Arthneeti Finance Newsletter June 2011

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ydenham Institute of Management Studies Research &

ntrepreneurship Education

SIMSREE Finance Forum Initiative | June 2011Arthneeti

Special Feature: Mr. Bharat

Sampat, CFO & EVP, DCB

Meeting Infrastructure Needs

of Indian Economy

Interview with Mr. Sujan Hajra,

Chief Economist, Anandrathi


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MSREE Finance Forum Arthneeti 20

eDITORSvIEWThe world economic outlook has been shadowed by rising debt problems in the Euro

region and with the contagion expected to affect the other PIIGS nations as well.

There are also concerns about United States unsustainable fiscal deficits, which is oneof the greatest challenges it faces. The US problems have been further aggravated with

the unresolved debate on debt-ceiling creating an impression of US default on public

debt.

Back home, the Indian economy grew by 8.5 percent in FY2011, which is lower than

expected but better than the global growth standards. In the backdrop of higher

inflationary pressures in the system, RBI continued its monetary tightening measures

because of the high domestic inflation which is much above the comfort zone. It

increased the repo rate & reverse repo for the tenth time by 25 bps to 7.5% & 6.5%respectively. The monsoons are expected to be good which would taper down the food

prices and moderate the inflation within RBI limit. Other emerging economies such as

China and Brazil have also been battling inflation for the past one year.

In this issue, we have interviewed a prominent banker and an economist on the

banking scenario and economic outlook respectively. The issue brings to you some

more interesting topics relating to infrastructure development in India, the Pharma

sector and Brazilian economy.

As part of our forum activity, we were fortunate to have Mr. Sunit Joshi, EVP & Head-

Capital Markets Group, SBI Capitals on campus for an insightful session on Capital

markets.

We do look forward to views and suggestion from the readers to help us improvise the

content of the Newsletter and make it more relevant and informative.

Hope you enjoy reading.

Gopidalai Muralidhar Rao(Editor-Arthneeti)


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CONTENTS

Special FeatureAn Interview with Mr. Bharat Sampat

CFO & EVPDevelopment Credit Bank (DCB)

Expert TalkAn Interview with Mr. Sujan HajraChief Economist & Co-Head-ResearchAnandrathi Financial Services

The SIMSREE Street

Economy Analysis

- BrazilMeeting the Infrastructure Needs of

Indian Economy

Sectoral View: Pharmaceuticals

Macr-O-nomics

Lessons On Finance

Personality To Emulate

Finance-Q ?

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13

17

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things now stand, most of the existing banks could meet

any reasonable increase in this hurdle without a stretch.

Q: There are quite a large number of Public Sector

banks (PSBs) with presence across India. Do you

think there is a need for consolidation in PSBs?

A: Firstly, each PSB has its own flavor and within State

Bank of India (SBI) group, subsidiaries have their own

flavor and focus areas. For example, Canara Bank is

different from SBI, which is again different from Punjab

National Bank (PNB). They have different targets and they

operate in different areas. They may be present across the

country but they have their own focus, but I do see a need

to consolidate in that sense. Government has significant

ownership but not complete ownership. Hence, it is not

like merging two wholly owned subsidiaries into one

company. Whether it would bring in economies of scale, I

think pursuit of balance sheet size is not somethingabsolutely a must. In fact banks which have become the

biggest banks have gone through stresses and strains. If

you look at Royal Bank of Scotland (RBS) or Citibank,

both had their own share of stresses and strains. In late

90s, some Japanese banks were used to be in top ten banks

in terms of size around the world, but today they dont

exist on that list anymore. Now, China is reaching that

place, but where are Japanese banks now. So, it is not only

size which gives you advantage. Larger deals can be run by

Indian banks on a syndication basis with the exposure

shared. I dont think mergers are necessary for thatpurpose.

Q: Aftermath the financial crisis, risk management

has been a priority. Basel Committee on Banking &

Supervision (BCBS) has recently proposed the new

Basel III norms. How would this affect the Indian

banks?

A: In India the Capital Adequacy Rate (CAR) stands at a

strong 13.4%+ levels. There are also other risks which are

not measured by the balance sheet by Basel II norms. So,

Basel III norms would pave way for better risk

management. Banks, in general should be able to make the

transition given that our CAR stands well above the

requirement by Basel Committee. Capitalisation levels are

strong in Indian banking industry. We would have to

eventually move to Basel III, which is inevitable and I

dont see any problem to it. You cant play in an

international market unless you are also streamlined with

the regulatory regime over there. If you declare your

capital adequacy as per Basel II and if the world has

moved onto Basel III standards, then how will they value

your credit worthiness? So, yes Basel III will come in and

RBI has already been taking steps on that front.

Q: How can Banks play an active role in

strengthening the Bond market?

A: I think there has been intermediation of routing

wholesale bonds through mutual funds for example. That

route has been to some extent restricted and curtailed by

RBI. Traditionally banks have offered good fixed deposit

rates and vis-a-vis the riskiness of the bonds there was to

some extent an aversion to bonds in retail investor

community. However if you see recently, L&T Finance as

of this week and Sundaram Finance came out with some

Rs. 1000 crores bond issue. Sundaram issue has been

oversubscribed 8 times in the first day. There is asignificant appetite decent corporate bond. Price

differentiation will also then start emerging and yield curve

could be more effectively embedded into the banking

system if we have a deep corporate bond market. So yes, it

is required but it would take time before it develops. For

an emerging economy which aspires to be a developed

economy needs to have a deep corporate bond market in

place.

Q: What has been the significant change in the global

banking system post the financial crisis?

A: Bigger Is Better no more holds good. There is less

emphasis on pursuit of higher market share and bigger

balance sheet size. Bigger banks face continuous scrutiny

from regulators on their liquidity, capitalisation levels and

corporate governance practices. Proposed Basel III

implementation will further strengthen the bank balance

sheets. Emerging markets have become the new growth

engines of the world economy and this provides a unique

opportunity for banks of these countries to grow rapidly.

Q: How much would the depressed US economy &

Euro crisis affect the Indian growth story?

A: Muted US economy and Euro crisis would result in

greater capital flows into high growth emerging markets

like India in terms of FIIs and FDIs. Economies of skill

and scale offered by Indian economy make India attractive

as a quality low cost production destination for many


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sectors. Emerging middle class drives increasing demand

for goods and services in sectors like FMCG, Two-

wheelers, Consumer durables, etc. Similarly, expected

infrastructure spend would drive demand for commodities

and industrial goods. This makes India, an attractive

destination as manufacturing hub for all industries. Lastly,

this also results in reverse bran drain or at least diminished

outflow of talent from India. This provides a ready talent

pool for domestic and international investors.

Q: DCB has been present in some states and other

major cities in India. So, is this a strategic decision to

expand in selected regions across India?

A: As far as DCB is considered, we are majorly present

across 56 branches of the total branches in Gujarat,

Maharashtra & Andhra Pradesh. On the other hand we are

present in major cities such as Delhi (7 branches), Kolkata

(3 branches), Chennai (2 branches) and Bangalore (4). Asfar as providing services to customers and reaching our

customers, we have tied up with couple of banks to enable

our customers get access to our services. For example we

have tied up with other institutions across 500 locations

for payment services. So, as far as services to customers

are concerned, those are equivalent to any bank with

national presence. As far as geographic presence is

concerned, we would prefer to work in clusters, deepen

our relations with customers in existing clusters and then

reach out to newer areas. Recently, we have received fresh

licenses in cities where we arent present. We got licensesin Noida, Ludhiana, Lucknow, Jaipur, Vijayawada and

Kochi and also received four more licenses for operations

in the developmental areas (2 licenses in MP, 2 licenses in

Orissa), which is for financial inclusion purpose. We are

looking at expanding our presence across the country.

Q: Nowadays, we find large Universal Banks offering

all types of financial services. So, are there any plans

for DCB to expand its financial services offerings in

near future?

A: I think universal banking position is possible at a point

wherein you have achieved a critical size. At this size, DCB

would not be looking to offering those services as we do

not want to get into this area now and in future, we dont

know. But what I would also like to say that, it is not

necessary that each bank has to be universal. One of the

most successful finance companies (HDFC) in India is not

a universal bank. It has its focus on housing mortgage.

Even Sriram Transport Finance Co. has emerged

successful by focusing on one segment. Each has its own

space and one has to play according to its strengths and

weaknesses.

Q: What are DCBs growth strategies in the years

ahead?

A: DCBs focus is on building low cost deposit franchise

with strong capital position. We have a strong focus on

retail CASA (Current & Savings Accounts) balances and

retail Term Deposits. On the asset side, we want a

balanced growth in advances which are secured and

repriceable. Our chosen areas of growth are Retail

Mortgages, Micro SME (businesses with turnover up to

Rs. 10 crores) and SME (businesses with turnover up to

Rs. 100 crores). We have a significant presence in Mid-

Corporate space. Agri & Inclusive Banking (AIB) helps us

achieve priority sector targets and promotes inclusivebanking.

Q: Is DCB looking forward to expansions through

M&As in India?

A: In near future, inorganic growth is not being pursued

by us.

Q: Do you think the Indian government is going slow

on financial reforms, critical to sustainability of

Indias growth?

A: I think a lot of work continues to happen at the

governments end. It is just that these structural reforms

needs lot of doing before the reforms becomes visible. I

am sure at the government level; huge amount of work is

going on. We would see the results coming out in future

sooner or later.

Q: RBI & Indian government have been targeting to

reach out to the unbanked population across India.

How according to you can Banks play a more active

role in financial inclusion?

A: Banks have a vital role to play to achieve the financial

inclusion objective in the country. Through expansion of

rural network, extension of no frills banking, micro-credit,

extension of banking facility through business

correspondent (BCs) model etc, we can achieve further

development of banking services in the untapped regions.


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Q: There has been a lot of interest being shown by

Banks & Telecom companies to enter into Mobile

Banking (SBI & Airtel JV, ICICI Bank & Vodafone

JV). Is DCB also looking into offering similar kind of

services through this platform?

A: Mobile banking has huge potential in India. We are

exploring that market and we have got some start towards

it and I think all banks will eventually enter into this space,

which is the future market for all banks. We already have a

product in Mobile Banking, but on a very small scale.

Q: Business Correspondents (BCs) Model is being

explored by various Banks. How do you view the

scope of such Model in bridging the gap between

banks and unbanked population?

A: We have seen several banks have launched it. People

have made a start and are offering the services. We alsohad a look at some, but what we want is to work through

the entire model before we enter into it. But, this can be an

effective model to spread banking into the masses.

Q: Where is the next phase of growth expected for the

Indian banking sector?

A: Presently the economic growth is weighed down by

inflation and high interest rates. Both are expected to ease

up towards the end of this year with inflation falling to

6.5% p.a. Even 6.5% is a very high number in itself. Goingforward, key growth drivers would be economic reforms

and infrastructure. There is no alternative option to

reforms as this would remove obstacles. On supply side,

development of infrastructure is only way the friction in

mobility of goods, services and factors of production can

be reduced which in turn would help impact inflation in

long run. This should help return Indian economy to

higher growth trajectory. As a thumb rule, banking sector

expands at a rate three times the GDP growth rate.

Q: How do you view the present global economic

scenario with negative cues coming from US, Japan

and European economies?

A: US have been under stress for quite some time. Euro

region has been facing serious challenges due to what is

happening in Greece. Yes, Japan is facing a problem

because of the natural calamity. The global growth would

be slow for the next few years. But globally, capital is still

intact and it would seek returns and if these economies are

not prospering then it would seek returns where there is

growth. This is where emerging markets like India would

win. We should be ready to attract it. An economy would

never go on a linear path, it experiences Ups & Downs,

but what you got to look is the secular trend.

Q: How should students prepare to make a career in

the field of Banking & Finance? What according to

you are the attributes required to be a successful

banker?

A: It is essential to have a strong grounding in Financial

Management and Economics. Financial management for

taking micro decisions, where the decisions come to your

table and Economics to understand strategically where

things are moving towards - macro picture. The interplay

of the markets can be understood only when you

understand economics, which is very important. Financialmanagement helps you to assess what is working for you

and what isnt working for you in the micro sense. It is

also very important to keep up with the events happening

in financial services world.

Reading of books like Liars Poker by Michael Lewis; Too

Big to Fail by Andrew Ross Sorkin; Barbarians at the Gate

by Bryan Burrough & John Helyar; One Up on Wall

Streets by Peter Lynch; The Money Guide by Paul

Erdman, etc gives a good practical insight into the world

of Banking & Finance. The books which have been

mentioned have their own significance, because it givesyou an all-round view of the financial industry. Usually

what you study is theory but in practice various important

aspects needs to be considered. Liars Poker, very famous

book- gives you deep insights into the practical working of

the debt markets, Too Big to Fail would help you

understand what has changed post the Lehmann brothers

(crisis), Barbarians at the Gate would give you some

insights about how do the Mergers & Acquisitions market

work, Leveraged Buyouts (LBOs), Management Buyouts

(MBOs) and consolidation issues; One Upon Wall Street

would help you understand how does the mutual fund

industry works and the fifth book The Money Guide

which is a non friction book helps you understand the

linkages between the markets - financial markets which

exists. I feel if you put all these as a sort of curriculum, you

would come up with more practical insights that would

help you develop an all round abilities in financial field.

By Gopidalai Muralidhar Rao, MMS 2010-2012


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Q: Economies especially emerging economies

have been facing Inflationary pressures. Is there

any global perspective or is it something

fundamentally wrong with inflation in India?

A: I think, it is a bit of this and bit of that. If you see

inflation dynamics in India, Wholesale Price Index (WPI)

is taken as the headline inflation which includes 4 major

components. One is the food component, which is

predominantly domestic because India doesnt eitherexport or import any major quantity. So, there the kind of

food inflation which we are expecting is basically

influenced by the domestic factors. The second

component is Non-Food Primary, which basically includes

cotton, jute, oil seeds etc. Here, the international

component exists. For example, if you look at the cotton

prices in India, today inflation is almost 100 %. So there is

an international component to that. The third segment is

Fuel, Electricity & all. The fuel prices, of course, a

significant amount has international linkage. All the

petroleum products are affected by the internationaltrends. Since, 1/3rd of the petroleum products are

decontrolled in India this directly passes through to end

users. Other things which are controlled in particular

Diesel, LPG and Kerosene there is some amount of lag

passthrough. So there the international impact is pretty

significant. The biggest segment with significant

international impact comes from the manufacturing

product prices. Almost 65% of Indias WPI weightage is

for manufacturing products especially the engineering

products and all. Manufacturing products are highly

internationally traded. The part of high inflation which istaking place in India now is a domestic phenomenon. The

lack of investment in agriculture, high dependence on rains

is the major factors leading to the current inflationary

pressures. On the other hand, internationally transmitted

component particularly fuel and manufacturing have also a

significant effect on prices and commodities are also being

affected from international prices.

Q: To what extent would RBI raise rates andwhat is the comfort zone for RBI?

A: RBI in the medium term would expect to see inflation

at a range of 4 to 5 % and in the long term below 4 %.

That doesnt necessarily mean that RBI would keep on

raising rates until inflation settles at the targeted levels. RBI

as you know is doing the tightening for more than 12

months and the major impact of policy tightening and

inflation happens with a lag of almost 18 months. RBI

would now start expecting the impact of its past tightening

measures on the overall inflation situation. So my sense is

that, RBI is pretty close to the end of policy tightening

cycle, though we would expect inflation to correct in the

second half of the current year.

Q: According to you, what measures can RBI

take to control inflation?

A: RBIs control is only on monetary policy and to some

extent on foreign exchange policies. RBI at this moment

has nothing more than monetary policy tools to controlinflation.

Q: How to manage the growth versus Inflation

scenario in India?

A: In the short term, there is always a trade-off between

growth and inflation. Basically, you need to understand

how the monetary policy tightening impacts inflation.

Monetary tightening, if it is transmitted, increases the

market interest rate. If market interest rate increases, that

affects the interest sensitive part of the spending which

basically includes investments and leveraged consumption.

So, to bring down inflation through monetary policy, you

necessarily have to do demand compression which means

lower growth. But the fact of the matter is that over a

longer period of time, high inflation is amicable to growth.

In the short term, there may be tradeoff between inflation

and growth but in the long term moderate and stable

inflationary environment actually promotes higher growth.

Mr. Sujan HajraChief Economist &Co-Head-ResearchAnandrathi FinancialServices


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So, in the long term there is no trade off, but in the short

term there is tradeoff. And there is a literature on sacrifice

ratio-how much change or reduction in inflation rate

results in how much loss of growth. So basically in short

term you have to satisfy growth to controlling inflation,

but it is likely to be inducing long term higher growth.

Q: Our Finance Minister has projected that fiscaldeficit would come down to 4.6% in FY12. Do

you think this is achievable given the government

finances going haywire?

A:The funds available to the government last fiscal from

3G & BWA was close to 1.05 lakh crores, but a significant

part of the amount has been carried forward to this fiscal

year i.e..approx 30,000 crores. So actually there is a positive

externality in that way. We are talking about fiscal deficit as

a percentage of GDP and you basically need to understand

that the denominator is also increasing. So, if your realgrowth assumed is 8 % and inflation is at about 8 % so

roughly speaking, you are talking about 16 % growth in the

denominator. So, that in itself brings down fiscal deficit. If

you look at the indicators as of now such as Tax

commission and everything, they are ahead of the budget

target. From that aspect, I dont see any significant

slippage from the fiscal deficit perspective. Even if there is

a slippage, it wont be significant. It would be well below

5%, may be something around 4.8% if there is any

slippage.

Q: The FY11 4th quarter GDP has declined to

7.8% and there are also signs of Industrial

slowdown by recent data. Do you see slowdown

in Indian economy?

A: To the contrary, I believe that from November 2010,

there has been significant buoyancy in the industrial

production. We need to understand the relation of FY11s

data particularly IIP & GDP against the previous financial

year i.e...FY10 was an abnormal year. In the first half ofthe financial year FY10, there was a subdued growth and

in the second half there has been significant buoyancy. The

base for last year (FY11) is FY10. So when you started in

the year FY11, your industrial production was in high

teens and in course of the year growth started faltering

mostly because of the asymmetrical base effect. What

happens is that actually, if you look at the IIP, the index

shows a no change between the periods April 2010 to

November 2010. It remained flat, while the growth rate

fluctuated between high teens and low single digit numbers

simply because of the asynchronized base. But

internationally you look at growth more as a seasonally

adjusted 3 months over 3 months moving average. If we

take this method, we see that after November, there has

been significant pick up in industrial growth from a (-) 8%,

the growth has become to (+) 8%, so there is a delta of

16% points. So, in that sense I dont subscribe to the view

that there is any serious slowdown in industrial production

in the second half. Similarly, one can also look at the GDP

numbers. In the (1st Half) FY12, you would see subdued

numbers because of the high base of the (1st Half) FY11.

Similarly, in the (2nd Half) FY12 we would see a

significant pickup in growth. It is more of a base effect

rather than any slowdown or pickup.

Q: Standard & Poor (S&P) has recently warned

US about downgrading its economy ratings. Doyou think there are chances of US defaulting?

A: US technically cant default because it has unlimited

power to print money. Its like India has internal debt and

government cant default on internal debt because at the

end of the day they have recourse to the printing press.

But yes, fiscal issue is a major problem not only in US, but

also in Europe particularly in PIIGS economies. So, this is

something that would dominate the economic

developments for the times to come. There is already a

school of thought which is predicting that the next crisis

would happen in government debt. This is a serious issue

and the international community has been looking at it,

otherwise this can result in a prolong period of low

growth.

Q: US have reached its debt ceiling. The

president and congress are at loggerheads to

raise the limit. So, how do you see these

developments?

A: As far as the fiscal reforms are considered, the congress

and president are at loggerheads. This in actually could be

a blessing in disguise because US economy has not

completely recovered from the global financial crisis,

which now you are calling as the great recession of 2008. It

may be too early for the government to take up further

fiscal reforms because the quantitative easing (QE2) has

just ended and if the government starts doing fiscal


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each year between 2000 and 2008 India had a current

account surplus. Now, gold from where I see is an asset

rather than a good. So it should ideally be a capital account

entry rather than current account entry. But internationally

gold is not taken as an asset for balance of payments

calculation. It doesnt impact other countries much

because the amount isnt very large, but India being a

major importer it has a large impact. From this

perspective, I think the nature of CAD in India is grossly

misunderstood. Secondly, if you look at the funding of

Indias current account deficit, more often than not the

role of portfolio flows which is pretty volatile is not more

than 30% on an average. Other kind of flows which India

receives includes FDIs, ECBs, Banking capital, NRI

deposits and external assistance. All those aspects also play

an important role. So, I dont think from the sustainability

of current account position, it is really an issue. Economic

theory suggests that if a country is in a growth phase, that

country should actually maintain a current account deficit.Basically, at the end of the day return on capital in that

country is much higher than the rest of the world. So,

economic theory suggests India should have current

account deficit.

Q: Will the problems in Japan further increase

after the natural calamity and nuclear disaster?

Do you feel any positive signs from Japans

perspective?

A: Japan obviously, what we have seen is the Lost

Decade in the 90s for certain policy mistakes. Over and

above that what we have seen in Japan is that Japan is the

most negatively impacted nation by population ageing and

issues associated with that. Japan is technically into

recession. As per US definition, 2 quarters of negative

growth is recession and Japan obviously is under recession.

But, the immediate positive effect would be reconstruction

because of the destruction by a series of natural calamities

and nuclear disasters. This should actually push Japanese

economy upwards, but at any case the potential growth for Japan is not high and Japan has to deal with public debt

problem. But since, most of the public debt in Japan is

domestically held; they have some amount of comfort

factor. But definitely Japan is withstanding problems since

90s and that is still persisting. Beyond the reconstruction

Japan has serious issues which have to be addressed.

Q: Indian government has been slow on reforms.

Do you think this would stifle growth in near

future?

A: If you look at corporate debt market, government has

actually increased the limit from USD 10 billion to USD

20 billion and now to USD 40 billion. Government is

actually bending backwards to attract fund flowparticularly for infrastructure funding. I think thats one

area where government has done a lot. The issue here is

more of regulatory delays which are happening whether to

start a mine and land acquisition has become a serious

issue. All these challenges we have to address. Otherwise

we would stifle growth very significantly.

Q: What are the key Lessons learnt from the

financial crisis?

A:What you have seen in the last crisis, the central reasons

of the crisis has been the mispricing of risk. That has

happened because there wasnt appropriate mechanism -

regulatory or supervisory mechanism. There was some

kind of regulatory arbitrage which has allowed this kind of

event to happen. We have seen that by nationalising the

private debt, we have come out of the crisis. So actually

the public sector has taken the burden on its balance sheet.

Every time we have seen that the resolution of one crisis

has actually set in the seeds for the next crisis starting from

the investment crisis in US or the dotcom bubble. All

these things increasingly have set up the seeds for the next

crisis. Public finance particularly in the developed nations

is a major risk area going forward. So in that sense there is

obviously large level of regulatory forbearance which has

led to the current crisis. Even now, we are mispricing risk

and arent properly pricing the sovereign risk, which is an

issue. We have of course learnt the price paid for allowing

an institution to be too big to fail. Bank for International

Settlements (BIS) recent initiative says that the systemically

important financial institutions must have a better capital

adequacy ratio. Those are the kind of steps taken tosafeguard as there is nothing called a full proof system and

mostly it is learning by doing. Prior to the crisis, many of

them knew that the housing sector in US had problems

and issues, but not much concern was raised then. So long

you are making money as a financial institution; you have

to go with the model. So, thats the problem of capitalistic

system under which we work.


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Q: What are the key challenges that India need to

address to achieve the double-digit growth?

A: India has always grown at a high pace and the growth in

investment has been high. For India to achieve double

digit growth, the investment rate should be significantly

high. If you take the incremental capital output ratio of

something around 3.5 to achieve 10% growth, you need a30% investment, for a capital output ratio of 4, u need a

40% investment. From that perspective, high investment

requires high domestic savings. Otherwise you would be

overly dependent upon foreign capital. Basically

investment in infrastructure is critical for India to grow

going forward. For that we need lot of reforms across

various sectors. For example, the land acquisition reforms,

issues related to mining sector and procedural delays have

to be addressed. Apart from that for funding

infrastructure, you need a vibrant debt market. So the

reforms in the debt market are very important. In 1990s when the government has initiated reforms, the

assumption was that the government should withdraw

from the productive activities and private sector would

play a major part instead of government. This has

happened in the manufacturing sector to some extent and

to some extent in infrastructure but this didnt happen in

the context of agriculture. Now, it is clearly accepted that

private and public can be substitutes in industry and to

some extent in infrastructure, but they are complementary

in agriculture. If and only if government invests in a large

irrigation project, private investments would flow to

support the project. So my sense is that investment in

agriculture and improving productivity in agriculture is

very important. Otherwise you would face high food

inflation and thereby wage inflation. Thats another issue

government needs to address. Thirdly, government has to

take care of the financial position. We have to reduce the

fiscal deficit. Basically, today if we look at government

expenditure, 70% is committed expenditure. It either goes

for paying the salaries of the government servants, or it

goes into debt servicing or it goes into politically sensitive

subsisidies. So, if 70% expenditure is committed

expenditure then how much discretionary spending

amount is left with the government for vital investments?

This issue also needs to be addressed. So, these I would

say are the 3 major challenges for India Sustaining high

investment growth in infrastructure including agriculture,

increasing agricultural productivity and reforms in public

finances.

Q: What are the key takeaways for a student from

the crisis?

A: It is very important to understand the business cycle

and phase of business cycle where you are. You are now

experiencing the crisis period as a student. You should

understand the logic of business cycle and you should not

interpret everything linearly. So if inflation is 5 %yesterday, 6% the next day, 7 % the other day, then you

shouldnt necessarily draw a line that it would go to 9%.

One needs to understand that it is also cyclical. You should

also understand that there is a non-linearity in it. It would

top up and it would go down. So understanding business

cycles is very important for you as students. One needs to

be aware of the events happening around and needs to

assess why things are changing. You shouldnt try to be

conformist. Just because people are telling you that FY12

growth would be lower than FY11, you shouldnt believe

that. At the end of the day you would be paid for yourlogic no matter in which profession you are. So long you

have logic, it would be fine and logically you should try to

understand rather than following anybody. Economics and

finance are very innovative subjects; you try to understand

for yourselves.

By Gopidalai Muralidhar Rao, MMS 2010-2012 &Sangeet Srichandan, PGDBM 2010-2012

It is very important to

understand the business

cycle and phase of

business cycle where you

are. Understanding the

business cycle is very

important for you as a

student


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13


Vodafone & Essar To End Their Partnership Vodafone, the worlds biggest

mobile phone company by

revenues and Indias No. 3 mobile

operator, agreed to end its

partnership with Essar. It has

offered $5 billion for buying 33%

stake of Ruias in the company. The

exit transaction will be in two part i.e... 22% Put or Sell

Option for Essar worth $3.8 billion and 11% Call or Buy

option for Vodafone worth $1.2 billion. The transaction isassumed to be completed by November. After this

transaction Vodafone may launch its IPO.

Indias Largest Debt Raised By HindalcoHindalco raised Rs 7875 crore

in debt for a greenfield smelter

plant at Mahan, Madhya

Pradesh. This is Indias largest

debt raising exercise till now.

Hindalco has raised the loan

from a syndicate of 31 banks on

a floating rate basis for a tenor

of 12.75 years. The Mahan project will have an annual

capacity of 3,59,000 tonnes of aluminium smelter and also

includes a 900 MW captive thermal power plant.

Relief For The BanksBanks will be exempted from paying service tax on foreign

exchange transactions entered into with other lenders. The

transaction with the customer will be charged a nominal sum

of 0.-0.5 % of the transaction amount.

Wipro Buys SAIC Unit In USWipro technologies, Indias third largest exporter of software

services has acquired the oil and gas

IT practice of US headquartered

Science Applications International

Corp. (SAIC) for $150 million. The

acquisition is mainly done to bring

back the growth on track. Wipro

lagged in the previous quarter as compared to its competitor

because of wrong anticipation of recovery in US and Europ

Wipro has done lot of changes in management to bring bac

the growth in its favor.

Exports Cross $200 Billion MarkIn the first 1

months of 2010-1

backed on th

demands from U

and other marketIndias export wa

$208.2 billion. Th

imports for the sam

11 months grew 18% to $305.3 billion over the year ago fo

the same period.

Rabobank Gets The Banking LicenseRBI gives its green signal t

Rabobank, a bank based i

Netherland, for the full-fledge

banking operations in Indi

Rabobank was a promoter in Ye

bank but it had sold its 11% stake

months ago. According to India

banking regulations, foreign bank holding more than 5%

equity in any Indian bank can not apply to open branches i

India. The bank also runs non-banking financial compan

under the name of Rabo India Finance Ltd which lends t

food and agricultural businesses and renewable energ

companies.

Pratip Chaudhuri appointed SBIs New ChairmanState Bank of India, the country

biggest lender, got a new chairman

Pratip Chaudhuri will take place o

O P Bhatt who retired on 31

March after a five year stint wit

SBI.


14/33

14


Unilever & P&G Fined By European CommissionUnilever and Procter & Gamble have

to pay a fine of $457 million to

European commission as they were

indulged in illegal practice. Unilever,

P&G and Henkel were charged for

fixing up the prices of detergents in 8

countries over a period of 3 years. The price-fixing is illegal asit kills the competition and considered as anti-competitive

strategy. Henkel was not fined because it was the first

company to provide evidence to regulators.

Aditya Birla Group Acquires Domsjo FabrikerAditya Birla Group, a Mumbai based conglomerate acquired

Sweden based pulp maker Domsjo Fabriker for $340 million.

This acquisition shows the intent of Birla group to grow the

fibre business globally.

Muthoot Finance IPO OversubscribedMuthoot Finance, Indias largest gold

loan company, has seen its 900 crore

IPO drew bids for at least 25 times

the share on offer. The offer was

oversubscribed because of investors

expectation which they saw during

Manappuram, rival of Muthoot

financ, IPO launch. Manappuram share price has doubled in

few months.

Johnson & Johnson To Acquire Synthes Johnson & Johnson, a

US based health group,

is all set to buy Swiss

medical device maker

Synthes Inc for $21.6

billion. This deal will be the largest buy ever by Johnson &

Johnson. The acquisition is done to boost its orthopaedic

business. The acquisition process is expected to be over in the

first half of 2012.

US Credit Rating Downgraded By Standard & PoorStandard & Poors

downgraded the outlook for

the United Statess AAA

credit rating to negative

because it believes there are

risk U.S. policymakers may

not reach agreement on

how to address the countrys long-term fiscal pressures.

K V Kamath To Be New Chairman Of InfosysInfosys appointed K V Kamath as the new chairman in plac

of its founder N R Narayna Murthy. The job of new chairma

is to draw a succession plan for the exit of all founders an

appointment of youn

professionals to run th

company. K V Kamath has th

expertise to perform this job ahe did the similar thing whe

he was the chairman of Indias largest private bank ICICI. A

lot of restructuring at top management level is expected in th

tenure of new chairman.

Airtel To Raise $1 BillionBharti Airtel is all set to raise $

billion through a global bon

issue. The raised money will b

utilized to repay the debts whic

were taken during the acquisitioof Zain telecom. The issue will b

in the form of debentures and wi

have tenure of 10 years.

RBI Raises Repo Rates By 50 Basis PointsRBI increased the repo rate by 5

basis points to 7.25% in a

aggressive move to tame inflation

The move indicates RBIs priority t

control inflation to comfortab

levels.

Apple Topples Google As Most Valued BrandApple Inc maker of iPhone, iPad an

iMac overtook search engine gian

Google as worlds most valuab

brand. Apple is valued at $153

billion whereas Google is valued a

$111.5 billion. IBM, McDonanlds Corp and Microsoft com

at 3rd, 4th and 5th most valued brands in the world.

Adani Group Buys Coal Port In Australia Adani Enterprises, a group that ru

the countrys biggest private por

acquires the Abbot Point Coal termin

in Australia for $2 billion. Th

acquisition is groups 3rd oversea

acquisition in last 9 months. With th

deal Adani Enterprise has become the largest Indian investo

in Australia.


15/33


16/33


17/33


18/33

18


implemented. The newly elected government under the

presidency of Dilma Rousseff will have a tough time in

meeting the aspirations and demands of an overheated

economy, specially doing that with a ten party collation

government will be a tough task. The priorities of the

current leadership should be in bringing fiscal

consolidation and improving the social fabric of the

economy with introduction of pro-poor policies on the

lines of its existing bolsa familia program and national bio-

diesel program. It would be interesting to see how the

government reacts to the challenges, considering that both

the objectives are contrary to each other.

Its quite unlikely that if you had told me 10 years ago

that I would buy the Brazilian Real, I would have thought

you were crazy. In the last five years -the Brazilian

currency in terms of the American currency, hasdoubled. This is what Warren Buffet had said, when he

was questioned about Brazil as an investment destination.

The South American power house was widely believed to

be the first country to come out of the economic

downturn. It was in 2008 that Fitch and S&P upgraded the

Brazilian economy from speculative to investment grade.

According to Baker and McKenzie Brazil will continue to

enjoy a steady FDI inflow, however, the government needs

to reconsider its taxation policy on FDIs and FIIs. In 2009

Brazil became oil self-sufficient and it does not need a

huge chunk of the oil it has (worlds largest oceanic oilfields is in Brazil), the government can attract loads of

foreign currency by exporting this oil. With the world cup

and Olympics not far away the Brazilian government is

expected to invest nearly USD 93 billion. This investment

will certainly give a boost to the economy in terms of

employment and infrastructure development. PWC, in its

report on emerging economies, has predicted that Brazil

by 2050 would be as large an economy as Japan. Having a

look at the different sectors of the economy gives us an

idea as to why people expect Brazil to be the next big

thing. The major ongoing steel projects and the newmining code and the governments plan of investing USD

40billion to reduce the housing deficit, would certainly

foster the economy. In 2010 itself Brazil saw a spike of

23% in assets under management, the private-equity firms

controlled had business worth $36 billion, the primary

reason behind these developments is a maturing capital

market, several IPOs and the support of the government.

Despite all these in 2010 the World Banks Doing

Business Survey had stated that it took 120 days to start a

business in Brazil, far above the regional average of 45.5

days. The challenge for the newly elected government

would be to curb the rising inflation without adversely

affecting the investment scenario of the country.

Drafting an effective monetary policy is the tricky answerto most critical question for developing economies, how to

maintain a sustainable growth keeping inflation under

control? Current ICPA inflation index of 6.77% (May

2011) has crossed the upper limit of the target range (4.5%

+/-2%) estimated by the Brazilian Central Bank (BCB) for

H2 2011.

Inflation & Unemployment Rate

Year Inflation Unemployment

2003 10.4% 12.3%2004 6.2% 11.5%

2005 5.1% 9.8%

2006 4.2% 9.3%

2007 3.6% 8.7%

2008 5.7% 7.9%

2009 4.3% 8.1%

2010 5.9% 7.4%

2011 *5.7% *7.2%

So far in current fiscal year policy makers have raisedbenchmark interest rates twice but the lagged effect of this

is expected in third and fourth quarters. Current lending

rate (Selic) of 12.25% (as revised on June 8, 2011) vis--vis

10.75 % (January, 2011) shows the urgency of the issue.

This has got clear response from the market as Bovespa

(Sao Paulo exchange) has dropped by 12% since January,

2011.The confliction and dilemma of fiscal and monetary

policies will keep Banco Central Do Brazil (Brazils central

bank) and government under continuous watch. Though,

announcement of a 50 billion Reais ($30 billion) cut in

spending and increase in interest rate, similar steps areexpected in near terms. Finally the pressing question for

Brazil is; how long can it restrict spending when large

international events like the FIFA World cup (2014) and

the Summer Olympic Games (2016) are around the

corner?

Investment

Monetary Policy


19/33


20/33

20


Despite bright economic prospects, most emerging Asian

countries such as China, India, Indonesia and other

Association of Southeast Asian Nations (ASEAN) continue

to suffer from underdeveloped infrastructure. Increased

emphasis is being laid on infrastructure investment and

development to stabilize a shaky platform of growth. Of

these countries, the two that are projected to dominate this

sector are China and India. Indian economy has undergone

fundamental changes over the last decade. Growth in

investor interest is driven by strong economic growth,

low interest rates, rising foreign exchange reserves,

quality and cost competitiveness and encouraging

Government policy-making. The strong levels of economic

growth achieved in India in recent years have led to an

expansion of industry, commerce and per-capita income.

This in turn has fuelled demand for infrastructure and

utilities including energy, transportation, telecom, water

supply and other urban infrastructure. In comparison to

emerging markets, Indias investment expenditure in

infrastructure over the next decade will account for 28% of

the total planned investment expenditure by emerging

markets. So, this makes India, the second biggest

destination after China for infrastructure spend in the

emerging markets, making it an attractive venue for privatesector investments.

(Source: Mckinsey)

The Planning Commission estimates investments in

infrastructure projects in India will be more than $1100

billion over 2010-11 to 2016-17, an amount higher than its

real GDP in 2009-10. The investment in infrastructure in

India has increased from 4.9% of the gross domestic

product (GDP) in 2002-03 to 7.18% in 2008-09. It is

expected to increase to 8.37% in the final year of the 11th

Plan and likely to touch 10% of GDP in the 12th Five

Year Plan (2012-2017). With the increasing investment,

the share of private sector in the total investment on

infrastructure has increased rapidly. The contribution of

private sector in total infrastructure investment in each of

the first two years of 11th Plan (2007-2012) was around

34%. This is higher than the 11th Plan target of 30%, and

25% achieved in 10th Plan period. It is expected to rise to

36% by end of 11th Plan and 50% during the 12th Plan

(2012-2017).

A comparison between India and China shows that the

Gross Capital Formation as a percentage of GDP is only

32 percent in the case of India compared to 42 percent for

china, with a greater part of the differential arising in the

infrastructure and real estate sector. Further, total funds

available for the 12th Plan are expected to be

approximately 31 percent short of the INR 4,100,000 Crore

targets, translating into a funding gap of almost INR 1,

273,000 Crores for the Plan period. The gap in

infrastructure is costing India between 1.5-2 per cent of

GDP growth every year. This shows the tremendous

opportunity that India provides in terms of Infrastructure

for both domestic as well as International financiers.

Source: Planning Commission [1: Anticipated Spend, 2: Projected Spend]

49%

28%

7%

2%

2% 2%

10%

100 Percent=INR 220 Lakh Crores

China

India

Russia

Mexico

Brazil

Indonesia

Other

Meeting Indian

Infrastructure Needs

Infrastructure Spending In Emerging Markets

(2008-2017)

Infrastructure Plan for XIth & XIIth Plan


21/33

21


PPPs is the way forward and

government is increasingly looking at

using the public private partnership

(PPP) model to fund infrastructure

projects. PPPs are essentially win-win

solutions that seek to draw on the strengths of bothsectors. Thus, the efficiencies of the private sector can

ensure better deliveries of public infrastructure like roads,

bridges, water supply and sewerage projects, ports and

airports, etc. The presence of the public sector ensures

certain concessions, and mitigation of some of the risks.

Thus, the combined capital and intellectual resources of the

public and private sectors can result in better, more

efficient services, without raising taxes for the public.

Indian Government has taken

several steps to spur growth in the

infrastructure sector following the

economic reforms.

A specialized financial intermediary

for infrastructure was incorporated in 1997 called IDFC

(Infrastructure Development Financial Corporation).

Following the conversion of the erstwhile development

financial institutions (DFIs) into commercial banks

namely, IDBI Bank and ICICI Bank infrastructure

projects faced the problem of securing long term debt.

In order to mitigate this problem of long term borrowings,

the Indian government has set up Indian Infrastructure

Finance Corporation Ltd (IIFCL), to secure long term debt

for infrastructure projects. IIFCL has the ability to borrow

up to $2.32 billion that will be guaranteed by the

government.

The Union Budget 2010 has allowed tax deduction on

investment in Infrastructure bonds till Rs, 20,000 forindividual investors. This move had increased the

attractiveness of infrastructure bonds for individuals and

would help raise debt capital required for infrastructure

investments.

Over the past few years various investment funds have

committed themselves towards the infrastructure sector in

India, but still there is a huge gap of funding which can be

met by proper and timely implementation of policies by the

Indian government to facilitate the flow of investments

towards this direction.

The government should consider a series of policy

measures to remove these barriers and steer more capital

into Indias infrastructure sector by ensuring flows from

existing sources of capital and allow new investor groups to

enter infrastructure sector.

The presence of a strong debt market

leads to development of an alternative

source of funding and reduces the

pressure on banking sector for credit

growth. Developing a robust bond

market will help channel more funds

into infrastructure.

From examples seen in the United States with Municipal

bonds and Malaysia with infrastructure bonds, bond

markets have played an important role in channeling capital

into infrastructure. Unfortunately, the bond market

penetration in India is currently only 2 percent of the GDP

significantly lower than other developing countries like

China (8 percent) and Malaysia (15 percent).

The government should make continued efforts to grant

further access to the bond market for FIIs on an ongoingbasis. The present limit of $10 billion for government

securities, $15 billion for corporate bonds and $25 billion

for long-term corporate bonds (for infrastructure) should

be enhanced in order to ensure adequate liquidity is

available in the debt markets. Efforts should be made allow

institutions (including banks) to offer credit enhancement/

guarantees to bond issuances in the onshore market by

companies engaged in infrastructure projects/

infrastructure finance companies. Interest rate futures

markets should be developed. Poor and lengthy

enforcement laws relating to default proceedings, and

limited participation by domestic institutional investors

should be removed. Besides, the regulations regarding

securitization also need to be changed to make it more

attractive to the players. Therefore, its high time the

appropriate measures to provide thrust to the debt market,

which would be a significant step to boost infrastructure

investments in future.

Public-Private Partnerships (PPPs)

Indian Governments Approach

Fostering Infrastructure Development

Develop Robust Debt Market


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22


International experience suggests that domestic

institutional investors play a key role in making the markets

more resilient, while participation by foreign players makes

the market more liquid. In several Latin American

countries- Chile and Mexico, the growth of domesticpension funds and insurance companies played an

important role. There is a need to liberalise investment

guidelines for insurance companies and provident and

pension funds, as well as the sectoral, single party and

group exposure limits of banks and insurance companies so

they can invest in or lend to high quality infrastructure

Special Purpose Vehicles (SPVs).

The New Pension System (NPS), which was expanded to

include unorganized sector workers in 2009 has enormous

potential to mobilize long-term savings, but is still in itsinfancy. The proposed Insurance Bill amendment, which

proposes raising foreign ownership limit in insurance

companies from 26 to 49 per cent, should help attract large

foreign players into the market. Also further flexibility in

investment norms could help in enlargement of the

support base for equity and bond market. While the

Government has recognized the importance of the issue,

the pace of reforms and establishment of an institutional

framework has been slow in comparison to what has been

achieved by competing economies. Indias savings rate

stands at around 36 percent and in order to meet hugemagnum of investments, efficient channelizing of the

relatively high domestic savings would be required.

Apart from institutional funds,

infrastructure projects today

also use external commercial

borrowings (ECBs) to raise

resources. But there is a cap on

the amount of ECBs that can beraised currently. In a recent move, the government of India

(GoI) has raised the cumulative ECB cap by $ 10 billion to

$ 30 billion. With demand for funds far exceeding supply,

there needs to be further hike in the limits of borrowing.

Hybrid funding instruments such as Convertible

Debentures, FCCBs, warrants etc, have recently witnessed

a number of regulatory changes. There is a need to widen

the net further and look for more creative solutions for

funding.

Government should encourage Banks and specialised

Infrastructure NBFCs to raise long-term infrastructurebonds free of Statutory Liquidity ratio (SLR) and Cash

Reserve Ratio (CRR) requirements for a longer term period

(10 to 20 years), specifically for infrastructure.

Although it will be important to resolve financial issues,

there is a need to attend to non-financial concerns as well,

in order to encourage timely and long-term investments in

infrastructure. The most pressing non-financial concerns

include - simplifying project clearance mechanisms,implementing projects on time, and strengthening the

contractual framework. Allaying these concerns will reduce

the risk and increase the comfort level of financers.

With a $ 1 trillion investments expected over the XIIth

Plan period, there is a need for a Regulator. The

government could establish a distinct regulator to address

the concerns of the infrastructure industry.

India has a long way to

go given the lack of

adequate infrastructure

across cities, towns and

rural areas. The

potential solutions

would help enhance

timely flow of funds to support the debt requirements of

infrastructure projects. Lot of opportunities exists for both

domestic and international players to tap. The policyactions taken by the government towards infrastructure

sector would determine the fate of Indias growth over the

next few decades.

Liberalise Investment Guidelines for

Domestic Institutional Investors (DIIs)

Regulator for Infrastructure Sector

ECB Source of Financing

Infrastructure Focus Bonds

Simplifying Project Clearance Mechanism

Outlook

By Smruti Ashar, MMS 2010-2012


23/33

23


Base Rate (9.25% - 10%)

Savings Bank Rate (4%)

Deposit Rate (8.25% - 9.10%)

Bank Rate (6%)

Repo Rate (7.50%)

Reverse Repo Rate (6.50%)

Lending / Deposit Rates

Policy Rates

Macr - O - nomicsCategory/

Index Open High Low

Current

Value

Previous

Close

Broad

SENSEX 18,694.19 18,936.43 18,513.22 18,561.92 18,618.20

MIDCAP 7,014.77 7,053.88 6,995.45 7,006.75 7,014.58

SMLCAP 8,359.93 8,403.04 8,354.11 8,363.22 8,356.39

BSE-100 9,803.17 9,877.10 9,718.41 9,740.64 9,767.42

BSE-200 2,318.19 2,336.40 2,302.55 2,307.37 2,313.23

BSE-500 7,303.53 7,345.21 7,247.69 7,261.52 7,277.46

Sectoral

IT 5,867.22 5,924.55 5,837.91 5,856.64 5,835.19

POWER 2,599.58 2,616.37 2,586.33 2,597.20 2,596.17

TECH 3,587.93 3,615.64 3,563.33 3,570.90 3,570.11

CG 13,778.50 13,843.26 13,674.49 13,739.69 13,738.37

OIL&GAS 9,211.39 9,211.39 9,097.19 9,121.12 9,130.46

HC 6,550.79 6,566.20 6,503.56 6,518.25 6,532.54

CD 6,902.34 6,946.38 6,869.35 6,886.48 6,902.34

BANKEX 12,910.58 13,465.21 12,699.61 12,846.94 12,879.34

FMCG 4,068.40 4,079.99 4,034.79 4,039.31 4,056.41

PSU 8,644.81 8,658.03 8,530.51 8,541.96 8,587.43

REALTY 2,208.93 2,239.44 2,174.64 2,186.65 2,198.46

AUTO 9,034.39 9,064.82 8,949.56 8,993.51 9,047.06

METAL 14,733.00 14,885.81 14,574.29 14,610.04 14,735.26(Source: Reuters & ET as on 17th July 2011)

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The global pharmaceutical market is undergoing rapid

transformation. As blockbuster drugs come off patent, there

are fewer new products in the pipeline to replace them. This is

due to declining R&D productivity and rising regulatory costs.

Global Pharma multinational corporations are looking at new

growth drivers such as the Indian domestic market to

capitalise on the growing opportunity. Emerging markets will

be the next major growth drivers for the global Pharma

industry, with more than 40% of incremental growth in the

industry coming from emerging economies in the next

decade.

Indias domestic Pharma market valued at approximately

US$12 billion in 2010 showed a strong growth of 21.3% for

the twelve months ending September 2010. The domestic

market is estimated to touch US$20 billion by 2015, making

India an attractive destination for clinical trials for global

giants.

(Source: McKinsey)

One of the reasons behind this expected growth rate is tha

Indias pharmaceutical industry has a favorable macr

environment.

The Indian economy has rebounded from the glob

economic downturn, with real gross domestic product (GDP

growth reaching 9.66% in 2010.

The Indian middle class is also expanding rapidly, wi

affordability of medicines increasing, and an increase

percentage of disposable income being spent on healthcare.

The government has made public healthcare one of its to

priorities by launching policies and programmes that ar

aimed at making healthcare more affordable and accessibl

especially in rural markets.

The industry is witnessing trends such as acquisition

increased investments, deeper penetration into tier I to tier V

and rural markets, growth in insurance coverage an

innovation in healthcare delivery. Taken together, these trend

are leading to increased affordability of services to patien

and access to quality medical care.

Sectoral View

Indian Pharma Sector

Overview

Top 15 Pharmaceuticals Markets, 2015 (US$ Billions) Indian Pharma Sectors SWOT Analysis


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At the moment, approximately 90% of Indias pharmaceutical

market is made up of branded generics. This segment will

grow at a CAGR of 15% - 20% for the next five years.

Generic generics and patented products contributions to the

market as a whole is currently very low. By 2020 though,

patented drug sales are expected to increase, owing to an

improvement in the implementation of patent laws and

spread of health insurance. The OTC segment is expected to

be a strong growth driver for the industry.

The Indian Pharma market is largely dominated by branded

generics. This segment contributes around 90% of total sales,

and represents one of the key strengths of the market,

encompassing the OTC segment as well. Only about 10% of

the market constitutes commodity generics sold through

institutional sales and innovator products. The branded

generics segment is expected to grow at a CAGR of 15% -20% for the next decade.

The prescription products that are either novel dosage forms

of off-patent products produced by a manufacturer that is not

the originator of the molecule or a molecule copy of an off-

patent product with a trade name .In India, any non-

patented molecule with a brand name other than the

innovators name is termed as a branded generic. In the

global context, substitution when an innovator product goes

off-patent - is the key driver for generics. In India, its about

driving a difference using the core equity of a brand, over a

competitors product.

A generic drug is the bio-equivalent version of a brand name

drug. Currently, the market share of generic generics is very

low. The reasons being:

1. Lack of generic generics regulations and guidelines for theestablishment of bio-equivalence, for example the

Abbreviated New Drug Application (ANDA) guidelines

that exist in the U.S.

2. Doctor comfort derived from prescribing medications othe basis of brand name.

Generic programme in India is the government run Ja

Aushadi. This programme provides no-name generic drugs a

subsidized prices in 24-hour pharmacies that are located a

over the country.

OTC Drugs means drugs legally allowed to be sold Over th

Counter by pharmacists, i.e. without the prescription of

Registered Medical Practitioner. Although the phrase OTC

has no legal recognition in India, all the drugs not included i

the list of prescription-only drugs are considered to b

nonprescription drugs (or OTC drugs).

The OTC segment has been identified as one of the potenti

growth drivers for the Indian Pharma industry, as the sale o

OTC drugs in India has been increasing over the years.

Key Growth Drivers For OTC Segment

Wider Distribution Channel: Companies can sell theirproducts outside of pharmacies, for example in post-offices

and department stores.

Direct To Customer Advertisements: The governmentallows public advertising of these products, giving drug

makers greater freedom to use more creative methods while

marketing their products.

Increased Consumer Awareness: There is an increasedreliance on self-medication as public awareness of common

ailments goes up.

Low Price Controls: Other than acetylsalicylic acid andephedrine and its salts, very few of the OTC active ingredien

fall under the current DPCO price controls.

The market size for patented drugs as of today is very sma

Only about 1-2% of the market is made up of patented drug

which are being sold by multinational innovators. There ar

multiple Indian companies that have drugs in the pipelin

with a greater focus on R&D, but estimates suggest that

would be at least 7 to 10 years before these begin to have

serious impact on the industry. Industry experts believe th

the current size of the patented drug market is estimated a

US$120-130 million. Due to weak patent laws in the past, an

multiple, cheap generic versions of drugs present in th

market, multinational players were hesitant to introduce the

patented products. In the future, with growing affordability,

Indian Pharma Market Segmentation

Branded Generics

Over The Counter (OTC) Products

Generic Generics

Patented Products


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The global pharmaceutical industry is changing. The

pharmaceutical business model is witnessing a paradigm shift

from a fully integrated company structure towards a future

where companies use a wide range of outsourcing,

partnership initiatives and other contractual and relationship

arrangements to create networks of collaboration and

discovery. This evolution in Pharma business models has

enormous repercussions for the Indian pharmaceutical sector,

and related sectors like biotechnology. Indian companies now

have an unprecedented opportunity to partner with global

players across a wide range of activities, from contract

manufacturing and

licensing arrangements,

to franchising and

Joint venture

opportunities.

Export-oriented

business CRAMS:

Outsourcing has been

the traditional method

of doing business with

Indian companies.

Historically, the focus

for the pharmaceutical

industry has been on

lower value adds

manufacturing activitiessuch as APIs and

generics, and India

continues to play an

important role in these

segments. In recent

years, Indias Pharma

companies have also

begun to move up the value chain. Foreign companies are

now increasingly tapping Indias growing research skills in

addition to its manufacturing skills.

Licensing: Multinationals are also striking licensing

agreements to get a share of the Indian pie. Most

developmental costs are borne by the licensor in licensing

arrangements, resulting in the licensee paying a high unit cost

and having little control over manufacture. However,

licensing can be effectively used to establish a common

platform in order to gain rapid in-market acceptance and

create a complete therapy range through arrangements such as

cross-licensing.

Franchising: Indias retailing industry also offers hug

opportunities for foreign companies to either set up their ow

retail franchisee or enter into collaboration with existin

players. Franchising arrangements can leverage on purchasin

power from the franchisor buying in large quantities an

passing down savings to franchisees. Continued busines

support from the franchisor such as technology, product

training and marketing is an added advantage.

Joint Ventures: Joint ventures (JVs) are becoming a mor

prevalent option for companies looking to capitalise on th

opportunities presente

in India. Foreig

companies ar

increasingly looking

local partners to wor

with in order to increastheir presence in Indi

Domestic partners brin

together extensive loc

expertise due to the

familiarity with th

business environmen

knowledge support an

the networke

capabilities of othe

local pharmaceutic

companies. Thesadvantages, along wit

low production cost

skilled labor and faste

drug development ca

be productively utilise

by wester

pharmaceutic

companies coming into India.

Partially or Wholly owned subsidiaries: Som

multinational companies have also increased their stake i

their Indian subsidiaries to take advantage of the Ind

opportunity. Unlike in some other sectors, fully owne

subsidiaries in the pharmaceutical industry offer little risk i

terms of sharing critical data and competitive advantage, a

most are subject to strong control by the parent company

Pharmaceutical companies willing to have wholly owne

operations in India can gain value from being present acros

the value chain, from drug discovery to clinical trials throug

to manufacturing. Other benefits may include tax advantages

Business Models


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The Central Drug Standard Control Organisation(CDSCO), which falls under the purview of the Ministry

of Health and Family Welfare, is the primary regulatory

body in India.

The Drug Controller General of India (DCGI) presidesover the CDSCO and is in charge of the approval of

licenses for drugs at both the central and state levels.

In January 2005, India introduced the product patentregime in accordance with the TRIPS agreement with an

amendment to the Indian Patents Act. Further, in 2008,

the introduction of the Drugs and Cosmetics

(Amendment) Act 2008 put forth stringent penalties and

imprisonment

Intellectual Property Rights (IPR), patented productlaunches should increase 2008, the introduction of theDrugs and Cosmetics (Amendment) Act 2008 put forth

stringent penalties and imprisonment.

FDI of up to 100 per cent in drugs and pharmaceuticals ispermitted through the automatic route. For licensable

drugs and pharmaceuticals manufactured by recombinant

DNA technology and specific cell/tissue-targeted

formulations, FDI requires prior government approval.

The GoI plans to set up a pharmacopeia commission tosupport ayurveda, yoga and naturopathy, unani,

siddhaand homoeopathy (AYUSH) through guidelines

laid down in the review of the Eleventh Plan.As stated on the National Pharmaceutical Pricing Authority

(NPPA) website, the NPPA is responsible for fixing and

controlling the prices of 76 bulk drugs under the Essential

Commodities Act.

The Department of Pharmaceuticals was formed on July 2,2008, under the Ministry of Chemicals and Fertilisers with

the objective of focusing on the development of the

pharmaceutical sector in the country and to regulate

various activities related to the pricing and availability of

medicines at affordable prices, R&D, the protection of

intellectual property (IP) rights and international

commitments related to the pharmaceutical sector.

The GoI has been actively supporting the industry withvarious measures. It is embarking on a major multi-billion

dollar initiative, with 50 per cent public funding through a

PPP model, to harness Indias innovation capability.

Policy & Regulatory Framework


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With the new patent regulations the industry expects to see a

major structural shift with the entry of foreign

pharmaceutical manufacturers. There is a high level of market

fragmentation. As per ORG IMS Rankings, the top 4

companies Cipla, GSK Pharma, Abbott Healthcare (erstwhile

division of Piramal Healthcare) and Sun Pharma have

maintained their respective positions over the last four years.

Unlisted players like Mankind Pharma and Alkem have

consolidated their last year's positions at No 5 and No. 6,

respectively. Lupin, which is at No. 7 for the second

consecutive year, was earlier at 6th and 5th positions in 2008

and 2009, respectively. Abbott and Zydus Cadila are again

shuttling between 8th and 9th positions. Ahmedabad-based

Intas, another unlisted company, has made its entry into the

league of top ten companies.

Rank Company Year

endedMay2011

Rank Company Year

endedMay2011

1 Cipla 11.3 6 Alkem 17.6

2 GSKPharma

10 7 Lupin 12.5

3 AbbottHealthcare

7.4 8 Abbott 24.6

4 SunPharma

15.5 9 ZydusCadila

15.3

5 Mankind 27.2 10 Intas 30.2

Industry Consolidation

Merger activity has been intense within the industry in the

last decade. Analysts believe that three firms;

GlaxoSmithKline, Bristol-Myers Squibb and Merck are likely

candidates to be directly involved in the next round of

industry consolidation.

Science and Innovation

Over the last decade the knowledge base of thepharmaceutical sciences has changed dramatically and

continues to change rapidly. As new technologies and bodies

of scientific knowledge emerge, whole new set of

opportunities and threats are being introduced. Over the last

decade, we have seen this happen as companies that were not

very effective in research and new product development were

acquired.

Increased Competition

The industry has seen a legion of new market entrant

increased competition among key players and industry

consolidation. Competitive advantage within the industry is

being constantly redefined and to maintain their presence

key industry players are being forced to revamp their

organisational structure, overcome huge barriers in R&D andclinical trials.

Changing Consumer Profile

Consumers are now better informed and there are

expectations on the industry to show that their products

deliver better health and greater economic value. In the past

decades governments were either the sole or major

purchasers but the current trend shows that healthcare

industry is now driven by insurance companies and

individuals. The increasing price sensitivity of the consumer

and financial muscle of health insurance companies is forcingfirms in the industry to cut product

Arthneeti Finance Newsletter June 2011

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Transcript of Arthneeti Finance Newsletter June 2011