Niveshak

THE INVESTOR VOLUME 4 ISSUE 2 February 2011

THE
EGYPTIAN
RENAISSANCE

INflation pg. 08 ISLAMIC BANKING PG. 19

FROM EDITOR’S DESK Dear Niveshaks
It’s back to February, the month of Union Budget. As the day of bud-
get is approaching, expectations of the industry and common man have
started to build up regarding the various policy measures that government
Niveshak will take to alleviate the various problems that our economy is facing cur-
Volume IV rently. The Indian economy with sinking stocks, skyrocketing inflation and
ISSUE II moribund industrial output certainly doesn’t present a rosy picture and the
Finance Minister, Mr. Pranab Mukherjee has a tough task ahead in tackling
February 2011 all these issues. Clearly, the biggest of these issues is the inflation, particu-
larly that of food items. Although, the food inflation has eased a bit in early
February, it still remains at a high double digit. The RBI has raised short term
interest rates seven times since the last budget and is expected to do so
Faculty Mentor for the eighth time in the coming March. While the monetary measures
Prof. N. Sivasankaran didn’t help much in controlling the supply side driven inflation, it certainly
had its effect on the industrial output which has fallen to a very low level as
indicated by the latest IIP numbers. The corrective policy measures taken by
the government to balance growth with the inflation will be something to
THE TEAM watch out for in this budget. Another major issue to watch out for will be
the diesel price deregulation. The petrol price deregulation that the govern-
ment undertook last year helped in reducing the fiscal deficit and minimiz-
Editor ing the losses of oil marketing companies. But it is the prices of diesel that
Rajat Sethia constitutes a major share of fuel subsidy bill and hence a diesel price decon-
trol is urgently needed in order to reduce the fiscal deficit. However, given
the current inflationary environment, the step seems to be difficult.
Sub-Editors The month of February has been one of the worst for the Indian stock
Alok Agrawal market in the recent times. The benchmark Sensex fell to its seven month
Deep Mehta low on February 11 before recovering from the shocks of Egypt crisis and
Jayant Kejriwal weak IIP numbers. Just three months ago, when the US government had
Mrityunjay Choudhary announced its monetary easing policy, financial experts had predicted a
Sawan Singamsetty tsunami of foreign fund inflows leading to a rise in the stock markets in
emerging countries. However, nothing of that sort has happened till now.
Shashank Jain
Infact, the foreign institutional investors who had pumped close to 29 bil-
Tejas Vijay Pradhan lion dollars in 2010 have already withdrawn 1.4 billion dollars from the In-
dian markets this year till the mid of February. If trends are to be believed,
then the Indian stock markets are headed south. However, we all know the
Creative Team inexactness of stock market forecasts and it would be interesting to find out
Vishal Goel the direction of stock markets in the coming months.
Vivek Priyadarshi A major issue that dominated the headlines this month was the Egypt
crisis. This month’s cover story goes deep into what went wrong in Egypt
and the effect it is having on the rest of world. The “Article of Month” is on
All images, design and artwork the burning issue of inflation and the measures government should take
are copyright of in order to control the same. The present issue also features an article on
IIM Shillong Finance Club MNREGA, the impact it had and the way ahead. Another interesting article
in this issue is on Islamic Banking, issues and concerns surrounding it and
the benefits of adopting it in India. Finally, don’t miss the interview of Mr.
Himadri Bhattacharya (Executive Vice President at Tata Capital) where he
©Finance Club shares his views on varied issues such as the Euro crisis, inflation and the
Indian Institute of Management things to watch out for in global and Indian economy in the year ahead.
Shillong
Stay Invested.
www.iims-niveshak.com
Rajat Sethia
(Editor -Niveshak)

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears
no responsibility whatsoever.
 CONTENTS
Niveshak Times finsight
04 The Month That Was 19 Islamic Banking

Cover Story
13 THE EGYPTIAN
RENAISSANCE

PERSPECTIVE
16 NREGA and Unemployment

He speaketh Article of the month

11 Mr Himadri Bhattacharya, 08 Inflation
Executive VP, Tata Capital

FINLOUNGE
22 Fin-Q
 www.iims-niveshak.com

The Niveshak Times

EVERY COUNTRY IS TO ADJUST ITS CURRENCY WHICH IS MARKET RELEVANT
AND WHICH SHOULD BE DRIVEN BY THE MARKET FORCE AS FAR AS POSSIBLE

TEAM NIVESHAK
IIM, Shillong

DOMESTIC BUSINESS INTERNATIONAL NEWS

23 infra stocks hammered…Anil Ambani Moser Baer enters new territory: Informa-
Group seeks probe tion and Web Security Solutions
It was overall a bad month for ADAG group stocks, World’s 2nd largest optical storage media manufac-
with all of them getting hammered by the bears. turer plans to offer indigenous solutions covering
This prompted Reliance Infra to seek an Intelligence design, development and manufacturing to enable
Bureau probe into the decline of 23 infrastructure data and information security to increase data se-
stocks. Some of them were Reliance Power, Reliance curity for e-commerce transactions. The company
Infra, NTPC , BHEL and NHPC, L&T, JSW Energy, Adani initially plans to include end-to-end data security
Power, Tata Power and Voltas Ltd. There are claims solutions, namely ‘Authentication Keys’, ‘Licensing
that an illegal bear cartel run by a stock market op- Tokens’, ‘Mobile solutions’ and ‘secure storage’ in
erator has caused a loss of over Rs 300,000 crore its product portfolio. The solutions will be provided
from the infrastructure sector stocks in a short pe- through USB pen drives, SD and micro SD cards and
riod of less than 90 days ending February 9. in the form of software.
Silver Silver all the way!! The metal hits 31- Japan and India sign trade pact, Malaysia fol-
year high with improved investments lows
The Month That Was

Silver touched $31.95, its highest since 1980, rising In order to revive its weak economy, Japan signed a
14 per cent so far this month. Demand for the pre- free trade agreement with India by lowering barriers
cious metal was fuelled by on-going unrest in the to trade and deepening its economic ties with the
Middle East region. The gold: silver ratio - the num- fast-growing nations of emerging Asia. The economic
ber of ounces of silver needed to buy an ounce of partnership agreement was signed by Japanese For-
gold, dropped to its lowest in 13 years at around eign Minister Seiji Maehara and Indian Commerce
43.5. Holdings in the world’s largest silver-backed, Minister Anand Sharma. It will slash tariffs on goods
exchange-traded fund, iShares Silver Trust, edged up from DVD players to shrimp and lumber, and intro-
to 10,438.56 tonnes. duce measures to promote investment and deal
with intellectual property rights. This was important
Government scraps ISRO S-Band spectrum
for Japan, which sees itself falling behind regional ri-
deal with Devas Multimedia
val South Korea in the area of free trade agreements.
In the wake of raging controversy, the S-Band spec- India signed a comprehensive economic cooperation
trum deal between ISRO’s commercial arm Antrix and agreement (CECA) with Malaysia too. This pact gives
private firm Devas Multimedia has been scrapped. Indian doctors, accountants, two-wheelers, etc.
The annulment comes for handing over 70 MHz of S- greater access to the Malaysian market. But there is
Band spectrum to the private firm for Rs 1,000 crore a price associated with it. This is in return for faster
which may have resulted in a loss of Rs two lakh duty cuts for refined palm oil and binding tariffs on
crore to the exchequer. CAG has already initiated ac- other palm products along with a freer entry to Ma-
tion over the deal. laysian engineers, accountants coming in India on
Food inflation hits a 9-week low at 11.05 % temporary contractual assignments.
Falling again for the second straight week, food in- Nokia and Microsoft on way to embarking
flation stood at 11.05 per cent for the week ended historic software deal
February 5. It was mainly due to declining prices Windows Phone software would now be available
of pulses, wheat and potato. Food inflation for the across all Nokia smartphones replacing its home-
week ended January 29 was 13.07 per cent. Pranab grown platform. The deal is expected to be through
Mukherjee also expects inflation to be 7 per cent by in a couple of months according to Nokia CEO Ste-
March. phen Elop. Though Nokia shares took a beating of

4 NIVESHAK VOLUME 4 ISSUE 2 february 2011

 www.iims-niveshak.com

The Niveshak Times

WE CAN GIVE THE CENTRE GOOD GOVERNANCE AND THEY SHOULD
TELL US WHAT THEY EXPECT OF US. - NITISH KUMAR

more than 20 per cent after the strategy turnaround, Monetary Fund. Japan’s real gross domestic product
industry executives have lauded the new alliance as slipped by an annualised 1.1 per cent in the October-
good for competition and innovation. December quarter as the expiration of auto subsidies
Fed is fast pacing on financial revamp says Ben hit car sales, a new tobacco tax sapped cigarette de-
Bernanke mand and a strong yen hurt exports.
The central bank is working in tandem with other reg- Two Global heavyweight stock market opera-
ulators to implement the biggest overhaul of the U.S. tors set to merge
financial rules since the 1930s according to the Federal Trumping a tie-up between London and Toronto,
Reserve Chairman. The main aim of the policy makers Deutsche Bourse and NYSE Euronext announced
is to enact laws that would protect the country from plans to build the world’s largest stock exchange, and
another financial crisis like the one that hit in 2008 sparking speculation about who might be next. The
and plunged the economy into a deep recession. merger appears set to capitalise on the revival of the
Equity markets after the slump of 2008. This trans-
$3.73 trillion budget plan unveiled by Obama
action creates a group that is both a world leader
for 2012
in derivatives and risk management and the premier
U.S President Barack Obama unveiled a $3.73 trillion global venue for capital raising.

The Month That Was

budget pledging $1.1 trillion in deficit savings over the
Easier to track foreign black money: Swiss
next decade through spending cuts and tax increases.
Gov. relaxes rules
The deficit for the current year is expected to surge to
an all-time high of $1.65 trillion. It reflects a sizable tax- Switzerland relaxed norms for sharing information on
cut agreement reached with Republicans in December. secret bank accounts of overseas tax offenders by
For 2012, the administration sees the imbalance de- allowing varied modes of identification, a move that
clining to $1.1 trillion, giving the country a record four could help India in its black money trail. At pres-
straight years of $1 trillion-plus deficits. Obama aims ent, only name and addresses are accepted as valid
to achieve two-thirds of his projected savings through identity modes. The Indian government is facing in-
tense pressure from Opposition, as also courts, to act
spending cuts that include a five-year freeze on many
tough against those who have amassed illicit wealth
domestic programs. The other one-third of the savings
in foreign countries that have strict secrecy rules. The
would come from tax increases, including limits on tax
Swiss Parliament is debating a treaty between India
deductions for high-income taxpayers.
and Switzerland to pave the way for authorities here
China surpasses Japan’s economy in 2010 to seek details of illicit wealth stashed away by Indi-
Japan surrendered its 42-year ranking as the world’s ans in Swiss banks.
second-biggest economy to China in 2010, after data on G-20 reaches compromise deal on tracking im-
Monday showed a fourth-quarter contraction caused balances
by weaker consumer spending and a strong yen. Nom-
French Finance Minister Christine Lagarde said the
inal GDP of $5.474 trillion in 2010 put it behind China’s
world’s dominant economies have reached a compro-
$5.879 trillion, the data showed. While Japan was ex-
mise deal on how to track imbalances in the global
pected to fall behind a surging China in the year, the
economy that have been blamed for exacerbating the
data underlined the weak state of the Japanese econo-
financial crisis. China was persuaded to agree on a
my burdened by deflation, soft domestic demand and list of five yardsticks for imbalances, by softening
pressured by the industrialised world’s biggest debt. the criteria for measuring current account surpluses.
While China’s leap forward reflects a shift in economic The other four indicators are public and private debt
power as the country transforms itself from poverty- levels, currency reserves and real effective exchange
hit communist state to global heavyweight, it high- rates. The summit was attended by Finance minis-
lights the need for Japan to re-energise its economy. ters and central bank governors from the Group of
However, Japan remains around 10 times richer on 20 rich and developing countries.
a per-capita basis, according to the International

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 5

 www.iims-niveshak.com

Market Snapshot
AoM Perspective
as

Source: www.bseindia.com
Month That W

www.nseindia.com
MARKET CAP (IN RS. CR)
BSE Mkt. Cap 65,28,596.17 BSE
Index Full Mkt. Cap 27,90,579.85
TheFinGyaan

Index Open Close % change

Index Free Float Mkt. Cap 14,74,649.07 Sensex 19,095.69 18,438.31 -3.44
Source: www.bseindia.com
MIDCAP 7,191.87 6659.18 -7.41
Smallcap 8946.17 8121.26 -9.22
CURRENCY RATES AUTO 9325.95 8614.90 -7.62
INR / 1 USD 45.11 BANKEX          12417.62 12543.13 1.01
INR / 1 Euro 61.70 Consumer Durables 6054.34 5831.88 -3.67
INR / 100 Jap. YEN 54.24 Capital Goods 13538.18 13207.34 -2.44
FinSight

INR / 1 Pound Sterling 73.25 FMCG 3701.64 3326.77 -10.13

Healthcare 6535.00 5981.75 -8.47
IT 6630.33 6399.59 -3.48
METAL 17727.53 16734.02 -5.60
OIL&GAS 9745.48 9498.56 -2.53
POWER 2788.04 2619.85 -6.03
PSU 8824.22 8573.66 -2.84
REALTY 2496.12 2064.67 -17.28
TECk 3888.37 3724.80 -4.21
Source: www.bseindia.com
Data from 24th January 2011 to 21st Feb 2011

6 NIVESHAK VOLUME 4 ISSUE 2 February 2011

 www.iims-niveshak.com

Market Snapshot
RESERVE RATIOS
CRR 6%
SLR 24%

AoM
LENDING / DEPOSIT RATES POLICY RATES
Base rate 7.6% - 8.5% Bank Rate 6%
Savings Bank rate 3.50% Repo rate 6.5%
Deposit rate 7% - 8% Reverse Repo rate 5.5%

Perspective
Gold INR 20575.00 / 10 grams

The
Silver 49400.00 / kg
WPI 8.23%

Month
Crude Oil $92.70
Index of Industrial Production (IIP) 1.60%

FinGyaan
That Was
FinSight

India is ranked 21st while USA

and China are 14th and 15th
respectively.

Countries between Saudi Ara-

bia to Kazakhstan are ranked
from 1 to 10 respectively

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 7

 Inflati n
Gunjan Seth & Snehal Punjani
Narsee Monjee Institute of Management Studies
Introduction etables, eggs fish and meat in last
Indian food prices
India with over 270 days of two months of 2010. Significant price
have hit their high- increase has been observed in com-
sunshine, 900 mm of annual rainfall,
est level in the fiscal varied agro-climatic conditions, hun- modities like onions, tomatoes, gar-
year 2010-11, rising dreds of rivers kissing its soil and lic and rice which are key ingredi-
the huge agrarian population has all ents in a common man’s daily meal.
at an annual rate of The key reason cited for this food
ingredients for it to be an agricultur-
18 per cent. These al power. Yet India faces the daunt- price inflation is the bad monsoon
AoM

exorbitant prices ing task of taming Inflation. in India (See Table 1).
have hurt urban
and rural poor, and
especially the large
numbers of marginal
farmers, landless
labour, tribal people,
etc. The article talks
about the measures
Fig.2:Price trends in Primary food
government should Fig.1: Key drivers of annual primary
food inflation articles
take to control the There has been a significant
Figure 1 shows the key driv-
food inflation in our ers of annual primary food inflation decrease in the sown area of rice
country. where we can observe that vegeta- and coarse cereals. Though, the oth-
bles, rice, eggs, fish, meat and milk ers show a miniscule increase, it is
have contributed the most to the in- not enough to sustain or meet the
flation. growth in the population and de-
mand. The high food price inflation
From Figure 2, we can also see
is having a significant impact on the
the rise in prices (WPI) of fruits, veg-
Indian consumer, the “Aam Aadmi”
Rabi Area Sown (in mn Hectares)
2009 - 2010 2010 - 2011 Difference
Wheat 27.91 28.84 3.33%
Rice 1.27 0.92 -27.56%
Coarse Cereals 6.36 5.88 -7.55%
Cereals 35.54 35.65 0.31%
Pulses 13.69 14.53 6.14%
Food Grains 49.23 50.18 1.93%
Oil Seeds 8.73 8.94 2.41%
Table 1

The key reason for significant

price increase in commodities
like vegetables and rice is the
bad monsoon in India.

8 NIVESHAK VOLUME 4 ISSUE 2 february 2011


Fig.3: Average Indian Household spending across all
categories
as we know him.
As we can see from Figure 3, approximately
42.8% of the average household spending goes into
food products. With India facing high food inflation,
the consumers have to cut their spending on other
non food items and thus affecting the total GDP of
the nation( as the consumption part goes down).
As our traditional Indian culture believes in
investing their savings in gold and fixed deposits
which yield around 8-10%, inflation being around 12-
14% is hurting the common man and Middle class
consumer.
Reasons for Inflation
A number of reasons other than erratic mon-
soon behaviour mentioned earlier can be given as:
1. India lost around INR 58,000 crore worth of
agricultural food items due to lack of post agricultur-
al harvesting infrastructure. If the government made
efforts for the proper storage
of these food items, the price
rise could have been well un-
der control.
2. The Indian farmers are
largely dependent on the mon-
soon season for the irrigation
of the crops. The Government
talks about inclusive growth and stress on rural In-
dia. However, it has not helped the farmers in any-
way as the suicide rate has been on the peak in the
recent past.
3. Productivity issues are also prevalent in In-
dia. The per-hectare agricultural yield in India is half
that of China. This again points to the inefficiency
and the failure to help the farmers adopt latest tech-
nology in order to increase the crop output.
Indian Government has never really tried to ad-
As the Indian economy under-
goes structural changes, the
causes of domestic inflation
too have undergone drastic
changes
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
dress these issues although it talks about inclusive
growth and developing the country. There are a num-
ber of things into which the government can look
into such as control on hoarders and black market-
ers, allowing the private sector to import and store
these goods at low import duties and also release its
large wheat storage into the market. Though these
are not major factors, Government of India can adopt
such kind of measures to control the food inflation
to some extent.
However, inflation in an economy like India
has become a common phenomenon; hence natural
fallout of this has been that we, as a nation, have
AoM
become virtually intolerant to inflation. While infla-
tion till the early nineties was primarily caused by
domestic factors such as supply unable to meet de-
mand, the situation has changed significantly today.
Today it is caused more by global rather than by
domestic factors. Naturally, as the Indian economy
undergoes structural changes, the causes of domes-
tic inflation too have undergone drastic changes.
Needless to emphasise, causes of today’s infla-
tion are complicated. However, it is indeed intriguing
that the policy response even to this day unfortu-
nately has been fixated on the traditional anti-in-
flation instruments of the pre-liberalisation era like
negative, or slightly positive, real short-term inter-
est rates. The only effective anti-inflation strategy
entails aggressive monetary tightening that takes
policy rates into the restrictive zone. There is only
one way out for India a significant
increase in real, or inflation-ad-
justed, policy interest rates.
Considering these factors, it
is very important for the Govern-
ment to try and control the infla-
tion or at least try and ensure that
these circumstances do not arise
again in the future. As mentioned above, there are
several ways of curbing food inflation. It is only that
the Government needs to be more proactive rather
than being reactive.
Inflation that stood at around 8% twelve months
back is still hovering above 8% mark presently and
central government which initially expected inflation
to moderate by itself due to base effect finds itself
in a soup. Inflation has not subsided primarily due
to its incidence across different commodities. Pulses
9
 and potatoes were the drivers of Inflation a year
back while onions, milk and dairy products have
been the main culprits today. Erratic rains in three
major onion producing states (Maharashtra, Karna-
taka and Gujarat) delayed the Kharif crop and led to
the spike in Onion prices ( Rs.80kg ) which in turn
led to rise in food inflation(18.32% from 14.4%). Food
articles that have a weightage of 11.05% have led to
the spurt in overall inflation (8.23%). Composition of
the items driving the inflation has changed but Infla-
tion continues to haunt the common man.
Steps taken by Government
Government has added to the woes by not
dampening the prices through large foreign exchange
AoM
reserves and by exhibiting a lackadaisical approach.
It failed to realise that inflation was more of a gener-
alised problem than supply-demand problem. Also,
certain policies of government that were introduced
to appease certain sections of society have worked
against the very purpose for which they were intro-
duced. Hiking of minimum support prices for cereals
(from 49% to 73%), pulses and oil seeds (by up to
83%) have added to the problem of inflation.
Food articles which are the main drivers of
the inflation numbers are prone to speculation and
speculation can be responsible for pushing up the
prices even if there are only mi-
nor demand- supply imbalanc-
es. Speculation is a real concern
in deregulated and liberalised
economy like that of India. The
margins between wholesale and
retail prices have increased in
recent times stressing the role
of speculation on food and com-
modity prices.
One of the most important
food items that have had a strong impact on current
inflation situation was onions. Onions at a price of
Rs.80/kg did trouble the common man more than
any other commodity as it forms the integral part
of an Indian diet. Onions therefore are most signifi-
cant politically and government has thus sprung into
action with several measures which are mentioned
below:
1. NAFED, to sell onions at the retail outlets at
Rs.35 /kg and government will compensate loss
through budgetary support .However its reach is
An efficient and seamless
transportation is a must in
order to stabilise the prices.
10 NIVESHAK VOLUME 4 ISSUE 2 February 2011
limited.
2. Government to ban food exports and lib-
eralise imports to boost domestic supply. Ban can
prove to be counterproductive as imports have be-
come costlier.
3. PDS to be strengthened through computeri-
sation and other steps. However it will remain inef-
fective unless infrastructure for storage and trans-
portation is overhauled
4. Government to take stringent action against
hoarders and black marketers under Essential Com-
modities act. But this falls within the purview of the
states and district magistrates, who lead the drive,
rarely get a free hand
However they have hardly been effective in
taming the rising prices. Thus dealing with inflation
systematically is the order of the day.
Conclusion
Government needs to come up with structural
reforms that can help it in reforming agricultural
infrastructure and the distribution system. Farmers
need to be included in the formal agribusiness net-
works. Private mandis offers a route for inclusion
of farmers in this system. Private mandis are pri-
vate players buying directly from farmers. But APMC
Act restricts farmers only to the government regu-
lated mandis and thus needs a
change to bring this reform.
Besides this an efficient
and seamless transportation
is a must in order to stabilise
the prices. This will ensure con-
nectivity between food surplus
region and food deficit region
and also increase the fuel effi-
ciencies of transporting vehicles
and in turn stabilise the prices. Concerns of wastage
should be dealt with effective Stock Rotation policy.
Buffer stocks should be rotated regularly in order to
stabilise the prices and storage systems should be
effective in preventing the wastage. All these mea-
sures may not be able to give immediate results
but will provide a solution to an issue that has to
be dealt in a systematic manner. However If govern-
ment continues with its current attitude, it will never
be able to catch hold of the Inflation problem.
 Mr Himadri Bhattacharya
Executive Vice President, Tata Capital
Mr. Himadri Bhattacharya is a risk management professional with over thirty years of expe-
rience in banking and finance. Mr. Bhattacharya has worked in the Reserve Bank of India
as the head of the reserves management. Currently, he is at TATA Capital where he is involved
in the treasury operations, including the derivatives desk, international operations, financial

advisory services and private equity.
Niveshak: Sir, Can you tell us
something about the nature of
your work at RBI and Tata Capi-
tal? How different is the experi-
ence of working in public and
private sector?
Mr. Bhattacharya: Well in RBI, I per-
formed many functions which includ-
ed managing the country’s external
funds. At the time, I left RBI, the size
of the reserves were about 300 bil-
lion dollars. Essentially, my job was
that of a portfolio manager, but like
any other manager, I was involved in
several other functions. Coming to
the second question of the difference
in working in public and private sec-
tor, I would say that working in RBI is
not like working in government. RBI is
an autonomous body. The overall eco-
system of any function in RBI is very
different from what happens in gov-
ernment. In the function of managing
foreign exchange, where I worked, we
had specific objectives to be achieved
and there was accountability at each
stage. There was very little bureau-
cracy and I would say that the en-
vironment at RBI was very similar to
any other private enterprise. One of
the important differences between
the government and RBI is that in
government everyone will introduce
himself/herself by the designation
he/she holds, while in RBI designa-
tion is important, but more impor-
tant is your competency. The work
that you perform is more important
than your designation. My change to
private sector was therefore without
much of a hiccup and the kind of
things I handle at TATA Capital bears a
resemblance to my work at RBI.
Niveshak: Having worked at RBI
He Speaketh
In a candid interview
with the Team Nive-
for so long, does it become easy for
shak, Mr. Himadri
you to predetermine the actions of
RBI in a particular situation? Bhattacharya shares
Mr. Bhattacharya: To an extent, I can an- his views on the
ticipate the thinking that goes in RBI. It’s Euro crisis and infla-
impossible for anyone, howsoever long tion scare in emerg-
he has worked in RBI, to correctly predict
the monetary policy action of RBI in a ing markets. Also, he
particular situation. The important thing tells us the things to
is that I can understand the mechanism look out for in the
of way things happen at RBI, but it would
be unfair on my part to say that just be- global economy and
cause I have worked in RBI, I can forecast the Indian economy
or predict specific action that RBI is going in the year ahead.
to take.
Niveshak: Given the on-going Euro
crisis, what do you think are the
pros and cons of having a common
currency like Euro?
Mr. Bhattacharya: I have studied Euro for
many years and to understand the pros
and cons of Euro, we have to understand
that different countries in Europe have
looked at Euro very differently right from
its origin. For powerful countries like Ger-
many and France, it was more about ex-
tending their reach and economic influ-
ence. For smaller countries it was more
about ending their isolation and join main-
stream Europe. The basic purpose of Euro
was to have a powerful monetary union.
The problem however is this - If you have a
monetary union, you should have a strong
fiscal framework also, if not a fiscal union.
There should be good fiscal management
amongst the member countries. There are
vast differences amongst all member na-
tions’ w.r.t natural resources, industrial
productivity, etc. You just cannot compare
any two countries. For example, In India,
you cannot compare states such as Gu-
jarat and Tripura. There is monetary Union
between Gujarat and Tripura and the lat-

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 11

 ter will always face a balance of payment deficit w.r.t
Gujarat. If both sates were to be countries outside the
monetary Union, first thing that Tripura would do is to
devalue its currency w.r.t Gujarat, which is not possible
in a monetary Union. Thus, it’s clear that in a union, the
less developed country will always face a deficit and
hence a strong fiscal discipline has to be instilled among
all member countries. In absence of a good fiscal frame-
work, countries like Greece were able to borrow at rates
comparable to that of Germany and France. The policy-
makers of these countries encouraged it too, thinking
that capital flow inside the nation would help balance
of payment. The main flaw is the rate of interest that
He Speaketh
financed the balance of payment, which in absence of a
monetary union would have been much higher. It is over
borrowing that did it - over borrowing at a rate which
did not reflect the macroeconomic factors in the less
developed countries.
Niveshak: Do you see Euro getting dissolved in
the future?
Mr. Bhattacharya: No. I don’t even see any member
country getting expelled or leaving the union. This cri-
sis will help the leaders across the monetary union to
install mechanisms for more fiscal consolidation. Having
said that, let’s understand this – the lesson from the
whole thing is that in order for a monetary union to be
successful amongst disparate nations, fiscal discipline
is a must. Also, there is a need for some kind of fiscal
union which provides for transparent fiscal transfers be-
tween countries which have surplus and the ones that
have deficit.
Niveshak: Sir coming to India now, with the
problem of rising inflation and slump of Indus-
trial Production, how do you see India balanc-
ing growth with inflation?
Mr. Bhattacharya: For now the focus will be on curbing
inflation and not on growth. So far as the monetary pol-
icy of India is concerned it has been balancing between
growth and Inflation. For now inflation is the number
one issue and it has to be controlled even if growth
takes a back stage for a while.
Niveshak: There has been an unprecedented rise
in prices of agri commodities over the last few
months. Do you think that mechanism like price
control and minimum support price will help
in controlling these prices?
Mr. Bhattacharya: No, price control or MSP wouldn’t
help. The issue is slightly more complex than it has
been reported in the media. If you look at the prices
of food items globally, it has been on a rise. The food
price index globally or country wise has been going
up. The point is it that the reason behind the rise in
prices is not just supply side issues. My feeling is
that while there is no de-emphasizing of supply side
situation but if we blame only on supply side we will
12 NIVESHAK VOLUME 4 ISSUE 2 February 2011
be missing on something. The inflation expectation in
general has gone up which is typically the case when
supply side constraint persist over a time. Supply
chain constraints increase the inflation expectations
and everyone increases the prices around in general.
Then it becomes extremely difficult to dampen those
inflationary expectations through monetary policy
measures without impacting growth opportunities
substantially.
Niveshak: Sir, seeing the growth and boom
don’t you think that commodity prices are
bound to rise and it is something normal?
Mr. Bhattacharya: They are bound to rise that is a dif-
ferent issue let us not go into that. There are several
issues: demand related factors, the supply situation, cli-
mate and so on and also substitution cost depending on
outlook of rate of return. But what is more important is
once we allow the supply side things to effect the infla-
tionary expectations than we get into a very different
situation. There is another issue if we assume the prices
are rising globally than also the rise in prices in India is
far ahead than the global average. My feeling is that the
income inelasticity of even various small products like
sugar has grown high. So income disparity is an issue.
Seeing the agriculture sector grow by 2% and service
sector by 10% eventually this imbalance will be reflected
in demand supply situation particularly in regard to es-
sential commodities. So the only solution to this in the
long run is to supply side response.
Niveshak: Sir, which sectors do you see to be
in the limelight in the year 2011.
Mr. Bhattacharya: Chemical, fertilizer, infrastructure
look good given their huge impact in the develop-
ment of economy.
Niveshak: Do you see India leading the global
growth charts in 2011?
Mr. Bhattacharya: If you are talking about the Indian
equity markets or Indian currency, outperforming its
Asian counterparts I don’t think so. There are several
reasons including high inflation requiring larger doses
of monetary tightening, our fiscal situation, and cur-
rency being at a comparative disadvantage with Ko-
rea, Indonesia, and China.
Niveshak: Going forward what are the things
you would be keenly looking forward about
India and the world?
Mr. Bhattacharya: Well, I am keenly looking forward to
the World Cup! (Smiles). The other things that I look
forward to from a global perspective are the resolu-
tion of the crisis in Europe, and the effect of bold fis-
cal correction steps by Osborne in UK. So far as India
is concerned, I would very much look forward to the
government’s fiscal and monetary policy and easing
of inflation.

INTRODUCTION
It would be wrong to say that
the reasons for restoring the democ-
racy in Egypt were completely eco-
nomic or financial. But the two men-
tioned factors had a significant role
to play in the struggle. Egypt, being
the most populous Muslim country
in the Arab world with a population
just under 80 million, has immense
potential to change the economic
and financial scenario of the Middle
East and surrounding regions. Coun-
tries such as United States and Israel
that have vested interests in Egypt
are watching the latest develop-
ments very closely.
What went wrong?
Most of Egypt’s economic wor-
ries can be attributed to President
Hosni Mubarak’s ruling style. The
country’s trade was completely cut-
off from the rest of the world. What-
ever little foreign investment that
Egypt had, was from the large busi-
ness houses in Saudi Arabia. Egypt
Fig 1. Projected real income growth for different income
groups in Russia, India, Egypt and Saudi Arabia (next 12
months)
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
MRITUNJAY CHoudhaRy & Vivek Priyadarshi
Team Niveshak
ranks 137 in the world in terms of
per-capita income. The country ranks The spirit of revolu-
98 in terms of level of corruption tion in Egypt has
along with Mexico according to the
study by Transparency International
caught the attention
Corruption Perception Index 2010. of people world-
Despite having access to major trade wide. The spillover
routes and abundance of natural gas of this movement
Cover Story
and tourism opportunities, the real
household income is forecasted to to the surrounding
decrease over the next 12 months as Arab countries with
shown in Fig.1. similar autocratic
The Egyptian economy primar- setups may pose a
ily depends on agriculture, petro-
leum exports and tourism. Egypt has
credible threat to
huge reserves of natural gas that is the political stability
exported. The wealth of the nation in the Arab world.
does not trickle down to the com- The rest of the world
mon people. About 40% of the pop-
ulation (currently 80 million) lives
is also anxiously
with under $2 a day. The spiralling keeping track of the
price of basic items is another mat- day to day happen-
ter demanding immediate attention. ings in this region
Egypt has constantly been receiving
foreign aid from the US at an aver- given its far reaching
age of $2.2 billion since 1979. But all global ramifications.
this aid did not translate into pros-
Fig 2. Monthly spending by category (in percentage)
13
 perity for the Egyptian economy.
With the global food inflation on the rise, Egypt
faces a dangerous problem of food inflation as well
because food occupies the highest share (40%) of
the country’s consumption pattern as shown in Fig
2. The crisis has also broken down the backbone of
the financial system of the country. The Government
stopped all banking and stock market activity as
local and foreign investors queued up to withdraw
their savings and investments. The Egyptian stock
market lost $12 billion dollars approximately 16% of
its value. The Egyptian pound fell to a six year low
(1$/5.88 Egyptian Pounds).
The tourism sector acted as a cushion for the
Egyptian economy earning the valuable foreign re-
serves. In 2010, about 15 million foreign visitors
visited Egypt generating $12 billion in revenues.
Tourism employs 12.6% of Egypt’s workforce and
contributes 11% to the country’s total economic out-
put. With the starting of the revolt, tourism came
to a standstill.
Cover Story
The two important factors that blew the lid off,
was the chronic problem of unemployment and the
failure to promote upward mobility. Even though
Egypt ranks 16th in terms of population, the nation’s
GDP per capita is just $6,200 and in terms of output,
Egypt ranks 136th in the world. Mubarak’s regime
had initiated a set of economic reforms but they
were put on hold because of global economic reces-
sion of 2008 and could not be started again.
HOSNI MUBARAK – THE RICHEST MAN ON EARTH!
The ongoing Egyptian crisis has brought into
limelight a very interesting fact. The iron-fisted mili-
tary ruler of Egypt, Mr. Hosni Mubarak has amassed
wealth between $40 billion and $70 billion as quoted
by the British Newspaper Guardian. This could thus
shift the current positions of world’s richest billion-
aires Carlos Slim (at $ 54billion) and Bill Gates ($ 53
billion)
Such disproportionate wealth accumulation
was possible because the constitution was suspend-
ed for 30 long years and all business proposals for
the country right from development projects in the
Nile basin to the transit projects in the Suez Canal
which accounts for 4% of world’s oil shipment, had
to be approved by the President without any ac-
countability and transparency.
Speculation surrounding oil
prices are gaining strength as
the crisis deepens in the region.
14 NIVESHAK VOLUME 4 ISSUE 2 February 2011
Post the crisis Mubarak’s assets have been
seized in Switzerland. But this doesn’t mean that the
money would be returned to the Egyptian people.
The Egyptian government has requested some EU
members to freeze the assets of some high ranking
officials under Mr. Mubarak but does not include the
name of Mr. Mubarak or his family members.
Effect on the world
Crude oil prices broke the $100 per barrel mark
to reach an all-time high levels of 2008. The price
rose on account of the fear of the unrest being
spread to North African and Middle East nations that
account for more than 50% of the world’s fuel sup-
plies. Also the Suez Canal is one of the main routes
for oil transportation as 3 million barrels of crude
oil pass through it every day. Such a situation of
uncertainty has caused the institutional investors to
be up on their feet.
Apart from the increase in the oil prices, the
Egyptian crisis did not have any serious implications
on the world economy in the short run. This is so
because Egypt had kept itself away from the Inter-
national Finance System. Its banks were not con-
nected to the International Banking System. It had
very few Government bonds that were held by in-
vestors abroad because they were classified as junk
bonds even before the crisis. The huge drop in the
stock market(16%) would also not affect the global
economy because most of the investors were local.
Egypt would require huge restructuring costs
and might turn to United States, International Mon-
etary Fund and the World Bank for help. There is
huge pressure on Egypt’s foreign currency reserves
because tourism the hard cash earner (11% of the
GDP) has come to a halt. But if democracy is guar-
anteed Egypt might become the hottest destination
for international investment due to its promising
sectors such as agriculture in the fertile Nile valley,
trade through the Suez, oil and Natural gas reserves
and tourism.
Middle East
The middle-east countries are not sure as to
how much impact the stand-off would have on their
equity, debt and currency markets. But this incident
has sent an alarm signal to all the countries, espe-
cially Algeria, Jordan, Morocco and Syria, to take up
the issues of unregulated markets, unemployment
and income levels seriously. Autocratic rulers in the
region are under pressure to ensure proper function-
ing of the economy under free and fair market forc-
es. The cost of debt insurance through credit default
swaps has increased significantly. Many investors in
the Gulf countries had invested in Egypt in sectors
such as real estate, construction, banking and tele-
com. Saudi Arabia is the major trading partner of
Egypt exporting Saudi Riyal 8.34 billion and import-
ing SR5.37 billion worth of goods. Around 1.4 million
Egyptians work in Saudi Arabia underscoring the im-
portance of Egypt in determining Saudi Arabia’s GNP.
Israel
The stepping down of Mubarak has economic
and political implications in the Middle East. Israel
will be impacted the most by this event. Egypt was
the first Arab country to be friends with Israel. Egypt shutdown continues long enough to allow depletion
has been a mediator between Israel and the Pales-
tinians. The Gaza Strip, which is the bone of conten- Impact on trade
tion between them lies between Egypt and Israel.
line with the global trend then it will foment fur-
ther inflation. However not doing so will put further
pressure on the margins of oil marketing companies
(state utilities) which have already been bearing a
loss of Rs 1.90 a litre on petrol, Rs 9.20 a litre on
diesel, Rs 21.60 a litre on kerosene and about Rs 400
per cylinder on cooking gas.
Impact on domestic companies
The domestic FMCG companies having manu-
facturing facilities in Egypt for catering to the con-
sumer base in MENA (Middle East and North Africa)
region may see a dip in their bottom line as sales
from this region account for 7 to 8% of total reve-
nues of these companies. Work at the manufacturing
setups in Egypt have been stalled for the time being
and meeting the demand will pose a problem if the
of existing inventory.

Cover Story
Although commerce minister Anand Sharma
Egypt also supplies natural gas to Israel through a
has expressed confidence that situation in Egypt is
pipeline called the “Pipeline of Peace”.
not likely to impact trade given the status quo of the
The United States of America shipment of Indian goods through Suez Canal but
The United States was very helpful to the auto- it is prudent for the commerce ministry to keep a
cratic government of Hosni Mubarak as was evident close watch over the situation and be prepared with
by the heavy economic aids and grants. Egypt has a contingency trade plan. Around one fifth of India’s
a key strategic location that influences countries in exports amounting to $40 billion (approximately) are
North Africa and the Middle East. If the US Govern- routed through the Suez Canal, so closure of the
ment does not have an Egyptian Government that canal will create a bottleneck for India’s sea borne
speaks its language then the US might lose a strate- trade to Europe and east coast of America. The Apex
gic advantage in the region. export promotion organisation of India, FIEO has
Concerns for India suggested an alternative trade route around South
Africa in such an eventuality. However the alterna-
The limited trade connection between India tive route will prolong the shipping time by 15-20
and Egypt may lead one to mistakenly assume insu- days resulting in shipping delays and even cancella-
lation of Indian economy and trade from the Egyp- tion of orders.
tian unrest. However given the complex set of in-
terconnections characterising the global market it is Conclusion
highly unlikely that a major player like India may The common man has been disillusioned by
afford to remain aloof from the deepening crisis in the economic empowerment façade foisted upon
the West Asia. Even though there may not be a direct them by the despotic regime and its high time that
impact on Indian economy but domestic market and the current regime gives way to a democratic set-
companies will in all likelihood be affected by the up. The future story of Egypt would determine a lot
changes in global market ensuing from the ongoing changes in the Middle East, the most important be-
Egyptian crisis. ing the stability of oil prices and trade in the region.
Impact on crude oil prices
Given the fact that India imports three fourth
of its crude oil requirements and two thirds of the
world’s explored oil reserves reside in West Asia
makes it imperative for India to ensure a speedy and
stable resolution of the political upheaval looming
large in the region. The uncertainties surrounding oil
supply following the political turmoil in Egypt have
already begun to push up the global crude oil prices.
If Indian government raises the domestic prices in

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 15

 NREGA and Unemployment
Ankita Agarwal
XLRI Jamshedpur
The NREGA has
been the flagship
program of the UPA
government since its
launch in 2005. In
this article we assess
the impact this has
had on the unem-
ployment in India
and also the way
ahead.
Perspective
16 NIVESHAK VOLUME 4 ISSUE 2 february 2011
EMERGE
The Mahatma Gandhi National Rural
Employment Guarantee Act (previ-
ously National Rural Employment
Guarantee Act) provides a legal
guarantee for one hundred days
of employment in every financial
year to adult members of any rural
household willing to do public work-
related unskilled manual work at the
statutory minimum wage of Rs. 100
(US$2.17) per day. It is essentially a
job guarantee scheme. In standard
economic policies, when cost pres-
sures rise, the central bank tightens
interest rates, creating a buffer stock
of unemployed people, which reduc-
es wage demands, and ultimately
inflation. When inflationary expec-
tations subside, these people get
their jobs back. In a job guarantee
program, a buffer stock of employed
people (employed in the job guar-
antee program) provides the same
protection against inflation while
ensuring full employment.
Total outlay on the NREGA scheme over the years
This has been by far the larg-
est rural development project
in the history of India covering
41 million households across
625 districts.
This has been by far the larg-
est rural development project in the
history of India. As of 2010-11, it cov-
ers 41 million households across 625
districts. The government has given
it prime importance & increased its
funding over the years.
Though the main emphasis is
on providing employment, the law
also aims at raising the productivity,
increasing the purchasing power, re-
ducing distress migration and creat-
ing durable assets in rural India. The
present recession is a promising mo-
ment to expand the programme with
greater emphasis on the second ob-
jective of building social capital in a
big way.
GROW
Unlike in other social schemes,
here participants have come for-
ward with projects which are local-
ly beneficial to the community but
may not necessarily be prescribed.
The scheme is increasingly being
pulled by the beneficiaries rather
than being pushed by the administrative machinery.
Some prominent examples are:-
1. Convergence of schemes - In Cuddalore, Tamil
Nadu worksites double up as class rooms, health-
care centres and nurseries for SHGs. In Kammapuram
Block, four SHGs got together to set up a kiln and
trained 40 NREGA workers, who have produced and
sold 5 lakh lamps during Diwali, earning an extra Rs
10,000 per family.
2. Wasteland to mango orchards – In Dharwad,
Karnataka the local SC/ST community planted mango
trees over 7,500 acres of wasteland as part of NREGA
work. They have sought an SHG loan to set up a
processing unit. The additional income could be Rs
40,000 per hectare.
In Bhilwara, Rajasthan a social audit of MNREGS
activities was done by social rights activists led by
Mazdoor Kisan Shakti Sanghatan’s stalwart cam-
paigners Aruna Roy and Nikhil Dey, NGOs, State gov-
ernment officials and Ministers, and observers from
the office of the Comptroller and Auditor General of
India. They carried out spot inspections, gathered
feedback from beneficiaries, and took complaints
right down to where it mattered — to the local post
office that blocked payment of wages and to the
sarpanch who, villagers fearfully whispered, had si-
phoned off NREGA funds. The whole hearted sup-
port of the govt. was also commendable. The social
audit created amongst the poor beneficiaries the
confidence to hold the programme’s managers to
account.
HURDLES
From its inception, NREGA has been plagued
with numerous problems:
1. Shoddy implementation: Decline and degener-
ation of the administration at all levels, particularly
at the block level, and the lukewarm, half-hearted
approach to democratic decentralization.
2. Delays in wage payment: Even small delays
Year Total Households Covered
2006-07 20983491
2007-08 33889122
2008-09 44940870
Participants have come for-
ward with projects which are
locally beneficial to the com-
munity
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
often cause enormous hardship to workers who live
on the margins of subsistence. A recent investiga-
tion of hunger deaths in Baran district, Rajasthan,
found that delays in NREGA wage payments were
partly responsible for the tragedy.
Different reasons behind this failure are:
a. Lapses in the banking system – The current
infrastructure of banks and post offices in rural ar-
eas is unable to handle the mass payments of NRE-
GA wages.
b. Inefficient local administration - Very often,
it takes more than 15 days for “payment orders” to
be issued to the banks by the implementing agen-
cies like the gram panchayat.
c. Distance – Most villages are very far away
from the nearest concerned financial institution.
d. Deliberate slowing down of wage payments
- Delays in work measurement, bottlenecks in the
flow of funds, irresponsible record keeping, bank
payments - these make workers turn against the
Perspective
programme. It is a convenient way for local influ-
ential people to sabotage NREGA & stop the devel-
opmental work thereby preventing empowerment of
the poor people.
3. Refusing to recognize problems: The entire
administration from the central, state governments
and the rural development ministry right down to
the district level officials are in a constant denial
mode to save face.
4. No grievance redressal mechanism: Programme
Officers at the block level typically have no data on
delays in wage payments. The workers, for their
part, have no way of airing their grievances.
5. Removal of minimum wage payment: On Janu-
ary 1, 2009, the government froze the (then) NREGS
daily wages at Rs.100 and delinked it from the sacro-
sanct Minimum Wages Act, 1948. This was a big blow
to the poor workers, who had always been under-
paid in the Indian labour market.
Households providing Percentage
100 days employment
2159201 10.29
3599025 10.62
6507438 14.48
17
 As a result, the coverage of the program has been
below expectations as shown above.
PROSPER
NREGA was modified to MNREGA in 2009. More than
just a name change, it was a set of tweaks aimed at
addressing some of these problems:-
Perspective
government service or may move on the jobs of
their own choice.
c. Deputing young officers from the state services
and public sector banks to work as BDO’s for a
fixed period after a short orientation course.
3. District officer: He can be made the chief execu-
tive of the panchayats in the district. This will go
a long way in ensuring accountability of the pan-
chayati raj.

We propose a few more recommendations:-

1. National Rural Development Board: It should be
properly empowered to take responsibility of this 4. Wage payment:
project. Possible changes:- a. The grievance clause (section 25) of NREGA
a. Should be clothed with adequate statutory which provides penalties on anyone who does
powers not do his or her duty under the law, should be
b. Lean organization responsible for policy and enforced much more stringently.
overall guidance. b. Replace piece work rate with daily wages in
c. Well staffed regional office for each major river drought- affected areas
basin to provide technical guidance and supervi- c. Buffer funds gram panchayats and post offices
sion, maintenance of assets etc. to avoid bottlenecks
d. Panchayats should work in close tandem with d. Partial advance in cash at the worksite can be
the board provided.
2. Block development officer: A survey done by a
collector of north Bihar showed that there’s require-
ment of about 6000 bright young men and women
to work as BDO-s. One of the chief problems of
NREGA has been inadequate number of BDOs.
Possible solutions to this:
a. Mandatory BDO service for a fixed time
period(say 2 years) for all new civil service re-
cruits
b. Recruiting from IIT’s, regional engineering col-
leges, national law schools etc. through short
term contract. Later, they may be absorbed in the

18 NIVESHAK VOLUME 4 ISSUE 2 February 2011

 ISLAMIC Banking
Islamic banking is based
on the principles of Islamic eco-
nomics — an economic frame-
work in accordance with Islamic
law (Shariah). Shariah prohibits
usury / payment or acceptance
of interest on specific term loans.
Islamic banks would never know-
ingly have anything to do with
companies involved in gambling,
alcoholic beverages or porcine
food products. To ensure Shariah
compliance, Islamic banks usual-
ly have boards of religious schol-
ars. However, Islamic banking is
not only for Muslims. Anyone
can participate in Islamic Bank-
ing provided he/she has faith in
Shariah. In 1994, Malaysia creat-
ed the world’s first Islamic inter-
bank money market. Now, nearly
one-quarter of all Islamic banking
business in Malaysia is transact-
ed by non-Muslims. Some Islam-
ic banking services are Islamic
charge and debit cards, Islamic
debt investments, Convertible
bonds, Islamic bonds.
Caliphate is the absolute Is-
lamic rule, wherein the economy
focuses on distribution of re-
sources in order to meet the basic
and luxurious needs of individu-
als in society, and the state has
a clear role in policing, taxation,
managing public assets, and en-
suring the circulation of wealth.
Such a political framework in its
true form does not exist in to-
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
Akhilesh Shenoy & Kartikey Seksaria
Welingkar Institute of Management, Mumbai
day’s world. The non-Islamic po-
litical framework simply proposes
Islamic finance has
two main tenets: no interest can been gaining mo-
be earned on loans and socially mentum on a global
responsible investing. This is the scale for the last
way conventional banking is Is- few years. Today,
lamized—the first step towards Islamic Banking is
an Islamic economic framework.
Modern day Islamic scholars and
sought by Muslims
academics have developed vari- and non-Muslims
ous modes of Shariah compliant due to the benefits
financing that are designed to it offers. While the
work within the prevailing capi- conventional banks
talist economic framework. In were in bad shape
order to achieve this balance nu-
merous concessions have been
during recession,
afforded to financial institutions Islamic banks were
that would not apply if a viable unscathed due to
interest free economic system ex- their unique lending
isted. The intention behind mak- practices. The article
ing these concessions is to en- goes in details about
courage the evolution of this type
of alternative system.
the benefits of Islam-
Financial institutions around
ic banking and what
the globe are trying to keep pace that means for India.
with the growing demand for Sha-
riah compliant products and ser-
vices. As many as 75 countries all
over the world have recognized
the need for Islamic banking and
opened doors for it.
FinSight
The segment constitutes
nearly 22% of the total banking
in Malaysia, which is considered
as hub of Islamic banking. It has
been growing at nearly 20% in
countries like Kuwait, Bahrain
and Saudi Arabia.
Islamic law prohibits usury,
the collection and payment of
interest, also commonly called
riba.
19
 Opportunity for India
With the present set of banking regulations
in India, Islamic banking cannot be implement-
ed because many of the banking principles in
place are based on interest payments. Mak-
ing a strong plea for launching Islamic
banking, Muddassir Siddqui, an
authority on the subject, said
that India should open inter-
est-free banking windows
in conventional banks as a
pilot project.
Currently, close to
one trillion US Dollars are
being managed by about
400-500 Islamic banks world-
wide. Interest free banking
system would offer a great op-
portunity to attract substantial in-
vestments from countries in the West Asian
region to India as the institutions and high net
worth individuals there were looking forward to
investment opportunities in India. According to
Abdur Raqeeb, general secretary and convener
of National Committee on Islamic Banking of In-
dian Centre for Islamic Finance, India can at-
tract a good portion of investments from Islamic
countries by developing an appropriate regula-
tory framework.
Benefit of Islamic Banking for India
Islamic Banking as its fundamental prin-
ciple provides interest free loans. It can be a
boon for poor farmers struggling to repay debt
and looking for cheaper sources of credit. Pres-
ently there are abundant cases of financial ex-
ploitation of farmers who are charged exorbitant
interest rates by money lenders and by profit
FinSight
the farmers will invest in more capital goods &
better technology, thereby increasing agricultur-
al produce & as a result bring down raging food
inflation prevalent in the economy. By introduc-
ing interest free loans vis-à-vis Islamic banking
we can also arrest the depressingly
regular cases of farmer suicides in
vidarbha & elsewhere.
One can argue that Is-
lamic banking can bring
about more inclusive eco-
nomical growth by pro-
viding inclusive banking.
Muslims, who are the sec-
ond largest community by
religion in India, constitute
over 15 per cent of the popula-
tion in India but they hold only
12 per cent of the accounts in the 27
public sector banks as far as priority sec-
tor advances are concerned. The share of other
minority communities, which form roughly 6
per cent of the population, is 8 per cent. These
figures become even more disappointing in the
44 minority-dominated districts in the coun-
try. Muslims, who form over 33 per cent of the
population there, hold only 21 per cent of all
public sector bank accounts, while other minori-
ties, who form only 2 per cent of the population,
hold 5 per cent of all accounts. The main reason
why Muslims do not hold accounts or borrow
from conventional banks is because of interest
which is charged and given by such banks. Giv-
ing or taking interest is against the Islamic reli-
gious principles. Bringing about Islamic banking
will ensure considerably higher participation by
Muslims in the banking sector. Also as lending

by Islamic banks is not restricted to Muslims

MFIs. Struggling to repay these huge loans limits alone it will no doubt benefit marginalized sec-
their borrowing capacities & hence as a result tions of society as well
their investing capabilities. Farmers borrowing
A further benefit of Islamic banking is the
from Islamic banks can prove beneficial for the
potential accessibility to $1.5 trillion worth of
economy as it will pump in more money via
Shariah-compliant funds from the Gulf countries.
increased investments by the farmers them-
Such funds do not come into India because of
selves. As their investing capacities increase,

Islamic banks have over 60%

excess liquid funds which
cannot be properly utilized due
to non-availability of Sha-
riah Compliant products and
instruments.

20 NIVESHAK VOLUME 4 ISSUE 2 February 2011

absence of Islamic banking as a banking option.
At a time when India is looking to make huge in-
vestments in development of infrastructure and
is looking out for sources of funds, these funds
CROSSWORD SOLUTIONS
seem too attractive to be avoided.
One last plus point of Islamic banking was JANUARY 2011
experienced during the financial crisis of 2008-
09. While most conventional banks went bank- Across
rupt or were on the verge of bankruptcy, not
a single Islamic bank went through such a cri-
sis. While conventional banks with their huge
1 GLB
amount of reserves were willing to invest in any
venture regardless of the levels of risk involved 5 BSE PSU INDEX
thereby increasing chances of incurring bad
debt, Islamic banks follow strict rules against 6 FUTURES CONTRACT
lending to companies with any risk involved
thereby incurring close to zero debt. Assum-
ing any future financial crisis was to hit India
8 P NOTES
causing most conventional banks to go bank-
rupt, Islamic banks would help in tiding over 9 BRIDGE LOAN
the inevitable liquidity crunch thereby helping
in speeding up economic recovery.
All in all implementing Islamic banking in Down
India seems to be a viable & a wise option both
economically & politically.
2. BEHAVIORAL ECONOMICS

3. VOLATILITY INDEX

4. MSB

5. BWS

7. LEVERAGE
FinSight

..

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 21

 FIN-Q
1. An underwriting agreement that allows the underwriter to buy up to an ad-
ditional 15% of shares at the offering price is known as___________

2. Which country’s coin has the following line imprinted on it, 'This is the root
of all evils'

3. This synonym for the US Dollar was coined in the 1800s when it was not paid
at par

4. Name the Indian “Scamster” who propounded the infamous “replacement

cost theory” for valuing stocks?

5. The effect refers to the fact that the merger of two firms decreases the prob-
ability of default on either's debt

6. The practice of buying initial public offerings at the offering price and then
reselling them once trading has begun, usually for a substantial profit.

7. The term used for buying a company to sell its assets is ____________
FinLounge

8. Identify the famous Wall Street Personality

9. ‘X’ is an account that one bank holds with a bank in a foreign country usu-
ally in foreign country’s currency. Identify ‘X’

All entries should be mailed at niveshak.iims@gmail.com by 5th March, 2011 23:59 hrs
One lucky winner will receive cash prize of Rs. 500/-

22 NIVESHAK VOLUME 4 ISSUE 2 February 2011

ANNOUNCEMENTS
ARTICLE OF THE MONTH
The Article of the Month winners for February 2011 are
Gunjan Seth & Snehal Punjani
of NMIMS Mumbai
They receive a cash prize of Rs.1000/-

Crossword Winner
The Crossword Winner for the month January 2011 is
Rahul Agrawal
of MDI Gurgaon
He receives a cash prize of Rs.500/-
CONGRATULATIONS!!

ALL ARE INVITED

Team Niveshak invite articles from B-Schools all across India. We are looking
for original articles related to finance & economics. Students can also contrib-
ute puzzles and jokes related to finance & economics. References should be
cited wherever necessary. The best article will be featured as the “Article of the
Month” and would be awarded cash prize of Rs.1000/-

Instructions
»» Please email your article with the file name and the subject as <Title of the
Article>_<Institute Name>_<Author’s name/Group’s name> by 05 March 2011.
»» Article must be sent in Microsoft Word Document (doc/docx), Font: Times New
Roman, Font Size: 12, Line spacing: 1.5
»» Please ensure that the entire document has a wordcount between 1200 - 1500
»» The cover page of the article should only contain the Title of the Article, the
Author’s Name and the Institute’s Name
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