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Reservation in India: What Does the Constitution Say?

Mithun Madhusudan

Welfare

Parliament sessions are always a hectic time, but this one has been even more so with a number of critical Bills listed for passage. The most important so far has been the decision to create a 10% quota for the economically weaker sections with the General Category in jobs and higher education.   Now before we comprehend what the proposed law might do, we need to go back in history and understand the context for reservations in India. What is the objective of reservation? How has the policy evolved over the years? What are the provisions of the new law? What are the concerns associated with the law and the process of its passage? What does it mean for the future of reservations in India?   What is the Basis of Reservation in India?   Article 15 of the Constitution defines a fundamental right of all citizens of India - “Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth”. However, in recognition of the vast inequalities existing in India at the time - driven by centuries of unequal distribution of benefits to different classes of society, the government thought it would be prudent to create an exception to the above Fundamental Right. Subsequently a clause was added to article 15 by the Constitution (First) Amendment Act in 1951 to allow the state to make special provisions - the text of the clause being “Nothing in this article or in clause (2) of Article 29 shall prevent the State from making any special provision for the advancement of any socially and educationally backward classes of citizens or for the Scheduled Castes and Scheduled Tribes.” This cleared the way for the government to enact laws as required to provide reservation (i.e. a special benefit on the basis of caste, which was explicitly prohibited by Article 15 alone). This forms the historical and legal basis of reservation in India. This was pushed a little further in 2005, when the government added another clause which allowed reservation for backward classes in private educational institutions as well. More details here.   Right after Independence, moves were made to ensure social justice and provide equal opportunities to the most “backward” people in our country - these were historically the Scheduled Castes and Tribes who were the primary victims of untouchability and caste pollution practices. In 1954, to further the country’s affirmative action practice, a 20% reservation in educational institutions funded by the state was created. This was subsequently raised to 22.5% and also included jobs in Central Government institutions. Another important aspect - the affirmative action quotas are only binding for Central Government-funded educational institutions and Central Government jobs. The states are free to enact their own laws regarding affirmative action, and decide which sections get affirmative action benefits. Check the list of states and their distribution of the quotas by various classes here. Hence the frequent agitations over the last year (Gujjars in Rajasthan and Marathas in Maharashtra) to be added to the list of social and educationally backward classes and become eligible for reservation.     What are the “Socially and Educationally Backward Classes” that the Constitution Defines?   The Constitution does not list any socially and educationally backward classes. This is left to the government of the day to notify. Consequently, from time to time the Central and State governments can create and update lists of castes which are supposed to benefit from reservation.   This also led to the next phase of India’s affirmative action politics - popularly called the ‘Mandal politics phase’. This began in 1979, when the Morarji Desai-led Janata party government appointed a Commission led by BP Mandal to examine the need for affirmative action for “the socially or educationally backward classes" of India. The Commission recommended that other socially and educationally backward castes which formed ~ 50% of the population also need affirmative action and they should get an additional reservation of 27% of the seats in Central Government jobs and educational institutions. The report was finally implemented in 1990 by the VP Singh government, but not before widespread student protests. That was a different time in pre-liberalization India, where the only real hope of a job was with the Central Government, hence the anger.   Reservation is allowed for SCs, STs, OBCs (who SCs, STs, OBCs are, is defined by the government) only in Central Government funded higher educational institutions and Central Government jobs. For OBCs, only those whose parents are not gazetted officers of various grades in the Central Government, armed forces, or PSUs, or those whose family’s annual income is below INR8L are eligible i.e. for OBCs there is a stringent criterion which removes the so called ‘creamy layer’ from the benefits of reservations. There are no such economic criteria in the case of SCs or STs.   Why is the 10% Reservation Likely To be Challenged in the Supreme Court and be Struck Down as Unconstitutional?   This relates to a Supreme Court judgement called the Indra Sawhney judgement. The government’s implementation of the 27% reservation was challenged as being unconstitutional and against Article 15 of the Fundamental rights. However, the Court upheld the 27% reservation as valid, and further dictated that the total reservation cannot exceed 50%. The current numbers are 15% SC, 7.5% ST, and 27% OBC. Interestingly this judgement also struck down another government order which mandated 10% reservation for “economically backward sections of the people” maintaining that solely economic criteria cannot be used to determine which are backward sections of the population to benefit from reservation - effectively ending attempts for economic based reservation.   So What Does the Recently Passed Constitutional Amendment Say?   The amendment explicitly adds more clauses to Article 15 and Article 16 of the Constitution to allow the state to a) create criteria to define economic backwardness (the current clause in Article 15 relates only to social and educational backwardness) and b) provide for reservation for such identified economically backward classes, upto a maximum of 10%. These are of course in direct contravention of the Supreme Court judgment above. Predictably the amendment has already been challenged in the Supreme Court. Expect it to go through a long cycle and probably end with a decision by a 9-judge bench.   The first two pages of this PRS research PDF tells you what exactly the changes are. The Amendment has now been signed by the President of India and is law. Now the government has defined the economic criteria of annual family income of INR8L for benefiting from this reservation. This quota will be applicable to people who are outside the benefits of the 49.5% - essentially non-SC, non-ST, and non-OBC. This is not restricted by religion or caste and is applicable only on the basis of economic criteria.   What are the Concerns with this Law?   First, the manner in which the law was passed. Passing laws, especially Constitutional Amendments is a rather long-drawn out process, involving readings of Bills, circulation to the members of the Lok Sabha and Rajya Sabha in advance, discussions over days, referring it to a Parliamentary Committee for advanced research and inviting public comments. This Bill started from a Cabinet note and amended the Constitution all within a week. Needless to say, there was not a lot of debate on the merits and demerits of the bill, which is sad, because that is where we would have really seen what the ramifications of this could be. Unfortunately, no political party seemed to be willing to take a stand against any reservations in our country.   Another concern is with respect to the economic criteria itself. Data suggests that around 95% of Indians will be eligible for reservation based on these criteria. A quota that benefits everyone does not really benefit anyone, does it?   The last point is a lot more subjective. Remember that the initial articles in the Constitution did not provide for an economic criterion for applying the benefits of affirmative action. How far is this valid today? We have all heard about the anecdotal problems with the system of reservation - the same sections of society getting benefits from reservation, certain well-off sections enjoying benefits while the poor get left out, the ‘merit’ argument - but it is worthwhile to dwell on the original reasoning behind reservation for a moment.     The reason economic criteria was explicitly left out not because people were not poor, but because the society in 1951 actively pushed socially backward communities into poverty. Economic backwardness was a consequence of social backwardness, and social networks of caste and class provided for a rigid structure where certain classes could not lay claim to economic opportunities despite how hard they tried. Certain sections of society, certainly the ‘untouchables’ faced active discrimination not because they were poor - they were poor because they were actively discriminated against. The cause was social, but the effect was economic, which is why the initial language clearly states “socially and educationally backward classes”. It is important to recognize that affirmative action is primarily intended to remove social backwardness criteria, and empowering traditionally backward portions of the population to have a voice in every sphere of importance in the country.   Now to answer the question - how far does the social backwardness criteria hold true in India today? Has reservation lifted people out of their socially and educationally backward state?   The % of population split into the various sections is - “A survey by the National Sample Survey Organisation (NSSO) put the OBC population in the country at 41%, the SC population at 20%, ST population at 9% and the rest at 31%.”   In an absolutely equal country where benefits accrued to all equally, the proportion of population in various important posts in the Central government (where reservations are applicable) would also have a similar pattern.     As per data received from 78 ministries and departments, including their attached and subordinate offices, the representation of SCs, STs and OBCs in the posts and services of the Central government as on January 1, 2016, is 17.49%, 8.47% and 21.57% respectively.   On this basis, it does seem that reservation has worked for SCs and STs (as a consequence of it running for ~70 years), but not for OBCs, where their representation is still smaller than their % in the population.   An interesting aspect of this data is that as you go higher in the Central government posts, the representation reduces significantly.   According to a written reply by the Department of Personnel and Training (DoPT) in the Lok Sabha, there are 431 officials at the Secretary, Special Secretary, Additional Secretary and Joint Secretary level in various Central Ministries and Departments. Of this, only 28 belong to the SC category and 12 to the ST category.” Make of this what you will.   What Next?   Affirmative action is an accepted practice across the world to provide representation to under-represented classes. There is always going to be a debate raging on whether keeping caste as a criterion for reservation fuels casteism and political opportunism, but the reality of our country is that large sections are still under-represented and face the kind of daily atrocities in society that you and I don’t. For them, it is imperative that affirmative action policies tread the thin line between social and economic criteria, understanding the realities of our situation. In the long run, economic criteria are more objective, but we cannot discard the legacy of hundreds of years of exploitation which has driven a large percentage of our population into the lowest rungs of society.   For now, we await the Supreme Court’s view on the latest amendment and see where it goes.   You can subscribe to my weekly letter series titled "Policy & Governance for Dummies" by clicking here.   View the letter archive by clicking here.       (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

10 Must-Have Books on Avoiding Obesity, Good Nutrition, and Diet Plans

Dr Arun K Chopra

Ship Shape

Akin to the previous article, which suggested some must-have books to begin resistance training, this one discusses some valuable books on nutrition. Reading these will provide you with an insight into the root causes of obesity, i.e. food and habits which are likely to promote it), while simultaneously offering some effective tools to deal with it.    As discussed earlier, it is easy to design a diet and lose some weight in the initial few months. The trouble is in maintaining progress. Multiple well-designed and meticulously conducted studies have demonstrated that weight loss tends to plateau even in the most committed individuals over 6-12 months, and is inexorably followed by weight regain over the course of the year after. Hence, two years after an enthusiastic beginning, most people (>90% in several studies) are back where they started from. A depressing scenario, indeed!     Those who have been following this series from the beginning know that it’s possible to lose weight and keep it off too, provided some rules are followed. While one can learn a lot about the impact of different food items and nutrients on weight just by revising the Ship Shape articles on nutrition, some of you may want to delve deeper for a fuller understanding of this rather complex subject.   Please bear in mind that a lot of the information in the earlier articles is from scientific medical journals and text-books, which are a little too complex to be followed by the lay man. I shall thus be presenting a list of books that can be read by anyone, not just doctors or science students.   The Root Causes of Obesity and Lifestyle Diseases   1. Why We Get Fat: And What to Do About It, by Gary Taubes   This is one of the landmark books that examine the history and causes of weight gain in the last 50 years. With data from scientific studies in populations that have stayed away from civilisation, as well as rat studies, it presents at length the insulin model (simply put, the carbohydrate model) of obesity, with compelling data on why calories don't matter, that is, fat is not burnt by the body unless insulin levels in the blood are low. He also recommends a regular intake of all kind of meats, while avoiding refined carbs completely (including wheat and wheat products) – two major diet controversies today.   2. Wheat Belly: Lose the Wheat, Lose the Weight, and Find Your Path Back to Health, by William Davis, MD   This one is by a cardiologist, who also believes that modern wheat is to be avoided in order to be healthy and fit. The data on two pieces of whole wheat bread raising the blood sugar more than two tablespoons of pure sugar comes from this text. With the recent wave of going gluten free, especially among athletes and sportspersons, a look at this very informative book is warranted.   3. The Obesity Code: Unlocking the Secrets of Weight Loss, by Jason Fung, MD   Dr Fung is a nephrologist with special interest in diabetes and obesity, and also supports the insulin model, i.e., the carb-based model of obesity. He also presents the history behind the data leading to guidelines restricting fat intake, and their loopholes. While the book has been criticised for quoting blogs in addition to medical journals, he was one of the early researchers to implicate refined carbs more than fats in obesity. Finally, he suggests a diet pattern that enables us to avoid getting fat, or lose weight if we need to.   4. Eat Fat Get Thin, by Mark Hyman, MD   Another book presenting the background of the demonisation of fats by studies conducted in the 1940s-60s, and their formal restriction to prevent obesity and heart disease in subsequent dietary guidelines. It discusses the impact of fats on metabolism, explaining at length why fats do not cause obesity.   5. The Case Against Sugar, by Gary Taubes   A thorough discussion on how sugar and refined carbs have helped usher in obesity and lifestyle disease. While it has been criticised by authorities as being biased, the amount of data on sugar that was relatively ignored in the 80s and 90s is shocking. There is no doubt that these items should be minimised in our diet, as this book will undoubtedly convince you.     What and How Should One Eat?   6. Food: WTF Should We Eat: The No-Nonsense Guide to Achieving Optimal Weight and Lifelong Health, by Mark Hyman, MD   A book that discusses the nitty-gritty of diet, it talks about all individual food groups (e.g., meats, eggs, dairy, fruits and vegetables, etc.), and provides guidance on what items can be consumed ad lib, what are to be limited and what is to be avoided. He suggests his version of an ideal diet-the “Pegan diet”, a synthesis of the Paleo and Vegan diets (discussed earlier), designed to keep one near ideal body weight and full of energy. Perhaps one of the most useful texts if one wishes to plan one’s own diet.   The two books discussed above (3 and 4) also give useful information about what to eat and when to.   Small, Frequent Meals or Intermittent Fasting?   7. Intermittent Feast, by Nate Miyaki   A to-the-point discussion on the benefits of eating a more natural diet (akin to Paleo) while minimising refined foods (carbs or fats) with natural proteins and fats. Carbs can be increased by people who exercise heavy regularly, while fats need to be emphasised by sedentary individuals, who gain weight rapidly if they eat excess carbs. Overall, the recommendation is to avoid refined foods and keep the meal frequency low (he strongly recommends a satisfying dinner, and light snacks during the day).     8. The Warrior Diet: How to Take Advantage of Undereating and Overeating, by Ori Hofmekler   An Israeli ex-Army officer, he has evolved his own techniques for Maximum Muscle, Minimum Fat by using The Anti-Estrogenic Diet and finally, The Warrior Diet (incidentally, all 3 are titles of books he has written on nutrition and fitness). He also reiterates the remarkable benefits of intermittent fasting-feasting as in the above book, especially for people who are physically active.   9. Better than Steroids by Warren Willey, DO   This is a book for bodybuilders, or those who perform heavy exercise regularly. Rather than using steroids or other supplements of doubtful value, Dr Willey outlines how one can achieve similar results with healthy food combined with exercise. He gives detailed plans regarding calorie intake and adjusting meals according to exercise plans and goals.   For Those Who Want Quick Fat Loss   10. New Atkins for a New You: The Ultimate Diet for Shedding Weight and Feeling Great, by Westman, Phinney and Volek   The original Keto diet – the Atkins’ diet is discussed here. Replete with details of the Induction and Maintenance phases, full of practical meal recipes and plans, this is a must-have for those planning a short phase of the Keto diet. While there are concerns about its health implications for long-term use, there is no doubt about keto diet's fat-loss efficacy.   Among these books, the most useful books to understand the cause of obesity are Why We Get Fat: And What to Do About It and The Obesity Code. The most helpful one for designing a healthy and balanced diet is Food: WTF Should We Eat? Better than Steroids is more useful for athletes, sportspersons and bodybuilders. Wheat Belly is an essential read if one wishes to go gluten-free, or is gluten sensitive.   That’s it then-the complete low-down on the sources for the secrets of nutrition, fat loss and muscle gain.   You can buy the book by clicking on its title in the article. You would be re-directed to Amazon where you can place your order. Happy reading :)    This is a recurring column published every Sunday under the title: What is Nutrition.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How Your Logo Design Shapes Consumer Judgments

INSEAD Knowledge

Consumer Behaviour

Amitava Chattopadhyay, INSEAD Professor of Marketing.    The shape of your logo affects how consumers perceive your organisation, its products and even its behaviour.   While they’re commonly called “intangible assets”, logos matter. GAP learned this lesson when it attempted to change its logo, but quickly abandoned the endeavor after it met with a furious backlash from followers on Twitter and Facebook. The fact that GAP had suddenly decided to update its iconic and classic logo without consulting its loyal fans was just one reason for its failure.   What the retailer hadn’t realised was how the subtle aspects of its logo were perceived and how a complete revamp might affect those perceptions.   As my colleagues and I point out in a new paper, a logo’s shape can affect the judgments people make about the attributes of a company or product. Specifically, we find that circular or angular logos activate associations of “softness” and “hardness” respectively.     These associations extend beyond physical notions of softness and hardness. For example, if a person is reading an ad for a services company, the notion of softness may give the reader the image of the company as being more sensitive to its customers.   How Do You Want to be Perceived?   We took this further by presenting an ad for a specific product, in this case a sports shoe, to see whether the effect of the logo’s shape influenced perception of a specific product. We found that the circular logo led to perceptions of comfortableness, whereas the angular logo led to perceptions of durability. In another experiment to solidify these findings we used a different type of logo with sofas as the product category, which had the same effects, with consumers associating the sofas with softness if a rounded logo was present and hardness when an angular logo was present.     Shaping Perceptions   While logo shape has a big part to play in consumer perception, it can also be accentuated or reduced by accompanying visual imagery in an advertisement. This is due to how mental imagery is processed by the recipient. Generation of mental images happens in what psychologists call the visuospatial sketchpad of working memory. This sketchpad can be constrained if opposing visual imagery or ad headlines differ from the inference drawn from the logo shape.   On the other hand we found that ad headlines affected a different part of working memory (the phonological loop, responsible for speech-based and numerical information), but with similar outcomes. In our shoe ad, we found that the attributes of circular or angular logo shapes were made more noticeable if the headline of the ad reflected similar attributes. This effect was also diminished when the headline focused on other aspects. In our shoe ad for instance, the logo shape’s effect on comfortableness was accentuated with a headline that illustrated comfortableness, but this effect was diminished when the ad headline focused on durability. It’s no wonder advertising guru David Ogilvy described the headline as 80 percent of the ad.   We also found that consumers had a higher willingness to pay for the product if the logo shape inferences were consistent with the verbal information of the ad.   What Logos Say About Your Firm’s Behaviour   We also investigated whether these findings could be taken beyond physical product perceptions and into the realm of general brand characteristics, including the behaviour of company employees. Participants in one experiment were shown the scenario of a passenger carrying overweight baggage trying to board a plane operated by a company with either a circular or angular logo. They were asked how likely the passenger was to be allowed to board without a penalty. As expected, participants reckoned the airline would be more likely to allow the passenger to bring their bag on board without a penalty if it had a circular logo. They also thought the airline would be more willing to respond to customer needs and cared more about its customers if it had a circular logo.   Picking Your Shape   So how does a company decide on the shape it will use for its logo? Designers are taught that circles are graceful and their curves are seen as feminine, warm and comforting. Angular shapes on the other hand represent order, rationality and formality. This guidance, however, is very general. In a business context, organisations have multiple motivations at play and the implicit messages in logos can be accentuated or reduced depending on the desired behaviour the organisation is trying to influence.     As we noted in our earlier experiments, we exposed people to shapes before actually asking them to carry out a specific task with regard to a logo. We found that even this exposure has the same effect. This holds important implications not just for logo design but also for companies designing display spaces or even products or packaging; the bottom line being that if an organisation wants to be perceived as rugged, durable and tough, an angular logo will work best, but for those who wish to be seen as caring and soft, a circular logo is for you.   Amitava Chattopadhyay is the GlaxoSmithKline Chaired Professor of Corporate Innovation at INSEAD. He is co-author of The New Emerging Market Multinationals: Four Strategies for Disrupting Markets and Building Brands. You can follow him on Twitter @AmitavaChats.   Follow INSEAD Knowledge on Twitter and Facebook.   This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

15 Must-Have Books to Start Exercising

Dr Arun K Chopra

Ship Shape

One of the toughest things about starting resistance training is to learn how to do the individual exercises accurately. As alluded to earlier, venturing head on into weightlifting is not the best idea. One must start gradually, learn the proper form of the exercises and then progress slowly but steadily.   Hence, we have two major challenges at hand.   To learn the proper form of these exercises To plan the workouts, their days, and sets/duration, etc.   We shall look at the first one today.   Resistance training can be done in several forms - bodyweight training or callisthenics, weightlifting with free weights and/or machines, and dumb bells/kettle bells. Let’s look at some great resources for these.   Bodyweight Exercises   The best way to start resistance training is to learn bodyweight training. It’s easier to learn. There is little, if any investment needed and the chances of injury are also less. Further, there is nothing more efficient than learning to move one’s body in space effectively.                                  1. Convict Conditioning by Paul “Coach” Wade   This is one of the best resources to learn about body weight exercises. Learn it from people who have nothing to develop their strength, except their hands and feet, and sheer will power – convicts. This wonderful book outlines the history of bodyweight strength training (with multiple photos), and the techniques to master the big 6 basic exercises – push-up, pull-up, squat, bridge, hanging leg raises and the handstand. Not just this, it gives the means of progression to elite standards in these (though the last couple of elite levels in the one-arm pull-up or one-legged squat are probably unrealistic). Still, it’s one of the best books to get started on the subject.   2.  Never Gymless by Ross Enamait   Another great text on a wide variety of body weight exercises, their variations and progressions. Also, it looks at the use of simple tools to make these exercises easier, or harder, as per requirement, for instance ropes, boxes, etc. More to the point, but perhaps, not as inspirational as Convict Conditioning.   3. Raising the Bar by Al Kavadlo   For those who want to do the pull-up and can’t, or think pull-up is the only exercise you can do on a bar, is this little gem from one of the finest practitioners of Callisthenics, The Kavadlo brothers have written several books on the subject. Here, he outlines the steps to master these difficult exercises, as well as how to make slow, but steady progress. To see the results, check out their “human flag” photos. You can see four progressions for the pull-up here.   Weightlifting   Bodyweight training has enough juice to last a lifetime. However, there are many who want to lift heavy weights. While Schwarzenegger and Bill Pearl do give cursory descriptions of hundreds of strength exercises in their huge volumes on weightlifting, these are not the best sources for learning the proper form. For that, the classic text is Starting Strength.   4. Starting Strength by Mark Rippetoe and Lon Kilgore   Perhaps the best book to master the big 5 - the bench press, overhead press, squat, dead lift and power clean. While he does spend pages on apparently simple aspects like positioning of the feet, where one should look and the different types of grips, at the end, one does come out much wiser. However, my favourite part is the Foreword. Rippetoe dedicates the 2nd edition to his teacher, Philip S. Colee, who passed away with cancer. He writes,   You have not witnessed determination until you have seen a man wearing an oxygen bottle do deep squats for sets of five across…(the metastatic cancer) was not going to prevent him from living his remaining days as he saw fit-he taught many of us here at the gym what was possibly the most valuable lesson…no matter what your personal circumstances might be (the universe is unconcerned with such details), you get out of life exactly what you have contributed to the effort. It is my honour to have been his student. He will be missed.   Strongly recommended.   5. Strength Training Anatomy Workout by Delaware and Gundill.   This is a useful text which shows good anatomical photos of various muscles, and outlines of several exercises with barbell and dumbbells. Should ideally come after one has learnt the basics from Starting Strength.   6.  Exercise Technique Manual for Resistance Training by the National Strength and Conditioning Association (NSCA)   A useful resource, it encloses two DVDs showing correct and incorrect exercise techniques.   However, Olympic lifts (snatch, clean and jerk) are much more technical and more injury prone than the power lifts (squat, bench press, dead lift). Hence these are best learnt from a coach, especially in the younger age group. As one ages, it’s much harder to master these rapid jerky movements, and much more likely to cause injury.   Kettlebells   7. Enter the Kettlebell by Pavel Tsatsouline   Pavel is the Russian strength coach who introduced Kettle bells to the West. This is one of his finest books in mastering the difficult art of handling the “gym in the palm of one’s hand”. Many of his books have been criticised for being overpriced and too brief; this isn’t one of them. It contains detailed descriptions of the major kettle bell exercises – the swing, the Turkish get up, the clean, the press and the snatch. Embellished with tips and tricks from the master himself, this book is a must-have for all kettlebell enthusiasts.   8. Kettlebell RX: A Complete Guide for Athletes and Coaches by Jeff Martone   This is the other complete guide to learning the above-mentioned exercises and more. A Martial Artist and a trainer of repute, Martone is well known for his feat of performing get ups with a female athlete clinging to his forearm, instead of holding a kettlebell, highlighting the strength these exercises can build over time. While this book is more structured and systematic than Pavel’s, the two are probably complementary.   Other Useful books for Strength Training   9. Never Let Go by Dan John   A well-known strength coach, Dan John specialises in writing practical, no-nonsense guide books on strength training. Subtitled “A Philosophy of Lifting, Living and Learning”, this one is full of useful insights. Dan John’s inspiring writing is sure to fire up the newbie as well as the seasoned athlete.   10. Practical Programming For Strength Training by Mark Rippetoe   Another book by the author of Starting Strength, this one teaches us the tough art of programming - the term used for cycling of workouts, or simply, taking two steps back, in order to take three steps forward. As one starts plateauing which is inevitable within 6-12 months (probably even sooner) of starting strength training, programming is critical to progress.   11. Strength and Physique (3 slim volumes) by James K Chan   A police officer and a martial artist, Chan shows how to build strength, fitness and bulk by using the right exercises and the right schedules. While these books are printed privately (hence lack proper page numbers), they pack a lot of useful information for designing your own workouts, should you choose to exercise in your home.   12. Body By Science by Doug Mcguff and John Little   The best for the last. This is a complete text book for fitness, strength and fat loss. It discusses the metabolism at length, followed by a description of 5 major exercises (both machine based and using free weights) that are crucial to building whole body strength. It also packs in detailed chapters on HIIT and fat loss.   Highly recommended.     Further Reading   13. The Complete Keys to Progress by John McCullum   An old-school guide to strength training. If one starts to lose enthusiasm or novelty, this is the go to resource for finding inspiration and variety.   14. High-Intensity Training the Mike Mentzer Way by Mike Mentzer, with John Little   The detailed work on HIIT protocols, as applied to strength training.   15. Power to the People by Pavel Tsatsouline   His detailed exposition on using just two basic exercises (dead lift and the side press) for two workouts a week for maximal strength and fitness.   What Should One Start With   I suggest Convict Conditioning or Starting Strength as the first text, depending upon preference for body weight training or weightlifting. The NSCA Manual is also useful due to the DVDs showing correct and incorrect exercise forms. Those preferring kettle bells can start with either Pavel or Martone, both are excellent.   Once you have eased into a routine of regular exercise, Dan John and James Chan give you more variations, as well as philosophy (especially Dan John and McCullum). Raising the Bar will serve well for conquering the one-arm pull, the muscle-up and other enviable, impossible to perform bar exercises.   As Pavel says, “Power to You!”   P.S. One can refer to Athlean-X to understand the correct posture for the exercises mentioned through the article.   You can buy a book by clicking on its title in the article. You would be re-directed to Amazon where you can place your order. Happy reading :)   This is a recurring column published every Sunday under the title: A Guide to Exercise.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

The Dark Side of Exercise and Nutrition: Workout Injury, Fatigue, Steroids, Supplements and More

Dr Arun K Chopra

Ship Shape

Over the past couple of months, we have discussed the all-encompassing benefits of a healthy diet and exercise. As the year comes to a close, think it is now time to take a look at the darker side of things.   A primary concern while exercising is that of injuring oneself. This has been discussed in several previous articles on running, weightlifting, using kettle bells, etc. Let’s address all of these in one place.   Nearly half the people who run regularly end up injuring themselves over the course of a year. These injuries can be anywhere - feet, ankles, knees, hips, back or neck. There is also the risk of road traffic accidents if one is running on the roadside instead of on a track or in a park.     Herein lies the importance of a coach - to learn the proper stance, develop the right stepping, using the right footwear for individual needs, and most importantly-the right way to stretch fatigued muscles. Most injuries can be prevented by these, and doing proper warm up and cool down, which are essential for any strenuous exercise.   Another common concern is that of a sudden cardiac arrest during or immediately after a long run. This has also been discussed at length earlier. To reiterate, in healthy and fit individuals who exercise regularly, the risk of such an unfortunate accident is very low, and rises only to a very minor extent while exercising. Conversely, regular exercise significantly lowers the risk of sudden collapse during the rest of the day (a risk which is much higher in sedentary individuals). It’s important to be aware of this. This is also why it’s recommended that any person starting on a strenuous exercise program, especially after the age of 30, undergo a medical check-up prior to beginning. Notably, males are much more likely than females to suffer such events.   One is also prone to injury while weightlifting, though surprisingly, less so than running. However, trainees often suffer muscle pulls, which need time to heal, and muscle soreness and stiffness, which are mostly benign and self-limiting. One needs to differentiate between muscle soreness occurring soon after unaccustomed or heavier exercise, delayed onset muscle soreness and muscle pulls or worse still, tears. While the first two will settle with appropriate rest and decrease (but not disappear) with experience, muscle pulls may need physiotherapy and avoidance of exercises stressing the injured muscles till they heal. However, some soreness is normal after a heavy bout of exercise, and the muscle need not be avoided unless the situation worsens.     Muscle tears need professional opinion from an orthopaedic surgeon or ideally a sports medicine specialist. Even more important is to find out why the muscle was injured - was it was due to an improper technique, or inappropriately high weights? Needless to say, that the predisposing factors need to be addressed. Proper training for learning techniques is even more important for exercising with kettle bells, as rapid, jerky movements with a weight are more likely to cause injury.   Resistance training mandates following proper exercise techniques, and realising that slow and steady is the only way to gain. It’s been said that we overestimate what we can achieve in a year, but underestimate what we can in a decade. This is particularly true for weightlifting. Growing from 30s to 50s, a feeling of improving youth and fitness that is imparted is a most satisfying reward. The ancillary benefits of sticking to lifting heavy weights regularly are many, not least of which is developing an iron will to persist in the face of adversity.   One is usually prepared for pain and injury when initiating an exercise program; it’s the desire for rapid progress and unrealistic goals that causes greater harm. After the initial honeymoon period of rapid increase in strength and fitness, one reaches a plateau within 3-6 months of regular exercise, depending upon one’s initial fitness levels. At this stage, a coach is most crucial in guiding a trainee regarding programming-a term signifying taking a couple of steps back before moving 3 steps ahead. Even so, progress is slow and hard to find. The obvious solution at this stage is shortcuts: the use of supplements and/or drugs to augment performance.     These have been in use for decades now: Arnold Schwarzenegger was candid enough to admit that in his time, they used drugs to boost performance as they didn’t know better. However, others like legendary cyclist Lance Armstrong admitted to using them with full knowledge, managing to fool authorities for years, before finally coming clean a few years back. It’s important to understand supplements for what they are, along with their long-term consequences.   Whey protein is safe upto reasonable limits - 30-40 g per day can be easily digested and tolerated by a healthy young athlete aiming to fulfil her protein requirements. Other safe products include multi-vitamins and some minerals within recommended doses. Limited amount of creatine and glutamine powders may enhance strength and hasten recovery, respectively, and may be consumed under medical supervision. However, these are expensive and often come from unreliable sources.   Nothing beats a healthy diet, regular exercise and a solid will, as far as a normal adult aiming for fitness is concerned.   Steroids and other performance boosting drugs are a strict NO-NO; these harm the body in numerous ways and people might suffer lasting consequences for years even after giving them up. Youth in their pursuit of strength or a six-pack should not get carried away. They should persevere with their efforts and avoid taking short cuts - an endeavour that is fraught with permanent risks.   In summary, exercise is a life-changing endeavour, with multifarious benefits. It has to be a lifestyle change, rather than a compulsion and should not be muddied with drugs or supplements for rapid gains.   This is a recurring column published every Sunday under the title: A Guide to Exercise.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Why is Protein a Diet Essential For Muscle Growth and Bodybuilding?

Dr Arun K Chopra

Ship Shape

Proteins are well known as the building blocks of muscle. They are made up of amino acids, which are divided into Essential and Non-essential. Non-essential does not suggest unimportant. Its rather a medical term implying they can be synthesised in the body, while the Essential ones can’t.   Hence, Essential amino acids must be consumed as part of one’s diet, as their deficiency hinders effective muscle growth.    Further, proteins have the same calorie content as carbs (about 4kcal/g) but are much harder to digest. Nearly a third of their calories are consumed merely in digesting them. This means consuming proteins keeps us full for longer, and imposes a lighter calorie burden on the system, resulting in weight loss and muscle building, if supported by proper exercise.   Yes, muscle growth is a function of two inputs - proper nutrition AND exercise, both alone being inadequate for the best results.   Speaking of the nutrition part...for years debates have raged around two aspects:   1. How much protein is required daily, for building muscle? 2. Are meats the only good source of protein?   How Much Protein?   The first question is harder to answer than commonly believed. The Recommended Dietary Allowance (RDA) say that for a normal, healthy adult (read sedentary individual), about 0.8-1 g/kg of body weight is enough. This translates to around 56 g/day for an adult male weighing 70 kg and 46 g/day for a 59 kg female. Even this amount is hard to source in average Indian vegetarian diets.   Moreover, much higher intakes are recommended for inducing optimal muscle growth.   For those who practice regular strength training, the requirement stands at around 1.5-2 g/kg of body weight. These are recommended for professionals and not the average gym enthusiast, who could do well with c.1 g/kg, with a reasonable upper limit of 1-1.5 g/kg daily.   Bodybuilders supposedly need even higher intakes, with different authorities recommending 1-1.5 or even upto 2 g/lb body weight (1 kg=2.2 lb), meaning an intake of upto 2.2-4.4 g/kg body weight. This kind of consumption is obviously impractical, except for professional athletes, who typically consume 4,000-6,000 kcals per day via 6-7 divided meals. Note: This is NOT recommended for weekend enthusiasts and needs professional advice - which this series of articles does NOT claim to be. Consult your Dietician.   The very idea of heavy protein intake for muscle building has been questioned. Coach Wade, the author of Convict Conditioning, rightly questions this guideline - having witnessed convicts achieve massive gains in strength and muscularity, despite being on relatively restricted prison diets, and being limited to bodyweight exercises and few fixed weights.   Having said that, a healthy protein intake along with willpower certainly helps build muscle and prevent muscle breakdown, especially while trying to lose fat in order to achieve definition.   The Best Sources of Protein   Now to the second question. The best source of protein comprise: eggs, meats (red and white), fish, milk and nuts. These deliver the most healthy and complete proteins having all Essential amino acids.   Also, as you can notice, these are largely non-vegetarian sources. Does that mean that vegetarians can't have enough protein or become strong?     Absolutely not! But non-vegetarian foods definitely have their advantages with respect to muscle building. For starters, they contain complete proteins with all the Essential amino acids. They also have a much greater protein content per gram, containing 50-90% of their calorie content as protein, compared to 13-20% of total calories in vegetarian sources.   Conversely, most vegetarian sources lack a few of the Essential amino acids. The only vegetarian source of complete protein is: soy, buckwheat and quinoa. Other healthy vegetarian sources are nuts (almonds, walnuts, cashews, pistachios, pecans, peanuts), tofu and tempeh (from soybeans), lentils (daals), chickpeas and beans like kidney and black beans (also called legumes), green peas, spirulina, oats, wild rice, chia seeds, nut butters, and vegetables like broccoli, spinach and asparagus. Fruits contain only small amounts, the maximum being found in guavas, berries and bananas.     Its not practical to eat only quinoa or soy all day long, one has to improvise. For instance, daal and rice both have incomplete proteins, but daal-chawal together have all the Essential amino acids. For reassurance, some of the most impressively muscled Bollywood stars – John Abraham, Vidyut Jamwal, Sonu Sood and Shahid Kapoor are vegetarians. Around the time he was shooting for Dangal, Aamir Khan became a vegan as well.   Further, in India there are 3 types of vegetarians – vegans, lacto-vegetarians (a diet that includes vegetables as well as dairy products) and ovolacto-vegetarians (a vegetarian who does not eat meat, but does consume some animal-derived products such as eggs and dairy).   Obviously, it is much easier for the latter two groups to imbibe the required amount and quality of proteins - eggs and milk/dairy are some of the richest and best sources.   Eggs contain very high quality proteins. The PDCAAS score (a marker of protein quality) is 1 for egg protein and whey. One large egg has about 6.3 g proteins, about 3.75 g being in the white. Soya is another excellent source of proteins. Notably, it also contains phyto-oestrogens, making it unsuitable for consumption in substantial amounts by males.   Milk also has IGF-1 (Insulin like growth factor-1), which is also very helpful in bulking up. So, next time someone says she is a hard-gainer, tell her to drink two glasses of whole milk daily and exercise: she will be surprised.    Protein Supplements   Anybody aiming for >1-1.5 g/kg daily intake of proteins has to take supplements. They broadly come from 3 sources - whey and casein derived from milk; albumin from egg whites; and soya. Whey and casein can be consumed by lactovegetarians. The former is better for muscle building (more anabolic), while casein is slowly digested and so is better for preventing muscle breakdown (anti-catabolic).     A lot of controversy exists about the role of protein supplements. Proteins are digested by the kidneys, hence there is no problem with consumption of reasonable amounts of proteins (1-1.5 g/kg body weight) if kidney function is normal. However, when professional bodybuilders take huge amounts of proteins (2-4.4 g/kg) along with drugs/supplements of questionable quality (as proteins are very expensive), chances of damaging the liver and kidney are high.   Thus, one should preferably consume natural foods rich in proteins rather than large amounts of whey or other supplements; if one has to, then 30-40 g of whey or other supplement protein is a reasonable amount per day.   In summary, proteins are very important for building muscle. A healthy consumption is even more important for strength trainees. While meats, eggs and dairy are the best sources of complete proteins, it’s quite possible to consume healthy proteins as a vegetarian (even as a vegan), and become strong and muscular.   Next week, we shall try Understanding The Myth Behind Converting Fat into Muscle.   This is a recurring column published every Sunday under the title: What is Nutrition.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

In a World of Rising Debt: Who Possesses the Greatest Risk?

Colin Lloyd

Macro

A world of debt – where are the risks?   Private debt has been the main source of rising debt to GDP ratios since 2008 Advanced economies have led the trend Emerging market debt increases have been dominated by China Credit spreads are a key indicator to watch in 2019   Since the financial crisis of 2008/2009 global debt has increased to reach a new all-time high. This trend has been documented before in articles such as the 2014 paper from the International Center for Monetary and Banking Studies – Deleveraging? What deleveraging? The IMF have also been built a global picture of the combined impact of private and public debt. In a recent publication – New Data on Global Debt – IMF – the authors make some interesting observations:   Global debt has reached an all-time high of $184 trillion in nominal terms, the equivalent of 225% of GDP in 2017. On average, the world’s debt now exceeds $86,000 in per capita terms, which is more than 2.5 times the average income per-capita.   The most indebted economies in the world are also the richer ones. The top three borrowers in the world—the United States, China, and Japan—account for more than half of global debt, exceeding their share of global output.   The private sector’s debt has tripled since 1950. This makes it the driving force behind global debt. Another change since the global financial crisis has been the rise in private debt in emerging markets, led by China, overtaking advanced economies. At the other end of the spectrum, private debt has remained very low in low-income developing countries.   Global public debt, on the other hand, has experienced a reversal of sorts. After a steady decline up to the mid-1970s, public debt has gone up since, with advanced economies at the helm and, of late, followed by emerging and low-income developing countries.   The recent picture suggests that the old world order, dominated by advanced economies, may be changing. For investors, this is an important consideration. Total debt in 2017 had exceeded the previous all-time high by more than 11%, however, the global debt to GDP ratio fell by 1.5% between 2016 and 2017, led by developed nations.   Setting aside the absolute level of interest rates, which have finally begun to rise from multi-year lows, it makes sense for rapidly aging, developed economies, to begin reducing their absolute level of debt, unfortunately, given that unfunded pension liabilities and the escalating cost of government healthcare provision are not included in the data, the IMF are only be portraying a partial picture of the state of developed economy obligations.   For emerging markets, the trauma of the 1998 Asian Crisis has finally waned. In the decade since the great financial recession of 2008 emerging economies, led by China, have increased their borrowing. This is clearly indicated in the chart below:     The decline in the global debt to GDP ratio in 2017 is probably related to the change in Federal Reserve policy; the largest proportion of global debt is still raised in US$. Rather like the front-loaded US growth which transpired due the threat of tariff increases on US imports, I suspect, debt issuance spiked in expectation of a reversal of quantitative easing and an end to ultra-low US interest rates.   The IMF goes on to show the breakdown of debt by country, separating them into three groups; advanced economies, emerging markets and low income countries. The outlier is China, an emerging market with a debt to GDP ratio comparable to that of an advanced economy.   At 81%, China’s private debt is much greater than its public debt, meanwhile its debt to GDP ratio is 254% – comparable with the US (256%). Fortunately, the majority of Chinese private debt is denominated in local currency. Advanced economies have higher debt to GDP ratios but their government debt ratios are relatively modest, excepting Japan. The Economist – Economists reconsider how much governments can borrow – provides food for thought on this subject.   Excluding China, emerging markets and low income countries have relatively similar levels of debt relative to GDP. In general, the preponderance of government debt in lower ratio countries reflects the lack of access to capital markets for private sector borrowers.   Conclusions and Investment Opportunities   Setting aside China, which, given its control on capital flows and foreign exchange reserves is hard to predict, the greatest risk to world financial markets appears to be from the private debt of advanced economies.   Following the financial crisis of 2008, corporate credit spreads narrowed, but not by as much as one might have anticipated, as interest rates tended towards the zero bound. The inexorable quest for yield appears to have been matched by equally enthusiastic issuance. The yield-quest also prompted the launch of a plethora of private debt investment products, offering enticing returns in exchange for illiquidity. An even more sinister trend has been the return of many of the products which exacerbated the financial crisis of 2008 – renamed, repackaged and repurposed. These investments lack liquidity and many are leveraged in order to achieve acceptable rates of return.   The chart below shows the 10yr maturity Corporate Baa spread versus US Treasuries since March 2007:   Source: Federal Reserve Bank of St Louis   The Baa spread has widened since its low of 1.58% in January 2018, but, at 2.46%, it is still only halfway between the low of 2018 and the high of February 2016 (3.6%).   The High Yield Bond spread experienced a more dramatic reaction into the close of 2018, but, since the beginning of January, appears to have regained its composure. The chart shows the period since September 2015: Source: Federal Reserve Bank of St Louis   Nonetheless, this looks more like a technical break-out. The spread may narrow to retest the break of 4% seen on November 15th, but the move looks impulsive. A return to the 3.25% – 3.75% range will be needed to quell market fears of an imminent full-blown credit-crunch.   If the next crisis does emanate from the private debt markets, governments will still be in a position to intervene; the last decade has taught us to accept negative government bond yields as a normal circumstance. Demographic trends have even led long dated interest rate swaps to trade even lower than risk-free assets.   A decade after the financial crisis, markets are fragile and, with an ever increasing percentage of capital market transactions dictated by non-bank liquidity providers, liquidity is ever more transitory. Credit spreads have often been the leading indicator of recessions, they may not provide the whole picture this time, but we should watch them closely during 2019.   Originally Published in In the Long Run     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How Vulnerable are Emerging Markets to Rising US Interest Rates?

Colin Lloyd

Macro

Emerging Market Sensitivity to US Monetary Policy – What does the Fed think?   Emerging market currencies have suffered from US interest rate increase The Dallas Fed proposes reserve/GDP ratio as a simple indicator of stress If tightening is nearly complete there may be buying opportunities in EM stocks.   In Is US Leading The Global Economy Towards A Recession?, I speculated on whether US tightening of monetary policy and the reversal of QE was causing more difficulty for emerging markets – and even perhaps Europe – than it was for the domestic US economy. I was therefore delighted to receive an update on 9th December from the Federal Reserve Bank of Dallas, entitled, Reserve Adequacy Explains Emerging-Market Sensitivity to US Monetary Policy. The authors, J. Scott Davis, Dan Crowley and Michael Morris, remind readers that ex-Chairman Greenspan made the following observations after the Asian crisis of 1997/98:   In a 1999 speech to the World Bank, Greenspan summarized the rule stating that countries should manage their external assets and liabilities in such a way that they are always able to live without new foreign borrowing for up to one year.   Personally I find the choice of one year to be a conveniently arbitrary time period, but the remark was probably more concerned with prudence, after the event, than an attempt to model the sudden-stop over time. It also ties in with the generally agreed definition of a country’s short-term debt, that which has to be repaid or rolled over within a year.   The authors go on to discuss reserve balances:   Reserves are a safety net to guard against currency instability when major advanced economy central banks tighten policy.   The burning question is, what level of reserves is necessary to insure the stability of one’s currency? The authors suggest that this should be the following equation:   FX reserves – Short-term Foreign-Currency Denominated External Debt + Current Account Deficit   Their solution is to observe daily changes in the interest rate spread between the Corporate Emerging Market Bond Index (CEMBI) and 12 month Fed Fund Futures. To relate this to the level of central bank reserves an ‘interaction term’ is constructed which describes the relationship between reserve levels and credit spreads. An iterative process arrives at a level of reserves relative to a country's GDP. One may argue about the flaws in this simple model, however, it arrives at the conclusion that a 7.1% central bank currency reserve adequacy to GDP ratio is the inflection point:   To that end, a range of possible threshold values is tested—from reserve adequacy of -10% of GDP to 20% of GDP. The threshold value most supported is 7.1% of GDP. When reserve adequacy is less than that, the sensitivity of the CEMBI spread to changes in Fed funds futures is proportional to a country’s reserve adequacy, with the CEMBI spread becoming more sensitive as reserve adequacy declines. Reserve adequacy above 7.1% doesn’t much affect CEMBI sensitivity to expectations of US monetary policy— sensitivity is similar whether reserve adequacy is 9% or 29%.   The chart below shows the level of reserves for selected EM countries since 2010, the colour coding shows in red those countries with reserves less than 7.1% of GDP and in blue those above the threshold: Source: International Monetary Fund; Bank for International Settlements; World Bank; Haver Analytics   China has maintained extremely high reserves despite maintaining fairly tight currency controls. The table above shows PBoC reserves gently declining but they remain well above the 7.1% inflection point.   Observations and Recommendations   The Fed model is elegantly simple, it would be interesting to investigate its applicability to smaller developed economies; I imagine a similar pattern may be observed, although the reserve requirement inflection point might be lower, a reflection of the depth of their domestic capital markets. I also wonder about the effect of the absolute level of interest rates and the interest rate differential between one country and its reserve currency comparator – not all emerging markets peg themselves to the US$.   This study could also be applied to frontier economies although it may not necessarily be so effective in measuring risk when the statistical basis of GDP and other statistical measurements is suspect – consider the recent upward revisions of the economic size of countries such as Nigeria and Ghana. This paper from World Economics – Measuring GDP in Africa – March 2016 – has more detail.   As part of an initial screening of EM markets for potential risk, the central bank reserve to GDP ratio is easy to calculate. It will not reveal the exact timing of a currency depreciation but it is an excellent sanity check when one is tempted, for other reasons, to invest.   Last year Turkey and Argentina both saw a sudden depreciation, but, with the Federal Reserve now indicating that its tightening phase may have run its course, now is the time to look for value even among the casualties of the Fed. India is, of course, my long-term EM of choice, but as a shorter-term, speculative, recovery trade Turkish or Argentine bonds are worthy of consideration. With inverted curves, shorter duration bonds are their own reward. Argentine 4yr bonds spiked to yield 36% in November and currently offer a 33% yield. Turkish 1yr bonds are even more beguiling, they spiked to a yield of 32% in October but still offer a 22% return. Momentum still favours a short exposure so there is time to take advantage of these elevated returns.   Originally Published in In the Long Run     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

RBI vs Government Tussle: Urjit Patel Resigns, Appointment of New Chief, PCA Framework For Banks, Question of Surplus and More...

Mithun Madhusudan

Macro

We live in interesting times.   Last week witnessed a lot of drama. Elections in five states, Supreme Court announcing verdict on the Rafale deal, and of course a lot more happening at the RBI. The latest developments at the RBI have considerable ramifications on the health of the economy, and hence on you and me.   Let’s begin by asking some fundamental questions. What does the RBI do? Why is its independence important? Who takes the key decisions related to the RBI? Why is there a confrontation between the government and the RBI? What's next?   What is the Mandate of the RBI?   The RBI is the apex supervisor and regulator of the entire monetary system in India, including, and not limited to setting interest rates, regulating the money supply, and banking regulation - with an overarching aim to maintain price stability. Why are central bankers obsessed with inflation? Because it is considered to be an important indicator of the health of the economy.     How Does the Central Bank Control Inflation?   Inflation is influenced by the supply of and the demand for money in an economy. RBI influences the supply of money by setting the interest rates at which it lends to banks, which in turn affects the rates at which banks lend to customers. Low interest rates suggest an increased supply of money. Consumers want to buy more, industries want to manufacture more, and the money to do all this is available at a low interest rate. This leads to growth in GDP (borrow money -> make stuff -> sell for money -> return to bank -> keep the profits). The RBI sets these interest rates via a panel called the Monetary Policy Committee, consisting of three RBI members (including the Governor), and three government officials. The Committee meets 8 times a year to set a new interest rate for the following period.   Therefore, low interest rates theoretically are good for GDP growth. However there is a down side. As supply of money in the economy increases because of the low interest rates, inflation also starts to increase (i.e. as supply increases, money becomes even cheaper, meaning you have to pay more to buy the same things). This hurts GDP growth in the long run, which is why the RBI has to maintain a balance between keeping the rates too high or too low.   Why is the RBIs Independence Important?   The Government does not control interest rates. Why is that? Let’s begin with investors - those who lend money in the hope of a good return. Investors detest risk and uncertainty, and prize stability above everything else. Hence, they flock to countries which have a stable government, a moderate and stable inflation rate, and a strong rule of law. This means that they can theoretically put their money in and earn a guaranteed return some time in the future. However, if the government is unstable, there is an added risk for investors - they demand a higher interest rate to lend to risky countries. This means that war torn countries find it hard to raise money, and hence unable to fuel growth, subsequently finding it harder to access money - perpetuating a self reinforcing cycle.   Inflation rate is a very important signal for investors - ensuring that their investment does not erode over time. Therefore, it is important for the economy to keep the metric stable.   So far so good.  But why would the RBIs and government’s objectives be any different? Why would there be any disagreement? Why wouldn’t the government want inflation to be stable?   A short and highly simplified answer follows - governments are in it for a short term of 5-10 years. In this period, their primary motive is to deliver short term GDP growth which pleases the masses and increases their chances of getting elected in the next. As described above, the easiest way to spur GDP growth in the short term is to make money cheaper (i.e. lower interest rates). But this has risks for long term growth as investors' returns erode and they start pulling out money from the country, leading to lower investments and hence lower growth. Precisely why the mandate of setting interest rates is kept away from the government's purview.   Who Takes the Key Decisions at RBI?   The Central Board of Directors is the main decision committee of the Central Bank. The Government of India appoints the directors for a four-year term comprising of a Governor, and not more than four deputy Governors; four directors to represent the regional boards — usually the Economic Affairs Secretary and the Financial Services Secretary — from the Ministry of Finance and 10 other directors from various fields.   The RBI is governed by a separate law called the RBI Act, which defines its autonomy and its dependence on the government.     What are the Key Issues of Conflict Between the Government and the RBI today?   The governments wants to kick start the GDP growth which slumped in the previous quarter, just before a crucial election year. To get this done, it needs cheap money i.e. lower interest rates. In addition, the Indian banking system today is in the grips of a severe Non Performing Asset (NPAs) crisis - large loans given to industries have been defaulted on (Nirav Modi et al are just the face of the crisis). RBI sees NPAs at 12% of total loans in March 2019. This means out of every Rs 100 lent out, Rs 12 is at varying levels of risk of not being returned. Naturally this makes banks more cautious while lending, as they fear not getting the money back. Subsequently, there is less money in the economy for investments and to fuel growth.   To reduce these NPA levels, the RBI issued circulars to various banks under the Prompt Corrective Action (PCA) framework (which was showing results - 3 banks show signs of revival under PCA). This framework forbade some banks from lending excessively until their NPA levels reduced, further reducing the supply of money in the economy.   In a crucial election year, the government needs money to circulate in the economy, and the above factors mean that money is in short supply. Therefore, over the last few months the government has been pressuring the RBI via various methods (appointing its supporters on the RBI board) as well threatening to use a little known section of the RBI Act (What is Section 7 and why is it seen as an extreme act against the independence of the RBI) which allows it to issue directions to the RBI in matters of public interest - i.e. tell it what to do.   More details here.    So What Happened?   The timeline is interesting and well documented here - all the way from private disagreements to public statements by the RBI Governors warning governments against interfering with its independence, and by the government asking the RBI to act in the public interest. This finally led to the resignation of the RBI Governor and one of his deputies last week. The government showed no hesitation in appointing Shaktikanta Das, ex bureaucrat, also responsible for the implementation of demonetisation as the new RBI Governor. In the coming days, the RBI is expected to decide on the continuation of the PCA framework for banks, thus allowing them to lend more freely. It is also expected to decide on the transfer of part of the RBIs cash reserves to the government (more money to spend). What is the use of RBIs reserves and how much should be held? The article outlines the details, but the common consensus is that RBI reserves are higher than the global average and also that higher reserves allow economies to absorb greater financial shocks.   What Next?   Now we watch closely. It is almost a given that the RBI will ease regulations allowing more money into the economy in the short term. What is more important to gauge is how investors will react to it. If they start pulling out money from the markets expecting higher inflation and/or monetary instability, it could be very bad for longer term growth. The central question however remains - how far did the government go in getting a theoretically independent entity to agree to its decisions? And how will that affect the RBI and financial institutions in the long run?   Until next time.   You can subscribe to my weekly letter series titled "Policy & Governance for Dummies" by clicking here.   View the letter archive by clicking here.       (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

US China Trade War, A No Deal Brexit: Is A Global Economic Slowdown Priced In Yet?

Colin Lloyd

Macro

US stocks have given back all of their 2018 gains; Several developed and emerging stock markets are already in bear-market territory; US/China trade tensions have eased, a ‘No’ deal Brexit is priced in; An opportunity to re-balance global portfolios is high.   The recent shakeout in US stocks has acted as a wake-up call for investors. However, a look beyond the US finds equity markets that are far less buoyant despite no significant tightening of monetary conditions. In fact a number of emerging markets, especially some which loosely peg themselves to the US$, have reacted more violently to Federal Reserve  tightening than companies in the US. I have discussed this in a previous article.   In the wake of the Financial crisis, European lacklustre growth saw interest rates lowered to a much greater degree than in the US. Shorter maturity German Bund yields have remained negative for a protracted period (7yr currently -0.05%) and Swiss Confederation bonds have plumbed negative yields never seen before (10yr currently -0.17%, but off their July 2016 lows of -0.65%).   Japan, whose stock market peaked in 1989, remains in an interest rate wilderness (although a possible end to yield curve control may have injected some life into the market recently). The BoJ balance-sheet is bloated, yet officials are still gorging on a diet of QQE policy.   China, the second great engine of world GDP growth, continues to moderate its rate of expansion as it transitions away from primary industry and towards a more balanced, consumer-centric economic trajectory. From a peak of 14% in 2007 the rate has slowed to 6.5% and is forecast to decline further:   Source: Trading Economics, National Bureau of Statistics of China   2018 has not been kind to emerging market stocks either. The MSCI Emerging Markets (MSCIEF) is down 27% from its January peak of 1279, but it has been in a technical bear market since 2008. The all-time high was recorded in November 2007 at 1345.   A star in this murky firmament is the Brazilian Bovespa Index made new all- me high of 89,820 this week.   Source: Trading Economics, OTC/CFD   The German DAX Index, which made an all-time high of 13,597 in January, lurched through the 10,880 level last week. It is now officially in a bear-market making a low of 10,782. 10yr German Bund yields have also reacted to the threat to growth, falling from 58bp in early October to test 22bp yesterday; they are down from 81bp in February. The recent weakness in stocks and flight to quality in Bunds may have been reinforced by excessively expansionary Italian budget proposals and the continuing sorry saga of Brexit negotiations. A ‘No’ deal on Brexit will hit German exporters hard. Here is the DAX Index over the last year:   Source: Trading Economics, OTC/CFD   I believe the recent decoupling in the correlation between the US and other stock markets is likely to reverse if the US stock market breaks lower.   Ironically, China, President Trump’s nemesis, may manage to avoid the contagion. They have a command economy model and control the levers of state by government at and through currency reserve management. The RMB is still subject to stringent currency controls. The recent G20 meeting heralded a détente in the US/China trade war; ‘A deal to discuss a deal,’ as one of my fellow commentators put it on Monday.   If China manages to avoid the worst ravages of a developed market downturn, it will support its near neighbours. Vietnam should certainly benefit, especially since Chinese policy continues to favour re- balancing towards domestic consumption. Other countries such as Malaysia, should also weather the coming downturn. Twin-deficit countries such as India, which has high levels of exports to the EU, and Indonesia, which has higher levels of foreign currency debt, may fare less well.   Evidence of China’s capacity to consume is revealed in recent internet sales data (remember China has more than 748 million internet users versus the US with 245 million). The chart below shows the growth of web-sales on Singles Day (11th November) which is China’s equivalent of Cyber Monday in the US:   Source: Digital Commerce, Alibaba Group   China has some way to go before it can challenge the US for the title of ‘consumer of last resort’ but the official policy of re-balancing the Chinese economy towards domestic consumption appears to be working.   Here is a comparison with the other major internet sales days:   Source: Digital Commerce, Adobe Digital Insights, company reports, Internet Retailer    Conclusion and Investment Opportunity   Emerging market equities are traditionally more volatile than those of developed markets, hence the, arguably fallacious argument for having a reduced weighting, however, those emerging market countries which are blessed with good demographics and higher structural rates of economic growth should perform more strongly in the long run.   A global slowdown may not be entirely priced into equity markets yet, but fear of US protectionist trade policies and a disappointing or protracted resolution to the Brexit question probably are. In financial markets the expression ‘buy the rumour sell that fact’ is often quoted. From a technical perspective, I remain patient, awaiting confirmation, but a re-balancing of stock exposure, from the US to a carefully selected group of emerging markets, is beginning to look increasingly a attractive from a value perspective.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How to Make Sense of the Indian Economy: The Much-Cited GDP!

Nikhil Arora

Macro

  Understanding the Economy is an exercise in data. Ground realities are measured and tracked through numbers, which are adjusted and combined with other pieces of data to derive more numbers. A few layers later, we arrive at Metrics whose trends inform our view on the state of the Economy. These Metrics are everywhere in the News. However, most people struggle to understand their composition and meaning. With that in mind, I have decided to share a brief overview on a few of Metrics, that you have probably heard of, but not always sure of their implications.   Side note: With the Central Statistics Office (CSO) recalibrating, and in a way downgrading, GDP growth figures for the 2006-2012 UPA era, the opposition triggers a no holds barred attack on the incumbent government. Deeming this as an adequate signal on the increasingly confrontational relationship of economics with politics, I thought it is worthwhile to start with the much-cited GDP .   The Gross Domestic Product or GDP   An almost abused term – GDP is the total market value of all goods and services produced in a country for a given period. That is the definition. GDP doesn’t necessarily have to be for a country, it can be for a bigger region i.e. a combination of countries like the European Union, or a smaller one like a state – basically bound by the scope of its measurement.   The GDP is supposed to be representative of a country’s income or economic health and is hence an extremely important and a heavily cited Metric. Usually expressed in Dollars, the number on a stand-alone basis makes little sense. It is much more useful when compared vs. other countries to get a notion of how big one’s economy is.   The comparisons can be refined by adding layers. In its raw form, the GDP figure usually cited is the nominal GDP i.e. it doesn’t consider differences in cost of living or inflation between countries. This difference can be accounted for by taking adjusted numbers - termed as GDP at Purchasing Power Parity (PPP) for the former and Real GDP for the latter. The idea for PPP being that considering GDP is a proxy for the country’s economic health/income, it should be measured relative to its cost of living. By that logic, India’s Nominal GDP is 6th largest in the world, but in PPP terms it is 3rd largest. Real GDP in contrast doesn’t add any fundamental changes, but rather adjusts for inflationary effects. The rationale being that in an inflationary environment, the Nominal GDP gets artificially increased due to rising prices of goods and services and hence that effect needs to be stripped off. Real GDP, as the name sounds, is supposed to be a more Real indicator of economic health.   More interesting than GDP is the idea of tracking GDP growth (in percentage terms). Low GDP countries normally demonstrate a higher rate of growth, one reason being that their growth rates are calculated on a much smaller base. This base effect is extremely important to understand the context to the numbers.   For instance, we often tend to compare ourselves with China while commenting that India has a comparable GDP growth rate. It is true both India and China demonstrate a 7-8% annual increase in GDP. But in India, the percentage increase is on a base of $2.6tr whereas for China it is on a base of $12.24tr. A 7% annual increase for India would be $182bn, but for China would be $857bn! Its good to keep this context while comparing GDP growth rates and before patting oneself on the back.   How is GDP calculated? Unless you’re an economist or statistician, that question is not important. There are different ways – factor cost, production method, income method, expenditure method etc. Each method has its pros and cons i.e. it is not exactly a science. As said earlier, the GDP number on a stand-alone basis does not make any sense. It needs to be compared. When comparing, you do need to ask if the numbers being compared are calculated on a consistent basis.   Comparing Real GDP with Nominal GDP is wrong! Comparing Nominal GDP with GDP at PPP is wrong! Are the figures in the same currency? Measured during the same period? Did the basis behind calculation change over a period?   That brings us to what has lately been happening in India.   In 2015, the method for calculating India’s GDP was changed from the factor cost method to the expenditure (at market prices) method. Another modification was to switch the "base year" from 2004/05 to 2011/12. Switching the base year broadly means to update the sectoral allocation (i.e. Services, Agriculture, Industry etc.), this making it more "representative" of the current economy. This new methodology was applied to numbers from 2012/13 onwards (i.e. representing a bit of the UPA tenure but the entire NDA tenure). The older series (i.e. 2006-2012 or representing entirely the UPA tenure) was not updated.   Now figures for the UPA tenure (2006-2012) have been updated as well, making the comparison more "like for like."    Why the Fuss?    Well, "experimental" estimates were released for 2004-2012 (again entirely UPA tenure) which showed them on average better than the NDA tenure which followed. But the CSO's latest numbers reverses that story. The rest is just politics.      Shifting gears to Economics, to understand the 2015 change in detail, click this link. To really understand the technical nuances of how GDP is calculated, go to a university!   This will be a recurring column published every Friday under the title: “How to Make Sense of the Indian Economy”.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

The Self-Righting Ship: Debt, Inflation and the Credit Cycle

Colin Lloyd

Equities

Rising bond yields may already have tempered economic growth; Global stocks are in a corrective phase but not a bear-market; With oil prices under pressure inflation expectations have moderated.   The first self-righting vessel was a life-boat, designed in 1789. It needed to be able to weather the most extreme conditions and its eventual introduction (in the 1840’s) transformed the business of rescue at sea forever.   The current level of debt, especially in the developed economies, seems to be acting rather like a self-righting ship. As economic growth accelerates and labour markets tighten, central banks gradually tighten monetary conditions in expectation of inflation. As short-term rates increase, bond yields follow, but, unlike the pattern seen in the higher interest rate era of the 1970’s and 1980’s, the effect of higher bond yields quickly leads to a tempering of credit demand.   Some commentators will rightly observe that this phenomenon has always existed, but, at the risk of saying this time it’s different, the level at which higher bond yields act as a break on credit expansion are much lower today in most developed markets.   When in Doubt, Look to Japan   For central bankers, Japan is the petri dish in which all unconventional monetary policies are tested. Even today, QQE – Quantitative and Qualitative Easing – is only seriously being undertaken in Japan. The Qualitative element, involving the provision of permanent capital by the Bank of Japan (BoJ) through their purchases of common stocks (at present, still, indirectly via ETFs), remains avant garde even by the unorthodox standards of our times.     Recently the BoJ has hinted that it may abandon another of its unconventional monetary policies – yield curve control. This is the operation whereby the bank maintains rates for 10yr maturity JGBs in a range of between zero and 10 basis point – the range is implied rather than disclosed – by the purchase of a large percentage of all new Japanese Treasury issuance, they also intervene in the secondary market. During the past two decades, any attempt, on the part of the BoJ, to reverse monetary easing has prompted a rise in the value of the Yen and a downturn in economic growth, this time, however, might be different – did I use that most dangerous of terms again? It is a long time since Japanese banks were able to function in a normal manner, by which I mean borrowing short and lending long. The yield curve is almost flat and any JGBs with maturities shorter than 10 years tend to trade with negative yields in the secondary market.   Japanese banks were not heavily involved in the boom of the mid-2000’s and therefore weathered the 2008 crisis relatively well. Investing abroad has been challenging due to the continuous rise in the value of the Yen, but during the last few years the Japanese currency has begun to trade in a broad range rather than appreciating inexorably.   In the non-financial sector, a number of heavily indebted companies continue to limp on, living beyond their useful life on a debt-fuelled last hurrah. Elsewhere, however, Japan has a number of world class companies trading at reasonable multiples to earnings. If the BoJ allows rates to rise the zombie corporations will finally exit the gene pool and new entrepreneurs will be able to fill the gap created in the marketplace more cheaply and to the benefit of the beleaguered Japanese consumer. My optimism about a sea-change at the BoJ may well prove misplaced. Forsaking an inflation target and offering Japanese savers positive real-interest rates is an heretically old-fashioned idea.   Whilst for Japan, total debt consists mainly of government obligations, for the rest of the developed world, the distribution is broader. Corporate and consumer borrowing forms a much larger share of the total sum. Given the historically low level of interest rates in most developed economies today, even a moderate rise in interest rates has an immediate impact. Whereas, in the 1990’s, an increase from 5% to 10% mortgage rates represented a doubling payments by the mortgagee, today a move from 2% to 4% has the same impact.   The US Stock Market as Bellwether for Global Growth   Last month US stocks suffered a sharp correction. The rise had been driven by technology and it was fears of a slowdown in the technology sector that precipitated the rout. Part of the concern also related to US T-Bonds as they breached 3% yields – a level German Bund investors can only dream of. Elsewhere stock markets have been in corrective (0 – 20%) or bear-market (20% or more) territory for some time. I wrote about this decoupling in Divergent – The Breakdown of Stock Market Correlations, Temp or Perm? Now the divergence might be about to reverse. US stocks have yet to correct, whilst China and its vassals have already reacted to the change in global growth expectations. Globally, stocks have performed well for almost a decade: Source: MSCI and Yardeni   The next decade may see a prolonged period of range trading. After 10 years, during which momentum investing has paid handsomely, value investing may be the way to navigate the next.   Along with stocks, oil prices have fallen, despite geopolitical tensions. The Baker Hughes rig count reached 888 this week, the highest since early 2015. With WTI still above $60/bbl, the number of active rigs is likely to continue growing.   US 10yr bond yields have already moderated (down to 3.06% versus their high of 3.26%) and stocks have regained some composure after the sudden repricing of last month. The ship has self-righted for the present but the forecast remains turbulent.   Originally Published in In the Long Run     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)  

The Week That Was Quiz

Have a crack at the quiz on the top Business News of the week.

Crossing Borders: Devising A World-Wise Brand Strategy In A Globalised World

University of North Carolina Kenan-Flagler Business School

Consumer Behaviour

An American consumer drives his Korean-made Hyundai to a local store to buy chocolate from Swiss manufacturer Lindt & Sprüngli. In Guangzhou, an affluent Chinese shopper drives her BMW to Carrefour – the French-owned hypermart – to buy Coca-Cola.   The globalization of the marketplace – accelerated by rapidly falling transportation and communication costs – demonstrates the sway that global brands have with billions of consumers. And as the global middle class grows over the next few decades, brand preferences will influence trillions of dollars in purchases.   Marketing professor Jan-Benedict E.M. Steenkamp has studied what distinguishes successful and unsuccessful global brands on six continents. He drew on his 25 years of academic research and interviews with corporate executives around the world to write the new book “Global Brand Strategy: World-Wise Marketing in the Age of Branding.”     Steenkamp introduces the global brand value chain and explains how brand equity factors into shareholder value. Designed to help global marketing executives guide, launch or revitalize global brands, the book also provides real-world case studies of successful and unsuccessful global brand expansions.    “Many major American companies derive easily 50% or more of their sales growth from overseas markets,” Steenkamp says. “When I talk to senior managers at all types of companies, they do not see people rising to the top without them having shown themselves to be very effective brand stewards in the global arena.”   Why Are Brands Important Globally   Brands play three key roles for consumers, says Steenkamp.   They make decisions easier. At a time when products and services are increasingly complex – most of us simply can’t assess the technical quality of a car or a smartphone – brands guide us toward the products and services most likely to meet our needs. They reduce risk. Will those new running shoes stand up to your daily three-mile jog? Choosing a brand that has an established reputation for quality reduces the risk of those shoes falling apart after the first week of pounding pavement. They provide emotional benefits. For many consumers, brand choices are a way of signaling our values and aspirations. Though most of us will never climb Mount Everest, a jacket from The North Face signals to others that we appreciate aspirational values such as exploration and achievement.   Brands also are important for business-to-business (B2B) buyers, Steenkamp says.   Many buyers in small firms don’t have deep technical expertise to fully evaluate their options, and many B2B purchases are relatively low cost and routine, and as such aren’t worth extensive evaluation. Purchasing managers are also human and subject to limitations on their time and susceptibility to social influences as consumers. Managers also look to reduce risk. You can hardly be blamed if the product breaks down if it is sold by a famous brand, reminiscent of the axiom of purchasing agents that “nobody ever got fired for buying IBM equipment.”   Together, these factors allow brands to influence B2B purchases.    Developing Strong Global Brands   Brand managers can’t approach the global marketplace the same way they do in the “local” market of a brand’s country of origin. Well-managed global brands have distinctive needs beyond those of a local brand.   Companies need to consider several factors. Among the most important:   Value proposition: To be successful as a global brand, executives must identify the brand value proposition that appeals to a global – not just local – market segment. “It is more difficult to identify a brand proposition that resonates globally,” Steenkamp says. Simply transplanting a brand’s value proposition from one country to another is no guarantee of success. Trade-offs when adapting to local conditions: Brand managers must consider the trade-offs they’re making when adapting a product or service to local market conditions. Ikea, for example, is focused on providing low-cost goods. Doing extensive customization for each market – such as creating new product names in local languages – would increase costs, contrary to Ikea’s low-cost value proposition. When McDonald’s entered the Netherlands, it found customers would not eat its french fries with ketchup. When the company adapted to local tastes by making mayonnaise available, sales took off. Global brand managers must understand when trade-offs make sense and when they might damage the brand. Incentives for brand managers: Companies need to ensure that incentives for global brand managers are aligned with business strategy and the end-goal of increasing brand equity and shareholder value. Allowing global managers to make decisions in local markets to increase sales there at the cost of weakening the brand globally is ultimately destructive.   These aren’t the only considerations for executives in charge of global brands. The opportunities and challenges of the digital age, the growing importance of firm-wide corporate social responsibility in managing global brands and the role of global brands in creating shareholder value are among the other issues that Steenkamp addresses in “Global Brand Strategy.” Global brands can generate tremendous value for companies, so the allure of taking a strong local brand and expanding into other countries is understandable. But global brands are also more complex and challenging to manage, says Steenkamp, who provides a roadmap that all global brand executives need to consider.    This article originally appeared in the R.O.I. Research Magazine published by UNC Kenan-Flagler.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Pain of Holding a Share: Lessons From Kotak Mahindra

RichifyMeClub

Investment

A few days ago, I was reading an analysis report on Kotak Mahindra Bank (KMB) by Jana Vembu. It explains how KMB emerged as a survivor by providing its banking services to consumers, corporates and commercial businesses. As per the report, INR1 invested with Mr. Uday Kotak (Managing Director, KMB) in 1985 would be worth INR2 Lakh today. Source: Moneycontrol   Let me throw in some color. With lots of ups and downs in 33 years, INR1L invested in Kotak Mahindra Bank (KMB) would be worth INR2,000cr. That’s an astonishing rise of 1,99,99,900%. Amazing. Isn’t it? Who doesn’t love to own such companies? And yet, a majority of us fail to grasp such exemplary returns.   Why?   Because owning such companies can turn out to be a real nightmare during the holding period. The fear that erupts inside us after observing a decline in stock price often outpowers the conviction with which we had bought the stock in the very first place. This compels us to sell the stock even if its primary business is fundamentally strong. In fact, under panic, we fail to analyze the capability of the management that works day and night to make it.   The Pain of Holding a Stock   In a span of 33 long years, KMB compounded at a CAGR of 45%. But this didn’t happen every year. The high returns did come at a cost. The kind of volatility that the company and its investors had to go through is depicted in the chart below. Source: Moneycontrol   During the 2008-Recession, it lost its value by 84.9%. Post-recession, it took more than 5 years to reclaim its 2008 peak. Not only this. At least on 6 occasions, the stock fell down by more than 50%. Around 73% of the time, during its journey, it stayed below its previous all-time high open price. Besides, it tasted the aftermaths of Kargil War, Asian Currency Criss,  the Dot-Com Bubble Crash, 2008-Recession and other global key events which took the investors through a rather tumultuous ride.   Despite all these volatility, I wish I had owned the shares of KMB. But why? Because it’s headed by one of those exceptional leaders, Mr. Uday Kotak, who has built the Kotak business worth billions of dollars from scratch - no mean feat.   The truth is that all great companies go through such adverse stages. The pain of holding a stock lies in the fact that it can face a drawdown in extreme double digits. That too for a long period of time. Sometimes, it may never even recover within a stipulated time frame. The other times, it may test your patience by staying stagnant. Be it the adhesive big player Pidilite or biscuit maker Britannia. They all have fallen down in the past.    Source: Moneycontrol On the other hand, the ones who have the stomach to ride such roller-coaster rides throughout the awful phases make the real money. All they need to do is ignore the short-term fluctuations in the stock prices and focus on the long-term business prospects instead. With a growing business and its earnings, the stock price eventually starts resonating.   Having said that, it reminds me of one of the quotes by Prof. Sanjay Bakshi of MDI, Gurgaon:   If you end up owning a fantastic business, then plan to hold it for a long time. And prepare yourself for a roller coaster ride. If you have chosen the right business to own, the ride will be worth it in the end. ~ Mr. Sanjay Bakshi, Professor at MDI, Gurgaon   While writing this post, I happened to remember an old BBC interview on Charlie Munger (Vice-Chairman, Berkshire Hathaway). On 26th October 2009, he was asked, “So how much does Charlie worry when Berkshire’s common stock declines?“   He replied:   Zero. This is the third time that Warren and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%.   Further, he added:   I think it’s in the nature of long-term shareholding of the normal vicissitudes, in worldly outcomes, and in markets that the long-term holder has his quoted value of his stocks go down by say 50%.   Then, later in the interview, he said:   In fact, you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.   That’s the pain of holding a stock. It can wipe off the gains that may go beyond our imagination!!!   PS: This post has been inspired by Michael Batnick’s They All Fall Down and Morgan Housel’s The Agony of High Returns   Originally Published in RichifyMeClub   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How to Prolong Competitive Advantage

INSEAD Knowledge

Culture

By Phebo Wibbens, Assistant Professor of Strategy at INSEAD.   The resources that take a company further.   When Swedish furniture giant IKEA established its first store outside of Scandinavia, it created an expansion strategy of researching new markets, then opening a flagship store with local customisations and then franchising. Its customisation model was different, allowing for quirky marketing like “Swedes go home” in Switzerland. IKEA used its competitive advantage of a systematic expansion model, in terms of where the stores are and how they are laid out, with the willingness to make important changes when necessary. For example, it adjusted product sizing in the United States, where traditional Swedish-designed drinking glasses had to be supersized to stop Americans from buying flower vases to use as tumblers.     Competitive advantage, i.e. those conditions that give a company its favourable position, had been thought to last only about five years on average, according to traditional measures. But as IKEA and other firms have shown, a much longer period of success is available to some companies. When evaluating their firms, executives – and the market – have a tendency to consider only the resources they can see, ones that directly affect profit, which we call operating resources. More central to a firm’s long-term success, however, are what academics refer to as “higher-order resources”, those intangible assets that improve a company and help drive long-term growth, such as strategic capabilities.   Long-term successful companies must be able to change the way they operate; this is the fundamental idea of higher-order resources, also sometimes called dynamic capabilities.   Traditionally, strategy scholars focused on a firm’s operating resources when analysing its competitive advantage, but these do not explain why some firms outperform others with the same or similar resources for a longer period of time.   In the article, “Performance Persistence in the presence of Higher-Order Resources” in Strategic Management Journal, I found that firms can make their resources go further when they are complemented with intangible but valuable higher-order resources, such as superior strategic planning, M&A capabilities and forecasts. With a model based on empirical data covering 4,000 firms over three decades, I found that when taking into account both operating and higher-order resources, firms enjoy a competitive advantage for 18 years on average.   The Special Sauce   Higher-order resources are not quantifiable the way that profits are. Fundamentally, both operating and higher-order resources are always idiosyncratic and unique. If there were a general prescription for better resource positions, every firm would have them and these resources would no longer grant any advantage. This makes empirically measuring them a challenge. To confirm the importance of higher-order resources for prolonging competitive advantage, I had to consider the patterns expected in profit and other large-scale observable data, like the persistence of profit growth. Then I used statistical procedures to find the data consistent with what we would expect in firms with higher-order resources – akin to how physicists use extensive computer models to detect the signal of otherwise undetectable new particles such as the Higgs boson.   This “special sauce” of higher-order resources gives a company a competitive advantage for a longer time than previously predicted, but it is finite and should be examined on a firm-by-firm basis. For example, Apple has used its superior tech design capabilities from the arena of desktop computers to transform personal music players and mobile phones.     Evaluate Your Firm’s Resource Position   So, how can managers make sure their firms have these higher-order resources?   First, you must evaluate your firm’s drivers of current profits; what are the operating resources that generate the majority of profit? Often there are a few markets, a few key customer segments or a few key products which are the linchpin to your firm's economic profit. What are the underlying resources that enable your firm to do much better than any competitor? Understanding exactly what it is about your core business that allows your firm to make more profit than your competitors is absolutely critical.   Second, consider how your firm’s resource positions have evolved over time. How did your company acquire these capabilities in the first place? And how can they be improved? Are your competitors better able at improving resource positions? How have you done over the past ten years? Few firms consider their resources at the strategic level. And even fewer firms think about what the pattern has been and what the future holds in relation to their competition; in other words: how their higher-order resources stack up vs. those of their competitors.     Higher-order resources: The Danaher example   On their own, higher-order resources don’t provide profits. The Danaher Business System (DBS) has made Danaher extremely successful for more than 20 years. The company, a diversified conglomerate, applies a modified version of the Toyota Production System to strong, niche industries which were not achieving their full potential, like precision tools or dental tools. Little about Toyota’s system was specific to cars; it was a general philosophy of manufacturing applicable to other industries, a perfect example of higher-order resources. For years, Danaher has bought small, underperforming companies and used DBS to turn them around, adding them to its portfolio.   DBS, in itself, produces zero profits. Without a business to apply it to, it would yield nothing. But in combining DBS with other higher-order resources, such as a very skilled M&A and corporate development team, Danaher has been steadily growing and increasing profits over a very long time. The company’s CEO Larry Culp has recently moved to General Electric. Over the 14 years with Culp at the helm, Danaher’s market capitalisation and revenues grew five-fold.   As we have seen with IKEA, Apple and Danaher, higher-order resources help bolster operating resources. They produce persistently better resources over the long term, leading to a longer stretch of competitive advantage. Although broad, my findings show that acknowledging the importance of higher-order resources is a decidedly valuable insight. As an executive, you intimately understand how your firm’s resources make a difference. Consider your higher-order resources, like the M&A team or technologies that can be used in multiple businesses, for example, and make an assessment of where your firm’s profit drivers are and how your resources have adapted over time.   Phebo Wibbens is an Assistant Professor of Strategy at INSEAD.   Follow INSEAD Knowledge on Twitter and Facebook.   This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Money vs Management: What Determines Employee Retention and Attrition

University of North Carolina Kenan-Flagler Business School

Consumer Behaviour

Employee turnover isn’t just a managerial challenge. The resulting disruption, hiring and training costs along with decreased productivity and customer satisfaction affect the bottom line.   But what can you do to reduce turnover? Conventional wisdom suggests money and managers have significant influence on if employees stay or go – but is one more important than the other?   “Once you know how compensation, management and other factors affect employee attrition, you can decide how much to invest in each – which gets to the challenge and options for managers,” says Brad Staats, Associate Professor of Operations at University of North Carolina Kenan-Flagler Business School.     To understand turnover, Staats and Seyed Morteza Emadi, Assistant Professor of Operations at UNC Kenan-Flagler, built a model that captures both the firm’s decision to terminate a worker’s employment (involuntary attrition) and a worker’s decision to leave (voluntary attrition).   Their model not only answers the money vs. manager question – it also suggests ways to predict and reduce turnover. They share their findings in “A Structural Estimation Approach to Agent Attrition.”    Modeling Attrition   Using data from an Indian business process management (BPM) company, Staats and Emadi built a statistical model. They collected individual demographics, salary and employment data for 3,680 workers in a single BPM contact center in India over five years, and compiled macroeconomic data about the Indian economy during the same period.   Then they used the data to build a structural model that looks at how factors – such as salary, who an employee’s manager is, and non-monetary work conditions – affect both voluntary and involuntary turnover. The framework not only yields a robust, predictive model, but also can be used to examine policy changes and how individuals would respond to them.    BPM companies provide back-office support – handling functions such as data entry, technical support or customer service for other firms. The market for such services was worth about $186 billion in 2015, and India accounted for 38% of that market — more than $70 billion.    No matter what industry you work in, chances are you’ve dealt with an Indian BPM at some point, such as calling your credit card company or seeking tech support. For workers, hours can be long and providing customer service can be stressful. Turnover in the industry is high — 50 to 75% annually for Indian BPMs. For these companies – and the clients depending on them – reducing turnover promises considerable economic benefit.       What Matters Most?   Emadi and Staats found that the two most important factors in whether employees stayed in their jobs were salary and who their managers were.    Pay had a relatively small effect – and managers made a much larger impact.   “Conventional wisdom says you don’t leave your job – you leave your managers,” Staats says. “In this context, managers are a really significant driver.”   Supervisors have a strong impact on whether employees stay. Based on their data, if all employees were managed by the best supervisor, voluntary turnover would be reduced by more than 30%.   On the other hand, employees’ sensitivity to salary was low. Their model showed that a 30% increase in salary would decrease voluntary exits by just 2.5%.    “It’s easy to pull the salary lever,” Staats says. “We show the easy answer isn’t the right answer. Instead, company leaders should think about how to reinvest in your people.”     In addition, tenure changed workers’ behavior in important ways. Over time, their sensitivity to salary increased, but their willingness to stay for non-salary factors went down. And their long-term focus decreased even more.    This all has implications for how to structure interventions to reduce turnover, say Emadi and Staats.   Their data also suggests some factors that distinguish managers with the lowest voluntary attrition. They have, for example, higher rates of involuntary attrition by their workers — meaning they are more likely to terminate employment than average managers.   That’s not surprising, Staats says. It suggests those managers are attuned to making sure all of their employees are pulling their weight. If you’re doing a good job yourself, then not having to prop up underperforming co-workers might make your work environment more attractive.    But does any of this matter if you don’t operate a BPM company in India?    The answer is yes. Emadi’s and Staats’ model can be generalized to any workplace and they welcome the opportunity to run their model with data from more companies. Plug your company data into it and you should get a better understanding of what drives attrition for your employees.    “Part of our excitement about this project is that it creates a framework to take a comprehensive approach,” Staats says.   Employment at an Indian BPM isn’t the same as working at an investment bank or one of those West Coast tech firms known for their lavish perks, but Staats suspects the results for those or other firms would be similar.    “Anecdotally, there’s nothing I see here that I haven’t seen in companies that espouse how wonderful their working environments are,” he says.    Many people can earn a basic income regardless of where they work, he says, so other factors – such as interactions with a manager – become more important.    “Our work provides managers with a framework to develop a better understanding of their own attrition process, perform policy experiments – from pulling the salary lever to changing supervisors – and then make strategic decisions that could translate to profits or losses for the firm,” says Staats. “From an operational perspective, it moves us being concerned just about product and consumer operations to managing people as one of the most important resources we have.”   This article originally appeared in the R.O.I. Research Magazine published by UNC Kenan-Flagler.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Formula 1: Understanding The Economics Behind an F1 Race

Harmeet Dhiman

Sports

Editor’s Note: This is the second of a series on Formula 1 (F1) Racing. While the first part touched upon the manpower and the tech involved, here I will talk about its economics.   The Economics of Formula One Management   The contracts, distribution, and commercial management of rights and licenses of the F1 circuit is controlled by London-based Formula One Management Limited.   The company provides media distribution and promotion services to the FIA F1 World Championship. Let us look at its revenues and expenses.     Revenues   F1 is the 9th highest revenue generating professional league in the world, with a top-line close to $1.83bn in 2017.   Formula One Management Limited (FOM) primarily has 3 sources of revenue:   1. Race Promotion: This is the fee paid by the race organizers at every venue across the world. They are driven by predesigned contracts and increase by a few percentage points each year. As per Forbes, organizers pay an average of $31.5 million annually to host a race . These are medium to long-term contracts ranging from 5-10 plus years. Teams also must pay an amount per season to enter the next season, along with a base price of $0.5m plus. In addition to that, teams need to shell out $5,161 for every point scored, whereas Constructors Champions have to pay $6,194 per point. Race promotions contribute to almost 30-35% of the revenue.   2. Broadcasting: There are close to 100 broadcasters of F1 globally, in almost all languages. Rights may be given for an entire-season or part-season. These contracts are also escalated yearly by some percentage. Contract length varies from 3-6 years. Broadcasting contributes to another 30-35% of the revenue.   3. Advertising and Sponsorship: Global and Official Sponsorship deals with Emirates and Rolex (as of 2018, worth c. $200 million over 5 years each), Heineken (till 2023, worth $250 million), Tata Communications, DHL, Pirelli, Mercedes AMG, Amazon Web Services (AWS) and Johnnie Walker bring in the major chunk of ad revenue – through trackside advertisements, race-specific title sponsorships and official supplier deals. These are mostly multiyear deals, lasting at least 3 or more years. Advertising and sponsorships contribute around 15% of the revenues for F1.   4. Others: These include introduction and registration of new teams, hospitality, freight, TV production, licensing etc. These back close to 20% of the revenues.   Now Speaking of Costs   1. To F1 Constructors: FOM distributes a major portion of the revenue it receives amongst the teams in 9 monthly payments. This works as a royalty to remain in the sport and constitutes a good percentage of funding for the teams.   2. Others: Running costs, administrative costs, organizing events etc.   The biggest teams have the deepest pockets. They also spend the most on technological developments to pit against their rivals. Teams incur huge costs, sometimes much more than they can raise as revenue from FOM.   The Economics of Formula One Teams   Now let’s move on to the operations of the individual teams.   Revenues   1. Share from FOM: F1 teams receive payments from FOM every year as a share of the revenue generated annually. In 2018, FOM distributed $940 million, i.e. 68% of the underlying revenue to the 10 qualifying teams. However, the distribution is not equal. Here is the breakdown of money distributed to each team: Source: Autosport *Force India is now known as Racing Point Force India Amt1: Payments based on classification over two of the past three years Amt2: Payment based on end of season finishing in constructor’s championship LST: Long- Standing Team Bonus Bonus: Constructor’s Championship Bonus   Each team gets $36 million as a part of participation in two of the past three seasons. Haas were excluded because this was their first completed season in F1. Every team gets a proportion of payment depending on their finish in the Constructor’s Championship.   Ferrari received the most money from FOM - $180m in total; which included a long-standing bonus of $68 million, exclusively given to them. Mercedes, the Constructor’s Champions of 2016, received a $35 million bonus for achieving its target of winning two championships. Red Bull Racing received a bonus of $35 million (other) for signing the current bi-lateral agreement. Williams received a heritage bonus (other) of $10 million.   2. Sponsorships: Another source of revenue for the teams is sponsorships. Every car has a list of sponsors. The revenue from each depends on different contract lengths, and where the brand is placed on the car. For example, a sponsor would have to pay more if their brand is placed on the rear wing, as compared to the sides or near the driver seat. Ferrari reportedly gets $220 million from sponsorships alone. This amount is much smaller for midfield teams, which unlike Ferrari, Mercedes, Red Bull Racing or McLaren are not big brand names commercially.    3. Engine and Parts Sales: Manufacturing teams such as Ferrari, Mercedes and Renault always receive payments for supplying engines and parts to other teams. E.g. Ferrari received close to $60 million from engine leases alone in 2016. (Ferrari supplied engines to 3 teams in 2016; each engine lease is c. $20 million per year) .   4. Merchandise Sales: Mercedes, Red Bull Racing and Ferrari have considerable merchandise sales from clothing, accessories etc. that adds to their topline as well.   Costs   1. Building Costs: The major cost incurred by teams is for building the car. An F1 car is different not only in terms of the engine, but also aerodynamically. Official figures are never revealed for how much a car costs, but an average estimate is given below:   Source: WTF1   So, one F1 car costs close to $8 million on an average. This cost goes up for the bigger teams as they have more resources and capital to invest in the development of the car and its tech over time. Remember, this is just an estimated cost of building a car at the start of the season, any damage means new parts, some tracks demand change in aerodynamics - hence new front wings are needed sometimes. And in case, the car suffers a crash, the chassis or the entire car has to be rebuilt.     2. Other costs for Formula1 teams include: Driver salaries ranging from c. $61 million/year (Sebastian Vettel, Ferrari) to $150,000/year (Sergey Sirotkin, Williams). Year round research and development of performance and development of the car. Logistics - Transporting driver homes, cars, spares, technological equipment across the world. Personnel Salaries - Engineers, team crew, and administrative salaries.   F1 racing is an expensive business; spending as much as what these teams do, barely earning a fraction of the same amount, but continuing to stay in the game for years is no small feat.   In the next article, I will explore how Formula One teams have sustained their positions so far and how Liberty Media (F1 Group’s owner) would be F1’s Ride or Die.    Stay tuned.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Formula 1: Manpower, Tech, and Money

Harmeet Dhiman

Sports

Editor’s Note: This article is the first of a series on Formula1 (F1) Racing. In the coming weeks, this column will attempt to understand F1 – the game, its regulations, management and the underlying economics.   For many, F1 is just where the fastest car wins.   However, the astounding man-hours, the technology, and the money that goes into building an F1 car is staggering.   How staggering? For starters, it costs around $8 million apiece. Each car is fitted with over 200 sensors and over a kilometer of wiring. Impressed?   With the last F1 Grand Prix of the year scheduled to unleash by this month-end, I will try to breakdown how F1 operates, hoping that you’d be fascinated enough to tune into the upcoming race.   Facts   F1 is the highest level in single seat racing. The first official championship points’ contested F1 race was held at Silverstone, UK in 1950. Today, each racing team, known as ‘constructors’ has 2 cars on the grid with 2 drivers each, and additional 1-2 reserve drivers.   At present, there are 10 racing teams, which means 20 racing drivers who compete in 21 races over the world. The above figures are specific to 2018. It may change depending on next year’s revised race calendar.   There are 2 championships to be won – ‘The Driver’s Championship’ and ‘The Constructor’s Championship’.   Each driver is rewarded a point based on the position he finishes at: 25 for the driver who finishes first and 1 for the driver who finishes last. Every constructor receives the same points as the driver.   The driver and the team with the greatest number of points at the end of the Championship are declared the winners.   All competitive racing divisions, single seat (Formula1, Formula2, Formula3000, GP2 etc.) and double seat (World Endurance Championship, World Rally Championship etc.) are governed by Federation Internationale de l’Automobile (FIA).   Can Anyone Build a Fast Car and Win?   Not really. The FIA strongly controls regulations around a car that can be raced. In fact, The “Formula” in F1 refers to the stringent set of rules to which participating cars must comply.   The idea is to ensure a level playing field much like in boxing, where you can’t field a flyweight vs a heavyweight.   Every car is identical in terms of its dimensions (length and width of the car, the front and rear wings, tires, etc.), the engine and its specifics, the electronics. So much so that the fuel and tires to be used are also predefined.   Since 2014, the V6-hybrid engines are being used. The Power unit (i.e. the engine) consists of 6 elements – the Internal Combustion Engine (ICE), Motor Generator Unit-Heat (MGU-H), Motor Generator Unit Kinetic (MGU-K), Energy Store (ES), Turbocharger (TC), and Control Electronics (CE).   These engines use a clever technology called the Energy Recovery System (ERS) which recovers and redeploys the car’s heat energy from the exhaust and brakes, that would have otherwise gone waste.   This energy is used during a lap as per the driver’s discretion and can give up to an additional 160 horsepower to the driver.   More details about the Power unit and ERS can be found here.   How is The ‘Formula’ Enforced?   FIA attaches a seal to each element within the Power unit before the race to ensure no parts can be rebuilt or replaced.   Each driver is permitted to use three Internal Combustion Engines (ICE), Motor Generator Unit-Heat (MGU-H) and Turbocharger (TC) and two Energy Store (ES), Control Electronics (CE) and Motor Generator Unit- Kinetic MGU-K per season.   Any additional unit used over the pre-specified number results in a 10-place starting grid penalty for the current race (If changed during the race weekend, before the race) or in the next race (If changed after the previous race weekend).   Technical Rules   The ICE must be 1.6L in capacity, and rev-limited to 15,000RPM (Revolutions per minute). Fuel flow to the engine is limited to 100 kilograms/hour, to ensure every car has the same supply of fuel. The use of any device, other than the engine and one MGU-K, to propel the car is not permitted.   Additional technical and sporting regulations can be found here   Constructors can design and use every component of the car by themselves (called works team or factory team) or buy it from another team or supplier. Currently there are only 3 works teams on the F1 grid – Mercedes, Scuderia Ferrari and Renault.   Williams and Racing Point Force India buy their engines from Mercedes (The latter also buys gearboxes from Mercedes). They develop the rest of the car in-house.   Haas buys the suspension, gearbox, engine, hydraulics and all electronic components from Ferrari.   Sauber has a similar agreement like Racing Point Force India of purchasing engines and gearboxes from Ferrari.   McLaren and Red Bull Racing buy engines from Renault, and Scuderia Toro Rosso buy engines from Honda, in an exclusive deal. Red Bull Racing will shift to Honda engines from 2019.   Formula One, in 2017, also launched its eSports Series that will allow gamers and fans to compete for the title of ‘Formula1 eSports Series World Champion’. This not only popularizes the sport further but taps on a new avenue for in-game sponsorship and revenue.   The economics of the game get even more interesting. Stay tuned for that and more.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Transfin. Podcast S2 E18: Brextinct, Breaking Bad, Hotflix

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Transfin. Podcast S2 E17: Bad Apple, WeNotWork, Reserve(d)

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In Conversation with a Doctor: Nutrition, Exercise, Health Tips

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Gold Digger, Brextinct, The Good Samaritan and More...

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A Swap Deal, A Proposed Investment, A Speculation and More...

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What Does the New FDI Policy For E-Commerce Actually Mean?

Professor S

LongShorts

The government recently released new changes to the FDI policy governing the e-commerce sector. These guidelines which strike down at predatory pricing and deep discounts aim to provide a level-playing field for all can prove to be a game changer for the sector.     I. High Level: The Ministry of Commerce and Industry recently released new changes to the FDI policy for the e-commerce sector which aim to cut predatory pricing and deep discounting by retail giants, thereby bringing about a "level-playing field" for the smaller and multi-channel players, as well as the brick and mortar retailers.   II. Differentiation: The guidelines differentiate between a Marketplace based model of e-commerce and an Inventory based model of e-commerce, allowing 100% foreign direct investment through automatic route in the former, but no such capital injection in the latter.   Marketplace based model of e-commerce: In this model, the role of the e-commerce entity is restricted to being a facilitator between the buyers and the sellers with no ownership or control over the inventory or the good and services to be sold.   Inventory based model of e-commerce: Within this model, an e-commerce entity owns the inventory of goods and services and sells them directly to the customers.   III. Why?: Experts opine that it was the heavy discounts, primarily funded by FDI which made it difficult for smaller players and offline retailers to compete against the big players. The new guidelines would ensure fair play for all.   IV. Current Scenario: Till now big the retail giants such as Amazon and Flipkart were bypassing the Marketplace model by creating legal entities which first buy from vendors (i.e in a way keep inventory).   V. Changes:   Concentration: As per the new regulations, an e-commerce marketplace entity will be deemed to control the inventory of a vendor if the marketplace entity or its group companies purchases more than 25% of such a vendor’s inventory.   Equity: An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.   No more discounts: E-commerce marketplace entity are prohibited from directly or indirectly influence the sale price of goods or services.    No more exclusivity: The regulations dictate that platforms cannot enter into exclusive deals with sellers. This would mean that online exclusive brands would now have to tap multiple companies to sell their products     VI. Cause & Effect:   For brands: Brands like BPL, Sanyo, Thomson, Xiaomi, OnePlus, etc, operate as online-exclusive brands on online marketplaces such as Amazon India and Flipkart. In light of the new guidelines, these are likely to enter into partnerships with multiple platforms, become sellers by themselves or venture offline, focusing on retail expansion.   For retail giants: Flipkart and Amazon have launched their private labels such as Smartbuy (Flipkart’s native label for chargers and cables) and MarQ (Flipkart’s homegrown brand for air conditioners and smart televisions) and Amazon Basics (the giant’s native arm which sells electronics, kitchen and dining, travel and more.) which offer goods and services at lower costs and higher margins. Flipkart and Amazon may have to enter into re-seller agreements with multiple Indian companies to be able to sell their products as per the new FDI guidelines.   VII. Loopholes: The new FDI rules state that an online marketplace cannot sell products from a vendor in which they have a stake. However, they do not say anything about selling goods from a subsidiary firm of a vendor. For example, Cloudtail is a joint venture between Amazon.com and Narayan Murthy’s family office Catamaran Ventures, which forms a majority of Amazon's sales.   VIII. The Watchdog: The government is also considering the appointment of a dedicated e-commerce regulator.   If implemented with due diligence, the new rules can provide the much-needed fillip to small players and brick-and-mortar retailers who have suffered massive losses on back of the colossal discounts and cashbacks offered by the retail giants over the years.   IX. Next steps: The FDI rules are expected to come into force by February 1st, 2019. A new comprehensive draft policy for e-commerce sector as a whole is expected to be released in a few weeks.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Fair Play, Censored, Shutdown and More...

Professor S

TheWeekThatWas

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Netflix and Hotstar May Adopt Self-Censorship Code, Flipkart and Amazon Face Heat Under the New FDI Guidelines, India's Fiscal Deficit Widens et al.

Professor S

End Of Day Wrap Up

While the new FDI guidelines for the e-commerce sector may have rather severe ramifications for the retails giants such as Amazon and Flipkart, they might prove to be of aid to the smaller retailers. Govt appoints panel of six to review RBI's Economic Capital Framework - a perennial bone of contention with the govt. Fearing Indian govt's rather punitive regulatory stance, streaming services such as Netflix and Hotstar may adopt self-censorship code.   Now to the week's Top Business Stories through our End Of Week Wrap Up:     POLICY Ex-RBI Governor Bimal Jalan to head panel of six set to review its Economic Capital Framework. Govt to inject INR28,615 cr in seven PSBs. RBI opposes dilution of bank capital norms; might consider revision of existing prudential regulations. Recovery of Indian banks improved in 2017-18 after the implementation of IBC, as per the Trends and Progress Report released by the Central Bank.   Hit Refresh: RBI ‘Surplus’ reserves has been a perennial bone of contention with the govt. The Committee of six will decide whether the Central Bank holds excess provisions, reserves and buffers, which could be remitted back to the govt.   Who Gets to Decide?: Rakesh Mohan, a former deputy governor, will be the deputy chairman. Bharat Doshi and Sudhir Mankad, Directors in RBI’s Central Board, NS Vishwanathan, a Deputy Governor at RBI, and Economic Affairs Secretary Subhash Chandra Garg are other members of the committee.   Also: Government is likely to infuse INR28,615 crore in seven public-sector banks through recapitalization bonds by the end of December including United Bank of India, Central Bank of India, Oriental Bank of Commerce and UCO Bank.   Zoom Out: The government had earlier announced an infusion of INR65,000cr in PSBs in 2018-19, of which INR23,000cr has already been disbursed while INR42,000cr is remaining.   The What: In light of the “Report on Trend and Progress of Banking in India 2017-18” released on Friday, the RBI opposed the relaxation of rules around risk weights and capital requirement for Indian banks. The Central Bank warned that relaxing the current risk-adjusted capital norms could hit the economy at a time when defaults are high and provisions low, as per a Livemint report.   Perspective: At present, the capital adequacy norms for Indian banks are higher than those recommended under Basel.   What else: RBI also suggested that it intends to issue revised prudential regulations, including guidelines on exposure and investment norms, risk management framework and select elements of Basel III capital framework to All India Financial Institutions—investment and development institutions that are crucial to the economy.   Also this: For the 701 cases admitted under the National Company Law Tribunals (NCLT), and claims admitted on 21 accounts for an amount of INR9,900cr, the recovery has been INR4,900cr, indicating a haircut of about 50%.   Also, some nice fresh stuff (what we call "data") from the RBI: Click links to access:    Report on Trend and Progress of Banking in India 2017-18 Statistical Tables Relating to Banks in India: 2017-18   ECOMMERCE Govt tightens FDI guidelines for e-commerce sector. New draft ecommerce policy to plug in loopholes that may favour giants such as Amazon and Flipkart. Govt considers appointment of a dedicated regulator for e-commerce sector. Flipkart, Amazon may consider franchise options to meet new FDI norms.    Rules first: New FDI guidelines out, stating that:   Gist: Govt cracking a whip on Flipkart, Amazon - restricting them from giving out discounts/cash backs.  Secondly: Flipkart and Amazon have to follow a “marketplace” model in India (where you just connect sellers with buyers) rather than the “inventory” mode (where the platform holds its own inventory e.g. Amazon in US). Till now they were bypassing by creating legal entities which first buy from vendors (i.e in a way keep inventory). New rules place more controls.  Conclusion: Bad for ecommerce, good for brick and mortar retail. Prices on e-commerce may align with brick and mortar over the medium term, though subject to full policy guidance.  The new framework will come into force on February 1, 2019.   What’s the new draft about?: As per a Business Standard report, the new draft ecommerce policy to be released next week will seek to plug in gaps in the policy released yesterday. As such, the policy released yesterday might have inadvertently favored retail giants such as Amazon and Flipkart.   Up Close: For instance, the new FDI rules state that an online marketplace cannot sell products from a vendor in which they have a stake. However, they do not say anything about selling goods from a subsidiary firm of a vendor. For example, Cloudtail is a joint venture between Amazon.com and Narayan Murthy’s family office Catamaran Ventures, which forms a majority of Amazon's sales.    Also this: As per a Livemint article, the government is also debating the need for a dedicated regulator for the sector to ensure fair play for all.   What about Amazon and Flipkart?: Flipkart and Amazon may have to enter into re-seller agreements with multiple Indian companies to be able to sell their products as the new FDI guidelines prohibit platforms from purchasing more than 25% from a single vendor.   ECONOMY India’s fiscal deficit widens to 115% of full-year target in November. Govt plans INR1.25L crore direct benefit scheme for farmers.     Up Close: India’s fiscal deficit stood at INR7.16L crore at the end of November, according to data released by the Controller General of Accounts. This is 114.8% of the budgeted estimate of INR6.24L crore for 2018-19.   Expert opinion: The government is widely expected to miss its fiscal deficit target in the current fiscal year or else be forced to announce spending cuts in the last quarter, per a BloombergQuint report.   Farm woes: The government is considering relief programs for agriculture sector with special focus on a direct benefit scheme for farmers to help them meet expenses for seeds, fertilizers, pesticides and laborers.   Also this: Another option being deliberated by the government is “price deficiency payment”, under which subsidy would be provided in case the price falls below an MSP (minimum support price)-linked threshold.   The Bigger Picture: The move comes ahead of the 2019 general elections and shortly after the government lost in 3 states, primarily agrarian, in the recent elections. Implementation of these income support scheme could see the exchequer taking a hit of INR600-700bn a year, according to a Business Standard report.   COMPANIES Chinese e-commerce giant JD.com plans $1bn share buyback. FedEx appoints Indian-American Rajesh Subramaniam as President and CEO.   What you need to know: JD.com’s shares have slumped nearly 16% in the two days after recent rape allegation against CEO Richard Liu, and 50% in the past one year. The buyback program is worth about 3.5% of the company’s market capitalization.   The Big Picture: Shares of JD.com and other Chinese tech companies have plunged this year on back of an investor base worried about a slower economic growth in China, tightening government regulations and an ongoing trade war with US.   What else?: Rajesh Subramaniam appointed as President and CEO of FedEx. He is an IIT-Bombay graduate from Thiruvananthapuram, and is currently the Executive Vice President, Chief Marketing and Communications Officer of the co. He has been with the co for more than 27 years.        CONTENT Netflix, Hotstar and other streaming services may adopt self-censorship code. JioCinema ties up with Disney for content partnership.    Code of conduct: According to an Economic Times report, streaming platforms including Netflix, Hotstar and Reliance Jio may soon adopt a voluntary censorship code that would restrict streaming of content that is banned by Indian courts, disrespects the national emblem and flag, outrages religious sentiments, promotes terrorism or violence against State etc. The code is likely to adopt a redressal mechanism that will allow viewers to send complaints in case of any violation.   The Why?: The development is considered to be a preemptive move against the Indian government imposing its own rules, which may be punitive in nature.   Zoom Out: Amazon, Facebook and Google are unlikely to opt in, fearing that the code might interfere with creative liberty and set a precarious precedent of regulating the internet. It is worthwhile to note here that the three speculated to be pushing against the code perhaps see content as secondary to their core business offering and more as a tool to augment their primary businesses. Furthermore, considering that Facebook and Google's Youtube are largely user-generated content platforms, any self-policing could be seen as counter-intuitive with meaningful ramifications to their business models.   Jio’s deal with Disney: JioCinema, Reliance Jio’s digital app has tied up with Disney to push content through a dedicated section on its platform from the likes of Disney, Pixar, Marvel, and Lucas film.   (Don't want to miss out on these End Of Week Wrap Ups? Subscribe Now to our No Nonsense Email Digest and get the day's Top 6 Business stories straight to your mailbox.)