MACROSCAN : January 2015

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INTERNATIO Russian Ruble
INDIAN
collapse
NAL
BUSINESS
ECONOMICS

INTERNATIO
NAL
BUSINESS

INDIAN
ECONOMY

Snapchat valued at
$10bn in the latest
round of fundraising
Xiaomi fundraising
values group at
$45bn
FDI Insurance cap
rises from 26% to
49%
Retail inflation
lowest, WPI 0% for
November

FACT-ABASE

CONCEPT
CRACKER

on HOME icon on
Micromax plans a
$500 million IPO
SpiceJet financial
crisis; Jet fuel rates
cut by 12.5%

Personalities
Key figures

Coase Theorem
Hedonic Pricing

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1

INTERNATIONAL ECONOMICS
Ruble
Collapse Shakes Russias Economy
NEWS
The tale of a devastated currency and its after-effects

On 15th December 2014, Ruble the Russian currency fell by as

much as 19% in a worst single day drop in past 16 years

Russian economy was in trouble for quite a few months , but the
giant fall of the currency could be attributed to two reasons primarily

First is the plummeting prices of global crude oil prices - Oil and Gas
industry contributes approximately 50% of Russias revenues

Secondly, the sanctions imposed by the U.S. and Europe did not help
the cause of the troubled currency

This along with a panic rush on the part of investors to get their
money out of Russian assets led to the giant run on the entire
country
NEXT

Mohit Surana

INTERNATIONAL ECONOMICS
Ruble Collapse Shakes Russias Economy
NEWS
The tale of a devastated currency and its after-effects

In response to the collapsing Ruble, the Russian central bank, raised the
interest rates from 10.5% to 17% in an attempt to make Russians resist
the frenzied spending by citizens and investors

The banks could raise the interest rates again in an attempt to contain
the currency slide, but this would only worsen the countrys present
economic slowdown

The other alternative with Russia is To continue supporting its currency

by spending its foreign exchange reserves. However, it has already spent
around one-fifth of its exchange reserves in 2014 in a bid to support its
currency

Russia, which fulfills most of its food requirements through imports faces
an impinging threat of costlier food imports owing to a weak domestic
currency, which may lead to a rise in poverty rates of the nation
NEXT

Mohit Surana

INTERNATIONAL BUSINESS
Snapchat
valued at $10 bn in the latest round of
NEWS
fund-raising

With the valuation of $10bn, Snapchat joins elite group of mobile application based start-ups like
Uber

Snapchat, founded in 2011, is a Los-Angeles based mobile

messaging application that allows users to send annotated photos or
videos to friends with a pre-defined limit until which users can view
the message, after which is deleted from the recipients device as
well as from Snapchats servers

As of May 2014, around 700 million snaps are exchanged daily

through the smartphone app, globally

Earlier this month, Snapchat revealed that it had raised $486 million
in the latest round of funding which took its valuation to $10 bn

According to a WSJ report, Snapchat had turned down a $3 bn

acquisition offer from Facebook in September 2013
NEXT

Mohit Surana

INTERNATIONAL BUSINESS
Xiaomi fundraising values the group at $45 bn
NEWS

The valuation makes Xiaomi worlds most highly valued technology startup

Beijing based Xiaomi, worlds third largest mobile distributor was

founded in 2010. It designs, develops, and sells smartphones, mobile
apps, and consumer electronics

Xiaomi is Chinas top-selling smartphone manufacturer and raised $1.1

bn venture capital funding late last year, valuing the group at about $45
bn surpassing Uber the online cab-booking smartphone application

In September 2014, Xiaomi had a 15% market share in China compared

to 13% market share of Lenovo

Xiaomi was valued at $10 bn when it last raised funding in August 2013

Xiaomi sold 60 million smartphones in 2014 and is looking forward to

sales of another 100 million this year
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Mohit Surana

INDIAN ECONOMY
Union Cabinet approves ordinance on Insurance Bill
FDI cap in Insurance sector hiked to 49% from 26%

The Union Cabinet approved the promulgation of an ordinance on the Insurance Laws
(Amendment) Bill of 2008 on 24th December 2014, a day after the Winter Session of
Parliament concluded.
The ordinance hikes FDI cap in Indian Insurance Companies from 26% to 49% and
empowers the IRDA to regulate key aspects of Insurance Companys operations to
enable more effective regulation of the insurance industry.
The investment limit is composite, i.e., it includes both FDI and FII.
As insurance companies generally have long gestation periods that can last 7-8 years,
they need new equity capital to help fund growing businesses and encourage new
players to enter the industry. The insurance ordinance shall help enable the same.
Although the cap for foreign investment in insurance companies has been increased,
the ordinance ensures that the Indian party in the JV controls the decision making in the
company. Control includes the right to appoint the majority of directors or to control the
management or policy decisions of the company.
NEXT
Anubha Aggarwal

INDIAN ECONOMY
Union Cabinet approves ordinance on Insurance Bill
FDI cap in Insurance sector hiked to 49% from 26%

Currently only 6% of Indians have insurance cover. The insurance ordinance by helping
insurance industry would help cover more people under its umbrella.
The ordinance allows for the maintenance of records of claims and policies in an
electronic format.
Further, the definition of the health insurance business has been updated to include
sickness benefits on account of both domestic as well as international travel, as against
only domestic travel.
In addition, the minimum paid-up equity capital in health insurance companies has
been increased to Rs.1 billion to make sure only serious players enter the market.
It also makes claim processing rules simpler for policy holders. It makes life insurance
policy unchallengeable on whatsoever ground after three years of issue of the policy.
NEXT
Anubha Aggarwal

INDIAN ECONOMY
Union Cabinet approves ordinance on Insurance Bill
FDI cap in Insurance sector hiked to 49% from 26%

Further, the policy holder can also transfer the policy, with all the rights it
entails, to a third-party. However, an insurer is permitted to reject such a
transfer on the basis of certain guidelines.
A life insurance policyholder can also nominate a person or persons to whom
the claims will be paid, anytime before the policy matures for payment.
An overarching theme of the insurance reforms is to give the IRDA greater
flexibility and powers to regulate the insurance sector.
Previously, for an insurance company that is less than 10 years old, the firstyear commission was capped at 40 per cent of the premium whereas if the
insurer is more than 10 years old, the first-year commission was capped at 35
per cent. The IRDA will now have the flexibility to introduce fresh incentives.
NEXT
Anubha Aggarwal

INDIAN ECONOMY
Retail inflation lowest, WPI reaches 0% for November
Decline in vegetable and global crude oil prices touted to be the reason
Consumer price index-based inflation eased to a record low of 4.38 percent during November from 11.16
per cent during the corresponding month last year . WPI also turned zero which was 1.77 per cent last year.
Except manufactured items, prices of which rose by 2.04%, inflation of primary products and the fuel group
contracted by 0.98 % and 4.91 %
The cause of the same has been cited due to fall in vegetable prices by 28.57% and also the fall in
petroleum product prices as a consequence of lower global crude prices.
The fall of prices is not a welcome news since it points to a deeper problem of decline in consumer
spending. Manufactured product inflation(constituting around 65 per cent of WPI) was minus 0.3 percent in
November. This was due to the fact that people were slow on purchasing goods. This may over the course
lead to no incentives for businesses to expand and hence a slow economic growth.
However, many analysts feel an eroding base effect, especially for food items with a probable lower kharif
or monsoon crop output, may see wholesale price inflation picking up again. The rise in global food prices
would also help pick the inflation.

NEXT
Anubha Aggarwal

INDIAN BUSINESS
Micromax plans to raise upto 500 million IPO

Will Micromax be successful the 2nd time, with an aim to become the no.1 company in the
smartphone
segment player after Samsung is planning
Micromax informatics, India's 2nd
largest smartphone

to have an IPO.

Founded in 2000, Micromax started making phones in 2008 and now commands a
2.2% share of the global smartphone market in September as per Gartner.

Micromax is fast catching up with Samsung and now expects a revenue of about $2
billion in FY15, nearly twice that of 2014.

Economic Times reports that it has started looking at investment bankers to manage
an initial public offer to raise as much as $500 million (Rs 3,170 crore).

It has already shortlisted Morgan Stanley and Goldman Sachs to manage the offering
and is reported to be expecting valuation of 14 times its operating profit.

Micromax had in 2010 planned to raise $150M In IPO backed by private equity firms TA
Associates and Sequoia Capital but later backed out due to poor market conditions.
NEXT

Yashvardhan Singh

10

INDIAN BUSINESS
SpiceJet Financial Crisis
SpiceJet overcomes its financial crisis, Reasons and lessons learned

The problems of the Indian Aviation Industry continued in 2014 with

Indias 2nd largest low cost carrier SpiceJet having to ground its fleet
for more than 10 hours.
SpiceJet has been under financial stress, having incurred record loss of
Rs 1003.24 crore in the fiscal year ended March 2014
Such was the gravity of the situation that SpiceJet had to manage its
working capital through advance ticket sales.
Fearing another Kingfisher in the making , the civil aviation ministry
asked SpiceJet to stop advance sales as SpiceJet had cancelled more
than 1800 flights in December alone.
Unable to raise capital through advance sales resulted in drying up the
airlines funds and oil companies refused to supply fuel to SpiceJet
unless it paid its dues. This resulted in grounding of its fleets for more
than 10 hours.
Later Aviation Ministry allowed SpiceJet to book orders till March and
banks have provided it short term loans resuming some of the flights
starting new year.
NEXT

Yashvardhan SIngh

11

INDIAN BUSINESS
Vistara starts operations; Jet Fuel prices cut by 12.5%
The reasons for these problems is manifold. In 2011 SpiceJet shifted its policy of a
standard fleet of aircrafts to Bombardier Q400 turboprop to connect to Tier 2 and 3
cities.
India though a growing market for Aviation industry is a high cost operating centre in
terms of jet fuel, airport charges and other flight charges.
Non standardized fleet, more number of destinations and high cost of Aviation Turbine
Fuel (ATF) in India has added to Spicejets woes.
Incidentally starting January 9, Vistara, joint venture betweenTata and Singapore
Airlines starts its operations in India.
In response to the reducing oil prices across the world, oil marketing companies reduced
jet fuel prices by 12.5%. This has resulted in lowest ATF rate in the last 4 years.
With fuel costs accounting for about 40 per cent of an airlines operating expenses, this
comes as a much needed relief especially for SpiceJet
Y

NEXT
Yashvardhan SIngh

12

Concept Cracker
Coase Theorem
Efficiency in trading an Externality

Ronald Coase developed this theorem while considering the subtle

yet important issue of assignment of property rights which
contributed to his winning the Nobel Memorial prize in Economics.

The Coase Theoremstates that, when conflicting property rights

occur, bargaining between the parties involved will lead to an
efficient outcome regardless of which party is ultimately awarded
the property rights.

However , the aforementioned statement assumes the following :

Complete, competitive markets
No transaction costs i.e. bargaining is costless
Perfect information symmetry
Costless court system for enforcing agreements
No income or wealth effects
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Saumya Data

13

Concept Cracker
Coase Theorem (contd)

--- Example
A noise emitting turbine company will end up compensating the residents
affected by the noise because the value of operating the turbine is greater
to the company than the cost of compensation, if the residents have the
required rights.

Similarly, if the rights are vested with the company and the value gained by
diffusing the noise is greater to the residents than the cost of compensating
the turbine company for shutting up, the residents will pool in money and
pay the company.

Therefore, regardless of initial assignment of property rights, an efficient

outcome has been achieved.

Consequently, Coase Theorem asserts thatif property rights are well defined
and transactions costs are low, private parties can internalize an externality.
--- Application
The Coase Theorem has been used byjuristsand legal scholars in the
analysis and resolution of disputes involving bothcontract lawandtort law.

NEXT
Saumya Data

14

Concept Cracker
Hedonic Pricing
A pricing method for valuation of Environmental goods

The hedonic pricing method is used to estimate economic values for

ecosystem or environmental services that directly affect market
prices.

It is based on theprinciplethat, thepriceof a marketed good is

affected by certain external environmental or perceptualfactorsthat
can raise or lower the "base" price of that good.

It can be used to estimate economic benefits or costs associated

with:
environmental quality, including air pollution, water pollution, or noise
environmental amenities, such as aesthetic views or proximity to
recreational sites

The basic premise of the hedonic pricing method is that the price of
a marketed good is related to its characteristics, or the services it
provides.
NEXT

Saumya Data

15

Concept Cracker
Hedonic Pricing(contd)

Therefore we can value the individual characteristics of a

good by looking at how the price people are willing to pay

for it changes when the characteristics change.
------ Example

The hedonic pricing method is most often used to value

environmental amenities that affect the price of residential
properties.
On observing the prices of houses that are bought and
sold , it is noted that houses with fewer rooms fetch lower
prices, as do with lower air quality.
Therefore, by observing the prices of many houses with
different characteristics , it is possible to back out the
implicit value that is being placed on air quality, for
instance.
NEXT

Saumya Data

16

FACT-A-BASE
INDIA AT A GLANCE
MEASURE
GDP

CRR
SLR
IIP
CPI (Industrial
Workers)
Government
Bond Yield-10
Year

VALUE
1.876
Trillion
USD
4%
22%
162.4
253
7.86%

WORLD AT A GLANCE
MEASURE
LIBOR (Yearly)
US One Year
Constant
Maturity Treasury
(CMT)
US Treasury
Yield- 10 YearCoupon- 2.75%
Pratik Bandishte

VALUE
0.62730
0.23

2.03%

Arvind Panagariya

Appointed the first vice-chairman of the newly

formed NITI (National Institute for Transforming
India) Aayog

Professor of Economics and the Jagdish

Bhagwati Professor of Indian Political Economy
in the School of International and Public Affairs
at Columbia University

Former Chief Economist of Asian Development

Bank and Professor of economics & co-director,
Centre for International Economics, University
of Maryland

Worked for the World Bank, International

Nachiket
Mor
Monetary Fund, World Trade Organization, and
the
An Indian
and
a member on
of the
Central
Unitedbanker
Nations
Conference
Trade
and
Board
of
the
Reserve
Bank
of
India
Development in various capacities

Board Chair of CARE India and a member of

RBI Eastern Area Local Board and Central
Board; and the Boards of IKP Centre for
Technologies in Public Health and CRISIL

Headed the Committee on Comprehensive

Financial Services for Small Businesses and
Low Income Households formed by Raghuram
Rajan to study various aspects offinancial
inclusionin India

Served as a Board Member of Wipro for five

years and Board Chair of the Fixed Income

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