Sab waqt ki hera pehri hai – Looming Currency War

“Currency war” (jargon made popular by Brazilian prime minister) has brought out three points very clearly:

1) Too much of everything is bad, even the money.

2) Hard hit every country has taken due to the recession and even the great USA, the most ardent proponent of free market now actually not interested in free market, ask President Obama.

3) With time everything changes including the needs and perception - earlier everybody was running behind capital but now no one wants it.

Third point is going to be the centre of attraction in the article.

The lines from the song “Sab waqt ki hera pheri hai” from the Bollywood movie Hera Pheri is becoming more and more apt with each passing day. These lines mean that with the time all needs and perception change. It were the emerging economies like Brazil, India etc which wanted to capital most in early 90s, and now they want none. Earlier emerging economies were running behind the capital. Now capital is running behind these economies. Who can forget the crisis India faced because of inadequate foreign exchange. It was blessing in disguise for sure because it caused India to open its market for the world and since then India has not looked back. The growth story is there for everybody to see. Clocking above 7% growth is no mean feat, ask USA but don’t ask China.

So suddenly what has happened that caused this war of currency. As usual whatever happens nowadays, it is because of recession root of this “war” is also in recession. Huge amount of money to the tune of 12 trillion dollars as per IMF estimates is pumped by the central governments in their respective economies to revive them. But as an old saying goes you can take horse up to lake to drink water, but you cannot make it drink. So even though money was pumped in the system, people and businesses were sceptical about the recovery and demand and hence demand for money didn’t increase in these economies. Returns nosedived in sync with dip in growth of the economy. The effect is two pronged. Manufactures have to search for market and hence exports become more and more important just not for China but also for every nation in the world as consumption in their economies is not reviving. Secondly investors (read speculators) started moving out of these economies looking for good returns and growth. Their search (Even Google was not required) landed them in developing economies market.

Problem arising out of excess capital inflow is also twofold. As money inflow increased, the country in which it started flowing in, its currency started appreciating making exports more and more uncompetitive. Cost of sterilization kept rising. Secondly markets started becoming more and more speculative and volatility increased as most the capital inflow is portfolio investment. Hence to tackle these problems governments started taking measures to stop appreciation of their currency. Like Brazil’s doubling of transaction tax on fixed income flows. These kinds of measures are being taken by China for years and it is able to keep its currency down artificially to keep up its export competitiveness. Problem now is that these kinds of measures are being taken by every other government. So if all government start taking steps to depreciate their currencies, it will trigger a downward spiral which may be detrimental for the growth revival in the world and everybody will be worse off. Question is in this game who will blink first.

Soon it will be Rime of an Investor – Money money everywhere not a penny to invest.

Dushyant Chaturvedi

Infrastructure in India - An opportunity

It takes just few minutes on a railway station in India to understand what it means when somebody says India lacks Infrastructure. No doubt India has to go a long way as far as achieving infrastructure revolution. The path will be very difficult and will require commitment not only from government but from every citizen of India. What citizens have to do with it? Isn’t building infrastructure government’s job? I think we the people of India now have to come out of this mould of leaving our issues to be resolved by some unknown hand of God. It has to be the society and people of India to come out and build the nation. It will be a painful process and the worst part of it is that those who are going to build it will not be able to enjoy its fruits. Every generation builds for the future generations and that is how nations are built.

Now after philosophy it is time for business. Economics sense says any rational investor will not take up that venture, which cannot provide economic returns. So is there profit in this market? Actually how big is the market? Is there really an opportunity? Well to answer these question just consider this fact that Indian’s eleventh five year plan envisaged Rs 20,00,000 crore requirement for infrastructure development in 5 years completing in 2012. So we are talking about a market which requires investment of tune to 9% of India’s GDP in five years. So at modest 10% return we are talking about Rs 2,00,000 crore profits over the five years i.e. 40,000 crore per year. There are not many industries who can boast of such returns. But are these returns sustainable? Definitely so if we consider the fact that above requirement is expected to remain so in the years to come with growing urban areas, development of rural areas and increasing population.

A back of the envelope analysis of the sector tells us that there are very favourable government policies to encourage investment. There is demand, which is heading north. Competition is yet not fierce. Users are too many and need the services. Suppliers are too eager to cater. So it seems that it is one of the most profitable sectors in India. But then the big question why investments are not coming up. Why it is still lagging?

Infrastructure projects generally require huge investment and generally affect large no. of people while implementation. Risk increases more so when we consider that generally these are long duration projects and for getting the returns investor may have to wait for years. The very nature and structure of this sector makes it a difficult sector to enter.

There are 2 major challenges in infrastructure projects at the moment:

1. Long term sustainable financing for these mega projects

           - It is easier to get the initial funding, but getting a sustained funding in long term is a challenge,

             which causes stoppage or delays in projects.
           - Sources of funds should be increased within the Indian economy. Currently, Banks are a major 

             source of funding. They themselves face liquidity issues in long term. Apart from Banks, other 

             financial institutions such as insurance companies should also come forward for financing.
           - Government issues infrastructure bonds for raising funds. Banks and other FIs can also look for 

             this option, though ICICI already follows this practice.
           - It is important to start generating some cash flows after some time, so as to keep the interest of 

             debtors in long term

       2. Execution Challenges

           - Land acquisition
           - Environment policies very confusing for the companies right now
           - Delays in approvals from government side

It is critical for the success of ventures to take care of above issues and create better models for implementation, models that achieve participation and support from public also. That will be most critical factor above all.

Otherwise years after years we will be standing on the same railways stations wondering why trains get late. And while waiting for the train we will be wondering why India lacks Infrastructure.

- Dushyant Chaturvedi and Rishi Khanna

Unfulfilled demand

In the growing telecom market, we are currently witnessing intense price war among leading operators. The competition in the telecom space initially was about access to large customer base and later on it switched to providing wide varieties of VAS. This was then followed by price war when new player pitched in to the battle. Some of these players timed their entry just before 3G/4G spectrum allocation. Giants like Bharti Airtel, reliance, Tata Tel and Vodafone focused heavily on winning spectrum in their planned network circle, while new players started eating up their market share in every possible way. These biggies in fact were in no mood to get into price war, however, they don’t have any option as they want to retain their market share. It is very much essential to retain customers since they want to launch 3G/ 4G services to this customer base first. They have paid huge license fee and are under high pressure to start earning from the first year itself. In fact, the spending on 3G/ 4G and impact of price war has made Vodafone group to cut the value of its Indian arm by $3.2 billion.

Once number portability starts then customers will find it easier to switch from one operator to another. Customer retention is very important for all of these operators. Under 3G/4G spectrum it is data service which is a major source of income to operators. Operators are crafting their strategy to roll out high end data based VAS to their customer base.
On the other hand the voice communication need of the consumers is not fully met by most of the operators. When we did a survey for our academic project, we found that still basic voice communication plays an important role because of huge potential rural market. According to Gartner India at present have more than 660 million subscribers and estimate that it should grow to 993 million by 2010 with penetration reaching 82%. So there is a clear gap in what people want and what firms in the industry perceive to be important for consumers.
But according to PricewaterhouseCoopers’ analysis aggregate EBITDA margin for core voice services is decreasing. It dropped from 33.3% in year 2003 to 29.5% in year 2009. It is largely because of drastic fall in the call services price due to tight competition. In spite of growing market in to rural area operators are still targeting some of the lucrative circles and making every effort to snatch the share from competitors through price cut.
So it is important for operators to equally focus on voice services even after commercial launch of 3G/4G specific services for three reasons. First it ensures a critical mass of consumer base to launch 3G/4G specific service in a cost effective way. Secondly, call service is the basic feature sought after by every individual so focus into growing part of the market is important. Last but not least, consumers are willing to switch to better serving operator once number portability is in place this helps operators to gain market with least effort.

Source: http://www.gartner.com, http://www.dot.gov.in/, http://www.pwc.com