should result in higher sales. But it is not going to be so.

Why?

Because Rado watch is a luxury item. It’s a Veblen good.

A Veblen good is a good for which demand increases as the price increases. Veblen goods
are typically high-quality goods that are made well, are exclusive, and are a status symbol.
Veblen goods are generally sought after by affluent consumers who place a premium on the
utility of the goods.

Rado being a luxury product is an exception to the demand-price curve in economics.

The fast-track watch is much less of a luxurious brand than Rado. Fast-track being an
indigenous brand can afford to lower prices as it thrives on volume of sales.
On the other hand, Rado thrives on brand image of which expensive pricing is an element.
Moreover, to pay for cross border innovation and technological transfers, Rado needs to
maintain its margins.

The economic considerations in Switzerland are not the same as in India as well.

7. Producers of processed goods and related consumer goods often issue coupons that let
consumers buy products at discounts. These coupons are generally distributed as a part of
advertisement for the product. They may appear in the newspaper or magazines or in
promotional mailings. For example, a coupon for a particular breakfast cereal might be
worth 50 cents towards the purchase of a box of the cereal. Why do firms issue these
coupons? Why not just lower the price of the product and advertise the same and also
saving the cost of the printing and distrusting the coupons?

There are things coupons can do aside from lowering the prices than just lowering the price
of a product as per marketing perspective. Coupons can be used as an advertising medium.
In that way coupons acts as a form of communication tool with customers than just plain
seeing discounted yellow tag/orange tag.
Because it’s a good way to still get more profits from those who already shop with you and
are too lazy to coupon hunt. The coupon is more of a way to attract new customers to try a
product vs trying to increase the market share by lowering the price. They figure if they can
get a new customer hooked the first time with a discount, they can then get their value out
of them 10-fold when they buy the product again from that point on at the regular price.

Another thing is it affects the buying decision of customers. Usually, coupons have an
expiration date thus making customer oblige to buy that product in a given time period. A
coupon in a customer’s hand has stored (perceived) value. You want to spend it before it
expires. Coupons, once a customer takes action to acquire it, is effective in converting to a
sale more than just a price drop. Lowering prices is a practice that often leads to a race-to-
the-bottom.