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How to Use Artificial Intelligence for Effective Customer Segmentation: An Illustrative Example

Anil Mittal

Artificial Intelligence

Editor’s Comment: What degree of insights are possible through Artificial Intelligence (AI)? How to make these inputs actionable from a business perspective? These questions are often lost in the theoretical narrative of AI, so it’s worthwhile to examine a real-life example to reflect upon its power.   Let us assume you run a gym and take most business actions based on experience and often only a hunch. Whenever you encounter one of the below questions, your best option may be to guess or seek an external opinion:   Who are your most important customers? Who should you focus on the most? Which products are popular with existing customers? What are those products’ principal purpose? To increase strength or to stay in shape? Which customers should be first offered your new products and services such as spa & sauna, personal trainers etc.?   To answer such questions, you will attempt to do some form of segmentation, based on 1 or 2 parameters like demography, region etc.   e.g. Millennials are more likely to buy a certain product or service or customers belonging to a region are likely to invest in a certain offering.   The human brain can easily segment and visualize customers when there are around 1 or 2 parameters involved. There is no way the human brain can crunch more than 3 parameters simultaneously.   AI has the capability to assess hundreds and thousands of parameters together, providing unbelievable results. Availability of abundant data and computation power has made this possible in recent years.   These very questions were troubling C&C, a gym operator, which hired a Data Scientist. Fortunately, C&C as storing its customer data in a methodical format as seen below:   Using Artificial Intelligence for Customer Segmentation   Interestingly, using unsupervised AI learning methodology the Data Scientist was able to segment 1,000 C&C customers in the following segments: *Quadragenarian means between ages of 40 to 50 We can hence derive: There are c. 50% active people, comprising Quadragenarian and Young Active Males, using most services of the Gym. This is the segment generating the highest revenues. Their friends and family are either current or potential customers. There are 40% young, inactive females who use the Gym’s services to increase their strength. C&C should seek to improve and customize its services for this segment and convert them into active, high revenue customers. 10% customers are not really adding any value to the business and are unlikely to use the Gym’s new services.   AI can bring rich and actionable insights such as the above in the domain of customer segmentation. Businesses should realize the importance of in-depth data and the power of Machine Learning to take their progression to the next level and maintain an edge against competitors. In my 10 years of professional experience, this is the single most important point of learning I have derived.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Is Artificial Intelligence Really Killing Job Opportunities: Truth vs Hype

Terence Tse

Artificial Intelligence

Recent studies on artificial intelligence-led unemployment certainly make uncomfortable reading.   A frequently cited report points out that some 47% of jobs in the US will be automated in the near future. Another study suggests that 45% of the daily tasks currently done by humans could be automated if current trends continue. It looks like human beings will become the horses of the past. And horses were never given the chance to vote on their future careers.   What AI Actually Is   In spite of the doomsday views, the reality is that the current capability of artificial intelligence (AI) is actually rather limited. It is important to understand that there isn’t really that much intelligence in AI. Intelligence refers to one’s capacity for logic, understanding, self-awareness, learning, emotional knowledge, planning, creativity and problem-solving. Yet, at the moment, machines can do very few of these things.   The true ability of AI lies in the way that it processes a huge amount of data sources and then, based on it, makes the right guesses in terms of decision output. Machines “learn” over time by repeating the same task, adjusting their information input and processing capabilities to become better at "guessing" the output.   It is true that machines these days can read, see images and hear natural speech with unprecedented levels of accuracy. For instance, at Nexus Frontier Tech, our Intelligent Scanner can already achieve 99.2% accuracy in reading typed or handwritten texts, regardless of whether they are presented in the digital or physical form. In this way, machines look very capable and smart. Yet, under the hood, the mechanism is not very different from how our brain works (hence the fact that AI development right now is mostly based on artificial neural networks). Our brains work by taking information from various sources, determine how important each piece is and mix them together to form a decision. What machines are doing is just taking in new data, assigning a weighting to the data in terms of importance, and making statistical guesses. They don’t “know” what the input and output really mean. What AI Can Actually Do   Considering AI “learns” by going through the same routines again and again, what they can actually do is often limited to individual tasks. In other words, they are good at creating pockets of excellence but much less able to engage in full business transformation. AI is, at the moment, nothing much more than an app that supports existing business processes. In this sense, in the current business environment at least, it is not as much about AI as IA – ‘intelligent assets’ or ‘assistance’. It is just helping us approach business in smarter ways – in particular, dealing with standardised work. Given that AI can only take over a single, narrow aspect of work, ultimately, what it can automate away is often only portions of a job.   It is also important to remember that the success of using machine learning lies squarely in the success of how the human activities surrounding the new technology are organised. Coming up with the processes and workflows, together with putting the right people in charge (someone who can manage both machines and robots), is therefore key to effective AI adoption.   In this respect, it is really unlikely that a vast number of people will be losing their jobs anytime soon. Machines cannot create, market, deliver, feed, clean or fix itself. AI, like other machines, are just tools. And tools need to be used to create value. By people. Lately, there is a Chinese T-shirt manufacturer that signed a memorandum of understanding with the State of Arkansas to hire 400 people by paying them $14 an hour in the company’s new factory. What is their job? They are there to make sure the machines and robots do their jobs properly. Machines, therefore, cannot do much without human beings. And human beings cannot really do much without machines. So, instead of arguing whether machines or AI will eliminate our jobs, it would be much better for us to think about how to be best friends instead of competitors.   This article was originally published here.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Initial Coin Offering: The Wild Wild West of Cryptocurrency Market

Terence Tse

Cryptocurrency

ICO stands for ‘initial coin offering’. Many of us know this. But, to me, it may as well stand for ‘incredible commercial opportunities’ or ‘incredulous and crazy offerings’.   The 'Kodak Moment'   A couple of weeks ago, I posted an article that shows how some companies’ share prices jumped as a result of merely announcing the development/deployment of blockchain. For example, the chart below shows the stock performance of Kodak. On the 9th of January this year, the company’s share price shot up by more than 300% when it announced a forthcoming ICO with the aim of creating a “photo-centric cryptocurrency”. I have always known that technology would eliminate my job as a corporate finance professor. And I think my time has come: instead of value being created through the proper management of a company’s finances, all it now takes is to say that you are doing something with ICOs and blockchain.   Source: Kodak Stock Performance during ICO announcement   A recent survey by TokenData on last year’s ICOs finds that out of 902 events it tracked, 142 failed before funds were raised, with an additional 276 failing after fundraising. This represents a failure rate of 46%. But there’s more. The survey also finds another 113 projects that it calls ‘semi-failed’ because their teams dropped off the radar or their community withered away. Now, if you think that is crazy, wait until you delve deeper into what some of the cryptos do – or don’t do.   First, some coins don’t even bother to link themselves with the blockchain. For instance, there was a crypto issue that carried the (noble) intention of raising money to build the new satellite city of New Dubrava in Russia. The whitepaper on the RSC coin (don’t ask what it stands for as the paper never bothers to mention it) is six pages long and comes in the form of a letter pleading for help. It doesn’t mention any business model, growth strategies or anything that can help investors understand how the funds raised will be used. And blockchain? What blockchain? According to information shown on TokenData, it did not raise a single cent.   Other cryptos have much more realistic objectives. Wu-Tang Coin is just using ICO to raise the money needed to buy a limited-edition recording by the hip hop group Wu-Tang Clan. And that’s it. Reading its five-page whitepaper is, therefore, easy, as it makes it clear that it is a gift and nothing else. Amount raised: $954.   At least it managed to raise that amount though. A quick count on TokenData reveals that 19 ICOs received less than $500. Most interestingly, 15 of these were within the past seven months. This probably reflects the fact that investors are becoming warier of ICOs and are increasingly being aware of their pitfalls.   Make Our Country Great Again My exploration into the wild land of ICOs was rewarded with some interesting finds. For instance, I discovered that PutinCoin exists (market value: $1.65M). According to its whitepaper, it is "a cryptocurrency coin [its description] created to pay tribute to the people and the president of Russia. It was created and developed with the intention of supporting the vastly growing Russian economy, the market around it and even the economy across the Russian boarders [sic]”. As you could perhaps guess, there is also a TrumpCoin (market value: $379,000). As far as I can tell, it was created to support his election campaign. And, of course, there is the MACRON coin (market value: $767,500). The purpose of this coin is rather telling: “MACRON was created in support of (then) French Presidential candidate, Emmanuel Macron (who eventually went on to win the elections).” Crystal clear.   Praise The Lord   Jesus Coin, on the other hand, seems to have much bigger drawing power. With a market value of $1.40M, its website claims that “It’s Time to Decentralize Jesus”. It is “the currency of God’s Son. Unlike morally bereft cryptocurrencies, Jesus Coin has the unique advantage of providing global access to Jesus that’s safer and faster than ever [sic] before.” I must admit that I love the fact that the team behind this coin is considerate enough to also provide the whitepaper in Latin.   Apparently, commercial opportunities aren’t confined to coins alone. This year sees the debut of Virtual Currency Girls (Kasotsuka Shojo) in Japan. It is formed of eight female band members, each of whom wears a character mask representing a crypto. Between them, they show Bitcoin Cash, Bitcoin, Ether, NEO, NEM, Ripple, Mona and Cardano. Virtual Currency Girls There are so many things about cryptos that you didn’t know you wanted to know. And now you know. Given the way things are going, I am sure newer ‘value creation’ ideas will emerge. It is going to be a fun, interesting and entertaining ride from here. I am cancelling my Netflix subscription.   A big Thank to Zoran Dordevic, CEO of Tolar for informing of the existence of the Jesus Coin. No, he is yet to buy one of these.   This article was originally published here.

Apple and iPhone: Making of the Brand

Loizos Heracleous

Digital

Editorial Comment: It remains a well-known fact that iPhone, Apple’s smartphone, makes up for more than half of the company’s revenues. However, lately, there has been a drop in the number of iPhones being sold, even in supposed growing markets such as China and India. This slump in sales is often credited to the exorbitant price of iPhone’s latest model ‘X’. Needless to say that Apple's future lies in striking the right balance between its pricing and brand positioning. As Apple awaits its Q2 results, here’s a rehash of how ‘Apple [made] a $999 gamble on its aspirational brand’ published on the launch of iPhone X.   Apple is taking a calculated risk with the pricing of its new phone. The US$999 iPhone X is a bet on users’ loyalty and wealth and is on the surface consistent with the company’s longstanding strategy of differentiation and exclusivity. The danger lies in how the phone sells in the world’s huge and growing emerging markets; Apple clearly thinks it is a risk worth taking.   And it’s not without reason. Apple has always targeted the higher end of the market worldwide rather than just aiming for a larger base of users. In fact, if anything, Apple tends to price phones higher outside the US. The UK has to stomach an inflated price for the iPhone X even when tax differences are allowed for.   To be clear, the top end phone is not the only option. British customers will be able to pick up an iPhone 8 for £699 and an iPhone 8 Plus for £799.   This is still more expensive than its direct competitors, but the demand curve for the iPhone is relatively inelastic. This means that for a given percentage increase in price, the percentage reduction in demand is smaller, giving an overall increase in revenues.   No wonder the iPhone accounts for the majority of Apple’s revenues and profits.   New Markets The question that most immediately arises is whether Apple’s move will work in important emerging economies. It is certainly consistent with Apple’s image as an exclusive handset and as “the real thing”, despite the availability of much cheaper imitations. The dilemma for Apple when it comes to marketing strategy is this: A high price, while aiding exclusivity and strengthening its premium strategy, may also constrain its growth in lucrative emerging economies such as India.   On the other hand, if Apple decides to offer cheaper versions of its products in particular markets, or lower prices for the same products that are more expensive elsewhere, it will create bigger problems for itself.   Cheaper versions of its products sold anywhere will detract from its overall premium strategy. The same products sold more cheaply in some countries will quickly create arbitrage options that can be exploited by black market traders, unsettling Apple’s strategy in developed markets, too.   For now, Apple has chosen to maintain a consistent strategy worldwide, and ride the growth of emerging markets by tapping into the expansion of the middle class as it occurs. Despite teething troubles, this decision is working out relatively well in China, a country further ahead in its modernisation journey than its fellow emerging markets powerhouse India, and where more users can afford to buy genuine Apple products. While the $999 pricing may not be the ideal option for India right now, the other options are worse for Apple.   In the medium to long term, more and more people will be able to afford Apple products in India and beyond. Keeping a consistent image and quality will aid in the slower but steady increase in users in those emerging economies. The goal is to keep the iPhone as an aspirational device people will buy as soon as they are able to.   New Features   At the same time, Apple is continuing to focus on intense levels of efficiency in production and more broadly at the operational level, aided by a largely consistent design, operating system and functions across its different iPhone models. The $999 iPhone has no home button enabled by a new type of screen, and includes face recognition and “animojies”. These are features that will find their way to more affordable iPhone models in subsequent releases.   As I have argued elsewhere, while Apple’s strategy for the broad market is one of differentiation, internally it is striving for the lowest cost possible, and has delivered impressive efficiency levels. How does it do this?   Well, it is a combination of things, including good integration across its product lines which increases Apple’s negotiating power over suppliers and makes effective use of external manufacturers. Apple also keeps its supply chain lean by getting its products out the door and into our hands as quickly as possible. Apple bosses, meanwhile keep innovation spending highly focused, and further dampen costs by using a stripped-down corporate hierarchy which cuts down on meaningless meetings.   So, the $999 iPhone might just be worth it for Apple, but what about the customer? The advances that the iPhone X offers, such as face recognition, wireless charging, infrared camera and edge to edge screen may be significant in terms of user experience. We will need to wait for the reviews to come in though; will the facial recognition work seamlessly? How will people react to the absence of the home button, and will the gestures offer ease of use? Pricing, apart from the ability to pay, is also to an extent a social construct. People will pay what they think is appropriate, if they can afford it. Apple has traditionally pushed the boundaries of customer sense of pricing appropriateness. In terms of affordability, in countries where mobile operators offer package deals, the incremental cost over the $699 iPhone 7 for example will amount to a couple of cups of coffee per month. In any case, users will have the option of buying the more affordable handsets.   People have been predicting Apple’s demise for several years now, but Apple’s performance has remained strong since Steve Jobs’ death. At a market cap of US$815 billion, Apple is the most valuable listed company in the world by some distance from the second, Alphabet (Google), at US$649 billion. Apple’s pricing move for its top iPhone is an example of the essence of strategy: making tough decisions, real choices that are meaningful for company performance. No move is risk-free, but at the very least this courageous move will create some distance from competing brands in terms of exclusivity.   Originally Published on The Conversation

Internet of Things: Champion of Road Safety, End of Traffic Woes

Vinay Solanki

Artificial Intelligence

Most of us have been hearing and probably following concepts like smart cities, smart homes, smart gadgets, Internet of Everything, Industrial Internet of Things (IIoT), etc. If you're not familiar with IoT or Machine-to-Machine and what it really means for a layman, please first go through this 2 minute read: Explaining IoT to a Layman.   Grave Situation   Accidents are increasing at an alarming rate across the world and especially in India. Around 4,80,652 road accidents took place in India in 2016 killing over 1.5L people and injuring almost c. 5L. There are various reasons ranging from bad road conditions, over speeding, poor street lighting, road rage, driving under influence of alcohol,  improper road designs and others. Two-wheelers account for 25% of total road crash deaths in India. India is on the top of list of countries by traffic-related death rates. The situation is becoming so serious that according to some stats there is one accident every minute.   Metros are literally competing with each other to become the accident capital of the world. It's fair to say I'm scared to take my car out, especially when I observe the style of driving, people recklessly switching lanes, autos driving in the wrong direction and sanctity of traffic signals being abused without much monitoring from the traffic police. Highways, even though expanding in number of lanes, are not becoming safer, with no proper signage, trucks flouting rules, motorists crossing speed limits and lane switching resulting in very dangerous driving environment.    Now let us see how various technology-based solutions under the umbrella of IoT or M2M can help reduce the frequency of accidents or at least better manage emergencies during accidents.   Smart Helmets   For bikers, whether they ride a motorcycle or a bicycle, it is key to wear a helmet and safeguard onself against head injuries. But what if there is a "smart" helmet that also communicates with other drivers and vehicles. For example, a helmet with LED lights which are connected with the bike's handle through Bluetooth or some other low energy communication protocol, making it turn RED when breaks are applied. LED on the left or right side of the helmet blinks when the bicycle is making left or right turn. How about putting a little GPS connection between the smartphone and the helmet which can allow a biker to project the directions on the road.   Most importantly, the helmet will be connected to the smartphone and in case of an accident, through a connected sensor send a message to a relative or a family member configured inside the phone app.   Look at the basic smart helmet demonstration developed by 2 college kids, who are part of IoT-NCR open community, a crude solution which shows that at cost of INR 3000 one can build a prototype. At a larger scale this solution can be made more economical for the riders. Another interesting invention is that of an avid biker and an engineer who join hands to build an IoT device that ensures road safety. You can read their story here.   Connected Cars and Connected Highways Everyone these days talks about connected cars. As per research, almost 80% of cars coming in market from January 2018 onwards would have an embedded module which would allow the vehicle to be connected with the owner and as well with the manufacturer.   Once your vehicle is linked to the internet and to you through a mobile app, there can be variety of information flowing both ways, which can significantly help reduce and manage road accidents. One basic use case is informing your near and dear ones in case your cars meets with an accident.   But for a moment think about how 'connected cars' and 'connected highways' can help prevent or minimize accidents. Heavy fog caused a 50 car pile up on Yamuna Expressway in January 2016. A 'connected highway' and car could have sensed the congestion/accident when the first two cars bumped into each other and immediately informed through a central server to all vehicles on the highway about the approximate accident location. This is possible if all cars have an RFID chip that is read by RFID reader at the toll gate. The system then knows which car entered the highway and adds them to notification database, and removes it from the system when the car leaves the highway through an exit or the last toll. Cameras on light poles or the RFID on the car, which met with an accident can communicate to the backend informing its status, thereby triggering through the central server, a message regarding a possible accident or a slowdown.   Another feature I can think of is Auto lock built into the car to avoid over speeding wherein if the speed crosses 100 KM on a 60 KM lane, the car will gradually slow down the first time, if it goes over again then it will slow down and send a warning message to the driver the second time and third time this violation can result into a car being locked down and message sent to the nearest patrolling station or cops to handle the situation manually. TCS presented the 'connected car' concept, which highlights some of these important points.   Smart Traffic Management With the nature of 'connected cars' and ''connected highways or other solutions such as smart traffic management are needed, which manage traffic conditions and blockages to minimise bottlenecks. For example how about traffic lights dynamically changing the timing of RED/GREEN/YELLOW based on the traffic in the connecting lanes.   Also these solutions can help the patrolling policemen catch violators easily and also charge them a penalty through an automated/integrated payments system. This reduces scope for bribery rampant in India. Delhi government during the odd-even rule in New Delhi collected huge amount of fines, and were also able to reduce traffic on road - how about a technology-based solution that allows them to catch offenders and collect fined in an automated manner?   Conclusion   I see immense potential in IoT and M2M based solutions to help cities and governments reduce accident rates and more importantly save lives of end consumers. $11 billion of fuel is wasted in extra fuel consumption due to traffic jams and I don’t know how to quantify the monetary value of time that it is saved for end consumers and enhanced productivity.   This article was originally published here.

Still Single and Seeking Love? Your Online Match Can Be Your Cupid

Go Gaga

Digital

Contemporary dating in India is increasingly being pushed into the digital space, so much so, that it might even put some job-hunting portals to shame. Often these days one finds a match sooner than one might find a job to his profile online. In a fast-paced world of 30-minute deliveries, much faster cab services and instant payments, "with no time to stand and stare", why should love take a miss?   “How I met your mother? Well, on a dating app.” My friends often tell me, “It’s a digital world, why not seek love the digital way.” But these dating apps are not just limited to finding the “perfect mate”. They are also often used by those looking for a friend or a long-term relationship.   In our so-called connected times, most social groups are still limited to 5-6 close friends. Continuous engagement through likes, shares, and tagging on social media, whilst does create the illusion of a wide circle - the dynamics of real and meaningful relationships haven't changed much. Busy schedules, traffic problems, and changing priorities ensure the avenues to meet new prospects driving your love life are still limited. Courtesy online dating apps, one can now connect to a greater number of people pre-selected as per your preferences. Apps like Tinder, Happn, TrulyMadly, Go Gaga use geotagging, algorithms and complex calculations to determine the “suitable” match for you.   These platforms differentiate themselves from social networking sites like Facebook in the fact that they are customized according to your preferences. One can mention their inclinations, choices, interests and even sexuality upfront, without fear of being judged or ridiculed. Online dating apps help people come out of their shell, virtually mingle with people of similar interests, establish trust and then finally spend some time in real life.   The dating market in India has seen some unique propositions in the last couple of years. While some apps like Tinder and Happn find matches based on location-proximity, some others like GoGaga promise to find trustworthy relationships using a unique “wing-man” concept, where your match is generated through mutual friends.    There are around 100 million people in India between the age group of 18-35 who are unmarried and actively looking for a relationship. The online dating market is expected to grow to c. $250m over the next 3 years growing at CAGR of c.10%. However, app-based dating is still to go full-throttle in the user mindset as there are often apprehensions about finding love online, mostly concerns around privacy and credibility. But then aren’t we ordering our groceries, electronics, and most of the essential utilities online? The new Digital India has truly enabled finding love the digital way.   We for one believe that for people to find love online, as a society we need to move away from the taboo of online dating. It’s no different from talking to your friend or crush on messages. Let’s not be ashamed of finding love online, for the “winged cupid [was] painted blind.”   The prime responsibility of online dating apps is building a genuine and credible community. Once concerns about privacy and authenticity are adequately addressed, the online dating industry in India is set to swipe right.    Written by Medha Mehta from Go Gaga

The Butterfly Effect: Is Another Financial Crisis Underway?

Emiel van den Heiligenberg

Investment

I’m passionate about macro investing. As long as the markets are open, I don’t think about much else. Some people call it passion, others call it addiction.   Investing is not just a job; to me, it's an all-consuming lifestyle! The job often feels like you need to be switched on all the time. I somehow feel the need to check the US close almost every evening and Asian markets as soon as I wake up, even though I'm supposed to focus on big picture, top-down issues for a living. The daily noise in the markets is not determining my views but the daily rhythm definitely helps me to build the bigger picture. It's that or I am just addicted to the buzz.   Luckily most of the markets are closed over the weekend, but by then there is so much reading to catch up on. There is the usual macro stuff to read, like economics and politics and then there is so much other news that is potentially relevant. As a self-declared 'information junky', I read all I can.   I think I have FOMO; the fear of missing out   The fear of missing that one special article or paper that provides a deep insight or a new trend. The fear of that odd idiosyncratic news item that would add conviction to an interesting trade idea. The fear of failure to recognise the ‘butterfly effect’: an idea from chaos theory that the flapping wings of a tiny butterfly can cause a tornado somewhere else on earth, weeks after.   This effect is present in markets as well. I guess many things in chaos theory are applicable to markets. For example on 9 August  2007, BNP Paribas froze trading on three of their funds which invested in assets known as collateralised debt obligations (CDOs). Equity markets dropped about 1% that day: nothing special and probably not even particularly related to these “flaps of the wings of the butterfly”. The S&P index made new highs a few months later and the fund closures were a distant memory for most market participants by then. One year later the global financial crisis (GFC) was upon us and Lehman Brothers filed for bankruptcy.     The investment teams of LGIM did quite well through 2008. Tim and James, our resident economists at the time, were anticipating recession and the credit team worried about the build-up of excessive leverage.   What About Today?   The build up of a bubble is not too difficult to spot; starkly rising asset prices are usually a good starting point in spotting a potential asset bubble, dramatically increasing debt ratios are a strong hint towards a credit bubble. The Bank for International Settlements has a great framework to spot credit bubbles. We use a similar framework. In this light, we believe China still poses substantial credit risks at the moment.   Many things in chaos theory are applicable to markets   The ‘Heiligenberg index’ is a range of indicators put in an equally weighted index. I keep track of this to help us predict both asset and credit bubbles. The index has signalled both the 2000 and 2008 bubbles quite well and the index is clearly elevated at the moment.    Last August, when I last blogged about this index, I believed it was too soon to call the top. Markets are up more than 10% since then. So far so good.   Compared to last year the Heiligenberg Index has increased as market volatility is increasing and interest rates are drifting up. It is clearly getting more difficult to deny the markets are getting bubbly, but the index is at more or less the same level as in 2014. That proved to be a false signal. All in all, like last August, time I think it's too early to raise the alarm.   So it is not the formation of a bubble that is difficult to spot, it’s the timing of the popping of the bubble that is the problem. There is no standard playbook for it. There are no maximum levels of valuation or debt after which the bubble must burst. Actually, there is even no guarantee a bubble will burst at all. There is a great Financial Times article on this “The importance of bubbles that did not burst”.      Yale’s Will Goetzmann complains that bubbles are booms that go bad — “but not all booms are bad”   The un-popped bubble in China, which pundits (and investors like us) have been warning about for years, is a case in point. We believe it is a credit bubble, waiting to burst. But it is difficult to determine when and there is a remote possibility it will deflate without bursting. Go defensive too early and you miss out on essential returns or pay out too much insurance premium.   The odds are stacked against investors timing a credit crisis. To increase those odds, we spend a lot of our research time analysing credit risk and our colleagues from the fixed income team are crucial in this discussion. This should help us better understand transition mechanisms that lead to a crisis (i.e. recognise the flapping of a butterfly before it turns into a proper tornado). However, we believe that credit problems are more likely to come to the surface when the economic cycle weakens, like in 2007, so our cyclical view remains crucial as well.   In that light, I reiterate what I said in early February. We believe global growth is doing well for now, inflationary pressures are building gradually but not alarmingly and we would expect our recession indicators to start flashing red around the end of this year.   Stay invested, stay diversified, but stay focused as well. No time to sleep.   This article was originally published on Legal & General   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.) 

Why Your Financial Planner Should Be a Robot

INSEAD Knowledge

Investment

By Lucas Weatherill, CEO & CIO at OnTrack Retirement, and Boris Liedtke, Distinguished Executive Fellow, INSEAD Emerging Markets Institute   Retirement planning requires more data and less human involvement to nudge customers to a more comfortable future.   In 2015 the Singapore-based bank, DBS, surveyed 600 local mothers in their 30s about retirement. The results were revealing. Three-quarters had not started planning for their retirement. Only 25% thought they would have sufficient funds to retire on. The average Singaporean household, headed by a 45-year-old, spends US$3,800 per month. However, 69% believe they would be able to retire on less than US$2,200 a month, while 38% believe it would be less than US$1,500.     It is unlikely that the average person is willing to settle for such a sharp drop in their lifestyle. Based on current spending levels, the reality is that Singaporeans' monthly retirement stipend will need to be closer to US$3,300 to maintain their current living standards. Most Singaporeans will draw US$550 per month from the Singaporean retirement income scheme for the elderly, the Central Provident Fund (CPF) LIFE. Contrary to popular wisdom, household spending does not decline significantly during retirement. This is often referred to as the retirement income puzzle.   According to a 2015 Nielsen survey, six out of 10 Singaporeans only start saving for their retirement once they reach 45. They believe they will just need to double their current savings to retire comfortably with peace of mind.   In China, the social pension is the primary source of retirement income. However, 43% of respondents in a survey conducted by the Society of Actuaries in 2016 believe the government or their company will cut their benefits in the future. With an estimated 329 million Chinese turning 65 by 2050, it is projected there will be a US$118 trillion pension deficit.   Why is Retirement Planning So Difficult?   For behavioural, judgement and decision-making reasons, planning for an uncertain future is extremely difficult – especially when the trade-offs are known. For example, putting more money into an investment or savings plan is considered a loss in the short term, as it decreases spending power and consumption. The exact future gain is uncertain.   What makes retirement so difficult is that it is not only numerically complicated but also inexact. Think of your retirement as a liability (much like an insurance company would). That liability needs to be at least matched (on the asset side) for you to be able to retire in comfort. The difficulty lies in how to model the liability and how to think about the structure of the asset.   The liability has two key components – both of which are difficult to assess: The longevity of the liability (i.e. the life expectancy of the youngest member of your household) The annual negative cash flow stream (i.e. the kind of lifestyle you want in retirement)   The composition of the asset has also two parts: Regular cash flow contributions (forced and unforced savings) The asset mix (including housing and all financial assets)   The average 55-year-old male has a life expectancy of 82 but he has a 22% chance of living past 85. If we assume a realistic retirement age of 67, that means, on average, the individual will live 15 years in retirement – but there is a one-fifth chance it could be more than 18 years. Based on our calculations at OnTrack Retirement, adding an extra three years of life reduces the probability of funding the entire retirement from 41% to slightly over 1%.   Reality of the Problem   By all measures, Singapore is a rich country – the net worth of Singaporeans is around US$275,000 per adult. Of that, housing is the dominant asset representing 55% of personal net worth. This is followed by cash at 24% and CPF retirement savings at just under 20%.   Retirement savings is a large financial asset for the household, but when we break the data up by gender and age, the numbers become more sobering. The average balance in CPF for a 45-year-old male is US$95,000. For a woman of the same age, it is only US$87,500. If we assume they are married, then household retirement assets are around US$180,000. At 45, with 22 years to go until retirement, surely you can still save enough, right?   Unfortunately data do not support this. At 55, the average male has US$98,000 and female has US$85,000, bringing the total household retirement assets at around US$183,000. However the couple now has only 12 years until retirement.   Of these balances, for a household, approximately US$87,000 is in cash instruments granting a low return. Only about US$94,000 is available for higher risk investment options which will mostly be relied on to grow the asset pool.   Most people have not been properly educated about the need to plan for retirement. Fewer than a quarter of Singaporeans have prepared a proper retirement plan with a financial professional. In China, 68% of respondents to the aforementioned study had prepared their retirement plan without help from a financial advisor. Their primary sources of information were family, friends and co-workers. As a result, most portfolios gravitate towards low-risk cash instruments.   The often praised CPF limits what people can invest in. As a result, many stick with what they know – their own house and cash. Presently CPF only allows four exchange-traded funds (ETFs) to be used. Among academics, ETFs are typically seen as a cost-effective investment advice.    Cost of Advice    People tend to be unprepared for retirement due to a lack of financial planning and associated costs.   Good financial advice does not take five minutes. Frequently costs are estimated based on the client’s situation but we find that looking at it from the financial planner's perspective is just as revealing. The average retirement plan takes between two and three hours to prepare – being conservative we estimate that it could cost the financial planner around US$300 per client. Assuming he or she wants to make a profit – and most do – they might need to generate US$435 in revenue per client plan.   The average 55-year-old male with a CPF balance of approximately US$98,000, after allowing for the minimum balance, has about US$41,000 to invest. If all that money is invested based on the advisor’s recommendations, that US$435 plan represents a total upfront cost to the 55-year-old of over 1% every time a plan is undertaken. That is just the cost for the advice. Then the client needs to pay the asset manager, custodian, trustee, etc. – roughly another 1% per year. Add inflation and the investment solution needs to make 4% per year just to keep up with today’s purchasing power. So, while the typical solution – more investment advice – is well meant, the end result at a macro level is unlikely to be economical for the average client.   Is There A Better Solution?   As an option, the human touch in retirement planning needs to be reduced with the help of fintech to make it affordable for the average person. A hybrid model blending a mix of technology for most people and face-to-face advice at pivotal moments is an obvious solution. It cuts cost for end users, but still gives them the flexibility to receive face-to-face advice when making important decisions that require a human touch to provide reassurance. At the same time, it enables financial advisors to provide more profitable outcomes for their clients. We will expand on how this can work in practice in the next article.   Lucas Weatherill is the founder & CIO at OnTrack Retirement.   Boris Liedtke is a Distinguished Executive Fellow in the INSEAD Emerging Markets Institute.   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.)

European Markets Overreact on Italy: Origin of an Actionable Trade Idea

Colin Lloyd

Credit

The yield spread between 10yr BTPs (Italy's Sovereign Bonds denominated in Euros) and Bunds (German Sovereign Bonds denominated in Euros) widened 114bps in May; Populist and anti-EU politics were the catalyst for this repricing of risk; Spain, Portugal and Greece all saw yields increase as Bund yields declined; The ECB policy of OMT (i.e. Outright Money Transactions where the European Central Bank acquires bonds of Eurozone Member States directly from secondary, sovereign markets) should help to avoid a repeat of 2011/2012.   I have never been a great advocate of long-term investment in fixed income securities, not in a world of artificially low official inflation indices and fiat currencies. Given the de minimis real rate of return I regard them as trading assets. I will freely admit that this has led me to make a number of investment mistakes, although these have generally been sins of omission rather than actual investment losses. The Italian political situation and the sharp rise in Italian bond yields it precipitated, last week, is, therefore, some justification for an investor like myself, one who has not held any fixed income securities since 2010.   An excellent overview of the Italian political situation is contained in the latest essay from John Mauldin of  Mauldin Economics – From the Front Line – The Italian Trigger:   Italy had been without a government since its March 4 election, which yielded a hung parliament with no party or coalition holding a majority. The Five Star Movement and Lega Nord finally reached a deal, to most everyone’s surprise since those two parties, while both broadly populist, have some big differences. Nonetheless, they found enough common ground to propose a cabinet to President Sergio Mattarella.   Italian presidents are generally seen as rubberstamp figureheads. They really aren’t supposed to insert themselves into the process. Yet Mattarella unexpectedly rejected the coalition’s proposed finance minister, 81-year-old economist Paolo Savona, on the grounds Savona had previously opposed Italy’s eurozone membership. This enraged Five Star and Lega Nord, who then ended their plans to form a government and threatened to impeach Mattarella.   The whole article is well worth reading and goes on to look at debt from a global perspective. John anticipates what he calls, ‘The Great Reset,’ when the reckoning for the excessive levels of debt arrives.   Returning to the repricing of Eurozone (EZ) debt last month, those readers who have followed my market commentaries since the 1990’s, might recall an article I penned about the convergence of European government bond yields in the period preceding the introduction of the Euro. At that juncture (1998) except Greece, every bond market, whose government was about to adopt the Euro, was trading at a narrower credit spread to 10yr German bunds than the yield differential between the highest and lowest credit in the US municipal bond market. The widest differential in the muni-market at that time was 110bp. It was between Alabama and California – remember this was prior to the bursting of the Tech bubble.   In my article I warned about the risk of a significant repricing of European credit spreads once the honeymoon period of the single currency had ended. I had to wait more than a decade, but in 2010/2011 it looked as if I might be vindicated – this column is not entitled In the Long Run without just cause – then what one might dub the Madness of Crowds of Central Bankers intervened, saved the EZ and consigned my cautionary oracles, on the perils of the quest for yield, to the dustbin of history.   In the intervening period, since 2011, I have watched European yields inexorably converge and absolute yields turn negative, in several EZ countries, with a temerity which smacks of permanence. I have also arrived at a new conclusion about the limits of credit risk within a currency union: that they are governed by fiat in much the same manner as currencies. As long as the market believes that Mr Draghi will do, ‘…whatever it takes,’ investors will be enticed by relatively small yield enhancements.   Let me elaborate on this newly-minted theory by way of an example. Back in March 2012, Greek 10yr yields reached 41.77% at that moment German 10yr yields were a mere 2.08%. The risk of contagion was steadily growing, as other peripheral EZ bond markets declined. Greece, in and of itself, was and remains, a small percentage of EZ GDP, but, as Portuguese and Spanish bonds began to follow the lead of Greece, the fear at the ECB – and even at the Bundesbank – was that Italy might succumb to contagion. Due to its size, the Italian bond market, was then, and remains today, the elephant in the room.   During the course of last month, European bond markets diverged. The table below shows the change in 10yr yields between 1st and 31st May: Source: Investing.com A certain degree of contagion is evident, although the PIGS have lost an ‘I’ as Irish Gilts have escaped the pejorative acronym.   At the peaks of the previous crisis, Irish 10yr Gilts made a yield high of 14.61% in July 2011, at which point their spread versus 10yr Bunds was 11.34%. When Italy entered her own period of distress, in November of that year, the highest 10yr BTP yield recorded was 7.51% and the spread over Germany reached 5.13%. By the time Greek 10yr yields reached their zenith, in March 2012, German yields were already lower and Irish and Italian spreads had begun to narrow.   During the course of last month the interest rate differential between 10yr Bunds and their Irish, Greek and Italian counterparts widened by 41, 100 and 114bp respectively. Italian 10yr yields closed at 4.25% over Bunds, less than 100bp from their 2011 crisis highs. With absolute yields significantly lower today (German 10yr yields were 2.38% in November 2011 they ended May 2018 at 36bp) the absolute percentage return differential is even higher than during the 2011 period. At 2.72% BTPs offer a return which is 7.5 times greater than 10yr Bunds. Back in 2011 the 7.51% yield was a little over three times the return available from 10yr Bunds.   I am forced to believe the reaction of the BTP market has been excessive and that spreads will narrow during the next few months. If I am incorrect in my expectation, it will fall to Mr Draghi to intervene. The OMT policy of the ECB allows it to purchase a basket of European government bonds on a GDP weighted basis. If another crisis appears immanent they could adjust this policy to duration weight their purchases. It would then permit them to buy a larger proportion of the higher yielding, higher coupon bonds of the southern periphery. There would, no doubt, be complaints from those countries that practice greater fiscal rectitude, but the policy shift could be justified on investment grounds. If the default risk of all members of the EZ is equal due to the political will of the European Commission, then it makes sense from an investment perspective for the ECB to purchase higher yielding bonds if they have the same credit risk. A new incarnation of the Draghi Put could be implemented without too many objections from Frankfurt.   Conclusions and Investment Opportunities   I doubt we will see a repeat of the 2011/2012 period. Lightening seldom strikes twice in the same way. The ECB will continue with its QE programme and this will ensure that EZ government bond yields remain at artificially low levels for the foreseeable future.   Unusually, I have an actionable trade idea: caveat emptor! I believe the recent widening of the 10yr Italian BTP/Spanish Bonos spread has been excessive. If there is bond market contagion, as a result of the political situation in Italy, Bonos yields may have difficulty defying gravity. If the Italian political environment should improve, the over-sold BTP market should rebound. If the ECB are forced to act to avert a new EZ crisis by increasing OMT or implementing a duration weighted approach to QE, Italy should benefit more than Spain until the yield differential narrows.   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 to Ensure a High Credit Score for Your SME

OfBusiness

Credit

As the owner of a Small & Medium-sized Enterprise (SME), you channel all your resources into your organization. All business ideas and strategies are directed towards its growth into a larger setup, both in terms of revenue and market size. With limited resources at disposal, SMEs end up juggling a lot of things, often ignoring important stuff like managing their business credit score.   A business credit score is identical to a personal credit score. While evaluating an individual’s credit score, the credit reporting agency takes into consideration different factors such as one’s credit card statement, loan repayment, monthly EMI payments etc. Similar exercise is undertaken for businesses. In the calculation of your business credit score, the credit worthiness is evaluated on basis of different factors such as outstanding balance, trade history, payment records etc. SMEs should always aim to have a credit score more than 750, which enables easy loan procurement.   It is important for a SME to have a high business credit score. Let us understand why. After a business comes into existence and passes the initial survival test, growth is the next big challenge. As the business expands, the capital requirement also increases. One needs to secure one’s finances before the business spirals towards bankruptcy. This is where a good credit score comes into play.   Following these simple tips and taking strategic business decisions accordingly can not only make your credit score better, but also lead to better operational efficiencies: Ascertain your business’ credit score – It may seem obvious, but this is the first and foremost thing you should do. Find out your current business credit score. You can request for a credit report from any renowned rating agency such as CIBIL, CARE, EXPERIAN or ICRA for a nominal fee. Once you know what your current score is, you can begin understanding what may help you improve it. Bill repayment schedule – This is one of the easiest and most actionable step to increase your business credit score. Paying bills before the stipulated deadline is important to avail uninterrupted services and in turn improve your business credit score. Don’t close credit accounts – Businesses generally take the wrong decision of closing old credit accounts after they repay all the credit. As a business organization, one may have put in a lot of time and effort in the past to manage one’s account balance. However, all payments history is deleted as soon as you close your account. When you clear all debit balances in your account, you nullify data to back the ‘credibility’ which you have earned on that payment. Fix errors in business credit score report – It is again an easy way to improve your credit score. Your credit report may have inputted an incorrect company name or address. As an SME it is important to keep an eye on all such small details and get them fixed as soon as possible. Also, keep your credit report up to date. Avoid risky or hasty decisions – Avoid dealing with companies with a bad credit history as it will not only affect your business credit score but also may lead to a default on payments. One should always ensure that one is dealing with the right people who have a good credit history. Also, do not indulge in any risky financial proposition that may reflect badly on your credit report. Other Pointers That May Help You Get Past Underwriters   Balanced credit usage – Do not take a lot of debt. Always keep a tab on your utilized credit as % of available credit. 30% is a healthy target. Make this a weekly or a monthly routine. Duration of default – Making timely payments is a big feat. In case you are unable to meet your dues on time, try to minimize the duration of your defaults. Your default period influences your credit.    (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

The Inflation-Employment Quandary: Future Direction of Monetary Policy

Colin Lloyd

Investment

Inflationary fears are growing and US rates continue to rise; Employment has become more flexible since the crisis of 2008/2009; Commodity prices have risen but from multi-year lows; During the next recession job losses will rapidly temper inflationary pressures.   Given the official policy response to the Great Financial Recession – a mixture of central bank balance sheet expansion, lower for longer interest rates and a general lack of fiscal rectitude on the part of developed nation governments – I believe there are two factors which are key for stock markets over the next few years, inflation and global employment rate. The fact that these also happen to be the two mandated targets of the Federal Reserve – full employment and price stability – is more than coincidental. My struggle is in attempting to decide whether demand-pull inflation can survive the impact of a rapid rise in unemployment come the next recession.   Inflation and the Central Bankers response is clearly the new narrative of the financial markets. In his latest essay, Ben Hunt of Salient Partners makes some fascinating observations – Epsilon Theory: The Narrative Giveth and The Narrative Taketh Away:   This market, like all markets, cares about two things and two things only — the price of money and the real return on invested capital. Or, as they are typically represented in cartoon form, interest rates and growth.   …This market, like all markets, needs a positive narrative on risk (the price of money) or reward (the real return on capital) to go up. Any narrative will do! But when neither risk nor reward is represented with a positive narrative, this market, like all markets, will go down. And that’s where we are today.   Does the Fed have our back? No, they do not. They’ve told us and told us that they’re going to keep raising rates. And they will. The market still doesn’t fully believe them, and that’s going to be a constant source of market disappointment over the next few years. In the same way that markets go up as they climb a wall of worry, so do markets go down as they descend a wall of hope. The belief that central bankers care more about the stock market than the price stability of money is that wall of hope. It’s a forlorn hope.   The author goes on to discuss the way that inflation and the war on trade has derailed the global synchronized growth narrative. Dr Hunt writes at length about narratives; those who have been reading my letters for a while will know I regularly quote from his excellent Epsilon Theory.   The narrative has not yet become flesh, to coin a phrase, but in the author’s opinion it will:   My view: the inflation narrative will surge again, as wage inflation is, in truth, not contained at all.   The trade war narrative hit markets in force in late February with the White House announcement on steel and aluminum tariffs. It subsided through mid-March as hope grew that Trump’s bark was worse than his bite, then resurfaced in late March with direct tariff threats against China, then subsided again on hopes that direct negotiations would contain the conflict, and has now resurfaced this past week with still more direct tariff threats against and from China. Already this weekend you’ve got Kudlow and other market missionaries trying to rekindle the hope of easy negotiations. But being “tough on trade” is a winning domestic political position for both Trump and Xi, and domestic politics ALWAYS trumps (no pun intended) international economics.   My view: the trade war narrative will be spurred on by BOTH sides, and is, in truth, not contained at all.   The two charts below employ natural language processing techniques. They show how the inflation narrative has rapidly increased during the last 12 months. I shall leave Dr Hunt to elucidate:   … analysis of a large set of market relevant articles — in this case everything Bloomberg has published that talks about inflation — where linguistic similarities create clusters of articles with similar meaning (essentially a linguistic “gravity model”), and where the dynamic relationships between and within these clusters can be measured over time. Source: Quid.inc   What this chart shows is the clustering of content in 1,400 Bloomberg articles, which mention US inflation, between April 2016 and March 2017. The graduated colouring – blue earlier and red later in the year – enriches the analysis.   The next chart is for the period April 2017 to March 2018: Source: Quid.Inc   During this period there were 2,400 articles (a 75% increase) but, of more relevance is the dramatic increase in clustering.   What is clear from these charts is the rising importance of inflation as a potential driver of market direction. Yet there are contrary signals that suggest that economic and global employment rates are already beginning to weaken. Can inflation continue to rise in the face of these headwinds. Writing in The Telegraph, Ambrose Evans-Pritchard has his doubts (this transcript is care of Mauldin Economics) – JP Morgan fears Fed “policy mistake” as US yield curve inverts:   US jobs growth fizzled to stall-speed levels of 103,000 in March. The worldwide PMI gauge of manufacturing and services has dropped to a 14-month low. The average “Nowcast” tracker of global growth has slid suddenly to a quarterly rate of 3.2pc from 4.1pc as recently as early February.   Analysts at JP Morgan say the forward curve for the one-month Overnight Index Swap rate (OIS) – a market proxy for the Fed policy rate – has flattened and “inverted” two years ahead. This is a collective bet by big institutional investors and fund managers that interest rates may be falling by then.   …The OIS yield curve has inverted three times over the last two decades. In 1998 it proved to be a false alarm because the Greenspan Fed did a pirouette and flooded the system with liquidity. In 2000 it was a clear precursor of recession. In 2005 it signaled that the US housing boom was already starting to deflate. …Growth of the “broad” M3 money supply in the US has slowed to a 2pc rate over the last three months (annualised)…pointing to a “growth recession” by early 2019. Narrow real M1 money has actually contracted slightly since November. …RBC Capital Markets says this will drain M3 money by roughly $300bn a year… …Three-month Libor rates – used to set the cost of borrowing on $9 trillion of US and global loans, and $200 trillion of derivatives – have surged 60 basis points since January. …The signs of a slowdown are even clearer in Europe…Citigroup’s economic surprise index for the region has seen the worst four-month deterioration since 2008.  A reduction in the pace of QE from $80bn to $30bn a month has removed a key prop. The European Central Bank’s bond purchase programme expires altogether in September. …The global money supply has been slowing since last September. The Baltic Dry Index measuring freight rates for dry goods peaked in mid-December and has since dropped 45pc.   Which brings us neatly to the commodity markets. Are real assets a safe place to hide in the coming inflationary (or perhaps stagflationary) environment? Will the lack of capital investment, resulting from the weakness in commodity prices following the financial crisis, feed through to cost-push inflation?   The Trouble with Commodities   Commodities are an excellent portfolio diversifier because they tend to be uncorrelated with stock, bonds or real estate. They have a weakness, however, since to invest in commodities one needs to accept that over the long run they have a negative real-expected return. Why? Because of man’s ingenuity. We improve our processes and invest in new technologies which reduce our production costs. We improve extraction techniques and enhance acreage yields. You cannot simply buy and hold commodities: they are trading assets.   Demand and supply of commodities globally is a complex challenge to measure; for grains, oilseeds and cotton the USDA World Agricultural Supply and Demand Estimates for March offers a fairly balanced picture:   World 2017/18 wheat supplies increased this month by nearly 3.0 million tons as production is raised to a new record of 759.8 million   Global coarse grain production for 2017/18 is forecast 7.0 million tons lower than last month to 1,315.0 million   Global 2017/18 rice production is raised 1.2 million tons to a new record led by 0.3- million-ton increases each for Brazil, Burma, Pakistan, and the Philippines. Global rice exports are raised 0.8 million tons with a 0.3-million-ton increase for Thailand and 0.2- million-ton increases each for Burma, India, and Pakistan. Imports are raised 0.5 million tons for Indonesia and 0.3 million tons for Bangladesh. Global domestic use is reduced fractionally. With supplies increasing and total use decreasing, world ending stocks are raised 1.4 million tons to 144.4 million and are the second highest stocks on record.   Global oilseed production is lowered 5.7 million tons to 568.8 million, with a 6.1-million-ton reduction for soybean production and slightly higher projections for rapeseed, sunflower seed, copra, and palm kernel. Lower soybean production for Argentina, India, and Uruguay is partly offset by higher production for Brazil.   Cotton – Lower global beginning stocks this month result in lower projected 2017/18 ending stocks despite higher world production and lower consumption. World beginning stocks are 900,000 bales lower this month, largely attributable to historical revisions for Brazil and Australia. World production is about 250,000 bales higher as a larger Brazilian crop more than offsets a decline for Sudan. Consumption is about 400,000 bales lower as lower consumption in India, Indonesia, and some smaller countries more than offsets Vietnam’s increase. Ending stocks for 2017/18 are nearly 600,000 bales lower in total this month as reductions for Brazil, Sudan, the United States, and Australia more than offset an increase for Pakistan.   It is worth remembering that local market prices can be dramatically influenced by small changes in regional supply or demand and the vagaries of supply chain logistics. Added to which, for US grains there is heightened anxiety regarding tariffs: they are expected to be the main target of the Chinese retaliation.   Here is the price of US Wheat since 2007: Source: Trading Economics   Crisis? What crisis? It is still near to multi-year lows, although above the nadir of the financial crisis in 2009.   The broader CRB Index shows a more pronounced recovery, it has been rising since the beginning of 2016: Source:  Reuters, Core Commodity Indexes   Neither of these charts suggest that price momentum is that robust.   Another (and, perhaps, more global) measure of economic activity is the Baltic Dry Freight Index. This chart shows a very different reaction to the synchronised increase in world economic growth: Source: Quandl   In absolute terms the index has more than tripled in price from the 2016 low, nonetheless, it is still in the lower half of the range of the past decade.   Global economic growth may have encouraged a rebound in Copper, another industrial bellwether, but it appears to have lost some momentum of late: Source: Trading Economics   Brent Crude Oil also appears to be benefitting from the increase in economic activity. It has doubled from its low of two years ago. The US rig count has increased in response but at 800 it remains at half the level of a few years ago: Source: Trading Economics   US Natural Gas, which might still manage an upward price spike on account of the unseasonably cold weather in the US, provides a less compelling argument: Source: Trading Economics   Commodity markets are clearly off their multi-year lows, but the strength of momentum looks mixed and, in grains and oil seeds, global supply and demand look fairly balanced. Cost push inflation may be a factor in certain markets, but, without price-pull demand, inflation pressures are likely to be short-lived. Late cycle increases in commodity prices are quite common, however, so we may experience a short-run stagflationary squeeze on incomes.   Conclusions and Investment Opportunities   Whenever I write about commodities in a collective way, I remind readers that each market is unique, pretending they are homogenous is often misleading. The recent rise in Cocoa, after a two-year downtrend resulting from an increase in global supply, is a classic example. The time it takes to grow a Cocoa plant governs the length of the cycle. Similarly, the lead time for producing a new ship is a major factor in determining the length of the freight rate cycle. Nonetheless, at the risk of contradicting myself, what may keep a bid under commodity markets is the low level of capital investment which has been a hall-mark of the long, listless recovery from the great financial recession. I believe an economic downturn is likely and job losses will occur rapidly in response.    I entitled this letter ‘Inflation or Employment’, these are the factors which will dominate Central Bank policy. Currently commentators view inflation as the greater concern, as Dr Hunt’s research indicates, but I believe those Central Bankers who can (by which I mean the Federal Reserve) will attempt to ensure they have raised interest rates to a level from which they can be cut, rather than having to rely on ever more unorthodox monetary policies.   Originally Published in In the Long Run

A Case For Investing In Gold: Push From Cryptocurrency Market And Crude Oil Price

Rohit Dhalaria

Investment

Indian households have a historic impetus to invest in gold. The data usually sticks. For 15 years till 2016, the metal generated an annualized return of 13.7% - just below the Sensex annualized return of 14.0%. Bullion delivered a solid compounded annual growth rate of 9.6% since 1999, having witnessed it’s all-time high in 2011, only falling marginally since.   Over the past half a decade, several analysts have predicted the emergence of gold bull markets in the upcoming years. Their predictions are mostly based on such past performance. Given the present volatility in global financial markets, relying solely on past data is risky. There are however a few significant drivers at play.   I believe the current US-China trade war combined with an up-and-coming market for gold-backed cryptocurrencies can significantly increase the worldwide demand for gold. This upward thrust in demand may be the beginning of a long-term ‘sustainable’ gold bull market.   US-China Trade War and The Petro-Yuan Rush Amidst the ongoing US-China trade war escalation, the Chinese government decided end of last month to issue the world’s first-ever Yuan-denominated oil futures contract. This may be an attempt to weaken the value of dollar by displacing it as the world’s reserve currency. The Yuan is backed by gold. This means that Yuan-denominated oil futures will allow trading investors to convert Yuan to gold and vice-versa. China is hence in effect is attempting to re-introduce the gold standard by allowing large-scale trading of oil for gold. This could create an unprecedented demand for bullion, leading to a significant increase in its prices. Investors refer to this as “Petro-Yuan Rush”, inspired from Venezuelan gold-backed cryptocurrency called “Petro Gold”, which was introduced in 2017 by the country as it waged an "economic war" against the United States seeking monetary and fiscal sovereignty.   Gold-Backed Cryptocurrency and Islamic Finance Speaking on introduction of gold-backed cryptocurrencies, Sean Walsh, Founder of Redwood City Ventures, a crypto-asset investment firm said:   “Rather than buying a cryptocurrency backed by gold, I’d just go buy the gold. Gold is a physical thing that you want to be able to hold in your hands, because that’s the point.”   The fact that the first gold-backed cryptocurrency was launched in 1995 but failed to catch on until 2017, when suddenly there was a huge hype for Bitcoin and its prices shot through the roof, tells us that Sean Walsh is probably right about the utility and fate of gold-backed cryptocurrencies.   Despite this, gold-backed cryptocurrency is of special interest to the Islamic investors. Islamic investors till date are barred from investing in cryptocurrencies, as they are not Shariah compliant investments. This is because products of financial engineering and speculation are against Islamic principles. However, a Dubai-based startup, “OneGram”, is offering gold-backed cryptocurrencies as a solution to this issue of religious permissibility. The company offers to store at least a gram of gold for each unit of OneGram cryptocurrency.   Backing cryptocurrency by a physical asset such as gold, limits the speculation on its price, and keeps the minimum value of the cryptocurrency at least equal to the price of the gold. The limitation on speculation deems the investment Shariah compliant. The demand for gold-backed cryptocurrency is increasing amongst the Islamic investors in the Gulf and South-East Asia. Recently in January 2018, United Kingdom’s Royal Mint also launched gold-backed cryptocurrencies.   Increasing popularity of cryptocurrency backed by gold also implies soon they would drive worldwide demand for physical gold. Moreover, crypto entrepreneurs facing regulatory backlash in countries such as China and India may find gold-back cryptocurrencies as a potential future.   Conclusion   Gold over the long term serves as an appreciating asset. However, the sudden rise in demand of gold-backed cryptocurrencies and the Petro-Yuan rush will act as strong catalysts in this growth. It is the right time to make investments in gold as the global markets prepare themselves for a long-term gold bull market.

Why PPP Model of Infrastructure Development Is Yet to Takeoff in India?

Gaurav Agrawal

Infrastructure

Infrastructure is a key enabler for any economy to attain competitive and sustainable growth. There is no denying that the last two decades has seen a remarkable expansion of infrastructure in India, both in scale and reach. Ironically, it is the same infrastructure whose underdeveloped state acts as a constraint in the realization of our potential. At the heart of this lies the Public-Private Partnership (PPP) model. Any attempt to know what went wrong must come to grips with how we, as a nation, implemented the PPP model, what were the misses and what needs to be fixed?   A PPP project essentially involves three major stakeholders – the government, the private developer and the bank. Each of these have their fair contribution in carving a failure out of a potentially successful concept. The model was initially developed to leverage the combined strengths of the government and private sector to meet India’s critical infrastructural needs. But a poorly implemented model has led to numerous projects going bust, increased the risk of loans turning into Non-Performing Assets (NPAs) ­and pushed developers on the brink of bankruptcy.   The Government and the Model Concession Agreement (MCA)   A fundamental mistake committed by the government was narrowing down the scope of PPP to a funding necessity, initially leveraging the model solely to attract private investment. They did not focus on garnering other benefits like the private sector’s ability to bring in latest technology, efficient managerial practices and complementary risk mitigation. Furthermore, the critical need to build institutions that would have enabled the efficient deployment of capital raised was overlooked.   The fact that Governments can often raise funds at lower costs compared to private developers makes this initial digression of approach even more counter-intuitive.   The government also failed to ensure the private sector gets protected from risks it was ill-equipped to handle, such as land acquisition or environmental clearances. These are often critical reasons behind stalled projects. The need to establish an independent regulator to ensure an efficient dispute settlement mechanism was ignored.   The Model Concession Agreement (MCA), which sets the implementation backbone of PPP projects, can be far too rigid. It, in general, applies a ‘one size fits all’ solution to all projects in a sector. It fails to recognize the fact that many projects may face unique technological risks or demands that may go beyond standardized templates. The MCA also sets greater bindings on private developers, thereby limiting the accountability of the state, and fails to ensure an equitable risk allocation. The Kelkar Committee has acknowledged this problem and provided a framework for the renegotiation of MCA under various circumstances.    The Private Developer   A report on PPP projects submitted by Kelkar committee pointed out the practice of deliberate inflation of the Total Project Cost (TPC) by developers. By inflating the TPC, developers source higher debts than required. If the project is then jeopardized, there is virtually no “skin in the game” for the developer, as the funds at risk come from the lenders.   A 2016 submission of a parliamentary standing committee found that the National Highway Authority of India (NHAI) allowed concession agreements with cost estimates different from those used in loan applications. The Committee report suggested that banks and other financial institutions must have the authority to review the MCA along with the concerned ministries.   Banks: Source of Funds   Unlike its international precedents, infrastructure in India was funded to a major extent by commercial banks. Since infrastructure projects have longer gestation periods and banks raise funds from depositors for a tenure ranging from short to medium term, a case of serious asset-liability mismatch gets created.   Ignoring the problem, banks not only went ahead in investing in infrastructure projects but also showed irrational exuberance in terms of lending to the sector. The share of bank loans to infrastructural projects rose from 13% in 2002 to 31% in 2015. The mammoth NPA problem that the commercial banks in India are facing today could have been considerably lower if bankers had acted with some foresight then.    Way Ahead   Success of PPP to a large extent depends on optimal risk allocation, an environment of trust among the stakeholders and a robust institutional capacity. To this effect, the government must necessitate the establishment of an independent regulatory institution and the creation of a robust dispute settlement mechanism.   Pricing and accounting reforms are required to improve the fiscal sustainability of projects undertaken, and to have a clearer projection of fund flows.   Apart from a sound regulatory and arbitration framework, a robust PPP enabling ecosystem includes diversified and financial institutions pivoting towards long-term funding such as wholesale banks.   The private fund flow into the infrastructure sector has been rightly streamlined by the establishment of the National Infrastructure Investment Funds (NIIF) by the government and the Infrastructure Debt Fund by the RBI. Further, a green signal to Infrastructure Investment Trusts (InvITs) is a step in the right direction as it would scale down the exposure of commercial banks to the infrastructure sector.   Moreover, the government’s roll out of the Hybrid Annuity Model (HAM) under PPP is a welcome move. The model seeks to balance the risk mitigation needs of private sector by providing c. 40% of the project cost in terms of annual annuities over a five-year time frame and the rest on a revenue sharing model.   Swift action to implement some of the key recommendations of the Kelkar committee such as setting up of a national level PPP institution, a dedicated PPP tribunal and a formal framework of contract renegotiation, is needed.   Building institutional capacity, better regulatory oversight, a diversified source of funding, efficient dispute settlement mechanism, flexible contract negotiation, and accounting and pricing reforms – such initiatives can greatly leverage the PPP model as a powerhouse to India’s growth and infrastructural requirements.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Infrastructure in India: Lessons From Chandigarh in Making India A Truly Smart City

Vineeta Shetty

Urban

Like Berlin surrounded by Russians, Chandigarh often has to be defended like an island of sophistication from the marauders surrounding her.   The city was master-planned in 96 hours, reflecting the urban philosophy laid down by the Congrès Internationaux d’Architecture Moderne (a highly influential organization propagating the development and formalization of Modern Architecture – “Le Corbusier” being a founding member), which still has lessons for new builds being planned around India.   During the short span of 65 years of its existence, Chandigarh has emerged as the role model of urban development, locally and globally, says local architect Jit Gupta. It is known for its state-of-the-art planning and architecture – giving a new identity to urban living and quality of life.   In addition, Chandigarh has the distinction of having achieved several key milestones – reaching its projected and targeted population of 5 lakh, four decades after launch, in 1991; providing a sufficiently high order of amenities and services; ensuring a much better quality of life to its residents; setting high norms and standards of planning and development; creating awareness on the importance of planned growth; and finally proving that good urbanism can make good money.  Le Corbusier Source: omertiroche.com Chandigarh has the advantage of all its land being owned by the government, meticulously planned as a three-phase project by a knowledgeable and committed initial team. Swiss architect Le Corbusier and his cousin, Pierre Jeanneret, were influential and powerful. Far from being dictated by political compulsion, they even butted heads with India’s first Prime Minister, Jawaharlal Nehru, to preserve their planning principles.    The choice of brick and exposed concrete foresaw the need to keep maintenance costs down. Stringent controls over each structure, especially buildings on important roads, renders the city amongst the most livable in India.   In his incisive wisdom, Chandigarh’s designer, Le Corbusier, whipped a 5-mile green belt around the city, later revising it to 10 miles. But no sooner was his back turned, this area encroached upon by the two states – Haryana and Punjab – when in 1966 Haryana was carved out of East Punjab (now the state of Punjab). The initial fear was that the newly built city would not attract more than 150,000 people, based on a density of 17 persons per acre in Phase 1. But now, civic administrators of Chandigarh struggle to keep the Swiss architect’s vision of “espace, lumiere and verdure” (loosely translated into space, light and greenery) alive, in the south and east of the city.     The heritage of Le Corbusier is strong and Chandigarh, built at an initial cost that matched that of the UN HQ building, is one of the few territories that recognised that more flyovers and underpasses, far from adding to the prestige of the city, are an open invitation to more traffic, predominantly from the suburbs of Punjab and Haryana that parasitically cling to its eastern and southern edges. The townships of Mohali and Panchkula add 1 million vehicles which barrel through the city en route to the airport and across the rest of the state. Open Hand Source: By Raakesh Blokhra (Flickr) [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons But as the administration has discovered, it is the untrammeled growth at the edges of the territory that poses the greatest threat to the city. The Periphery Control Act, while it had teeth, allowed only agriculture, floriculture and horticulture in the periphery to preserve the character of the city and to avoid haphazard and substandard development.   At some point the government lost control of land use and of population density. There were no mechanisms in place to check what states were doing with the parts of the periphery in their possession. With the reorganisation in 1966, Chandigarh as a union territory only retained 3% of its periphery, while 75% was quickly grabbed by Punjab, which, among Indian states, stands out as the uncrowned king of unauthorized colonies, evident by its ill-planned, dense and filthy neighborhoods.     Under the emerging Chandigarh Interstate Regional Plan, states are required to cooperate on issues such as garbage disposal, water supply and storm water drainage. High-level state committees have been constituted since the early 70s to arrest the effects of uncontrolled growth. So far, the two states have shown scant regard for heritage.   Masterplans are normally associated with cities, but the great threat to urbanization is the lack of masterplans for villages as well as technical knowledge to implement such plans. While urban building bye-laws came into effect, there are no rural building bye-laws, which makes construction a free for all. The latter only came into effect in 2016 to regulate zoning, width of roads, ventilation and so on, making building plans mandatory before commencement of construction. But there is no executing agency for these bye-laws, so it is left to village corporations to implement them with varying degrees of rigor.   Satellite imagery and geo-referencing has identified 17 pockets of different land use in the Chandigarh. Phase 3 for which space was earmarked by the founders of the city is the last opportunity to house more people and on Chief Architect Kapil Setia’s shoulders falls the responsibility to implement without raising the height restriction. In view of its landlocked situation, Chandigarh is seeking to lease land from Punjab and Haryana for meeting the central quotas for affordable housing. Palace of Assembly Source: By duncid (KIF_4646_Pano) [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons  To implement its newly-drafted Masterplan for 2031, the city needs to raise more money. Property taxes were non-existent in Chandigarh for 50 years, only enforced by the central government a couple of years ago. Belying the quality of life and the sense of space enjoyed by the residents, the taxes here are historically low by Indian standards. There is resistance to even paying 2-2.5% of the value of the land. Even the owners of sprawling estates are paying only INR1/sq yd, amounting to barely INR5000/acre. “We are not even retrieving the cost of collection,” says Setia.   As the city advances towards its vision of becoming a knowledge capital and a health care hub, Jit Gupta believes Chandigarh still requires a large number of interventions from the administration, institutions, communities and residents to transform it into a truly ‘‘smart’’ city. Here is his wish list: Chandigarh needs to change its basic character from a government city to the city of people, by changing focus from administration to residents It needs to create its own identity clearly defining the role of Chandigarh administration and Chandigarh Municipal Corporation in making it a city that is citizen-centric The Mayor and the Deputy Mayor of Chandigarh should be elected directly for a period of 5 years and not indirectly for a period of one year The City must promote accessibility rather than focussing on mobility. It must shift its emphasis from planning for vehicles to planning for the citizens It should with immediate effect put into place an incentive-based policy to promote green buildings and green communities besides taking up on priority a well-defined program to make the ‘Sectors’ self-contained and self-sufficient units in terms of everyday needs including living, working, services and basic amenities   For more considered and critical case studies of urban practice in Europe and India, point to www.thesmartcitizen.org. We are in the process of switching over to a mobile-optimised site.

How To Fight Depression: India On Mental Health and WellBeing

Soma Chakraborty

Welfare

With 36% of its population likely to be suffering from major depression at any given time, India, as per a WHO report, is one of the world's most depressed nations. However, a majority of Indians lack awareness about mental health. So much so that many of them often miss the signs of depression that they themselves or their close ones are struggling with. According to National Crime Records Bureau, there is an average of 371 suicides committed daily in India. Though the Mental Health Act passed by Parliament in December 2017 is a step closer to fight depression, the ground realities which speak of social stigma, poor infrastructure and alarming low psychiatrist-patient ratio put a question mark on the country’s readiness to combat the challenge.  The recent unfortunate news of popular Indian stand-up comedian Kapil Sharma undergoing heavy medication for depression has once again brought to the fore the fragility and vulnerability that lies beneath the surface of sometimes seemingly “normal” people. And the most tragic part is that the number of such “seemingly normal people” is dangerously increasing in India.   Anyone and everyone stand susceptible to depression. According to an ASSOCHAM report, 42.5% of corporate employees in India suffer from depression and the rate has increased by 45-50% between 2008 and 2015. In another shocking disclosure, the Global Burden of Disease Study reveals that depression was one of India's biggest causes of early deaths in 2015.   Amidst such grim statistics, the Mental Health Act passed by Parliament in December 2017 is a welcome long-awaited move to address the issue of depression. However, with several policy and regulatory hurdles, India’s fight against the silent killer, it seems, is going to be a long battle.   The Dark Clouds   The Mental Health Act, according to Institute of Human Behaviour and Applied Sciences (IHBAS) Director Dr Nimesh G Desai, is “aspirational, but partly unrealistic” as though the law makes access to treatment a “right” for mentally ill people, “delivering it is a challenge”. The IHBAS is the only Government mental health hospital in the national capital.   Experts opine that social stigma attached to mental health is the biggest challenge in the fight against depression. In majority of the cases, even if a person is aware that there are some psychological issues which need to be addressed, the social stigma surrounding the disorder makes it difficult for that person to seek psychiatric help and sweeping the issue under the carpet seems a more feasible option. According to a depression statistics in India, only 20% people currently are able to access mental healthcare. What is more ironical is that even as 60 million people in India, as per a study done by The Economist Intelligence Unit, are suffering from some sort of mental health disorder, there are only around 43 mental hospitals in the country. Even more frightening is the Central Government’s admission in the Lok Sabha about the abysmal shortage of psychiatrists in India. According to the Ministry of Union Health and Family Welfare, there are only 3,827 psychiatrists in the country against the required number of 13,500. Also, there are less than 900 psychiatric social workers and 1,500 psychiatric nurses against the 37,000 and 1,500 needed.   This gap, according to Dr Kersi Chavda, Consultant Psychiatrist of Mumbai-based PD Hinduja National Hospital and Medical Research Centre, is due to the fact that not many seats for post graduation in psychiatry are available in medical or teaching colleges in India. Additionally, bureaucracy and regulatory hurdles are making it difficult for the system to deliver, opines Desai in an interview to Sunday Guardian. Citing an example, he says while IHBAS currently produces eight MDs annually, it can easily produce 15-20 MDs a year.   Due to this shortage, the psychiatric treatment cost is also soaring in India. Though this issue can partly be resolved if insurance is made available for mental health but the challenge, as Desai says, is to “make insurance companies comply” with the Mental Health Act.   The Silver Lining However, all is not lost. According to the Indian Journal of Psychiatry, “the major depressive episodes are treatable in 70–80% of patients”.   Also, there is a growing awareness and acceptance, albeit to a minuscule extent, among the millennial generation in India regarding mental health. They are no longer shunning topics related to the issue. Conversations regarding depression are now taking place more in the open and in social media as well.   Adding to this growing positive atmosphere is the effort of some budding entrepreneurs in India whose aim is to make mental health care accessible and affordable to all. Of late, the country has seen emergence of start-ups like YOURDost, ePsyclinic, InnerHour, Wysa, nSmiles, HealthEminds, Seraniti, GrowthEX, TrustCircle and Trijog which are bringing effective psychiatric therapy and counselling to one’s doorsteps through online platforms in the form of apps, web and video chats and phone calls.    The Path Ahead   Some courageous youngsters in India have already taken the maiden step by bringing the issue of mental health in the limelight and now it is up to us how we take it further. There is not an iota of doubt that it is the mandate of the Government to address the infrastructure, policy and bureaucratic hurdles in regards to the mental health issue in the country, but at the same time, we also have to bring a paradigm shift in our attitude and develop a more open mindset on mental health. And to begin with, let’s not throttle our inner voice. Let’s speak to someone! The Fact Sheet The number of people suffering from mental health issues in India is larger than the population of Japan As per a WHO statistics, the burden of depression is 50% higher for females than males and the average age of onset of depression is 31.9 years in India According to Indian Journal of Psychiatry, 75% of working women suffer from depression or general anxiety disorder due to long working hours coupled with strict deadlines The Global Burden of Disease Study predicts that depression will be the second leading cause of disability worldwide by 2020. It also states that around 9% of the population in India suffers from mental illnesses and it is likely to reach 20% by 2020 According to a WHO report, India spends approximately 0.06% of its health budget on mental healthcare, whereas most developed nations spend above 4% of their budgets on mental health research, infrastructure, frameworks and talent pool

GDPR: The New Data Protection And Privacy Policy in Town

Simi Sebastian

Privacy

Mark Zuckerberg’s testimony could easily be one of the most viewed videos in the recent days. Recovering from the shock wave, nations around the globe have been prompt to raise their guards in the aftermath of the recent Facebook Data Breach incident, when the technology giant allegedly granted Cambridge Analytica, a British political consulting firm access to personal data of as many as 87 million Facebook users during the 2016 US elections without their consent.   General Data Protection Regulation (GDPR) The European Union (EU) has taken the lead in curating a privacy law of its own (surprisingly beating the United States which houses most of the technology giants across the globe), one that is likely to set an international precedent for all countries to follow.   EU is set to implement its General Data Protection Regulation (GDPR) on May 25th, replacing the Data Protection Directive, which went into effect in 1995. Inarguably one of the most complex and robust legislatures around data protection and privacy, GDPR lays down a baseline set of standards for all companies – those located within the territorial boundaries of EU and even those located outside EU, who store or process data of individuals who reside in EU.   Terms and Conditions Applied   Once put in place, the GDPR shall grant EU residents the right to discern and determine how their personal data is being stored, processed, used and transferred. GDPR defines personal data as any data that allows an individual to be identified, including names, address, birthdate or identification number as well as IP address, location data or any type of pseudonymous data.   GDPR is prescriptive and rigid in its instructions to organizations in what they need to ensure that they comply with the rules. On the outset, ‘Terms and Conditions’ while collecting the user’s data should be “unambiguous”, and “specific”. Catch-all clauses, which bundle consent such as “your data will be used to improve our services”, shall not be permitted anymore. Companies need to clearly lay out the purposes for which the user’s data is being obtained. The organization is required to obtain consent from the user every time there is a change in the usage of the data or an upgradation in the product. Users must also be allowed to seamlessly revoke consent. GDPR sets rules for how companies share data after it’s been collected, pushing companies to rethink how they approach analytics, logins, and, above all, advertising.   In Case of A Breach   Users can now closely monitor how their personal data is being processed and transferred across international borders. The law mandates companies to notify their users within 72 hours in case of any data breach and ensure that all steps are taken to remedy the situation.   Right To Be Forgotten   The new data protection act also lets users erase their personal data under certain circumstances, under the Right to Erasure Act. Users shall be granted the right to demand a copy of their data held by the organization, ask for the information to be corrected and demand it to be deleted if needed be. The Watchdog   Besides these, organizations have to appoint a “data-protection officer” (DPO), an ombudsman who will report directly to top management, ensure that the guidelines are abided by, train the staff and conduct internal audits.   Penalties   Other than the stern guidelines, what sets GDPR apart from all preceding privacy laws in EU is the significant financial penalties which the law can impose on organisations for not complying with GDPR. The penalty for non-compliance can be as high as €20m or 4% of a company’s global annual revenue — whichever is greater.   GDPR is undoubtedly posed to bring about an overhaul in the way in which data is handled. It will prompt organizations to reconsider the framework within which they collect, save, manage, process and transfer data – that is, from point of origin to point of consumption.   Teething Troubles   Some obvious teething pains are expected with a regulation of this extent and magnitude. One such problem flagged by companies with legacy consumer data systems is that it is difficult to exactly know where the regulated consumer data is stored. Personal data can be hidden in a wide range of places, including backup drives, unstructured data, log-in details and social media data. A mammoth task which lies ahead of these legacy companies in of the implementation of the law will be to ensure that all data is harmonized and sanitized.   According to a survey conducted by PricewaterhouseCoopers, 68% of US-based companies expect to spend anything between $1-$10 million to meet GDPR requirements. Another 9% expect to spend more than $10 million. Critics also argue that any kind of restriction on technology shall stymie innovation, especially affecting firms which use subject data as the main input for development of their technology. The Loophole   No regulation is without gaps or loopholes. Not surprisingly, Facebook was one of the first to identify a loophole in this legislation. Facebook is set to switch its data controller entity for all non-EU non-US users from Facebook Ireland to Facebook USA, in an attempt bypass GDPR for non-EU data. Therefore, by moving the information of 1.5 billion users in Africa, Asia, Australia, and Latin America out of EU, it suggests that Facebook intends to follow the law in spirit, but not in letter.   The Road Ahead   For those who are bound by the legislation and don’t have a way out, GDPR will require an ongoing supervision and governance of data. Post the initial compliance heavy-lift, all organisations must going forward ensure that their data collection and processing systems are in accordance with the GDPR guidelines.   What Does This Mean For India   Indian Information Technology Industry and IT-enabled services derive about 30% of its revenues from Europe. With EU set to roll out the new legislation, this sector will undoubtedly be the most affected. However, since India is currently in the process of building an express legislation which regulates data protection and privacy, GDPR can become an interesting roadmap to follow. As the nation paces towards becoming a truly “Digital India”, especially with the government undertaking initiatives such as Aadhaar, IndiaStack and DigiLocker, EU could be the torchbearer.

MHRD Disrupting College Education: Higher Education in India Under Attack

Pavitra Joshi

Welfare

The higher education system in India is seemingly close to becoming a commodity – available for sale at your nearest university for a hefty price! End of last month, the Ministry of Human Resource Development (MHRD) declared over 60 universities, including Jawaharlal Nehru University (JNU), Banaras Hindu University (BHU), and Aligarh Muslim University (AMU), “autonomous”. As per the new proposal of the University Grants Commission (UGC), these institutes of higher education must now sustain on a 70:30 funding mix, with 70% to still come from the government.  However, public grants are now to be replaced by loans courtesy the restructured Higher Education Funding Agency (HEFA), an MHRD-backed non-profit entity structured to provide low-cost capital to public universities.   In the words of Prakash Javadekar, HRD Minister, the government is “striving to introduce a liberalised regime in education”, where institutions are granted decision-making freedom with regard to operational (curriculum, programmes, hiring, distance learning etc.) as well as financial (fee structures, spending, funding) matters. The Education Minister of India asserts the emphasis will be on “linking [the said] autonomy with quality.”  While all that sounds very promising, it is key to understand that the “cost” of this promised higher quality and autonomy should not be a lack of access.   It is feared that withdrawn support to government universities would inevitably cause disruption in the disbursement of salaries to faculty, introduction of “self-financing courses” and a hike in fees hitting the students. That is primarily the argument of the Delhi University Teachers’ Association (DUTA), which has been protesting against this unprecedented move. In their defence, the idea that government universities are being “granted financial autonomy” with reduced funding does appear disingenuous. An increase in fees would be a natural outcome. While the argument in favour of a liberalised regime is understandable, the solution, in its present form, does appear to set a precedent for privatisation of India’s top government universities. Any dilution in the vision of these distinguished institutions, whose mission has always been to provide a quality future to anyone with merit, irrespective of their economic leanings, would be a travesty. The origins of the present debacle can be linked to the government’s attempts of aligning our education sector with the World Trade Organisation’s (WTO) General Agreement on Trade and Services (GATS), to which India is a signatory. Many experts disagree with GATS’ push towards educational liberalisation, arguing this sector, similar to healthcare, cannot be treated as a unidimensional ‘tradable commodity’. At our present lack of economic parity, access to education should remain a higher priority.   Each country has its own model with regard to education. Germany and Sweden follow a 100% subsidised model while the United States prefers a profit-driven quality focused system. The system in India presents a paradox. Our highest quality, merit-focused, and most economical institutions are usually state-owned. Private setups have a varied quality and are unanimously expensive. And they have never created the backbone of our system. Case in point is that out of 800 universities in total only 260 universities are Private. The rest are Central, State or deemed Universities. Institutes such as IITs, IIMs and AIIMS are autonomous in nature, i.e. they enjoy full freedom in deciding courses, course structure, admission criteria and fees. Central universities are governed by the Department of Higher education (DHE) under MHRD and are centrally funded, while the State universities as the name suggest are state-funded and managed. But it isn’t like the government is spending a lot. As per the CAG reports brought to notice in parliament between 2016 and 2017, the total tax collection of INR83,497 crore under the secondary and higher education cess (levied since 2006-07) lies unspent. What is more appalling is that the budgetary allocation for education has been reduced from 3.7% of GDP (2017-18 revised estimates) to 3.5% (2018-19) of GDP!   Aside from increasing state spending, India can definitely open its ‘market’ to private and foreign universities, granting them full and real freedom to be run as for-profit organisations. Shaking the funding model of government universities in a bout to privatise is not a solution.   Moreover, the government can consider encouraging big corporations to invest in education, either through their Corporate Social Responsibility (CSR) allocations, but preferably as core investments. Tax breaks, subsidised land & infrastructure, along with viability gap funding should act as possible sweeteners. Contributions can also be channelized through an industry-regulated and managed education-oriented fund, from which universities of national importance can seek grants and in turn build research and employment partnerships with the investee companies.   Long-term problems require long-term solutions. And shrugging responsibility, withdrawing support, and leaving an industry with a natural social objective to the free-wheeling forces of capitalism isn’t one. 

India's White Collar Fugitives: How to Bring Back The Future Nirav Modi or Vijay Mallya

Kamalpreet Singh

Financial Institutions

Stung by criticism over the INR12,000 crore PNB scam, the Government of India is all set to present the Fugitive Economic Offenders Bill before the parliament. The Bill was first announced last year by Finance Minister Arun Jaitley following the liquor baron Vijay Mallya’s escape to London in the aftermath of his alleged INR9,000 crore loan default. With diamond czar Nirav Modi following the white collar crime trail out of the country after fleecing another Public Sector Bank (PSB), the government has come under increasing flak for being unable to stop the repeated flight abroad of economic offenders.   What is the Bill?   The Fugitive Economic Offenders Bill allows the government to confiscate the assets of those ‘economic offenders’ who have fled the country, without the need for them having been pronounced guilty by a court of law. The fugitive in this case, will not be able to contest the confiscation of his assets. The provisions of the Act would be applicable only in cases where the quantum of fraud has been determined to be in excess of INR100 crore, and would not be limited to cases of fraud or loan default alone but would also cover tax evasion, benami properties, black money and corruption.   The need for the Bill was felt as economic offenders routinely escape the country leaving law agencies clawing at thin air.   The provisions of the Bill will not be effective retrospectively - which means Modi’s and Mallya’s assets aren’t going under the hammer anytime soon. However, it could prove to be an effective deterrent for crimes of this scale in the future.   So Why is There So Much Debate Surrounding the Bill?   While a commendable legislation on the surface, the Bill is likely to get considerably diluted as experts deem many of its provisions to be unreasonable and unconstitutional.   For instance, the sale of an accused’s assets without a trial to decide whether the person was, in fact, guilty of the said crimes is likely to meet with stiff resistance as it goes contrary to the basic tenets of the Indian Constitution and justice wherein a person is considered innocent unless proven guilty.   Another provision which is likely to be challenged is the blanket ban on contesting the confiscation of property by the deemed offender as it goes against set judicial principles.   How Do Other Countries Deal With Fugitive Economic Offenders?   While the Bill sounds like a revolutionary piece of legislation in India, similar Acts have been in place in most countries in the developed world for a long time. So while confiscation without conviction might seem a little extreme, it isn’t exactly an entirely new practice. Clear precedents exist in many countries such as the US, EU, and Malaysia. In fact, the United Nations (UN) itself endorses confiscation without conviction, albeit under specific circumstances. The United Nations Convention against Corruption, for instance, encourages states to confiscate such properties as they believe may have been accumulated due to the proceeds of corruption without a conviction in cases in which the offender cannot be prosecuted for reasons of flight, death, absence or in other appropriate cases. (Article 54-C)   Even within the Indian legislative framework, the provision for seizure of property of economic offenders is not an entirely novel feature of this Act. The existing Prevention of Money Laundering Act (PMLA) provides for confiscation of property without conviction as long as there is a reason to believe that non-attachment of property is likely to frustrate proceedings under PMLA. However, this clause has seldom been used as it is time-consuming and cumbersome, and can be challenged in a court of a law, causing the investigation to be bogged down in the legal dragnet. As a result, the PMLA has proved to be totally ineffective in preventing the flight of economic offenders to foreign shores.   Where the Fugitive Economic Offenders Bill goes beyond these legislations is in mandating that the confiscation of property would not be limited only to those accumulated using the proceeds or benefits of the crime under investigation but can be extended to cover all the accused’s assets in India and abroad. In this perhaps, the Bill is unique among all the existing anti-corruption and money laundering laws in the world.   Treating the Symptoms, Avoiding the Cause   What remains undisputed though is that the Bill is not directed towards addressing the core problem of Non-Performing Assets (NPA) in India’s PSBs that caused the twin Mallya and Nirav Modi scams in the first place. Corruption in India is systemic wherein the rich and the influential are able to manipulate questionable policies enacted by the government to swindle public funds. Punitive action, in the form of stringent legislation merely attempts to sweep up after the damage has been done without tackling the root cause of the problem. In the present case, both Vijay Mallya and Nirav Modi cases are outcomes of policy and governance lapses that led to creation of the NPA problem in the banking sector. Thus while legislation like the Fugitive Economic Offenders Bill is commendable and a welcome step in combating corruption, it appears to ignore the root cause of the illness while treating the symptoms.

OBOR and China Pakistan Economic Corridor: India China Pakistan Should Rethink ‘Competition and Conflict’

South Asia at LSE

India

One of the major bones of contention between India and Pakistan relations has been Beijing’s close ties with Pakistan. However, the possibility of India joining China Pakistan Economic Corridor(CPEC) should not be ruled out, writes Tridivesh Singh Maini.    If one were to look at the India-China relationship, apart from territorial disputes, one of the major bones of contention between both countries has been Beijing’s close ties with Pakistan.   The China Pakistan Economic Corridor (CPEC) passes through disputed territory and New Delhi has put forward its reservations on more than one occasion. This was one of the main reasons why India boycotted the One Belt One Road Summit (OBOR) held in China in May 2017.   Recently, China has expressed its willingness to address Indian concerns. The Chinese Ambassador to India in fact even suggested an alternative route. Speaking at the Jawaharlal Nehru University (JNU), New Delhi, Ambassador Luo Zhaohui stated:   ‘We can change the name of CPEC [China Pakistan Economic Corridor]. Create an alternative corridor through Jammu and Kashmir, Nathu La pass or Nepal to deal with India’s concerns’   Significantly,  at the recently held Boao Forum for Asia (modelled after the World Economic Forum held at Davos), in Hainan (China), President Xi Jinping stated that the Belt and Road Initiative (of which CPEC is an important component) has no ‘geo-political’ calculations. It remains to be seen.   However, Beijing has turned a blind eye to the activities of Pakistani terror groups which have targeted India and it is China’s support for Pakistan, which has ensured that Jaish-E-Mohammad (JeM) Chief Masood Azhar has not been declared a ‘terrorist’ at the United Nations, and it has blocked US moves in such a direction, more than once.   Only recently, the US has declared MML (The Milli Muslim League), a political party formed by Hafiz Saeed (who heads LeT Lashkar-e-Taiba (LeT) and Jama’at-ud-Da’wah (JuD), as one of the fronts of LeT. Its top officials have also been designated as specially designated global terrorists. The Tehreek-e-Azadi-e-Kashmir has also been declared as a terrorist organization by the US.   China-Pakistan Nexus in South Asia   It is not just the China-Pakistan nexus in the context of CPEC, or Beijing’s tendency to turn a blind eye to terror groups operating from Pakistan which should worry India.   Through its economic leverage in South Asia, China is doing its hardest to ensure that Pakistan remains relevant in the SAARC region. Recent visits of the Pakistani PM, Shahid Khaqan Abbasi to Nepal; the Sri Lankan President to Pakistan; and the Pakistan army chief to the Maldives; are also a clear reiteration of the fact that China’s increasing influence in South Asia is beginning to shape the geopolitics of the region, and Beijing will ensure that Islamabad’s ties with neighbouring countries do not deteriorate excessively.   While the key issues raised by Abbasi during his visit to Nepal were the revival of the SAARC Process (Pakistan is keen to host the next SAARC Summit in 2018 and sought Nepal’s support for the same, the summit of 2016 was cancelled, because India refused to participate post the Uri terror attacks, with Bangladesh and Bhutan) and trilateral cooperation between Nepal, Pakistan and China, Abbasi also raised the Kashmir issue during his meeting with the Nepal PM.   During the Sri Lankan President’s (Maithripala Sirisena’s) visit to Pakistan, the Sri Lankan leader, praised the China Pakistan Economic Corridor (CPEC) project, and also held discussions with regard to the revival of the SAARC Process. The Sri Lankan President had been invited as Chief Guest to this year’s Pakistan Republic Day celebrations.   Pakistan Army Chief, General Qamar Javed Bajwa, also visited Maldives, becoming the first high-ranking foreign dignitary to visit the country after the lifting of the 45 day emergency. Bajwa was invited by Maldives National Defence Force chief Major General Ahmed Shiyam, and met with defence minister Adam Shareef Umar. The Pakistan Army Chief also spoke in favour of strengthening ties between both countries. One of the significant takeaways of the visit was the proposed joint patrolling of the exclusive economic zone, also reported in a press release from the Maldivian defence and national security ministry.   Recent Convergences   Yet, in spite of all these differences between India and China, it should also be borne in mind, that China did not come in the way of putting Pakistan on the watch list of the international watch dog Financial Action Task Force (FATF) (Pakistan will be put on the grey list by January 2018). India in return supported China’s bid for the Vice-Presidency of the FATF. Commenting on the outcome, a Ministry of External Affairs spokesperson tweeted:   ‘Congratulations to China on its election as Vice President of Financial Action Task Force at the #FATF plenary mtg. on 23 February 2018. We remain hopeful that China would uphold & support the objectives & standards of FATF in a balanced, objective, impartial & holistic way.’   Interestingly, commemoration of the 60th year of His Holiness Dalai Lama in India was also low key, while celebrations were shifted from the capital to Dharamsala, the Foreign Secretary also sent an advisory to government officials to remain away from such events. There has also been a recent thaw between India and Pakistan: both sides have agreed to resolve issues which their diplomats have been facing through dialogue. Indian High Commissioner to Pakistan, Ajay Bisaria met with Pakistan National Security Adviser Lt-Gen (retd.) Nasser Khan Janjua on April 3,  2018. Both agreed to reduce tensions, and move towards resumption of dialogue. India and Pakistan had also agreed to humanitarian measures with regard to prisoners lodged in both countries (including release of prisoners over 60).   Can The Triangle Move Away From A Zero-Sum Approach?   While a lot of attention and media space is given to the zero-sum narrative in the context of India’s ties with China and Pakistan, recent overtures by India towards China have raised some interesting possibilities. First, could China be used to pressurize Pakistan to act against terror groups? A number of American analysts and policy makers including recently appointed National Security Advisor, John Bolton have recommended that China can be more effective in pressuring Pakistan to act against terror groups. In the longer run, New Delhi should not totally rule out triangular cooperation, if ties improve. In India, a number of individuals have even argued in favour of joining CPEC.   Arguments In Favour of India Joining CPEC   There have been arguments in favour of India joining CPEC (in both India and China), especially through the Wagah-Attari border, though recently even the Jammu and Kashmir Chief Minister pitched for New Delhi to explore the possibility of joining the mega project. Said Mehbooba Mufti:   ‘Why can’t we be partners in economic growth and share the benefits of projects like CPEC. Let us move beyond skirmishes [.] It would make the region a hub of emerging economic opportunities leading to cooperation in trade, commerce, tourism, adventure across the region’.   The Turkmenistan, Afghanistan, Pakistan, India (TAPI) pipeline, in which both India and Pakistan are participating, can also be part of the CPEC project, as has been argued by some. This will of course depend upon how Pakistan and India resolve their differences over the project, but given the fact that China has proposed to extend the project to Afghanistan, this possibility cannot be ruled out.   Conclusion   Whilst India joining CPEC may seem far-fetched currently, all three countries need to start thinking in terms of cooperation and not conflict. However, over the next few months in the run up to the elections in Pakistan, one cannot expect much in the context of India-Pakistan ties. In the meanwhile, China must also reconsider its responses to terrorism emanating from Pakistan and targeted at India. For South Asia to move beyond the current narrative of ‘competition and conflict’ innovative and forward-thinking solutions will be required but this is not impossible.   About the Author   Tridivesh Singh Maini is a New Delhi-based policy analyst associated with Jindal School of International Affairs, Sonipat. His areas of interest include the India-China-Pakistan triangle, the role of India’s state governments in foreign policy (especially the economic dimension), and federalism in India. He was a South Asian Voices Visiting Fellow at the Stimson Center, Washington DC and a Public Policy Scholar with The Hindu Centre for Politics and Public Policy, Chennai.  He has previously worked with The Observer Research Foundation, New Delhi and The Indian Express, New Delhi. Maini is a regular contributor for The Diplomat, Global Times and Quint.   This article was first published on South Asia @ LSE, and is republished with permission. Click here for the original article. These are views of the author, and not the position of the South Asia @ LSE blog, nor of the London School of Economics, or CPGS, Islamabad.

Reforming The Indian Bank: Improving Infrastructure Financing in India

Taponeel Mukherjee

Financial Institutions

The directive by the Finance Ministry that Public Sector Banks (PSBs) must start conducting forensic audits on all loan accounts above INR50 crore reflects an urgency on part of the government to reduce the mounting number of Non-Performing Assets (NPAs). In common parlance, a forensic audit is a branch of audit focused on fraud detection by assessing the company’s internal controls and determining whether any lapses in such mechanisms could have resulted in corrupt practices.   Forensic audits in companies may be at two levels. One, a curative forensic audit may be assigned to an independent investigator to conduct a truthful investigation of the suspected fraud. At another level, a preventive forensic audit may be adopted by companies to make structural changes which can create adequate checks and balances to combat crimes in the future. Such an audit is necessary to deter illegal activity emanating from ideas of greed and an often entrenched organisational attitude that 'fraud is not a crime'.   Both types of audit are costly affairs with significant consequences for the companies' bottomline. Such audits may inculcate an environment of mutual suspicion that may hinder risk-taking, critical for economic expansion and job creation.   Given the magnitude of NPAs lumbering Indian banks at present, lending is understandably constrained. Forensic audits may heighten risk aversion further, impeding good businesses from getting access to credit. A culture of suspicion may set into the banks, resulting in even lower lending by banks. The lack of loans may force companies to delay critical capital expenditure investments, dampening production and reducing job creation.   Despite forensic audits potentially slowing down the economy, they are worth the short-term pain if lessons learnt from them can be implemented to reduce the occurrence of frauds in the future and lead to the resolution of broader structural issues plaguing the Indian Bank.   Forensic audit must teach us a lesson or two regarding the type of frauds that have occurred, the length of time of the concealment of frauds, and methods adopted to conceal them. More importantly, mechanisms must be developed to identify such frauds in advance and and a road-map must be created to prevent the recurrence of such frauds in the future. If a comprehensive approach towards creating a policy framework is adopted, then the potential short-term pain of the forensic audits is worth it.   Forensic audits can add significant value only if, in addition to the audit, we look to resolve other structural issues in the Indian banking system. Some problems that deserve attention are a lack of information sharing regarding credit quality amongst banks, delayed recognition of NPAs, a mismatch of assets and liabilities on the bank balance sheets, and lending by PSBs to sectors they aren’t technically equipped to understand. Banks need to have a better system to share information on borrowers wherein a borrower, classified as a defaulter by one bank is not allowed to borrow from any other bank. A better flow of inter-bank information via a centralised database of borrowers would allow PSBs to better track credit quality of borrowers. Credit registries are essential mechanisms in this regard especially for expanding transaction-based lending technologies.   Nationalised banks created credit bureaus several years ago, but with limited reach and functionality, they are no cause for cheer. Robust credit registries will create a database that banks can use to develop credit scores to predict repayment based on borrower characteristics. Also, information sharing will significantly assist banks to identify NPAs early in the cycle, thereby avoiding a significant build-up of NPAs.   Even though some loans to the infrastructure sector have become non-performing, one must acknowledge the role of PSBs in infrastructure creation. PSBs must not end lending entirely to the infrastructure sector. Instead, policymakers should think of how they could improve lending to the infrastructure sector. PSBs with short-dated liabilities are not equipped to finance long-dated infrastructure assets. Any move away from infrastructure financing will be a gradual process. Specialised institutions and policy framework that allow private capital to fund infrastructure will be required.   Lending to specialised infrastructure projects requires significant technical expertise, which PSBs generally lack. Without the necessary expertise, banks risk funding sub-optimal projects. It is crucial for PSBs to identify sectors where they are technically qualified to finance versus which they are not.   To summarise, measures such as forensic audits are useful only if the learnings are used to frame better policies and implement substantial structural reforms. Without meeting the two conditions, forensic audits risk being another policy that fail to live up to their full potential.   Originally Published in Firstpost

Is US Leading The Global Economy Towards A Recession?

Colin Lloyd

Inflation

The Federal Reserve continues to raise rates as S&P earnings beat estimates; The ECB and BoJ maintain QE; Globally, corporations rely on US$ financing; Nonetheless, signs of a slowdown in growth are clearer outside the US.   After last week’s ECB meeting, Mario Draghi gave the usual press conference. He confirmed the continuance of stimulus and mentioned the moderation in the rate of growth and below-target inflation. He also referred to the steady expansion in money supply. When it came to the Q&A he revealed rather more:   It’s quite clear that since our last meeting, broadly all countries experienced, to different extents of course, some moderation in growth or some loss of momentum. When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries.   It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators. Sharp declines were experienced by PMI, almost all sectors, in retail, sales, manufacturing, services, in construction. Then we had declines in industrial production, in capital goods production. The PMI in exports orders also declined. Also we had declines in national business and confidence indicators.   I quote this passage out of context because the entire answer was more nuanced. My reason? To highlight the difference between the situation in the EU and the US. In Europe, money supply (M3) is growing at 4.3% yet inflation (HICP) is a mere 1.3%. Meanwhile in the US, inflation (CPI) is running at 2.4% and money supply (M2) is hovering a fraction above 2%. Here is a chart of Eurozone M3 since 1999: Source: Eurostat   The recent weakening of momentum is a concern, but the absolute level is consistent with a continued expansion.   Looked at over a rather longer time horizon, here is a chart of US M2 since 1900: Source: Hoisington Asset Management, Federal Reserve   The letters A, B, C, D denote the only occasions, during the last 118 years, when a decline in the expansion (or, during the 1930’s, contraction) of M2 did not lead to a recession. 17 out of 21 is a quite compelling record.   Another concern for markets is the flatness of the US yield curve. Here is the 2yr – 10yr yield differential since 1990: Source: Factset, Mauldin Economics   More importantly, for international borrowers, the 6-month LIBOR rate has risen by more than 60 basis points since the start of the year (from 1.8% to 2.5%) whilst 30yr Swap rates have increased by only 40 basis points (2.6% to 3%). The 10yr – 30yr Swap curve is now practically flat.   Also worthy of comment, as US Treasury yields have risen, the relationship between Bonds and Swaps has begun to normalise – 30yr T-Bond yields are only 40 basis points above their level of January and roughly at the same level as in the spring of last year. In April 2017   In Macro Letter – No 74 – US 30yr Swaps have yielded less than Treasuries since 2008 – does it matter? I wrote:   Today the IRS market increasingly determines the cost of finance, during the next crisis IRS yields may rise or fall by substantially more than the same maturity of US T-bond, but that is because they are the most liquid instruments and are only indirectly supported by the Central Bank.   It looks like I may have to eat my words, here is the Bond vs Swap table revisited:   Source: Investing.com, Interestrateswaps.com, BBA   What is evident is that the Bond/Swap inversion in the longer maturities has closed substantially even as shorter maturity spreads have narrowed. Federal Reserve policy has been the dominant factor.   Why is it, however, that the effect of higher US rates is, seemingly, felt more poignantly in Europe than the US? Does this bring us back to protectionism? Perhaps, but in less contentious terms, the US has run a capital account surplus for many years. Outside the US investment is closely tied to LIBOR financing costs, these have remained higher, except in the longest maturities, and these rates have risen most precipitously this year. Looked at another way, the higher interest rate policies of the Federal Reserve, despite the continued largesse of other central banks, is exporting the next recession to the rest of the world.   I ended Macro Letter – No 74 back in April 2017 – saying:   Meanwhile, although interest rates have risen from historic lows they remain far below their long run average. Pension funds and other long-term investors still require 7% or more in annualised returns in order to meet their liabilities. They are being forced to continuously increase their investment risk and many have chosen to use the swap market. The next crisis is likely to see an even more pronounced unravelling than in 2008/2009. The unravelling may not happen for some while but the stresses are likely to be focused on the IRS market.   One year on, cracks in the capital markets edifice are beginning to become more evident. GDP growth has started to rollover in the US, Eurozone and Japan. Yields are still relatively low but the absolute increase in rates for shorter maturities (e.g. the near doubling of US 2yr yields from 1.25% to 2.5% in a single year) is guaranteed to take its toll on corporate interest servicing costs. US capital markets are the envy of the world. They are deep and allow borrowers to finance far into the future. The rest of the world is forced to borrow at shorter tenors. A three basis point narrowing of 5yr spreads between Swaps and Bonds is hardly compensation for the near 1% increase in interest rates, or, put in starker terms, a 46% increase in absolute borrowing costs.   Conclusion and Investment Opportunities   How is the rise in borrowing costs impacting the US stock market? Volatility is back, but earnings are robust. Factset – S&P 500 Earnings Season Update: April 27, 2018 – described it thus:   To date, 53% of the companies in the S&P 500 have reported actual results for Q1 2018. In terms of earnings, more companies are reporting actual EPS above estimates (79%) compared to the five-year average. If 79% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting actual EPS above estimates since FactSet began tracking this metric in Q3 2008. In aggregate, companies are reporting earnings that are 9.1% above the estimates, which is also above the five-year average. In terms of sales, more companies (74%) are reporting actual sales above estimates compared to the five-year average. In aggregate, companies are reporting sales that are 1.7% above estimates, which is also above the five-year average. If 1.7% is the final percentage for the quarter, it will mark the largest revenue surprise percentage since FactSet began tracking this metric in Q3 2008.   The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report), year-over-year earnings growth rate for the first quarter is 23.2% today, which is higher than the earnings growth rate of 18.5% last week. Positive earnings surprises reported by companies in multiple sectors (led by the Information Technology sector) were responsible for the increase in the earnings growth rate for the index during the past week. All 11 sectors are reporting year-over-year earnings growth. Nine sectors are reporting double-digit earnings growth, led by the Energy, Materials, Information Technology, and Financials sectors.   We are more than halfway through Q1 earnings (I’m writing this letter on Wednesday 2nd May). Results have generally been above forecast and now the Fed seems conscious that they must not be too hasty to reverse the effects of both zero rates and QE. Added to which, while US stocks have been languishing mid-range, European stocks have recently broken out of their recent ranges to the upside, despite discouraging economic data.   The US stock market looks less expensive than it did in January 2017, when I wrote Macro Letter – 68 – Equity valuation in a de-globalising world. Then I was looking for stock markets with a low correlation to the US: they were (and remain) hard to find.   Other indicators to watch which exert a strong influence on stocks include the US PMI Index – last at 54.8 up from 54.2 in March. Above 50 there is little cause for concern. For the Eurozone it is even higher at 55.2, whilst throughout G20 no economy is recording a PMI below 50.   The chart below shows the Citigroup Economic Surprises Index (blue) vs the S&P500 Forward P/E estimates (red): Source: Yardeni Research, S&P, Thomas Reuters, Citigroup   Economic surprises remain positive rather than negative for the US. In the Eurozone it is quite another matter: Source: Bloomberg, Citigroup   A number of economic indicators are pointing to a slowdown, yet US stocks are beating estimates. To judge from price action, the market appears to be unimpressed by earnings. I am reminded of the old adage, ‘When all the buyers are in the market it’s time to sell.’ From a technical perspective it makes sense to be patient, but the market has failed to rise substantially on a positive slew of earnings news. This may be because there is a more important factor driving sentiment: the direction of US rates. It certainly appears to have engendered a revival of the US$. It rallied last month having been in a downtrend since January 2017 despite a steadily tightening Federal Reserve. For EURUSD the move from 1.10 to 1.25 appears to have taken its toll. On the basis of the CESI chart, above, if Wall Street sneezes, the Eurozone might catch pneumonia.   Originally Published in In the Long Run

Central Bankers in the Global Economy: Against Speculation, Towards Normalization

Colin Lloyd

Financial Institutions

The Federal Reserve continues to tighten and other Central Banks will follow; The BIS expects stocks to lose their lustre and bond yields to rise; The normalisation process will be protracted, like the QE it replaces; Macro prudential policy will have greater emphasis during the next boom.   As financial markets adjust to a new, higher, level of volatility, it is worth considering what the Central Banks might be thinking longer term. Many commentators have been blaming geopolitical tensions for the recent fall in stocks, but the Central Banks, led by the Fed, have been signalling clearly for some while. The sudden change in the tempo of the stock market must have another root.   Whenever one considers as the collective view of Central Banks, it behoves one to consider the opinion of the "Central Bankers' bank", the Bank for International Settlements (BIS). In their Q4 review they discuss the paradox of a tightening Federal Reserve and the continued easing in US national financial conditions. BIS Quarterly Review – December 2017 – A paradoxical tightening?:   Overall, global financial conditions paradoxically eased despite the persistent, if cautious, Fed tightening. Term spreads flattened in the US Treasury market, while other asset markets in the United States and elsewhere were buoyant…   Chicago Fed’s National Financial Conditions Index (NFCI) trended down to a 24-year trough, in line with several other gauges of financial conditions.   The authors go on to observe that the environment is more reminiscent of the mid-2000’s than the tightening cycle of 1994. Writing in December they attribute the lack of market reaction to the improved communications policies of the Federal Reserve – and, for that matter, other Central Banks. These policies of gradualism and predictability may have contributed to, what the BIS perceive to be, a paradoxical easing of monetary conditions despite the reversals of official accommodation and concomitant rise in interest rates.   This time, however, there appears to be a difference in attitude of market participants, which might pose risks later in this cycle:   …while investors cut back on the margin debt supporting their equity positions in 1994, and stayed put in 2004, margin debt increased significantly over the last year.   At a global level it is worth remembering that whilst the Federal Reserve has ceased QE and now begun to shrink its balance sheet, elsewhere the expansion of Central Bank balance sheets continues with what might once have passed for gusto.   The BIS go on to assess stock market valuations, looking at P/E ratios, CAPE, dividend pay-outs and share buy-backs. By most of these measures stocks look expensive, however, not by all measures:   Stock market valuations looked far less frothy when compared with bond yields. Over the last 50 years, the real one-year and 10-year Treasury yields have fluctuated around the dividend yield. Having fallen close to 1% prior to the dotcom bust, the dividend yield has been steadily increasing since then, currently fluctuating around 2%. Meanwhile, since the GFC, real Treasury yields have fallen to levels much lower than the dividend yield, and indeed have usually been negative. This comparison would suggest that US stock prices were not particularly expensive when compared with Treasuries.   The authors conclude by observing that EM sovereign bonds in local currency are above their long-term average yields. This might support the argument that those stock markets are less vulnerable to a correction – I would be wary of jumping this conclusion, global stocks market correlation may have declined somewhat over the last couple of years but when markets fall hard they fall in tandem: correlations tend towards 100%: Source: BIS, BOML, EPFR, JP Morgan   The BIS’s final conclusion:   In spite of these considerations, bond investors remained sanguine. The MOVE* index suggested that US Treasury volatility was expected to be very low, while the flat swaption skew for the 10-year Treasury note denoted a low demand to hedge higher interest rate risks, even on the eve of the inception of the Fed’s balance sheet normalization. That may leave investors ill-positioned to face unexpected increases in bond yields.   *MOVE = Merrill Lynch Option Volatility Estimate   Had you read this on the day of publication you might have exited stocks before the January rally. As markets continue to vacillate wildly, there is still time to consider the implications.   Another BIS publication, from January, also caught my eye, it was the transcript of a speech by Claudio Borio’s – A blind spot in today’s macroeconomics? His opening remarks set the scene:   We have got so used to it that we hardly notice it. It is the idea that, for all intents and purposes, when making sense of first-order macroeconomic outcomes we can treat the economy as if its output were a single good produced by a single firm. To be sure, economists have worked hard to accommodate variety in goods and services at various levels of aggregation. Moreover, just to mention two, the distinctions between tradeables and non-tradeables or, in some intellectual strands, between consumption and investment goods have a long and distinguished history. But much of the academic and policy debate among macroeconomists hardly goes beyond that, if at all.   The presumption that, as a first approximation, macroeconomics can treat the economy as if it produced a single good through a single firm has important implications. It implies that aggregate demand shortfalls, economic fluctuations and the longer-term evolution of productivity can be properly understood without reference to intersectoral and intrasectoral developments. That is, it implies that whether an economy produces more of one good rather than another or, indeed, whether one firm is more efficient than another in producing the same good are matters that can be safely ignored when examining macroeconomic outcomes. In other words, issues concerned with resource misallocations do not shed much light on the macroeconomy.   Borio goes on to suggest that ignoring the link between resource misallocations and macroeconomic outcomes is a dangerous blind spot in marcoeconomic thinking. Having touched on the problem of zombie firms he talks of a possible link between interest rates, resource misallocations and productivity.   The speaker reveals two key findings from BIS research; firstly that credit booms tend to undermine productivity growth and second, that the subsequent impact of the labour reallocations that occur during a financial boom last for much longer if a banking crisis follows. Productivity stagnates following a credit cycle bust and it can be protracted:   Taking, say, a (synthetic) five-year credit boom and five postcrisis years together, the cumulative shortfall in productivity growth would amount to some 6 percentage points. Put differently, for the period 2008–13, we are talking about a loss of some 0.6 percentage points per year for the advanced economies that saw booms and crises. This is roughly equal to their actual average productivity growth during the same window.   Source: Borio et al, BIS   Borio’s conclusion is that different sectors of the economy expand and the contract with greater and lesser momentum, suggesting the need for more research in this area.   He then moves to investigate the interest rate productivity nexus, believing the theory that, over long enough periods, the real economy evolves independently of monetary policy and therefore that market interest rates converge to an equilibrium real interest rates, may be overly simplistic. Instead, Borio suggests that causality runs from interest rates to productivity; in other words, that interest rates during a cyclical boom may have pro-cyclical consequences for certain sectors, property in particular:   During the expansion phase, low interest rates, especially if persistent, are likely to increase the cycle’s amplitude and length. After all, one way in which monetary policy operates is precisely by boosting credit, asset prices and risk-taking. Indeed, there is plenty of evidence to this effect. Moreover, the impact of low interest rates is unlikely to be uniform across the economy. Sectors naturally differ in their interest rate sensitivity. And so do firms within a given sector, depending on their need for external funds and ability to tap markets. For instance, the firms’ age, size and collateral availability matter. To the extent that low interest rates boost financial booms and induce resource shifts into sectors such as construction or finance, they will also influence the evolution of productivity, especially if a banking crisis follows. Since financial cycles can be quite long – up to 16 to 20 years – and their impact on productivity growth quite persistent, thinking of changes in interest rates (monetary policy) as “neutral” is not helpful over relevant policy horizons.   During the financial contraction, persistently low interest rates can contribute to this outcome (Borio (2014)). To be absolutely clear: low rates following a financial bust are welcome and necessary to stabilise the economy and prevent a downward spiral between the financial system and output. This is what the crisis management phase is all about. The question concerns the possible collateral damage of persistently and unusually low rates thereafter, when the priority is to repair balance sheets in the crisis resolution phase. Granted, low rates lighten borrowers’ heavy debt burden, especially when that debt is at variable rates or can be refinanced at no cost. But they may also slow down the necessary balance sheet repair.   Finally, Borio returns to the impact on zombie companies, whose number has risen as interest rates have fallen. Not only are these companies reducing productivity and economic growth in their own right, they are draining resources from the more productive new economy. If interest rates were set by market forces, zombies would fail and investment would flow to those companies that were inherently more profitable. Inevitably the author qualifies this observation:   Now, the relationship could be purely coincidental. Possible factors, unrelated to interest rates as such, might help explain the observed relationship. One other possibility is reverse causality: weaker profitability, as productivity and economic activity decline in the aggregate, would tend to induce central banks to ease policy and reduce interest rates. Source: Banerjee and Hoffmann, BIS   Among the conclusions reached by the Central Bankers bank, is that the full impact and repercussions of persistently low rates may not have been entirely anticipated. An admission that QE has been an experiment, the outcome of which remains unclear.   Conclusions and Investment Opportunities   These two articles give some indication of the thinking of Central Bankers globally. They suggest that the rise in bond yields and subsequent fall in equity markets was anticipated and will be tolerated, perhaps for longer than the market would anticipate. It also suggests that Central Banks will attempt to use macro-prudential policies more extensively in the future, to insure that speculative investment in the less productive areas of the economy do not crowd out investment in the more productive and productivity enhancing sectors. I see this policy shift taking the shape of credit controls and increases in capital requirements for certain forms of collateralised lending.   Whether notionally independent Central Banks will be able to achieve these aims in the face of pro-cyclical political pressure remains to be seen. A protracted period of readjustment is likely. A stock market crash will be met with liquidity and short-term respite but the world’s leading Central Banks need to shrink their balance sheets and normalize interest rates. We have a long way to go. Well managed profitable companies, especially if they are not saddled with debt, will still provide opportunities, but stock indices may be on a sideways trajectory for several years while bond yields follow the direction of their respective Central Banks official rates.   Originally Published in In the Long Run

Trade War in A Global Economy: On Globalization, Free Trade and Protectionism

IEI

Trade

Editor’s Comment: Against the backdrop of the ongoing Trade Wars, it becomes more pertinent than ever to participate in a discussion on globalization and free trade. Below are experts from an interview with Jean-Marc Daniel, Associate Professor of Economics at ESCP around the ongoing discourse on anti-globalization, protectionism and rejection of free trade.   Despite the current upturn in world trade, the return of a protectionist rhetoric since 2008 threatens the future of free trade. How do you analyse the rejection of free trade, which manifests itself in the economic policy of certain states (United States, Great Britain)?   What is striking, and relatively new, is that the dominant power, namely the United States, is assuming the leadership of protectionism. The return to grace of protectionist theories is due to public opinion associating free trade with delocalization, then delocalization to deindustrialization, even if the loss of industrial jobs is due more to robotization than to delocalization. By the end of the 19th century, this kind of false equation applied to agriculture had already led to protectionism, a protectionism embodied in France by Jules Méline.    Since the 2008 crisis, global economic recovery remains uncertain. Do you think free trade can save the economy?   2008 was a cyclical crisis similar to that of 1974/1975 or 1992/1993, even if each of these cyclical downturns has specific aggravating factors (oil shock in the 1970s, financial slackness in 2008). The problem is that, from cycle to cycle, each recovery is weaker than the previous one. Potential growth, i. e. growth independent of ups and downs, continues to decline. In France, we went from 5% in the 1960s to 1.3% today. This slowdown affects all developed countries, which have in common the fact that they are close to the so-called "technological frontier".    But there are countries whose potential growth remains strong because they are in the catch-up phase. The free movement of capital allows them to access the most efficient technologies and the free movement of goods allows developed countries to find new markets: thus, global growth is doubly successful.    From 1985 to 2014, the growth in world trade was higher than the growth in world economy. This is no longer the case, since the growth rate of world trade is now below the growth rate of the global economy. Is free trade less dynamic?    The slowdown in world trade is due to three factors. First of all, its growth phase due to its liberalization is rather behind us. During this phase, each country specializes according to its comparative advantage. As a result, it abandons some productions, which increases its imports; at the same time, the outlets of the activities it keeps are increasing sharply. Once this process is completed, international trade reaches cruising speed. Secondly, world trade has a strong industrial and energy component.  However, relative prices for this type of products are falling. Since 2014, the oil counter-shock has been spectacular. This leads to a mechanical decline in the weight of international trade in GDP. While statisticians do take into account the impact of these price distortions, their correction is not perfect. Finally, people are becoming receptive to discourses on "made in" and "economic patriotism".    The trade surpluses of some countries (China, Germany) are often seen as an attack on the national interests of their trading partners. Do you think trade surpluses affect global economy?   One country’s deficit is another country’s surplus. Responsibilities for global imbalances are therefore shared. In economy, we demonstrate that an external surplus reflects an excess of savings and a deficit reflects an excess of consumption. The Japanese, the Germans, and for some time now the Chinese, have been accumulating surpluses on the United States, surpluses that they invest there by buying US public debt. For example, the American consumer lives on German or Asian labour, while the latter, whose average age is constantly increasing, hopes that he or she will retire and live off American taxes.  There is something unhealthy about both American recklessness and the illusions of aging countries.     How do you see Europe's place in both world trade and the world economy?    The EU 28 is the world's leading economic power. Moreover, it has a high educational level and a real dynamic of innovation. However, it has two weaknesses: on the one hand, its demographics, which is a common point with Japan, and a certain lack of coherence in economic policy-making on the other hand, which hampers its flagship project, the euro.    This article was first published by the International & European Institute, ESCP Europe, and is republished with permission. Click here for the original article.

How to Make Free Trade and Globalization Work?

IEI

Trade

Editor’s Comment: Below are excerpts of an exclusive interview with Pascal Lamy, a French political consultant and businessman, and former Director-General of the World Trade Organization (WTO) around the ongoing discourse on anti-globalization, protectionism and rejection of free trade.   Pascal Lamy   Numerous phenomena attest to the disenchantment with free trade: the rise of protectionism and populism in Europe and the United States, the Brexit, the growing anti-globalization discourse among populations... Will the rejection of free trade be increasingly acute in the future?    First of all, there is no free trade. Nowhere is there free trade, because trade is always constrained by distance, taxes and controls on compliance with standards. It's a false controversy, an intellectual pretentiousness. These fights over free trade are therefore largely fantasized. What exists in reality is a trade openness movement, which has accelerated and slowed down over the course of history.    Overall, history has shown that there is a growing trend towards more open trade, because, for reasons well explained by David Ricardo and Josef Schumpeter, the international division of labour is quite rational. However, this process of openness can be painful from an economic and social point of view: it is efficient, but at the cost of transformations due to less severe competition for the strong than for the weak.   Returning to the question, there is indeed a rise of anti-globalization and protectionist discourses. The reason for this is simple: the systems for reducing social insecurity, most of which date back to the industrial revolution, have not kept pace with the increasing strength of globalisation.    This protectionist and isolationist wave is more pronounced in the United States because the American social system is the less performant among developed countries. 60% of Americans are still in favour of trade openness, but a large section of the population blame globalisation for the downward social mobility they are experiencing: this is the section that Donald Trump has managed to rally. He is taking steps towards a return to mercantilism, which is the Middle Ages of commercial thought. It's an absurd and minority view, but it sometimes found an expression in history, and Donald Trump brought it back into fashion, in thought, and increasingly in action. I am one of those who think that if he persists in this approach, it will affect US growth in the long term, even though it is on tax steroids. However, when we look at the figures, this protectionist rhetoric have little or no influence on reality at this stage, since international trade is increasingly opening up. That is why I do not believe in the theory of deglobalisation. The structural factors that are the main drivers of the current phase of globalisation will continue to operate as trade increases. Thanks to technological revolutions, these factors will continue to produce efficiencies. Data flows are growing exponentially: although they are still poorly measured, they are an essential component of globalization. Where there has been de-globalization and re-regulation is in the financial system following the 2008 crisis.   Is this rejection of free trade justified? Has free trade harmed more than it helped?    The trade openness movement is embraced by almost every country in the world: most countries are WTO members, with a few exceptions, most of which are temporary. The question that arises is under what conditions the efficiencies generated by trade openness bring welfare. But the benefits produced by free trade and their distribution between winners and losers is a highly controversial subject, with different approaches depending on levels of development, collective philosophies and economic theories. This is why opinions on free trade are often correlated with the size of countries and the quality of the social security system (difference between Nordic countries and countries such as Russia or the United States). It all comes down to the issue of fair trade, which is an ambiguous concept because it is subjective.    The rejection of free trade is stronger today than it has been for a long time, but it has emerged in the past: in the 1990s and 2000s, civil society organizations considered that free trade had negative effects on development. This thesis has been undermined because the reality has shown that developing countries benefit greatly from globalization because they have many comparative advantages. They are the strongest advocates of open trade, even if it means pursuing it with moderation. China is the best example.   The Doha Development Agenda, launched in 2001, has seen little progress since the failures of Seattle, Cancún and Hong Kong. Why are multilateral trade negotiations stalling?   It is true that the Doha Development Agenda has moved at a slower pace than would have been expected. But there has been progress: a very technical but major agreement on trade facilitation was reached in 2013 in Bali to simplify customs procedures. If there have been many bottlenecks, it is mainly because the United States and China do not agree on whether China is a developed country or a developing country, and to which WTO regime it should be subject: the Americans say that China is a rich country with many poor people and China replies that it is a poor country with many rich people.    This situation is unlikely to improve, especially when we see Trump's attitude on these issues. Obama had already weakened the system by participating in the blocking of negotiations for agricultural reasons. Trump goes further by challenging the WTO disciplinary system and its tribunal, calling them unbalanced against the US.   You have been Director General of the WTO. How can we reform this organisation to make it more efficient and transparent?    The WTO is much more sophisticated than other international organizations, notably because of the quality and complexity of its implementation, monitoring and dispute settlement processes: the WTO tribunal has no equivalent elsewhere in the world, because it renders binding judgments. But at the same time, the WTO is a medieval organisation: for example, the secretariat is a simple notary at the service of the Member States, it is not allowed to make proposals, which is a Westphalian way of operating. To make the WTO more effective, it must be transformed into an institution, such as the WHO (World Health Organization) or the ILO (International Labour Organization), i. e. it must allow experts, who are more competent than diplomats on certain subjects, to examine the options and make proposals.    Based on your experience as European Commissioner, what is the EU's place in world trade?    The European Union “fell” into trade when it was little. From the beginning, it was built on the ideological commitment to trade openness and reducing barriers to trade. The European Community started with the idea of a customs union, which was the outline of the current common market, and was enshrined in 1957 in Article 133 of the Treaty of Rome. Trade policy has logically been federalised, which gives the European Parliament almost the same prerogatives as the Council of Ministers in approving and supervising the trade agreements negotiated by the Commission. The EU has always been at the forefront on these issues, it has been very open and competitive, especially on goods and services, much less on agriculture. It has always pursued an aggressive commercial policy and, thanks to its negotiating skills, has evolved into a mini-multilateral organization.   What about France in a globalised world?    France has a special coefficient in globalisation, but this potential is little exploited. In my book Quand la France s'éveillera (Odile Jacob, 2014), I explain that the French have always had a problem with trade, except for a short period during the Second Empire, at the time of the free trade agreement between Cobden and Chevalier. Today, nobody in France knows Michel Chevalier, while everyone knows Jules Méline, who is at the origin of the Méline Tariff (protectionist measures on agricultural products). The problem dates back to the French Revolution, which profoundly changed the structure of agricultural production. Yet, we have had thinkers in favour of trade openness, such as Frédéric Bastiat.   How do companies integrate free trade?   It has always been true that trade is regulated by states, but its main operators are companies. 60% of international trade is intra-firm. Within themselves, companies organize free trade: when they have integrated value chains, they localize them according to comparative advantages by reducing the cost of distance. What will be the future developments of trade opening?    In recent years, there has been a great evolution in the regulation of international trade. In the past, barriers to trade have been designed to protect producers from foreign competition.    This logic is disappearing, partly because the fragmentation into value chains is increasing: this is a model where specialized skills are the main source of export value. Similarly, barriers to trade are no longer in customs duties, but in the costs of adjusting production or exports to different regulatory systems, norms and standards. We have moved from a logic of producer protection to a logic of consumer protection: the obstacle is no longer one of protection but one of precaution.    This new precautionary approach justifiably raises very politically sensitive problems, such as data protection, GMOs, hormones and environmental protection. The political economy of trade opening is therefore changing fundamentally. Trade openness will require a much more harmonised treatment of the precautionary principle in the future.    This article was first published by the International & European Institute, ESCP Europe, and is republished with permission. Click here for the original article.

Artificial Intelligence for Better Customer Service: Reward Loyalty and Manage Churn

Anil Mittal

Consumer Behaviour

Dawn of AI

Editorial

Express

Is Artificial Intelligence And Machine Learning Really Killing Job Opportunities?

Colin Lloyd

Tech

Artificial Intelligence for Better Customer Service: Reward Loyalty and Manage Churn

Anil Mittal

Consumer Behaviour

It is an accepted reality of doing business that customers come and go. Loyal customers might stay with you longer than new customers, but sooner or later they will churn. The idea then is to keep on increasing the tenure of each customer with the right customer engagement strategies. It is key to use Machine Learning for understanding your customers and reducing attrition.   Let’s look at: What is churn? How does it impact the top-line of a company? How can you predict who is going to churn? What should you do to stop the customers from churning?   What is Churn?   Churn or attrition rate is the number of customers who have used your products or services in the past but are not going to continue using them in the immediate future.   For different businesses, it can be defined in various ways:   Retail – Customers who aren’t going to purchase anything in next 2 months could be considered as churn (or inactive, dormant etc.) Telecom – Customers who have raised the request to disconnect services or those who have already disconnected their connections  Retail Banking – Customers who have not used your services over a certain time-period and / or are not keeping the threshold balance   How you calculate churn can vary from industry to industry. It also varies for different segments in the same company. Make sure you understand your customers at both the micro and macro segments.   How Does Churn Impact the Top-Line of A Company?   Consider this,   A company ABC has more than $100 million in annual revenues, with 100,000 active customers. Now this broadly translates into each customer providing $1000 in revenue.   Let’s assume the acquisition cost for each customer to be $100.   Assuming 1,000 customers leave at the start of the year means you are looking at losses of 1000 * 1000, which is $1,000,000.   In order to acquire the same customers, you will have to once again spend 100 * 1000 = $100,000   Hence, the Net loss with 1% churn rate is $1,100,000   I hope, you have my attention now!   How Can You Predict Who Is Going to Churn?   If you have only 10 customers – you might already know who is going to churn because you have the most advanced algorithm in your body i.e. your brain.   If your company interacts with 1000s of customers, you need technologically advanced processes which can identify ‘at-risk’ customers at the right time. That is where Artificial Intelligence becomes handy. Based on the trends and patterns in historical data, one can gauge with certain accuracy who is going to churn and more importantly, what are the main factors driving that churn?   If Customer is King, then Data is Queen   How better your company can predict the churn depends on:   Number of touch points (transaction data, demographics, call center, service requests, complaints) your customers have with you Duration for which these touch points have been stored Quality of all the data points. Ensuring that no incorrect data is being stored   In my previous experience, we can predict with 80-90% accuracy who is going to churn in the near future.   What Should You Do to Stop Customers From Churning?   You have to understand your customers both at a micro and macro level.   You should have answers to the below questions. And based on your answers, you can devise strategies to increase engagement for each customer.   Personalization is the key word in today’s business.   Which customer segment is generating the most revenue for you – Loyal Customers? Which customer segment is very new to your company – New Joiners? Which customer segment is composed of infrequent buyers – Dormant Customers?   Answers to the above questions will help you devise the right strategies for each customer.   For instance:   Loyal Customers – These customers are very critical for your business and they deserve your urgent attention. Target them with most lucrative offers and make sure they have a wonderful product experience. Remember, these are loyal customers, who often bring newer customers.   New Joiners – New customers should be treated differently. Help them enhance their product experience. Distributing user manuals/videos could help them understand your products.   Dormant Customers – Identify if customers using a specific product are experiencing more churn. Introduce them to your best products, instead.   Originally Published on Medium   (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Wake Up and Smell the Indian Coffee: Overseas Lessons for Coffee Board of India

Kanika Joshi

Agriculture

In February 2018, I went on a coffee expedition organized by Lavazza (in partnership with Oxfam and SDSN Youth) to cognize the narrative of coffee, discover the innovative aesthetics of coffee types, read the delicate livelihoods behind the production chain and understand perceptions associated with coffee culture. As part of the two-week program, I travelled to Turin and Dominican Republic to assess cultivation practices, understand production methodologies across geographies, meet stakeholders in the coffee value chain, and realise coffee's current relevance in the economy by decoding its socio-environmental impact.   Demand for Coffee is Increasing Globally   Coffee is worth $24 billion in exports as at 2018, as per the Observatory of Economic Complexity, MIT. It is globally the 117th most traded product and stands at 948th position by complexity, according to the Product Complexity Index. Demand for coffee and its consumption are globally on a rise even as the beverage is not a staple like wheat and rice or a necessity such as oil and steel. Furthermore, this little fruit, being a cash crop makes it to the New York Stock Exchange, demonstrating its immense worldwide demand.   Dominican Republic’s Policy Support to Coffee Farmers   In spite of coffee’s tremendous popularity as a beverage, little is known about its farm to table value chain and the lives of coffee farmers. My recent visit to the coffee farms in Dominican Republic, a country known for its pristine beaches, rich history, merengue rhythms and quality coffee, shines a spotlight on the interesting policies and collaborative approaches adopted by the island nation to promote production.   The Ministry of Agriculture in the Dominican Republic supports an efficient, competitive, innovative and enterprising agricultural sector that serves as a base for the Dominican economy, providing the population with food, job opportunities and social benefits.   So, What is So Unique About Dominican's Coffee?   The Dominican Coffee Council (CODOCAFE), a government body overseeing this commodity, runs The Coffee National Strategy, its flagship policy which seeks to increase yield by training technicians and coffee producers in the management of coffee plantations.   The Strategy aims to improve production, productivity, quality and marketing of coffee by funding the rehabilitation of local roads, restoring land, providing a compensation fund for diseased yield and most importantly promoting equal gender labour participation. The Coffee National Strategy also promotes the development of 'organic' coffee production via state-of-the-art technology to push an environment first agenda.   According to José Fermín Núñez, Executive Director of CODOCAFE, “In my country, the potential of coffee is recognized by the government which funds The Coffee National Strategy. CODOCAFE was created in September 2000, to design, plan and implement coffee policies of the country and work in coordination with the Secretary of State for Agriculture along with other Institutions of the Agricultural Sector. It is unique – as our purpose is to promote sustainable development of the Dominican coffee industry, in the aspects of production, productivity, quality, promotion, international marketing, technological innovation and most importantly, the well-being of coffee growers.”   After meeting the government stakeholder in the Capital, Santo Domingo, I visited the Neyba region (one of the seven coffee growing regions in Dominican) to interview some coffee farmers. Ambrosia Morillo, farmer and chairwoman of COOPROCASINE, a coffee processing cooperative in the region believes, “to improve the lives of small producers, we need to improve not only the cultivation practices or the agricultural technology, but also respond to the gender and age inequalities with an inclusion process that allows women and young people to work and grow in a sustainable way.”   Partnerships are at the core of activities of the Lavazza/Oxfam/CODOCAFE project that I visited in Neyba Village, with CODOCAFE being the government partner, COOPROCASINE being the local cooperative, Oxfam being the implementation partner and Lavazza the CSR partner, all working to improve the livelihoods of the coffee farmers.   How Does the Project Partnership Help the Farmers?   A young farmer explains, “The project has invested in coffee manufacturing equipment in the village which has helped us shape our identity as producers, and not merely harvesters. The project has trained us on good agricultural practices that can ensure a guaranteed regular income which has improved living standards of several fellow coffee producers.”   High Potential for Indian Coffee Market India is the 6th largest coffee producer in the world with the ideal landscape, weather and processing conditions which give its coffee a less acidic and unique flavour. India produces about 2.5% of world’s coffee on almost the same percentage of coffee plantations. The traditional coffee growing areas of India comprise of Karnataka, Kerala and Tamil Nadu. From 1950 to 2014, the total area under coffee cultivation in India has increased from 92,523 hectares to over 409,690 hectares, with Karnataka accounting for around 229,658 hectares (56.1%) of the total area and 226,335 million tons (70.7%) of total national production, as per data from the Coffee Board of India.   Apart from the standard support to coffee farmers in terms of good practices and entrepreneurship, the Coffee Board of India should also add indirect amplifiers focussing on gender equality, youth empowerment and food security. Coffee production should be seen as a local retail activity. “While India is primarily a tea drinking country, coffee is now becoming a fashion statement for the young and upwardly mobile”, said Bidisha Nagaraj, Group President (Marketing), Café Coffee Day in a recent article.   With the increasing demand for coffee, it may be interesting to draw inspiration from what I saw in Neyba region and initiate collaborative efforts between farmer cooperatives, private institutions and government bodies to bring about an effective change.   It wouldn’t be wrong to say that coffee production in India has not reached its maximum potential, yet. Collaborative effects with focus on gender/age equality can help us realise our full potential in the coming years.   For more information on Coffee Study Program organized by Lavazza in partnership with Oxfam and SDSN Youth, refer to this link.    (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Is Bidding For the Next Government Tender Worth It: Key Question For The SME

OfBusiness

Industrials

If you’re bidding for tenders as a product or service vendor, you will quickly realize most requests in the Indian context would be from the government. More than 75,000 requests for tenders are released by the central and state authorities each month.   Government tenders account for c.10% of India’s GDP. A majority are released by the Indian Railways, Military Engineer Services (MES), Central Public Works Department (CPWD), State PWDs and Public-Sector Undertakings (PSUs) like NTPC, HPCL and BPCL. Their value varies from as low as INR2 lakhs to as high as INR1000 crores. Source: By Loozrboy from Toronto, Canada [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons   With such a diverse portfolio of opportunities at play, small and medium-sized enterprises (SME) need to assess whether the cost of winning, and the threshold to break-even, makes the bidding effort worth it. Considering most of the SME’s limited resources are actively dedicated towards executing tender requests, it is of utmost importance to figure out the profitability of the tender before making a proposal. Let’s understand the economics behind tenders: The average cost of putting together a proposal is between 0.5%-1% of the tender value. We assume 1% or a minimum spend of INR1 lakh per tender Profit margins are typically between 5%-10% of the total tender value, based on location, tenure of contract etc. We assume 10% for the sake of demonstration Average win rate for all tenders an SME bids for is 20%. We assume a conservative scenario of 15%   As per the above table, it is evident that an SME needs to win at least 10% of the government tenders it bids for to break-even. Most are however doubtful on that measure. Interestingly, at values of >INR20 crores, the proposal making cost comes down to 0.1%–0.5%. Higher the tender value, lower will be the proposal preparation cost. It will also have a direct effect on the number of tenders that the SME can bid for at any point of time.                                              Checklist to Assess the Worth of Government Tenders   The following points should be kept in mind while assessing a government tender: The first thing to do is to sort and pick tenders most relevant to your organization. Check the number of government tender opportunities available in your area of expertise filter by locations where you would like to do business. You can go through the newspaper articles or go through the government websites for e-tender (e.g. https://gem.gov.in/) or use an aggregating app (e.g. Bidassist). Next thing to do is to decide the average value of contract you wish to and more importantly are capable to bid for. A simple rule of thumb is that if the tender size is 25% or more than your company’s annual turnover, then do not go for it. The authority will anyway not choose you in that case, as they don’t want to compromise on the service due to the size of their contract. Next is estimating the cost of preparing the proposal. If this is your first government tender contract, then the cost must be, give and take, >=1% of the overall government tender value for sizes Conclusively, an SME seeking to bid for a government tender must assess the profitability of the project before making a proposal. Return on Investment should be the key driver behind the decision to apply.   (We are now on your favorite messaging App – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Is Artificial Intelligence And Machine Learning Really Killing Job Opportunities?

Colin Lloyd

Tech

UK productivity – output/hour has risen 1.5% in a decade; UK unemployment, at 4.2%, is the lowest since April 1975; UK real-wages have risen by 1.1% per annum over the last four years; Robots may be coming but it’s not showing up in the data.   The subject matter of this Macro Letter is broad, so I shall confine my investigation to the UK. It was, after all, one of the first countries where services became a larger percentage of GDP than manufacturing. The crossover between manufacturing and services is estimated to have happened around 1881. When Napoleon Bonaparte described England as, ‘A nation of shopkeepers,’ his intension may have been derisive, but his observation was prescient. Of course, N. Bonaparte was actually quoting Adam Smith, who first coined the phrase in his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776. Now, he really was prescient!   As we stare into the abyss, anticipating the huge percentage of manufacturing – and now, many services – jobs which are expected to be replaced by machines, it behoves us to begin by reviewing the accuracy with which we measure services in general. A recent paper from the Centre for Economic and Business Research does just that for one sub-sector, although it suggests that mis-measurement of economic activity in services, always difficult to define, may be a factor in the poor productivity record of the UK. I have often described Britain as a post-industrial nation but this research, into one of the most vibrant corners of the economy, makes a fascinate read – The True Value of Creative Industries Digital Exports – CIC, CBER – March 2018 – finds, among other things that:   The UK’s creative industries exports are:  £46bn in goods and services – 24% higher than the official figure £31bn of total creative exports are services – 41% higher than the official figure £21bn of these creative services are digital services – 40% higher than the official figure   The CEBR goes on to point out other weaknesses in current measurements of economic activity:    …estimated official figures for 2016 highlight that the majority of creative industries sub-sectors are exporting digital services. The IT, software and computer services sector, for example, exports £8.95bn in digital services. However, according to these figures, the crafts and museums, galleries and libraries sectors’ digital services exports are zero – which we know is not the case.   Many UK YouTube channels, for example, are watched by millions of viewers across the world. It is through these types of platforms that the creative industries export audiovisual content, music, and tutorials. Such platforms and the content they offer, however, may not be registered as a service export. This is due to difficulties capturing data for business models such as those offering free content and based on advertising revenues. There are also structural challenges with collecting data on such exports. Often, it is difficult for digital intermediaries to determine the point of sale and purchase. The borderless way in which many global firms operate presents additional complications and the origin of the creative content, and of those who consume it, is frequently hard to track.   This brings me to the vexed question of productivity growth in the new machine age. In the Deloitte – Monday Briefing – Thoughts on the global economy – from 30th April, the author reflects on the discussions which occurred at the annual global gathering of Deliotte’s economic experts. I’m cherry-picking, of course, the whole article is well worth reading:    Despite discussion of recession risks I was struck by a cautious optimism about the long-term outlook. There was a general view that the slowdown in productivity growth in the West has been overstated, partly because of problems in capturing gains from technological change and quality improvements. As a result most of us felt that Western economies should be able to improve upon the lacklustre growth rates seen in the last ten years. We agreed too that apocalyptic media stories about new technologies destroying work were overcooked; technology would continue to create more jobs than it destroys. The challenge would be to provide people with the right skills to prosper. The question was, what skills? We had a show of hands on what we would recommend as the ideal degree subjects for an 18-year-old planning for a 40-year career. Two-thirds advocated STEM subjects, so science, technology, engineering and maths. A third, myself included, opted for humanities/liberal arts as a way of honing skills of expression, creativity and thinking.   Mr Stewart ends by referring to a letter to the FT from Dr Lawrence Haar, Associate Professor at the University of Lincoln, in which he argues that poor UK productivity is a function of the low levels of UK unemployment. In other words, when everyone, even unproductive workers, are employed, productivity inevitably declines: …it does not have to be this way. Some economies, including Singapore, Switzerland and Germany, combine low unemployment and decent productivity growth. The right training and education can raise productivity rates for lower skilled workers.    This theme of productivity growth supported by the right education and training is at the heart of a recent paper written by Professor Shackleton of the IEA – Current Controversies No. 62 – Robocalypse Now? IEA – May 2018 – the essay cautions against the imposition of robotaxes and makes the observation that technology has always created new jobs, despite the human tendency to fear the unknown: why should the adoption of a new swath of technologies be different this time? Here is his introduction: –   It is claimed that robots, algorithms and artificial intelligence are going to destroy jobs on an unprecedented scale. These developments, unlike past bouts of technical change, threaten rapidly to affect even highly-skilled work and lead to mass unemployment and/or dramatic falls in wages and living standards, while accentuating inequality. As a result, we are threatened with the ‘end of work’, and should introduce radical new policies such as a robot tax and a universal basic income. However the claims being made of massive job loss are based on highly contentious technological assumptions and are contested by economists who point to flaws in the methodology. In any case, ‘technological determinism’ ignores the engineering, economic, social and regulatory barriers to adoption of many theoretically possible innovations. And even successful innovations are likely to take longer to materialise than optimists hope and pessimists fear. Moreover history strongly suggests that jobs destroyed by technical change will be replaced by new jobs complementary to these technologies – or else in unrelated areas as spending power is released by falling prices. Current evidence on new types of job opportunity supports this suggestion. The UK labour market is currently in a healthy state and there is little evidence that technology is having a strongly negative effect on total employment. The problem at the moment may be a shortage of key types of labour rather than a shortage of work. The proposal for a robot tax is ill-judged. Defining what is a robot is next to impossible, and concerns over slow productivity growth anyway suggest we should be investing more in automation rather than less. Even if a workable robot tax could be devised, it would essentially duplicate the effects, and problems, of corporation tax. Universal basic income is a concept with a long history. Despite its appeal, it would be costly to introduce, could have negative effects on work incentives, and would give governments dangerous powers. Politicians already seem tempted to move in the direction of these untested policies. They would be foolish to do so. If technological change were to create major problems in the future, there are less problematic policies available to mitigate its effects – such as reducing taxes on employment income, or substantially deregulating the labour market.   Professor Shackleton provides a brief history of technological paranoia. Riccardo added a chapter entitled ‘On Machinery’ to the third edition of his ‘Principles of Political Economy and Taxation,’ stating:   ‘I am convinced that the substitution of machinery for human labour is often very injurious to the interests of the class of labourers’.   While Marx, writing only a few decades later, envisaged a time when man would be enabled to:   ‘…to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner… without ever becoming hunter, fisherman, herdsman or critic.’   As for Keynes essay on the, ‘Economic Possibilities for our Grandchildren’, his optimism is laudable if laughable – 15 hour working week anyone?   The paranoia continues, nonetheless – The Economist – A study finds nearly half of jobs are vulnerable to automation – April 2018 – takes up the story:   A wave of automation anxiety has hit the West. Just try typing “Will machines…” into Google. An algorithm offers to complete the sentence with differing degrees of disquiet: “…take my job?”; “…take all jobs?”; “…replace humans?”; “…take over the world?” Job-grabbing robots are no longer science fiction. In 2013 Carl Benedikt Frey and Michael Osborne of Oxford University used—what else?—a machine-learning algorithm to assess how easily 702 different kinds of job in America could be automated. They concluded that fully 47% could be done by machines “over the next decade or two”. A new working paper by the OECD, a club of mostly rich countries, employs a similar approach, looking at other developed economies. Its technique differs from Mr Frey and Mr Osborne’s study by assessing the automatability of each task within a given job, based on a survey of skills in 2015. Overall, the study finds that 14% of jobs across 32 countries are highly vulnerable, defined as having at least a 70% chance of automation. A further 32% were slightly less imperilled, with a probability between 50% and 70%. At current employment rates, that puts 210m jobs at risk across the 32 countries in the study.   For a robust analysis, if not refutation, of the findings of Frey and Osborne, I refer you back to Professor Shackleton’s IEA paper. He is more favourably disposed towards the OECD research, which is less apocalyptic in its conclusions. He goes on to find considered counsel in last year’s report from McKinsey Global Institute (2017) A Future that Works: Automation Employment and Productivity.   The IEA paper highlights another factor which makes it difficult to assess the net impact of technological progress, namely, the constantly changing nature of the labour market. As the table below reveals it has hardly been in stasis since the turn of the millennium:   Percentage Change in Employment 2001-2017, Selected Occupations   Notes: April-June of years. Figures in brackets are Apr-June 2017 levels of employment. Source: Author's calculation from ONS The job losses are broadly predictable; that technology has usurped the role of the travel agent is evident to anyone who booked a flight, hotel or hire-car online recently.  For economists there are always challenges in capturing the gains; back in 1987 Robert Solow, a recipient of the Nobel prize from economics,  famously observed, ‘You can see the computer age everywhere but in the productivity statistics’ – perhaps the technology has been creating more jobs than thought. Does the 170% rise in Animal Care and Control owe a debt to technology? You might be inclined to doubt it but the 400,000 Uber drivers of London probably do. We are still seeking signs in the economic data for something we know instinctively should be evident.   Between the mis-measurement of economic activity (if technology is being under-estimated to the tune of 24% in the creative industries sector to what extent are productivity gains from technology being underestimated elsewhere?) and the ever-changing employment landscape, I believe the human race will continue to be employed in a wide and varied range of increasingly diverse roles. If some of the more repetitive and less satisfying jobs are consigned to robots and machine learning computer code, so much the better for mankind. For more on, what is sometimes termed, the routinisation of work, this working paper from Bruegel – The Impact of Industrial Robots on EU Employment and Wages: A Local Labour Market Approach – April 2018 is inciteful. They examine six EU countries and make comparisons, or highlighting contrasts, with the patterns observed in the US. Their conclusions are somewhat vague, however, which appears to be a function of the difficulty of measurement: –   We only find mixed results for the impact of industrial robots on wage growth, even after accounting for potential endogeneity and potential offsetting effects across different population or sectoral groups. …We believe that future research on the topic should focus on exploiting more granular data, to explore whether insignificant aggregate effects (on wages) are to the result of counterbalancing developments happening at the firm level. Bruegel refrains from proposing cuts to personal taxation as favoured by the IEA, suggesting that a more complex policy response may be required, however, their conclusions are only marginally negative. I am inclined to hope that market forces may be allowed to deal with the majority of the adjustment; they have worked well if history is any guide.   Conclusions and Investment Opportunities   Ignoring the fact that we are nine years into an equity bull market and that interest rates are now rising from their lowest levels ever recorded, the long term potential for technology remains supportive for equity markets, for earnings growth and for productivity. If history repeats, or even if it simply rhymes, it should also be good for employment.   With interest rates looking more likely to rise than fall over the next few years, companies will remain reticent to invest in capital projects. Buying back stock and issuing the occasional special dividend will remain the policy du jour. Assuming we do not suffer a repeat of the great financial recession of 2008 – and that remains a distinct possibility – the boon of technology will create employment with one invisible hand as it creatively destroys it with the other (with apologies to Smith and Schumpeter). If governments can keep their budgets in check and resist the temptation to siphon off investment from the productive sectors of the economy (which, sadly, I doubt) then, in the long run, the capital investment required to create the employment opportunities of the future will materialise.   Originally Published in In the Long Run    (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How to Fix Working Capital Woes of the SME: Purchase Order Financing

OfBusiness

Industrials

Editorial Comment: Purchase Order Financing is a useful funding option for growing businesses and Small & Medium Enterprises (SMEs), typically seeking to fulfil a large customer order which requires a significant upfront payment. Cash constraints often cause ventures to forego large orders. Purchase Order Financing avoids such a situation by making the payment on behalf of the SME or by opening a line of requisite credit. This article explores the underlying mechanics of this specialist form of funding.   Purchase Order Financing is a relatively new, raw-material procurement procedure wherein a third party (the financer) pays the supplier for the purchase order. The financer is usually a Non-Banking Financial Company (NBFC) that makes the payment on behalf of the SME in accordance to the terms of the credit line approved. This payment method is quite new but comes with a multitude of benefits for the SMEs, rapidly making it an industry norm.  Why Is Purchase Order Financing A Game Changer?   The biggest challenge for a SME is the management of its working capital cycle. With the rate of repayment lagging behind the rate at which a payment becomes due, delayed settlements pile up, pushing SMEs to a compromising position. This, in turn, hampers their cash-flow cycle for raw-material procurement.   A lot of SMEs are owned and managed by first-time entrepreneurs. With limited financial resources at their disposal, these businesses are often bootstrapped. Due to a lack of expertise and experience, they typically end up crossing the budgeted threshold of expenses. This can unsettle the purchase cycle and creditor turnover ratio and lead to an accelerated accumulation of outstanding expenses.   The limited working capital availability not only impacts one's access to raw material, but also affects day to day operational requirements (eg. manpower costs). Furthermore SMEs find it difficult to procure loans from banks without adequate collateral, often found wanting.   NBFCs therefore have come up with an innovative payment mode which is designed to provide unsecured loans and credit lines to meet such short-term capital requirements without any security.    Features of Purchase Order Financing   Purchase Order Financing is designed to provide short-term financing hassle free and is tailored to overcome the shortcomings of bank loans. Features are as follows: Accessibility – Major players such as OfBusiness are present both online and offline. Most processes are on automated via digital platforms leading to quick verification of documents and disbursals. Quick Disbursement – Three to five days is the average time taken to approve unsecured business loans post submission of the required documents by NBFCs. This swiftness in disbursals ensures that any and all short-term capital requirements that might arise are fulfilled before any payments become overdue. Collateral-free – SMEs often find it difficult to secure a collateral for a short-term funding requirement. Purchase Order Financing in contrast requires no collateral. Payment of interest – NBFCs offer working capital up to INR2 crores for Purchase Order Financing. Credit lines offered by NBFCs require payment of interest only on the amount used and for the usage period only. Source: By Fahad Faisal [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], from Wikimedia Commons Benefits Of Purchase Order Financing   Better material costs – With availability of ready cash, SMEs gain more negotiating power over suppliers to secure better raw-materials in accordance to their requirements. Savings on interest payouts – Interest-rate charged amounts to c. 1.4-1.6% per month on the amount used and for duration deployed. As compared to traditional lenders, this rate of interest is 1% lower. Thus, SMEs using Purchase Order Financing for bulk raw-material procurement can save on interest up to 3% for over a period of 90 days. A wide range of products – NBFCs also help SMEs procure bulk raw-material at competitive prices from their strategic partners. This helps SMEs procure quality raw material for their operations and get it delivered to any location with ease. Different procurement organizations – offer bulk raw-material purchasing for TMT, steel bars, polymer, textile, cement etc.   Purchase Order Financing is a strategic solution for SMEs to ensure uninterrupted operations and have a better organizational relation with the suppliers. This idea has evolved over the past few years and is likely to have a steep growth curve with immense opportunities being offered to the SMEs. From savings on interest to better procurement, purchase order financing offers it all-in-one.

Grab And Uber Partner: Recipe For A Successful Acquisition

James Lim

Tech

Grab, a Singapore-based ride-hailing, ride-sharing, and logistics company announced its acquisition of Uber's Southeast Asia business on 26 March 2018. Following the announcement, there were several articles by Singapore mainstream news broadcasters highlighting that the Competition and Consumer Commission of Singapore (CCCS) was not notified about the deal. Hundreds of Uber staff were told to pack up and leave within 2 hours, leaving drivers worried about their car rental contracts and the future in general. Based on all these articles, it is obvious that Grab has not considered all of its stakeholders’ needs and concerns or identified actions to address them before announcing the acquisition of Uber, followed by the shutdown of the app to the public. As a result, many stakeholders were thrown off by Grab’s swift announcement and actions.   Grab has been presented with more time to plan for a better merger and acquisition (M&A) process considering the CCCS's recent directive to extend shutdown date of the Uber app from 8 April to 7 May, and a push to both companies to maintain part of their operations until the ongoing investigation concludes. Source: Grab Facebook Page     As such, Grab (and other organisations about to engage in M&A) might want to take the below pointers into consideration when planning and managing their current and future M&A.   As organisations such as Grab and Uber grow their businesses in today’s rapid pace of disruptive change, it is easy for them to lose sight of what is key in each stage of evolution. What made Grab and Uber successful in a very short period of time was the fact that they came out with a brilliant concept and provided an alternative in the market as market leaders.   However, given what has happened with its recent acquisition, it seems that Grab and Uber might have overlooked the importance of execution. In other words, while the focus on concept and speed has led to the success of Grab and Uber, a lack of focus on execution and accuracy has led its recent M&A to disaster. At the end of the day, Grab and Uber need to be aware that it is ultimately about making things happen, thus, execution and accuracy are as important as concept and speed.   While it is undeniable that Grab and Uber have done a pretty good job of communicating the deal to their customers through email communications, news release and a well-designed artwork stating “Grab & Uber Are Coming Together To Serve You Better”, the same cannot be said for their communication with other stakeholders such as internal employees and contractors (i.e. Uber drivers). Shortly after the public announcement, Uber employees were told to just leave the office and wait for updates, as reported by The Straits Times. It was later highlighted by Channel NewsAsia that issues such as registration, contract, and reward systems were yet to be ironed out. All these assertions by Uber employees and drivers make it clear that an effective M&A communication plan with employees and drivers was found wanting. In the normative sense, Uber employees and drivers should have been communicated with before the M&A announcement was made public. By paying little attention and focus in this regard, Grab and Uber risk projecting the image that they are only focused on profits and have lost sight of its people. Humans are ultimately the heart of any organisation and so they should never lose sight of that. Next, although the entire Grab management team is likely to be involved in managing the acquisition, the human resources (HR) function has a role that is particularly important. A high-performing HR function can be a valuable business partner in providing clarity to the management team to chart the end-to-end execution details (i.e. milestones, owners, timelines etc.) for its post-merger activities. This would include key elements such as change management, employee communication plan, compensation and benefits, harmonization plans, immersion programs for Uber employees and drivers etc.   Considering the fact that Grab did not have the email addresses of Uber employees, said it will 'try' to offer positions to all Uber staff in the region and changed incentives around the announcement, raises questions on Grab’s post-merger plan. As Benjamin Franklin once said “If you fail to plan, you are planning to fail”. Hence, it is important that Grab had come up with a well thought through execution (post-merger) plan during the initial preparation stages.   Last but not least, technology-driven organisations such as Grab and Uber might prefer to hire only people who are creative and innovative, as they are to align with the culture of the organisation. However, hiring people who possess similar characteristics to work together might not do the organisation any good. According to a study by Deloitte in 2013, diverse teams (i.e. people possessing different characteristics) outperform their peers by 80% in team-based assessments. Ned Herrmann, the father of brain dominance technology, described such diverse teams as whole brain teams whereby each team member has a different preferred thinking style (whether it is rational, practical, relational, or experimental) that can be leveraged by the group. It is only when a whole brain team with its diverse thinking preferences is at work that a company can perform at its best. It is therefore highly recommended that Grab gets people of different thinking preferences onboard to improve its execution capabilities.    Just like overcoming any other business challenges, Grab needs to identify and understand the key priorities and critical success factors in each M&A stage in order to attain a smooth and successful acquisition with Uber.

What is Nutrition?

Fats are to be preferred over refined grains, cookies and colas; vegetable oils (especially those mentioned above) are to be preferred; use different oils for different types of cooking; refined oils are to be avoided; oil blends are reasonable; butter can be consumed occasionally in modest amounts, frying should be done rarely, with appropriate oils that are discarded later, and nuts, seeds and fish oil are very healthy.

How To Invest In Stock Market: Discovering Selan Exploration Technology

Hersh Tolani

Tech

In focus this time is an oil exploration and production enterprise which sits on oil reserves whose value is 10x the price given to the company by the stock market. Presenting Selan Exploration Technology, an investment opportunity which is undiscovered, under-valued and unlikely to reduce in price.   Learn how to invest safely, grow your money and retire early. Subscribe to my YouTube channel here.

Emflux One @ Auto Expo 2018: Design Philosophy Behind India's 1st Electric Superbike

Editorial

Adda

We caught up with Vinay Raj Somashekar, Co-founder and Chief Designer of Emflux Motors, a Bengaluru-based start-up at the launch of Emflux One: India's 1st Electric Superbike.   Vinay shares the vision and process behind Emflux One's gorgeous design. Blending aesthetics of aggression with a sense of calmness and beauty (which typically personifies Electric) always poses a challenge. Vinay describes the journey of his team starting from ideas on paper to close collaboration with engineers and material experts finally culminating in this beast breathing life at the Auto Expo 2018.   Emflux One (600-650cc segment) promises a top speed of 200 Kmph on full charge with a similar quanta of range. Its acceleration is an eye-watering 0-100 Kmph in 3 seconds. Since charging remains a primary concern in the electric segment, the company plans to install 1,000 high-speed charging units capable of juicing up the bikes upto 80% of their battery capacity in less than 36 minutes! Moreover, the company aspires to translate tech beyond hardware by integrating real-time diagnostics, safety alerts, drive modes and cross-bike connectivity in its prop software platform accessible to the rider.   The company will manufacture only 199 units for domestic users. Release expected by March 2019. Pricing at INR6L-11L (subject to add-ons) Read more on Emflux Motors and Emflux One here.

Nobel Prize 2017: Richard Thaler & Behavioral Economics - The Man, The Ideas

Editorial

Trails

  Our tribute to the 2017 Nobel Prize Winner in Economic Sciences. Richard Thaler's contributions to understand the complexities of decision-making has virtually created a new field of study called Behavioural Economics. Humans as per Dr. Thaler are not always rational and their decisions are often driven by behavioural traits and information asymmetry of the real world. Richard Thaler is a vocal proponent of the Nudge Theory, which focuses on making small adjustments in the environment of people to drive their behaviour. He joins other great contributors to the study of human behaviour, including Daniel Kahneman, Amos Tversky and Gary Becker. Here we try to explain his basic theories of limited rationality, lack of self-control and social preferences. Hope you enjoy it.

How Do You Figure Whether A Government is Close to Default?

Editorial

Express

Credit Default Swaps (CDS) serve a key purpose, aside from acting as a hedging or speculative financial instrument. Their price (i.e. CDS Spread) is an indication of investor sentiment regarding probability of a debt issuer defaulting.   Higher the spread, more is the perceived risk of default.

How Much Has India's Corporate Tax Rate Dropped in the Last 15 Years?

Editorial

Express

India's corporate tax rate has been reducing in an intermittent but unidirectional fashion since 2003, from a peak of 37% to 30% for the latest fiscal.   What tax rate should we aspire to reach to strike a balance between a fiscal viability and commercial considerations?

Where Does Corporate Tax Rate In India Stand vs. Others?

Editorial

Express

  India's latest corporate tax rate stands at 30%.   While the headline rate has dropped by 7% in the last decade and a half, it is still the 5th highest corporate tax rate amongst Emerging and Developing Economies.